As the nation's economy flirts with recession, manufacturers of low-maintenance fence, deck and railing products are a mixed bag.
The top-tier players are all outperforming the home construction market, but as demand decreases, margins get thinner for smaller composite decking manufacturers, and further industry consolidation is expected.
Contributing to lower demand for new fence, deck and railing product is the ongoing credit crunch and the loss of equity in people's homes, which has long been a source of remodeling dollars for homeowners.
And yet another obstacle facing manufacturers is a concerted effort on the part of distributors and lumber yards to reduce the number of stock keeping units, or SKUs, in their warehouses.
That effort was among the most talked-about subjects at the Wood-Plastic and Natural Fiber Composites conference Oct. 6-7 in Baltimore. The annual conference is run by Exton, Pa.-based Principia Partners, a consulting firm for the building product and plastics industries, among others.
While the number of composite deck projects has risen steadily for the nation's No. 1 deck builder, Archadeck, the number of different composite products being used to complete jobs has been significantly pared down.
Robert Haislip, vice president of franchise support for Archadeck, a subsidiary of Richmond, Va.-based Outdoor Living Brands Inc., said that while composite projects now make up more than half of Archadeck projects eclipsing wood for the first time in 2008 the company has focused on reducing the number of deck brands it carries and installs.
In 2006, Archadeck used nearly 40 different brands of composite decking to complete projects. Year to date in 2008, the company has used 14.
Brand consolidation should be a giant red flag for bottom-tier composite lumber extruders trying to stay afloat. There seems to be a general understanding among industry officials and analysts that, as the number of SKUs are reduced by dealers, well-positioned, well-known brands will be the ones kept on shelves, leaving the marginalized brands with some pretty bleak choices.
Even major deck builders, like market leader Trex Co. Inc. in Winchester, Va., are trimming product offerings, said Ronald Kaplan, Trex president and chief executive officer.
``We're starting to drop the number of our decking SKUs,'' Kaplan said at the conference. The move has helped Trex's sales, he added.
The fourth quarter of this year, and the first quarter in 2009, will be telling, officials said.
``I would say the biggest thing is making it through the next six months,'' said Steve Van Kouteren, a principal with Principia Partners. ``Strong companies will stay in there. Companies with weak cash balances will be facing problems.''
This is the time of year when dealers and distributors traditionally engage in early-buy programs with decking manufacturers, allowing the former to get stocked up for the spring, and keeping the extruders humming through the typically slow winter.
``With the tight credit market and no money available, that's not happening anymore,'' Van Kouteren said. ``This goes anywhere throughout the supply chain, from manufacturers to wholesalers and dealers as well. People aren't holding a lot of inventory.''
Bill Ross, vice president of sales for New London, N.C.-based Fiber Composites LLC, said the industry is going to stutter during the next six to 18 months, but he believes the top players, including his company, will come out of the trough stronger than ever.
``The top four to five manufacturers are going to continue to grow market share, at the expense of the smaller guys,'' he said. ``I do think that the smaller companies will shutter up, and some of them will just go away. There will probably be three or four of us that remain.''
Just this month, Santa Ana, Calif.-based FiberTech Polymers Inc. filed for Chapter 11 bankruptcy protection. The company is credited with being the first to market with a composite fence product. FiberTech supplies Lowe's Home Improvement stores with its TimberWolf fence boards. Company officials did not return phone calls and e-mails seeking comment on the company's reorganization efforts.
On the flip side, there is a school of thought that suggests that decking sales will typically outperform the market because decks are often bought by high-wage earners who are less affected by economic downturns.
``Decks are not a necessity. We're an amenity. We're a choice,'' Ross said.
Trex's Kaplan said at the early October conference that it was too soon to tell what specific effects the economy will have on the category as whole, and Trex specifically.
``In the coming weeks, we'll begin to feel [the impact],'' he said.
Kaplan echoed Ross' suggestion that the high end of the market the industry's primary customer base is typically less affected by the ebb and flow of the economy.
``It would appear if you look backward, this category is not affected as strongly as overall housing,'' Kaplan said.
The alternative decking industry has definitely proven to be more resilient than the housing market, said Paul Bizzarri. He is vice president of innovation for Wilmington, Ohio-based TimberTech Ltd., another company that seems poised to weather the storm, along with Trex, Fiber Composites, Biddeford, Maine-based Correct Building Products LLC and Moosic, Pa.-based Azek Building Products Inc.
``We're positioned to service our customers, contractors, dealers and distributors,'' Bizzarri said. ``Those are the things we can control. You need to focus on what you can control, then monitor very intensely what you can't, and react effectively to that.''
``I've been through several economic cycles over 35 years,'' he said. ``We'll respond to, and deal with, reality and not worry about what we can't control.
``I can control the sales. I can't control the wind.''
Preparation and a positive outlook will be needed for the road ahead.
``Anecdotally, when times are good, you hear the modeling experts talk about how when new homeowners, with the buying of a new or existing home, spend most of the major remodeling dollars within the first three years of buying the home, from interior to exterior,'' Van Kouteren said.
``If you just stick to what the pundits talk about that three-year cycle since housing demand started going down in 2007, those types of projects are gone because not as many people have bought homes, then the next three years are going to be awful.''