Domestic Electrical Appliances in Argentina

Executive Summary

Domestic Disputes and Global Credit Crunch Slow Sales

The retail sales of domestic electrical appliances in Argentina experienced a slowdown in both volume and current value growth in 2008. Labour unrest in both the agricultural and manufacturing sectors affected consumer confidence in the first half, while the fallout from the international financial crisis adversely affected the sales of durable goods. In the second half of 2008, negative international conditions increased interest rates in consumer credit lines, marking the end of the economic boom that started in 2002.

Reputation and Overall Experience Benefits Multinational Players

For nearly six years, the devaluation of the Argentinian currency fed a growing consumer preference for private label products. To counteract the trend, multinational players, such as Philips Argentina SA, launched products with simpler designs that still maintained superior functionality, quality and durability at comparable prices. The strategy of the multinationals was based on stressing their reputation for quality products as a way to lure dissatisfied, low- and middle-income customers away from private label products.

Energy Efficiency Is Gaining Popularity

The government's decision in 2008 to establish two rates for energy tariffs based on consumption forced consumers to more seriously consider the energy efficiency of their household appliances. Consumers who used less than 1,000kW per two-month period, saw a 20% increase in energy tariffs, while consumers who used more than 1,000kW per two-month period were subjected to a substantial 500% increase in energy tariffs. The latter group constituted approximately one third of the households in Argentina. As a result, manufacturers of domestic electrical appliances, especially automatic washing machines, automatic tumble dryers, air conditioners and refrigerators, began to differentiate their products through energy-use labelling to guide the decision making of middle- and higher-income consumers.

Hypermarkets Gaining Share in Retail Sales of Domestic Electrical Appliances

Hypermarkets continued to steal volume share of domestic electrical appliance from independent electrical goods retailers. At the same time, major electrical goods retailers (multiples), like the major chains, Fravega and Red Megatone, remained the dominant distribution channel with over half of retail volume sales in 2008. Hypermarkets benefited from its diverse product offering and convenient shopping format, while electrical goods retailers, independents and multiples, were viewed as knowledgeable and highly focused on customer support.

Slower Growth in Sales Expected

In view of the expected further deterioration of economic activity, retail sales of domestic electrical appliances are anticipated to see relatively stagnant growth in volume terms from 2008-2013, with a marked sales contraction in large kitchen appliances. Purchasing power is not expected to increase sharply after 2008, and as a result sales in all categories of domestic electrical appliances will come under severe pressure.

Key Trends and Developments

the Government Seeks To Maintain Economic Growth and Consumer Spending

As a result of the decline in Argentinian economic growth due to high inflation rates and the abrupt decline of commodities prices in the last six months of 2008, consumer spending for durable goods began to drop. At the same time, consumer confidence plummeted as disposable income fell and Argentinian consumers further restricted their spending.

To stabilise the economy, the national government announced in November and December 2008 the launch of a series of credit plans with subsidised interest rates. The intent was to spur consumer spending, promote national production in car manufacturing, domestic electrical appliances and textiles and maintain economic growth.

Current impact

Retail sales of domestic electrical appliances, particularly refrigerators, benefited as a result of these government actions. The plan, renovación de heladeras (refrigerators renewal), offered by the government with the association of major electrical goods retailers (like Garbarino and Red Megatone) and hypermarkets (Jumbo and Carrefour), gave consumers the opportunity to trade their old refrigerators for new refrigerators produced locally, with a 33% discount, and a 12-installment, zero-interest purchase plan. According to official sources, this government-backed plan accounted for 10-20% of the retail volume sales of refrigerators in December 2008, with many major retailers selling out of refrigerators as a consequence.

Middle-income and low-income workers who had older appliances took advantage of this opportunity to purchase a new refrigerator through the leading retailers such as Fravega SAICF and Red Megatone SA. Consumers were lured by retailers that offered discounts for the purchase of a combination of products, such as microwaves or small kitchen appliances, in order to promote the demand for complementary categories.

Still, volume sales of large kitchen appliances declined for the first time since the Argentinian peso crisis in 2002. The government plan, although it helped stave off a greater decline, was not sufficient to boost the retail sales growth of large kitchen appliances.

Outlook

It appears that the Argentinian economy has entered a downward spiral, which is likely to negatively affect local retailing in 2009-2010. As a result, the largest players in durable goods, such as Fiat Argentina SA (an automaker), and Whirlpool Argentina SA, forecast that without government intervention, Argentina will suffer a one third loss in volume sales of cars, large kitchen appliances and consumer electronics in 2009-2010. For that reason the government took a proactive role by announcing new credit plans to stimulate spending and prevent further damage to the economy. With this intervention, it is possible that retail volume sales of domestic electrical appliances will only decline by 2% in 2009.

Future impact

Local manufacturers anticipate that the government will launch low-interest, instalment purchasing plans similar to the one for refrigerators, for the replacement of home laundry appliances and large cooking appliances with new, locally-manufactured items in 2009-2010. It is likely that consumers will embrace these promotions as an opportunity to replace their large kitchen appliances at attractive terms. Still, these measures are not expected to stave off the predicted decline in retail volume sales of large kitchen appliances through 2010, but will likely prevent a more severe contraction. The sustainability of such measures to promote national production is debatable, but government action may be able to sustain consumer spending to a certain extent in the short term.

Several multinational companies will not be able to participate in these promotions since they do not manufacture their products locally. As a result, many may decide to open or reopen manufacturing sites in Argentina, or enter partnerships with local manufacturers. Companies with local manufacturing capabilities are likely to see the most benefit from these programs. For example, Frimetal SA is eligible to participate because of its locally-manufactured refrigerators and will likely gain volume share, while BSH Electrodomésticos Argentina SA and Whirlpool Argentina SA will suffer as their refrigerators are sourced from Brazil and are therefore, ineligible.

Unionised Workers See Disposable Income Rise Faster Than Professionals

The Argentinian economy started to show the first signs of slowing growth in the second quarter of 2008. As a consequence of high inflation rates and protests from the agricultural sector, the disposable income of unionised workers, who are largely the lower-income wage earners, increased at a higher rate compared to salaries of professional employees. As a result of full employment in some economic sectors, including manufacturing, agri-business and utilities, management has little bargaining power when confronted with demands from the unions that have the support of the national government.

According to INDEC (Instituto Nacional de Estadística y Censo – National Statistical and Census Institute) the average salary in Argentina increased 21% in 2008. While employees of multinational companies received on average but a single digit increase in 2008, unionised workers saw nearly a 30% increase in wages, with teachers unions obtaining a 40% increase, steel workers with nearly a 30% increase and restaurant employees achieving a 31% salary increase.

Current impact

The rising salaries of low-income workers had a considerable positive effect on retail sales of domestic electrical appliances in Argentina. More consumers could afford to purchase small electrical appliances and more had access to the credit promotions offered by electrical goods retailers, such as Fravega or Garbarino. These included 12-month instalment loans designed for the purchase of large kitchen appliances, as well as promotions by local banks offering special, double-digit discounts for appliances purchased with debit cards or through a short-term (usually six-month) instalment plan. BBVA Banco Frances SA teamed with Fravega SAICF to offer such a plan. While consumers had previously enjoyed zero-instalment plans for 3-6 months prior to the economic downturn in the second half of 2008, retailers continued to offer instalment plans of up to 36 months for large appliances, but with an interest rate that could exceed 40% per year.

In contrast, non-unionised professional workers, who suffered a reduction in their disposable income in constant value terms, opted to restrict spending on domestic electrical appliances and traded down to lower value models. As a result, large kitchen appliances posted a stable performance in constant unit price terms in 2008, for the first time since 2002. This was also true for food preparation appliances, small cooking appliances, vacuum cleaners, irons and personal care appliances.

Outlook

The disposable income increase of unionised workers is expected to outpace that for professional workers in the near future. Legislative elections are scheduled for the second half of 2009 and the government requires union support in order to win them. Although the US credit crisis is likely to have a major negative impact on export industries like car manufacturing and some union demands will be scaled back in order to avoid employment cuts, the government will try to subsidise the impacted companies in order to avoid massive strikes or union protests over stagnant wages.

Future impact

Given the higher purchasing power of lower-wage workers, domestic electrical appliances is likely see a reduction in unit prices in constant value terms in 2009-2010 as manufacturers target sales towards these workers, seeking greater household penetration. Consequently, electrical goods retailers will likely continue to increase their number of outlets, with openings in low-to-middle-income neighbourhoods, as a way to increase their proximity. Supermarkets and hard discounters are also expected to expand their offering of domestic electrical appliances to build on this demand and spur sales.

Local manufacturers are likely to benefit the most from this trend as a result of having the highest representation of economy products in their portfolios, the highest brand awareness among low-income customers and the widest distribution in low-income neighbourhoods since their products are widely available through independent electrical goods retailers.

Increase in Energy Tariffs Makes Consumers More Energy Conscious

The government's decision in 2008 to institute a usage-based rate schedule for energy tariffs forced consumers to seriously consider the energy efficiency of their household appliances. Consumers who used less than 1,000kW per 2-month period saw a 20% rise in energy tariffs, while consumers of more than 1,000kW per 2-month period suffered a 500% rise in energy tariffs. Manufacturers of domestic electrical appliances, especially energy-consumptive appliances such as washing machines, tumble driers, air conditioners and refrigerators, were motivated to clearly label their products to indicate their energy efficiency in an attempt to lure middle- and higher-income consumers.

In addition, more Argentinian consumers are responding to the international trend of purchasing eco-friendly appliances and adopting more environmentally-sustainable lifestyles. Manufacturers took note of this, especially among the middle- and high-income customers, and responded by offering products with an "A" (extra-energy-saving) rating. These products included energy-saving refrigerators and washing machines with automatic load detection that adjusts how much water is used, as illustrated by Ariston Aqualis washing machines. These energy and resource conservation facts were then used as promotional features in leaflets and labels to emphasise the potential for long-term financial savings and demonstrate corporate responsibility.

Current impact

The main impact of green technology is at the marketing level, as illustrated by multinational companies like Tecno Aire SA with its Electra air conditioners, Jose M Alladio e Hijos SA's home laundry appliances and Argentron SA, which touted its products' efficiency in its advertising campaigns. Most of the sales of these products continue to be attributable to higher-income consumers who embrace green technology as a result of identifying with and adopting North American and European trends.

However, the government's new energy policies had a significant effect on the one third of all Argentinian households that regularly consumed more than 1,000kW every two months. There was now a strong monetary incentive for these consumers to begin to replace their inefficient appliances with new appliances that offer energy-saving features, especially since these newer models usually paid for themselves in saved energy costs within a year. Moreover, consumers showed more interest in smaller and more efficient appliances, forsaking the higher volume models of large kitchen appliances. In general, the multinationals benefited the most from these trends as their products featured the latest energy-saving technological innovations, such as the Indesit refrigerators, which use only one third the energy of a typical, domestically-produced refrigerator, or the Ariston Aqualis automatic washing machines, which use up to 40% less water than other models.

Outlook

Due to the expected rise in energy costs as local prices are adjusted to reflect international levels in 2009-2010, energy conservation will assume even greater importance in the decision-making process of consumers purchasing most large domestic electrical appliances. In anticipation of this trend, several retailers like Carrefour and Garbarino are labelling their large kitchen appliances with information on energy consumption and the expected yearly operating costs to promote the consumption of premium products. Although these products may be more expensive to purchase initially, they offer consumers a lower operating cost over the life of the appliance.

Future impact

Due to the government's decision to increase energy prices in 2009-2010, manufacturers are likely to begin campaigns to educate consumers of the benefits of appliances rated in the "A" energy class. The publishing of operating costs for appliances is expected to be an effective marketing tool to lure consumers. It is also likely that the government will implement an energy rebate scheme, which will pay back the saved energy costs to the consumer as a way to spur demand.

For domestic electrical appliances that have large energy demands, such as large kitchen appliances and air conditioners and heating appliances that run for an extended period of time, the multinationals will have a clear edge. Companies like BSH Electrodomésticos Argentina SA, Tecno Aire SA, Argentron SA and Whirlpool Argentina SA have access to the latest innovations in energy-saving technology, which is far more efficient than the technology used by most of the Argentinian manufacturers.

Local manufacturers that have not yet introduced appliances in the best or "A" energy class will be forced to modernise to keep up with the competition in the mid-price and premium segments. The leading local manufacturers, including Jose M Alladio e Hijos SA and Frimetal SA, will undoubtedly invest heavily in improving the energy-saving aspects of their products to preserve their market share.

Women Demand More Convenience As Workloads Get Heavier

One of the most significant effects of the Argentinian economic development in the 1990s was the influx into the workforce of women, who, replete with university degrees, competed for the first time with men for professional and executive jobs. After the devaluation crisis, these women maintained significant disposable income and demanded products that were more specifically orientated to their increasingly busy lifestyles.

Studies published by Alto Palermo SA, the owner of an important shopping mall in Argentina, characterised the typical Argentinian female professional in 2007 as a middle-to-high-income individual, with significant time constraints due to the demands of her career and the need to continue doing most of the household chores.

Current impact

In Argentina, women are the main decision makers when purchasing domestic electrical appliances, with some industry sources estimating that more than 70% of purchases are decided by women. As a result, the multinationals began to focus their advertising on product features that women would appreciate. In 2007-2008, manufacturers touted home laundry appliances that saved time and refrigerators that maintained food in better condition longer, rather than focusing on traditional features like capacity and frost-free technology. For example, Philips launched "sense and simplicity" TV spots that focused on specific product advantages that would appeal to women, such as kettles that maintain the water at hot temperatures longer, rather than technological features, such as triple filtering systems. As another example, the Ariston automatic washer dryer was positioned as a timesaving appliance, which gave women more free time for other tasks. This contrasted sharply with the traditional advertising employed by national manufacturers that promoted their home laundry appliances with the slogan "Tu mundo" ("Your world"), which underscored the assumption that household chores were still women's work.

Outlook

It is expected that the female presence in the workforce is likely to increase throughout the forecast period. Female students now represent the largest proportion of the enrolment in Argentinian universities, and both multinational and local firms, like IBM Argentina SA, The Procter & Gamble Co and Nobleza Piccardo SA, are implementing special programmes to help women obtain executive positions in keeping with the government mandate to promote labour diversity. Executive women face increasing pressure to limit time away from work for family and maternity leave, to insure their continued professional development. It is likely that women will have even less time to allocate to household chores as more enter the professional ranks.

Future impact

As a result of this trend, manufacturers of domestic electrical appliances will modify the traditional marketing strategy, which focuses on products orientated towards men and housewives. A new and different message will be needed in order to be an effective player in this new reality.

Domestic electrical appliances is likely to be positively impacted by the entry of more women into the workforce and executive positions, resulting in demand for modern appliances with a focus on time savings and simple operations. Marketing strategies that play to the products' advantages with respect to these factors are likely to be more successful with the important target group of professional women than strategies that focus solely on the products' technological features. Multinational companies, like Philips Argentina SA and Whirlpool Argentina SA, will certainly benefit from global advertising campaigns emphasising advantages that women will appreciate in appliances, in contrast to local manufacturers, like Frimetal SA and Jose M Alladio e Hijos SA, which may continue to rely on a more traditional advertising message to market their products.

Gourmet Food Trend Spurs Sales of Premium Appliances To High-income Customers

Sales of premium domestic electrical appliances were lacklustre in the review period since these products are typically not associated with enjoyment and status, the attributes that attract consumers to premium products. Most high-income consumers, the target group for premium products, employ a maid to help with household duties and, therefore, do not regularly use these appliances. Furthermore, much of the disposable income held by consumers was spent on premium consumer electronics, products more closely associated with status and leisure. Until 2006-2007, Argentinian consumers invested far more heavily in electronics in lieu of new large kitchen appliances and other domestic electrical appliances.

However this situation started to change in 2008, as high-income customers began to increasingly appreciate gourmet food, like Italian pasta, Norwegian fish and gourmet coffee, eaten at home as opposed to restaurants. In addition, more high-income families left the cities to move into gated communities in the suburbs to escape rising crime. Suburbs typically do not have as many restaurants as urban locations and residents of gated communities were less likely to visit restaurants at night due to the perceived lack of safety in coming and going.

Current impact

As Argentinians are increasingly attracted to and embrace gourmet food prepared in the home, major players like Whirlpool Argentina SA, Nesspreso SA and Argentron SA with its Ariston brand, worked to broaden their distribution networks and launch new products to appeal to these high-income consumers. Manufacturers adopted different strategies to attract their local audience. For example, Nesspreso SA opened a coffee boutique in the high-income, Recoleta neighbourhood to promote its coffee pod machines and partnered with upscale shopping centres, like Las Palmas del Pilar SA, to secure booths to sell coffee pods and supplies. On the other hand, Argentron increased its presence by using construction specialists that cater to high-income communities to promote its line of cookers and automatic washing machines. Whirlpool Argentina tried to focus on electrical goods retailers in premium locations to reach the high-income segment of consumers.

These companies also launched new product lines, like Whirlpool Argentina's 6th Sense cooking system. This introduction was priced more than twice that of the standard microwave models, but offered similar features and cooked food in less than half the time required by standard appliances. The Ariston brand hosted new models of cookers, ovens, hobs and hoods with special features, like dual fuel capacity, that were only available in premium stores. Nesspreso SA launched a new line of smaller coffee machines with coffee pods that was ideally suited for the smaller, modern kitchen.

Outlook

The trend towards upgraded large kitchen appliances is likely to continue in the long term, especially as restaurant prices are expected to increase in constant value terms in 2009-2010. Meanwhile, consumer confidence and spending are likely to remain limited due to the depressed economic climate in 2009. Industry players expect that construction of higher-end homes will see healthy growth since consumers generally view real estate as a secure savings vehicle. Many Argentinians developed a complete distrust of the financial system, due to recurrent asset confiscation, and prefer property as a means of building wealth. Another positive factor for retail sales of large kitchen appliances is the healthy lifestyle trend embraced by higher-income consumers who are willing to prepare more healthful food at home in lieu of eating processed food.

Future impact

As a consequence of the growing popularity of gourmet food products among higher-income consumers, categories of large kitchen appliances dominated by premium products, including ovens and built-in hobs, are likely to see rising retail volume and constant value sales growth in 2009. On the other hand, the retail sales growth of appliances targeting middle-income consumers is likely to decline.

Multinational brands are expected to benefit the most from this trend because these are the brands that are best known to higher-income individuals, by virtue of their broad range of premium products and their exclusive designs. Consequently, companies like Argentron SA, LG Electronics Argentina SA and Whirlpool Argentina SA will gain share in the premium segment of domestic electrical appliances at the expense of the local players.

To more effectively and directly promote the advantages of their premium product lines, some multinationals are expected to open their own dedicated outlets. Sony Corp and Philips Consumer Electronics already took this step to promote sales of their consumer electronic products in Argentina.