Consumer Appliances in Australia

Consumer Appliances in Australia

EXECUTIVE SUMMARY

Consumer appliances left unsupported

Consumer appliances in Australia, although buffeted by the global financial crisis in 2009, was somewhat sheltered due to the combination of the Australian Government’s “stimulus payments” to the majority of Australian workers, and the First Home Owners Grant, both part of their overall economic stimulus package. The effect of these measures faded in 2010, and consequently consumer appliances was left to deal with the resulting economic slowdown, the impact of which was significant price discounting by retailers and decline in value growth which was greater than volume decline.

MasterChef stimulates interest in cooking

One factor that certain consumer appliances categories could capitalise on in 2010 was the popularity of cooking-related reality television show MasterChef; the most popular television programme in Australia. Viewers of this programme were often inspired to improve their own culinary prowess; a goal which required an upgrade of their food preparation appliances. However, the success of MasterChef was not positive for all categories. The emphasis on “real cooking” for example, discouraged some people from using and therefore upgrading, their microwaves.

Solutions for renters embraced

Already occurring prior to the global financial crisis, although the economic instability made it worse, was the proportion of Australians forced out of the housing market and therefore pushed into renting. These Australians faced limitations on the type of consumer appliances that they could install, and consequently the options that were open to them experienced some of the strongest growth rates in 2010, such as room air conditioners, which were embraced by consumers who were not able to install split air conditioners.

GUD Holdings fails at Breville takeover attempt

The two largest consumer appliances companies in Australia (at least when measured by number of units) were involved in an attempted takeover bid: GUD Holdings, owner of the Sunbeam brand, endeavoured to purchase Breville Group Ltd, owner of Breville, Kambrook and distributors of Philips, which was big news. GUD Holdings wished to overcome the agreement it made with the similarly-named Sunbeam brand in the US which meant that it could only operate the Sunbeam brand in Australia and New Zealand; if successful, its takeover of Breville Group meant that it could avoid these restrictions by branding its products under the Breville brand. The acquisition attracted the attention of the Australian Competition and Consumer Commission however, which disallowed the deal.

Energy efficiency will drive future growth

Australia has long been the beneficiary of some of the lowest electricity prices in the world, but as energy shortages become more common, this will not last, and by the end of the review period, electricity prices were already amongst the fastest growing costs for Australian consumers; a trend that will intensify even without the introduction of an Emissions Trading Scheme. As electricity prices rise, Australian consumers will become increasingly attracted to more efficient models, with the plan of saving money through making an investment by upgrading their consumer appliances. Since these more efficient models will allow manufacturers to price them at a premium, energy efficiency will be able to be used as a means of generating both volume and value growth over the forecast period.

KEY TRENDS AND DEVELOPMENTS

Consumer appliances crumbles post-recession

Whilst the Australian economy and consumer appliances sustained the initial impact of the global financial crisis well, this was largely due to the impact of the various stimulus packages initiated by the Federal Government, most notably the A$900 “stimulus payment” to the majority of Australian workers. Whilst the stimulus payments supported the purchases of consumer appliances in the first half of 2009 – particularly for small appliances and vacuum cleaners, which could be purchased with this scheme and receive some change back in return – their impact faded throughout the second half and by the beginning of 2010, consumer appliances experienced a serious slump. The waning effects of the stimulus package, is only one reason for this slump; a number of interest rate rises, from just 3% in mid-2009 up to 4.5% in mid-2010, led to consumers delaying the making of major purchases.

In addition to the A$900 stimulus payment to Australian workers, a second key supporting factor was the expansion of the First Home Owners Grant, in which Australians buying their first home, were given between A$14,000 and A$21,000; a contribution that significantly bolstered the Australian housing market in 2009, particularly in the outer suburbs. Only intended to be a temporary measure, the First Home Owners Grant was withdrawn by the end of 2009, leading to a softening of the housing market in 2010.

Another impact of the global financial crisis on the Australian economy was its impact on the value of the Australian dollar, which experienced a roller-coaster ride; falling from over US90c to US65c before recovering again. This is a critical issue for manufacturers, since it determines their costs, their profit margins and therefore whether or not there is a need to raise unit prices. Another important determinant is the price of iron that is able to be negotiated between mining companies such as Rio Tinto and BHP – much of which is mined in Australia – and the steel producers, which are largely in China. Despite the impact of the global financial crisis, these iron prices vastly increased over 2009 and the first half of 2010, and despite a dip in the middle of 2010, are likely to continue edging up. This has served to squeeze profit margins for manufacturers, particularly those of small appliances.

Current Impact

The strong growth witnessed by many consumer appliances during the 2000s was due, not only to economic growth, but the growing affluence of Australia’s working classes who aspired to, and could increasingly afford, a middle-class lifestyle. Although the Australian economy largely escaped some of the more extreme effects of the global financial crisis – or at least managed to avoid a recession - one impact of it was to slow the growing affluence of working-class consumers, who therefore were forced to forego consumer appliance purchases.

The fluctuations of the Australian dollar over 2009 and 2010, was one of the factors behind the rising unit prices of food preparation appliances (from A$112 in 2009 to A$117 in 2010) and small cooking appliances (from A$92 in 2009 to A$96 in 2010), over the same period. These price rises have also been made possible by the growing interest in cooking amongst Australians as a result of the huge success of cooking-related reality show Master Chef, the most popular television programme in Australia in 2010. Other appliances that were not supported by the cultural phenomenon that is MasterChef were instead subject to price erosion as consumers had greater power to negotiate prices with retailers which were desperate to make a sale. Declining unit prices became the norm, especially amongst major appliances where the scope for lowering prices are greater, and personal care appliances where insufficient differentiation of models enabled consumers to trade downwards.

While most of the price erosion took place because of anxious retailers, manufacturers were also responsible for many of the declining prices in 2010. In personal care appliances for example, Remington launched new models at the lower end of the price spectrum.

Economic slowdowns often result in a number of casualties, particularly in relation to retailers. The largest of these casualties in 2010, was Clive Peeters, a mid-premium retailer of consumer appliances, which was placed into receivership in May 2010, after more than a year of troubles including an employee siphoning off almost A$20million. Having expanded rapidly during the economic boom, and acquiring Western Australian retailer Rick Hart in 2005, Clive Peeters went into debt – of A$120m – a debt that once the economic slowdown hit, it was unable to pay back. Although perceived as a marginally premium retailer, Clive Peeters was forced out of desperation to engage in the same discounting activities to compete with Harvey Norman, which therefore reduced its profitability. It is expected that the additional sales fuelled by the Government’s stimulus payments kept Clive Peeters going for an additional six months. After being put into receivership in May 2010, Clive Peeters was acquired by Harvey Norman in July 2010.

The general trend in small appliances was that concerns about the economic situation discouraged consumers from making purchases, but on those occasions where they did, manufacturers gave them ample reasons and ample opportunities to trade-up. These tend to only be gradual movements, with consumers who had previously bought entry-level models shifting up to mid-priced models, whilst those consumers who previously purchased mid-priced models shifted upwards to the premium segment.

Outlook

Given the extent to which the Australian Government’s stimulus payments and First Home Owners Grant fuelled retail growth over 2009,which disguised the impact of the recession at least amongst retailing, the economic slowdown was simply postponed until after the stimulus payments were spent, and thus increasingly took hold over 2010 and is likely to continue into 2011. A softening of the housing market for example is particularly concerning since it is a crucial driver for consumer appliances, particularly in relation to major appliances such as refrigerators, and washing machines.

In relation to renovations however, which makes up another large proportion of the demand for major appliances, the future is looking positive, with consumers still eager to improve their homes whenever and however they can. When asked, in the Nielsen State Of The Nation Report, in October 2009, how they “utilize spare cash”, 27% of Australian respondents answered “home improvements”, up from 26%. The eagerness of Australians to renovate their house is clearly still there, despite the economic slowdown, and will materialise once the economy recovers.

Concerns about the condition of European economies, and Australia’s exposure to these economies, led to a lull in consumer confidence during 2010, suggesting that consumers are tightening their belts again, and in at least the short-term, growth of major appliances will be slow. There are other reasons for such belt-tightening as well, since as the Reserve Bank Of Australia raising interest rates, from the lowest interest rates since the 1950s in 2009, to something closer to their normal rate. With inflation being the Reserve Banks’ primary concern, interest rates will continue to rise as the Australian economy recovers.

On the positive side however, the Australian dollar is likely to continue to trend upwards due to a combination of demand for Australia’s mineral resources, and rising interest rates that will attract investors. This is positive since an appreciating Australian dollar lowers the price of imports, which make up the vast majority of sales of consumer appliances in the country, thereby widening profit margins for manufacturers, and potentially making consumer appliances more affordable to local consumers.

Future Impact

The economic slowdown had the impact of encouraging consumers to go to greater lengths to find a bargain, and one way of doing this was online shopping; the result being that Kogan Technologies, a company that orders from the same suppliers as major global companies and then sells the product through its website, carved out a sizable niche in consumer electronics, and now has the goal of accomplishing the same in regards to consumer appliances.

In an attempt to keep consumers shopping, retailers relied upon discounts, sales, and promotions to a far greater extent than before the economic slowdown, and there is speculation that they are now so used to making purchases at a discount, that it will be difficult to encourage them to pay the full price again. Increasing unit prices will be difficult over the forecast period, and manufacturers will need to strive to add value to categories in order to convince consumers to spend more again. Energy efficiency will be one of the most popular and effective means of doing so.

As the Australian economy recovers, the Australian dollar is likely to appreciate, as investors are attracted to the rising interest rates. This will make it more affordable to import consumer appliances into Australia. Since virtually all consumer appliance products in Australia are imported, this appreciating dollar will allow manufacturers either thicker profit margins, or else an improved ability to engage in price competition. The main exception in relation to this is Electrolux Home Products Pty Ltd, which manufactures refrigeration appliances in the town of Orange, in New South Wales and large cooking appliance s in Adelaide, capital of South Australia. This is likely to be one reason for Electrolux’s shift to more premium price points where it can more easily compete on price.

A shift towards premium models will in fact be a key characteristic of the forecast period, as the appreciating Australian dollar ensures that they become more affordable and accessible to Australian consumers, whilst also being encouraged by the trend towards consumers increasingly choosing more energy efficient models which are likely to be charged at a premium.

Sunbeam versus Breville

The two major manufacturers in small appliances are GUD Holdings Ltd with its Sunbeam brand, and Breville Group Ltd, which in addition to the Breville brand owns the marginally lower priced Kambrook brand, and is the local distributor for Philips. These two brands have long been each others’ arch-nemesis, competing within most small appliance categories, often at similar price points; between them they comprise over 50% retail volume share of such categories as food preparation appliances, small cooking appliances and irons.

This meant that when GUD Holdings attempted a takeover of the Breville Group it was significant news, and gained the attention of the Australian Competition and Consumer Commission whose responsibility it is to give the go-ahead for large mergers and acquisitions such as this.

The takeover began when GUD Holdings bought 19.4% ownership of the Breville Group in May 2009, although at the time it claimed that it had no intention of a takeover. This changed by October 2009 when GUD Holdings announced a A$260 million offer for Breville. After much contemplation, the Breville Group board came to the conclusion that the benefit to GUD Holdings of controlling the Breville Group was greater than what GUD Holdings was offering, and recommended that its shareholders vote against the proposal.

This was followed by the Australian Competition and Consumer Commission deciding itself to oppose the acquisition, since the resulting GUD Holdings/Breville Group merger would possess over half the volume share of a number of categories, which represented an unacceptable level of power. It was also likely that the retail volume share of the combined companies would further increase after the acquisition as it attempted to flex its power in negotiations with retailers, which would not be strong enough to refuse.

Current Impact

The main reason for GUD Holdings’ interest in Breville is not to overwhelmingly dominate Australian consumer appliances, but in order to compete internationally; something it was unable to do at the end of the review period since its use of the Sunbeam brand is legally limited to Australia and New Zealand. This is the result of an agreement with another Sunbeam brand in the US owned by Jarden Corporation, which has the same logo, some of the same sub-brand names – such as Mixmaster – but are not in fact related. This reduces the options that Sunbeam has if GUD Holdings wishes to expand its operations. Whilst it could attempt to create another brand from scratch, this would be a risky process. Instead the plan was for GUD Holdings to sell Sunbeam products globally outside of Australia and New Zealand, but to do so using the Breville brand, which already has a significant presence in other non-Australasian markets, including the US. Without the control of the Breville Group, and therefore the Breville brand, GUD Holdings’ operations, at least in relation to consumer appliances will remain confined to Australia and New Zealand.

The operations of GUD Holdings are not purely focused upon the Sunbeam brand, and therefore consumer appliances, although this is its largest division. The company also owns Davey Water Products, Oates Cleaning Products as well as several others. The addition of Breville however, to GUD Holdings’ operations, would have fundamentally transformed the latter’s business, changing it from a company that was only half involved in consumer appliances, to one in which is almost purely consumer appliances focused.

Outlook

In relation to consumer appliances, GUD Holdings Limited is caught, in that there are few opportunities for further expansion. The Sunbeam brand is already stretched from food preparation to irons, to heating, and whilst the brand has not been able to dominate every category it has entered, the extent of its reach is impressive. There are some categories however, where Sunbeam has not been successful, where GUD Holdings feels disappointed, and is therefore withdrawing from. This includes hair care appliances, where Sunbeam was unable to make significant progress against Remington and Vidal Sassoon, which dominate the category, and because Sunbeam is typically considered more domestic and not sufficiently fashionable. Given that Sunbeam is withdrawing from the category and consolidating its operations to products where it has definite strengths, the brand appears to be actually contracting, hence its enthusiasm and appetite for overseas expansion.

There is of course the option of Sunbeam expanding into major appliances, to capitalise on its heritage in the kitchen, but this would be a huge jump. For one thing, the category in which Sunbeam would be the closest match, large cooking appliance s, would be a challenge given that this category is dominated by premium European brands. Despite its Café Series and success in coffee machines, Sunbeam has a long way to go before it can compete with Electrolux.

Electrolux however would not find it difficult to compete in small appliances against GUD Holdings and Breville Group, and despite several years of speculation that it plans to do so – encouraged by the fact that it has a range of vacuum cleaners and also in other small appliances products – it seems increasingly likely that the company will make such a move some time during the forecast period. Such a move is likely to significantly alter the dynamic between GUD Holdings and Breville Group, through the creation of a third major player, particularly one that has a heritage in European-style cooking, from which the majority of Australia’s cooking culture is based. Should this occur – and given that both GUD Holdings and Breville Group are both Australian-owned – then Australian consumers can expect a ramping up of marketing campaigns calling upon them to make a patriotic choice.

Future Impact

With the ACCC denying the opportunity for GUD Holdings to turn into a mega-consumer appliances company with near monopolist power, Australia will continue with two large and almost equal competitors for small appliances. Thus, it is virtually assured that the assertiveness and innovation that characterises this competition will continue. Breville’s innovation however comes from its hopes of breaking into international consumer appliances in a significant way, something that GUD Holdings is not able to do. This reduces the incentive for the latter to compete, and gives the Breville Group somewhat more of a competitive edge in the long-term.

Although the merger would most likely reduce competition in Australia, the combination of GUD Holdings and Breville Group products would create an attractive offer internationally, increasing the global presence of the Breville brand.

Since it was the resulting power of the merger that was the main issue for the ACCC, it is possible that the timing of the takeover attempt was wrong, and that such an attempt may be more successful in the future, since both the Breville Group and GUD Holdings experienced gradually declining share over the review period: GUD Holdings since 2006 and Breville since 2009 as competition from global manufacturers intensified. Examples of such manufacturers include the global brand owner of De’Longhi with its Nespresso coffee machines. In the absence of this acquisition, it is likely that this gradual erosion will continue. Still, at current rates, it will be a decade before GUD Holdings and Breville are no longer the largest players in small appliances.

Smaller houses for a smaller Australia

Overseas migration has exploded since 2003, although much of this is by accident, rather than part of an overall plan for nation building. In the decade prior to 2003, net migration averaged only around 100,000 a year, but rapidly increased to 300,000 over 2008-2009. These figures led to much public debate in Australia about how large Australia’s population should be, and how to prevent additional immigration from causing congestion, as is already the case in certain metropolitan areas such as western Sydney.

This is in addition to the other public debate over whether Australian cities should have low or high density housing, the implication being that Australian houses are too large and that this is environmentally unsustainable, and that this is the result of low density housing radiating out from the edges of the outer suburbs of Australia’s major population centres. The extent that physical size of the Australian home has expanded over the 2000s can be demonstrated by the fact that the average new Australian home, at 215 sq m, is now the largest in the world, even larger than those found in the US.

An even bigger issue however, is the lack of supply of new housing in Australia, with the demand for housing continuing to exceed its supply – partially due to high levels of immigration and partially due to public policies that discourage investment in supply - with the result that housing affordability in Australia continues to worsen, other than for a short time in 2008 and 2009 when both housing prices and interest rates plummeted. There are a variety of reasons for this, including the preference by the Government towards medium and high density housing, instead of the low density housing that Australian consumers appear to prefer, through limiting the release of land which can be used for residential purposes, and through limiting how far the outer edge of metropolitan areas can be allowed to grow.

The trend towards continuous expansion of the outer suburbs is only one factor however. A smaller, but still significant trend is towards living in the inner suburbs, and it is this development that has a far greater impact on consumer appliances. This is particularly the case in relation to Perth, the central business district of which experienced double-digit population growth each year between 2004 and 2009. Although population growth in other large metropolitan areas is not as extreme, Melbourne LGA (Local Government Area) has grown by over 5% each year from 2004-2009. These growth rates create the need for such consumers to invest in appliances that do not take up much space.

As a result, much new construction of buildings is replacing detached houses – the symbol of low density housing – with more medium density options. This is particularly the case in Sydney, where detached houses made up less than half of building approvals according to the Australian Bureau of Statistics at the end of the review period. A similar trend is occurring in relation to Melbourne, although growth in the outer western suburbs ensures that large detached houses remain popular.

Current Impact

Related to the trend towards smaller homes, is the trend towards the need by Australians to rent, and the “great Australian dream” of owning one’s own home becomes increasingly difficult to accomplish. Many of the fastest growing appliances are therefore built upon the needs of the growing number of Australians renting, as they attempt to overcome the restrictions of their rental agreements.

Probably the most important has been the growth in heating appliances and air treatment products. Since renters have little control over the installation of the larger variations of appliances such as split air conditioners in their homes, which are the responsibility of the landlord, they have embraced more temporary heating and cooling options such as room air conditioners and cooling fans. This has fuelled much of the strong growth that has characterised these categories since 2008.

Haier, a brand that has struggled to establish itself, even though it offers low-priced value, is repositioning itself as a brand that understands young apartment-dwelling consumers, with advertising that begins with “You know why you’ll choose Haier. It’s because you need enough beer money” and continues in much the same vein. Initially this repositioning, which is fairly drastic, was only introduced into New Zealand, in order to trial and fine tune the strategy, before crossing the Tasman Sea into Australia in July 2010. Haier Australia is confident that it has found a solid value proposition this time, and plans to heavily market its brand from now on.

Despite this trend towards high-density living, trends in consumer appliances have not developed exactly as expected. One expectation for example, was that automatic washer dryers would increase in order to save space in the laundry, which out of necessity has become located closer to the main living area and kitchen (and in some cases the home laundry appliances can be found within the kitchen). Instead sales of automatic washer/dryers declined in 2009 by 17% in retail value, demonstrating that Australian consumers have a preference for purchasing both an automatic washing machine and a separate tumble dryer.

Outlook

The large increases in the population since 2003, are likely to taper over the forecast period, with a new Prime Minister, Julia Gillard, who does not believe in a “Big Australia”; that is, a population for Australia of about 36 million by 2050, up from 22 million in 2010, and instead is working on means to ensure that Australia’s population is sustainable. Even before the elevation of Julia Gillard to Prime Minister, immigration was slowing; – after half a decade of phenomenal growth - partially due to the closing of a number of disreputable private colleges that had been promoting themselves as a sure-fire way for foreigners to gain permanent residency in Australia.

One popular solution is to encourage growth of “regional centres” such as Geelong and Ballarat in Victoria, where home owners could buy large size houses at affordable prices, and still have the facilities of the major metropolitan areas. Developing these facilities, attracting industries for employment, and therefore prospective home owners, will however be a challenge.

Despite the shift towards high and medium density living, Australia will continue to be primarily characterised by a low density living. The shift, should it even occur, will be slow, since it costs considerably more to build a home in high density regions than in low density regions, whilst existing suburban residents are growing increasingly resistant to their suburbs being transformed, and have become increasingly politicised as a result. As a result, economic forces will continue to push consumers into the outer suburbs, regardless of Government efforts to ebb the flow.

The trend towards smaller homes will also be fuelled by Australia’s ageing population, the majority of whom do not possess sufficient savings to continue with the standard of living that they have become accustomed to during their working lives; they will be forced to shift their consumption downwards, and find means in which to save money. An increased emphasis on cooking at home will be one result. According to figures from the National Centre for Social and Economic Modelling, the median super account for males is A$44,000 and for females is actually zero. This is because the super account was made compulsory only from 1992 which has not given the Baby Boomer generation adequate time to accumulate these savings.

Although not an instant issue, a factor which is only likely to become obvious towards the end of the forecast period, is the inability of Baby Boomers to easily fund their lifestyles which will significantly change Australian consumer appliances. To fund retirement, many will need to sell their homes, and move into smaller house, potentially creating demand for more major appliances, although at lower price points. Since these Baby Boomers will also need to cook at home more, they will experience the need to trade-up their food preparation and small cooking appliances. Since these purchases will need to last into the long-term, and are intended to be used a lot, Baby Boomers will tend to purchase high quality models. This does not mean however that they will be eager to pay a premium. With growing awareness of the condition of their finances, and a sudden increase in their spare time, Baby Boomers will be particularly adamant in relation to obtaining a good deal and will be fierce negotiators for a bargain.

Future Impact

Any solution to Australia’s worsening housing affordability, and the likelihood that growth in the demand for housing will continue to outpace any growth in supply, will mean that the size of the Australian rental market will continue to grow. This is particularly the case since the section of the property market to provide the most consistent level of demand has been from investors who tend to purchase properties to then rent out. This will continue to provide upward momentum to those appliances which are popularly used by renters, in an attempt to solve the challenges of overcoming the limitations of not owning your own home. Even Australians who own their own properties often have limitations placed upon them, if they live in a block of units, by the strata management, so that any growth in high density housing will lead to a switch from options such as split air conditioners, to room air conditioners.

Although the new Haier branding – “Go On. Live A Haier Life” – will likely be effective, and gain for Haier a niche of young consumers living in smaller apartments, in actual fact, an increasing proportion of singles living in smaller households will be middle-aged and older, made up of divorcees, and retirees with difficulties funding their retirement. A brand for older, single consumers, living in small dwellings, is therefore required, and likely to be successful, embraced by the mass retirement of Baby Boomers, starting from 2011. Such a brand could be a wide range of appliances, but a category such as smaller capacity fridge freezers for example, is expected to be one such popular choice since the elderly or singles do not need to store up food for the whole family.

Possible disruption in retailing

Retailing in Australia, in relation to consumer appliances, is becoming increasingly focused around just two retail chains: Harvey Norman and The Good Guys. This however is likely to change over the forecast period, with competition expected from a number of corners, including an evolving online retail scene, and DIY and hardware stores. In 2010, both of these were at a fairly embryonic stage, but have the potential to boom and to be disrupting to the status quo over the forecast period.

Online retailing of consumer appliances is far more developed in other markets – such as in the US and Europe - than it is in Australia, and there are many theories why this may be. The recalcitrant position of major retailers such as Harvey Norman and The Good Guys is often suggested as one reason, based on the attitude without these largest players on board, the Australian people will not take the plunge themselves, since they feel far more comfortable dealing with a major retailer.

The logistical challenges of distribution created by having a relatively small population over such a geographically large country is another, although since about half the population is concentrated in and around just two metropolitan centres (Sydney and Melbourne) this should not be too much of an obstacle, since few orders are likely to come from remote rural locations.

Another theory is that unlike other markets, which have long been used to ordering out of catalogues, Australian retail has always been almost purely “bricks and mortar”, making the transition to online purchases a far larger mental leap.

Another theory is that online retailers have not so far managed to offer a wide range of appliances, despite the fact that being able to offer all products is supposed to be one of the strengths of online retail, since such retailers are not limited by shelf-space.

Online retail of consumer appliances is evolving however, with a collection of emerging players such as Appliances Online, Brown & White and Big Brown Box, with the latter two dealing mainly with major appliances. At the end of the review period, small appliances did not have much of a presence in online retail.

Current Impact

The consolidation of consumer electronics retail, in which Harvey Norman and The Good Guys were already by far the largest players, went even further in 2010, with the acquisition by Harvey Norman of majority control of medium-sized retailer, Clive Peeters, after its chain of 45 stores was placed into administration in May 2010. Clive Peeters was a significant second-tier player which provided competition to the major retailers such as Harvey Norman and The Good Guys. The competition provided by Clive Peeters was not price-based, but in providing a marginally more premium option, and therefore a retail presence for many premium brands, such as Neff. This however is unlikely to significantly change, since Harvey Norman intends to retain the Clive Peeters brand, only under its ownership. This was a sensible decision since such a large increase in the number of Harvey Norman stores would not have been advisable, given that some stores would be too close to each other, thereby cannibalising each others’ sales. At the same time, there is a need for a significant retailer offering a mid-high price range which is not significantly covered by other retailers.

Harvey Norman now has such a large presence – even before the Clive Peeters acquisition – that it can dictate prices to suppliers, thus helping to either widen profit margins for Harvey Norman, or when necessary, to keep unit prices down to gain volume sales. Whether it has done so depends very much upon which products it is selling, and whether it can convince consumers to trade-up. In the case of food preparation appliances and vacuum cleaners it has been able to do so. In the case of refrigeration appliances, where the high price and profit margins gives it considerable room to move, offering retail discounts and lowering unit prices has been the preferable strategy.

The growing trend towards consumers researching online, even if the final purchase is made at a “bricks and mortar” retailer, increases the importance of reputation and the need to be a good corporate citizen, since the ramifications of failing to do so, are now far greater. Unfavourable news stories remain online long after the company would otherwise hope consumers have forgotten about them. In previous eras, the LG fridge-rate scandal – in which LG made incorrect reports in the “energy ratings” tests in relation to at least one Fridge Freezer model –would have been forgotten by consumers within a month, whereas any consumer researching LG online in 2010, would most likely be reminded of the scandal, which is likely to continue to appear high up in search results into 2011, and perhaps beyond

Outlook

Given the concerns about the number of retailers that were likely to exit consumer appliances due to the global financial crisis, the fact that only one major retailer, Clive Peeters was bought out, means that consumer appliance retail leaves the economic slowdown in much the same condition as it entered it. However, competition has been marginally reduced, and Harvey Norman, due to actually increasing its advertising budget during the slowdown, resulted in obtaining even greater power than it had prior to the global financial crisis. Such dominance however is likely to fade over the forecast period, and one reason will be the emergence of online retail.

The lack of online retail in Australia, led to many consumers visiting overseas websites to make their purchases, meaning that a growing proportion of purchases by Australian consumers are not going to local retailers. This does not occur so much in relation to consumer appliances, but it is happening in relation to consumer electronics, which tend to be sold by the same retailers. This therefore provides an incentive for “bricks and mortar” retailers to embrace online retail so as not to lose these sales.

As is the case in most categories, the online retailers that are likely to be most successful, are those which offer a greater level of variety than “bricks and mortar” retailers, and are able to achieve this at a competitive price. By the end of the review period, there was no Australian online retailer that had managed to introduce such a business model to consumer appliances, although Appliances Online and Big Brown Box do come close.

Although major appliances do appear to be dominant in online retail in Australia, this may not continue into the forecast period. 2010 witnessed Big Brown Box expand into smaller appliances, although its range remains fairly narrow. Given that for many categories, the product specifications are a far more critical determinate of a good purchase than actually being able to see the product in person, buying online makes a logical choice, and will become increasingly popular as a result, as researching the product can become a similar process. At the same time, the growing presence of mobile internet also means that online research can be done within the store environment.

Potentially even more disrupting for Harvey Norman and The Good Guys is the growing presence of DIY and hardware stores in consumer appliances. Bunnings Warehouse – owned by Wesfarmers, one of the largest retail groups in Australia, and also owns Coles Supermarkets, Kmart and Officeworks - already offers a growing range of large cooking appliances. Being part of Wesfarmers gives Bunnings significant marketing resources if it chooses to expand its range of consumer appliances, and there are ample reasons to suspect that it will do so, such as the imminent entry of Australia’s largest retail group, Woolworths Limited.

Woolworths Limited is the owner of Woolworths Supermarkets, Dick Smith Electronics, and Dan Murphy’s Bottleshop. Woolworths Limited acquired Danks – the owners of Home Hardware and Thrifty Link hardware chains – in a joint venture with American home improvement retailer, Lowes. Compared to Bunnings, the Danks chains are small, but Woolworths Limited plans an aggressive expansion, hoping to eventually have 150 stores, with the first “warehouse” store opening in late 2011, located in Ipswich, a rapidly growing town of 160,000, and the location of several large housing developments, just outside of Brisbane, Queensland.

In the US, Lowes also sells consumer appliances, and it is expected that its involvement will mean the joint-venture will involve consumer appliances as well as hardware, with offerings that are likely to be more extensive than that of Bunnings which is limited to large cooking appliance s. It is also expected that the brand personality of the resulting retail chain will be similar to Lowes and therefore appeal more to women, as opposed to the more masculine brand of Bunnings. This will make it a force to be reckoned with in relation to consumer appliances retail. Since it will take until at least 2011 before the Woolworths/Lowes chain begins to be rolled out, Bunnings has plenty of time to take defensive action and expand its own consumer appliances range.

Future Impact

The entry of both the Woolworths/Lowes joint venture, and the expansion of the consumer appliances range offered by Bunnings, that is likely to occur as a result, will undoubtedly place pressure on the existing major retailers, including Harvey Norman and The Good Guys, which are likely to compete through price reductions. This will serve to put downwards pressure upon the categories that will be offered by the new competition, which, if the current offerings by Bunnings are any indication, will be centred on large cooking appliance s.

Harvey Norman will also eventually need to counter the growth in online retail. As of 2009, the company had joined Twitter, and through this was monitoring online attitudes to Harvey Norman and rectifying any problems, such as when consumers complained about Harvey Norman via Twitter. Actually engaging in online retail will take far longer however, with Harvey Norman claiming that it needed to undertake a significant upgrade in its IT system, which could take as long as five years.

The expansion of online retail will mostly benefit major appliances. There are a variety of reasons for this. Major appliances is a highly priced category, meaning that the savings offered by purchasing online are more considerable for larger purchases. Technical specifications are also more important in relation to major appliances, which can be easily compared online, with the additional bonus of consumers being able to do further online research. Given the technically-savvy nature of consumers who tend to purchase online, this is a crucial strength of the model. Such considerations are not as prevalent in small appliances.

Online retail is still being held back by security concerns although these are fading. The simplest and quickest means of solving this problem is for the major players of offline retail, Harvey Norman and The Good Guys to enter the online sphere. Harvey Norman has declared that it will move into online retail by 2013, but it needs to upgrade its IT system first. Alternatively, a strong brand in online appliance retail could be developed, to appeal to technically-knowledgeable consumers who wish to buy online. Developing such a brand virtually from scratch would be a challenge, but through offering a wide range of appliances and making it simple to compare one model with another, it certainly is not impossible.

Instead it is Big W, the Woolworths Limited-owned mass merchandiser, which is making the biggest advances into online retail, which given the lack of sophistication and cutting-edge marketing generally expected of mass merchandisers is something of a surprise. In terms of the range of items available online, Big W is following the appropriate strategy of offering products that are not available within its stores, as well as targeting remote and rural areas which do not have sufficient access to retailers. These products remain however, like those available in Big W stores, at the value end of the spectrum. Online retail at the premium end of the spectrum is still wide open for most categories.

Although Harvey Norman and The Good Guys may suffer from this increased competition over the forecast period, their dominance should improve in the short-term due to the number of smaller players which may not survive the economic slowdown, since they do not have the ability to sacrifice profit margins on each individual sale in order to build volume. The demise of Clive Peeters is only the biggest and most publicised example of this.

Energy efficiency high on the agenda

The Australian Labor Party under Kevin Rudd was elected into Government in 2007, at least partially due to concern about climate change amongst the Australian population and a promise to introduce a Carbon Pollution Reduction Scheme, also known as an Emissions Trading Scheme. Since the opposition Liberal Party had also supported this policy at the time of the election, the chances looked promising at the time that such a policy would be introduced. It was not long before such hopes began to unravel, with the Australian Government ultimately finding it impossible to push the Emissions Trading Scheme through the Australian Senate, where the Government is outnumbered by the combined numbers of the Liberal Party, and the Family First party; both of which are against the scheme due to their being climate-change deniers (although a significant portion of the Liberal Party does believe in climate change) and the Greens party which refused to vote for it since it did not think the legislation went far enough. As a result in April 2010, the Prime Minster, Kevin Rudd, announced that the attempt to introduce the Emissions Trading Scheme would be postponed until at least 2012.

The Emissions Trading Scheme, although likely to be the widest reaching in its effects, is not the only environmental issue facing Australia. Another one, which impacts more directly upon consumer appliances is testing for Minimum Energy Performance Standards (or MEPS).

Currently, testing for MEPS and for energy-ratings is mandatory, but often undertaken by the manufacturers themselves, although the Australian Competition and Consumer Commission endeavour to ensure compliance.

The most immediate climate issue in Australia over the 2000s however was a long and pronounced drought, which led to water-restrictions and several state Governments introducing rebates for water-efficient automatic washing machines, a policy that was a significant success, at least in relation to encouraging sales of these products. The policy was so popular, with so many consumers receiving rebates for purchasing four-WELS (Water Efficiency Labelling and Standards) star models, which are fairly water-efficient, that the policy has since been tightened with the requirement to receive the rebate rising from four stars in 2008 to five stars in 2009, in New South Wales, whilst in Queensland the rebate has been withdrawn completely.

Equally important, particularly in relation to cooling and heating, which make up a large proportion of energy use and therefore the electricity bills of Australians, are House Energy Ratings. Although differences occur between one state and another, the idea is to ensure that Australia’s new housing stock are both more efficient to heat and cool and therefore have a significantly lower carbon footprint. Since the introduction of “energy star ratings” for houses, they have gradually tightened, and are gradually moving from a five-star requirement to a six-star requirement. New houses in Queensland for example, have needed to be six-star rated since May 2010. It is Queensland that has been at the forefront of legislation ensuring energy efficiency over 2009 and 2010, and have even gone further to introduce legislation ensuring that every house that is sold or rented from May 2011, has an assessment and consequent energy star rating, so that new owners or renters can make their choices accordingly, and sellers have an incentive to improve the efficiency of the houses they are trying to sell.

Current Impact

Although not entirely over, drought conditions did ease over the summer of 2009-2010. Such easing is only minimal however, with the water-storage levels of Melbourne, for example, improving from below 30% in June 2009, to a still very concerning 35% by the middle of 2010. At the same time, rainfall is still low when compared to the historical average, and water efficiency remains an important concern for many Australians.

The pressure to be energy-efficient led to at least one major manufacturer being dishonest about the efficiency of its products, even going as far as including a banned device in its refrigerators to make the model appear more energy efficient than it really is. Specifically, the device causes the refrigerator to go into a more energy efficient mode when the room temperature similar to that typically found in a test laboratory. Although this was an extreme example of “green washing”, more subtle examples are said to be widespread, with many manufacturers claiming energy consumption lower than their models’ actual consumption.

The credibility of the system has therefore been called into question, with claims that a large proportion - up to one third - of the models tested by the ACCC either do not meet the MEPS requirements or exaggerate their actual energy consumption. Given the high proportion of consumers who consider the “Energy Ratings” when making their purchases – believed to be more than 75% of consumers – such lack of credibility cannot but not have an impact, particularly given that such consumers are concerned mostly with saving money on energy bills. They are consequently willing to spend more on an appliance in order to save money in the long-term. Their willingness to do so will be impacted by the realisation that such savings might not occur.

Outlook

The future of many consumer appliances in Australia will be influenced by the policy of the Australian Government in relation to the Emissions Trading Scheme. However, any significant altering of or contribution to Australia’s carbon emission strategy is looking increasingly slow to develop.

In April 2010, after failing to get the Carbon Trading Scheme through the Australian Senate, due to being blocked by the Liberal Opposition, and the Greens party the latter of which felt it did not go far enough, the Australian Government, under Kevin Rudd, decided to postpone trying to pass the legislation until 2012. The disillusionment amongst voters led to a decline in support for the Government and the replacement of Prime Minister Kevin Rudd, with new Prime Minister, Julia Gillard, who during the 2010 Election Campaign announced a policy to establish a “citizens assembly” on climate change, to discuss the matter, and through this to gain consensus on the issue, something that Australia may have had at the time of the 2007 election, but has since lost. What this means in terms of introducing an Emissions Trading Scheme or Carbon Tax, or any action that even attempts to reduce Australia’s carbon gas emissions will not be introduced until 2013, assuming that it ever does.

If an Emissions Trading Scheme is introduced however, at some point during the forecast period, energy prices will rise, meaning that Australians will place growing importance upon energy efficient appliances. In fact, even without an Emissions Trading Scheme, energy prices are expected to rise, simply due to shortages of energy resources, but such rises would be more intense under an ETS. Australians have historically been fortunate enough to pay amongst the lowest prices for electricity in the world, a factor which has contributed to the popularity of premium models of major appliances, such as refrigerators. Expectations are that this advantage will not continue forever, with or without a Carbon Reduction Trading Scheme.

Although energy prices will rise, the bills paid by consumers for electricity are hoped not to rise as much, as they migrate to increasingly efficient appliances. Since consumers tend to have to pay more for a “green” appliance, they will be adamant that the claims must be true, and that they will actually save money in the long run. This makes the battle between Australian regulators and manufacturers, who may be tempted to “greenwash”, the marketing of their products all the more important. Without the credibility of the energy-ratings system, much of the confidence in consumer appliances will be undermined.

The delay – which may stretch to at least the end of the forecast period – in introducing a Carbon Pollution Reduction Scheme, certainly does not mean that manufacturers can relax in relation to energy efficiency. In fact just the opposite, since without a scheme, Australia risks not being able to produce enough power at peak times, which are during the early summer evenings, on extremely hot days, when workers arrive home and turn on their air conditioning units, all at approximately the same time This is not the best time to experience either a black or a brown out. Yet it is estimated that summer blackouts will be a regular occurrence in Australia from 2012 onwards, according to Business Spectator, with the situation becoming increasingly poor after 2015. Whilst it is demand for air conditioners that will push consumption over the edge, all major consumer appliances have a role to play.

Australians have shown, through their ability to cut water consumption during times of water shortages that they are willing to take action once the problem becomes more direct and has the potential to impact on them personally. Despite concerns about climate change, such environmentally concerned consumers are only adequate to prompt the rest of Australian consumers to a certain extent. Once black outs become more frequent post-2012 the need for more efficient models, particularly of air conditioners, will be more crucial, producing therefore a boom. Meanwhile the New South Wales Government predicts that energy prices will rise 65% by 2013, meaning that the need to be energy efficient is increasingly becoming more real for consumers.

One potential solution is the introduction of a “smart grid”, with “smart metres”, which can more easily inform consumers how much electricity they are consuming, and – in the case of a likely black out – reduce electricity to homes. It is hoped that this roll out will also drive a boom in purchases of “smart appliances” which are able to alter their own energy consumption in order to avoid peak-times where electricity will become more expensive.

Victoria was to have a more extensive roll out of smart metres to every household over the course of 2009-2013, but this was put on hold, after it was revealed that the higher electricity prices resulting from this action would affect those consumers least able to afford it. Furthermore, in order to make the most of the smart metre consumers will need to acquire “smart appliances”, priced at a premium over normal appliances, and therefore only affordable to affluent consumers. If a roll out of smart metres and the smart grid is to occur therefore, such social equity issues will need to be resolved. Since the smart metres enable power companies to charge more for peak-times, which are difficult for consumers to avoid, the electricity bills of most consumers are likely to go up, creating considerable political resistance.

Future Impact

During Australia’s prolonged drought, which has eased although not entirely dissipated, Australians were prepared to save water, and took action to do so. It is likely that Australians will, with a push, finally do the same in regards to energy consumption, particularly once energy bills begin to soar. This is particularly the case given that unlike the drought, global warming and higher energy prices are likely to continue into the long-term, if not be permanent.

In convincing consumers to upgrade to more energy efficient models, both in order to fight climate change and to reduce electricity bills that are likely to rise, consumer appliances have been handed an easy means of encouraging consumers to increase unit prices. Those categories which possess star-ratings such as refrigeration, air conditioners, washing machines and dishwashers, will experience strong shifts towards higher unit prices, whilst those that do not, will either need to find other incentives – such as exciting new features – or else experience falling unit prices as a result of the appreciating Australian dollar. However, an appreciating Australian dollar means that profit margins can widen, particularly if manufacturers can also accomplish unit price hikes.

In addition to improved energy star-ratings, manufacturers will be able to lift unit prices through introducing smart appliances which will give a significant value boost to refrigeration appliances, home laundry appliances, dishwashers and air treatment products.

The MasterChef phenomenon boosts consumer appliances demand

MasterChef, the cooking-centric reality television show that was the most popular show in Australia in 2010, with an estimated over five million viewers watching the final episode, about a quarter of the entire Australian population.

The popularity of this show has been phenomenal, and from a cultural point of view, is the end result of more than a decade of budding interest in food amongst Australian consumers, as Australians embraced the opportunity of branching out in relation to the foods they ate, from the “meat and three veg” and meat pies, which characterised the Australian diet up until the 1980s, and which had grown to be something of national embarrassment. In order to make up for this, a growing number of Australian’s began to aspire to being “foodies”, a trend intensified by the popularity of Jamie Oliver – who completed a live stadium tour in 2010, including two nights at the Hisense Arena in Melbourne which were sponsored by SMEG SpA - and Nigella Lawson. This is an interest that thrived over the 2000s regardless of whether the economy is booming – at which times Australian consumers use their discernable income to upgrade their cooking appliances – or whether there is a slowdown, in which case consumers cut back on eating out and learn to cook themselves. The main difference is that during an economic boom consumers are more likely to upgrade their major appliances, whereas during an economic slowdown they have to be satisfied with upgrading their smaller appliances. The combination of this build-up and the occurrence of an economic slowdown that encouraged consumers to eat-in and have dinner parties instead of eating out in restaurants, all combined to create the popularity of MasterChef.

Sunbeam is one of five major sponsors for MasterChef - the other four being Coles, Campbells, Fonterra and HandyUltra - with its appliances being used within the show, as well as offering a “Dine With A MasterChef” promotion. A new television advertising campaign was also launched in conjunction with MasterChef featuring an appropriation of the song “You Are My Sunshine/Sunbeam”, with Sunbeam appliances floating in the air like balloons.

In major appliances, Ariston was another sponsor, although its attempts at capitalising from this relationship were not as comprehensive. This is partially because this brand is available exclusively at Harvey Norman, and regardless of Harvey Norman’s leadership in consumer appliances retail this lack of availability in other stores is a limiting factor. The brand has also always struggled in Australia, and does not have the high level of brand recognition that is needed for such sponsorship to be particularly effective.

Whilst Sunbeam acquired the benefits of being a major MasterChef sponsor, arch-rivals Breville received the consolation prize of sponsoring My Kitchen Rules - previously My Restaurant Rules until the producers realised the improved sponsorship opportunities that they could gain from being based in a kitchen – which although not as popular as MasterChef, peaking with 1.4 million viewers, was still quite popular.

Current Impact

The media in relation to cooking is not solely based around MasterChef, or even television. Magazines, featuring recipes that inspire readers to develop their culinary skills, although they have been popular for decades, have also ridden the wave created by MasterChef. Magazines such as Delicious, Donna Hay and Woolworths Australian Good Taste, each boast a readership of close to half a million, with the former two being strongly skewed towards affluent, middle-aged women. Even bigger than these is Super Food Ideas which claims a readership of almost a million, and with a working-class skew.

The trend towards “foodie-ism” is most prevalent amongst the middle and upper classes, making this trend one that is profitable to cater to. MasterChef has generated the importance of premium appliances, and a proportion of consumers for whom cooking and domesticity is becoming an increasingly central part of their lifestyles. This is a lifestyle that consumer appliance manufacturers have, can and should, integrate themselves with, when considering marketing and innovations of their products.

MasterChef is not the only means of promoting a brand, and manufacturers are finally finding effective means by which they can use their online presence to build brand loyalty, largely through providing information to consumers, and becoming a trusted source of such information. Providing recipes is a central part of the Sunbeam website, even to the extent of having a “home economist” known as Angela. Similarly, Vidal Sassoon uses its website to provide information on how customers can style their hair.

Meanwhile, the need to find a recipe in a hurry is driving consumers to websites, such as taste.com.au, with 1.9 million unique browsers in June 2010.

Outlook

Given the strength of the MasterChef brand in 2010, and the growth of cooking magazines, it was only a matter of time before there was a MasterChef magazine, which was launched in 2010. Sunbeam has taken advantage of this through a promotion in which consumers who buy a Sunbeam model that was used on the show – which not surprisingly are premium models - will receive a six-month subscription to the magazine. An instant success, selling 180,000 copies in the first month, over twice the volume that was predicted, demonstrates the strength of the MasterChef brand and the likeliness that it will continue to retain its popularity into the forecast period.

Any hope that Breville may have had, that its sponsorship of My Kitchen Rules might counter the impact of Sunbeam’s sponsorship of MasterChef was probably dashed when Sunbeam gained the sponsorship of My Kitchen Rules for 2011, making it likely that both of Australia’s top cooking shows will be sponsored by the same manufacturer. Although likely to be less of a phenomenon, it is worth noting that Sunbeam is also the sponsor of Junior MasterChef.

Future Impact

If the success of other reality television shows – such as Big Brother and Australian Idol – which have reached similar levels of success is anything to go by, MasterChef will remain popular, and continue to be an influence on Australia until the end of the forecast period, encouraging consumers to improve their culinary skills, and as part of this, upgrade their appliances. Most impacted by this will be food preparation appliances, particularly mixers, with countertop mixers experiencing a constant retail value CAGR of 14% and hand mixers a constant retail value CAGR of 8%. It is also likely to advance the popularity of the Sunbeam brand, particularly if it continues to focus mostly upon the premium end of food preparation appliances.