WHIRLPOOL GOES OFF ON A WORLD TOUR
Any economics textbook will tell you how an oligopoly works: First, a few large companies cut prices to drive smaller, less efficient competitors out of business. Then, members of the oligopoly start raising prices and boosting profits.
But reality doesn't always conform to textbook definitions. Just ask David R. Whitwam, chairman of Whirlpool Corp., the world's largest manufacturer of major appliances. During the 1980s, Whirlpool and four other companies--General Electric, Maytag, Raytheon, and Electrolux--increased their share of the U. S. appliance market from 70% to 98%. But competition only intensified, and prices failed to keep pace with inflation.
So even though the Federal Trade Commission recently announced that it was investigating the large appliance makers for possible price-fixing, Whirlpool's profits have been under pressure. While revenues have jumped a healthy 65% since 1986, to $6.6 billion in 1990, earnings slipped 61%, to $72 million. Over the same period, return on shareholders' equity tumbled from 16% to 5%.
That's why Whirlpool is expanding overseas. It now has factories or joint-venture partners in 10 countries around the globe, and it's placing high hopes for the long term in developing countries (page 100). But the big push is in Europe. In 1989, Whirlpool acquired 53% of Philips' European appliance business. In a few months, it will pay $600 million more to purchase the rest of the venture, which is selling appliances in Europe under the Philips/Whirlpool name.
While the European market for appliances is growing much faster than that in the U. S., Europe won't be a whirl for Whirlpool. The appliance business it's buying from Philips is notoriously inefficient. Whirlpool has a daunting marketing task, too: It will lose the right to use the Philips name in 1999, and its own brands are little known outside the U. S.
'NOT ONE SCREW ALIKE.' The international thrust should prove a good long-term strategy for Whirlpool. But for now, the acquisitions have put pressure on profits and burdened the company with heavy debt. And there's no guarantee that global expansion will mean higher profits. It remains to be seen whether the fragmented European market will offer Whirlpool the economies of scale it enjoys in the U. S., where its two plants make more than 50% of all washers and dryers sold.
For starters, Whirlpool is putting the poorly run Philips operation through a heavy-duty wash cycle. In a reorganization that began in October, Whirlpool transformed a hodgepodge of sales and distribution systems in 13 countries into two pan-European operations. The shift alienated some old-line Philips managers who didn't like the change, and a number quit. "Reorganizing the Philips operation hasn't been easy," says Ralph F. Hake, Whirlpool's controller.
There's plenty of room for improvement on the manufacturing side as well. Under President Jan Prising, Whirlpool International is attempting to cut costs by standardizing parts and materials, which account for 55% of the total cost of an appliance. When Prising arrived in February, 1990, "there wasn't one screw alike in the washing machine made in our Schorndorf, Germany, factory and the one made in Naples," he says.
On top of it all, Whirlpool will have to build awareness of its brand in Europe. "Whirlpool may be a great name in the U. S., but it cuts no ice at all" in Europe, says John A. Kay, director of the Center for Business Strategy at the London Business School. Whirlpool is now in the middle of a $110 million ad campaign to boost consumer recognition, while gradually phasing in the Whirlpool name.
If Whirlpool can sort things out, it stands to benefit from an expected shakeout among the 12 or so major appliance makers in Europe. The Continent's No. 1, Electrolux, is also moving toward pan-European operations. But with more than 40 brands to manage, it must struggle for the kind of efficiencies Whirlpool hopes for. And Whirlpool has a lead in Europe over U. S. rivals Maytag and GE, which have focused expansion efforts on Britain.
Steep as the challenges in Europe are, Whirlpool has little choice but to look overseas for growth. Back in the U. S., sales of major appliances skidded 8% in the first quarter because of the recession. And the recovery, when it comes, won't eliminate industry overcapacity, fierce price competition, or pressure on manufacturers from large customers such as Sears, Roebuck & Co., which accounts for 20% of Whirlpool's sales. "Too much capacity and consolidation of the customer base swung the relative power from seller to buyer," says Richard C. Billy, an analyst with Prudential Securities Inc.
In Europe, on the other hand, only 14% of households own clothes dryers and 19% have dishwashers. And the penetration rate is almost zero in Eastern Europe. All in all, appliance sales should increase 4% annually during the next 10 years in Europe, compared with just 2% in the U. S., says Prudential Securities' Billy. Little wonder that Whirlpool is willing to put itself through the wringer.
BRANDS Whirlpool, KitchenAid, Roper, Estate, Kenmore, Inglis
1990 SALES $4.2 billion; operating profit: $271 million
Whirlpool, Bauknecht, Ignis, Laden
1990 SALES $2.5 billion; operating profit: $75 million
BRANDS Whirlpool, Acros, Supermatic, Krolls, Philips, Brastemp, Semer, Consul
1990 SALES NA; loss of $33 million
1990 SALES $220 million; operating profit: 0
DATA: COMPANY REPORTSDavid Woodruff in Benton Harbor, Mich., with Fred Kapner in Milan