AC Vendors See Silver Lining In This Season's Oversupply

New York— In the last issue of TWICE, dealers bemoaned the relatively cool summer weather that's put room air sales on ice, and the slash-and-burn pricing that some national accounts and vendors have resorted to in order to move inventory and drive traffic. (See TWICE, Aug. 9, p. 1.)

In part two of our room air report, execs from leading room air manufacturers Electrolux/Frigidaire, Haier and Samsung explain why AC carryover might not be such a bad thing this year, and how they're working to raise the bar on pricing with more fully featured and specialized models.

TWICE: How has your room air business fared this season?

Bernie Tymkiw, VP/sales, Haier America: Sales were up in April and May for the nationals, but parts of the country slowed down last month, particularly in the Northeast. However, the South and the West have had heat, which created holes in dealer inventory, so we've seen some opportunity buys.

But everyone's still waiting for that hot spell. A hot summer helps everyone. Retailers use the cash flow from room air to help pay for holiday season inventory. That's why there's nothing as exciting as the AC business, because three days of hot weather can turn it around. There's always another week when things can pop up, like last summer when it was hotter at the end of the season.

As we get later into the summer though, the smaller Btu units tend to outsell the larger ones because consumers figure there's not much left of the season, and they'll just look at price.

Vik Murty, marketing manager/home appliances, Samsung: This is the third year in a row that sell-in has been in significant excess of sell-through. There was an early heat spike out West in late May, but the two biggest markets, Philadelphia to Boston in the Northeast, and Chicago to Detroit in the Midwest, have both experienced exceptionally cold summers. In fact, there's only been one day over 90 degrees in New York City so far, which is a record. There's going to be a lot of older inventory floating around between retailers.

Greg Bagwell, VP/general manager, room air and new business development, Electrolux Group: It's not as hot as we would have hoped for, and we entered a compressed marketplace with a new line that was designed for the upper end. It was over-featured for the commodity market, but next year we'll participate in all areas of the business by adding more product in the opening price point area.

Nevertheless, we're comfortable with our sell-through, and the season's not over. There's still heat, and we expect retailers to continue selling room air through the summer.

TWICE: How will you contend with inventory carryover?

Bagwell: Industrywide, I believe there will be carryover into 2005 that's consistent with what we saw in early 2004. We'll dispose of it through pre-season sales next year. Having some carryover will actually place manufacturers in a better position this time out because significant increases in raw material costs and the newly required UL 484 power cord will filter into higher retail pricing on new models. There will certainly be some great values for consumers [on older inventory] early in the year.

Murty: We haven't run into a real messy situation with lots of carryover. If demand doesn't match what dealers had forecasted, we take some product back and balance the inventory by helping other retailers who might need it. We don't hold very much inventory, but have earmarked some for key customers which we can ship in the event of heat spikes.

We're also a global company, and 80 percent to 90 percent of the time we are able to take advantage of the season shift in the Southern Hemisphere by shipping some product to Chile and Argentina.

My guess is that old production will be exhausted next year on smaller Btu units because the new UL power cord and a 10 percent to 20 percent hike in the cost of copper and aluminum will probably add $10 to the price of products, at least at the beginning of the season. There's also a shortage of compressors in the 10,000 Btu to 14,000 Btu range. We're one of two manufacturers that build the majority of compressors, and hopefully compressor production will go up. If not, we're looking at another 10 percent to 15 percent increase in price.

The Samsung AC factories are currently assessing what the pricing increases will be next year, but I think we'll only see moderate hikes because of supply chain efficiencies and the pools of inventory out there.

At the same time, after three bad years for the business, there are very few manufacturers left, and much of the production has moved to China. U.S. producers will find it very difficult to survive in the marketplace. It will definitely make for an interesting year in room air.

TWICE: What differentiates you in the marketplace?

Tymkiw: Being a manufacturer puts us in a little different position. We don't have to renegotiate with our suppliers every year, and unlike other vendors, we carry inventory on a year-round basis because we sell in North and South America. So if it's a hot summer, customers can come back to us to fill holes in their inventory. Other vendors act as agents — they source supplies, and once they get orders, they're done.

We also have a dedicated air conditioning team that spends time on that category and is always looking ahead 12 to 18 months to determine what consumers want. We're focused on room air. It's not just an afterthought on a spec sheet. So from the time we introduced our first line three years ago, we went from six window units to an expanded offering that ranges from 5,000 Btus to 24,000 Btus and includes slider ACs, heat-cool models, portable units and even central air. We have a commitment to the category and have become a one-stop shop for retailers.

Bagwell: We found it difficult to remain competitive producing air conditioners from our Edison, N.J., facility, so last year we found a new partner in China and are working with the global Electrolux Group to leverage great design and technology from its markets around the world. Not having to run a factory has freed us up to look at new designs and features, such as our exclusive remote temperature sensing technology, which adjusts cooling based on the temperature near the remote, and our low-voltage compensation technology, which eliminates spikes from electrical surges. Surveys show that the consumer is willing to pay a premium of as much as $25 for innovative technologies.

Since we began sourcing through China we've seen a 50 percent reduction in service calls on our specialty units, and now that we have our logistics fully in place, we can direct-ship retailers with solid containers or can hot-truck product wherever and whenever needed from our warehouse in Pennsylvania.

Murty:Samsung AC is traditionally a step-up from the commodity business, so even some of our smaller units feature remote controls, which are very popular and are Energy Star rated. As Samsung develops new technology, we can introduce useful features to help raise price points, such as a sleep timer that raises the room temperature by 2 degrees so you don't wake up freezing.