Volume 8, Issue 6 - June 2007

Hanging Tough

Market Trends Indicate a Solid Future for 
Door and Window Manufacturers 

 by Michael Collins

Wood doors and windows, historically the dominant products in the fenestration industry, have come to share the spotlight over time with doors and windows made of vinyl, fiber glass and other faster growing materials. However, the wood door and window market is not only very large, it exhibits characteristics that make it a very attractive segment of the market for companies operating there.

Residential Segment
The Freedonia Group (www.freedoniagroup.com) estimates that the residential door and window market totaled roughly $23.5 billion in 2005. Of this overall market, $7.7 billion consisted of wood doors and windows used in the residential new construction market, while the wood repair and remodeling market was estimated at $4.2 billion in size. Through 2010, it is expected that the growth of demand for wood doors and windows in the new construction and remodeling markets will outpace aluminum and steel windows and lag behind vinyl doors and windows.

Growth Drivers
There are a number of factors at work in the current environment that support the growth of the door and window market overall, and the wood segment in particular. According to a report released by the National Association of Home Builders, the size of the average home has increased 50 percent since the 1970s. Between 2004 and 2005 alone, the average home size increased by 63 square feet, or about 2.7 percent. As homes become larger, the doors and windows used become larger and homeowners place an increasing emphasis on energy efficiency. Wood’s thermal properties make wood door and window products ideal for use in situations where energy efficiency is a prime concern. 

Wood for High-End Niche
Wood door and window manufacturers also benefit from the increase in the number of high-priced homes. In nearly all high-end homes, the doors and windows are made of wood, commonly from select grades or exotic species. Also, homeowners seeking to make improvements often view high-end wood doors and windows as a way to keep the original character of their home but add more modern amenities. 

Grand entrances, often costing $5,000 to $50,000, are becoming more common on high-end homes. Wood, often in exotic varieties, is usually the material of choice for these entry systems. The same trend applies to windows, which are becoming larger and are often made of exotic woods. Wood is an excellent material to use in larger windows and doors because of its structural stability and strength. 

It should be expected that the rate of growth of wood door sales will exceed that of wood window sales for the foreseeable future. While wood windows face competition from vinyl and other materials, wood doors do not face such intense competitive pressure from these materials. 

The Replacement Market
According to the Harvard Joint Center for Housing Studies, doors, windows and other external components are likely to need replacement every 25 to 30 years. This means that there are millions of homes in the U.S. that are in need of a first replacement of doors and windows and millions of other homes in need of their second replacement.

Wood door and window manufacturers have a unique opportunity open to them by offering wood products clad in aluminum. These clad wood products enjoy all of wood’s superior thermal efficiency, while offering a low-maintenance (usually powder-coated) exterior. A handful of U.S. and Canadian manufacturers have developed wood products clad in copper or bronze, which have become excellent products for the highest price-point homes in the residential housing market.

Trends - Imports
Wood doors and windows occupy a unique niche relative to competing imported products. At present, the majority of doors and windows imported into the United States are manufactured in Canada. According to the Census Bureau, some $950 million of doors and windows were imported from Canada in 2006. Roughly $490 million of these, or about 50 percent, were made of wood. Imports from Canada have grown modestly over time, with Canadian door and window exports to the United States having increased by roughly 40 percent since 2002. Chinese door and window exports to the United States, meanwhile, have increased by nearly 560 percent during the same period, to a 2006 level of roughly $270 million. While Canadian door and window sales are currently higher, Chinese companies are clearly poised to grow their market share rapidly, at the expense of U.S. and Canadian companies alike. 

There is some good news in the trade statistics, at least for wood window manufacturers. Of the $270 million in doors and windows exported from China to the U.S. in 2006, roughly $100 million of these, about 38 percent, were made of wood. The chart below illustrates the breakdown of Chinese door and window imports by material type. The vast majority of the wood products imported from China are doors, primarily entry doors. Only about one percent of the wood imports from China were windows.

Chinese companies have penetrated the wood window market more slowly because it is a more customized market than the wood door market. The types of projects for which Chinese production is the most competitive include long runs of highly uniform products. 

Challenges for Wood Products
The wood door and window market, of course, is not without its unique challenges and obstacles. Working with wood requires a great deal of care and a unique skill set. If a nearly finished product is routed, sanded or cut improperly, it can wind up in the scrap bin rather than on a delivery truck. Because of the use of exotic woods, such as mahogany and other hardwoods, wood doors and windows join a host of other products that come under pressure because of environmental concerns. In addition to environmental issues, using exotic grades of wood brings associated risks regarding scarcity of supply and high price volatility. Another challenge faced by wood door and window manufacturers comes in the form of regulations regarding airborne sawdust. The standards and requirements for airborne sawdust are only likely to continue to increase in the future, as are the healthcare costs for sawdust-related respiratory complications. These considerations are particularly important when chemically-treated specialty lumber is being used. 

Trends - Transactions
There are companies already operating within the wood segment that seek to grow by acquisition because it can accelerate a company’s growth more rapidly than growing organically. 

We have also encountered companies that are not currently manufacturing wood products but that are exploring the option of acquiring a wood door or window manufacturer. This is a perfectly sensible strategy, but not one that has been executed frequently in the past. Historically, such a material crossover has only occurred in the case of very large companies, such as the purchase by Andersen of Silver Line Windows. The benefit to a non-wood company of buying a wood manufacturer is that, in addition to rounding out the product line, it often provides access to a higher-priced segment of the market. 

What to Expect
Door and window manufacturers are weathering the housing downturn, along with all other building products companies. Continued strong merger and acquisition and plant expansion activity in the door and window industry, though, indicate a persistent level of long-term bullishness on the part of industry participants. As the housing market recovers toward the end of 2007, aggressive wood door and window manufacturers should be able to take advantage of their unique positioning in the market to continue to prosper. 

Michael Collins is with Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. 


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