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issue: January 2003 APPLIANCE Magazine

2003 Appliance Industry Forecasts
2003 Forecast North America: Holding On

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by Lisa Bonnema, Managing Editor

While the last year has literally seen its ups and downs, the North American economy continues to hold on as economists and appliance makers brace for what they hope is an upward journey

There is no question that the year 2002 had economists walking on eggshells, anxiously awaiting reports from the U.S. government and other key economic gauges. On the surface, all seemed surprisingly well - consumers were continuing to spend, leaving many to wonder if the situation wasn't as bad as anticipated or if a "post-boom" generation was simply in denial.

The U.S. economy pulled out of its three-quarter downturn in the fourth quarter of 2001, marking the end to what many claim is one of the mildest recessions in history. Results of the first three quarters of 2002, however, started to yield more questions than answers, showing increased government spending, a strong housing market, and healthy retail sales, but also indicating a less-than-steady GDP, low capital spending, and high rates of unemployment.

The start of 2002 seemed to be moving in the right direction, with GDP jumping up to an annual rate of 5 percent and, in turn, implying that the U.S. was far from 2001's negative territory. Most attributed the growth to inventory correction, as manufacturers slowed down production and discounted items to reduce the amount of stored goods. The U.S. Department of Commerce said high rates of government spending also lead to first-quarter growth.

The second quarter, however, showed signs of struggle. Real GDP grew at an annual rate of 1.3 percent in the second quarter, and consumer spending - the economy's life support for the last year - was starting to slow from the vigorous pace of the first quarter. Widespread corporate scandals, a slide in the stock market, a questionable job market, and a possible war with Iraq seemed to be affecting the confident U.S. consumer, and businesses continued to keep their dollars close. Talks of a double-dip recession and "gloom-and-doom" reports were starting to surface.

As of press time, preliminary third-quarter estimates put GDP at an annual rate of 4.0 percent, with the major contributors being personal consumption expenditures, government spending, (electronic) equipment and software, private and inventory investment, and exports, according to the Department of Commerce.

The third-quarter GDP estimate was encouraging, especially since it was higher than the advanced estimate of 3.1. But more questions arose when the Federal Reserve decided to cut interest rates by a half-percentage point in early November for the first time since December 2001. The Committee agreed that "incoming economic data have tended to confirm greater uncertainty," and that a sharp cut was necessary to help boost the economy from its current "soft spot."

Reactions were mixed as to whether the cut would further stimulate the economy, but the major concern was what would be done if certain factors - such as very possible war with Iraq - did put the U.S. economy into another downturn. With the Fed practically using up all of its reserves, the nation would have to turn to U.S. President George W. Bush for a successful package that would finally encourage capital spending, the missing link that most believe could bring the U.S. into full recovery.

When Will It End?

As of press time, the National Bureau of Economic Research (NBER), an authority in monitoring business cycles and economic activity, had not officially indicated the end of the recession, as it often waits several months after the perceived recovery to ensure that the downturn is truly finished and not just in a "lull."

It's notable that the NBER does not rely on GDP to track the economic activity because it is only monitored on a quarterly basis. Instead, it bases estimates on four monthly indicators - unemployment, personal income, the volume of sales of the manufacturing and wholesale-retail sectors, and industrial production. The first two principal indicators measure activity across the entire economy and the latter two cover manufacturing and goods.

While it has not been "officially" announced, the majority of analysts agree that the U.S. has in fact pulled out of recession, and one by one are giving "cautiously optimistic" forecasts. Most economists also seem to concur that a double-dip recession seems highly unlikely, specifically because consumers are showing no signs of drastic decreases in spending.

In fact, according to the University of Michigan's (U-M) annual economic forecast, the American economy will improve in 2003 and will surge to levels of the late 1990s by 2004. Saul Hymans, U-M professor of Economics, said that while he doesn't expect another "boom" any time soon, he does believe the economy will pick up steam in 2003. "Our forecast is based on a scenario in which things aren't quite as bad as we've been fearing - no major new corporate scandals, the job outlook stabilizes, and profits improve slowly, things get temporarily dicey in Iraq as the inspections become more intrusive, but no big blow up," he said.

In their annual forecast of the U.S. economy, Mr. Hymans and colleagues Joan Crary and Janet Wolfe report that national economic output, as measured by real GDP, will expand at a rate of 4.0 percent by mid-2003 and will remain at that rate in 2004, resembling the average growth rate experienced during 1995-2000.

On the whole, Mr. Hymans et. al. forecast the economy to expand by 2.5 percent in 2003 due to slow economic growth anticipated early in the year. The number is only slightly better than the 2.3-percent growth projected for 2002, but quite healthy compared to the mere 0.3-percent growth registered in 2001.

Falling unemployment, moderate inflation, and low, but slowly increasing interest rates are expected to accompany a rise in economic growth after mid-2003. "As final demand growth accelerates during the year, business [will] respond with higher levels of inventory investment," Mr. Hymans said. "Near-term economic weakness pushes up the unemployment rate at the turn of the year, but the labor market is strengthening by mid-2003," he added.

The Consumer Contribution

Most agree that the spending consumer has played a major role in keeping the U.S. economy afloat, especially since businesses have maintained low confidence levels. The main concern, then, has been whether or not the consumer will get "spent out" after more than a year of spending in spite of the economy, taking advantage of record-low interest rates, zero-percent financing, and sales on everything from clothing to small appliances. Realistically, how many cars can a consumer fit in his or her garage?

September 2002 reports started to show a softening in both consumer spending and confidence. The Commerce Department reported a drastic drop in durable good orders of 5.9 percent after only falling 0.6 percent in August. In addition, the U-M's monthly Index of Consumer Sentiment was also down for the fourth consecutive month.

Durable goods bounced back in October, but the U.S. government said that was lead by demand for machinery, transport, and communications equipment, suggesting business spending was finally starting to pick up. The consumer, however, continued to show low confidence levels, as the U-M Index dropped to the lowest level in 10 years. The Conference Board's Consumer Confidence Index showed similar results, dropping to its lowest level since 1993.

The good news is that November painted a brighter picture, with both the U-M and Conference Board indexes showing increases in consumer confidence. However, manufacturing contracted for the third consecutive month, according to the Institute for Supply Management's index. As of press time, durable good totals were not yet released.

The pending question is whether or not the consumer will remain resilient, and if the cocooning effect that occurred immediately following the U.S. terrorist attacks will continue to keep appliance sales at healthy levels.

Housing activity is one way to gauge appliance sales, as refinancing usually spurs remodeling, and new houses require appliances. According to David F. Seiders, chief economist for the National Association of Home Builders (NAHB), the housing market has continued to perform quite well in the face of an uncertain economy. Even before the Federal Reserve's Nov. 6 interest rate cut, mortgage rates had fallen to the lowest level since the mid-1960s.

While housing starts decreased in both August and October, NAHB said it remains confident that housing activity will remain at its record levels in 2003. In his November editorial, Eye on the Economy, Mr. Seiders said: "Great financing conditions supported robust levels of permit issuance (single-family and multifamily) in October, paving the way for strong housing starts in the coming months following a weather-related sag in October. Further, NAHB's Housing Market Index for November showed a systematic strengthening of builder attitudes toward current and future conditions in the single-family market, and surveys of lenders show that applications for mortgages to buy homes were quite good through the middle of the month."

The Association also believes that the possibility of the much-discussed housing bubble is quite low. Even though housing starts declined by 11.4 percent in October, the rate at which permits were issued was up. In a Nov. 20 statement, Gary Garczynski, NAHB president said, "It would be a big mistake to equate today's report with some kind of 'bubble' effect. Builders simply took a breather after a feverish pace of activity in September. While the drop-off was more than expected, single-family housing production remained above the third quarter's robust 1.34 million-unit pace. Moreover, Commerce's report on housing permits sets the stage for increased production in the months ahead."

In addition, a housing bubble is traditionally created by speculators who hope to make fast returns by buying homes and quickly selling them at higher prices, according to Raphael Bostic, a former senior economist with the Federal Reserve Board of Governors. The current situation, Mr. Bostic told Real Estate News in early October 2002, is quite different. "When buyers see home prices rising, they decide to jump in to the market while they can still afford housing," he said in the report. "This is perhaps the ultimate buy and hold strategy - just the opposite of speculation."

Canadian Confidence

America's northern neighbor, Canada, remained economically healthy in 2002 after skirting a recession in 2001. Second quarter GDP was four times the U.S. rate, totaling an annualized rate of 4.3 percent.

In a November 2002 statement, Kip Beckman, principle research associate at The Conference Board of Canada, said, "Canada has managed to avoid the global economic slowdown and has been one of the top performers in the world, both in economic growth and in job creation. Unlike central banks in most parts of the world, the Bank of Canada is leaning toward increasing interest rates to cool down the economy."

The Conference Board of Canada forecasts real GDP to grow 3.5 percent in 2002, and all provinces are expected to achieve economic growth near or more than 3 percent in 2003.

"The Canadian economy remains extremely strong," confirmed Ken Elsey, vice president of the Canadian Appliance Manufacturers Association (CAMA). "The government is looking to move to encourage a stronger dollar. Generally speaking, the housing market remains extremely strong. Building across Canada is unprecedented. They're calling for a forecasted 10-percent rise in the cost of housing next year in Canada. And that is simply because of pent-up demand, low interest rates, and a lower-than-expected unemployment rate. So, everything is tracking in a positive way."

Therefore, he told APPLIANCE, CAMA expects an overall 2.5-percent increase in major appliance sales in 2003. He adds that high-end appliances will "lead the charge," including stainless steel models and new products that have easier maintenance. "The interesting thing that I'm starting to sense is that white goods are moving out of a commodity market into a fashion market," explained Mr. Elsey. "The consumer is now saying, 'Well, if I'm going to make the investment in a new appliance and the life expectancy is so long, I might as well buy the product with all the bells and whistles and looks that I really want because, after all, I spend so much time in my kitchen.'"

He added that one major issue that has affected - and may continue to affect - the Canadian appliance industry is deregulation. "There's major issues now in Ontario with the deregulation of hydro production," Mr. Elsey told APPLIANCE in late November. "The government moved to totally deregulate, but as the price of electricity jumped - almost doubled - the government stepped in and put a price cap on hydro costs. But that subsequently tilted the initiative toward deregulation. If that had not happened, and the price of electricity was allowed to find it's own level and a more competitive market developed, I think that would have been good for the appliance industry in that the energy-efficient levels would have resulted in faster payback of new product," he continued.

"If hydro costs had been left to find their own levels, then I may have been sitting here saying you can expect a 4-5 percent increase in 2003. That deregulation turnaround by the provincial government in Ontario, which is half the Canadian market, probably softened the potential for growth in 2003," he said.

In its 2002 Major Appliance Industry Trends and Forecast, CAMA forecasts core product (refrigerators, ranges, washers, dryers, and dishwashers) sales to grow by 2.9 percent over the 2002-2004 forecast period. Core and non-core products (freezers, microwave ovens, cooktops, room air-conditioners, and food waste disposers) are expected to increase approximately 1.7 percent during 2002-2004, increasing from 4.62 million units in 2002, to 4.65 million in 2003, and 4.70 million in 2004.

While freezers and room air-conditioners are forecasted to be flat during 2002-2004, CAMA's data shows growth in the rest of the categories. Microwave ovens will continue to be the leader in unit volume with a forecast of 870,000 units in 2004, and cooktop volume will continue to increase at approximately 3 percent per year.

Major Optimism

In spite of sluggish economic conditions, the U.S. major appliance industry managed to do surprisingly well throughout 2002, and most analysts and major players expect that to continue into 2003.

In its November 2002 major appliance Trends and Forecast, The Association of Home Appliance Manufacturers (AHAM) projected approximately 65.7 million units to be shipped in 2002, a 4.8-percent increase over 2001. For 2003, it forecasted 68.7 million units shipped, up 1.6-percent from 2002. As of press time, the projection seemed to be on target, with October 2002 year-to-date shipments showing a 4.9-percent increase over the same period in 2001.

Industry research firm Economy.com forecasted a more conservative increase of 3 percent in 2002 unit shipments over 2001 and a 1.35-percent increase in 2003, numbers that matched AHAM's earlier, May 2002 forecast. The firm also projects sales to be slightly up in 2002 and 2003, with increases of 1.9 percent and 1.0 percent, respectively. It expects sales to reach higher levels in 2004 and 2005, with increases averaging 2.7 percent per year.

Standard & Poor's (S&P) forecast for the Household Durables Industry also indicates that the major appliance industry will see gains in both 2002 and 2003. "I expect 2002 industry shipments - both major appliances and the AHAM 6 - to be up mid-single digits," Efraim Levy, senior appliance analyst, S&P Equity Group, told APPLIANCE. "The economy, while slowly growing, has supported demand. Strong housing activity and new features on products were factors stimulating demand. Consumers have been the mainstay of the economy despite reductions in the confidence index."

He also predicts low- to mid-single digit gains for 2003. "People will fill the new homes they bought in 2001 and 2002," Mr. Levy explains. "Housing starts were up 1.9 percent in 2001, and we forecast a 5.4-percent rise in 2002, which carries over into 2003 demand."

The proof, however, will most likely be in U.S. manufacturers' fourth-quarter results. In September, top producers Whirlpool Corp. and Maytag seemed divided on full-year 2002 and 2003 expectations, although some speculated that had more to do with their individual circumstances than overall industry trends.

Whirlpool had a rather positive year, with the successful releases of its Duet laundry products, the Polara refrigerated range, the Personal Valet clothes vitalizing system, and its new Gladiator GarageWorks line, as well as making major acquisitions of Polar S.A. of Poland and Vitromatic S.A. de C.V. of Mexico.

Third-quarter core earnings confirmed the producer's optimism, reporting an 11-percent increase over the third quarter of 2001. Whirlpool North America posted record sales in the quarter, with a 6-percent increase in sales over the same period in 2001 (including Mexico). "Our regional business performed well during the quarter, despite economic pressures," David R. Whitwam, Whirlpool's CEO, said in an Oct. 16 statement. "The solid results were driven by the success of our brands and innovation initiatives in the marketplaceā€¦and by the benefits of our restructuring and productivity improvements."

Whirlpool also said that third-quarter U.S. appliance shipments were nearly 1-percent higher than the record shipments recorded during the same period in 2001, and it expects fourth-quarter shipments to increase another 2 percent. In a September announcement, the company projected a 5-percent increase in appliance shipments for the full-year 2002. Additionally, during a September presentation at the annual Steel Service Institute Conference, Neil Cline, Whirlpool's manager of Economic Forecasting, projected a 3-percent growth in industry sales for 2003.

Maytag, however, has been less optimistic. The company lowered its third-quarter earnings expectations in late September, stating that the economic "environment has been more challenging than expected." It also announced that it will close its Galesburg, IL, U.S. refrigeration plant in 2004, while gradually decreasing production in 2003. The company announced that the plant closing is part of a new refrigeration production strategy aimed at making Maytag more competitive; a plan that will include the construction of a new plant in Reynosa, Mexico that is expected to open in late 2003.

Maytag's third quarter earnings were only $0.01 higher than its lowered outlook, but were still 48-percent higher than the same period of 2001. CEO Ralph F. Hake said in an Oct. 14 statement: "We continue to see dramatic improvements in year-over-year performance despite what is admittedly a challenging environment for home appliances. On a limited sales increase of 3 percent for the quarter, our net income was up 48 percent, excluding the one-time gainā€¦. Through the first three quarters, our sales are up 15 percent and our comparative net income is up 79 percent."

According to a Sept. 24 Reuters report, Maytag expected third-quarter 2002 industry shipments to be lower than the same period in 2001, with a 1-percent decline in the fourth quarter. Additionally, in an October conference call, Mr. Hake said that he does expect Maytag to meet its earnings outlook for 2003 as long as industry shipments are flat to up to at least 2 percent. A Nov. 20 financial statement said Maytag's outlook includes a 7-10 percent increase in revenues.

Although not as vocal about its earning expectations, GE did raise some eyebrows when it made some structural changes in 2002, integrating its Appliance and Lighting businesses under the umbrella, GE Consumer Products, in order to make the businesses more competitive. The manufacturer reported flat third-quarter sales for its Appliances business versus 2001, but showed a 7-percent increase in 2002 year-to-date figures over the same period in 2001.

BSH Home Appliances Corporation showed some confidence in the market in 2002, breaking ground in February for a $154-million expansion to its U.S. facility. The company says it is optimistic about 2002 and 2003 shipments. "The year 2002 should end with appliance shipments showing an increase from last year," Dwayne McCormick, director of Merchandising told APPLIANCE. "Demand has remained reasonably strong because of low interest rates, allowing for home purchases and remodeling to continue at a robust pace for the first 9 months of 2002."

Mr. McCormick also said 2003 appliance shipments will show growth over 2002, with the most modest gains in the first quarter. "While interest rates for home purchases are low, tighter credit may hold sales down from the growth we all want," he said.

Steve Piro, president of AM Appliance Group, agreed that shipments would be up by the end of 2002, but added that growth won't be as high in 2003. "The consumer is running out of steam," he told APPLIANCE. "Debt is at a high level, and most people have already taken advantage of refinancing. We don't expect to see the growth that was experienced in 2002."

Samsung Electronics America says that microwave oven shipments will be relatively flat in 2002, as a slight decline in countertop units due to low consumer confidence will be offset by increases in over-the-range models due to the housing and refinancing boom.

Dan Baxley, Samsung's director of Marketing, Home Appliance Division, said he expects microwave shipments to be flat in 2003 as well, assuming that the economy continues to recover. "Volume could drop significantly if there are additional shocks to the economy such as a shooting war in the Middle East, another terrorist strike, or new revelations of corporate misgovernance," he explained.

Michael Jemal, president of Haier America, added that increased competition and price erosion will be major factors appliance producers will face in 2003. "Acquisition costs of components are not keeping pace with the price erosion, and labor costs continue to rise. This is causing massive pressure on profitability," Mr. Jemal told APPLIANCE. "Innovations to existing products and introduction of new 'category products' are ways to offset some of these pressures. Whirlpool has demonstrated this approach through their new Gladiator line."

According to Dale Persons, vice president of Public Affairs for Viking Range Corporation, the higher-end appliance segment has particularly benefited from the high housing and remodeling activity. "2002 has been a very good year for us," Mr. Persons said in late November. "Our numbers are up over 2001. Of course, it would have been an even better year if the economy had been stronger in the fourth-quarter particularly."

He expects 2003 to be a good year as well. "All of our indications lead us toward being cautiously optimistic," Mr. Persons told APPLIANCE. "Home improvement, new home sales, remodeling, etc. should continue to be strong if the interest rates continue to be positive in that way. The stock market, in general, of course is going to be a major factor. That is just going to affect everybody's business in general."

Mr. Persons added that because of the uncertainty in the stock market and other investments, consumers are more likely to invest in their homes and premium products, whether its appliances or other high-end consumer goods. "Consumers in general are looking for secure investments. But those in the high end, particularly, are looking at our types of products - luxury products - as a long-term investment."

Philip J. Uihlein, president of U-Line Corp., maker of high-end under-counter refrigerators, agreed that upscale appliance categories performed better overall in 2002 than other sectors, but also noted that poor economic conditions still affected the high-end market. "The upscale appliance markets faired much better than other industries, especially at the manufacturing level, in part due to the strength in housing markets and because our customer is affected less by slowing economic trends," he said. "The flat sales activity was nevertheless affected by the downturn in the economy. The slowdown did cause a fair number of our typical customers to buy lower priced or more competitive models in our product category. U-Line, on the other hand, posted a 21-percent increase in sales."

Comfortable Levels

The HVAC industry also benefited from the housing activity of 2002, with most categories showing promise for positive growth by the end of the year. As of October 2002, year-to-date shipments of room air-conditioners were up 10 percent compared to the same period in 2001, and central heating - including gas and oil furnaces and boilers, as well as steel boilers - showed a 3.9-percent increase.

In his keynote address at the Air-Conditioning and Refrigeration Institute's (ARI) annual meeting in November, Chairman Thomas E. Bettcher said that 2002 shipments for residential and light commercial unitary air-conditioners and heat pumps are expected to be well over the previous record of 6.7 million units. He also said the value of air-conditioning and refrigeration equipment installed in 2002 totaled an estimated $45 billion, which will provide steady business in the next few years as those units are serviced and replaced.

Dale Green, vice president of Sales & Marketing, Trane Residential Systems Business Group, estimates that 2002 air-conditioning and heat pump industry unit shipments will be up nearly 8 percent versus 2001. "The single-family new construction activity has held steady all year with no sudden downward bubble affecting HVAC shipments. The consumer replacement segment was reflective of an overall cautious economy, but the sustained hot weather in the [U.S.] northeast drove significant growth over last year for the entire industry," Mr. Green said.

Looking ahead, Trane expects 2003 to be flat with the outstanding 2002 industry shipments level; that is, assuming a normal summer in terms of temperature, according to Mr. Green. "Residential new construction is quieting down some versus the early 2002 pace, but should, again, mirror 2002. In total, Trane predicts 2003 to have a normal replacement cycle, and manageable residential new construction all year. Obviously, this could all change depending upon what happens on the international front. That aside, 2003 will be a good, solid year for the HVAC industry," he said.

Rheem Manufacturing Company, Air Conditioning Division, agrees, projecting both air-conditioning and heating shipments to be up in 2002 due to several economic factors. "Interest rates and inflation are forecasted to decrease through the end of 2002, while we expect energy prices to remain steady. These, factors combined with a rise in GDP and increased replacement demand, will lead to a slight increase in shipments for 2002," Karen Meyers, manager of Market Research and Government Affairs, told APPLIANCE.

She added that air-conditioning shipments will most likely hold steady in 2003, with a slight increase in heating shipments. "By the end of 2003, unemployment is forecasted to be down from 2002 levels while inflation and interest rates will have begun their upward climb. Consumer confidence is anticipated to rise, with new housing rates leveling off. These factors will balance out, leaving the HVAC industry unchanged," Ms. Meyers said.

Frank Hartman, vice president and general manager, Sales and Marketing, for Carrier added that as a partner to the homebuilding industry, economic conditions will continue to directly affect the HVAC industry. "We believe that consumer confidence, coupled with an economic recovery and the stability of interest rates are the greatest challenges for next year," Mr. Hartman told APPLIANCE. "The question of a looming housing bubble is a related area to watch."

With the reported decreases of business spending throughout 2002, the success of the commercial HVAC in 2003 will also heavily depend on the economy, according to John Whinery, director of Commercial HVAC Marketing for Lennox Industries Inc. "For the North American HVAC marketplace, there are many trends that can have an impact," he said. "Bank Lending and government funding will definitely be a contributing factor to the health of the construction industry. The diminished stock prices and overall distrust of Corporate America will continue to have its effects on commercial capital expenditures. Adoption and enforcement of new commercial building code standards will continue to drive higher standards for HVAC equipment. Another variable will be to what extent the U.S. housing market will be able to maintain its current pace."

The heating sector of the HVAC industry is expected to remain at comfortable levels. Based on projections provided by its member companies, the Gas Appliance Manufacturer's Association (GAMA) foresees moderate but steady growth for most space and water heating products over the next 4 years. For 2003, it expects more than 2-percent growth in shipments of residential gas furnaces, followed by increases of 4.5 percent annually through 2006. Shipments of cast iron gas boilers are expected to grow more than 4 percent for 2003 and again in 2004. Cast iron oil boiler shipment projections for 2003 are at a 1.5-percent increase, with increases of 1.4 percent for 2004.

The new year will also see some design changes for the comfort-conditioning category, especially the water heater segment, according to David R. Martin, vice president of Marketing for Rheem Water Heaters. "The number one story in the water heater industry in 2003, affecting the entire chain of distribution including the consumer, will be the new technology for flammable vapor ignition resistance (FVIR)," explained Mr. Martin. "FVIR represents the most extensive product-design change since modern water heating was invented more than a century ago."

Effective June 30, 2003, 30-, 40- and 50-gal, gas-fired, atmospherically vented water heaters with input ratings of 75,000 BTU/hr or less and produced on or after this date must be tested to a new American National Standards Institute (ANSI) Standard ANSI Z21.10.1-2001.

According to Mr. Martin, the new FVIR standard will not affect the current installed base of residential gas-fired water heaters, or any unsold water heaters made prior to the effective date. Change-out of existing water heaters, however, will not be a requirement.

Floor Care Forecasts

As of press time, vacuum cleaner sales remained steady, with industry sales up 1.2 percent for the first 9 months of 2002 compared to the same period in 2001. Full-size vacuum cleaners, however, were down 4.7 percent in the third quarter of 2002 versus 2001. Central vacuum cleaner sales, not included in aforementioned data, were up 6.2 percent from 2001's performance through the first 9 months.

Jim Holcomb, vice president of Marketing & Business Development for Royal Appliance Manufacturing Company, said Royal expects floor care shipments to be up 3-4 percent in 2002, but sales dollars to be flat or slightly down. "This is due to continuing pricing pressure in the key upright segment and a 'mixing down' in upright carpet extractors," he explained. "Upright average bills at retail have been declining for 3 years after rising for the 3 years prior to that. As bagless vacuum cleaners became popular, many consumers 'stepped up' by $75-$100 per unit to get this feature. Over the past couple of years, the opening price point for bagless uprights has come down to the $79-89 range. This has driven very large volume, but at lower prices."

While historically floor care units have been up 5 percent per year, Mr. Holcomb thinks 2003 will be a little soft due to the sluggish economy. "I would anticipate 3-percent unit growth and flat dollars for the year," he said.

Dave Gault, vice president of Business Development at The Hoover Company, also believes that shipments will be up by end of 2002, but at a lower value. "We think that full-size floor care units will be up, but we see that being offset by a decrease it value, with the exception of new entries in the bare floor category like our Floor Mate," Mr. Gault said. He attributes this simply to lower prices. "There's a competition among manufacturers and retailers to take pricing lower in the absence of true innovation," he said.

For 2003, Mr. Gault said that Hoover is hopeful that the price erosion of the last couple of years will finally bottom out. "I don't know if we can say that the prices will increase, but we're hopeful that there will be no further additional price erosion," he told APPLIANCE. "We're optimistic and expect growth in units and dollars. We see this in the full-sized products. There are some categories such as our extractors that will continue to benefit because of low penetration." Extraction penetration, he said, is about 25 percent, leaving a lot of room for adoption in that product category.

Another factor that may challenge the mature U.S. floor care industry in 2003 is the entrance of some new players, namely UK vacuum cleaner maker Dyson Appliances; Euro-Pro and Salton, both of which purchased assets from the now defunct Fantom; and ProTeam, a maker of commercial backpack vacuums. Established players such as Panasonic and Sharp were also talking about enlarging their roles in the sector.

In an October 2002 statement, Keith Minton, Hoover president, said he welcomed the new competition. "Competition pumps vitality into the industry, stimulates innovation, and gives the consumer many choices," he said. "We applaud the entrepreneurial spirit that moves new players to get involved. That's how the Hoover story began 95 years ago, and that's what keeps Hoover on a journey of continuous improvement, fed by research and development."

Small Issues

The cocooning effect the electric housewares industry claimed would help sales in 2001 seemed to be fairly accurate, as the sector finished up 2001 with a respectable 6.5-percent increase in sales over 2000, just shy of the 6.7-percent record growth recorded from 1999 to 2000, according to The International Housewares Association (IHA). Whether or not 2002 equally benefited, however, remains to be seen.

AHAM's Portable Appliance Division's October monthly statistical report revealed that cooking and food processing appliances were doing fairly well for the first 10 months of 2002. Although the category saw decreases in the first 3 months of 2002, October results showed a 22.4-percent increase in shipments over October 2001. In addition, year-to-date shipments through October 2002 were 5.9-percent higher over the same period in 2001.

Air treatment products, however, did not have a good year, registering year-to-date decreases for every month of 2002 compared to 2001. July 2002 showed a glimmer of hope, recording a 20.1-percent increase over July 2001, but October 2002 (the most recent data available) was a whopping 23.2-percent lower than the same month in 2001.

Third-quarter financial results were mixed between the top electric housewares manufacturers. NACCO Housewares Group, which includes NACCO's Hamilton Beach/Proctor-Silex (HBPS) and Kitchen Collection subsidiaries, reported net income of $4.6 million for the third quarter of 2002 on revenues of $148.4 million compared to net income of $0.3 million for the third quarter of 2001 on revenues of $155.0 million. For the 9 months ended Sept. 30, 2002, the Group had net income of $2.2 million on revenues of $404.5 million compared to a net loss of $2.7 million on revenues of $433.4 million for the first 9 months of 2001.

In an Oct. 24 statement, NACCO said that HBPS anticipates that ongoing programs to reduce manufacturing overhead costs and improve manufacturing efficiency, product quality, and customer service will continue to have a positive impact on results in the fourth quarter of 2002. The company said it is cautiously optimistic that markets for consumer goods will improve in the fourth quarter of 2002 compared to the fourth quarter of 2001. NACCO did, however, caution that shipments in the fourth quarter of 2002 at both its HPBS and Kitchen Collection subsidiaries could possibly be reduced by delays due to congestion at West Coast ports.

Applica Incorporated announced that third-quarter sales for 2002 were $194.9 million, a decrease of 4.1 percent over the third quarter of 2001. For the first 9 months of 2002, net sales declined 2.1 percent to $505.9 million as compared to $516.7 million in 2001. The company blamed continued weakness in Latin American and Canada, combined with softening U.S. sales as the major contributors to the declines in the quarter and first 9 months. The declines were partially offset by an increase in sales of pest control products, it said.

David M. Friedson, Applica's chairman of the Board and CEO, said in the quarter statement: "Although I am encouraged with the improvements in our operating margins, I am disappointed with the softer sales we experienced across most divisions during the quarter. Despite the difficult economic environment, we remain committed to our focus on balance sheet management."

For the fourth quarter, the company said reduced contract manufacturing orders and continued weakness in Latin America will negatively affect sales. Harry D. Schulman, Applica's president and COO, echoed NACCO's concerns, stating, "Sales will also be impacted by congestion resulting from the West Coast port lock-out, as well as increased credit risk of certain of our customers. We anticipate sales for the fourth quarter will be similar to last year."

Patient Predictions

While economists and appliance makers seem to be leaning toward "cautiously optimistic" outlooks for 2003, several question marks continue to make the U.S. economy fairly vulnerable: Will businesses finally take the plunge and start investing? Will the consumer run out of spending steam? Will U.S. President Bush instate a successful stimulus package? And, finally, what happens if the U.S. goes to war with Iraq?

As is always the case, economic predictions are nothing but educated guesses that, more often than not, completely miss indications of a major disaster. As many analysts have speculated this past year, patience and optimism are almost required in order to avoid a self-fulfilling prophecy.

With that in mind, here's the good news: the American economy did hold on in 2002 and doesn't show any immediate signs of loosening its grip. It seems fairly safe to expect a full recovery in 2003, but expect it to be fairly slow.


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