Jotun Claims Is One of The Most Modern in The World

Jotun opened in March at Sandefjord, Norway, a decorative paints plant costing NOK 500 million ($87 million), which the company claims is one of the most modern in the world. It replaces two other decorative paints units in the country.

 

Meanwhile AkzoNobel received a planning permit in February to build a £100 million ($161 million) high-tech decorative paints plant across the North Sea at Prudhoe in northeast England, which will also replace two other facilities.

The projects are part of a general trend in the decorative paints sector in Europe—and to a lesser extent in its industrial coatings segment—to centralize production of paints to raise efficiencies, increase sustainability and cut costs.

Shareholders view these projects as favorable because at a time of low demand for decorative paints in slow-growth Europe, they will help to maintain or even raise margins.

The plants also being welcomed by the growing number of home improvement retail chains in the region who are aiming to centralize as much as possible their own supply sources. The concentration of manufacturing by paint companies is helping these retailers increase the amounts of decorative paints purchased directly from producers with the aim also of reducing costs.

However ironically at the same time the retailers are also seeking to expand into areas in which they will be competing with their suppliers, especially by pushing up sales of their own brands. The reorganization of paints production is freeing up capacity for the making of own-brand products.

Jotun's plant at Sandefjord, which has been built as an addition to its existing plants at its Vindal site in the city, will supply the whole of Scandinavia, which is the company's main decorative paints market in Europe. A facility for the production of fillers has also been added while a unit for making tinters has been expanded.

As part of the reorganization, all production of marine and industrial coatings has been moved to Jotun's site at Flixborough, England.

The company says that its production facilities in Norway were "old and inefficient", production and logistics costs were too high and "significant structural improvements " were needed to make the company's operations cost effective.

"Constructing this plant in Sandefjord made the most sense for financial and market proximity reasons," said Jan Helge Eriksen, production and logistics director in Jotun's decorative business. "We believe we will gain a stronger market position by producing in the very market we sell in.

"With increased use of new systems and automation we can be more responsive to the market and produce according to demand," Eriksen said. "This again will lead to a lower build-up of stock and allows us to supply the market more quickly and efficiently."

The plant, with an annual capacity of 80 million liters, will enable a reduction in the use of solvents and the use of less hazardous chemicals. CO2 emissions from internal transportation are projected to be cut by 80 percent. Energy consumption will be decreased by half.

AkzoNobel's new plant at Prudhoe, Northumberland, on which construction work will start later this year for a scheduled opening in 2014, will replace an existing plant at the site and another at Slough, west of London. Both supply the UK decorative market, one of AkzoNobel's biggest in Europe.

The objective is to raise supply chain effectiveness, reduce working capital and accelerate responses to changes in the market the company said. The investment represents "a step change in the way we do business," said Guy Williams, AkzoNobel's UK country director.

The facility will consume 60 percent less energy compared with the existing plants' performance, while its range of technologies will include recycling and reuse of waste and water. It will cut in half the environmental footprint of the UK decorative business of the company.

AkzoNobel hopes that the efficiency of the new facility will contribute to reaching its medium terms target of an EBITDA margin of 13-15 percent in the medium-term, despite expected sluggish demand in Europe. In the first quarter European decorative sales rose only by two percent while dropping in volume terms. The decorative paints business returned an EBITDA margin of only 6.1 percent, half that recorded by performance coatings, its other paints business.

Meanwhile Europe's retail chains are also endeavouring to push up their own margins by gaining more control over their supply chains, particularly by doing more business directly with paint and other manufacturers rather than through wholesalers.

Concentration of production by paint and other suppliers in single plants makes direct sourcing easier. New centralized plants in Europe are often distributing their products across national borders which gives more scope for international retailers to buy directly from producers.

Greater efficiency in supplies can also be achieved by retailers through exploiting opportunities given by own brands.

At the same time retailers are also trying to create closer ties with their own customers by offering more advice and training to consumers and professionals. These initiatives can often clash with efforts by decorative paint companies to establish links with their customers.

Kingfisher of the UK, one of the biggest home improvement retail groups in Europe which runs the B&Q stores in its home market and the Castorama and Brico Depot chains in France, is currently a leading pacesetter in pursuing this strategy. In addition to having market leadership in the UK and France it has been building up strong positions in Eastern Europe.

It is aiming to increase direct sourcing to 35 percent in the medium-term, compared with a level of 15 percent at the beginning to this year and nine percent four years ago.

With common sourcing, which the company defines as products or ranges of products made by the same manufacturer, its target is a share of 50 percent against only two percent at present and less than one percent in 2008.

The achievement of these objectives will be helped by a rationalization and considerable international expansion of its own brands.

"Our aim with the current total of 150 brands around the world is that they will be reduced to about 11 in number, each with a high level of individual sales on an international level," said a Kingfisher official. "Our Colours brand which includes not just coatings but related products like wallpaper will play a major part in this project."

The drive behind its own brands is being supported in the UK by the roll-out of DIY training classes and the launch of a B&Q You Tube channel with 'how to' video instructions.

Coatings companies with centralized plants have the advantage of being able to meet retailers' needs for direct sourcing. But at the same time retailers are putting greater competitive pressures on them by strengthening own brands and setting up similar communications channels coatings manufacturers have themselves established with their customers.