Since being a MBA student, we must have heard the name of Michael E. Porter and his framework developed for Industry Analysis and Business Strategy development, an incredible research in the field of Economics. Here, I am going to present an industry analysis based upon Porter's five foreces model. Indian Paint Industry has been choosen for this analysis.
The Indian Paint industry, estimated to be Rs.21, 000 Cr. industry, has been growing at a rate of above 15% for the past few years. The organized players of the industry cater to about 65% of the overall demand, whereas the unorganized players take care of the remaining 35%, in value terms. The unorganized players mainly dominate the distemper segment.
The industry consists of two segments, namely
Decorative segment -Major segments in decorative include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc. Decorative paints account for over 77.3% of the overall paint market in India. Asian Paints is the market leader in this segment. Demand for decorative paints arises from household painting, architectural and other display purposes. Demand in the festive season (September-December) is significant, as compared to other periods. This segment is price sensitive and is a higher margin business as compared to industrial segment.
Industrial segment - Three main segments of the industrial sector include automotive coatings, powder coatings and protective coatings. Kansai Nerolac is the market leader in this segment. User industries for industrial paints include automobiles engineering and consumer durables. The industrial paints segment is far more technology intensive than the decorative segment. consists of powder coatings,
In the domestic market, Decorative segment accounts for 70% of the total demand for paints whereas the industrial segment accounts for the remaining 30%. Globally, the demand for paints is almost equally distributed, where both the segments account for close to 50% of demand. The paints sector is raw material intensive, with over 300 raw materials (50% petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the industry benefits from softening crude prices.
Indian Paint Industry
Supply: Supply exceeds demand in both the decorative as well as industrial paints segments, Industry is fragmented.
Demand: Demands is for decorative paints depend on the housing sector and good monsoons. Industrial paint demand is linked with user industries like auto, engineering and customer durables.
Barriers to entry: Brand, distribution network, working capital efficiency, and technology play a crucial role.
Bargaining power of suppliers: Price increases constrained with the presence of the unorganized sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is therefore that margins are better in the decorative segment.
Bargaining power of customers: High due to availability of high choices.
Competition: In both categories, companies in organized sector focus on brand building. Higher pricing through product differentiation is also followed as a competitive strategy.
Bargaining power of buyers: Households and Industrial Users are the main customers of this industry.
For housing requirements,the buyers can be customers (building contractors who buy in bulk) and end customers (people who paint/re-paint their house). Customers are more price sensitive because for them number of options are available and decisions are made based on qaulity, price and differentiating factors (like weather protection, environment friendly paints). The unorganized market has also have a large chunk of market share providing many options to lower income segment.
Whereas, Industrial segment is low margin high revenue business and buyers of these segments are knowledgeable about their needs. Therefore, price comparison is done effectively by the customers. However, The leading Industrial paint suppliers have their expertise in their favor, which limits the bargaining power of buyers.
Thus, Bargaining power of buyer is Medium.
Bargaining power of suppliers: The Indian Paint industry is raw material intensive industry with more than 300 products going into the manufacturing of the final products. The raw material can be divided into different categories like pigments, additives, solvents, binders etc. Titanium Dioxide is one of the key pigment used in he production of paint and is facing a global supply shortage. Thus supplier of this material has solid bargaining power.
Thus, Bargaining power of supplier is Medium.
Competitive Rivalry: About 80% of organized market is created to by the below four palyers of Indian Paint Industry. But the current market growth rate can provide ample room of opportunity for all the palyers of the industry to flourish. However, competition will keep on increasing as market will get saturated, but this will take some time to happen, till then one can keep satisfy customer need with good margin. Also, the presence of unorganized market does provide room for competition. Thus, on the whole competitive rivalry for the Indian paint industry is Low to Medium.
Company's Business Model
Asian Paints: Overall Market leader due to cost leadership in decorative paint market.
Kansai Nerolac: Market leader in Automotive Industrial Paint segments, also into decorative paint.
Berger Paints: Major revenue from decorative segment, also into industrial paints
Akzo Nobel: Major revenue from decorative segment, also into Automotive segment
Shalimar Paints: Mainly into decorative and non-automobile industrial coatings.
Availability of Substitute: The availability of subsitute of very minimal. In the rural areas lime wash is conventionally used substitute for paints. One alternative option for decorative walls availabe today is Wallpaper. Thus, the availability of substitutes in the Indian Paint Industry is Low to Medium.
Threat of new entrants: As it has been stated earlier that the paint market in Indian is dominated by few players, making it difficult for anyone new entering the industry to compete. Since new technologies are also available to shorten production life cycle of paint. Thus, Threat to new entrant is Medium.