After rubbing the shoulders with businesses involved in car refinishing for more than 15 years, I can surely state that certain paint companies implement aggressive market share acquisition as their main growth strategy. In practice, a paint supplier invests in the potential customer -bodyshop- by offering equipment, tools, spray booths and even cash money against the long term binding supply contracts. This is a very common practice in many countries, especially in developed and mature markets, where the growth in organic way is difficult.
Acquisitions, aggressive growth strategies and buyouts are not new in our business environment. In fact, it is very common in some industries. However, I would like to elaborate on this subject in the light of the automotive refinishing industry.
How does it work?
If you are not familiar with the above-mentioned contracts, let me describe them in a few words. Imagine a bodyshop with good or growing business, or even, a new, but promising collision repair shop. Any bodyshop needs primarily two groups of suppliers: spare parts supplier(s) and paint related materials supplier(s). If you are a potential supplier of paint materials, you have a lengthy road to go through in order to get the desired account. You have to prove that you have better product, prices that are more competitive, superior service and unmatchable technical support. Sounds like very hard thing to do, and it is very hard indeed. There is another way though. If your company has plenty of “free” cash, you can offer the potential customer very tangible, benefits upfront. The size of the investment depends largely on the perceived amount of sales a soon-to-be paint supplier projects. From my experience, the investment may comprise from free spray guns, sanders, polishers, free load of toners to the mixing machine to brand new spray booth and a lump sum of cash into account. Looks very promising indeed.
I do not want to criticize the paint companies. Not at all. In fact, this strategy though might hide certain risks and pays off. Otherwise, highly skilled managers wouldn’t proceed with this. The risks are definitely well calculated. On the other hand, if I were a bodyshop owner, I would have considered a number of risks for my business.
Firstly, everyone should understand that multinational companies, and big automotive paint manufacturers are no exemption, are businesses with very well-tuned profit generating machines. Every investment, big or small, is planned to deliver cash to its stakeholders. Therefore, initial cash infusion in any form will be certainly calculated into the prices charged in the future.
Secondly, binding contracts limit a bodyshop owner in the choice of suppliers, thus new products and technologies from other brands would be beyond your reach. Some of those contracts are very strict, meaning that you must buy everything through a given channel, appointed by that paint company.
Third, in case you would like to sell business, any binding contract would be considered as a liability, which will decrease significantly the sales price.
In any case, any decision of undertaking restrictive obligations must be very carefully analyzed. Remember, sweetness of free stuff will be gone quickly, but bitter taste of obligations burden will stay for a long time.