Supply Chain Shakeup   //   January 23, 2024

As paint brand Kelly-Moore ends operations, competitors try to swoop in

Regional paint company Kelly-Moore abruptly shut down this month after owing hundreds of millions of dollars legal expenses and unpaid taxes. But with that comes an opportunity for new paint suppliers to dive in.

After decades of mounting debts, Kelly-Moore announced that it’s closing down in an out-of-court process. The wind-down follows 20 years of paying out a total of $600 million in legal liabilities related to asbestos claims. The company also estimates that it has $170 million in future legal liabilities, plus an undisclosed sum of unpaid sales and use taxes.

The closure means the shuttering of more than 150 stores and its manufacturing facilities near Dallas. More than 1,000 employees are losing their jobs, and existing paint orders will be filled “to the extent possible,” according to a news release.

Kelly-Moore was founded in 1946 in San Carlos, California. It grew to a network of dozens of stores in California before expanding to Nevada, Oklahoma and Texas. With a distribution center in California and its own manufacturing facility, the business primarily served trade clients and was a favorite among contractors. In 2022, when the brand was sold to a private equity firm called the Flacks Group, its revenues were estimated at $400 million annually.

Now, other paint brands are already looking to fill up the market. Dunn-Edwards is “actively recruiting” laid-off employees and examining store opportunities, said Lisa Kudukis, vp of marketing and innovation at Dunn Edwards. The majority of Kelly-Moore’s stores — which it leased — are in California, with other locations in Texas, Nevada, and Oklahoma.

While paint may seem like a simple home purchase, about 90% of Kelly-Moore’s business came from large-scale trade jobs, like housing buildings or commercial contractors. Those who were counting on orders from Kelly-Moore may now have to change their plans, undergo color matching or make new orders from other brands.

“When we talk about potential hold up for contractors and their livelihood, that’s real,” Kudukis said. “We’ve got all hands on deck so we can streamline that transition.”

What went wrong

One of the driving forces behind the closure was that Kelly-Moore has spent $600 million on settling asbestos-related legal claims, which began getting filled in the late 1990s and early 2000s. Beyond that, it faces about $170 million related to future litigation, according to company estimates.

The claims come from the presence of asbestos in cement and texture products used in the mid-1900s. Asbestos was a widely used compound in paint and other materials throughout the midcentury. But it’s a known health hazard that is linked to the development of mesothelioma.

Kelly-Moore said it stopped using asbestos in products in 1981, while the federal government banned the use of asbestos in 1989. But lawsuits continue against a variety of companies to this day, such as a $22 million verdict against two companies in 2018. KCIC, a product liability consulting firm, found there were more than 1,900 asbestos-related filings by midway through 2023, a 2% increase from the year prior.

In additional to the asbestos-related payouts, Kelly-Moore also had liabilities related to sales and use taxes, though its release didn’t disclose how much.

The closure didn’t come without prior attempts at remediation. Flacks Group, a private investment firm, acquired Kelly-Moore in October 2022 as part of its portfolio of industrial companies and manufacturers. Managing partner Charles Gassenheimer then became the CEO. The headquarters moved from California’s Bay Area to Texas last spring to be closer to its manufacturing facility, an attempt to improve production and innovation.

Kelly-Moore also furloughed 700 of its employees earlier this year prior to making the decision to close as it sought out a last-ditch infusion of capital, but no new funding materialized.

Amy Zuccarello, a bankruptcy attorney for Sullivan & Worcester who hasn’t worked on a Kelly-Moore-related cases, said it’s not unheard for companies in similar positions to close down rather than go through a bankruptcy process — which requires cash on hand and assets to navigate. Kelly-Moore, for example, leased its stores and wouldn’t have any to sell.

“They would need a lender or investor to come in and put some money into the company as a DIP loan or some other kind of additional investment to keep them afloat in Chapter 11,” she said.

In a Chapter 11 filing, the company also would have had a litany of creditors to address that were likely beyond its capability. Outstanding tax liabilities get “pretty favorable treatment, Zuccarello said, meaning those liabilities could be addressed before other claims. “You can’t walk away from unpaid taxes.”

Kelly-Moore CEO Gassenheimer said in a news release that closing the chain was the “only viable alternative remaining for us after evaluating all other potentially feasible options.”

“The ownership group’s commitment from day one was to fix the business if we could,” he said. “Sadly, no matter how great the Kelly-Moore team, products and reputation for service, we simply couldn’t overcome the massive legal and financial burdens that have been weighing on the company for many years.”

A major West Coast paint player

The decision to close is a hard blow to those who have had positive association with the brand. Adam Mayer, a Bay Area-based architecture and designer who runs Studio AMA, said the majority of contractors he has worked with have used Kelly-Moore, partly because it was founded in the area and had a large presence of in-person sales people to connect with.

“Kelly-Moore made it easy for them to open a trade account and if they needed to get paint quickly for a job, it was easy for them to go talk to the local store,” he said.

Mayer said while designers sometimes prefer the wide color palettes of other larger brands like PPG or Benjamin Moore, contractors would often head to Kelly-Moore to get it matched. Mayer never objected, even if there were slight variations.

“It had a stellar reputation,” he said.

Dunn-Edwards’ Kudukis also said how the closure hit close to home for many longtime employees. The family-founded, 99-year old company was acquired by Japan-based Nippon in 2016, and the brand continues to grow. It recently launched a DTC line called Dura.

“There’s a special sense of drive because it’s so relatable,” Kudukis said.

What’s next

As of midday Monday, the company had yet to address the closure on its homepage or social media channels. And it’s unclear how many previously placed orders will be filled, or not. Kelly-Moore declined to address questions from Modern Retail and instead referred to its press release.

Former workers will be “fully compensated for regular time worked, and management will continue its efforts to collect receivables to pay all accrued benefits including Paid Time Off,” according tot he press release.

Kudukis from Dunn-Edwards said the company is aiming to recruit former employees with outreach on social media, particularly LinkedIn. She said she’s already heard from some employees that had been with Kelly-Moore for over 30 years, asking “do you have anything for me?” Dunn-Edwards is also looking at the now-emptied stores to potentially take over leases.

“Our first reaction is what can we do to help the people, and what can we do to break any interruption the contractors are going to have,” Kudukis said.

Mayer, the interior designer, said that contractors who are currently working on jobs that had planned to use Kelly-Moore paint will be heading to other brands and hopefully be able to find matching colors for anything they’ve started.

“It’ll be good for other paint brands,” he said. Yet there’s still some nostalgia and hurt whenever employees in the industry get laid off. It’s a sad occurrence, he said “to see a legacy just brand disappear.”