Electrolux applies emerging market lessons to wider business

December 13, 2013 1:00 pm

Electrolux applies emerging market lessons to wider business

By Richard Milne in Stockholm

Christmas shoppers in Stockholm’s upmarket NK department store have a chance this year to show just how much of a dedicated foodie they are: Electrolux is selling a stand mixer for SKr15,900 ($2,400) there. Handmade in France, the mixer is a reflection of the Swedish appliance company’s presence in professional kitchens: Electrolux equipment is found in half of Europe’s Michelin-starred restaurants, according to chief executive Keith McLoughlin.But perhaps a more important product for Electrolux is a powerful cooker ventilation hood that is on display at its headquarters just outside Stockholm’s city centre inSweden.

However, it is not for western shoppers. Instead it is designed for China, to cope with heavy wok cooking, as part of a kitchen that includes a dish steriliser and a fridge with sparkling white doors but no handles (Mr McLoughlin says this is because they are often placed in living rooms).

The hood is a feature that could soon be incorporated in western kitchens as part of the third way that companies such as Electrolux are now viewing emerging markets. Mr McLoughlin explains that at first products were dumbed down to cater for such countries. The second stage saw products being designed specifically for the likes of China or India.

Now, in the latest development, Electrolux is learning from the emerging markets and applying it to the rest of its business. “It starts to flow back, things that can be redeployed to other geographies,” Mr McLoughlin says.

It is part of the American-born chief executive’s drive to move Electrolux away from a decade of restructuring towards a future more based on growth and increased profitability.

Five years ago, almost 90 per cent of its business was in mature western economies. Now it is just 65 to 70 per cent and that is due to drop to 50 per cent by 2017-18. In Brazil, a market where the company was not present a decade ago, Electrolux is now market leader with 30 per cent.

Mr McLoughlin stresses how important local knowledge is in the appliance business, citing the Brazilian craze of buying washing machines for Mother’s day and Canadians’ desire for lots of plugs in the kitchen – for example to make tea – something that is less necessary in the neighbouring US.

At the same time as it is pushing into emerging markets, the Swedish group has started to expand its product range, focusing not just on big appliances such as washing machines and cookers, but also smaller ones such as coffee machines and blenders.

Mr McLoughlin, chief executive since the start of 2011, says Electrolux sees opportunities in ventilation and air and water purification as well.

At the back of his mind is the desire to change how Electrolux is perceived by investors. Most class it as a manufacturer of goods rather than a consumer company, looking at its many factories, which after a decade of almost continual restructuring, have moved in large part from developed to developing countries.

Mr McLoughlin says that throughout those 10 years Electrolux has maintained its profitability and ability to generate cash, producing consistent total shareholder returns of 15 per cent a year. “Very little of that 15 per cent has come from growth or margin expansion. [I said to the board] what if we continue to have that organisational capability to crush out cash and we start investing in growth?” he says.

The chief executive says the early results are promising: Electrolux has recorded eight consecutive quarters of revenue growth above its target of 4 per cent while gross margins have improved by 1 percentage point in a year.

But investors still need persuading: the shares are down 11 per cent over the past 12 months, against rises of more than 10 per cent for the Stockholm market and Swedish consumer discretionary companies.

At first products were dumbed down to cater for such countries. The second stage saw products being designed specifically for the likes of China or India. Now, in the latest development, Electrolux is learning from the emerging markets and applying it to the rest of its business.

Mr McLoughlin wants to increase investment in research and development, lift Electrolux’s fragmented brand image, especially in Europe, and boost its margins. “If we do all three, analysts can start viewing us as a consumer company,” he says.

The pricey stand mixer is part of that effort to boost its brand. The Swedish group is trying to emphasise Electrolux as a premium brand, with other labels – Zanussi in the UK, Westinghouse in Australia and Frigidaire in the US – being positioned as cheaper.

Another big push has been on modularisation, or “globalising the 80 per cent behind the hinges”, as Mr McLoughlin puts it. Making appliances in standard sizes means components – such as bigger or smaller air compressors for fridges – can be incorporated in the same basic design.

He sees big changes coming to appliances soon to make them “smart, green and connected”. For example, washing machines could whirr into operation at the cheapest times for energy consumption, while remote diagnostics could allow engineers to fix a dishwasher without having to visit the consumer. Software could enable a tender rack of lamb to be cooked according to a professional cook’s instructions.

Mr McLoughlin adds: “There is certainly a trend globally to more interest in food . . . and the appliances have to stand out too.”