The UK Window Industry: Balance Sheets & Quicksand

Whilst there are some very successful businesses within the UK window industry, unfortunately, too many are seriously challenged due to their weak balance sheets. This may not have mattered so much during the long years of growth and comparative prosperity but, in today’s saturated market, it’s a crippling disease that the industry ignores at it peril.

Let me support this statement with some facts.

The Plimsoll Report analyses the financial performance of the 1,000 largest businesses in the industry. The table below shows some interesting data from their latest report, published in April 2014.Figure 1

Only 368 of the 1,000 largest companies saw their net worth increase during the previous year and 160 saw theirs remain static. So less than 50% actually increased their net worth. The report also shows that the average net profit for this group of businesses, during the last year was 2.3% of sales, which is a very low average indeed and suggests that there are a significant number of serious loss makers, balancing out a few star performers.

The pie chart below shows Plimsoll’s categorisation of these 1,000 businesses in terms of their strength and sustainability. 227 are classified as being “in danger” and another 90 categorised as “caution”.Figure 2

So, although 578 are either strong or good, a very large proportion of these businesses are relatively weak and, as we see from the above table, are either stagnant or declining.

The report also points to increasing polarisation between some highly successful businesses, building on their success and, at the other extreme, a very significant number of businesses in decline, to the extent that, without some form of intervention, they are at an increasing risk of failure.

Remember, we’re talking about the top 1,000 businesses in the industry, which according to Insight Data has around 14,000 businesses active within it. So, if this is the picture painted of the top 1,000, it’s fair to assume that the collective position of the smaller businesses is even worse.

To test this hypothesis, I undertook a small experiment.

From the GGF website I selected 10 businesses that were GGF members. I disregarded the larger names that would have been part of Plimsoll’s top 1,000 and I also disregarded all smaller businesses, of which I had any prior knowledge. So all ten that I selected were completely unknown to me; but to try and provide some regional balance, I ensured that my selection was distributed around the country. Having made my selection – and it’s important to note that I selected the companies, without any prior knowledge of their financial status – I then obtained their latest accounts from Companies House. For all but one company, the accounts were abbreviated, in line with small company rules.

The table below shows, in an anonymised format, some key balance sheet figures for all ten companies.Figure 3

Of the ten, there are two really good businesses (Company A & Company B) with strong or fairly strong fixed asset bases, good liquidity, represented by high net current assets, and significant shareholders’ funds (net assets). What isn’t shown, in the table, is the fact that Company A substantially increased its net worth over the previous year. So here we see two businesses in comparatively strong positions.

By contrast, Company J is balance sheet insolvent, having net liabilities of circa £20k. It’s difficult to tell from abbreviated accounts how the business is able to continue trading. It has net current liabilities of £30k, indicating a significant liquidity problem; and it has minimal fixed assets of £12k. So it’s either hanging on by the skin of its teeth, lurching form crisis to crisis, or it’s being supported by a kindly creditor or shareholder. Realistically, this business needs to embark on a major transformation strategy, which, in the absence of any significant cash, may be very difficult. But without this, the prognosis is unlikely to be very good.

The remaining seven businesses are all solvent, from a balance sheet perspective; but their nets assets (shareholders’ funds) range from virtually nothing to not a great deal; so none of them is in a strong financial position and two of them, Companies G and I, have net current liabilities, suggesting a very tight liquidity issue. Of the seven, only Company G has significant fixed assets; but that’s offset by its net current liabilities.

Based on this analysis, I’ve classified 20% as stars or stronger performers, 40% as chugging along but quite vulnerable, 30% as more seriously challenged and 10% as insolvent. This is a significantly worse position than that shown by Plimsoll for the top 1,000 companies. But if the systems companies and some of the large trade fabricators were to analyse the balance sheets of the companies, making up their customer networks, I have little doubt that they would find a very similar pattern. And this is the nub of the industry’s problem. We have a comparatively small number of larger capital intensive players, at the core, dependent on supply chains that are built on quicksand.

Roughly, 80% of the industry’s output to the final customer is via these small businesses, 80% of which range between vulnerable or insolvent; and that isn’t a foundation for a successful long term future.

So what can we do about it?

In my view we need to consider this very serious challenge on two distinct levels, namely strategic and cultural.

At the strategic level we need to move away from the current laissez-faire supplier-customer relationships, with each level of the supply chain and each business, within the supply chain, doing its own thing, in its own way, and often not very well. And we need to move towards strategic alliances that enable entire supply chains to act in a co-ordinated way, based on common standards, systems and processes and under the umbrella of a single brand.

A homeowner in Newcastle upon Tyne, buying from a fabricator/installer of Systems Company X should receive the same product, quality and service levels as a homeowner in Truro, buying from the Systems Company X fabricator/installer in Cornwall. The processes and systems deployed should be identical throughout; and the total brand experience should be exactly the same, just as it would be if these two customers were buying from a large national brand such as Everest or Anglian.

I’ve waxed lyrical, in previous articles, about the issue of small businesses in our industry having no brand, on which to base their business/marketing strategies. The systems companies and large trade fabricators have commoditised the product to an unprecedented extent; and to an extent that does not exist in other building product or home improvement markets. Other than the 20%, or so, held by the large national brands, most of the market is price driven, with an unrealistic belief that good selling can deliver premium prices in the absence of a brand. Good sales reps can undoubtedly achieve higher prices than poorer sales reps; but there aren’t enough of them; training is a never ending journey because of the high turnover rate, within sales forces; and, in any case, the higher rates that the good reps do achieve are relative to the levels of their own sales forces not to the levels of a premium brand.

It’s no wonder that we have so many unprofitable or marginally profitable small businesses within the industry. On their own, they’re not big enough to develop strong brand positions. They rely on local reputation, which is very difficult when, at best, their product is only purchased, by the end user, a few times in a lifetime. Some do break through to become significant local or regional brands; but these are a small minority and, even then, their own perceptions of their brand strength can sometimes be considerably greater than an independent brand recognition survey would assess them to be. Many of these small businesses are left, by the systems companies and large fabricators, to fend for themselves, often without the management and business skills that they need to run a successful, profitable business.

There can be several different ways of creating more cohesive networks under a single brand; and the precise structure is not the key issue. However, there are four important requirements.

The first is that there is a core organisation, at the heart of the network, that implements and monitors performance standards over the product range, productivity, operational efficiency, quality, systems, process and service levels. This could be a systems company, a large fabricator or some other third party; but all businesses, within the network, must be contractually bound to adhere to those standards.

The second is that each business, within the network, must have real and meaningful business support available to it. This doesn’t just mean marketing support of one sort or another. It means that they need support that will enable them to manage their businesses better, achieve high levels of operational performance, make good profits and build strong balance sheets. Everything from HR to PR; from production to installation; from financial control to administration; from IT to process and systems; from management to organisation structure. Support in all of these areas needs to be available to help the businesses, within the network, build on their strengths and really get to grips with their weaknesses.

The third is that the whole organisation must go to market under a single brand, with co-ordinated advertising, PR and lead generation strategies; albeit tailored to suit local circumstances. This could mean a franchise type arrangement, where the franchisees only use the core brand e.g. McDonalds or Body Shop; or it could be a dual brand with an identifiable independent business selling a branded product range – System X from ABC Windows. Either way, there should be a single, state of the art website, enabling the brand to be properly managed, developed and controlled, rather than many small, often not very good, websites with a wide range of uncoordinated brand messages, giving rise to hopelessly confused brand values.

The fourth is that all this has to be paid for; and each level of the supply chain – systems company, trade fabricator and retailer/installer – must accept their share of the cost. Again, there are many different ways of achieving this; but one thing is for sure, neither the systems companies nor the large trade fabricators can fund it on their own; so it must be a cost to the entire network, but proportional to each layer of the supply chain and to each business within it.

Developing a network with a good, well managed product range, supplied through a group of disciplined businesses, all optimising their operational performance and service levels, will bring significant financial rewards at all levels of the supply chain. And if this happens under a strong brand, the network, as a whole, can determine where it wants to position itself in the market and the price levels appropriate to that position.

This last point is incredibly important. Not every network can be a premium brand, going to market with a premium price. Some will need to be value brands and some will need to be budget brands. The cost structures, within the networks, will need to differ accordingly, as will the brand values that are developed and promoted.

That’s enough about the strategic level. So let’s now consider the cultural challenge.

To achieve the change, from where we are to where we need to be, a significant cultural shift is required.

I’ve talked to many senior people, from within the industry, about the need for the sort of changes that I’ve described. And there seems to be an acknowledgement that the products have been commoditised and that this has given rise to some serious difficulties. There’s also an acknowledgement that, if the industry is going to thrive once again, substantial change is required. But when it comes to the specifics of what that change should be, the barriers often go up and the reasons why things can’t be changed seem to overwhelm the reasons why things can and must be changed. The result, not surprisingly, is inertia and a retreat to comfort levels, which is likely to lead to continued decline.

Somehow, the bigger players must start thinking outside their traditional boxes. So much of our thinking is still influenced by the sales driven philosophies of the 1980s and 90s; but those days are over and the industry needs to move on. The face of retail and direct sales has changed beyond recognition, due to the on-line revolution; and we need to look closely at what happens in other more progressive markets and at the cutting edge of both B2C and B2B developments. There’s so much to learn and we’ve been so slow to learn it. Perhaps we need to bring in more people from more dynamic retail environments; not just to teach us but to lead us and to give us the confidence we seem to lack. One way or another the major players must initiate the changes that the industry needs because it can’t continue to exist on a foundation of quicksand.

But a different culture is not just needed amongst the larger players, it’s needed within many smaller businesses as well. Many of them really must raise their games; and this is something, with which some will struggle to come to terms. But they need to manage their businesses better so they can generate more profit, strengthen their balance sheets and create greater long term sustainability. But without help and support, of the type I’ve described, this is often very difficult for them to achieve; and sometimes impossible. So whilst I’m urging the systems companies and larger fabricators to develop more controlled networks, with far more support for the businesses in their supply chains, the smaller players need to accept that they may need some help and that they will lose some independence, as the price they pay for support from the network, of which they become part. At the moment the supplier/customer relationships, within the various supply chains, are a free for all that are, in practice, damaging many more businesses than they are helping. The network approach is that each business, within the supply chain, is part of and contributing to a larger team. But the strength of the larger team, within the market, is greater than the sum of the strengths of the individual businesses.

If we can start to address these cultural issues, the changes that are needed will start to flow.

On a final note, there are actually some encouraging signs that movements in the right direction are beginning to happen, albeit very slowly.

The US building products giant Masco is now well established in the UK window industry; and, whilst it’s still a bit of a sleeping giant, it’s hard to believe that it won’t want to develop a more dominant position over here. When it does, it will start to put some real pressure on the indigenous industry to change.

Similarly, Internorm, the leading European window brand, seems to be showing some increased interest in the UK market and this may also add to the potential pressure from Masco.

On the home front, Epwin’s recent news that it’s floating on the AIM market and appointing a new Chairman is very interesting. Peter Mottershead was a previous CEO of Anglian and brings some serious retail experience to Epwin. So we could see some interesting developments and perhaps a much greater emphasis on the Swish brand, which although a household brand name, remains only a small part of Epwin’s business. Perhaps it’s another sleeping giant that is starting to stir.

Network Veka is currently by far the most advanced network in the UK window market and has created a very successful organisation focused on first class service levels and operational performance. It’s associate Veka UK, now owns the Halo brand, which was originally designed as, and intended to be, a consumer brand (As the first CEO of Bowater Halo, I wrote the original business plan!). It’s not hard to imagine a “Halo” branded product supplied through Network Veka; that could be very powerful, so who knows.

The Conservatory Outlet is almost the opposite of Network Veka. It’s a fast developing network of independent businesses, all going to market under a single brand, based on a modern, on-line marketing strategy, using a single website. It seems to have some strong legs and, whilst still comparatively small, may be showing the way to some of its larger rivals.

Imagine combining the operational disciplines of a Network Veka type organisation with the brand management and marketing strategy of a Conservatory Outlet type organisation. Eureka! We’re getting there slowly; and someone is going to join the dots up before very long. And when it happens that organisation will be catapulted into a commanding position, within the market, with others being forced to play catch-up.

It will be interesting to see who gets there first. Epwin with Swish? Veka/Network Veka with Halo? The Conservatory Outlet by extending its business model? Or perhaps a current outsider? Polyframe, the Halifax based trade fabricator, has been taking market share very successfully, resulting in controlled and profitable growth. This has involved a number of strategic alliances with other fabricators/retailers; so perhaps its next move could be to extend its business model to incorporate a Conservatory Outlet type brand and marketing strategy. Who knows?

The changes that I’m advocating are starting to happen, albeit in a small way and perhaps without all the dots being joined up yet. But to return to my starting point about weak balance sheets and foundations of quicksand, things need to speed up. At the moment there is still too much resistance to change, a lack of vision, too little mould breaking strategic thinking and not enough energy and resources being applied to shaping the future. If we’re going to create a firm foundation for the future and address this debilitating balance sheet problem, this must change; not tomorrow or sometime/never; but today.

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