2008 FORECAST: Survival of the Fittest in 2008

A leaner window and door industry may emerge thanks to this year’s tight market.
Christina Lewellen
January 15, 2008
FEATURE ARTICLE | Statistics, Markets & Trends

Window and door executives across the country are adopting the following mantra for 2008: What doesn’t kill us will make us stronger.

It goes without saying that we’re in for another tough year, but many industry representatives believe the survival-of-the-fittest phase that will mark this year will result in a leaner, meaner fenestration industry on the other side of the downturn. Many companies jumped on the window and door bandwagon during the peak new construction years of 2004 and 2005 when housing starts flirted with the 2 million mark and homeowners were easily manipulating home equity opportunities to make upgrades. Now the honeymoon is over, and macroeconomic conditions and financial headlines are not good—subprime lending is a mess, oil prices are beating their own records regularly and home values in some overheated regions have gone out with the tide. As the downturn and eventual first signs of recovery stretch out over another calendar year, the fittest window and door manufacturers, suppliers and dealers will still be standing on the other side, industry respondents say. “I think that the strong will survive and thrive in this market and in the end there will be several less competitors to fight with,” says Alan Levin, president and CEO of Northeast Building Products, a manufacturer based in Philadelphia.

“I suspect manufacturers that survive will be healthier on the other side,” agrees Dave Koester, brand manager for Weather Shield Windows & Doors. “It will be a time of cleansing for the industry.

“It’s a down year,” he continues. “Everyone is fighting for business so I think it will be a year of returning to the basics—build a practical window that is energy efficient, performs well and looks decent.”

Practically all industry executives are bracing for a tough year, but that’s not to say some aren’t entirely up for the challenge. “While we need to be responsive to the challenging market conditions by aligning our costs and capacity, we know we can’t cut our way to prosperity,” says Dave Haddix, senior vice president and chief financial officer for Therma-Tru Doors. “We must continue to focus on delivering demonstrable value, quality and service to our customers and all the way down the channel. That way, we’ll be poised and ready for growth when the market turns around.

“As I’ve told our associates,” Haddix adds, “the future is bright. I just wish we could fast forward.”

NEW CONSTRUCTION
We are “almost certainly looking at another down year,” says David Seiders, chief economist of the National Association of Home Builders. Citing mortgage and credit problems; home sales, housing starts and permits all being down; and weak demand coupled with heavy inventory, he noted, “The question is will we be seeing the bottom in 2008?”

In the new construction market, Seiders and his team of economists at NAHB figure new housing starts will be in the less-than-a-million range for 2008. This is a considerable dip from the record-high levels of nearly 1.8 million annual starts just a few years ago (Fig. 2). Seiders expects 2007 starts will end up just over the million mark at about 1.07 million and thinks 2008 will come in around 911,000 starts for the year. By 2009, the NAHB team believes starts will peek up over the one million line again.

While some industry representatives argue that certain segments of the new construction market—including more reasonably priced entry-level homes and upper-end custom homes—will continue to fare well in the down market, the middle-market that has dominated new construction starts for the first half of this decade will undoubtedly be hurting through 2008. “For the tract builder, it looks pretty bad,” says Larry Crouch, director of national and international sales for Cascade Windows. “A lot of them still have too much inventory and some have even more than others.”

REMODELING AND REPLACEMENT

While just about everyone agrees that new construction will continue to struggle, the replacement and remodeling market presents a more mixed outlook. Homeowner spending in 2007 dropped more than 2 percent from 2006, and analysts at Harvard University’s Joint Center for Housing Studies expect the slight downward trend to continue into 2008 (Fig. 2). “As homeowners become increasingly concerned about falling house prices and a slowing economy, home improvement spending is dragging,” says Nicolas Retsinas, director of the Joint Center for Housing Studies. “Coupled with very modest home sales, spending levels are likely to fall.”

“The recent problems in credit markets are expected to dramatically reduce the level of cash-out mortgage refinancing activity,” adds Kermit Baker, director of the Remodeling Futures Program of the Joint Center. “Given that equity withdrawals have been a key source of funding for home improvements, market spending is expected to suffer.”

Global Insight, which examines the home improvement products market for the Home Improvement Research Institute, is more optimistic for 2008 (Fig. 3). While it too estimates sales of residential repair and remodeling products were down in 2007 (1.3 percent), it sees growth of 2.2 percent this coming year to a total $315.6 billion. It is more bullish for the long-term, but suggests problems in the new housing market will keep growth below trend until 2009.

Window and door industry watchers see a certain amount of growth in the replacement arena, particularly for homeowners who are looking for energy efficiency or need to repair non-functional products. “Much of this pent-up demand is not truly discretionary,” says Michael Collins, an investment analyst with Jordan, Knauff & Co. “In other words, these repairs need to be made, although they may be put off because of concerns regarding home values. If the market stabilizes at all in 2008, I believe a good portion of this repair and remodeling business that has been ‘on the sidelines’ will be completed.”

Dick Wilhelm, executive director of the Fenestration Manufacturers Association, says manufacturers and distributors in the Southeast region of the country are already seeing a significant uptick in remodeling work. Pointing to a recent gathering, he reports, “They were emphatic that it is increasing. Several of them told us that a lot of builders they deal with are sending out letters to existing homeowners and telling them that they are in business for the remodel. They say, ‘We’ve got the labor force, we can get in there and get it done.’ Remodeling is indeed increasing in the Southeast market, according to these guys.”

Others within the industry don’t see the increase yet, at least on a national basis. “Until credit becomes easily available and home values start back up, I see remodeling on the same track as new construction,” says Wayne Gorell, president and CEO of Gorell Windows & Doors. “I believe it will decrease again next year commensurate with new construction.”

INDUSTRY GAMEPLAN
Despite the primarily bleak outlook for the industry in many segments of the market and in many areas of the country, there are companies that are faring relatively well. Crouch says Cascade has continued to grow throughout 2007 and the company was hiring additional sales people heading into 2008. “There are a lot of window manufacturers that would have been ecstatic if they could have finished ‘07 over ‘06 so we feel pretty good about what we’ve done,” he says. “You provide a good product at a reasonable price and get it to the customer the way they wanted it, and they’ll come back. It’s real basic stuff.”

Going back to the basics is going to be the key to the survival of the fittest shake out this year, many industry observers predict. “When the market is down, as it is now, everyone in the buying process—from the homeowner to the builder or remodeler to the distributor—places more focus on quality, service and delivery,” says Chris Monroe, vice president of marketing for Simonton Windows. “Energy efficiency and low maintenance were the most popular qualities in windows we sold in 2007 and we expect that to be the case again in 2008.”

In many instances, consumers are moving away from the commodity mentality that has previously dominated the industry toward an expectation for quality and performance, says John Stephenson, president of Great Lakes Window. “It is clearly a buyer’s market, and they know it,” he points out. “They expect quality and they are more educated than ever.”

Manufacturers won’t be the only ones in the supply chain getting leaner in 2008. Dealers and distributors will also have to focus on core competencies to emerge from the contracted market. “In the distribution channel, dealers and yards will face the same challenges as manufacturers,” says Weather Shield’s Koester. “They, too, will have to evaluate their operations and only the strong will survive. The dealers who know their products, service their customers well, and run efficient businesses, will survive.”

Many manufacturers, including Weather Shield, will turn more attention to retailers this year in an attempt to weather the storm. “Weather Shield is supporting dealers with training programs to help them survive and we’ll continue to offer those programs and perhaps others throughout 2008,” Koester notes.

Partnership along the supply chain will be critical this year, agrees Steve Dawson, chief financial officer and executive vice president of sales for CGI Windows & Doors. “In this climate, manufacturers need to reach out to new customers, new markets and work closely with their distributors to close the sale.”

OTHER SPEED BUMPS
A significant challenge for all industries this year—fenestration being no exception—is accelerating oil prices. “With oil at or above $90 per barrel, it will definitely have an impact on manufacturing costs, particularly in the vinyl industry,” says Paul Langer, national sales manager for remodeling and replacement products, Peachtree Doors & Windows.

Beyond material prices such as the resin for vinyl, window and door manufacturers will also continue to combat shipping costs that come at the hands of high-priced fuel. “Given the fact that alternative fuels in this country are a sliver of the total energy market, there is no reason to believe that oil prices will return to their historical lows any time in the foreseeable future,” says Collins. “If companies are continuing to fulfill orders that are marginally profitable because of shipping expenses in the hope that gas prices will drop, they should probably eliminate that business unless a fuel surcharge will completely cover their additional expenses.”

Joe Gaskins, co-owner and vice president of sales for MGM Industries, seconds the motion. “Price increases may be a reality for 2008.”

In addition to the macroeconomic factors at play, there are a few other hurdles on which the window and door industry may stumble this year. One tune that many producers are singing concerns proposed changes to Energy Star requirements. The Department of Energy is considering tightening requirements to return the Energy Star label to its once elite status in the marketplace. “I think the biggest concern in the industry today is the concern that Energy Star will lower the [numbers] too low and it will cost manufacturers millions to meet them,” says Northeast Building Products’ Levin. “I have received multiple e-mails from competitors worried about this. I think that it can turn the industry upside down.”

Others are closely watching the progression of class action lawsuits threatening the industry. Henry Taylor, president of Architectural Testing, says testing facilities such as his are increasingly coming to the aid of window manufacturers who are taken to court over construction defect issues. In the last 15 years, the company has gone from practically no field testing to 15 two-man crews doing field testing every day, he says. The demand has prompted the company to open a second office to assist manufacturers in these types of cases. “These window manufacturers will fix their problems at no cost, and yet they get saddled with high insurance premiums and high attorney fees,” Taylor says. “I think one of the biggest threats and biggest concerns to this industry is the class action lawsuits. I have started this forensic department to help defend the manufacturers, not the plaintiffs, sort out the facts [of what’s actually happening in the field].”

Manufacturers will also face growing number of imports from China and other areas of the world, particularly in the commodity end of the market, warns Collins. “When imports continue to grow at a healthy clip in an environment where the overall market growth is very modest, they can only do so by taking market share from domestic companies,” he points out.

Consolidation may continue as a trend in 2008, and closures and downsizing may overshadow merger and acquisition activity, some predict. “Times like this are always an opportune time for consolidation and acquisitions,” says Mike McElroy, president of interior door replacement company Highmark Digital. “Shake-ups are good. It makes us really think about our business.”

“It could well be that there will be fewer manufactures on the other end of this downturn,” says Koester. “I think we’ll see many manufacturers consolidating or going out of business.”

END ON A BRIGHT NOTE
Many believe that this year may end on a better footing than it began. While it’s still anyone’s guess, there are plenty of analysts who believe the market may begin moving in an upward direction by the last quarter of 2008.

“I’m playing the optimist that our economy won’t slide into a recession,” says Koester. “Job creation is still strong, interest rates are low. We’ve yet to see how the subprime lending problem will impact the economy in the long term. I foresee, and am hoping, it won’t become a recession.”

In fact, it could be job creation, low interest rates or even the outcome of the presidential election that gets the ship back on course, some say. “Any macroeconomic factor that would boost consumer confidence and influence affordability for both remodeling projects and new home purchases will help steer the industry on the road to recovery,” says Therma-Tru’s Haddix.

Those who are handling the downturn well will likely be ready to pounce when the pendulum does swing. “I think that ‘cash is king’ and the strong will get great deals on equipment and materials and be ready for when the market turns,” says Levin. “We have had almost every equipment company in trying to sell us equipment at huge discounts. We are taking advantage of these deals and still modernizing our facility, knowing that when it does turn, we’ll be ready.”

While many view the proverbial glass as half empty, others are viewing 2008 as a year like any other—one ripe for business expansion and, hopefully, profits. “Pragmatism, building products, and more specifically windows and doors have lost market volumes approaching 50 percent over the last two years,” says Gorell, “but that means there are still hundreds of millions of dollars being spent on windows and doors. Don’t look at how bad the decline has been; look at how you can get your share of the hundreds of millions still being spent and available to you.”

Contact Christina Lewellen, senior editor, at clewellen@glass.org.

  • New Product Development in 2008

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    In addition to guessing how the housing market will play out in 2008, many in the industry are also taking a stab at how new products and innovation will fare in a down market. About 44 percent of respondents in a poll conducted in WDweekly, Window & Door’s weekly electronic newsletter, expect that new products and innovation will be the key to standing apart from the crowd in what will likely be a competitive market next year. About 16.5 percent of others, however, voted that innovation may slow as builders and consumers might be less likely to open their wallet for advances. Another 16.5 percent contend that new product launches will vary by market segment, with more in the upper end, and 13 percent think innovation will hover at present levels. Last in the pack, at 10 percent, was the option that companies will cut back on innovation in an attempt to focus on core competencies to survive.