OEM Report: Appliance
Tuesday | 22 September, 2009 | 5:02 am

It all comes out in the wash

Written by By Lauren Duensing

September 2009 - Slow and steady wins the race. This strategy worked out for the tortoise in the well-known Aesop fable, but in business, a slow market is never a desirable quality. Unfortunately, the housing market in the United States has been posting decidedly sluggish numbers.

However, housing market indices are showing some improvement after posting historic lows. The NAHB/Wells Fargo Housing Market Index rose in July to 17, up from 15 in June. According to the NAHB, both new and existing home sales have been up in each of the last three months, and builders continue to make good progress in reducing their inventories of new homes. The month’s supply also fell from 10.2 months in May to 8.8 months in June.

The NAHB also notes, "The seasonally adjusted S&P/Case Shiller 20-City and 10-City Home Price Indices were down in May over April, but the decrease was miniscule compared to past double-digit declines. Home prices for eight of the 20 cities were up for the month, though again, all cities’ home prices were down from the previous year. This is an indication that supply and demand have come, or are coming, into balance and that demand for housing is improving.

"Several factors contributed to the improvement in housing. The first-time home buyer tax credit seems to have taken hold, encouraging many to take the plunge and purchase a house. This tax credit of up to $8,000 is available to first-time home buyers--individuals who have not owned a home in the previous three years--who close on a new or existing home no later than Nov. 30 of this year, subject to income restrictions. Interest rates remain at historically low levels, improving the affordability of houses.

"Lower house prices have also improved affordability. Many measures of affordability, including the NAHB/Wells Fargo Housing Opportunity Index, indicate that housing is at or near the most affordable level it has been since the inception of each index."

Trickle-down effect
Needless to say, the rough housing market is having an effect on appliances.

"Appliance shipments actually peaked at the end of 2005 and have been declining since then," says Evan Barrington, vice president, The Stevenson Co., Louisville, Ky., which specializes in marketing research solutions for consumer durable products and services for the home. "The slowdown in housing has led to the expected slowdown in appliances, but then you throw on top of it the whole economic downturn, which was much broader than just housing, with the declines in consumer confidence and the run-up in the unemployment rate, it just made things that much worse. For the year as a whole, we’re probably going to see appliance shipments down somewhere between 11 percent and 13 percent."

According to the Reuters/University of Michigan Surveys of Consumers, "Consumer confidence slipped in July as consumers anticipated their personal finances would improve more slowly than they had anticipated several months ago."

"It is difficult to determine whether the recent loss in confidence simply reflects the impatience of consumers or the sprouting of changed assessments of the effectiveness of the stimulus policies," said Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers, in the July press release. "In either event, economic apprehensions can be expected to increase, along with rising unemployment and stagnant incomes during the months ahead. Although consumer spending will improve during the balance of 2009, total personal consumption expenditures will post a lackluster increase of 1.5 percent during 2010."

"Appliances are pretty cyclical," Barrington notes. "When the economy is doing well, appliances are going to do well. When it’s not doing well, they’re going to get hurt. They’re big-ticket consumer durables, and when consumers don’t have money, it’s difficult for them to buy appliances."

As a result, like companies in many industries today, appliance manufacturers are cutting costs and evaluating business strategies to survive.

In its second-quarter results, Whirlpool Corp.’s Chairman and CEO Jeff Fettig commented, "Customer demand for appliances was significantly lower in the second quarter, which negatively impacted our global unit volumes. Late last year, we took actions to restructure our business, aligning our capacity and resources to lower demand levels."

And Electrolux President and CEO Hans Stråberg commented in a company statement, "Market development continues to be weak, although in North America we see certain early signs that we are beginning to reach the bottom. The volumes in North America have declined for 12 consecutive quarters and in Europe for six consecutive quarters. We will continue to adapt to lower volumes in the coming quarters."

But when it comes to cutting costs, keeping up with fluctuating metals prices can throw a wrench in the works.

Stråberg said, "The raw material market is very uncertain. Notwithstanding the lower steel prices, we are beginning to see rising costs for other raw materials, such as copper and plastic. The challenge for us right now is to find the right balance between the accelerator and the brake. After summer, we will need to build up our inventories from the very low levels we have today to handle the increased demand that occurs during the second half of the year."

"Certainly. when [metals] prices are high, that puts tremendous cost pressures on the manufacturers," Barrington says. "As long as I’ve been involved with the industry, there’s always a tremendous pressure to keep costs as low as possible. So when metal prices go up, that’s extra pressure. It’s always been a competitive environment, and it’s not easy for the manufacturers to pass along price increases. So there’s always been a major push toward finding efficiencies to allow cost takeout. In the current environment, that’s become so much more important."

Sticking with innovation
The industry continues to innovate. When it comes to trends in the market, stainless steel isn’t losing any ground. "Consumers continue to like stainless," says Barrington, although he notes that the significant gains the material has already experienced don’t leave much room for further growth.

"Recently, the two fastest-growing products have been front-load washing machines and bottom freezers. Those are two new variations on an existing product that have caught consumers’ attention. I think we’ll continue to see movement in that direction on those products."

He also notes that there will continue to be new designs rolled out that include colors and "certainly a lot of emphasis on energy efficiency. I think the industry has learned that it has to keep coming up with new ideas, which will help maintain the interest among consumers."

Computer displays and interfaces in the kitchen are still in the works, but increasingly, appliances are merging with the world of consumer electronics. Some comparisons are blatant, such as Toshiba’s 19-inch stainless steel HDTV. Typically, consumers are attracted to HDTVs for their big screens, sleek designs and clear picture, but moving these large items into the kitchen is unthinkable. The 19LV612U boasts a tough stainless steel exterior, helping it blend in to kitchen decor, but it has similar power to its larger counterparts with a 720p LCD panel and an integrated slot-loading DVD player.

Because of consumers’ interest in ongoing innovation, for the appliance market, hopefully, there’s nowhere to go but up.

"Clearly, it appears that housing has bottomed out, although we’re still at very low levels, and that’s a positive," says Barrington. "It has a long way to go, but we’re finally moving in the right direction with these modest gains that we’re seeing. It’s much better than what we were facing through much of last year, where every number coming out was worse than the prior number. I think that even the overall economy is improving, and things will gradually start getting better. That will help appliances. The key unknown is just how fast, or maybe more appropriately, how sluggish the recovery will be." MM


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