A Peek into Why Paint Prices are Rising
How is the semiconductor chip shortage related to rising paint prices?
The Indian paint industry has grown at a rate of 10.4% over the last 12 years. In fact, Asian Paints, the industry leader, posted a volume growth of 18% over the last 2 years. Seasoned players such as JSW and Aditya Birla are entering the industry and pouring in millions of dollars.
Asian Paints and Berger Paints are all set to bring the sharpest price increase ever! The cost of paints will go up by 7-9% post-Diwali.
But what’s the need of increasing the prices so aggressively? Won’t that impact demand and give the competition an opportunity?
In today’s piece, we will uncover it all. Read on.
Inflation
The demon mehengaayi has hit the paint industry really hard. The inflation rate is close to 18-20%, something that the industry has not seen in the last 3-4 decades.
Crude price, which accounts for 55% of the raw material cost, has gone up by 30%. The prices of other ingredients such as titanium and additives have also gone up. All, at the same time.
Coincidence much? Nope. It’s all connected.
The Covid induced Global Supply Chain crisis has got to the paint industry too. Even if one teeny-tiny ingredient was stuck in some vessel across the oceans, it would be enough to halt the entire production.
But that’s not all. There is one other reason that has impacted the prices. An increase in demand. While people were stuck at home, the demand for paint had been going up. In normal times, it would have been a reason to cheer. But with a shortage of ingredients, the increased demand has only made the raw materials more scarce and sought after. Plus, Diwali is around the corner.
And you know what scarcity does? It pushes prices all the way up. But that’s not it - there’s one more demon eating the profits of paint giants: a semiconductor shortage.
Semiconductor Shortage
We know a lot has been said and written about the semiconductor shortage.
But, how the heck is paint related to semiconductor chips?
Well: Tinting machines.
Companies have over 1,000 shades of paint. Do you think they manufacture all of those?
Naah. These paint companies produce only a handful of shades. The distributors then use something called a tinting machine to mix. And, voilà! Thousands of shades at your disposal.
These tinting machines require semiconductor chips. Get it?
While this may not be a grave matter of concern for established players, it can severely hurt new entrants.
Why? Because these tinting machines are specific to the company. If a dealer has a tinting machine of Asian Paints, it won’t work for Indigo and JSW Paints. And if the entrants fail to ramp up their distribution at a faster rate than the leaders, it will be difficult for them to catch up.
The average yearly rate of addition of tinting machines by Indigo Paints is 51.2% (total 5,800 tinting machines exist) as compared to 14.6% by Asian Paints (total 58,000 tinting machines exist). With the chip shortage hitting the industry, how will these companies maintain the growth rate?
They will have to shell out extra money to convince the dealers to buy their tinting machines. And this increased cost will push the companies to increase the paint prices.
Haaah. Crazy, no?
Well, what’s even crazier is that this increased paint cost phenomenon is not restricted to India. It’s a global phenomenon. Sherwin-Williams, the largest paint manufacturer in the US has also said that it will be increasing the prices to cope with rising input costs.
While it makes sense to increase the prices now, what will happen when the costs go down? Will these companies reduce the prices or will they continue to pocket the higher margins?
Well. Only time will tell… Until then, ReadOn.
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