Why Big Business Has Gone Cold on Big Appliances

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Nobody, it seems, wants to sell refrigerators these days.

German engineering giant Siemens (SIE:GY) is offloading its 50 percent stake in an appliance business to Robert Bosch, its partner in the venture. Just a few days earlier General Electric (GE) hawked its appliance business to Sweden’s Electrolux (ELUXB:SS) for $3.3 billion.

Both of these castoff units are profitable and do massive trade in a business with fairly large barriers to entry. Designing a refrigerator is still trickier than making a killer app. So why the house-cleaning? Getting rid of those pesky consumers. GE and Siemens had the same explanation for ditching their appliances: the desire to focus on core businesses of building power plants, airplane engines, MRI machines, and locomotives.

It’s even harder for competitors to get into those businesses, and the clients are massive companies and governments content to sign multiyear deals. Those on the hunt for a new dryer are a far more fickle lot.

Appliance sales are hugely reliant on the economy at large. If recent college grads don’t get jobs and new houses, they probably won’t buy new washing machines. Low rates of household formation give a huge advantage to a cheaper brand: Mom & Dad’s Appliances. For those who are already living on their own, a fancy new dishwasher is easy to pass up when the household budget gets tight.

The secret in the appliance game is selling to homebuilders, not home buyers. GE has a sizable corporate appliance business, which is part of the reason Electrolux bought in. But even contractors have proved to be capricious clients of late.

In the past 10 years, annual appliance sales in the U.S. slid 24 percent, to 52.3 million units, according to Euromonitor. The housing bust of 2008 did the most damage. And even though real estate has rebounded, appliances haven’t.

GE has been trying to sell its appliance unit since 2008, and it’s easy to see why. Last year the company had five different businesses that operated at profit margins of more than 17 percent, including its aviation department and its capital group. GE’s appliance and lighting unit, however, posted a lean 5 percent return.

What does all this mean for consumers? Quite possibly higher prices. There are now two appliance giants in the U.S. Behind the new No. 1 created by the GE/Electrolux tie-up, Whirlpool (WHR) hasn’t been idle. The parent company of the KitchenAid, Maytag, and Jenn-Air brands recently bought a 60 percent stake in Indisen, an Italian company. Here’s a look at how market shares break down in the U.S.

Meanwhile, there are plenty of incentives for these companies to focus on ultra, high-end devices. Not only do fancier, more expensive models encourage people to trade up, but affluent consumers make for a more dependable base. It’s fairly easy to spend close to $2,000 on a washing machine these days, and the ceiling on refrigerators is virtually limitless. Home Depot (HD), for example, is giving a hard sell on a $6,000 model by Samsung Electronics (5930:KS), and SubZero (SZG:AU) has a suggested price of $16,285 on its Pro 48 model.

The average cost of a major appliance in the U.S. has climbed from $485 to $604 in the past 10 years. If prices stay at those levels and buyers finally return en masse, perhaps GE and Siemens will want to get back in.

 

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