Indian paint industry: bright growth prospects – Ravi Raghavan
The Indian paints industry has seen remarkable changes during the last decade. In this period, almost every major multinational has established or entrenched their presence, incumbents have built on their market position and the industry has become far more sophisticated in terms of the products it manufactures, the way it sells to customers and in the range of technologies it uses.
The growth of the industry is not surprising; after all, paint demand is intimately tied to GDP, which has grown at record levels for much of the decade. Overall, paint demand in India has grown 1.5-2.0 times GDP growth, though some segments have done better. Decorative paints, for instance, grew about 20% annually in the second half of the last decade and the overall market by about 18% in 2008-09. Nevertheless, per capita consumption is still small (about 2-litres), indicating the growth story still has considerable steam left in it.
Unlike in the developed world, the paint industry here is fragmented, with about 1000 companies, of varying sizes and abilities, in the fray. At the top of the heap are about ten large players, each with annual sales exceeding $20-mn, and cumulatively accounting for about 65% of the total market (valued at about $3.75-bn). The rest of the market is divided between 130-odd medium-sized operators (with sales of $2-20-mn each) and 850 or so small players, with annual sales below $2-mn. Price pressures are, not surprisingly, intense in the bottom of the market, and companies have been vulnerable to shocks emanating from wild swings in prices of key inputs such as titanium dioxide and other pigments and solvents. This pressure on prices is also manifest in the fact that while the SMEs account for less than 35% of the market in terms of value, they have about 50% share of the 2.3-mn litres of paints sold each year.
One common way to differentiate this disparate industry is by the consumers it serves: into industrial and decorative coatings. In value terms, the Indian decoratives market is much larger (about 70% or $2.6-bn), but the share of the industrial segment has increased rapidly in recent years concomitant to growth in key segments as automobiles, white goods etc.
The dominance of the large companies is clear across both segments, but is even more so in decorative paints, where marketing spends are higher as the industry needs to reach out to a much more dispersed customer base. The organised sector here is a mix of home-grown and multinational companies with Asian Paints the clear market leader (with little more than 50% of the market), followed by Kansai Paints, Akzo Nobel and Berger, in that order.
Modernisation and expansion of the supply chain
The decoratives business leverages a wide retail network to push sales, which are spread throughout the year, but with some seasonal bias. The strong growth in the real estate sector, driven by availability of ready home finance, and the government’s emphasis on boosting residential infrastructure are important drivers.
Uniquely to India, paint choice is seldom in the hands of the consumer (except, possibly, for choice of colour) and often rests with dealers, contractors, architects and interior decorators. Companies have recognised the vital role played by contractors and try winning loyalties through incentives and loyalty programs.
The retail supply chain has seen significant expansion and upgradation, especially in the second half of the last decade. There are now about 50,000 outlets selling paints across the country, and nearly half have been set up in the last five years. Large paint companies have also invested significantly in related infrastructure – each of the large companies has 40-70 depots to replenish inventories at the retail end. The majority of paint dealers (90%) are small shops, but are a vital link in the chain from the paint company to the consumer/contractors.
During the middle of the last decade, paint companies first ventured to set up tinting systems at the sites of their dealers to enhance the user experience and bring efficiency into a complicated supply chain. The idea has since caught on and some 30,000 tinting systems have since been installed across the country. At the same time, the channels for distribution are also becoming more sophisticated, in response to a trend amongst consumers to be more involved in the paint buying process, unlike in the past. For the first time – as in developed countries – paints are being sold through brand and ‘experience’ stores (manned by colour and lifestyle consultants!), multi-product stores, multi-brand stores etc., besides the traditional ‘hardware’ stores. However, one important segment – do-it-yourself (DIY) – still remains conspicuous by its absence and this is unlikely to change any time soon.
Shifting painting habits
With economic growth has come about a significant shift in painting habits. From a task to be taken up on occasions (e.g. weddings & festivals), painting is increasingly seen as an ‘anytime’ activity with even the monsoons not as much a deterrent as before (thanks to quick drying paints). The quality of products used has also seen a significant shift: low-cost lime wash (with colour) and distempers are giving way to emulsion and wood finishes, with better properties and margins for producers. In urban centres, dictates of fashion (colour, texture and even smell) have opened up niche markets, which are gradually being expanded.
Opportunities for chemical suppliers
While the growth opportunities that lie in the paints industry bode well for suppliers of chemicals such as resins, pigments, solvents etc., the intense competition in the marketplace almost across all these segments is compressing margins. Most products lack differentiation, and sell on price, as commodity chemicals. Unlike in developed countries, where the business of resins for paints, for instance, is seen as a non-core activity by paint companies and often outsourced to other producers, most Indian paint companies continue to produce these inputs. This has kept operating rates for most other resin producers low, making them extremely vulnerable to fluctuations in prices of key raw inputs (monomers, solvents & energy, to cite a few).
The business of additives, which are small volume chemicals (such as biocides, dispersants, foam control agents, driers & catalysts) added to a paint to overcome performance issues or enhance performance, is better, as technology is still a barrier to entry. For these speciality products the business model is to sell solutions, not products and high customer intimacy makes frequent shifts from one supplier to another much less common.
All in all, the prospects for the paint industry are bright, but that for suppliers of chemical inputs is somewhat dimmed, largely due the severe competition in the marketplace. The challenge for suppliers will be to innovate under these trying times with the objective of carving out a rewarding market position!
