Elephants in the room
Stock markets generally have recovered their shock at voters’ decision to Brexit, but construction and housebuilder shares are in the doldrums and sterling is down. It may rally when confidence recovers, but the pound is vulnerable to nervous sentiment.
Most of the window industry’s raw materials and components are imported, and priced in US dollars and Euro. Steel, aluminium, wood, PVC resin, hardware, reinforcement and imported components are all affected, and the pound has lost more than 10% against the dollar since June 25th. Some have already increased prices. Realistically it’s a question of how much and how soon, not if prices need to adjust.
We don’t yet know where it will settle, but unless sterling recovers, timber, aluminium, PVC and other materials and components are likely to go up by 10 to 15% and stay up for the foreseeable future.
Price increases are the elephants in the room. We know they’re looming but no one wants to think about them.
Fortunately, Deceuninck maintains huge stocks of profile in our vast new warehouse at our extrusion plant in Calne, Wiltshire. We also buy forward and ‘hedge’ against short term currency swings to give customers greater certainty. So even though the price of PVC resin has already gone up dramatically to us and all extruders, we’ve taken the pain and not passed the increase on straight away, buying time to see whether rates would swing back.
It’s important the industry does pass price increases on to Mr and Mrs Smith. Historically we’ve not been good at that! Why is it so crucial this time? Simply because no one in the industry is making the margins that would enable them to absorb these increases.
In PVC resin alone, the increases systems companies have had to accept amount to around £40m over the course of a year. Add the increases for steel, aluminium, wood, hardware, reinforcement and other components, and retailers and installers need to be planning to raise their prices by 6-12% to maintain their margins.
We, and I suspect most businesses, are watching exchange rates closely, and by early September we’ll be letting customers know the level of increases. But at that point the whole country, not just this industry will be passing on similar price increases: on food, cars, furniture, paint, clothes and other goods. So the industry will be adjusting to its new cost of living at the same time as Britain is getting used to its new cost of living. News headlines will be full of it, and homeowners will be expecting increases. So it’s important that installers pass them on promptly, along with other retailers, to protect their margins.
Some homeowner were put off thinking about projects during the referendum debate and leads have been down since the beginning of June. But older, financially secure homeowners just kept on going. The fundamentals that drive the market are solid and lead numbers will recover!
Britain’s population is the fastest growing in Europe by a long way, but housebuilding has been lagging behind demand for the last 15 years. The homes we’ve built have been getting smaller with less space for living too. We’ve been building half the houses we need, so house prices keep rising. That’s good news for homeowners whose housing wealth has grown as the value of their homes has increased.
The over 45s in particular – the Haves – want to improve their homes and can comfortably afford to do so, in good times and bad. Their wealth underpins the substantial, well-capitalised Bank of Mum & Dad, lender of last resort for first time buyer deposits and the improvements needed to bring their new homes up to scratch. Britain’s homes are also the least energy efficient in Europe and many need a facelift.
Home ownership has been falling, as the Have Nots have struggled to get on the housing ladder, or stay on it. But housing has never been more in demand or been less important. We can be absolutely certain that house building and housing repair, maintenance and improvement will become even more important than it is now. Housing will be a top priority over the next 20 years.
Britain is recovering from a momentary loss of confidence triggered by an unexpected referendum result. It was a turning point which caused the biggest political upheaval in living memory. But the fundamentals of our market and our Deceuninck UK business are extremely strong. They’ve never been stronger. We need to make sure the industry’s margins stay strong enough to take advantage of the opportunity.
Managing Director Deceuninck UK