All Mixed UpThe North American appliance market has split with the housing market over the past two years. Will it return to form in 2020?
One of the truisms of the metals supply chain is the appliance market runs hand in hand with the residential construction market. As home sales pick up, appliances will come along for the ride.
Recently, that maxim has been delivered a very rare hit.
While the housing market has not been going gangbusters since the recession, for a variety of reasons, it continued an upward trend in 2020. But the appliance market didn’t follow suit, a condition that has left veteran industry watchers a little perplexed.
“My experience is when housing grows, you’re expecting to see appliance pick up. But that hasn’t been the case the last two years,” says Evan Barrington, an appliance market analyst for The Stevenson Company, Louisville, Ky.
According to Census Bureau data, new home sales in 2019 were estimated at 681,000 units, a healthy 10.3 percent climb from the prior year. Yet appliance sales declined 4.6 percent to 75.6 million units.
The drop was across the board, the Association of Home Appliance Manufacturers reports. Only laundry products, among the six largest categories of appliances, enjoyed higher sales last year, climbing 1.6 percent.
Whether this divergence is a small blip or a decoupling of the two segments remains to be seen, but for the time being the appliance industry can hope it’s the former. The housing market is expected to increase again in 2020, according to projections from the National Association of Realtors.
In his 2020 forecast, Lawrence Yun, NAR’s chief economist and senior vice president of research, projects new home sales to climb an additional 11 percent in 2020 to 750,000 units. That will combine with a projected 4.6 percent increase in existing home sales to 5.6 million units, meaning more than 1 million homes could change hands this year.
Perhaps the one drawback to robust housing demand in 2020 is the state of inventory. Currently, stocks of new homes are at just 5.7 months, a historically low figure. Experts agree that more homes simply need to be built.
That’s obviously music to the ears of the appliance makers, as new homes inevitably do mean new appliances. Yet, the appliance sector, perhaps spooked by the rare turn of events in 2020, is not anticipating a spectacular year.
In its most recent conference call with investors and analysts, Whirlpool executives offered a conservative forecast on appliance demand. “We maintain our cautious demand outlook for North America. While U.S. housing starts show positive signs of strengthening, that has not yet translated to higher appliance demand,” says Jim Peters, CFO of the Louisville-based company.
One possible explanation for the divergence dates back to the last recession, when the housing market hit rock bottom. Though new home construction is the strongest driver of appliance sales, there is a significant replacement market as well. Since the industry is now 10 to 12 years since housing started to tumble, there are fewer models reaching that typical age for replacement.
“We’re now comping against the low years post-recession,” said Whirlpool CEO Marc Bitzer. “And that will be around for two more years.”
All of this is contributing to the mediocre market Whirlpool sees. Others have a similar take about the broader segment. “We’ll see a little bit of growth, but 1 percent growth is still pretty much moving sideways,” Barrington says.
Not every participant in the sector will suffer equally. Birmingham’s Jemison Metals anticipates rough times for the broader market, but also for his company’s primary appliance customer to defy national trends.
“A couple of weeks ago, I would have said I’m optimistic it will be a decent year [for appliance], but it seems all of that data is turning around pretty quickly. The optimism has turned to pessimism” says Craig Mathiason, Jemison’s president and COO. “Our particular share is with a company trying to be aggressive and grow their market share, so we’ll be fine, but overall it will be a bit sluggish.”
Italian appliance maker Forza is enthusiastic about its prospects for the year to come. “We expect demand to stay strong and increase along with the healthy U.S. economy,” says Marco Guerzoni, director of marketing.
As with other markets, the appliance industry has been caught up in trade disputes over the last few years, particularly given the global nature of the supply chain. The major participants are hopeful that a lot of those headaches are behind them.
“We typically don’t involve ourselves in trade issues because of the global nature of our members,” says Jill Notini, vice president of communications and marketing for Washington-based AHAM. “However, over the past year we have been addressing the impacts the tariffs have had on our manufacturers. With some of them, there has been a lot of uncertainty and disruption. The uncertainty is diverting resources from innovation and R&D to understanding and managing the trade disruption.”
Mathiason sees other effects as well. “If Whirlpool is sourcing a product from China, somebody has a new job when those tariffs are introduced and they have to go visit other parts of the world to find a new supply chain. They have to monitor that and get other people involved. That’s cost.”
Based on its research, Whirlpool doesn’t anticipate tariffs having the negative effect on the business this year.
The recent signings of the United States-Mexico-Canada trade agreement and the Phase One trade deal with China are a source for optimism in the industry. “We have always been supportive of USMCA. We have been working in both the U.S. and Canada to support the agreements that would modernize the agreement and reinforce our strong partnership with North American countries,” Notini says.
On the materials front, one thing has held remarkably stable – the enduring appeal of stainless steel. Barrington, for one, continues to be “amazed at how resilient the demand for stainless steel is.”
For the past two decades, regardless the state of the economy, consumers have demonstrated a strong preference for stainless in appliances. “I fully expected during the recession in 2008-09, when things got tough, for people to back away from stainless a little. It didn’t happen,” he says.
Forza is counting on that chronic appeal holding. “Stainless steel will increase its presence in our product categories. It is a unique material with unique mechanical performance and a beautiful appearance,” says Guerzoni. “The grade of stainless we are using is a 304 for the aesthetic part and 430 for some structural components.”
Stainless continues to make greater inroads in part because of the developments taking place within the industry. Kloeckner Metals, Roswell, Ga., is at the forefront of those changes with its commitment to its PVD process.
PVD, which stands for Physical Vapor Deposition, is a process for metals, including stainless, where the substance bonds with the surface of the material, rather than simply coat the metal.
The benefit to the appliance industry, says Jamie Pfleger, Kloeckner’s director of PVD, is the material can be colored while still retaining the traditional look of stainless. “What you lose in a painted stainless is a feature of the stainless itself. You don’t see the grain or the polish.”
The drawback is the time and cost of the process doesn’t lend itself to mass production. Rather, Kloeckner has been targeting the high-end boutique end of the market. That could change if Double Stone Steel, Kloeckner’s partner in PVD, is able to successfully develop a process for surface treatment of coil products, rather than just sheets. “I think then you’d see it become available for mass production,” she said.
PVD can also be used to apply anti-fingerprint, to the stainless, which Barrington notes is another way the material is retaining its appeal among consumers.
Including stainless and other metals, Whirlpool executives expect a little more stability this year on the raw material front than what the industry has experienced in the recent past. “We will see less of an inflationary environment, but it’s not completely gone and reversed,” Bitker said.
One change Mathiason has noticed is the desire from the appliance makers to have more streamlined supply chains, which is one reason Jemison has been adding downstream capabilities to its service center offerings. “Particularly with our appliance customer, they prefer to deal with one guy, so it’s relatively easy to take that extra business and add it to what we’re doing now. We’re dealing less with fabricators because we’re taking it in-house now.”
One other trend that remains at the forefront of the appliance space is the push toward greater connectivity in the home. “I think there’s a lot of exciting technology developments in terms of building in connectivity capabilities,” says Notini. “We see artificial intelligence in appliances being able to predict when to work or the cycles to run. There’s a whole evolution of designing for the future and building in more technology and more sensors.”
Barrington agrees the industry is embracing these technologies, though he’s not certain how much payoff it’s seeing for its efforts. “There’s a lot of talk of smart appliances, but how much of that is changing consumer behavior, I’m not really sure.”
Nonetheless, he recognizes that it’s an extremely exciting time to be part of the appliance sector.
“Having been in the industry a long time, it’s amazing how much more rapid new product development is occurring today than it did, particularly 10 or 15 years ago,” he says. “That is good for consumers and it is overall good for the industry.”