Picking on paints

Deflation has a fairly strong grip on suppliers of construction materials. But plant engineers may not want to "settle" for just any price cut. Data from Thinking Cap Solutions' ICE model suggests that several industries share the following economic characteristics: (1) inflation-adjusted margins are above normal, (2) the cost of making a typical unit of output is falling, and (3) industry prices either are falling more slowly than costs or actually rising despite lower costs. That means some industries improved their bottom line at the expense of the customer. So plant engineers may want to push harder for lower prices.

The paint industry (SIC 2851) is a case in point. Thanks to a sharp reduction in U.S.-made raw materials costs, per-unit manufacturing spending fell 3.9% between August 2000 and August 2001. Instead of passing savings along to buyers, producers increased tags for the average paint product by 2.3% in the 12 months ending August 2001.

The result: an inflation-related margin gain of $3.64 for each $100 of product sold. To put margins back to the same level held in August 2000, the industry would have to cut prices by 6.8%. To put margins back to the level held on average over the past five years requires a 3.7% price cut.

Looking at the Plant Engineering price/cost table we see several other opportunities for buyers who want to haggle. Industries where costs are falling and margins are above average include: millwork (SIC 2431), hardwood plywood (SIC 2435), and plumbing fittings (SIC 3432).