Major battle over appliances

A battle is brewing in appliance sector in the US market. Can three large home centre chains succeed where other retailers have failed, asks Bob Vereen.

Regional and national appliance chains, as well as independent retailers, have been trying for years to knock Sears Roebuck down a market share or two in the major appliance business. None have succeeded, and some have even given up trying – most notably Circuit City, a billion dollar national chain which dropped appliances last year to concentrate on electronics.

Menards’ appliances are positioned adjacent to the kitchen remodelling section

But now Home Depot and Menards are joining long time major appliance seller, Lowes (already with the second largest market share), in fighting for a significant share of these big-ticket sales. It’s proving to be an interesting battle and comes at a time when Lowes’ sales and profit growth continues to outpace Depot.

Lowes’ 3rd quarter results showed a 35% gain in profits and an 18% gain in sales to $6.41 billion. In contrast, Home Depot, while reporting a 21% increase in profits, saw total sales increase only 9% and reported comparable-store sales down for the previous month, while Lowes were up 2%. Depot sales rose 9% to $14.48 billion for the quarter.

Home Depot’s major appliance section has better lighting and signage than other parts of the warehouse store

Depot attributed the smaller-than-usual sales increase to its policy of flooding markets with stores and “cannibalising” existing stores because new, nearby stores took sales away from them. This is the second quarter in which Lowes’ sales and profit growths, percentage-wise, exceeded those of Depot. “We expect to increase revenue 18-19% annually and earnings per share by 19-20% over the next two years,” says Robert Niblock, executive vice-president and chief financial officer.

Depot, with 1,500 stores, has placed major appliance sections into 550 stores by the end of 2002. Sears has nearly 800 full size stores stocking appliances. Lowes, which operates 800+ stores, has been in the major appliance business almost since its inception, but most of its early development was concentrated in small towns. Now it is concentrating on metropolitan markets where it wants to compete with Depot on its traditional lines.

However the question remains: Will Lowes enjoy the same success with appliances in big cities as it does in smaller towns where it often dominates smaller independent appliance retailers?

Appliance sector

Last year was the third year that Depot has been in the major appliance business, having started in 1999, but now it is accelerating its efforts under direction of its new ex-GE boss, Bob Nardelli, whose experience included a stint with GE’s major appliance division.

Lowes’ appliance section has not been “set off” from the rest of the store

Overall, major appliances are a $20 billion business. Sears controls 40% of the market, Lowes has 13%, followed by appliance chain Best Buy and then Depot with 5%. Sears has admitted that its major appliance sales decreased in August 2002. Perhaps part of Depot’s 5% market share caused it.

In many ways, the addition of major appliances to a home centreÕs product mix makes sense. After all, a big chunk of their business is in kitchen remodelling. Why plan a remodelled kitchen and then turn over the sales of stoves and refrigerators to another retailer? Why not go for all of it?

But, so far at least, the assortments and presentation of major appliances in the three home centre chains severely lag that of Best Buy and Sears, as well as that of many regional chains or larger independent dealers.

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Sears devotes around 10,000 sq. ft. to appliances in its anchor stores

There is much less space devoted to major appliances in the three chains than at Sears; fewer models are shown, and since Sears launched Brand Central some years ago, the brand assortment is also narrower in the home centre chains. The home centre chains offer only one or two brands, typically, compared to more at Sears.

In checking one metropolitan market, Sears appears to devote about 10,000 sq. ft. to appliances in its anchor stores, whereas Depot allocates only about 1,500 sq. ft. Lowes does somewhat better, devoting about 5,000 sq. ft. in a typical store. Menards generally allocates about 1,500-2,000 sq. ft.

Depot’s major appliance section dispenses with the bare-bones warehouse look of the rest of the store. Lighting is better and signing is much improved, including its price-beating guarantee of 10% on identical advertised models.

Surprisingly, Lowes’ appliances look as though they are being displayed in a warehouse, even though the usual Lowes store is better lit than a Depot warehouse. The section has not been “set off” from the rest of the store as effectively as it now is in Depot.

Menards, with its lower gondola fixtures, is able to make its appliance section stand out without extra effort. While the category is at the rear of the store, it is nonetheless logically positioned adjacent to the kitchen remodelling section.

Another difference noted is that Sears’ section, like that of chains like Best Buy and other appliance retailers, is staffed at all times with employees. In all three home centre chains, no full time employee was immediately visible in the major appliance sections.

Sears’ strong point, besides its highly rated Kenmore brand, is its installation and after-sale service. Menards and Depot periodically offer free delivery, but both it and Menards will be hard pressed to match Sears in after-sale service. Sears also devotes more category-specific advertising to majors, whereas the home centre chains often just include majors as part of multi-page circulars. Lowes does distribute some appliance-only newspaper ads from time to time.

Small appliances at Housewares showThe “shaky” economy and the threat of war with Iraq continue to drive Americans into their homes, causing them to spend more money on products for the home, according to attendees of the 2003 International Housewares Show, held recently at McCormick Place in Chicago.

Consumers are looking for products that do multiple tasks, like microwaves that also toast foods and items that take a new twist to an age-old need, such as a solar-powered food cooker. Style preferences are once again leaning toward the traditional, with white, black and chrome-colored small appliances dotting the show floor. The nesting trend is making small appliance a growth area for a growing number of home improvement retailers.

Many industry experts are expecting the first and second quarters of 2003 to improve over the last two quarters of 2002. “Housewares and especially electronics, are doing well,” says Ira Kalish, chief economist for Retail Forward, a management consulting firm. “These categories are being positively affected by the strength of the housing market. The decline in short-term interest rates has translated to an increase in discretionary dollars that is stimulating home buying and products related to the home.” The housewares industry is positioned to continue the seven percent average annual growth it has experienced over the last five years, according to Philip Brandl, president of the International Housewares Association, which sponsored the show.

From www.homecenter.news.com

To read more about the International Housewares Show, Bob Vereen provides his report on page 41 in the AHJ.