Coatings World - June 2011

about the same portion in profits. Comparatively, in the U.S. retailers capture four times more of the profit pool than the paint manufacturers that supply the stores. Why? (see Chart 3 below, “Economic Profit Pools in the Architectural Coatings Industry”)

Marketers are taught to capture as much of a defined market as possible because there are EOS (economies of scale) competitive advantages that will lower manufacturing, marketing and administrative costs. On paper these advantages should provide improved profits that can be reinvested to continue the cycle. Research shows that as an industry, paint and coatings do not capture value; therefore, the industry doesn’t have the cash engine to reinvest in R&D, among other things. This phenomenon is captured in the model espoused by Harvard’s Michael Porter (see Chart 4 on the next page, “Coatings and Adhesives Margin Power Position”).

According to “Porter’s Profitability By Market Position” model, the ML should be both the volume and profit leader in an organized market. In this chart, it becomes

apparent who is practicing value marketing and those who are not as so-called market leaders.

Powder coatings as a product line has suffered the greatest value loss, losing 70 percent of its value over the course of 35 years. To illustrate, consider the value movement of white appliance polyester, a specific application of generic powder coatings, from 1995 to 2010 when its value shrunk by 59 percent (see Chart 5 on the next page).

To place this data into proper perspective and to stay even with the CPI, this same polyester powder coatings selling today at $1.28 per pound would have to sell at

$5.50 per pound. A $3.90 per pound loss has taken place over 15 years. This represents a value loss three times the current selling price.

Why did powder coatings rise so fast within the metal substrate OEM Sector and fall equally fast in its value proposition? Simply speaking, it’s the combination of these six elements at work:

1. Ease of market entry (low cost of capital at formulator level);

2. Booming economy (all boats float when tide is up/opposite when economic tide is low);

3. Too many formulators chasing too small market growth;

4. Excess capacity at the formulator level;

5. Little product differentiation ( commodity problem); and

6. Price to fill capacity (with commodities, price is the lever).

Considering all types of coatings on a forced ranking approach, recent research shows that when price is excluded, the most important buying criteria among paint and coatings customers is product performance. This is followed by 12 other elements of decreasing value to the customer. Please note that the Sales Representative is last in importance at number 13. Why would that be the case? Why, since the representative is the face of the company, is it dead last? (see “Paint and Coatings Customers’ Buying Criteria” side box)

The answer has to do with customer expectations. The customer, like all of us these days, wants instant gratification in product development; problem-solving technical service; customer service; and accurate and timely intelligence in its market. The sales representative is not giving these to the customer. (see side bar “Paint and Coatings Customers’ Buying Criteria”).

Paint and Coatings
Customers’ Buying Criteria

1. Product Performance

2. Value
3. Product quality consistency
4. Delivery on time
5. Technical service
6. Customer service
7. R&D capability
8. Trust
9. Company image
10. Marketing capability
11. Communications
12. Management capability
13. Sales representative

Source: Chemark Consulting

The customer is no longer interested in entertainment. Entertainment is acceptable only after the job is done. The customer needs to survive first and in order to survive customers constantly require solid intelligence. Unless the sales persons are technically skilled, combined with market/sales savvy plus a strong inquisitive energetic attitude, he or she and the company will suffer.

Present and future

The formulator “profit squeeze” provides an opportunity for raw material suppliers to offer “systems” and thereby gain greater control over their own destiny as well as the formulators’ business.