Masco Pricing Spineometer: 3 of 5 Vertebrae

Masco, an architectural coating (paint) and plumbing company had an unremarkable Q2 2024. Revenue fell slightly by 1.7% to $2.1 billion and earnings before interest and taxes fell likewise by 1.5% to 397 million over the same period last year.

A review of Masco’s 25 July 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Price management was a thread-line throughout CEO Keith Allman and CFO Richard Westenberg’s comments to shareholders.

• For Q2 2024, Masco reported a favorable price/cost relationship in their $1.25 billion plumbing and, an unfavorable price/cost relationship in the $838 million decorative architectural segment.
• Macroeconomic impacts on consumer financial standing are having an impact on pricing, mix, and sales quantities.  The DIY (do it yourself) paint segment was associated with softer sales quantities while PRO (do it for me) paint segment performed stronger.  The understanding is that the DIY segment, which tends towards middle-class customers, is feeling a strong financial strain and has lower sales quantities due to the reduced existing house sales volumes, thus resulting in less remodeling in the current economic environment.  Meanwhile, the PRO segment, which tends to serve more affluent customers, is healthy.
• Economic shocks and possible higher import tariffs also have a measurable impact on financial performance at Masco, and again pricing decisions are used to address these challenges. Richard Westenberg commented on two specific issues impacting his business today.  “We do see some commodity inflation and ocean freight – elevated ocean freight here that it’s going to be serving as a bit of a headwind as we enter the second half of the year. Specific to your question, we do see pricing in the Plumbing segment as an offset to that.”
• Pricing discipline is important to Keith Allman spoke. He stated “Plumbing:  Operating profit for the segment was up $4 million to $249 million, and operating margin was 19.9%, largely in line with the prior year, driven by our pricing discipline and operational performance
• Ongoing pricing decisions explicitly impact performance according to Richard Westenberg. With regards to plumbing offerings, he stated, “Pricing actions increased sales by 2%.”  With regards to the paint segment, he stated, “In the quarter, total paint sales decreased high-single digits due to lower volume and price.”
• Over the Covid and Post-Covid economic cycle, Masco has actively taken price up.  “[O]ver the last couple of years, we’re knocking out 40% price increases across our total company on average,” said Keith Allman.
• Product innovation and simultaneous offering breadth (SKU) reductions were also discussed.  “customer-backed innovation to meet an unmet need and to continue to leverage our brand, build our brand and give us that pricing power … it really is a two-edged sword of unmet customer need and complexity reduction,” said Keith Allman.
• Every business unit was subject to  price improvements, even in the relatively small lighting business, Keith Allman stated, “With regards to the lighting business, we – the team has taken some really proactive actions with regards to opportunistic pricing, streamlining lines of business, exiting lines of business that had less profitable dynamics to them and of course, cutting cost and really has positioned the business for success going forward.”

In the long run, Masco appears healthy yet, as discussed above, short-term economic shocks and product innovation have a direct impact on business performance.

On long-term economic trends, Keith Allman stated, “We continue to believe that the long-term fundamentals of our repair and remodel markets are strong and that structural factors, such as age of housing stock, consumers staying in their homes longer, and higher home equity levels will drive increased repair and remodel activity in the mid to long-term. … We continue to believe that the long-term fundamentals of our repair and remodel markets are strong and that structural factors, such as age of housing stock, consumers staying in their homes longer, and higher home equity levels will drive increased repair and remodel activity in the mid to long-term.”

On long-term pricing and product management trends, Keith Allman stated, “We do have a demonstrated ability over time to price and to get a fair price, and we’ve earned that with our expense and our spend, brand, our innovation pipeline, how we do in terms of service, our advocacy with the channels that we’ve driven, to help us get that kind of must-have position on the shelf. So, yeah, we’re confident, we will hit our margin targets.”

Based on Masco’s business, industry benchmarks would suggest 16 to 80 professionals would work in pricing at Masco.  Based on management comments, we expect to find them at the upper end of this range.  The Value-Based Pricing Framework discussed in Pricing Done Right identifies the following needs.

• Many analysts and managers supported by pricing software are needed to provide deal price guidance are necessary at Masco.  Selling tens of brands with thousands of items (SKUs) per brand to multiple customers with each deal subject to negotiation implies a strong need for transactional price management.
• Senior pricing strategists optimizing strategic discounting and rebate policy would be needed to work with senior commercial teams.  This need derives from their channel strategy.  39% of net sales were to Home Depot.  The remainder of sales were to other retailers, wholesalers, specialty dealers, and e-commerce channels.  This breadth of channel management implies a strong role of pricing in setting commercial policy and aligning channel prices to strategy.
• Pricing would benefit from a geographic dispersion across North America, Europe, and Mexico.  80% of revenue is from North America.  20% is from predominantly Europe.  Market structures and pricing policies would differ across these geographies. Also, inflationary differences and currency impacts on price capture would be necessary to be under management.
• Pricing and new product development are important given the innovation goals of Masco.  For Masco, both studies of Economic Value to Customers and Conjoint Analysis would be useful.
• While management did not discuss price promotions, given that Masco’s end customers are consumers and that Masco does sell through retail channels, it can be expected that pricing professionals are working with product managers to define price promotion policies.
• From management statements, it is clear that economic factors impact price capture and as such the team should have some economists evaluating macroeconomic and microeconomic conditions as they relate to pricing.

Research into the investment by Masco in pricing yielded challenging results.

• Dedicated pricing professionals numbered only in the single digits, not the tens to hundreds as expected by industry benchmarks.  Instead, pricing responsibilities were dispersed among pricing, product management, brand management, marketing, innovation, sales and commercial management, finance, and strategy and analytics.  This is far from ideal.
• Roles of the few dedicated pricing managers that could be identified ranged from analyst and specialist to director.
• Most of the pricing specialists were located in the states though other executives that identified pricing as part of their responsibilities could be identified in Europe.

This was far short of the ideal.  Pricing is important at Masco and, as indicated by executives, it is under management.  Yet, pricing as a profession at Masco does not appear to be recognized as an established career track.  This leaves open the opportunity for other pressures to drive pricing decisions to suboptimal outcomes and indicates that pricing is only a career step at Masco, not a career track with the professional standing and necessary peer positioning with other decision-makers.

Given the importance and capability of pricing at Masco as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of September 2024.

Masco Pricing Spineometer: 3 out of 5 Vertebrae. Management recognizes the importance of pricing at Masco and has taken some steps to bring pricing under management but much opportunity for improvement is suspect to exist.

MAS (Masco Corp.) rose from 70 the day prior to their earnings call to 75 one week later. FY 2023 revenue of $7.97 billion with a 17.1% operating margin and P/E ratio near 13.

For FY 2023, a 1% improvement in price would yield a 5.8% improvement in operating profits holding all else constant at Masco.