Road to Recovery Begins in 2010
January 10, 2010
FEATURE ARTICLE | Segments, Channels, Statistics, Markets & Trends
Everyone is cautious, but there are traces of optimism in the window and door market. While most industry representatives expect a challenging start to 2010, they are, generally speaking, anticipating a flattening out and perhaps a slight uptick in the back half of this year.
"While there are many indicators that the marketplace has hit bottom, market projections are for the recovery to be gradual," says Sid Spear, VP of sales and marketing with Simonton Windows.
“On a macro scale, certainly there remain significant challenges on the employment, new housing and consumer confidence sides,” says Gary Delman, president of Sunrise Windows, Temperance, Mich. “Our company’s plan is to keep focused on the 90 percent of the people who are employed who have a need to upgrade their homes with energy efficient products.”
“We expect some modest lift in the latter half of 2010, but this will be a tough winter to get through,” says Mark Gallant, vice president of marketing for Atrium Cos. Inc. “The rebound for housing and its related goods and services will be painfully slow.”
Many suppliers and manufacturers are hanging their survival hats on better-performing products, not only to take advantage of government tax incentives, but also because buyers no longer have to settle for lesser quality as might have been the case at the peak of the building craze. “The market is what it is and we can all learn from the last two years,” says Peter Allen, vice president of sales, corporate stores, for Four Seasons Sunrooms. “The strong will survive and the products that perform will win the battle.”
The American Recovery and Reinvestment Act is boosting optimism a bit as well. The windows that qualify for the energy efficiency tax credits are buoying many companies’ sales. “The ARRA tax credit has definitely been one major glimmer of hope for the remodel/replacement market,” says PGT Industries’ Rod Hershberger, president and CEO. “We have seen a definite spike in sales for those PGT products that are eligible for the tax credit. Consumers are very much aware of the tax credit through all of the advertising, promotions and news stories, so there is hope in this arena through 2010.”
"One of the bright spots we saw toward the end of 2009 was homeowners taking advantage of the $1,500 tax credit," Spear agrees. "Our fourth quarter manufacturing volume indicates that homeowners are making the smart decision to invest in energy-efficient windows now to take advantage of the tax credit they’ll receive in 2010 thanks to this investment."
Industry veterans have survived to tell the tale of an economic cycle or two. Still, these past swings pale in comparison to the current downturn, dubbed the Great Recession. “This downturn will go into the record books as the longest, broadest and most severe since the Great Depression,” says Mark Zandi, chief economist and co-founder of Moody’s Economy.com. His evidence is presented in Table 1, which compares economic data from the recent recession to those dating back to the 1940s. Thus, the hesitant predictions for 2010.
The National Association of Home Builders calls for almost 700,000 starts this year, compared to about 560,000 in total last year. These numbers bear little resemblance to the 2005-2006 new construction peak of about 2 million starts—or even the 1.8 million annual starts that some industry experts consider a sustainable level of new housing. The good news is that NAHB’s economists see housing starts moving in the right direction, thanks in part to the expansion of homebuyer tax credits. NAHB sees 2010 remaining weak, but the numbers should continue to trend in a positive direction into 2011 and 2012 (Table 2).
"That segment of the market is rock-bottom low right now and should start to slowly move up next year," says Simonton's Spear. "Even if new construction crawls back upwards slowly, any growth in that area will be seen as positive."
The remodeling side of the market also looked poised for improvement heading into 2010. According to U.S. Census Bureau statistics, homeowner spending reached $145 billion in late 2007. By early 2010, the economy had sucked about $40 billion worth of wind out of those sails. Still, economists at the Harvard University’s Joint Center for Housing Studies believe homeowner improvements have bottomed out. As 2009 wrapped up, its Leading Indicator of Remodeling Activity had “turned a corner,” as year-over-year declines in spending lessened (Fig. 1). “Remodeling spending by homeowners shows early signs of stabilization,” says Nicolas Retsinas, director of the Joint Center. “While the housing recovery has been erratic, a strengthening of the economy could produce spending increases on home improvement projects by the second quarter of .”
All of this translates to a similar picture for the window and door industry. Overall, total shipments of prime windows, a number that includes both new construction and retrofit products, will be about 40 million units—a shadow of the 70 million unit high in 2007, according to Ducker International (Fig. 2). The research firm, which prepares a report in conjunction with the American Architectural Manufacturers Association and the Window and Door Manufacturers Association, is calling for a cautious upturn in the next few years, pegging demand at more than 50 million units in 2011 and about 57 million units in 2012.
WOUNDS TO HEAL
The building products sector and the economy in general are telling the same story for 2010: While numbers are finally moving in the right direction, they will likely never return to the over-inflated level of the bubble years. “Manufacturers will need to assess their capacity and cost structures relative to a new, permanently lower level of base demand,” says Jason Love, principal and vice president of Luxbaum Windows and Doors, West Palm Beach, Fla. He, along with other industry executives, sees numerous specific challenges ahead.
"Financial stability will be a challenge for many manufacturers in 2010," says Spears. "Companies need capital to grow, buy and sell product, and for effective marketing. Many industry companies are facing financial difficulties and it will be a challenge for some of them to survive because of the extended down cycle of the economy."
Spears notes that Simonton is fortunate to have a financially stable parent in Fortune Brands, and has continued to make investments in expanding its business. "We’re one of the very few companies I know of that has a sustained focus on new product research and development. That dedication to growth in the future, along with investing in new products and services, will help us strengthen our marketplace presence in 2010 and beyond. "
“Getting leads in the remodeling business hasn’t really been our biggest challenge, getting them financed has," notes Four Seasons' Allen. "Consumers still want to improve their homes, but they want to use finance as the way to fund it." More stringent financial requirements prevent many of these customers from getting funding, limiting potential sales, he continues.
“Recovery is being defined by this cycle as being long and drawn out,” says Atrium’s Gallant, “with nagging issues like high foreclosures, high real estate owned by financial institutions, continuing high mortgage defaults, lowered consumer confidence and lack of political competence on how to stimulate the broader economy.”
“The health of the economy will continue to be the biggest challenge,” agrees Sunrise's Delman. “Unemployment is too high, consumers are concerned about the future, credit is tight; these are all huge challenges not just for our industry, but any industry to overcome."
Even those who are less rattled by the macro economy are still watching changes in legislation that could impact how window and door businesses are run. Gorell Windows & Doors’ founder Wayne Gorell, president and CEO, expects challenges from changes to Energy Star, lead paint requirements and personal and business tax codes. “If the rules on lead paint are implemented as planned, we see smaller orders—less than seven units—diminishing significantly,” he projects. “The added cost [to comply with lead abatement rules] will make the added cost per unit prohibitively expensive, except on large orders.”
“We can expect to see some acquisitions and additional bankruptcies/restructurings,” Love says of the fenestration industry. “Pricing will be a challenge as well, as firms struggle to be as competitive as possible. Generally, firms will try to compete on other factors beyond price and quality. My guess is that firms will be pressured to offer unrealistic warranty coverage or service plans for their products.”
Similar concerns circulate among window and door dealers. Patti Freko, director of marketing for Feldco Windows, based in Chicago, says high unemployment rates and poor consumer confidence are likely to weigh down this year’s performance. David Marling, millwork manager for Marling Lumber in Wisconsin, wonders how quickly-changing government actions could impact his business. “I feel that our area (Janesville, Wis.) is still hit hard and that new construction will [see more recovery] in 2011,” he reports. “We have focused on remodeling for a few years and if it wasn’t for that, we would be hurting.”
“The biggest challenges [for this year] will be a combination of financing—banks are still very skittish about offering consumer financing—[and] manufacturers rising to the challenge and providing products that consumers want and can afford,” says Michael Foit, co-founder of Apex Energy Solutions, a dealer based in Ohio. “Lastly, consumer confidence will play a huge role as the economy tries to recover.”
And then, of course, there’s the issue of having a smaller pie to slice up, says Hershberger. “For many years, the new construction market fueled the many regional and national manufacturers,” he points out. “With the decline in that market, those left are focused on the replacement market. Here, there is intense competition for a small piece of the pie.”
So given the challenging backdrop, what does the industry see as possible glimmers of hope? First, the tax credits, both federal and state, for energy efficient upgrades. “Our company has experienced a tremendous growth that began in February of last year, right after President Obama announced the tax credit for fenestration products,” says Jeff Witkin, executive vice president for Northeast Building Products Corp., a Philadelphia-based manufacturer. “Since that time, business increased, and we would expect that trend to continue through 2010.”
The 2010 tax year deadline for the credits may also spark activity, Gallant adds. “Tax credits will have a positive effect, especially with an end-of-year looming deadline to create a meaningful sense of urgency with homeowners.” Sunrise’s Delman agrees. “The tax credits will continue to have a positive influence on our business throughout 2010, and I believe that consumers will be motivated to act as the end of the year approaches.”
The tax credits get a lot of attention, but it’s also the energy savings consumers are seeking, Allen says. “[Buyers] have mostly had bad experiences with lower-cost products that don’t provide the energy savings they are looking for. Poorer performing, less efficient products will either have to improve or cease being used.”
Consumers have come to expect high performance, says Apex’s Foit. With this as a “given,” aesthetics and features still play a significant role in making a sale, regardless of the economic conditions. “We see products that are both well engineered and come with several design options doing the best in 2010,” he says. For this reason, Foit considers state and federal tax credits not as the be-all-and-end-all savior in the economy, but as just another bullet for dealers’ marketing guns. “Window dealers should not hinge their business models on what the government … decides to decree, but rather focus on consistently offering great quality and value to their customers.”
PGT's Hershberger notes that while the tunnel may be long, there is some light at the end of it for new construction as well. “The national builders are in a better situation financially and have cash to spend,” he says. “Land values have decreased so more people will be able to afford new homes. The new homebuyers’ credit should help buyers move into a new or different home. All of this sets the stage nicely for when the credit and jobs start flowing again.”
As is the case with many individuals, many companies in the U.S. are reevaluating and reprioritizing as a result of the Great Recession. For the window and door industry, this means right-sizing supply to meet deflated demand and stepping up to provide consumers with the quality they will expect their dollars to buy them. “The industry needs to refocus itself on building better products which last longer and are congruent with a slower pace of new housing starts, as well as less rapid turnover in the housing stock,” Luxbaum’s Love says.
Many agree that the recession has not only educated consumers about things like real home values and tax credits, but has also made them more interested in the value they receive for what they do spend. “The recent focus on housing has made homeowners more aware and more educated about product options for both new construction and remodeling,” says Roger Murphy, president of U.S. Block Windows Inc. “Energy efficiency typically ranks at the top of the consumer’s list, [but] reliability and low maintenance are also major requirements.”
“The product has to perform better than they expected, the installation has to be flawless, and our companies have to be there to stand behind the products we provide,” Delman says. “Consumers are very smart. They know that all these things may cost a little bit more, but that it’s worth it to invest in great products and great companies.”
“The consumer today is smart, the consumer tomorrow is smarter still,” Allen notes. “Train your people well in the facts and understand the various government and power companies’ incentives to provide good information to the consumer.” Northeast Building Products has taken advantage of the downturn to make investments to be better positioned for the recovery, Witkin says. “We have learned as an organization that regardless of conditions, as a company, you must keep moving and swimming forward,” he says. “By this I mean that you need to continually invest in your people, new equipment and technology that allows you to swim forward. Failure to do this will result in your company treading water, or drowning.”