The 2011 Industry Pulse

Annual survey finds manufacturers and dealers movinng forward cautiously
John G. Swanson
January 1, 2011
SPECIAL FEATURES | Markets & Trends

Like the economy, industry optimism is growing slowly, according to the 2011 Industry Pulse, Window & Door’s exclusive annual survey of industry executives. More North American window and door manufacturers and dealers see business improving, perhaps because more are confident that the worst is over. The study clearly indicates that industry executives remain guarded in their outlook.

Sponsored by Quanex Building Products, the study is designed to provide an annual gauge of industry expectations and plans for the coming year, as well as assess the attitudes of industry executives regarding a variety of current trends. Prepared by Ascendancy Research., a St. Louis Park, Minn.-based market research firm, the sixth edition of the study is based on the responses gathered from about 400 Window & Door subscribers.

Conducted in November 2010, the online survey consisted of a series of questions related to expectations for the economy, industry sales overall and individual company forecasts and plans. Respondents were classified into five categories, including dealers/distributors with sales less than $100 million (34.3 percent) and those with sales of more than $100 million (0.3 percent), as well as window and door manufacturers with sales less than $20 million (29.6 percent), sales between $20 million and $100 million (11.6 percent) and sales of more than $100 million (21.5 percent).

Expectations
In general, respondents’ predictions for the economy in 2011 are a bit more optimistic than they were going into 2010. The survey results, however, are definitely more optimistic than they were two years ago. Overall, less than half of the respondents predicted slow growth for the coming year, with 42.1 percent expecting modest growth and another 9.6 percent foreseeing strong growth for 2011 (Fig. 1). Two years ago, in the aftermath of the housing crash and bank bailouts, less than a quarter of respondents predicted moderate or strong growth.

Looking ahead to 2011, dealers and distributors may be slightly more optimistic than manufacturers. More than 8 percent of dealers predict strong growth for 2011, compared to just about 5 percent for manufacturers. Interestingly, more than 8 percent of manufacturers predicted strong economic growth for 2010, so their outlook may be a bit more restrained.

More of the industry sees the window and door business faring as well as the general economy in 2011, if not doing a little better (Fig. 2). Just over a third of respondents see window and door sales trailing the economy overall—a figure that has dropped for the past four years. The percentage of respondents expecting the industry to outpace the economy remains fairly low, particularly in comparison to the last of the boom years for housing.

The most definitive indicator of greater optimism may be executives’ predictions for their own companies. This year, more than 70 percent of respondents predicted their companies’ sales will increase slightly or significantly in 2011 compared to 2010. That’s only a 3 percent increase from last year, but again, it represents a substantial increase from predictions two years ago.

Looking more closely at the results, Fig.3 reveals more respondents indicated sales would increase significantly in 2011, with fewer predicting slight increases for their companies or that their sales would stay about the same. There was also slight uptick in the number of respondents predicting slight declines in sales, but a decrease in those predicting significant declines.

Of note, manufacturers were slightly more optimistic than dealers about the year ahead. About 75 percent predicted slight or significant sales gains for this year, compared to about two thirds of dealers and distributors. Among manufacturer respondents, there was greater optimism among those working for smaller and medium-sized companies. Only 6.9 percent of the manufacturers with sales over $100 million predicted significant increases in sales at their companies, compared to 29.8 percent for manufacturers with sales between $20 million and $100 million and 17.5 percent for those at companies with annual sales under $20 million.

While the past two years have seen a recovery in the percentages of companies expecting sales gains, respondents definitely have more limited expectations than the boom years. For 2006, more than 40 percent of the dealer respondents predicted significant increases in sales. Slightly more than a third of the manufacturers said the same thing at the time. For 2011, those percentages are at 15 and 16 percent respectively.

The Industry Pulse also looks at responses by region to determine if there are significant deviations in outlook in different parts of the country. The results suggest greater optimism is spread out fairly evenly this year, although Canada stands out. Close to 90 percent of the respondents from north of the border predict increased sales for 2011, compared to 73 percent in the West, 71 percent in the South, 66 percent in the Northeast and 59 percent in the Midwest. The West also stands out with more respondents—27 percent—forecasting significantly increased sales for 2011. The Midwest is a distant second at 16 percent.

Capital Spending
Whether it’s a sign of greater confidence in the market—or simply a necessity to stay up-to-date and competitive—the latest Industry Pulse suggests that capital spending within the window and door industry will increase again in 2011. The percentage of respondents predicting a slight increase in capital spending now stands at almost 30 percent, double the same figure from the 2009 study (Fig. 4). At that time, looking ahead to 2009, only 3 percent of respondents predicted a significant increase in capital spending. For 2011, more than 8 percent now project increased capital spending.

More than half of the large distributor/dealer respondents predicted increased capital spending for 2011, compared to just over a third of those dealers with less than $100 million in sales. That spending pattern is reversed at the manufacturing level, however. More than 40 percent of smaller and medium-sized manufacturers predict increased capital spending in 2011, while slightly less than a third of the larger manufacturers—those with sales of more than $100 million—say they will increase such spending in the coming year.

The survey also asks dealers and manufacturers what their main goals are for capital spending in the coming years (Table 1). Once again, increasing efficiency of existing operations remains the number one goal. After several years of declines, the percentage of respondents that said expanding capacity would be their main goal increased slightly looking when they were looking ahead at 2010. That number slips again this year, perhaps a sign that many continue to see overcapacity in the market.

Also of note is a shift in percentage of respondents indicating “expanding market presence with new locations” as a main goal. That figure rose from 14 percent to 18 percent this year for dealers and distributors, a first after several years of declines. The percentage of manufacturers offering that response declined, however, for the first time in several years. Just under 10 percent of manufacturers named expanding market presence as the number one goal for 2011, down from 16 percent last year.

Employment Levels
The closings and shutdowns of the past several years continued right through to the end of 2010, but employment levels within the industry may improve in 2011. This year’s Industry Pulse once again suggests more companies are adding employees than losing them.
For four years, from 2006 to 2009, the study found a growing number of respondents predicting decreased employment levels at their companies, along with a sharply declining percentage of respondents projecting increased employment levels (Fig. 5). That trend reversed itself finally last year.

Looking ahead to 2011, nearly 40 percent of respondents predict their companies will increase employment levels. That’s off from the 2006 peak of nearly 60 percent, but well above the near-20 percent low of 2009. That same year, 20 percent of respondents forecast decreased employment levels at their companies. That number has now dropped to about 6 percent. Looking at the responses by type of company and size, the one stand-out is medium manufacturers—companies with sales between $20 million and $100 million. More than 60 percent of those respondents predicted increased employment levels at their companies for 2011.

Industry Impacts
The Industry Pulse asks respondents to rate the impact of various developments within the business and the economy on their companies for the coming year compared with the previous year. Overall, demand for energy efficiency, demand for value-added products and demand for value-added services have been seen as the most consistent positive factors in our industry (Fig. 6). On the negative side, changes in materials pricing and foreign imports have rated as consistent negatives.

This year’s study finds respondents less enthusiastic on most fronts. With the exception of demand for value-added products, manufacturers and dealers are rating most factors less positively. The change in number of doors and windows per home has scored positively consistently, but more respondents must see smaller homes and/or less lack of available credit having an impact on the number of products they are selling per job.

It may be more stringent energy requirements recently passed or some other factor, but the industry opinion on building codes flipped from a net positive for the window and door business to a negative for 2011. Also, changing direction is demand for lower price product, which now rates as slight negative for the first time too.

The study also asks manufacturers and dealers to assess the impact of various societal and macroeconomic factors (Fig. 7). As in previous years, respondents see the litigation and regulatory environment worsening. Labor costs and taxes are also expected to to have a more negative impact on business this year than in 2010.

Ranking as a slight positive again are both the hiring and interest rate environments for the coming year. “Green/global climate change concerns” continue to be seen as a positive influence for the industry, although less so than in the past few years. Despite the likely end or a reduction in tax credits for energy efficient products for 2011, government programs and incentives are still seen as a positive for the coming year, perhaps suggesting hope for other initiatives.

Product Lines and Activities
In addition to asking about expectations and plans, Window & Door’s Industry Pulse survey asks manufacturers and dealers to indicate what product lines they carry, what activities they are involved in, and what’s been added within the past two years. Overall, patio doors and replacement windows are the most commonly-carried products, with more than 80 percent of respondents indicating their companies offer those lines. Those products are followed closely by entry doors and new construction windows, each offered by more than 70 percent of respondents. Slightly more than half of these companies reported offering mouldings, trim and accessories, followed by interior doors and skylights.

Continuing a trend evident in recent studies, moulding, trim and accessories and entry doors scored highest among the products “recently added” by respondents. Just over 4 percent of the respondents said those lines were new for their companies in the past two years. Scoring highest in this category was installation services, added by nearly 8 percent of the respondents’ companies in the past two years.

Full Study
Window & Door developed the Industry Pulse as an annual report to provide insight into industry trends and year-to-year comparisons. The full study, sponsored by Quanex Building Products and prepared by Ascendancy Research, now features six years of data, including detailed tables showing responses by company type. The $39.95 report is available for purchase at www.windowanddoor.com/store.