Electrolux 2010 Annual Report Download - page 55

Prices and overcapacity
Strong downward pressure on prices has been evident in most of
the Group’s markets for a number of years. Price competition has
been particularly severe in low-price segments and in product seg-
ments where there is substantial overcapacity as well as in markets
with low levels of consolidation. In Europe, where prices have been
declining for several years, many producers were able to defend and
raise prices in 2009 despite weak demand and a fragmented mar-
ket. In 2010, price pressure was again intensified, partly driven by
changes in exchange rates. In light of the comprehensive relocation
of production to low-cost areas during the past decade, most pro-
ducers have similar cost levels today. In addition, rates of capital
intensity in the industry are relatively low, which facilitates rapid
adaptation of production for manufacturers. The industry’s struc-
tural overcapacity always implies a risk of short-term downward
price pressure due to manufacturers choosing to increase produc-
tion to capture market shares through lower prices. For example, in
North America, extensive price campaigns for washing machines
resulted in downward price pressure in the segment in 2010.
The vacuum-cleaner industry, which has seen a greater degree
of transformation than appliances, does not suffer from the same
price-deflation. Consumers are prepared to pay higher prices for
new functions and intelligent design.
Electrolux, as one of the few global manufacturers of appliances
and vacuum cleaners, has the opportunity to optimize production
and procurement on a global basis, thus creating scope to continue
reducing costs.
Demand trends
Demand for appliances is primarily dependent on general business
conditions. Since Electrolux is a producer of consumer goods, sales
are affected at an early stage in the economic cycle. Lower market
demand can lead not only to lower sales volumes, but also to a shift
in demand to products with lower prices and margins. In addition,
utilization of production capacity declines in the short term. A stron-
ger global economy contributed to the rise in demand in most mar-
kets during 2010. In the US, during the second quarter, the federal
rebate program to promote the purchase of energy-efficient house-
hold appliances resulted in many households bringing forward their
planned purchases of appliances. Demand grew strongly during the
first six months to then stabilize during the second half of the year. In
the growth markets of Latin America, Asia and Eastern Europe,
demand accelerated off the back of the rapid growth of a affluent
middle class. Demand in the mature markets of Western Europe and
Australia was unchanged or declined somewhat. As a result of high
penetration in the majority of product categories in Western mar-
kets, in combination with a historic low demand, sales are becoming
increasingly dependent on households replacing their old products
with new. Replacement products accounted for approximately 75%
of sales of household appliances in the US during 2010.
Specific segments such as frost-free freezers and induction hobs
show continued strong growth, irrespective of market. Governmental
incentives for stimulating consumer purchases of energy- and water-
efficient household appliances have been implemented in several
countries, including Brazil, the US and Australia. Electrolux has a lead-
ing position in this segment, and can benefit from increased demand.
The industry is in a phase of rapid change Shipments of core appliances in the US
The vacuum cleaner industry has reached price stability. Major appli-
ances is in an earlier stage of the change process.
Market demand for core
appliances in the US
increased by 5% in 2010. The
growth derives from a very
low level after more than
three years of decline.
Replacement products
accounted for approximately
75% of sales.
50
Million units
45
40
35
30
00097 98 99 01 02 03 04 05 06 07 08 09 10
Price/cost
Before Transition period 5-7 years New price stability
15–50% lower
Time (year)
2-5 years
Vacuum cleaners
Appliances
51