SIC 5722
HOUSEHOLD APPLIANCE STORES



This industry covers establishments primarily engaged in the retail sale of electric and gas refrigerators, stoves, and other household appliances, such as electric irons, percolators, hot plates, sewing machines, and vacuum cleaners. Many such stores also sell radio and television sets. Retail stores operated by public utility companies and primarily engaged in the sale of electric and gas appliances for household use are also classified in this industry.

NAICS Code(s)

443111 (Household Appliance Stores)

Industry Snapshot

According to the U.S. Census Bureau in 2000, there were 29,600 appliance and electronic stores, with 9,800 dedicated solely to the sale of appliances. Despite the weak economy of the early 2000s, the appliance industry showed healthy sales. According to the Commerce Department, retail sales of appliances grew at an annual rate of 7.5 percent during the first nine months of 2002, compared to a 3.9 percent increase in overall retail sales.

At the beginning of the twenty-first century, household appliances were often sold in discount stores, such as Kmart or Wal-Mart, but household appliance superstores like Best Buy and Circuit City were on par with, if not better placed than, discount stores and department stores. Household appliance stores sold everything from washers and dryers to digital satellite systems, from radios to home theater systems, from personal computers to cellular phones, and from audiocassettes and compact discs to videocassettes, DVD players, and electronic accessories.

According to the Consumer Electronics Manufacturing Association (CEMA), electronic appliances and accessories purchasing increased in the late-1990s, especially in the newer product categories. Household appliance superstores continued to deploy newer and slicker marketing strategies to keep up with the increasing competition. Sales of consumer electronics were expected to rise along with many sectors of the retail industry.

Organization and Structure

The appliance industry is a low-growth, relatively mature industry offering acceptable gross margins and relatively low inventory turnover. The latter, combined with the large amount of space required for storage, makes for relatively low competition compared to other sectors of the retail industry. Throughout the mid-to late 1990s, the industry experienced significant consolidation, and this is expected to continue. A number of important players have gone out of business, including Sun Television and Appliances Inc., Newmark and Lewis, Home Center and Federated Group, Crazy Eddie, Fretter, and Highland Superstores. In addition, 40 Silo stores and 110 McDuff/Video Concepts stores owned by Tandy were closed. Many other regional chains faced decreasing profits and sales as a result of competition from larger stores such as Best Buy and Circuit City.

Small stores, which sell only household appliances, were becoming increasingly rare and were being outmuscled by larger chains. The market has shifted toward superstores, which offer a comprehensive range of household wares and home office supplies, in addition to low margin consumer electronics. As in other sectors of the retail industry, there is a movement toward a no-frills warehouse-type format, which allows stores to offer a dominant selection in every category in which they compete, while creating significant cost efficiencies relative to the more traditional formats. The megastore format has the potential to generate a much higher profit per square foot. The large store size creates savings in fixed store costs—including rent, labor, service, and overhead. The idea in a mixed format superstore is to use appliances as a draw into the store. If the store can satisfy customers in what is usually the first household purchase, it can usually retain them for subsequent electronic and personal computer purchases.

In the United States, consumer home appliances and consumer electronics are an important and sizable part of total retail sales. These items together account for about $68.5 billion in sales annually. With consumer electronics, sales are usually renewed on a regular basis by the introduction of new technology that substantially widens the scope of the industry. According to P. J. Muldoon of McDonald and Company Securities, "Over the course of the century, there has been a pattern of at least one 'revolutionary' product per decade: the gramophone (1920s), the radio (1930s), the black-and-white television (1950s), the color television (1960s), the component audio system (1970s), and the video cassette recorder (1980s). There is additional impetus to growth in this retail segment from a steady stream of enhanced forms of existing items (for example the proliferation of improved television formats—stereo, with remote, big screen, etc.). Historically, because of these factors, retail sales of consumer electronics generally grow at above-average rates relative to retail sales and consumption."

Background and Development

The first household appliance store was established in 1827 in Salem Village, Massachusetts, by Amasa Goodyear, according to J. Leander Bishop in the History of American Manufacturers. She sold housewares such as coffee and tea pots, waffle irons, brass andirons, and cast iron gridirons in addition to a range of hardware goods.

The early household appliance stores usually sold a combination of housewares and hardware products, according to Earl Lifshey's The Housewares Story. They took shape as independent units and as departments within large stores. Of the latter, Lifshey writes: "It was the emergence of the department stores in the latter half of the past century that spawned the housewares department as we have come to know it. The conditions and economies of those days encouraged the expansion of housewares departments. Some of the great department stores … had houseware departments of enormous size, owing less to the extensive assortment of items than to the practice of maintaining large stocks of goods on the selling floor. Such refinements as cost accounting and the pressure for getting maximum sales per square foot did not come until much later."

The turning point in the industry took place around the time of the Civil War. During the early and mid-1860s, a number of key developments occurred: the electrification of people's homes; a rise in the standard of living; improvements in transportation systems, particularly the railways; increased capital; the development of plate glass, which made store windows possible; and the rise of retail advertising. The advent of electricity, in particular, revolutionized the household appliance store industry, making possible the invention of the range of items that have become synonymous with the business, such as refrigerators, electric cookers, and vacuum cleaners.

Electricity had been around for a long time, however, before there was a significant demand for household appliances. George H. Jungen, a former vice-president of the Baitinger Electric Co. in New York City, described the situation in an interview with Earl Lifshey in the December 20, 1937, issue of Retailing Home Furnishings : "Electricity was first used in factories and office buildings long before being introduced into the home. Electrical appliances—such as they were at the time—couldn't be readily purchased by interested consumers from dealers simply because there were few or no such dealers around. There were only five firms (in New York City) then handling electrical goods: Stanley & Patterson; Latham; Manhattan Electric; Western Electric; and J. H. Burnell. Most of their business was done on electrical equipment. When people wanted to get an electrical appliance, it was only natural, therefore, that they should think of getting it from the people who furnished them with other electrical supplies." Consequently, many of the larger household appliance stores, such as Lewis & Conger and Hammacher Schlemmer, issued catalogs and mail order services to encourage sales.

As late as 1914, department stores as prominent as Marshall Fields in Chicago were debuting their "household utilities" departments, selling kitchen utensils, laundry requisites, refrigerators, sewing machines, vacuum cleaners, and electrical sundries. The real invasion of household appliances had yet to come. It was only in the 1940s and 1950s that many of the appliances Americans in the early 2000s take for granted became a part of the average American household. Since then, new products have appeared with increasing predictability. In the early 1980s, consumer demand for electronics led to large sales and profit growth; many companies flourished. By the mid-1980s, however, the environment became more competitive, the market for VCRs became saturated, and the recession of the late 1980s slowed overall sales.

In 1993, the overall market for home appliances improved but remained difficult, and competition was expected to remain stiff. P. J. Muldoon stated: "From the better tone of housing markets in 1992, it appears that the trough in this segment has been reached and that demand for consumer durables will rise. The overall industry environment—namely, generally sluggish demand and the declining trend in pricing—continues to call for a strategic orientation toward grabbing more market share. Surviving operators have to properly prepare financially and strategically. Those that survive will be presented with considerable growth opportunities. This potential will be enhanced further in the more distant future when the next blockbuster is introduced."

Despite the rise and proliferation of superstores, a greater number of small stores were in the industry. According to Dun's Survey of American Business 1993, most stores in the industry were small or medium sized. In 1993 there were 14,201 outlets that generated annual sales between $100,000 and $250,000—more than twice as many as in any other sales' range. There were 5,669 small retail outlets that had between $50,000 and $99,000 in sales revenue, and more than 3,000 stores had sales of less than $50,000. There were progressively fewer stores in the higher revenue brackets: 6,351 outlets had sales between $250,000 and $500,000; 4,769 had sales from $500,000 to $1 million; 3,902 had revenues from $1 million to $5 million; and only 620 stores had annual sales in excess of $5 million in 1993.

The industry as a whole experienced sales growth in the first quarter of 1993. In a 1993 survey by the Salomon Brothers of 75 percent of all household appliance stores, 67 percent of stores reported unit sales growth. These figures were significantly higher than those for the third quarter of 1992, when 17 percent of stores reported flat sales and another 17 percent experienced a decline in sales. Moreover, many retailers experienced an upsurge in sales in April and mid-May of 1993. The following leading brands carried by many household appliance stores helped increase retail sales: General Electric, Whirlpool, Maytag, Roper, Hotpoint, Kelvinator, Amana, Tappan, Speed Queen, Frigidaire, KitchenAid, Sharp, and Jenn-Air. According to Russell L. Leavitt,"buyers cited manufacturer promotional activity and the financial position of consumers along with low interest rates as primary factors contributing to the stronger appliance sales."

With regard to inventory levels, the Salomon Brothers report found that 47 percent of household appliance retailers considered their inventory levels to be consistent with demand. Another 42 percent considered their stocks slightly above target levels, and 11 percent of buyers believed inventories were too low. Retailers considered their inventories of laundry, cooking, dishwasher, and microwave supplies as mostly on target, while many stated that their inventories of refrigeration equipment and room air conditioners were often high.

In terms of the range of inventory, the mix of product lines at the retail level were concentrated toward midpriced products in the early to mid-1990s. A greater proportion of stores were stocking lower-priced refrigeration, cooking, and laundry products. According to retailers, premium brand merchandise made up 17 percent of overall appliance sales in the first quarter of 1993. The trend among appliance store retailers was to broaden product range in an attempt to increase market share.

Although personal computers were expected to be one of fastest selling products at household appliance stores through the mid-1990s, toward the end of the decade, high definition TV, consumer electronics, and digital products in all categories gained considerable market share.

Price wars, acquisitions, expansion, and slick marketing strategies were the name of the game in the mid-1990s. Household appliance superstores were carrying practically every type of electronic equipment a home would need. Household appliance stores were becoming a one-stop shop for consumers. Use of better displays, in-store catalogs, and extended service plans were helping lure customers and further boost sales at household appliance stores.

According to HFN, a Salomon Brothers survey found that major appliance retailers expected sales to be flat and inventories to be higher between May 1, 1995 and April 30, 1996. These forecasts were based upon sales for January through April 1995. However, the household appliance stores were ahead of the market figures with their new marketing strategies. Prices increased by approximately 2 percent. Sales softened and promotional activities expanded. Almost 55 percent of retailers reported an increase in appliance sales.

In the mid-1990s major electronics and appliances retailers were showing definite trends of expansion. Montgomery Ward's acquisition of New England based Lech-mere and Circuit City's purchase of 18 former Silo store leases in the Los Angeles area validated this trend. Circuit City plans included growth by 180 stores between January 1994 and January 1997. Minneapolis-based Best Buy Inc. had expanded in the southeastern and western United States. Best Buy introduced seven Concept III stores, the largest stores in this chain, in Los Angeles in the mid-1990s. Best Buy also opened several stores in the Washington, D.C. area, and Cleveland areas for the first time.

Along with the expansion were new marketing strategies and promotions to increase sales. Besides opening new stores in geographically diverse areas, many companies boosted profits through employee training. The willingness of appliance superstores to reinvent themselves through product diversification was established with Best Buy's introduction of gourmet kitchen appliances at its outlets in May 1996. This move also reflected the tough household electronics and appliances market of the mid-1990s.

According to an article in HFN, the appliance industry had prospered despite increased competition: "Notwithstanding the burgeoning of mass merchants with their capacity to slash prices, manufacturers selling directly to consumers, and the growing appeal of Internet shopping, independent electronics and appliance dealers as a whole fared reasonably well during 1997, as reflected by several key performance measures."

Included in those measures was a lowering of wholesale cost due to retailer participation in buying groups, exciting new electronic and technological advancements, and increasing interest in home theater products. Those stores that offered appliances as well as furniture and electronics fared best, typically averaging an 18 percent gain over 1996.

Another factor encouraging the industry was the increase in housing development. The North American Retail Dealers Association (NARDA) reported that it had risen to a 12-year high in 1999. "January '99 housing starts jumped 3.8 percent over the robust numbers posted in December '98. This surge sets a pace for 1999 housing starts to reach 1.8 million." As a result, appliance and electronic sales were expected to remain strong into the next millennium as more consumers would be purchasing new items.

Demographics were also key in the success of this industry. Appliance stores in general target 35-to-64 year olds. With a 35 percent growth rate, this population segment grew faster than any other in the late 1990s.

In 1998, the U.S. appliance market was also seeing a decline in prices. Due to increased importing from China, Japan, South Korea, and Mexico, increased pressure was placed on price. This factor resulted in lower prices for the consumer as American manufacturers were forced to provide quality, innovative products at lower costs to compete with foreign imports.

While many stores such as Best Buy and Circuit City saw gains in 1998, some smaller, regional stores succumbed to the pressure of the rising superstores. Sun Television and Appliance Inc. went bankrupt along with Fretter Inc. and Highland Superstores in the mid-1990s. Rex Stores Corp. saw sales decline in 1998, as did Tops Appliance City Inc. In 1999, though, Rex Stores did see some growth in sales.

In 1998, the industry saw sales of $68.5 billion as consumer demand for appliances remained steady due to the stable economy, consumer confidence, and the increase of new housing developments. The majority of appliance stores were fairly small-scale operations with only a few workers in the early 1990s; however, a continuing trend toward consolidation of the market in the late 1990s led to the leadership of superstores and warehouses in this industry. Although these megastores comprise a minority of the industry's stores, the low prices that they are able to offer due to their economies of scale make competition against them extremely difficult for smaller stores. Due to the success of these retailers, appliance stores tended to diversify their product range. By the late 1990s, most household appliance stores offered a wide range of products—including consumer electronics and office supplies.

Current Conditions

Following the terrorist attacks of September 2001, consumer confidence plunged. A survey of 5,000 U.S. households in October 2001 indicated that 26.8 percent expected to buy a major appliance within the next six months, compared to an average 29.6 percent who planned a major appliance purchase between March and September of 2001. However, by October 2002, the monthly survey indicated a rise in consumer confidence, with 27.9 percent of those polled expecting to buy a major appliance in the following six months.

According to forecasts by the Association of Home Appliance Manufacturers (AHAM) in January 2003, an estimated 67,685 major appliances were shipped in the United States in 2002, with an estimated shipment of 68,746, or 1.4 percent increase, during 2003. Most appliance categories showed low but consistent levels of growth. Portable dishwashers and room air conditions both declined in shipments as in-built units and center air become standardized in new homes. Increased tariffs as well as shortage of key components due to U.S. production slowdowns have caused prices spikes in certain sectors of the major appliance industry. As tariff restrictions are eased and U.S. steel productions speeds up, prices are expected to level out.

Industry Leaders

Of the variety of companies engaged in retailing household appliances, either exclusively or as part of a range of product lines, Best Buy Company Inc. led the industry with sales of $19.6 billion in fiscal year 2002 with sales of $10.8 billion. Home Depot, the nation's largest home improvement chain with total sales of $58.2 billion in fiscal 2002, sells a wide array of goods, including household appliance. Lowe's, Inc. has emerged as the nation's second largest home improvement chain, with 2002 revenues of $26.5 billion, and in 2002 it held an 18 percent share of the home appliance market share.

Sears, with total annual revenues of $41.3 billion, also maintained a large share (39 percent) in the appliance industry. Throughout the late 1990s, the company was attempting to reduce its costs and restructure itself to meet the demands of a changing market. Circuit City Stores, once one of the nation's leading appliance dealers, opted out of the appliance market in the early 2000s to fill their floor space with more business-related goods, including office furniture. Heilig-Meyers Co. also a notable company with sales that reached over $2.4 billion, filed for Chapter 11 bankruptcy in February 2003.

Best Buy, Inc. was the country's largest specialty retailer of brand name major appliances and consumer electronics in 2002 with sales of $19.6 billion. The company attributes its rise to the top to its Concept II, which was introduced in 1989. Before implementing this new sales strategy, Best Buy's stores were much like those of competitors Circuit City and Silo—their sales were largely driven by a highly visible commissioned sales force that pushed high margin goods. Only display items were exhibited on the shop floor, and prices were not necessarily discounted. Concept II takes into account the fact that most shoppers dislike aggressive salespeople, preferring instead a self-service format, a wide selection of stock, and low prices.

F. B. Bernstein of Merrill Lynch Capital Markets explained the strategy fully. "The Concept II prototypes have a no frills warehouse appearance, virtually all the merchandise is displayed on the sales floor, and they adhere to a lowest price policy. They feature fewer brand names than competing stores, but almost all the leading brands are carried; merchandise is displayed by vendor, rather than the more traditional merchandising by price point. They also have far more selling space than traditional consumer electronic retail stores; the additional space is mostly being utilized for expanded assortments of computers."

Concept II had a dramatic effect on the economics of Best Buy's business. Sales increased dramatically, while gross margins and store expenses were reduced. The net effect of these changes was improved profitability. Concept II eliminated commissioned salespeople and reduced the overall number of salespeople in the store. With the success of its Concept II stores, Best Buy established a new marketing strategy with the Concept III stores in the mid-1990's. These stores, which were similar to the Concept II stores, were the largest stores in the chain. Concept IV stores were introduced in 1998. These stores were 45,000 square feet dedicated to digital displays, merchandise grouping such as Home Theater and Digital Imaging, and superior customer service. With $1.4 million in net income—an 87 percent increase over 2001—Best Buy employed more than 289,000 workers in 2002.

Workforce

According to the U.S. Department of Labor, Bureau of Labor Statistics, there were 73,360 employed in the appliance store sector in 2001, a large percentage of whom were part-time sales associates. All sales-related occupations totaled 34,990, or nearly 48 percent, of the entire workforce. The mean annual salary for a sales associate was $26,440; managers and supervisors earned a mean annual salary of $42,750; general and operational managers earned a mean annual salary of $57,670; and chief executives earned a mean annual salary of $85,640.

Research and Technology

Like all sectors of the retail industry, household appliance stores have been strongly impacted by new technologies, particularly computerization, the Internet, and advanced electronics in the late 1990s. Computerization revolutionized the control of inventory flow and the ordering of stock and allowed more stores to move to a justin-time system of delivery. Management information systems have made information collection and analysis faster and more accurate. Research has focused on new management techniques to keep up with the fluctuating market.

Pricing continued to be studied especially closely in the late 1990s, and an increasing number of industry retailers switched from promotional sales to every day low pricing (EDLP). Standard and Poor's Industry Surveys stated: "For retailers, the benefits of an EDLP strategy versus a high/low strategy can be significant. Most important are reduced costs: advertising outlays for sales are eliminated, a more even flow of merchandise improves inventory management, and labor costs are reduced since prices no longer need to be marked down. Moreover, the equation works both ways: lower costs can be translated into lower price." Most of the bigger chains have undertaken detailed studies of their business and have sought ways to reduce costs, increase efficiency and productivity, control inventory, and rationalize operations.

Another change in the late 1990s was the advent of online retail shopping. While commodities such as books, CDs, and apparel were much easier to sell online, the appliance industry has not backed down from offering products online. This industry is expected to see solid growth in Internet sales by 2001. Best Buy and Circuit City offered some appliances online in 1999. The National Retail Federation expected that more than 40 million households would be shopping online by 2003.

Increased technology in the appliances themselves is also expected to have an impact on this industry. Electronics are changing how many basic appliances work. In an HFN article, Ron Kerber—Whirlpool Corp.'s executive vice president and chief technology officer—stated that electronics are "going to be a huge impact on this business. They will control functionality; they will add functionality." Sales are expected to rise with the introduction of such innovations as advanced cooking controls that could time the start and stop of cooking, either in an oven or microwave; advances in refrigeration, dishwashers, and clothes washers; and new products for home dry cleaning.

Further Reading

Beatty, Gary. "The Laptop Refrigerator: White Goods Increasingly Will Depend on Advanced Electronic Functions." HFN The Weekly Newspaper for the Home Furnishing Network, 30 August 1999.

Bernstein, F. B. Best Buy, Inc. Company Report. New York: Merrill Lynch Capital Markets, 22 June 1993.

Best Buy Company Information, 2003. Available from http://www.bestbuy.com .

Delano, Daryl. "Year Ahead Looks Positive (Sort Of)." Appliance Manufacturer, January 2003, 50-59.

Hoover Company Profiles. Hoover's, Inc., 2003. Available from http://www.hoovers.com .

National Retail Federation Home Page, April 2003. Available from http://www.nrf.com .

North American Retail Dealers Association Home Page, April 2003. Available from http://www.narda.com .

Simpson, David. "Exceptions to the Rule." Appliance, January 2003, 34-39.

U.S. Department of Labor, Bureau of Labor Statistics. 2001 National Industry-Specific Occupational Employment and Wage Estimates, 2001. Available from http://www.bls.gov .



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