Window and Door Manufacturers Hold Breath to Stay Afloat in 2009

Some see hope in remodeling and replacement business
Christina Lewellen
January 15, 2009
FEATURE ARTICLE | Segments, Markets & Trends

Not surprisingly, it’s tough to find anyone too optimistic about 2009. To say that window and door executives are being cautious about their projections for the coming year is more than a slight understatement. Still, there are glimmers of hope, particularly looking just beyond the coming year.

“I believe that the industry won’t turn until 2010,” says Alan Levin, president of Northeast Building Products, a Philadelphia-based manufacturer. “It is going to take at least a year for consumer confidence to build again and even after that it still will be a bit before they are going to have extra income to buy home improvement products.”

Steve Dawson, executive vice president of CGI Windows & Doors, a Miami manufacturer, agrees that expectations for industry growth are in the long-term-outlook category. “[We] expect the market to continue to be soft in 2009, with some firming in late 2009/early 2010,” he says. “[It will] likely be several years before it starts to grow again.”

In the meantime, window and door manufacturers report that they will focus on refining their processes, staying lean and product differentiation to come out of the downturn stronger and positioned for future growth. “…Our view is that we can’t control the market, but we can control how we compete in the market,” says Denise Bergeland, marketing manager for Hy-Lite Products. “That’s why our focus continues to be doing what we need to do to outperform the category and gain market share. While the home products industry is facing significant challenges, the good news is that the long-term demographics of the category remain excellent.”

Survival of the fittest will also be the name of the game for this year as companies struggle to keep their doors open through lean times, industry observers predict. “While it’s unclear how long the housing correction will last, it’s likely the consolidation of manufacturers, distributors, and remodelers, such as we’ve seen throughout the past several years, will continue,” says Sid Spear, vice president of sales and marketing for Simonton Windows.

And despite the bleak new construction outlook, there are still industry veterans who believe the replacement/retrofit market will keep the industry afloat this year. “I think new construction could stay in the doldrums through all of 2009 with a slow recovery starting in 2010,” says Wayne Gorell, CEO of Gorell Windows & Doors. “But I see the retrofit side starting a strong uptick in the spring of 2009.”

Much of the turn-around timing will depend on how nervous the buyers continue to be, says Dave Winter, executive vice president of Highmark Digital. "As I learned in economics, consumer perception is everything," he says. "As soon as we get that turned around I think we'll see the light at the end of the tunnel. But I don't want to minimize the importance of the need for our government, businesses and private citizens to show responsbility and restraint to make common sense decisions for our future."

NUMBER CRUNCHING
The residential window and door industry is expected to post positive growth through 2012, according to The Freedonia Group. The Cleveland-based market research firm notes that the industry will not see the kind of growth it saw pre-bubble-burst, but it will likely be modest, reasonable growth of about 3 percent annually through 2012. Demand should be worth about $40 billion in four years, analysts say—a number that is significantly dampened by the dreary outlook for residential new construction.

“Through 2009, I would say that the residential market for windows and doors will remain soft, due to the housing market,” says Matt Zielenski, a Freedonia analyst. “Completions will be much lower compared to the middle of the decade. Newly-built homes will be smaller in size—thus less room for windows and doors."

Like some industry executives, he does see potential on remodeling and replacement side of the business.  “I would argue that the improvements and repairs market would offer better growth in 2009,” Zielenski continues. “While most of this is due to the weakness of the residential construction market, some of it will come from homeowners improving the energy efficiency of their homes. For those able to get a loan, now is the time to do renovations and expansions; contractors are looking for work.”

Longer term, Freedonia predicts demand for windows will grow at nearly 4 percent per year, mainly due to consumers’ interest in energy efficiency. Storm protection products in coastal regions will also drive demand for windows through 2012, the research firm notes. Demand for doors, on the other hand, will likely perform below the industry, perhaps posting 2.4 percent annual growth through 2012.

On that new construction front, the National Association of Home Builders had forecasted 936,000 total housing starts for 2008, a 30.2 percent decline from the 1.34 million homes produced in 2007. Analysts project starts to slide 16.2 percent further this year, to 784,000 units, before picking up again in 2010 to the 1 million level.

David Seiders, recently-retired chief economist for NAHB noted at the association’s Fall Construction Forecast that he believed the steep decline in sales of new single-family homes should be coming to an end in early 2009, setting the stage for “tepid” improvement in new residential construction later this year. He warned, however, that outcome has grown increasingly uncertain in light of the turmoil that has gripped world financial markets.

“Things are a lot worse than any of us had anticipated six months ago,” Seiders said at the conference, and the nation’s housing market–which is the root cause of the collapse in confidence among lenders–has continued to spiral downward. “Risks are piling up on the down side. These are tough times, no question,” he added.

“The bottom line is that the financial crisis can’t get much better until the thing that started this thing off–housing starts–gets better,” said Maury Harris, U.S. chief economist for UBS, who also spoke at the conference.

Average home prices are down 20 percent from their peaks, noted Mark Zandi, chief economist for Moody’s Economy.com, at the conference.  He expects the weak job marketing and waves of foreclosures that plagued the end of 2008 to drive prices down even further in 2009.  He predicted in that the housing market would reach rock bottom in July, but that prices won’t likely bounce back until late 2010. “Nationwide, 27 states are in recession and 14 are very close to recession,” Zandi pointed out at the NAHB conference. Some parts of Texas and North Dakota have escaped the trend but overall the regional picture parallels the national outlook—virtually the whole country started the year in or near recession.

While new home inventory is slowly clearing out, Zandi contends that it will take another two years to shed nearly 1 million excess homes. This means new home construction will probably be significantly depressed through 2011, or perhaps longer, he said.

Still, this type of economic cycle is to be expected and hopefully we can walk away with some lessons learned, Zandi concluded. “Historically speaking, this kind of mess happens every 10 years,” he said at the conference. “But what’s going on now is so significant, it’s searing our collective psyche. We’ve learned something important and changes that policymakers are enacting now regarding the regulation of our banking system will be codified under the next President so that we will have a better system in place at the end of the day.”

ROOM FOR REMODELING
The weak economy and uncertainty about the future have rattled the home improvement market, but most analysts agree that homeowner spending will rebound long before we see a turnaround in the new construction market. “There are a few hopeful signs that we may be nearing a cyclical low point for home improvement activity,” says Kermit Baker, director of the Remodeling Futures Program for Harvard’s Joint Center for Housing Studies. “Existing home sales appear to be stabilizing and interest rates for financing home improvements are favorable.”

Still, the front half of this year will be a challenge. The Joint Center's Leading Indicator of Remodeling Activity shows home improvement spending decreasing at an annual rate of 12 percent through the second quarter of 2009. “Falling home prices and job losses contribute to reduced spending on homeowner improvements,” says Nicolas Retsinas, director for the JCHS. “Any remodeling rebound must be accompanied by stability in the housing market.”

At a fall conference hosted by the Home Improvement Research Institute, analyst J. Walker Smith, president of Yankelovich Partners, pointed out that median figure for home improvement spending for all projects had dipped to $1,320 in 2008 from $1,535 in 2007. So although people are spending less, there is indication that they’re still spending. “Despite the economy, consumers are still involved in this marketplace,” he said. “There is still an opportunity to do some business.”

HIghmark Digital's Winter agrees that some home improvement money will continue to flow. "Larger remodeling projects will be severely affected since equity lines will have disappeared or be extremely hard to tap," he explains. "However, any remodeling project with a price tag of less than $5,000 will be viable for many homeowners, even in this market. The stronger companies that already cater to the remodeling sector and can offer an affordable home improvement project will see a small increase in business this year."

BUCKLING DOWN
Window and door executives have gone well beyond trimming the fat from their businesses.  Many spent much of last year making tough decisions about paring down their infrastructure so supply does not flood waning demand. In the final six months of 2008, Window & Door reported that more than a dozen top manufacturers in the country laid off more than 1,000 workers. “I think that 2009 will be an industry-changing year that will see the strong get stronger and the weak fall by the wayside,” says Levin. “I think that many more window manufacturers who for years counted on growth at the expense of realistic margins will feel the wrath of those poor decisions. It will be a blood bath in 2009 and not only will window manufacturers fall but they will take down some suppliers with them.”

So in an attempt to control the bleeding, many manufacturers are diversifying, getting back to the basics of their core business strategies, adjusting resources to serve different markets, or some combination of these solutions. Simonton Windows, for example, will pull on the strength of its parent company, Fortune Brands, and look for ways to create synergy with its related sister companies, says Spear. “Fortune Brands is diversified with interests in premium spirits, home and hardware, and in golf,” he explains. “These diversified interests provide stability to our company, even during challenging economic times. Secondly we have sister companies within our industry that we can explore partnerships with for mutually-beneficial projects and programs. In particular, we’re currently discussing joint opportunities with Therma-Tru, one of our sister companies.”

Levin says Northeast Building Products has seen an uptick in higher-end replacement jobs, so the company has adjusted some of its focus to cater to dealers in this segment. “We notice these accounts growing even in this bad economy.”

Therma-Tru is adjusting its market game plan to serve the replacement/retrofit segment. Whereas  door products played strongest to the new construction market before the economic slump, Therma-Tru is trying to make replacement entry systems an easier project for dealers to manage. “We’re re-tooling Therma-Tru to be an organization that is easy to purchase through because we know that the millwork industry, and doors in particular, can be a complex and daunting experience, especially in the R and R area,” says Dave Randich, president. “People who are used to windows and siding and roofing may find doors overly complex. But we do see this segment as an opportunity to Therma-Tru. We’ve recalibrated our strategy to serve this segment.”

Window and door dealers and distributors are also swiftly altering their business strategies to survive the downturn, including undertaking initiatives to lean their operations, diversify their product offerings and clientele, and get the message out to customers about their heightened value propositions (see related sidebar).

YEAR OF ENERGY
Many believe that energy will be the name of the game in 2009—not “green,” necessarily, but energy. Gas ans energy prices eased up in the final months of 2008, but industry observers believe builders and, in particular, consumers will expect significant value from their fenestration purchases. “Consumers will recognize in the future that they can gain a higher rate of return on investment with energy-saving window products,” Simonton’s Spear says. “And while energy costs have flattened out most recently, we believe there will still be an ongoing interest from consumers on investing in products that have the most positive impact on their home.”

While green and third-party verification of green will continue its swift evolution in the next 12 months, many industry representatives say the mainstream buyers may tolerate incremental improvements. “We believe green will remain popular in 2009, but won’t make huge advancements due to the economic situations currently being faced by homeowners, builders and remodelers,” says Hy-Lite’s Bergeland. “You’ll see small changes in green from manufacturers because ‘going green’—whether it’s with a product launch or a change in manufacturing operations—is a costly endeavor for a manufacturer. And, in a downturn market situation such as we’re in, it’s hard to justify major expenditures.”

Levin agrees that outright energy savings will likely trump green efforts this year. “I still think that a lot of manufacturers are going to be green just for marketing purposes but I don’t see many of them spending a lot of resources on it.”

CGI’s Dawson also sees cost as the major hurdle to green growth. “We are seeing some adoption,” he says. “However, costs continue to be the focus.”

THE UPSHOT
The new construction industry still has a lot of inventory reduction to accomplish, but the remodeling and replacement side of the business could be the saving grace for the next year to 18 months.  Industry veteran Wayne Gorell offers a particularly bullish prediction: “I believe sales could improve year-over-year by 20 to 50 percent.”  The CEO of the vinyl window manufacturer expects consumer confidence will improve and people will begin spending money again when the banks release their grip on the credit market. “I believe banks will start easing up on credit in the first quarter of 2009, which will start the flow of business for retrofit,” he says. “With improved confidence and money available, there is a tremendous pent-up demand for energy-saving retrofit windows and doors.”

Perhaps his experience gives him reason to be calm when looking to the future. “Having started in this industry in the mid-1960s, I’ve seen several recessions, but the only one that hurt the retrofit side of the business was 1980-1981. That was because even though banks were asking for 20 to 25 percent interest on home improvement finance money, they still didn’t want to lend it,” he explains. “Other than 1981, the replacement window industry has been pretty much recession-proof, so I’m not concerned about this recession. I’m concerned that the banks will continue to refuse to lend money to qualified buyers. Once lending opens up, we should see a very strong rebound.”

Ryan Self’s reporting contributed to this article.

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