Electrolux 2010 Annual Report Download - page 75

Business risks
The Group’s ability to improve profitability and increase shareholder
return is based on three elements: innovative products, strong
brands and cost-efficient operations. Realizing this potential
requires effective and controlled risk management. The major risks
at present are described below.
Fluctuations in demand
In 2010, demand for appliances stabilized in the major markets of
Electrolux. Following three years of recession (2006–2009), the
North American market grew by 5% in 2010. In Europe, demand
increased somewhat in Western Europe (1%), while Eastern Europe
– after a period of deep recession – grew by 6%, albeit from low
levels. In Latin America, growth diminished in Brazil after the stimu-
lus package ended, while other markets grew strongly. In the Asia/
Pacific region, the Australian market stabilized and the Asian mar-
kets continued to grow healthily.
Weak demand in earlier years has resulted in Electrolux opera-
tions being run at an average of 60% capacity. Despite this, the
Group successfully achieved an operating margin in excess of 6%,
excluding items affecting comparability. Decisive actions and sav-
ings packages throughout the Group have proven that Electrolux
can quickly adjust its cost structure when demand for the Group’s
products declines.
Price competition
Most of the markets in which Electrolux operates feature strong
price competition. This is particularly severe in the low-price seg-
ments and in product categories with large over-capacity.
During the year, pressure on prices increased in the Group’s
major markets. A government subsidization program for green prod-
ucts led to greater volatility in demand in North America. The subsi-
dization program generated increased demand during the second
quarter. When the subsidization program expired, demand declined
in the third quarter, which led to higher inventory levels among pro-
ducers and retailers. To maintain demand and to reduce inventory
levels, campaign-driven price promotions were introduced. In
Europe, prices also fell, primarily in Russia, Southern Europe and the
Nordic region. Price pressure also prevailed in Australia.
Exposure to customers and suppliers
After a number of years of recession and uncertainty in the financial
markets, the situation stabilized for the Group’s retailers and suppli-
ers in 2010.
Quelle of Germany, one of the Group’s major retailers, went into
bankruptcy in the fourth quarter of 2009. This reduced the Group’s
sales of appliances under private labels. New sales of appliances to
IKEA in Europe partly offset the decline in volumes.
Electrolux has a comprehensive process for evaluating credits
and tracking the financial situation of retailers. Management of cred-
its as well as responsibility and authority for approving credit deci-
sions are regulated by the Group’s credit policy. Credit insurance is
used in specific cases to reduce credit risks.
Raw materials and components account for most costs
A large share of the Group’s costs refers to materials. In 2010,
Electrolux purchased raw materials and components for approxi-
mately SEK 44 billion, of which approximately SEK 20 billion referred
to the former. The Group’s exposure to raw materials comprises of
mainly steel, plastics, copper and aluminum.
Market prices of raw materials increased in the first half of 2010.
In the second half of the year, market prices of steel initially declined
before climbing again towards the end of the period. Electrolux uses
bilateral contracts to manage risks related to steel prices. Some raw
materials are purchased at spot prices. The total cost of raw materials
in 2010 was approximately SEK 1 billion higher than in 2009.
Restructuring for competitive production
A large share of the Group’s production has been moved from high-
cost to low-cost areas. The restructuring program was launched in
2004. The remaining costs for this program are expected to be
taken in 2011. The total cost of the program is approximately
SEK 8.5 billion and it will generate annual savings of approximately
SEK 3.4 billion compared with the starting position in 2004.
Restructuring is a complex process that requires managing a
number of different activities and risks. Increased costs related to
relocation of production can affect income in specific quarterly peri-
ods. When relocating, Electrolux will also be dependent on the
capacity of suppliers for cost-efficient delivery of components and
half-finished goods.
Cost item % of total cost
Personnel 15%
Depreciation 3%
Fixed costs 18%
Raw materials and components 43%
Transports 6%
Product development 2%
Brand investments 2%
Other¹)29%
Variable costs 82%
Total 100%
1) Marketing, IT, energy costs, consultant costs, etc.
Risk Change Pre-tax earnings impact, SEKm
Raw materials
Steel 10% +/– 900
Plastics 10% +/– 500
Currencies¹) and interest rates
USD/SEK –10% +601
EUR/SEK –10% +319
BRL/SEK –10% –314
AUD/SEK –10% –273
GBP/SEK –10% –202
Interest rate 1 percentage point +/– 60
1) Includes translation and transaction effects.
Sensitivity analysis, year-end 2010 Cost structure 2010
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