Not long ago, Dealerscope did its own deep dive into how the appliances industry is being innovated—both from a retailing perspective as well as an actual hardware and product perspective. And more recently, we uncovered some data that showed more and more consumers are willing to do their home product shopping—including for major home appliances—online. But what are retailers actually seeing?
The easiest way for us to answer that question is to talk to some of the folks in the industry who hear from the solid majority of appliance retailers out there—buying groups. And that's just what we did. So, for an update on all things appliances, we turned to the people we know at BrandSource, Nationwide Marketing Group, and NATM Buying Corp., for an inside scoop on what they and their members are seeing out of the appliances market.
Dealerscope: Some retailers are reporting that they are already feeling the effects of the Trump tariffs on the cost of appliances. Are you hearing the same things from your members? At what point do you see dealers passing along the added expenses to consumers?
Gerald L. Satoren, Executive Director, NATM Buying Corp.: In the first half of 2018, virtually every major appliance manufacturer has increased both wholesale and suggested retail prices. Yes, the Trump tariffs have been somewhat of a factor in these pricing decisions. But in my opinion, these increases, at least this round, are largely the result of significant year-over-year spikes in raw material costs for all appliance makers, and have made these price increases an inevitability… tariffs notwithstanding. How much each of these variables contributed to rising prices is debatable.
What is not debatable is this simple fact: the cost of these increases has already been passed along to the American consumer. By any measure, the average selling price at retail for virtually all major appliances is higher than it was a year ago by about three to five percent on average. Now the question becomes: are the poor industry shipment results reported by AHAM [the Association of Home Appliance Manufacturers] this summer (wiping out what had been a healthy five percent growth in the first four months of the year) a result of higher prices or a coincidental softening of consumer demand that would have occurred anyway? Time will tell.
Chad Evans, General Manager, Merchandising, BrandSource: The costs have gone up. Affected brands had price increases but then unaffected brands also took price increases, obviously, because they could, to keep on par. It’s definitely causing things to go up, and causing some pricing pressures. Consumers are used to seeing Product X at a certain price, and now it’s gone up a hundred dollars, or in some cases, even more than that. Manufacturers started passing them along, some of them, as early as February or March timeframe, or April. Some of them are actually taking additional price increases in August. So I think it was probably a pre-emptive thing, so that they didn’t run into availability issues, because I think that’s probably a worse evil in their minds – running out of product because they’re selling all they could get their hands on. I think they were pre-emptively saying well, if we can raise the prices, cover some of our costs, and keep availability steady, then that’s probably the best of both worlds. I think it’s indefinite at this point in time (July). I don’t know how many more price increases will happen over the course of the next 18 months. I think everybody will pretty much stay steady at where we are right now, unless there are some major changes. But I don’t anticipate any additional major changes. But you never know.
Thus far, what have been some of the biggest successes for 2018 for your dealers, in terms of the appliances business? And (besides tariffs) what have been some of the biggest challenges?
Patrick Maloney, Senior Vice President, Appliances, Nationwide Marketing Group: Implementation of digital marketing platforms has put the independent dealers of Nationwide on a level playing field with national retailers. These digital events are targeting customers along all steps in the purchase funnel to drive local-market awareness to their respective retail locations.
Our members continue to outpace the industry in both unit volume and dollar sales. We have seen a favorable mix increase, specifically in the premium and luxury categories. Our intense focus on digital marketing, coupled with world-class in-store experiences, has driven both foot traffic and close rate. With the uncertainty that these pending tariffs created for the business, our merchandising teams focused on a narrow assortment that could deliver value to consumers while creating margin opportunities for our members. Our biggest challenges, year to date, have been inventory and margin challenges. Several major suppliers had significant model transitions throughout the first half that drove these inventory challenges.
Evans: Well, in our channel, business overall has been really, really strong, based on the fact that you’ve got players like hhgregg which at this point in time was kind of winding down last year, and Sears, obviously, having closed lots and lots of stores. Our dealers in the independent channel are very, very busy, and are saying that things are actually very good from a sales standpoint. To a certain extent, margins have increased on certain models. Obviously, with taking price increases, there’s a little bit more flexibility for a manufacturer to put together aggressive programs that can help increase the margin. So if dealers select the right products to sell that the manufacturers are funneling them to them, there’s some increase in margin that I’m hearing out there – particularly with some of the larger dealers who have the ability to buy in on some of the opportunities that are out there as models change, even focusing on key SKUs where manufacturers have helped maintain a stronger margin. All in all, I think it’s good news.
If you look at the industry, industry shipments aren’t good right now, but we’re not seeing that or hearing that in our four walls. I think it’s definitely affecting the big-box stores to a certain extent.
As a buying group, what are you doing to prepare your membership for the business or market conditions they may meet later this year, or in 2019? What sorts of programs are you emphasizing?
Satoren: As a group, preparation for the rest of the year and beyond continues to be focused on enhancements and initiatives that strengthen our greatest asset and advantage…our stores.
At this point, I think it is safe to say that proponents of the impending “brick-and-mortar apocalypse” did not get it quite right. The retail carnage of 2017 was not about physical stores. It was about retail formats of any kind that could not, or would not, adapt the value proposition of their offering to the way consumers currently desire to purchase goods and services. Recent data clearly supports that consumers, regardless of generation or demographic, enjoy and even prefer a visit to a physical store to see, touch, feel and interact before they buy, particularly when it comes to consumer durables like major appliances. So, the message is simple. Create the right end-to-end shopping experience, and they will come.
For that reason, I am very confident that there is still a lot of runway ahead for continued prosperity and growth for all independent appliance retailers that rely on physical stores. If you don’t believe it, just look at the gains the independent channel has racked up so far in 2018. Independents have long enjoyed the luxury of being nimble with the ability to quickly adapt their businesses to national and, most importantly, local changes in consumer desires and behavior. And that is exactly what this channel has been doing this year, last year, and every year.
So, to answer your question, in my mind there is no “most important” program or initiative. The wheel does not need to be reinvented here. It is more about the basics. It is about what successful retailers have always done…continuous examination of all the fundamentals of their operation and value proposition and adapting to the changing needs and expectations of their local appliance shopper. More specifically, these days it’s about trying to widen the gap in areas where independent brick-and-mortar stores have always enjoyed an advantage. Things like sales associate knowledge and expertise, compelling step-up showroom assortments, best-in-class availability and delivery (many can do same-day), and service where self-servicing dealers have a huge advantage in having control over turning what is usually a negative experience into a positive one. It’s also about closing the gap in areas where digital has required transformation. Here, it’s things like ensuring your web and mobile platforms complement your stores in the way consumers want to shop and purchase but also in a way that will entice them into the showroom. And in making sure your marketing investments are properly allocated in the right promotions and the correct advertising media mix to bring maximum traffic to the stores.
If appliance retailers remain focused on excellence in these areas and their buying groups are providing the resources to support their needs, then their members will be positioned to win no matter what the business conditions might be going forward.
Maloney: Two of the most important initiatives that Nationwide has embarked on over the past few years are our “Prepare for Share” strategy and our investment in world-class digital marketing capabilities. These programs have proven successful and will be expanded upon in the coming years. Prepare for Share is an all-encompassing merchandising, promotion and sales strategy that puts our members in a position to grab market share as it becomes available. With the decline of Sears, the loss of hhgregg and the enormous replacement business at hand, this initiative not only gives our members insight to the opportunity, but it puts the tools in their hands to go out and get it. Additionally, Nationwide made a significant outlay in our members’ future, with the purchase of Site on Time and the strategic partnership with Retail Web Services. These organizations give NMG world-class digital marketing capabilities and extend the reach of our comprehensive digital library.
Evans: We’re trying to work closely with the manufacturers to make sure that we get our dealers focused on key assortment. We understand that there are pressures from an availability or a pricing standpoint, and that those can be somewhat mitigated if we trim down the mix a little and focus on key SKUs where there is better margin and better availability, hopefully by working with vendors and putting forecasts together. We’re doing that with some of our larger dealers, to mitigate any potential issues that might pop up…
What subcategory within appliances has the highest growth potential for late 2018, and for 2019, and why?
Evans: Across the board, we’re seeing a nice increase in overall kitchen packages. Dealers are starting to do a really good job of not just selling single items. That bodes well for the French door refrigerator category. Laundry continues to be strong but obviously, there are still some concerns in the laundry space based on the fact that two of the brands growing the fastest that are in our channel – LG and Samsung – potentially could have some availability issues. But at this point we’re not seeing that, and we are seeing some nice business in laundry.
LG is opening that plant and Samsung’s already got their rolling. We haven’t seen any availability issues thus far, and we’re working closely with them to make sure that we are at the forefront if we do see those things pop up. But at this point we’re not hearing it from them.
We’ve been tracking the takeup of smart appliances over the last five years in consumers’ homes. What is smart appliances’ takeup rate like at the consumer level at present – is it gaining momentum to a significant degree? And if so, what has made the difference in its momentum gain?
Maloney: The take rate has been slow considering the 10-year replacement cycle. The typical electronic replacement cycle is generally six to eight months. Appliances typically have a “need in” vs. “want in” replacement cycle. Industry data suggests that the current “want in” rate for appliances is at eight percent, according to Traqline Q2 data. That means over 90 percent of purchases are “need in.” The offerings in connected appliances have yet to provide enough lift in demand to accelerate the growth of this segment of the business.
Universal platform connectivity will increase the takeup rate of connected appliances. Over the past few years, most manufacturers have developed a product that will work with several different network providers. This eases a consumer’s conscience when making the final purchase decision. Nationwide has been a leader in this space for serval years. Our connected-home offering continues to expand and has become a focal point for our PrimeTime! Shows. As an example, exclusive offers from Google Home have given our members a leg up on the industry and their competitors.
Satoren: Yes, for sure, smart appliances are gaining momentum at the consumer level. But not to the degree that I would call significant. Early adopters and affluent consumers that can afford “cool” over practical are buying, and are the primary drivers of the growth.
I think there are two reasons that we aren’t seeing quicker adoption. The first is a that while some of the smart features/benefits built into appliances truly hit home with consumers and they see the value, the fact is, many of the features smart appliances offer simply don’t provide enough benefit to compel the majority of consumers to dig deeper into their wallets. The second issue is that they are too expensive. Many manufacturers don’t introduce “smart” until you get way up in their lineups, or they bundle so many smart features together that they are forced to price them in the upper reaches. This takes these appliances out of consideration for most consumers.
Smart devices, connectivity and interoperability are all ubiquitous and inexpensive these days. There is really no reason to limit them to the upper end of product lineups. The key to really having this piece of the business take off is to take some of the most compelling smart features and put a few of them into products further down in the line. That’s not to say they should be in leader products, but it shouldn’t be too tough to get the right smart story to begin at the first or second step in a lineup.
I believe the manufacturer that can get “smart” positioned correctly the soonest will be rewarded by the discretionary purchaser as well as by the duress purchaser who maybe deciding to jump up a price-point or two when replacing their broken appliance.
Evans: They will continue to gain momentum, as more and more of the useful things smart appliances can do continue to be advertised and demonstrated and talked about on sales floors. It’s been around for a while, but I don’t think anybody’s really seen the benefit of some of the things that smart appliances can do. We obviously have a good viewpoint, working with our high-end custom integration division on the CE side – the viewpoint being that more and more customers are understanding smart homes and the benefits of those on the CE side – and we’re trying to tie that in on the appliances side. It’s going to continue to grow, but it needs to be demo’ed. That’s something we’re working with manufacturer on to help our dealers show it the way it needs to be sold. At this point, it’s not a feature – like a smart range that I can turn on and off from a phone, for example – that will drive a consumer into your store to buy, but it’s definitely something that if it is shown, they will buy it.
Are premium-priced appliances picking up steam among consumers, from what your members are reporting?
Evans: Yes, they are. If you go back several years, when the economy was really strong in the early 2000s, before the crash, appliances were doing very well because a lot of people were remodeling and upgrading, moving from freestanding packages to built-in and more higher-end. And you’re seeing a shift back into that. Overall, the economy is in a good spot – unemployment is down, the stock market’s good, housing prices are going up. There’s a lot of movement in different areas of the country and that always bodes well for luxury appliances, and that’s the space our dealers do well in. They are that space – selling mass premium… It’s just people cycling back into those, where they were a few years ago. You’re seeing more dealers get back into it who stood on the sidelines a bit in 2008 when it turned down. It also depends on the area the dealer is in – on the coasts and in areas like Chicago, there’s opportunity for that ongoing.
Maloney: The premium and luxury appliance business has experienced robust growth the past several years, specifically in the independent space. From the Nationwide Exclusive PriMetrix POS reporting systems, we see and expect these business segments to maintain double-digit year-over-year growth trends through the balance of 2018.
How hopeful are you that the appliances replacement cycle will have its usual positive impact on the market as a whole?
Evans: We’re seeing that as well. It’s been 10 years – and it’s anywhere from seven to 10 years that an appliance will last. You are starting to get into some replacement business.
Satoren: No need for hope here. The replacement cycle has proven itself to be a reliable indicator, and we’ve been experiencing its positive impact for the past few years. A historical look at the “AHAM Core 6” category bears this out. A run up from 1996 through 2005 took the industry from 31.1 million units to a peak 47.1 million in 2005. 2006 and 2007 were slightly down, though still historically strong, at 46.6 million and 44.1 million units, respectively. Of course, the Great Recession took its toll starting in 2008 and the slump ran until 2012, which bottomed out at 35.8 million units. The rebound began in 2013, and the industry’s averaged nearly six percent annual growth since then.
So, it’s very clear that the replacement cycle has impacted the industry in a very positive way for the past few years, and especially the past two, with 2016 coming in at 46.3 million and 2017 bringing a record 47.7 million units.
The real question, and concern, is what does the “cycle” mean for demand for the next four years, considering 2008 through 2012 averaged 37.4 million units. It’s hard to believe, but it’s been 10 years since the housing bubble burst. Obviously, the pain of the downturn was primarily borne by the builder and remodel segments. Accordingly, it is no surprise that the recovery of the builder channel has been responsible for the largest chunk of the industry’s overall growth for the past several years.
Looking ahead, I think it’s a safe bet to believe the uniquely remarkable period that began 10 years ago will not repeat itself. But, even though we will not face another housing crash, some markets around the country currently appear to be overvalued. Are we going to face a correction in this channel? It is very possible, and the industry can’t afford it.
Why? Because the bigger wild card is the other 80 percent of the business…the retail piece. If the builder channel does go through a correction, it will put more pressure on the retail channel to sustain growth. I do believe the duress replacement piece of the business, which is nearly 70 percent of it, will not be negatively impacted very much in terms of units.
The replacement cycle is the rule here, for sure. People aren’t going to choose to wash their clothes in a lake instead of replacing the broken washer, even if it does cost more than it did a year ago. Most consumers have no idea what it cost last year. However, with the 10-year anniversary of the start of Great Recession trough upon us, the pool of replacement-cycle consumers will be smaller than we’ve enjoyed the past four years. By default, this this is going to make the discretionary or aspirational buyer a very interesting and important target for both manufacturers and retailers. Though they represent the smallest percentage of the business, this is everyone’s dream shopper. They have higher incomes, think appliances are cool, and purchase premium products. There is no doubt that the manufacturers that bring the most innovative and compelling products to market along with the retailers that best meet the desires of how consumers want to buy appliances will be the winners.
As I said earlier, this segment will be very important and could very well mean the difference between growth or not for the next few years. Once again, time will tell.
Maloney: The replacement cycle has provided a strong base which the appliance business has been building upon since about 2012. We feel this will continue to have a positive effect, but at a slightly diminishing rate in the coming years. The industry’s largest shipment years were 2005 and 2006. If an average appliance lasts 10 to 13 years, the industry is in the midst of its largest replacement cycle to date. As we see the influence of this replacement cycle waning, the onus falls on the group and its members to drive more awareness, capture additional foot traffic and maximize every sales opportunity. Nationwide will continue to expand its digital offerings while developing more streamlined merchandising strategies to enable independent retailers to win in their respective markets.
Any other comments or observations on the appliances market you’d care to make that we haven’t covered?
Evans: For the balance of the year, for the independent channel, business has been pretty solid. We have noticed a little bit of slowing through Memorial Day and Fourth of July, but not to the extent where the bottom fell out – in general, a little bit of a slowing. But I think some of that has to do with the fact that in lots of parts of the country, there was not a Spring; it went right from Winter to Summer. And typically for these months, in appliances, retail is slower because people are vacationing. So we anticipate it being solid through the end of the year, for sure.