Analysis of the Paint Industry

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Although paint offers certain advantages with regard to entry costs and competition, rising costs and legislative factors make paint a risky proposition for a new product to manufacture in our excess plant space. Barriers to entry with regard to capital expenses and technology cost are relatively low. The market continues to be unconsolidated with numerous small manufacturers and opportunities in niche markets. However, despite those positive aspects, the industry is already heavily regulated and this driver of cost is expected to increase in the near future. Moreover, raw material costs are expected to rise over the next five years narrowing profit margins. Low barriers to entry mean low investment costs

As is shown in exhibit 1, equipment costs are relatively low for paint manufacturing when compared to other manufacturing industries which spend over 20% of each dollar earned on capital equipment expenses. Conversely, paint manufacturers typically spend less than 15% of each dollar earned on equipment expenses, which is even lower than the entire economy average. (3) The largest expenses associated with paint manufacturing are variable costs such as raw materials, which typically account for over half of total industry costs, and other expenses directly related to the manufacturing process such as wages and waste disposal. This dynamic means that transitioning the excess warehouse space would be relatively cheap and much of the investment in manufacturing paint would be limited to short term liabilities from the cost of acquiring raw materials. By nature, this arrangement would mitigate much of the potential risk from taking on a new manufacturing venture. (2) Exhibit 1

Markets have room for small manufacturers
There were over 835 individual manufacturers active in the industry during the 2012 fiscal year, over 92% of which were small companies with fewer than 100 employees. Trends towards consolidation are present but they have been slow. (2)...
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