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$100$

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CHAPTER $4$ OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING

Architectural coatings are considered to be a mature market with long$-$term sales growth projected in the range of $1$ to $2$ percent per year. Demand for architectural coatings and sundries reflect the level of house redecorating, maintenance, and repair, as well as sales of existing homes, and to a lesser extent new home, commercial, and industrial construction. Industry sources also noted that the demand for architectural coatings and sundries is affected by two other factors. First, the architectural coating segment faced competition from alternative materials, such as aluminum and vinyl siding, interior wall coverings, and wood paneling. Second, paint companies had developed higher$-$quality products that reduced the amount of paint necessary per application and the frequency of repainting. Counteracting these factors, industry observers foresaw increasing demand for paint sundries due to a trend toward do$-$it$-$ yourself painting by household consumers.

U$.$S$.$ paint manufacturers are under growing pressure to reduce emissions of volatile organic compounds $($VOCs$)$ from paints and to limit the consumption of sol$-$ vents. The Environmental Protection Agency $($EPA$)$ has proposed a three$-$step plan for the reduction of VOCs in architectural and industrial maintenance coatings. The first phase of the plan, which took effect in $1996,$ required a $25$ percent reduction in VOC content from the base year of $1990.$ VOCs must be reduced by $35$ percent $($from the $1990$ base year$)$ in $2000$ and $45$ percent in the third phase in $2003.$ Compliance with EPA regulations has further eroded historically low profit margins in the paint industry.

Consolidation and Competition

in the Architectural Coatings Segment

Slow sales growth, the necessity for ongoing research and development, and recent compliance with governmental regulations have fueled merger and acquisition activ$-$ ity in the U$.$S$.$ paint industry since $1990.$ Companies seeking growth and a higher sales base to support increasing costs are making acquisitions. Companies that were unwilling or unable to make capital and research and development $($R&D$)$ commit$-$ ments necessary to remain competitive sold their paint businesses. Industry sources estimate that the number of paint companies is currently $600,$ or about $40$ percent fewer companies than in $1975.$ The number of paint companies is presently declining at a rate of $2$ to $3$ percent per year. Merger activity generally involved the purchase of small companies by larger firms to boost their specific market or geographic pres$-$ ence. Still, because of readily available technology and difference in paint formula$-$ tions associated with regional climatic needs, a small number of regional paint manufacturers, such as Jones Blair Company, have competed successfully against paint manufacturers that distribute their products nationally.

Major producers of paint for the architectural coatings segment include Sherwin$-$ Williams, Benjamin Moore, the Glidden unit of Imperial Chemicals, PPG Industries, Valspar Corporation, Grow Group, and Pratt & Lambert. These producers account for upwards of $60$ percent of sales in the architectural coatings segment. They market paint under their own brand names and for retailers under private, controlled, or store brand names. For example, Sherwin$-$Williams markets the Sherwin$-$Williams brand and produces paint for Sears.

About $50$ percent of architectural coatings are sold under private, controlled, or store brands. Sears, Kmart, Wal$-$Mart, and Home Depot are major marketers of these brands. In addition, hardware store groups such as True Value and Ace Hardware mar$-$ ket their own paint brands.

Specialty paint stores, lumberyards, and independent hardware stores that sell architectural paint and paint sundries have been able to compete in the paint business despite the presence of mass merchandisers $($such as Sears$)$ and home improvement centers $($such as Lowe's and Home Depot$).$ Industry sources estimate that specialty paint stores account for about $36$ percent of paint and sundry sales; hardware and

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JONES BLAIR COMPANY

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$101$

lumberyards account for $14$ percent. Furthermore, specialty paint and hardware stores and lumberyards in nonmetropolitan areas have outdistanced mass merchan$-$ disers and home improvement centers as sources for paint and paint sundries. This is largely attributable to a lack of home improvement centers and mass$-$merchandiser distribution in these areas and paint store, hardware, and lumberyard customer rela$-.$ tions and service. However, Wal$-$Mart has been an effective competitor in many non$-$ metropolitan areas.

Exhibit $1$ shows store patronage by do$-$it$-$yourself painters and professional painters. As indicated, home centers $($including wholesale home centers$)$ and mass merchandis$-$ ers $($including membership clubs such as Sam's$)$ represent the two most frequently patronized categories of retailers shopped