OEM Report: Appliance
Monday | 27 September, 2010 | 4:00 am

Competing for consumers

Written by By Lauren Duensing

September 2010 - Demand increases caused by popular homebuyer tax credits came to a crashing halt at the end of August. July existing-home sales, which included single-family, townhomes, condominiums and co-ops, dropped 27.2 percent from June numbers and are 25.5 percent below July 2009 levels.

"Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired," Lawrence Yun, National Association of Realtors chief economist, said in a press release. "Since May, after the deadline, contract signings have been notably lower, and a pause period for home sales is likely to last through September. However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs."

That definitely would assist appliance manufacturers, but in lieu of a strong residential market and with a continually volatile environment, companies are refocusing their efforts on cost reduction, productivity, profitability and innovation with good results.

"We are seeing an increase in sales for our stainless steel and appliance-grade materials, as well as galvanized for some applications," says Jim Chain, president of Almetals Inc., Wixom, Mich., a specialty metals slitter and distributor.

And he foresees orders continuing to fill the books, "especially as the housing industry starts recovering from the deep recession that it has been in. As building increases, so do the orders for ovens, refrigerators, dishwashers, washing machines and dryers."

And despite July’s stunning drop, Yun’s forecast for the year is still relatively positive. "Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place [this] in perspective, annual sales averaged 4.9 million in the past 20 years and 4.4 million over the past 30 years."

Flat U.S. demand
Chuck Turack, vice president and general manager of coil products for Outokumpu, Schaumburg, Ill., a global stainless steel producer, does not see a major pickup in demand from the company’s appliance customers for the rest of 2010. "[Demand] was down and now is up slightly but has flattened. This will continue," he says.

"The major manufacturers have all posted favorable Q1 and Q2 shipments versus 2009, although this has not yet been translated to consumer sales, and more importantly, is retailer restocking after a period of destocking during 2009, rather than like-for-like consumer sales," says Simon Maddrell, head of consumer appliance research, Euromonitor International Ltd., London, an independent provider of business intelligence on industries, countries and customers.

"We expect a lag in sales through the rest of the year in terms of sell out versus manufacturer sell in," he continues. "Q3 and Q4 are important sales periods for manufacturers and retailers, although with consumers still feeling the pinch in several key markets, including the U.S., Germany, Japan, U.K. and Russia, the likelihood of a return to pre-recessionary spending appears highly unlikely--especially because consumer cocooning is still prevalent and importantly, discretionary affordable luxury spending and lower unit prices due to stimulus packages is a more likely leader for higher-than-expected half-yearly sales."

Globally, however, the appliance industry will post growth due to the strength of emerging markets. Maddrell forecasts marginal growth in 2010, with "developed markets posting indifferent results."

He also says markets, especially those within the Euro zone, are not at risk of growth returning to pre-recession numbers but "rather a bounce after deep contractions in volume and value in 2009, resulting in some pent-up demand driving 2010 sales. Therefore, there is a real risk that there will be a double-dip in sales through 2011 and potentially 2012. This is especially true of a few markets still suffering from the recession with austerity packages in place.

"In the case of emerging markets, China, India, Brazil and Indonesia will be driving unit volume sales in absolute growth terms on the back of low penetration rates for the major appliance categories, stimulus packages and positive real GDP growth. However, the question at the moment, especially for China and Brazil, is how much of the growth at present is stimulated? Once stimulus packages disappear, what will be the underlying organic growth rate?" says Maddrell.

He points out in the markets Euromonitor International researches where stimulus packages are in place, an estimated 25 to 50 percent of the growth rate is actually stimulated, rather than organic, growth.

Demand drives sales
In order to be prepared for these volatile market conditions, efficiency is the current buzzword among appliance manufacturers, both from a product and production standpoint, creating savings all along the supply chain.

Whirlpool Corp., Benton Harbor, Mich., reported in its second-quarter results that profit growth for North America was driven by cost and productivity initiatives and higher volume. The company saw a spike in year-over-year demand in April for washers, dryers, refrigerators, freezers, dishwashers, ranges and compactors, but numbers are expected to retreat slightly for the second half of 2010 as rebates for consumers dry up.

In an Aug. 11 business update given at the Credit Suisse 2010 Industrials conference, Jim Campbell, president and CEO of GE Appliances and Lighting, pointed out the company is making its appliance factories more competitive with lean manufacturing, focusing on cost and productivity. Specifically, the company is using one team, no silos; implementing Kaizen, model lines and the 3Ps; eliminating defects to increase quality; and maximizing cost-competitive vertical integration.

In August, home-appliance manufacturers and energy-efficiency advocates agreed on improved efficiency standards for refrigerators, freezers, clothes washers, clothes dryers, dishwashers and room air conditioners. This includes new national minimum-efficiency standards, production tax credits for super-efficient appliances and the inclusion of Smart Grid readiness as a feature of future Energy Star-qualified appliances.

"This joint proposal will make the next generation of major home appliances the thriftiest ever when it comes to energy and water use," said Steven Nadel, executive director of the American Council for an Energy Efficient Economy, in a press release. "The resulting energy and water savings will cut bills for consumers by billions of dollars and reduce global warming emissions for decades to come."

"In terms of the key purchasing points for consumer appliances, macro trends such as energy efficiency, noise reduction, appliance integration and health are all important drivers for sales," says Maddrell. "However, especially in developed markets, price has become more important. Therefore, manufacturer price mix in terms of product portfolio is a large part of market-share building. For example, in Germany, we witnessed during 2009 a move to more premium brands; however, this was due to unit price discounting from the retailers driving sales. During 2010, we are seeing consumers gravitating back to cheaper, mid-ranged products as discounting abates. Price mix, therefore, is important in this market."

As a result of price focus, Turack sees more requests from his customers for a rolled-on finish that replicates No. 4 polish, and in addition to increased usage for aluminum, stainless and galvanized materials, Almetals has noticed over the past few years "the appliance industry is specifying more 201 stainless in place of 304 to reduce cost," Chain says. "We have also seen more requests for stocking (JIT) programs, which helps the customer’s cash flow and reduces their interest costs.

"We worked with one manufacturer to switch from a hydroformed part to a stamping, which was a cost savings and a new program for Almetals. We have another project that is being developed for next year with a stamper to help them redesign a part to reduce the gauge requirement and alloy of a high-volume part. When we are successful, the stamper will be able to offer his customer, an appliance manufacturer, cost savings."

Ultimately, the customer is always right. Whether consumers demand bigger appliances, varying colors or electronic interfaces, the appliance manufacturers will strive to bring these to market.

"We believe the consumer demand for specific materials is changing, which will have an effect on the market," says Chain. "There has been some tendency on behalf of the consumers to move away from the stainless steel finishes due to cost. In addition, there appears to be a trend toward various painted finishes. We are noting that some manufacturers are getting creative with the painted products on the fascia of stoves, refrigerators and dishwashers. These products are complimentary to the kitchen color and/or the look and feel of the room. We believe this trend exists due to the increased pricing of stainless steel appliances and the decorative twists of the consumer. Every so many years, there must be changes in the product for the market to create additional need--just good marketing on behalf of the appliance industry." MM


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