Volume 9, Issue 9 - October 2008
T R E N D T R A C K E R
The recent dramatic rise in the cost of fuel likely will have a continuing effect on door and window industry participants for years to come. This industry is heavily driven by logistics, with most companies servicing, on average, a 300- to 500-mile radius around their manufacturing facilities. Due to the fragmentation of the industry, many companies that attempt to ship products significantly further than 500 miles find that a comparable competitor located closer to the customer offers a lower price because of their shorter shipping distance. The Energy Information Administration, a U.S. government agency, estimates that diesel prices will reach an average level in 2008 that is 45 percent higher than their 2007 level. This increase is reshaping the industry and the way the companies view manufacturing facilities and customers.
Impact of High Energy Prices There are a number of other effects of high energy prices, none of which are favorable for manufacturers in the door and window industry. Higher fuel prices are tied to higher overall energy prices, which increase the cost of heating and cooling plants and producing products. Vinyl manufacturers are particularly affected by rising energy costs, because vinyl is a petroleum-based product. In a macroeconomic view, higher fuel costs have a negative impact on consumersí pocketbooks and consumer confidence, neither of which is good for the housing industry. A particular scenario that is negatively affected by high energy prices is the aspiration of many city dwellers to trade up to a larger home in a suburban area. Higher energy prices make both ends of that equation less attractive, since heating that larger home becomes more expensive, as does commuting further to work.
Blueprint for the Future
It is always impressive to hear from a company that it manufactures its product in the middle third of the country and is able to pass along sufficient shipping costs to sell profitably to customers on both coasts. It is usually an indicator of a high-quality, highly differentiated product that is not viewed as a commodity by customers. Companies actually can use the ability to pass along shipping costs as a sort of litmus test to determine whether they are focused on a segment of the product spectrum that adds enough value. It doesnít mean companies should aspire to serve an ever increasing radius. However, becoming knowledgeable of your customersí willingness to pay to have your product shipped to them is a way to test the perception of your products that a marketing study is powerless to match.
Another aspect of the future of the industry that is virtually assured as a result of higher energy prices is continued consolidation. Being a small company will continue to become more difficult as larger competitors with well placed manufacturing facilities will be able to whittle away significantly at the outer edges of smaller companiesí service areas. In the past, adding to the acquiring companyís product offering has been the most commonly mentioned reason for completing an acquisition. We would be surprised not to see companies begin to mention the logistics advantages of the placement of the acquired companyís plants as being among the primary driving factors more often.
High energy prices are likely to be a reality for the foreseeable future. This is the time for companies to assess the profitability of their most far-flung customers and to redouble their efforts to focus on value-added products for which customers happily will pay additional shipping costs.