Appliance Market: Will This Be the Year?
The market for major appliances is among the last to recover from the recession, but the increase in housing starts late in 2012 bodes well for the industry—and the metals producers and distributors that supply it.
By Dan Markham, Senior Editor
While most major end markets have enjoyed some type of rebound since the recession, the appliance market continues to lag. Hope exists, with some justification, that the turnaround in appliance demand could begin later this year.
End markets, such as automotive and energy, have enjoyed robust growth over the past few years. Even the residential housing market, which propels appliance sales, is finally showing signs of bouncing off the bottom. But U.S. demand for appliances has remained tepid from the start of the housing crash through the end of 2012.
Shipments of the six major appliance groups—washers, dryers, dishwashers, refrigerators, freezers and ovens/ranges—have declined for two straight years, reports the Association of Home Appliance Manufacturers, Washington, D.C. In 2010, Cash for Crispers—the government incentive designed to stimulate appliance upgrades—significantly increased shipments from the prior year. The tumble in subsequent years, however, suggests the program merely pulled sales forward rather than creating incremental demand.
Last year, U.S. shipments of the AHAM 6 declined 2.3 percent from 2011. That followed a 4.3 percent decline the prior year. Shipments of all appliances in 2012 fell 0.2 percent to 60.7 million units.
Experts forecast a reversal of fortunes in the latter half of 2013. Benton Harbor, Mich.-based Whirlpool, the nation’s largest appliance maker, expects shipments to grow 2-3 percent this year in the United States, with additional growth in most other global markets. The company believes the industry will benefit from numerous positive drivers in both the near and short term.
Others share that mild optimism about the year to come. “Beginning this year, appliance should see positive growth, even if it’s just in the low single digits,” says Chris Plummer, an analyst with Metal Strategies, West Chester, Pa.
Chief among the positives is the residential housing sector. Housing starts, a key driver of appliance shipments, were up 27.5 percent in 2012. Most of those gains came in the last four months of the year, too late to boost the appliance market data.
Large percentage gains in residential construction are expected for the foreseeable future. The National Association of Home Builders, Washington, D.C., projects further growth of 25.4 percent in 2013 and 20.9 percent in 2014, which would finally take annual housing starts back over 1 million units.
Growth will include both single-family homes and multifamily projects. NAHB projects single-family home starts will increase 23.0 percent this year to 658,000 units, and another 28.9 percent in 2014 to 848,000 units. Multifamily home starts will jump 23.0 percent to 321,000 units this year, but only 4.5 percent in 2014. Both types of construction mean increased production of white goods by the appliance industry.
Of course, there’s a lag between housing starts and when appliance makers see new demand, which explains why the market has not benefited yet from the year-end surge in home construction. “We are on the housing completion side, not the housing start side. The housing completions in 2012 were still very low, below 600,000 units,” said Whirlpool North America President Marc R. Bitzer during his company’s year-end conference call. “You add six to eight months for completions.”
Additionally, the housing figures were working off such a low base that the percentage gains, while encouraging, are still somewhat muted. Housing remains more than 60 percent off its mid-2000 peak. Still, any upturn is welcome after such a prolonged slump, say executives.
There are other encouraging trends for metals distributors and processors serving the appliance industry. Manufacturers have been shifting production of some machines back to North America from China and other foreign locations, a trend that gets obscured by the overall shipment figures.
“We think the NAFTA market is doing quite well. We’ve seen some repatriation of things, like production in China moving back into Mexico,” says Plummer.
That trend toward more North American production is not likely to change, for a variety of reasons. Increasing labor costs in the developing markets, freight costs and supply chain delays, currency concerns and product development issues have made manufacturers more aware of the risks in locating production of appliances so far removed from their customer base. “There is a cornucopia of factors involved, which came together and made decision makers think the United States is a good place to manufacture,” says Steve Wasil, director of national sales for ThyssenKrupp Stainless USA, Chicago.
Whirlpool and General Electric have already made substantial investments to restart some product lines in the U.S. In May, Electrolux will open a new 750,000-square-foot manufacturing plant in Memphis where it will build cooking products.
“Shifting this back to the States helps us and others supporting U.S. manufacturing,” says Dave Yundt, president and general manager of the Harmony plant for Main Steel, Tinton Falls, N.J.
Another positive trend for the industry is the nature of the replacement cycle. Appliances purchased during the building boom of the early 2000s are nearing the end of their useful life and must soon be upgraded. “Add the typical 10-year life of an appliance, and you can expect some pretty healthy replacement,” Bitzer says.
The domestic appliance market also enjoyed a recent victory on the international trade front, when the U.S. International Trade Commission and the Department of Commerce released a unanimous final determination on dumping of certain products from South Korea and Mexico. Commerce ordered antidumping duty orders on large residential washers from the two countries.
Interior design trends continue to favor the use of stainless steel. Stainless steel producers report market share gains as a result of customer preference for shiny, silver refrigerators and ranges. Though the growth of stainless in the appliance market may not be as rapid as a decade ago, the material is still making inroads.
“The market overall was down, but on the stainless side it’s a brighter picture,” says Yundt. “We’ve seen nothing to indicate that stainless is not still a very attractive option and what customers want.”
Appliance buyers still perceive stainless as a high-quality option, not just for kitchen exteriors but for internal parts, as well. “We’ve seen a further migration toward internal components manufactured out of stainless,” Wasil says. Dishwashers with interior tubs made of stainless, rather than plastic, can now be found at various price points. “It started on the high end, and over time it has worked its way into the middle and even the low-end of the market,” says Wasil, who sees customer preferences moving away from the lower-cost ferritic stainless products and back to the real thing.
For appliance makers, most of the R&D in recent years has been on ways to make their machines more energy efficient, both out of customer demand and government dictate. The Department of Energy is wrapping up the development of a host of new energy efficiency targets that will be met in the coming years. New energy standards for dishwashers went into effect this year, to be followed by similar measures for refrigerators and air conditioners in 2014 and clothes washers in 2015.
Though the appliance makers worked with the DOE in developing the standards, meeting the new requirements is a challenging task. Refrigerators are facing the fourth-generation standard, and this one involves not just a new standard, but the development of a new test procedure, says Jill Notini, vice president of communications and marketing for AHAM. The 2014 model refrigerators are expected to achieve 20-25 percent efficiency gains across the board.
Once the baseline standards are met, the DOE will develop even higher targets for those appliances that want to be classified as Energy Star models. Research indicates that such a distinction is quite attractive to homeowners. In a recent survey of home buyer preferences, Energy Star appliances were considered essential or desirable by 94 percent of the respondents. AHAM is hopeful that Energy Star allowances will be made for those products that are smart-grid capable, where the machines will take a signal from the local utility and possibly shift a load or delay a function based on the needs of the grid. “Smart appliances represent the next generation of efficiency,” Notini says. “It’s benefiting beyond the home itself, all the way back to the grid, by being able to recognize high-peak times and making adjustments. It’s transformational for the industry.” And calls for new copper-intensive controls.
Appliance makers believe such innovative functions will drive profitability, as consumers become as demanding of their appliances as they are of other technology tools.
“Innovation sells,” Whirlpool Chairman and CEO Jeff Fettig said during the company’s conference call. “Our view of how to grow faster and win in the marketplace is through product innovation, not through price cutting.”
“Desired features are less about the gadget and more about how they lend to the overall experience,” says Michele Bedard, vice president of marketing for Sub-Zero and Wolf Appliance, Madison, Wis. She points to Sub-Zero’s air purification system, which scrubs the air of molds and bacteria, as an example of the type of practical advancement sought by consumers.
In conjunction with helping the industry reach energy efficiency standards, AHAM also has been working on an overall sustainability standard for appliances, a campaign that covers energy, materials, end-of-life, performance and manufacturing concerns. Such a focus dovetails nicely with the metals industry, sources say, which has a better record on recyclability than other competitive materials.
The appliance industry is challenging its suppliers to improve their performance as part of the sustainability initiative, Bedard says. “The metal supply base has been consolidating greatly over the last several years and inventories are held at a much lower level. Metal distributors/processors are challenged with providing a high standard of quality at a lower cost on a consistent basis.”
Ultimately, the industry is primed for a recovery, even if lingering caution delays it until the second half of the year. “When all the dust settles, we’ll see the NAFTA appliance sector bruised and beaten, but still holding up fairly strong,” Plummer says.