It looks as though the UK economy may have grown by as much as 2% in 2013, which is a lot faster than the pundits were forecasting not very long ago. That’s great news but, perhaps even better, the IMF has just upgraded its 2014 growth forecast for the UK to 2.4%. In general the outlook for businesses is now much more encouraging than has been the case for several years. But what does this all mean for the window and conservatory sector?
We need to remember that our problems started long before the banking crisis of 2008 and the subsequent recession. The window market, including all its sectors, peaked in around 2004 and the prime driver for its decline, since then, has been saturation in the domestic replacement window sector, which was, and still is, the largest sector by far. The market today is substantially smaller than it was ten years ago; and, even though respected market analysts, like Robert Palmer of Palmer Market Research, are forecasting growth over the next two or three years, for the foreseeable future, the total window market is unlikely to be anywhere near as big as it was in 2004.
Let’s now think about what happens in shrinking markets. Consolidation tends to occur between some of the major players, as they take capacity out of the market. We’ve seen that happen; for example, Epwin Group’s merger with Latium Group; and Veka’s acquisition of Bowater Windows (WHS Halo), the business I started in 1982. The number of companies withdrawing from the market or diversifying into other sectors also tends to increase; and we’ve seen that as well. Sadly there tend to be more company failures; and that has happened too. But perhaps most significant of all, shrinking markets tend to change the structure of supply chains, as businesses become more focused on their core strengths; and I’d like to look at this more closely.
Over the years, the systems companies, as a group, have never created any real brand strength for their products, except within the trade itself. This is quite unusual; and, if you think about other building material and home improvement markets, they are littered with well-known brands. Ideal Standard, Showerlux, Mira, Stelrad, Myson, Poggenpohl and Alno are but a few. Of course a few major players have developed well-known brands; for example Everest, Anglian and Safestyle; but these are the exception. The vast majority of the market is dependent on products originating from the systems companies. As a result, most small and medium sized players are selling commodity products and having to rely, almost entirely, on their own reputations rather than on the brand strength of the products they supply. To the homeowner one plastic window is much the same as another; and this has left most of the systems companies as capital intensive producers of a commodity, from which they make little or no money. Ironically, this has also helped both timber and aluminium products to stage a revival; and some businesses are doing very well, as a result.
At fabricator level we’ve seen some major changes. The number of fabricators has been falling for quite a long time, giving rise to a trend of fewer larger fabricators. Some of these large fabricators have developed very successful strategies, focussed on building market share, as smaller retail fabricators withdraw from fabrication to focus on sales and installation; think of Polyframe. But interestingly, despite market shrinkage, a higher casualty rate and fewer fabricators, the number of businesses involved in the industry hasn’t changed very much. So what we seem to be seeing is polarisation between a relatively small number of major players and many very small businesses, often started up by ex-employees of larger businesses that have either downsized, diversified, withdrawn or failed. This in turn has led to the development of the “one stop” specialist trade counter businesses such as Window Fitters Mate and The Window Store. These businesses are merchanting operations, from which small window installers can buy their frames, glass, trims, fixings, mastics and everything else needed to install windows, doors, conservatories and roofline. So we’re seeing another layer in the supply chain, which now progresses from systems company to fabricator, then to trade counter and finally to installation contractor. Interestingly enough, the market is developing in a similar way to the central heating market, after the central heating boom of the 1970s and 1980s. Something I predicted in an article I wrote for Glass & Glazing magazine back in 2002.
Shrinking markets impact on individual businesses in many different ways; but ultimately, it’s all about market share. Stronger businesses take market share from weaker businesses; so if you’re losing market share in a falling market, you’re hurtling towards the precipice of oblivion, unless you can do something to reverse the trend. Even if you’re gaining market share, your sales can still be falling unless you are gaining market share at a greater rate than the rate, at which the market is shrinking. So what determines whether you gain or lose market share? The answer is whether you can create and maintain sufficient competitive advantage. If you can, you’re winning; if you can’t, you’re not.
Hopefully, the UK window market has now hit the bottom of the cycle and is starting to show some signs of revival. However, we are likely to have a problem of overcapacity for some time, until supply and demand have reached a more sustainable equilibrium. So life is likely to remain tough for many businesses in the industry for a while yet. Achieving and maintaining real competitive advantage is, therefore, all important. So let’s look at what this means.
When we talk about competitive advantage, many people tend to think about things like price, quality, customer service etc. And of course these are all important factors. I like to group all of these together under the heading “Operational Excellence”. Basically it’s all about being better, more efficient and more cost effective than your competitors; and in highly competitive markets, this is essential. However, if we’re honest with one another there are far too many businesses in the window industry, whose level of operational excellence isn’t good. And these businesses need to work hard on addressing this serious weakness, if they are to secure their futures in the tough market conditions that are likely to prevail for the foreseeable future.
However, there are other equally important factors in the creation of competitive advantage and I’d like to mention three of these.
The first is financial strength. Obviously larger corporate businesses have much more financial muscle than SMEs; and this will always be the case. But that’s not really the issue. If a smaller business has a strong balance sheet, relative to its size, it is in a much stronger position than similar sized competitors with weaker balance sheets. It is much easier for it to fund the changes it must make in order to achieve the levels of operational excellence that are required to give it the competitive advantage it needs. But there are far too many businesses in the industry with weak balance sheets. It is, therefore, very important for those businesses to rebuild their balance sheets. To some extent the issues of balance sheets and operational excellence are chicken and egg. You need some financial strength to achieve the level of operational excellence you require; but you need to achieve a reasonable level of operational excellence to build your balance sheet. So some careful and well thought through strategies are needed.
The second is sales and marketing strategy. Whilst there are undoubtedly examples of some really good and highly effective sales and marketing practices within our market, the industry, as a whole, remains in a time warp. We’ve grown up on a diet of untargeted, randomly implemented, in your face, lead generation, accompanied by crude, high pressure selling that focussed on pounding “punters” into submission. It worked, in the past, thanks to almost 35 years of uninterrupted market growth aided and abetted by a lack of both consumer awareness and statutory regulation. But the world has moved on. Our market has been contracting for nearly ten years, our customers are far savvier and statutory regulations are much tighter. Added to all this, the internet has revolutionised retailing and direct sales in a way that we couldn’t have imagined only a few year ago. Today, successful retailers and direct sellers, across a wide spectrum of market sectors, are those that have adapted to and exploited these new conditions.
Marketing today is about getting the right product to the right customer, at the right time, via the right channel, at the right price. It’s about brand building, establishing brand values, brand positioning, delivering the brand promise, accurate targeting and empowering the customer to make his/her own decision in your favour. As an industry we’re light years behind many other retail and direct sales markets. But actually, this presents a huge opportunity for those businesses that are willing and able to embrace change and turn themselves into modern marketing businesses. Despite all the gizmos and widgets we build into our products and get very excited about, in consumer terms, we’re supplying “me-too” commodity products, which are very hard to differentiate. Gaining competitive advantage, at consumer level, through product differentiation is, therefore, nigh on impossible. But gaining competitive advantage by taking a 21st Century approach to marketing is where the future lies for the more switched on businesses in our industry.
The third and final factor is the more general business strategy. Where does your business sit within the current supply chain and is that position sustainable, as the supply chain changes?
We’re seeing fabrication consolidating towards fewer larger fabricators; and many of those larger fabricators are doing very well as a result of this momentum. They’ve probably achieved fairly high levels of operational excellence and may have built up reasonable balance sheets. They’ve also seen power, in the market place, shifting towards them and away from the systems companies. But what happens when the flow of small fabricators, pulling out of fabrication dries up, as it will? Without a brand, these businesses will be faced with the same problem as the systems companies; selling a “me-too” commodity product. So will they make the same mistake that the systems companies made or will they start to develop networks that are based on consumer brands?
We’re seeing the growth of very small installation businesses and the one stop trade counters that supply them. Without any consumer brands, this part of the market is inevitably price driven, particularly as many of these small installation businesses have limited selling skills. Depending on whether some of the larger fabricators do or don’t embrace the brand challenge, this may or may not continue to be the case. Thinking outside of our market, you can buy a top of the range Worcester Bosch boiler via a small plumber/heating contractor and pay a premium for the product, whilst paying a much cheaper installation fee than you’d pay British Gas. So there may be an opportunity here for premium prices for a fabricator brand but installation will still be cheaper for the homeowner than it would be through a larger retail business.
At the other extreme, we still have a few major brands selling at premium prices; Everest and Anglian spring immediately to mind. But the interesting one is Safestyle because they have come in as a comparatively late entrant and have grown to become a major player, ranking alongside Everest and Anglian. They’ve also been very clever with their brand positioning, which differentiates them from their two main rivals. This all indicates that there is still a market for higher priced branded products. But set it alongside the growth of the trade counters and small installation businesses, and it suggests that we’re starting to see a significant degree of polarisation between the large brands and the small installers. In this situation, the middle ground is inevitably being squeezed; and this is precisely what happened in the central heating market after the central heating boom of the 1970s and 1980s.
So if your business is in this middle ground, as many are, what are you going to do? You can either carry on and be pushed gradually into extinction or you can start to develop a strategy that reduces your exposure. That could include many different things. You could look at developing a trade counter business. You could become a specialist in a particular niche – conservatory roofs, composite doors, bi-fold doors, vertical sliders, etc. You could diversify into other materials – timber, aluminium, composites etc. You could diversify into other home improvement products – kitchens, bathrooms, bedrooms, studies, garage doors, driveways etc. You could combine any of these and many more options besides. You could also develop entirely new business models that are web based. You’ll need to tread carefully and you won’t get everything right first time but the successful players, in the future, will be the ones that address the challenges that a changing market presents.
Summing all this up, it seems to me that we operate in an industry that has, to a large extent, been bypassed by developments in many other markets and that we’re now a long way behind the general level of play. The peaking of the market around 2004, its subsequent decline and the effects of the recession, since 2008, have played havoc with us; albeit some star players have emerged during that period. However, the long term effects of those difficult years and the impact of what is now a mature market means that the industry itself must also mature. Businesses, in general, need to raise their game, combining operational excellence and financial strength with 21st Century marketing and business strategies that are sustainable in a market that is changing beyond all recognition.