Price Promotions Take Toll On Majap Profits - Twice

Price Promotions Take Toll On Majap Profits

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BENTON HARBOR, MICH. —

Rampant discounting has come to major appliances, and the industry’s two largest manufacturers are feeling the pinch.

Whirlpool and Electrolux reported lower third-quarter earnings last month as the combination of price promotions and the higher cost of raw materials ate into profits.

The majap industry had traditionally avoided the kind of deep discounting, at least on premium products, that’s more familiar to the consumer electronics business. But four years of declining sales, and a falloff in artificial demand after a federal rebate program ran its course, has compelled vendors and retailers to cut prices, or respond in kind, in an effort to jumpstart volume.

Indeed, U.S. industry unit shipments of major appliances decreased 3 percent during the third quarter, Whirlpool noted, and financially stressed consumers are trading down to lower-margins models, adding to industry woes.

In a conference call with analysts, Whirlpool chairman/ CEO Jeff Fettig acknowledged that the company’s North American unit cut prices during the third quarter in two key product categories, including laundry, in response to “extremely aggressive” pricing by competitors and “a sharp change in demand.”

Similarly, outgoing Electrolux president/CEO Hans Straberg said sales promotions increased within the North American market as the federal rebate program waned. “We experienced a very strong second quarter as a result of the government-sponsored rebate programs to promote energy-efficient products,” Straberg said in a statement. “Consumers took advantage of this opportunity by advancing their purchases of appliances, which in turn resulted in a drop in demand during the third quarter. As a result of the market volatility, price promotions were intensified at the end of the quarter, especially in the U.S.”

Whirlpool’s third-quarter net earnings fell 9.2 percent to $79 million on essentially flat sales of $4.5 billion. But operating profit for the three months ended Sept. 30 rose nearly 24 percent to $234 million due to cost reductions and productivity initiatives and increased monetization of certain tax credits. These favorable factors were partially offset by higher material costs and lower product price/mix.

“As expected, we faced a challenging environment during the quarter which resulted in a significant slowing in sales growth compared to the first half of the year,” Fettig said in a statement. “Our ongoing focus on cost reductions, productivity and innovative new product launches continues to enable us to adapt to changes in the macroeconomic environment.”

In North America, third-quarter sales declined 3 percent to $2.4 billion as unit shipments increased approximately 1 percent. Third-quarter 2010 adjusted operating profit for the North America region fell to $114 million from $147 million in the prior year, due to a lower product price/mix and higher material costs, which were partially offset by cost reductions and productivity initiatives.

Based on the current economic outlook, Whirlpool has lowered its full-year estimate for industry unit shipments from an increase of 5 percent to a 3 percent gain.

During the conference call, executives acknowledged higher North American inventory levels, which they attributed to product transitions, weaker-than-expected demand, and a traditional seasonal buildup in advance of the fourth quarter.

Whirlpool North America president Marc Bitzer said the price cuts, plus positive consumer response to several product launches, led to “strong brand share growth” during the quarter. New product introductions included:

• Whirlpool brand’s top-of-the-line front-load Duet laundry pair, which uses as little as 11.5 gallons of water per load;

• Whirlpool brand’s Cabrio high-efficiency top-load laundry pair, which uses 74 percent less water and 76 percent less energy per load compared with conventional pre-2004 top-load washers;

• Maytag brand’s Ice20 Easy Access four-door refrigerator, touted as the industry’s most energy-efficient four-door refrigerator ;

• KitchenAid brand’s large-capacity dual-fuel doubleoven range and dishwasher with retro-style recessed handle; and

• Amana brand’s Tandem front-load laundry pair, which uses 73 percent less water and 71 percent less energy compared with conventional pre-2004 top-load washers.

Bitzer added that Black Friday promotional activity will mirror last Thanksgiving weekend, with the greatest participation by national chains and more limited promotional activity by the independent dealer channel.

Meanwhile, Electrolux reported a 5 percent decline in sales, to $3.6 billion, and a 12 percent drop in net income, to $189.2 million, for the third quarter ended Sept. 30. Excluding the unfavorable impact of currency fluctuations, net sales declined 2.3 percent.

In North America, operating income dropped 37.7 percent to $60.1 million due to higher costs for raw materials and increased price promotions amid a weak U.S. market, although Electrolux’s termination of several private label contracts had a positive impact on product mix, the company said.

Pricing pressure was especially acute within the washer category, Electrolux noted, and increased marketing efforts for the launch of new Frigidaire brand products also impacted operating income.

Separately, the company said it planned to shut its washer plant in Webster City, Iowa, in the first quarter of 2011.

— Additional reporting by Steve Smith

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