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issue: November 2002 APPLIANCE Magazine

Merloni Special Section Overview: A Step Ahead
Jumping Ahead

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Lisa Bonnema, Editor

APPLIANCE traveled to Fabriano, Italy to interview key executives at Merloni Elettrodomestici headquarters.

Once lost in a crowd of 400 European appliance makers, Merloni Elettrodomestici (Fabriano, Italy) has emerged as one of the region's top producers. How does a small Italian company move from number 300 to number three in the European appliance market? By aggressively innovating, successfully acquiring, and carefully planning its every move. Merloni Elettrodomestici SpA was established in 1975 as a spin off from the household appliances division of Industrie Merloni, a producer of weighing machines founded in 1930 by Aristide Merloni. In 1950, Industrie Merloni moved into the water heater business and as it succeeded, Francesco Merloni, the oldest brother, expanded it into a bathroom and sanitary products business. A few years later, Vitorrio Merloni, the youngest brother, founded Merloni Elettrodomestici's predecessor by diversifying into gas cookers made in the Merloni family's hometown, Fabriano, Italy. As he aggressively added product group by product group to his lineup, Mr. Merloni, now the chairman of Merloni Elettrodomestici, built new factories one by one in farming communities with high rates of unemployment. A long way from its humble beginnings, this accomplished appliance maker now produces a full line of cooling, cooking, and washing appliances under five brands, including its core brands, Ariston and Indesit, as well as the regional ones-Scholtés, Stinol, and the recently acquired Hotpoint. It employs 20,000 people, has 16 factories across Europe, and produces more than 8 million units (11 million including its GDA operations) for the Greater European market, which includes both Western and Eastern Europe. In fact, according to company estimates, Merloni has grown 20 times its original size, and based on its performance over the last 2 years, it's still growing. The appliance maker reported record profits in 2001 with net sales totaling 1.97 billion Euros (U.S. $1.91 billion), a 23-percent increase over 2000. And, so far, 2002 results seem to be keeping up with last year's record pace, with first-half figures showing a 23-percent increase in turnover compared to the first-half of 2001. If all goes as planned, the company intends to close out the year with net sales of 2.5 billion Euros ($2.42 billion) and a 14-percent market share, on the heels of European giants AB Electrolux and Bosch Siemens. If you ask any employee of Merloni Elettrodomestici-from top management to the plant floor-the key to the company's remarkable success, they will all give you the same answer: Innovation.

At a time when most companies are taking a few steps back, Merloni Elettrodomestici has jumped into Europe's number three spot with every intention of maintaining an aggressive stride to the only place it plans to rest-the top.
  Merloni Statistics

Out of the 8 million appliances Merloni Elettrodomestici produces annually (11 million including its recent Hotpoint acquisition), approximately 2.5 million are digital washing machines.

Growth through Innovation

Indeed, Merloni is by far a global industry leader when it comes to innovation. From its products to its processes, the producer is basically fearless when it comes to implementing new ideas and making necessary changes. And the proof is in its history, starting in 1975 when the company was one of the first to implement lean production, changing over each of its factories to produce only one product. "We were the first to decide to have each factory make one product," Vittorio Merloni, chairman, tells APPLIANCE. "I visited several U.S. companies, and I saw that the factories were an enormous investment for very low productivity."

In 1983, it divided its business into two separate areas, built-in and freestanding, a strategy now widely used by appliance makers all over the world. It was also one of the first Western European appliance producers to move into Eastern Europe.

The company wasn't even afraid to let go of a little control in order to strengthen its operations, choosing to move from a private company to the Milan Stock Exchange in 1987, and 10 years later, separating the top management responsibility into two roles: chairman and CEO.

The innovation most credit the company for, however, is its work in digital appliances. In 1995, the company introduced its Dialogic machine, reportedly the first washing machine based on electronic sensors or "fuzzy logic," which laid the ground work for several of today's appliance technology advancements. Just 4 years later, Merloni was one of the first producers in the world to launch a complete line of appliances that were connected directly to the Internet.

With a resume like that, it's no wonder that after his appointment to CEO in 2000, Andrea Guerra didn't hesitate to continue the company's core value proposition to "innovate constantly." During his 2-year leadership, Merloni has increased its product development cycle to every 6 months; acquired the Stinol brand in Russia; launched Solutions, a customer service business unit that can remotely service Merloni digital appliances as well as other brands; developed an innovative Pay Per Use digital washing machine model with Italian utility company Enel; and, most recently, acquired General Domestic Appliances in the UK, which produces the well-known Hotpoint brand.

"In this industry, you must be aware of two facts: there are no secrets, and there is no competitive advantage that can last longer than 6-8 months," says Mr. Guerra. "And so either you are always in the R&D labs developing, or you are lost."

Using his theory, Mr. Guerra's first move as CEO was to speed up Merloni's product renewal and time to market. The company has implemented a plan that includes an aesthetic renewal every 6 months, and a platform innovation every 12 months. "If you have the same product in the market for a year's time, what you only see is an erosion of the price point," Mr. Guerra tells APPLIANCE. "Having new products, new performances, and new ideas every six to eight months allows you to keep the price point or even increase it."

In order to keep up with the constant product updates, however, the company had to implement a new platform approach, which meant changing its product development and manufacturing processes.

While it had been using a platform approach since 1996 (starting with its 1998 dishwasher products), the company is in the process of completing a second-generation changeover that will better accommodate Mr. Guerra's quicker development schedule. "In the beginning, for example, the product platform was basically just to reduce the ‘noise' around the product development. We tried to concentrate resources on the most important things," says Giuseppe Salvucci, Merloni's director of Marketing. "The second-generation platform that we are completing now is a complete platform, which standardizes as many components as possible. The structure of our washing machines, for example, has the same cabinet, tubs, and drums for all models and brands."

According to Mr. Salvucci, the only differentiating or "flexible" parts in his example would be the exterior panel and the digital control.

During a time when most companies are watching their costs very closely, Merloni is still moving forward with its new platform plan, forging ahead with pure confidence. "Using a platform means making an investment, a big investment, that will really change the product offerings of this company," admits Mr. Salvucci. "But in the past, this really changed the position of the company in the market, in terms of performance, reducing costs, and increasing demand. Using a product platform means that the company has a commitment. There is no reason to change the priority of the second-generation platform because we've already reached the decision that [this is how] we have to do things."

The Story of Value

Mr. Guerra explains that a major focus during his leadership is to bring value to Merloni products. He says that the white goods industry-from the retailers to the manufacturers-didn't do this at all in the 1990s and, in turn, created a price erosion that labeled appliances as commodity items. "It is unbelievable that today you can find a washing machine that is cheaper than a pair of shoes," he says. "I find this unacceptable."

According to Mr. Guerra, in the 1990s, products were really being marketed to the trade, not the consumer. "This product can hold three bottles or six bottles, runs at 1,000 rpm, is 240 liters, what does that mean to the consumer? What we are trying to do is give heart to white goods. And sensors are allowing us to do this," he says.

He uses the company's Ariston Class line of refrigerators as an example. "Through digital marketing we are absolutely able to direct the product to whomever we want," Mr. Guerra explains. "So we invented…‘stories' on which we did all the advertisement and all the promotions. One is the Ice Party function. Usually, when we need to quickly cool a wine bottle, we put it in the freezer. We forget about it. It bangs, it crashes, then you have a horrible smell, glass is everywhere, etc. We invented a special place where you put that in the freezer, you press a button, and for 10-15 minutes the cooling is directed to the bottle until it reaches the right temperature, and the refrigerator alerts you. This is a common problem," he says.

"When you go to buy a refrigerator it is because you need to buy a refrigerator. You are not going because you want the Ice Party function. But there is a story it tells," he explains.

Mr. Guerra is quick to add that "creating value" requires knowing your customer and clearly defining your brands. "If you look around Europe and watch the brand positioning and brand strategies of different companies, I think ours is the most clear," he says.

Indeed, while other European appliance makers maintain a full portfolio of a dozen or more brands, Merloni has kept its strategy simple, offering only five main brands, which have been methodically positioned. Ariston and Indesit are its core or competitive brands, which target "Enlarged" or "Greater" Europe, which the company defines as from Portugal to Russia and from Norway to Turkey. Its Scholtés brand is more of a regional brand and is currently strong in France, Belgium, and the Netherlands and was introduced to Italy in April. Local brands include Stinol, which represents a line of refrigerators that is strong in Russia, and Hotpoint, which focuses on the UK market.

Realizing the importance of clearly differentiating its core brands, the company recently invested several of its efforts on redefining its Indesit brand. "Up to five years ago, Indesit was a 'no name,' very similar to a private label OEM," says Mr. Guerra. "We have taken that brand and invested in its identity, to give it a unique commercial quality across Europe. We are the only one to invest in a competitive brand," he adds.

Clearly defining Indesit was especially important in order to significantly reduce any sales crossover with Ariston. In terms of target markets, Ariston reaches the medium to medium-high segment of the market with a focus on built-in appliances, and Indesit targets the medium to medium-low end with a focus on freestanding appliances. While the company had created distinct separations between the two brands, it didn't feel the differentiation was reaching the consumer.

According to Lamberto Dolci, Merloni's Brand & Advertising manager, the Indesit brand has been completely revised, from its logo and stationary to its print and television advertisements. The brand's core values are simplicity, reliability, and strength with a focus on younger consumers. To project this image, a new logo was created. The name portion of the logo included a mixture of lower and upper case letters in its name to project uniqueness. The symbol was an image of a simple knob that also incorporates the letter "i" for Indesit. "The knob is an essential part of the product that is, at the same time, very easy," says Mr. Dolci. "Indesit is a symbol because it gives you all your needs in the main element."

The company also decided to keep people out of all of its print and television advertisements in order to give an image of convenience. Mr. Dolci explains, "We felt the top desire of the person who wants a medium, medium-low product is quality, is affordability, is strength. No whistles, no bells, but the BEST a product can give with the right price. They want the domestic appliances to do the work, while they are playing." Thus, the brand's motto, "We Work You Play."

A Clear Focus

While adding value is certainly one of Mr. Guerra's top priorities, it is not his main goal. "The main goal in the white goods industry, which is an industry that is constantly dating and will always be going through a consolidation process, is to grow," he explains. "Not just to grow, but to be profitable."

Merloni may be aggressive and innovative, but the appliance maker has always had a clear strategy, knowing exactly where it was going and where it wanted to end up. In fact, its strategy is based on a traditional philosophy Mr. Merloni has respected since his university professor first explained it to him years ago. The company follows an "onion" business model that diagrams product demand by price and brand. The company's Ariston and Indesit brands, for example, are at the "core" or middle of the onion, while Scholtés is toward the top. "My professor spent a lot of time explaining the onion of the market, and where it is important to stay," says Mr. Merloni. "You can stay at the top and in the middle, but you have to decide if you're going to be a niche player or if you want to be the middle. But you need to be strong enough to stay in the middle of the onion."

According to Mr. Merloni, the company plans to focus many of its efforts to stay "in the middle of the onion," but it isn't opposed to new opportunities. In fact, its recent launch of the French brand Scholtés in Italy is one example of how the company is still "feeling out" new market opportunities.

Thus far, the company has successfully mapped out each brand's place on its business model while simultaneously analyzing the European market and acquiring companies when it saw opportunities. The recent acquisition of GDA and its Hotpoint brand may be the best example of this. Mr. Salvucci explains: "In the last three years, the UK market grew between five and seven percent every year, while Germany, before the biggest market in Europe, lost between five and seven percent every year. Now we are thinking that in 2002, the UK will be the largest market in Europe. So having the brand leader in that country is extremely important in order to look at being the number one in the immediate term."

Merloni also recognized the market potential in Eastern Europe early on, especially in the Community of Independent States (CIS), also known as the former Soviet Union. In 2000, it acquired Stinol, a leading refrigerator brand in the largest of the independent states, Russia. It has also made three industrial investments to date in Poland, including building a new factory in Lodz, Poland in 1999, to further establish an Eastern presence.

While the company intends to take full advantage of the strengths of its new brands, it still wants to maintain its "simple" approach. "In white goods, one of the secrets to being more profitable is that when you acquire, you integrate," Mr. Guerra tells APPLIANCE. "Merloni does not want to be a sum of different companies. It wants to be one single company. That is one of the basic aspects, and all of our efforts and strengths today are on that."

With all of its acquisitions over the last 3 years, Mr. Guerra says that so far, he is pleased with the company's consolidation of the acquired brands. "We have done a very quick and good job with Stinol because we knew Stinol very well. And today, Lipetzk is almost a normal Merloni factory in terms of its process and quality. It is one of the best cooling factories I have seen around Europe."

The company does recognize that it has its work cut out for it with its recent purchase of Hotpoint. While the brand was successful when it was acquired, with a reported market share of at least 23 percent, Merloni has plans to make it stronger.

So far, the company has hired a new CEO for its GDA operations, Marco Milani, who was formerly the company's managing director. And, as of press time, the company had plans to launch a 3-million Euro ($2.9-million) advertising campaign to support Hotpoint in the UK.

Even so, both Mr. Guerra and Mr. Salvucci agree that there is still much to do be done before the new brand is successfully integrated into Merloni, including a thorough analysis of the brand's positioning as well as creating synergies between GDA and Merloni in areas such as R&D. Says Mr. Guerra, "With Hotpoint, we have a bigger challenge. All of our efforts are on that today."

The Next Step

So what could possibly be next for this fast-growing company? Its focus right now is to become the leader of "Enlarged Europe," with no short-term plans of moving into other markets such as the U.S. or Asia. The reason for this is two-fold. "Europe is the biggest market in the world, bigger than the United States," says Mr. Merloni. The company also feels it needs to fully understand its core market before trying to penetrate others. And fully understanding a market, according to Merloni Elettrodomestici, means being number one.

"I want to grow in Europe," says Mr. Merloni. "Three years ago, we were number five and number six. Now, the only possibility is number two or number one. We must change our mentality. We are not a follower; we have to become the leader."

In fact, Mr. Merloni believes that it is too late for anyone, including Merloni, to try and successfully open operations in China. The only way of penetrating that market, or any new international markets, he says, is through joint ventures. "There is one top company in China, two or three in South Korea, and three in Japan. All together, there are six or seven in control of the market in Asia. Five or six control the market in Europe, and four control the market in America. It's quite impossible that one will buy the other," Mr. Merloni explains. However, he adds, "Some joint ventures will start."

While they aren't a main focus for the company, Merloni is prepared for the market possibility and does have some joint ventures of its own in other areas of the world. In 1996, it acquired a 74-percent stake in Racold Electrical Appliances Ltd. in India. It also has a manufacturing presence in China with Haier Merloni Washing Machine Co. Ltd., a joint venture with appliance company Haier in Qingdao, and in Argentina with associate Argentron SA.

Limiting its focus on Europe certainly doesn't mean limiting its opportunities, according to Mr. Guerra. The company estimates that out of the 370 million people in Western Europe, only 60 million appliance units are sold yearly. Eastern Europe has a population between 420-430 million, with only 15 million appliances sold annually. "You have to be strong in Western Europe today, but the East is the ground for tomorrow," Mr. Guerra says. "If today you are able to acquire the correct market shares in the east, you will be for sure successful tomorrow. This is the battleground for sure."

Mr. Guerra confirms that there are no further acquisitions planned for the remainder of 2002, but notes: "In this consolidation process, you always need to have an acquisition project in your drawer."

Thinking ahead is certainly one of the strengths of Merloni. With a balanced mix of experience and innovation, the company is quickly approaching its final destination. "Three years ago, people were asking us who we were going to sell to," says Mr. Guerra. "Now, they are asking us what we will buy next."


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