UK Windows And Doors Group are gone. Safestyle UK are in a very tight spot indeed. A large number of smaller fenestration firms have gone bust in the last few months, adding to the larger casualty numbers in the wider construction market.
Polyframe added Eurocell and moved away from Duraflex. Glazerite added Deceuninck to their portfolio, challenging their existing supply relationships. Prefix ditched Ultraframe and moved over completely to the Sheerline system.
Systems companies have been racing to create brand new profiles to meet proposed 2025 FHS regulations which will set new minimum U-Values of just 0.8.
There have been mergers and acquisitions throughout the year.
It feels very much like the fenestration sector is about to go through a significant adjustment in it’s size, type and scale. There will be some winners and there will be some losers.
More casualties to come
One of the most common responses to the turbulence of this week is “there will be more to come”. It seems as though the industry full expects more companies to suffer a similar fate in the coming months as the looming recession and downturn exposes weaker companies to the harsh trading elements.
The failure of UKWDG is obviously a large one, and Safestyle is obviously not small fry in terms of the size of their business in the sector. But I am unsure whether we will see further failures of this scale or not. These events don’t come around all that often, even during a recession, so when they do happen they are notable. But I think perhaps that a string of very high profile names going to the wall is unlikely.
What I do think we’ll see is a continuation of the trend of smaller to medium sized businesses deciding now is the time to exit the sector. Or, larger companies swallow up smaller ones to steal market share. Plus, investors from outside the UK cherry pick at some of our better companies as a means of accessing the UK market.
I think what is clear to see is that the volume-based businesses are being hit hardest. Not too long ago I explored the idea that even just a 10-15% drop in demand could be the undoing of some companies, especially those that relied on mass volume at low margins. And so we find ourselves in a market that is perhaps down more than 15%, maybe closer to 20% in reality, and that is sadly pulling the rug from a number of businesses.
A lack of diversification I think is also a reason why some are not doing as well as others. If I take a wider view of the sector, and taking into account our own performance over the last few months, the recurring pattern I see is that those companies who are doing better are doing so because they have adapted to shifting demands. I make a big deal these days about aluminium and flush windows. It is because they are such strong growth niches despite the wider market being in contraction. Those I have spoken to who made the move to aluminium are finding they are reaping the benefits it brings. Namely access to wealthier clients and better margins.
Upheaval for two years
If you take a broader look at the sector, taking into account shifting trends, the rise of aluminium and non-PVCu materials, as well as legislative changes going into 2025, our sector is about to undergo some major reconstruction.
Some companies will benefit from this. Those who make the products that are needed to comply with stricter new regulations will see a boost. Aluminium systems companies I think will perform strongly as they seek to make the most of the change in direction from homeowners. I think the labour shortage is going to get worse, which will push up wages, ultimately costing the homeowner more in replacement products.
Those who have not diversified, or companies who rely on mass volume sales with minimal margins will continue to suffer. The UK is set for stagnant growth for at least the next couple of years and will have to get used to living and spending in an era of higher interest rates. That is going to dampen consumer spending for a while. As we have seen this week, it only takes a relatively small decrease in demand to pull the rug from some companies. If spending does continue to be flat or decrease, then volume-based businesses are probably going to become very nervous, if they aren’t already.
I believe that the shape and look of the industry is changing in front of our eyes. It is becoming more diverse and splintered. There are more pockets of opportunity as well as more areas of peril. We may see new companies formed. We’ll likely see mergers and acquisitions to take out competition. We’ll see some companies go altogether. All in all, the road to 2025 is going to be a choppy one.
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