Consumers have more options than ever when choosing appliances. Appliance makers are exploring their raw material options in an effort to cut costs.

By Myra Pinkham,
Contributing Editor

Demand for major appliances remains strong, which is good news for appliance manufacturers and their metals suppliers. Despite strong sales, however, appliance makers’ profit margins continue to suffer from high materials and energy costs, which cannot be entirely passed on to consumers.

“2004 was a good year for appliances,” says Evan Barrington, vice president of Stevenson Co., Louisville, Ky., a consumer durables consulting firm.

He notes that through October, industry shipments of the AHAM (Association of Home Appliance Manufacturers) Six appliances, which include washers, dryers, dishwashers, refrigerators, freezers, and free-standing and built-in ranges, were up 7.5 percent from the same period in 2003. That’s a greater-than-expected growth rate for a mature industry such as appliances, Barrington adds.

Several appliance manufacturers report that sales have outpaced their initial predictions, despite an election-year blip. Demand had slowed prior to the U.S. presidential election, notes Carlos Coutinho, director of sales and marketing for Heartland Appliances, Cambridge, Ontario. Now that the elections are over, sales have picked up dramatically, says Phil Uihlein, president and chief executive officer of U-Line Corp., Milwaukee. “Uncertainty is the mother of fear. Now people are more certain than before about their future,” he adds.

For 2004 as a whole, AHAM estimates that major appliance shipments will reach a record 76.67 million units, up 4 percent from the 73.70 million units shipped in 2003. In 2005, however, that growth rate is expected to moderate, with shipments rising just another 0.4 percent to 76.98 million units.

Likewise, for the AHAM Six, shipments were forecast to hit 45.16 million units in 2004, up 6.3 percent from 42.50 million in 2003. This year, the growth rate is expected to slow to just 0.8 percent for shipments of 45.56 million units.

Though the growth rate is slowing, demand remains healthy for appliances across the board, says Barrington. The only notable exception is air conditioner shipments, which were down 12.7 percent in the first 10 months of 2004. “Air conditioners tend to be out of step with other appliances, as their sales are driven more by weather than economic conditions,” he explains. Retailers, who were burned by two unusually cool summers, are likely to be very cautious about how much air conditioner product they buy this year, he adds.

Housing market impact
Low interest rates continue to bolster sales of new and existing homes, as well as home renovations, which bodes well for appliance demand, Barrington says, noting the strong correlation between housing trends and appliance purchases.

Despite fears that the housing boom, hot for so long, must cool soon, Michael Carliner, economist for the Washington-based National Association of Home Builders, says that 2004 will almost certainly be a record year for single-family housing starts and for the total value of construction. While there might be some slowdown in housing starts this year, unit completion will equal or exceed that of 2004.

The high turnover of existing homes will mean continued strength in renovations. With the housing market running at full capacity, and builders and contractors all busy, many renovation projects had to be postponed until this year, adding to 2005 demand for kitchen and laundry machines, Carliner says.

“People are staying at home more and taking pride in their homes,” observes Lourenço Goncalves, president and chief executive officer of Metals USA Inc., Houston.

That pride is often most evident in the kitchen, says Paul Leuthe, corporate marketing manager for Sub-Zero Freezer Co., Madison, Wis. “The kitchen is a place to escape. People don’t scrimp there. They want granite countertops and stainless professional cooking equipment. Even if they don’t cook, they want a nice kitchen.”

No kitchen appliance is more popular than any other. They all tend to be replaced at the same time, says Karen Collins, marketing communications manager for Broan-NuTone LLC, Hartford, Wis. “When you remodel, you are generally looking for all your appliances to have the same finish. It tends to be a domino effect.”

Stainless steel, long popular in Europe, continues to gain appeal as the finish of choice for consumers in North America. Kitchen appliance is one of the fastest growing markets for stainless steel, says Dan Greenfield, spokesman for Allegheny Technologies Co., Pittsburgh. “Stainless was always used in commercial kitchens due to its hygienic and cleanliness attributes, but now stainless is also being more widely used in home kitchens because of both aesthetics and functionality.”

Stainless cleans easier, is naturally antibacterial and can stand up to the high temperatures of stoves, as well as dishwashers and clothes washers, says Stephan Lacor, vice president and general manager of Mexinox USA, Bannockburn, Ill., a unit of ThyssenKrupp Mexinox. “Stainless holds up to the heat and keeps the heat inside, making it much more energy efficient,” he adds.

The quest for a stainless look, originally only offered on high-end appliances, has flowed downstream into the medium price range. Today, stainless appliances can even be found in big-box discount stores.

Some less expensive appliances appear to be made of stainless steel, but use a “satina” surface, which has a metallic look but is actually a resin alloy, notes Stephen Duthie, spokesman for Whirlpool Corp., Benton Harbor, Mich. The high price of stainless steel is likely to encourage further product substitution of this sort.

With stainless getting more mainstream, appliance designers are seeking ways to vary its appearance. For example, Sub-Zero now offers “platinum stainless,” which is a bead-blasted stainless with a softer feel. “It doesn’t have as much brilliance as normal stainless, but it has a satiny feel that doesn’t show as many fingerprints,” Leuthe says. The company also uses “carbon stainless,” which is stainless steel treated in an acid bath. “It gives it a gunmetal look. You can see the grain. It is something more exotic that the customer is willing to pay for.”

Last year, Allegheny introduced a new fingerprint-resistant stainless product called “Alklean” to complement its “Kooline” rolled-on finish and its bright anneal stainless finish, which gives appliance makers a selection of products to choose from, Greenfield says.

There are alternatives to stainless. Heartland’s Coutinho says that colors and porcelain finishes are being revived. Affluent consumers looking for something different are turning to stainless with glass or even to copper and brass, says Broan-NuTone’s Collins, though these tend to be small-volume products.

Availability woes
Appliance manufacturers were hard hit by raw material supply issues last year, finding it difficult to procure both the carbon and the stainless steel they needed. “It has been hard to get in line and get metal,” says Collins of Broan-NuTone, pointing to the consolidation among stainless producers and the export of metal abroad, particularly to China.

The tightness in the steel market was magnified by the fact that appliance demand was higher than predicted, Mexinox’s Lacor says, which means that manufacturers did not contract for high enough volumes from their metal suppliers.

That situation was made worse by the fact that not all stainless is acceptable for use in appliances. “They need high-quality, surface critical, engineered product, while most producers make more of a commodity product,” he explains.

Steel processors, distributors and mills “had to muster all their creativity to keep steel moving to customers in 2004,” says Lawrence “Bo” Burr, president and chief executive officer of Atlas Steel Products Co., Twinsburg, Ohio. He expects steel availability to improve this year.

That doesn’t erase an even larger problem for appliance manufacturers—
continually rising metal prices. In the past year, carbon steel prices rose by about 100 percent, Collins says, while stainless prices rose about 50 percent in just the past six months.

According to average monthly spot prices published in American Metal Market, the price of Grade 304 stainless cold-rolled sheet was $1.25 a pound in November 2004 vs. 66 cents a pound a year earlier.

U-Line Corp.’s Uihlein adds that manufacturers also expect price increases on resins and plastics, given record oil prices. Even the price of foam insulation has risen. “It is a perfect storm—all of our raw materials have increased or they will shortly.”

Metals producers and distributors alike say they have had no choice but to raise their prices. Much of the increases are due to raw material surcharges. LME nickel prices alone surged to $14,037 per metric ton in November 2004 from $12,102 a year earlier.

Fred Mason, vice president and general manager for Stainless Sales Corp., Chicago, says nickel and other surcharges pushed the service center’s purchasing costs 30 to 40 percent higher. “We have to pass it on.”

Appliance manufacturers have had difficulty doing the same. While most did raise suggested retail prices a bit last year, the increases were modest due to the competitive nature of the business and resistance from retailers.

“We try to keep prices as low as possible,” says Chris Ahearn, spokesperson for Lowe’s Home Improvement, Morrisville, N.C. “We realize that manufacturers are experiencing cost increases, but we try to work with those manufacturers to keep prices as low as possible. We could raise prices for a limited time until commodity prices fall, at which time we would require a similar decrease.”

This year, Duthie says, Whirlpool is looking to raise prices 5 to 10 percent, but even if successful, profits will still be squeezed. Manufacturers have taken various steps to cut costs, but there is a limit. “It is at the point that we are starting to devour ourselves.”

Shopping alternatives
One option for appliance makers, suggests Greenfield, is to use a different grade of stainless, such as 201, which contains 3.5 percent nickel vs. Grade 304’s 8 percent nickel content; or Grade 430, which has no nickel at all.

Katie Benchina, marketing manager for ThyssenKrupp Mexinox USA, says the savings realized from using Grade 430 could be considerable. The raw materials surcharge is only $15 a hundredweight vs. $50 for Grade 304.
“It has the same hygienic benefits but less fluctuation in price,” Benchina says, and since it contains more iron, it has the added benefit of being magnetic.

One drawback: Grade 430 is not very formable and can be used only for flat surfaces, Greenfield says. By contrast, Grade 201 can be used in almost any appliance application with no degradation of performance. Like 304, however, Grade 201 is not magnetic. But it does offer savings of about $20 a pound over Grade 304 and its price, like that of 430, is less volatile. “This gives appliance manufacturers an option for controlling their cost,” he suggests.

If interest rates rise hastily this year, the housing market could cool, taking some of the steam out of appliance demand, Barrington cautions.

Still, 2005 should be a fairly successful year for most players, Coutinho at Heartland Appliances says. Leuthe agrees, citing stability after the election and general optimism among consumers regarding the economy.

Manufacturers’ margins will remain under pressure, though, Collins says. “The metal situation is very challenging, more challenging than we have ever experienced. But we are up to that challenge.”