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Read the case carefully, analyze it conducting Porter’s Five-Forces Framework

and come prepared for classroom discussions

The UK Decorative Paint Industry

The UK has one of the longest-established paint industries in the world,


with a history that can be traced back well over a century. Since the mid-1980s,
the UK has been able to boast the largest paint producer in the world (ICI Paints
Division), and some of the most significant research in paint and associated
technology has been undertaken by companies in the UK. The UK industry has
total annual sales of approximately £2 billion, which makes it (in terms of
aggregate turnover) about the same size as the crisps and snacks industry or the
UK-based film industry.

There are several types of paint produced in the UK in addition to the


familiar brush- or roller-applied decorative paints. The majority of paint production
falls into four main user categories: decorative, industrial, automotive (including
original equipment manufacturing (OEM)) and ‘specialist’ coatings products. This
case study is particularly concerned with the decorative paint industry, whose
products provide the benefits of obscuring a substrate (such as a wall), providing
weather protection and providing a pleasing finish in a range of colours and
finishes.

The number of competitors within the industry has varied according to the
general buoyancy of the economy as a whole. As a mature product, sales of
paint closely reflect the overall rate of national economic growth. In the mid-
1980s, the number of UK producers peaked at over 330, but this number
reduced to around 250 during the recession between 1991 and 1993 due to
falling demand from industry, local authorities, and the DIY (Do It Yourself) sector
and construction companies. Between 1993 and 2000, the number of paint
companies increased again as the general demand in the economy increased.
Decorative paint producers are keenly aware of the need to keep prices as low
as possible because, in addition to consumers having a choice of many different
paint producers, the major benefits of decorative paint can be met using several
alternative materials.

Although the industry contains a small number of relatively large


producers (notably the two largest – ICI Paints Division and SigmaKalon), the
majority of competitors are small to medium in size, varying from as few as five
employees to as many as 500. Leigh’s Paints of Bolton, for example, is one of
the largest with 350 employees, whereas a typical ‘small’ producer is Caledonia
Paints Ltd in Glasgow where the proprietor both produces and distributes the
product using a small production facility and a van that has been equipped to
carry cans of paint to a limited number of local buyers.

For Classroom Discussions and Academic Purpose Only.


Strategic Management - Prof. Gaurav Vatsa
The technology contained in the majority of paint products is relatively
straightforward. Most conventional paints (including all decorative gloss and
emulsion paints) are manufactured by a process called high-speed dispersion,
which involves stirring the ‘ingredients’ together at very high rotational speed until
the requisite level of consistency is achieved. High-speed dispersion machines
are rather like large kitchen mixers and can be purchased, reconditioned, for as
little as £5000. The formulations (‘recipes’) for most simple paints can be readily
obtained from suppliers of raw materials who have a vested interest in ensuring
that paint manufacturers have ready-to-use formulations for successful paint
production.

The paint industry is a part of the broader chemical industry. As such,


producers are subject to the same health, safety and emissions legislation as
other parts of the chemicals sector such as petrochemicals. This has presented a
number of challenges to paint companies over recent years. Two such hurdles
have been the COSHH Regulations, 1989, which significantly tightened materials
handling rules in the workplace, and the Environmental Protection Act, 1990,
which increased restrictions on environmental malpractices, including emissions
of harmful substances into the environment. In common with other companies in
the chemical industry, many competitors have seen the apparent advantage of
pursuing international standards accreditation and these (ISO 9000 quality
standard and ISO 14000 environmental standard) have consumed significant
amounts of management time. Some of the larger paint buyers have made it a
condition of supply that all paint suppliers should be accredited with ISO 9000.

Concentration has significantly increased over recent years among the


key volume buyers of decorative paints. Whereas, in the early 1970s, decorative
paint was retailed largely through small independent DIY stores, the expansion of
the DIY ‘sheds’ has meant that buyers are now able to purchase in much higher
volumes and competition among manufacturers has intensified for shelf space.
As these ‘sheds’ have become larger and fewer in number (through mergers,
acquisitions and some withdrawals from the retailing of DIY products),
competition among paint producers has become even more intensified.
Concentration has also increased, although to a lesser extent among the trade
buyers such as painting contractors and construction companies.

The basic ingredients of paint fall into three chemical categories. Resins
(also called binders or vehicles) are typically synthetic polymers that bind
together other components and also provide the mechanism by which the paint
sticks to a substrate and provides weather-ability. Because most binders are
derived from oil products, the costs to paint manufacturers are, in part,
dependent upon the market rate for crude oil. The second category – pigments
and extenders – are typically dry powders that are dispersed into the vehicle and
provide colour, opacity and some chemical properties such as anti-
corrosiveness. These compounds are also subject to variable market prices

For Classroom Discussions and Academic Purpose Only.


Strategic Management - Prof. Gaurav Vatsa
according to the relative volumes of market supply. The pigment that is used
most is titanium dioxide – a white pigment that adds colour to almost all white
and light-coloured paints (to which additional tints are added). Titanium dioxide
results from the processing of a titanium ore which, like all ores, is subject to
price variations according to its abundance (or scarcity) and availability. Titanium
dioxide production is highly concentrated – four large producers control most of
the world output. Third, most paints contain a solvent (usually an organic oil-
derived compound) that makes the paint ‘wet’ and which evaporates when the
paint is applied. Most of these components require production on a large scale
and are consequently made by large chemical intermediate manufacturers, many
of which are chemical multinationals (e.g. Exxon, Bayer, Total Oil, Shell, etc.) for
whom paint components comprise a relatively small proportion of their output.
Like binders, much of the content of solvents is oil-derived. Accordingly, the
prices charged to paint companies for solvents are largely a function of the price
of oil (which, in turn, depends upon the production volumes of oil on the world
market).

Competition among players in the decorative paint industry has become


increasingly intense as the number of competitors has increased and the
concentration among buyers has forced producers to cut prices and provide
enhanced service to the DIY ‘sheds’ to gain shelf space in DIY superstores at the
expense of other producers. It is likely that the more successful companies in the
future will be those that can control costs most effectively and/or persuade paint
users of the distinctiveness or quality of their products to gain brand loyalty.

Financial results for a selection of competitors in the UK industry are shown in


Table 1.

Table 1
Selected results for UK-based decorative paint companies for year ending 2000
(includes international and export sales)

Company Total Sales Trading Profit (PBIT)


ICI Paints Division £ 2152 million £ 177 million
SigmaKalon £ 1640 million £ 110.8 million
Akzo Nobel Decorative £ 203.4 million £ 6.994 million
Paints
Coates Brothers £ 137.8 million £ 5.75 million
Manders £ 37.2 million £ 0.11 million
Valspar £ 28 million £ 0.83 million
Trimite £ 27.6 million £ 0.55 million
Humbrol £ 14.37 million £ 0.571 million

For Classroom Discussions and Academic Purpose Only.


Strategic Management - Prof. Gaurav Vatsa