Standalone paintmaker finds extra gloss

So much so that an empty 10-litre paint container doubles as a rubbish bin reception at the company's HQ, a tapered modernistic structure in southeast Melbourne decked out in a pastel (a Dulux product of course) called coppersmith.

And don't even think of attempting the "dull as watching paint dry" line on chief executive Pat Houlihan, who proudly points to labs of white-coated chemists, part of a cohort of 80 seeking the next generation of more durable and vibrant coatings.

Dulux has proved a surprisingly high-gloss package since its July 2010 demerger from Orica and separate listing, with investors applauding its inaugural first-half (March) earnings announcement in May.


As for Houlihan, the 43-year-old Geelong Football Club tragic is palpably enjoying being liberated from the explosives-oriented mothership.

"We were just over 10 per cent of Orica -- we were pretty much off the radar (to investors)," he says. "As we have come out on our own, people are starting to get the opportunity to understand what drives our business and make their investment decision."

A key tenet to this greater appreciation is that Dulux's offerings -- spanning not just paint but the Selleys (adhesives, car care and such) and Yates (garden-care) ranges -- are not linked to the whims of the housing cycle.

Rather, Houlihan sees Dulux -- which has no listed equivalent since Wattyl was bought out by US paint maker Valspar last year -- as the "slow-moving equivalent of a fast-moving consumer goods company".

About 75 per cent of Dulux's revenues are exposed to existing homes, with only 10 per cent dependent on new houses.

Investors thought paint was a building product and had all the strengths and weaknesses of that sector, Houlihan says. "They (investors) are starting to see we are not classified in the same bucket as a building products company. We don't see big peaks in terms of the economic upswings, nor do we see big troughs."

With an overall 40 per cent share of the paint market, Dulux enjoys unassailed dominance of the paint sector, not only through its eponymous brand but names such as British Paints, Cabots and Berger.

Overall, the paint sector is a mature one that pitches to a consumer audience that won't readily embrace change. Despite attempts at packaging innovation, daubers still prefer the messy old-fashioned paint pots. But after a period of stability, the competitive dynamics of the sector are poised for a radical shake-up as Masters, Woolworths-Lowes' big-box hardware chain, takes on incumbent Bunnings.

"Clearly they wanted to have our brands in there, and clearly on that premise we wanted to be in there and we will be in there," Houlihan says.

But Woolies' aggressive challenge to Wesfarmers' Bunnings also means a diplomatic balancing act for Dulux, as it earns 30 per cent of local revenue from its ubiquitous green warehouses.

In a sign that this balance of business won't change in a hurry, Dulux has seen off the threat of Nippon Paints, which had been available exclusively via Bunnings as the chain's de facto house brand.

Bunnings is also in the process of "de-ranging" Wattyl paints and the products of Selleys' rivals H.B. Fuller and Bostick. "Bunnings is our single largest customer and we have had a fantastic long-term relationship," he says.

Houlihan says Dulux doesn't intend to play favourites with its four core brands (Dulux paint, Cabots stains and the Selleys/Yates range), which will be available in all retail and trade channels.

But in the case of non-core brands, Dulux is open to exclusive deals to support its key partners. British Paints are sold only in Bunnings while Berger is largely exclusive to 3D Inspirations Paint and Colour.

Globally, Houlihan says, foreign entrants have struggled in an inherently parochial market.

"Successful paint companies are strong regional players, first and foremost," he says.

"(Nippon Paints) didn't build a factory because they wanted to prove their model -- that they could develop their business from scratch -- which turned out not to be the case."

Houlihan says Dulux has also seen off threats from US paint brand Benjamin Moore -- owned by Warren Buffett's Berkshire Hathaway -- and India Paints.

Main rival Wattyl still struggles under Valspar's ownership, but Taubmans (owned by US group PPG) has lifted its share.

Not that sector big-daddy status has prevented other big suppliers from wilting in the face of Woolworths' and Wesfarmers' pricing power (think Goodman Fielder or Foster's).

Houlihan believes Dulux enjoys an advantage in that it has had harmonious relations with both chains as a supplier of its non-paint products.

"Selleys and Yates have always had a relationship with the grocery channels, including Metcash (which has an alliance with Mitre 10). As they go into hardware we know how to deal with grocers in terms of supply chain capability and account management."

Houlihan adds that the Selleys arm shouldn't be underrated in terms of injecting operational nous. "It's a business that can manage complexity well," he says.

"It has a supply chain funnelled in from 30 countries and it also makes at least half of the stuff domestically (30 per cent offshore)."

Still, consumers and investors would be forgiven for seeing Dulux as a paint company: one-third of sales come from retail paint and a further third from tradies (through 70 trade stores and 150 agency agreements).

A further 15 per cent comes from industrial-style coatings, such as those constantly applied to the Sydney Harbour Bridge.

Offshore (non-Australian/NZ) revenues account for 5 per cent of the total and are the most obvious source of growth.

A decade ago, Orica established a beachhead in Hong Kong and in late 2008, Orica bought the Shanghai-based woodcare business Opel, which delivered 750 useful distribution points. Currently, all the products sold by Dulux in China are sent from Australia, "but over time, as we grow our business offshore, it gives us the flexibility to put in some manufacturing investment".