market review of wpc decking market in spain during 2014 and trends for 2015

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Market review of WPC decking market in Spain during 2014 and trends for 2015.

Composite decking continues to gain popularity and grow in the market. In 2014, the WPC decking sector has been a niche growth area within the hard-hit floorings sector.

How has the market performed? Two years ago we pointed out for some executives from the WPC decking sector that the Spanish market would soon grow sharply. Players should start to build their market positions immediately. As we forecast, WPC decking sales boomed during 2013-14 in Spain, exceeding 50% in 2014 alone. A new phase of consistent growth has started. The rest of the European market, which is a few years ahead of the Spanish market in terms of development, grew at averages of almost 40% during its years of greatest expansion, and now increases at annual rates of less than 10%. This moment, then, is key to shaping the future of the market. It is critical for significant players to position themselves and capitalise on this period of growth so as to offset future retractions when the market achieves greater maturity. Aside from the consumer spending crisis, which has affected the Spanish market for a number of years, other factors have come together through 2014 to leverage growth in the WPC decking niche, despite generally poor performance in the indoor flooring sector in recent years. These include growth in the home improvement sector (+9%),

investment in the hotel sector and the incipient recovery in private consumer spending (up 2.4% in 2014). Spanish imports of tropical woods, which increased around 12% during 2014, in line with trends in other European markets, also corroborate the upturn in this sector, despite higher prices for traditional species such as ipe wood, increasingly restricted supply at point of origin and the less favourable EUR/USD exchange rate. Development and forecast for the home improvement sector in Spain, 2007-2014

Understandably, the behaviour of the home improvement sector can account in part for expansion within the market. During 2014, spending in this sector in Spain reached 13.9

Source: Andim

ac




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billion euros, up 9.4% on 2013 (UFEMAT-Andimac), with home improvement accounting for 82% of total building-trade activity (24% in 2007). For 2015, the sector forecasts a 2% growth in volume, with a share in overall activity figures of just over 85%. The price range for home improvement projects is €300-€850/m2, depending on the quality of fittings and whether or not energy efficiency improvement is included. A unit of 90m2, therefore, would cost around €60,000 to renovate (ANEER). If an outdoor area of some 40m2 were to be included, using exterior decking, the cost would be approximately €4,000 - less than 10% of the total project cost. As such, an outdoor area with decking is accessible for any home improver, whatever their budget. The positive outlook for consumer spending, along with growth in consumer confidence and personal finance suggest an improvement in the market environment for the outdoor decking and garden sectors.

Similarly, investment in numerous renovation projects within the hotel and leisure sectors has also contributed, and will continue to contribute, to growth in the composite decking market. Winter 2014-2015 has seen various projects using outdoor decking get underway in tourist destinations, involving thousands of square meters of WPC decking.

Spanish GDP growth rate forecast 2015-16

Source: Banco de España In short, the first steps can be observed toward a recovery in consumer spending and growth in the Spanish economy (GDP +2% in 2015). Together with traditional factors (pleasant climate, lifestyle and the tourism sector), these can be viewed as potential drivers for growth in the decking and garden furnishings sector over coming years, a situation unlike that in other European countries. This growth, however, will not impact equally on all players: the winners will be those who best align their products with the needs and limitations of the market. What changes are taking place in terms of supply? For the moment, the outdoor WPC decking sector has not seen significant innovation aside from the improvement in capped products. In the USA, Trex has entered the sector of doors for outdoor furnishings, but these are not yet available in Europe. Overall,




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the whole range of exterior decking products has performed well, both in the standard, sanded-finish WPC segment (which has the largest market share) and in capped products. As we forecast some time ago, the value proposition of capped products has attracted market attention in 2014. A significant increase in sales, mainly in the commercial segment, and competitive intensity in this segment is to be expected over the next two or three years. Over this period, reliable, competitively priced capped products produced in the Far East will poach sales both from the more expensive US-produced ranges by Fiberon and Timbertech, and from the standard, mid-range price band. In terms of imported products priced in US dollars, it will be key to bear in mind how the EUR/USD exchange rate evolves in order to check if and how it affects the pace of growth in the sector.

Source: Onegrow

During 2014, new manufacturers have also entered the market, although suspected

quality issues have affected their progress. A number of domestic players have also ceased their activity within the last year. All considered, and after various years in the market, two companies are the leading domestic manufacturers, yet both with standard finish products. Regarding other European brands, some have managed to maintain a position with moderate sales, while others have tried unsuccessfully to break into the market with ineffective pricing and marketing strategies that have failed to produce significant sales results or achieve top of mind awareness. In terms of new products currently under development, a number of manufacturers have innovative proposals in the pipeline, which will bring new solutions into play. It is possible that some of these may reach the market during 2015. Finally, the implementation in 2014 of the new CEN 15534 standard for WPC products, which the sector had lobbied for, does not seem to have had a noticeable impact to date as a means of quality differentiation, nor has it acted as a barrier for certain types of products to enter the market. Price development In general, over the period 2012-2014, all the B2B price ranges have seen a reduction in their lowest prices of around 10%. For the US-made products this has been due to product line extension with more competitive prices,




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while competitive pressure has been the key driver in the case of products manufactured in Asia. The current market price range is €25-70/m2, from low-end products such as the hollow, polished-finish profiles manufactured in China through to premium level capped solid profiles from the leading US brands. The lowest market prices for Asian commodity products has fallen from €27/m2 to €25-24/m2, although this has been offset by significant growth in sales volume. The products Made in USA, mainly solid boards, dominate the high-end price range of €42-70/m2, which covers the whole selection of profiles: Standard, Co-ex, Capped and Cellular PVC . The US players present in the market are Timbertech and Fiberon. The mid price range of €40-28/m2 covers some European manufacturers and, in part, overlaps with the lower prices in the high-end range. It also accounts for the Capped products Made in China, to which the market has responded very positively thus far. In all, considering the current price ranges from the traditional distribution channel, the main distribution channel for WPC decking in Spain and Europe up to now, the average B2B market price for the whole WPC decking category has fallen by around 12-15% over the last three years, with very significant price elasticity of demand. As far as substitute products are concerned, the price trend has been upward for IPE wood decking at point of origin: USD2500-3600/m2 FOB Belem-Paranaguá. At a national level, traditional channel installation prices stand at around €45-50/m2 for a

decent quality product. Nevertheless, imports of IPE wood have grown around 10% despite the limited supply, the rise in the exchange rate and an increase in prices. B2B prices 2014 (VAT excluded)

Source: own research In all, imported products represents more than 70% of market total, mainly those from China. Prices in euros would have to be increased around a +18% in order to maintain profitability, while products manufactured in Europe would recover competitive edge. As an example, an imported product with a Manufacturer Suggested Retail Price (MSRP) of 45/m2 in 2014, would have to increase its price to around €55/m2 in 2015, in order to maintain its gross margin relatively stable. Let’s see what would happen there. The distribution channel As has been the case since WPC decking first arrived on the scene, the traditional distribution channel for wooden flooring has been the main sales channel for WPC decking




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(as well as in the rest of Europe) with an estimated market share of over 60%. In recent years, retail sales of WPC products have reached significant levels of atomisation across Spain, thanks in large part to value-priced products produced in Asia. Nevertheless, the large-scale national and regional distributors still account for the majority of sales of the most prestigious brands. Not all the international brands manage to achieve top of mind awareness, however, with very uneven levels of success from one to the other. All in all, we consider that, to date, the only brands that have truly managed to position themselves within the market are Fiberon and Timbertech. As regards the DIY store channel, WPC decking has not yet achieved significant presence. When WPC decking is displayed, the predominant product types are value-priced commodity profiles manufactured in Asia, either unbranded or sold as the retailer’s own brand. The DIY sector is the only channel for home improvement products and materials to have grown in recent years. In terms of business volume, growth reached 4% in 2014, with a turnover of almost €2.45 billion (the sector had already grown 1.9% in 2013). Regarding the number of stores, 2014 saw the total reach nearly 600 points of sale, including various different retail formats.

Concentration of DIY points of sale in Spain, by region (2014)

Source: own research During 2015 and 2016 the leading chains are set to continue their programmes of new store openings. In all, as we outlined in previous reports, this continuous and sustained expansion of different formats within the DIY channel reflects a change in consumer behaviour within the sector and an opportunity for those products which do not yet have a significant presence within this distribution channel.




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Some trends to bear in mind for 2015

There are some signs of optimism

(growth in consumer spending, investment, GDP) relevant to growth in the Spanish WPC decking market in the short and medium term.

Reliable, competitively priced capped

products are set to gain significant market share over the next two years.

It will be key to observe the growth

and protection strategies the leading brands implement in the solid profile segment, given their products will become more expensive as the exchange rate becomes less favourable.

The evolution of the EUR/USD

exchange rate will be a relevant factor in sustaining the pace of growth. This growth, to a large extent, will derive from an increase in sales of Asian products.

The estimated fall of the euro to parity

with the US dollar (-18%) will improve competitiveness of European products and put pressure on importers’ profit margins, creating an advantageous environment for the former to increase market share.

This new exchange rate scenario is already being taken into account, with market prices up around 15% for some non-European imported products.

Atomization in distribution, along with

commoditization, will continue in the WPC decking market, following a similar pattern to that previously seen in the laminate flooring sector.

In the medium term, the growth in DIY

points of sale in Spain will open up an opportunity for those products suited to this distribution channel, currently under-valued in the composite flooring sector.

For WPC decking manufacturers, synchronisation of the Product-Distribution-Brand-Cost value chain will be critical to ensure competitiveness and sustained growth. Prices and margins on products with limited added value will suffer the greatest pressure.

In line with the traditional evolution of

the flooring market in Spain, it is foreseeable that the greatest growth will take place at the extremes of the market: in other words, in the high end and value-priced segments. The mid-range segment will see the lowest growth rates in the medium term.




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