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WOOD PLASTIC COMPOSITE DECKING MARKET REPORT

SPAIN 2017-18

Growth & Marketing Consultancy

WPC DECKING MARKET SPAIN 2017-18

WOOD-PLASTIC COMPOSITE DECKING MARKET REPORT - OneGrow Business Consultancy

Summary Executive Summary …………………..…………………………………………………….. 2 Chapter 1. The Market. Introduction ……..…………………………………………….…. 4

Beginnings and Evolution Supply Prices Distribution Channels Demand and Trends

Chapter 2. Products. Types of WPC decking in the market …………………………….... 8

Product range development Details of the products available in the market Thickness Width Lengths Colours Predominant finishings Accessories Warrantees Market share by product type Other products Trends

Chapter 3. Distribution channels …………………………………………………….…..… 16

Description of the main distribution channel operators Distributor Regional wholesaler Medium and large-scale DIY chains DIY chains Other channels

Chapter 4. Market Prices ………………………………………………..………………..… 22

Price ranges by origin and product type. Price development Which prices have worked better in recent years?

Apendix …………………………………………………………………………....………… 26

Main Market Players by region - Estimated Volume per player P

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Executive summary The market has been growing at an estimated CAGR of 15-20% during the last four years.

Spanish economic recovery and investment in the refurbishment of homes and hotels, all

indicate — taken with due caution — that the growth trend for WPC decking could continue at rates of around 15-20% over the next three years.

Until 2010, solid profiles accounted for practically 100% of the market. Later, however, as

the market evolved, hollow profiles began to gain presence and now represent almost 80% of the total volume, mainly with products made in China.

At present, 3D WPC capped decking from Asia are the most sought-after in the market,

with prices ranging from €35/m2 to €44/m2.

Until 2014, sanded finish products headed up the pack and explained a big part of market

growth. Nowadays, however, it is the 3D capped products that are leading the way.

In general, there is a correlation between the type of finish used and the project carried

out, be it a family home or a commercial premises.

The “Made in USA” brands have a long track record in the market, but have lost market

share over the last few years, maintaining a relevant position only in the top tier.

The WPC decking in Spain is mainly sold through the specialised distribution channel for

wood flooring, despite the distribution channel is organized around several kinds of players.

Alternative channels for WPC decking such as e-commerce, garden centres, the

swimming pool sector and building supplies chains are still, for a number of reasons, underdeveloped.

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The estimated average market price is currently €32/m2, with a downward trend driven by growth in demand for value-priced products.

However, the average price may increase slightly in coming years given the shift in

consumption from first-generation sanded hollow profiles to hollow profile capped 3D products.

In this respect, the euro-dollar (EUR-USD) exchange rate is a relevant factor for business

development given the high volumes of imported product valued in dollars which the Spanish market absorbs.

The EUR-USD exchange rate for 2017-2018 (≈+16%) could become a relevant business

driver, aiding growth for products imported from outside the EU. Subsequently, it places a question mark on competitive edge for products manufactured in Europe.

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Introduction

1. Beginnings and evolution WPC decking products arrived to Spain around the year 2004. Since then, the dominant product type has varied as consumer needs have evolved. Initially, solid profile products took the lead, before later conceding market share to the more competitively priced hollow profile alternatives. During the introduction stage, the first to arrive in Spain and dominate the market were solid profiles from the US brands Weather Best, Fiberon and Timbertech. From Europe, the French brand Silvadec made inroads too. Some firms also attempted to introduce hollow profiles (EON) but were unsuccessful due to product quality issues.

At that time and until 2010, solid profiles accounted for practically 100% of the market. Their presence in large-scale public building projects was extremely widespread: Barcelona airport, theme parks, public walkways etc. Later, however, as public spending waned and the market evolved, hollow profiles began to gain presence and now represent almost 80% of the total volume, mainly with products made in China. These “Made in China” products suffered numerous quality issues at the start of the business cycle. This earned them a negative reputation and benefitted other players, despite their higher prices. Over time, quality improvements have been made and the Chinese products have managed to secure the confidence of an important portion of the market.

THE MARKET

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This has translated into a relevant increase in market share. Meanwhile, the European manufacturers (Silvadec, Megawood, Werzalit, Twinson, Rehau, UPM, etc.), although present in the Spanish market, have not been able to position themselves effectively due to uncompetitive pricing and inappropriate commercial strategies. At the outset, some of them also experienced problems with the quality of their products.

Overall, WPC decking has been present in Spain for more than 13 years. The real acceleration in this sector, however, has come about over the last five years. From 2014, average annual growth is estimated at around 20%, explained primarily by the increased demand for Asian products and, to a lesser extent, for goods produced in Spain and Portugal . At the same time, the rise in prices for tropical wood alternatives (IPE +100% 2006-2016) has contributed to a general growth in demand for WPC decking.

Supply

In terms of domestic supply, the second half of the last decade has witnessed the development of local manufacturers, with TARIMATEC the first local producer to emerge. Currently, there are eight manufacturers in the region — four in Spain and four in Portugal — each with projects at different stages of development but with similar outputs. In total, the current output of these regional manufacturers stands at approximately 6.000 tonnes. With regard to international supply, products from Asia take the largest share of the market, followed by locally produced alternatives and finally, goods “Made in USA”. As mentioned above, European producers have not been able to secure relevant positions. The upward trend in this sector is expected to continue, with increased market share for Asia-produced hollow profile capped products with woodgrain finish and in a range of different shades and colours. Prices

In general, the flooring sector in Spain (laminate, wood, ceramics) is highly price sensitive; this has been illustrated once again with WPC decking. In particular, recent market growth can be explained by the rise in demand for hollow profiles produced in Asia or domestically, with B2B (*) prices up to €30/m2 or lower. At present, 3D capped products from Asia are the most sought-after in the market, with retail prices to Pros ranging from €40/m2 to €44/m2 (*1). They are positioned as the entry level products P

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for the perceived high-quality segment (capped / co-extruded products). (*1) B2B prices for decking boards without fixings in the following cases: a) distributor to installer; b) domestic manufacturer to installer / distributor; and c) importer to installer / distributor. Distribution channels

From the outset and until now, traditional wood flooring distributors have provided the main distribution channel for WPC decking. With the increased market for WPC products, distribution has fragmented considerably across the whole of Spain, following a similar pattern to what happened some years ago with laminate flooring.

In contrast to the situation in other European countries, WPC decking in Spain lacks significant presence in the DIY channel because of the way purchasing and consumer patterns traditionally work in this market. However, over the last three years, WPC has gradually gained presence in this channel. At present, the predominant products are private-label or non-branded goods made in Asia. Recently, a local business from the flooring sector has attempted to develop their own WPC decking brands for this channel but with very limited results. The two US brands operating in Spain — Fiberon and Timbertech — do not have operational bases in the country. On the one hand, they work with an exclusive distributor; on the other, with a dedicated exclusive sales agent who sells by container (20` FLC) to distributors at a national level. Over recent years, both Fiberon and Timbertech have gradually lost significant market share as they have failed to adapt their strategies to the new market context, and have been unable to take advantage of the global growth in the market to maintain their position.

In terms of products made in Asia, distribution is highly fragmented. Sales are made through importers who then work with agents / distributors to cover different geographies across Spain.

The strategies for distribution channel development and trade marketing employed by manufacturers, meanwhile, tend to be traditional, not particularly innovative and involving minimal investment. Product and brand awareness gaining in the market is shaped primarily by word of mouth among installers rather than any structured promotional campaigns. The “Made in USA” products enjoy strong brand recognition and are synonymous with “quality” as they were the first to arrive on the market. Finally, the e-commerce channel is not yet relevant, neither for the B2B nor B2C segments. Demand and trends

Although Spain has been affected in recent years by diverse economic crises, market volumes for WPC decking have shown a consistently upward trend, often in contrast to other flooring products and the economy in general. Estimated annual average growth in the WPC decking market has been 20% over the last four years and earlier. As in other European markets, the key driver of demand for WPC decking is home improvement. This area currently accounts for 80% of total residential building activity in Spain, reaching a figure of €15.2 billion in 2016, with expected average growth of 2% for 2017 and 2018. Furthermore, sales of second-hand homes have reached pre-crisis (2007) levels in 2017, and are set to total more than 300,000 transactions by the end of the year. It is estimated that 70% of these second-

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hand homes acquired will demand some kind of home improvement. Families Home-Improvement Investment

At the same time, hotel-sector investment in refurbishment, another critical driver for the WPC decking sector, has grown dramatically since 2012 with a CAGR of over 40%. In the first half of 2017, investment reached €1.655 billion, double the volume in 2016 like-for-like. It is estimated that the total for 2017 will be in excess of the €2.6 billion invested in 2015.

Refurbishment Hotel-Sector Investment

Generally speaking, refurbishment in hotels is a consistent driver for sales of higher quality products. As such, current improvements in Spain’s macro-economic indicators, investment in hotel and residential refurbishments, an increase in home improvement spending, and the general upturn in the real estate market all indicate — taken with due caution — that the growth trend for WPC decking could continue at rates of around 20% over the next three years. With regard to that expected market growth, it is important to highlight that a big share of that growth will be concentrated in the segment of capped 3D decking boards at competitive prices, which today roughly represent an estimated 30% of the total market. In short, Spanish economic growth (GDP 2017 +3%, 2018 2.5%) and investment in the refurbishment of homes (+3% 2017) and hotels (+20% 2017), together with other factors traditionally associated with Spain — the pleasant climate, lifestyle, and tourist sector gains — set this market apart from other European countries. Taken together, these are potential drivers for growth in the WPC decking sector in coming years.

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Types of WPC decking in the market Summary of product range development.

As in every European market, the WPC decking sector in Spain encompasses a wide range of products, both in terms of origin and finishings. Supply and demand for these products has varied in line with the natural evolution of the market. During the introduction stage, the dominant products were USA-produced solid profiles by Fiberon and Timbertech, the first manufacturers to enter the Spanish market during the first half of the last decade. Until 2010, their top-ranking position was undisputed.

Later, from 2010 onwards, with increased consumption and greater competition, hollow profiles (made in China or by regional manufacturers) started to take the market by storm. Much lower prices compared to anything previously available, along with the improved positioning of WPC products thanks to the commercial activities of the US brands, were the drivers for growth. As a result, hollow profiles now dominate, with an estimated market share of 80%. Of the local and regional manufacturers (Spain and Portugal), five produce hollow profiles and three work with solid boards. The dominant polymer is PVC, followed by polyethylene.

THE PRODUCTS

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