Electrolux, GE Deal Marks Industry Consolidation

Appliance companies are getting bigger and going global.

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Electrolux's purchase of GE's home appliance division marks a major shift towards consolidation in the home appliance market, both in the U.S. and worldwide.

The deal closed this morning for $3.3 billion—$800 million more than was originally anticipated—and is expected to pass regulatory approval. In addition to potential job cuts, it could send ripple effects throughout the home appliance industry, as Electrolux uses the GE brand to bolster its product offerings and access to new markets and sales channels.

The deal closed this morning for $3.3 billion—$800 million more than was originally anticipated.

Currently, Electrolux and GE are the second and third largest appliance manufacturers in the U.S. by market share, respectively. Even combined, it's likely they would remain smaller than industry leader Whirlpool, and they still face threats from fast-growing Korean brands Samsung and LG.

However, a single entity would be better positioned to fight competitors, especially in a dynamic, worldwide marketplace.

"The appliance industry is a large, growing global business that's not overly capital intensive," Electrolux President and CEO Keith McLoughlin said in a press conference this morning. "However, it is competitively intense."

The combined company harnesses three well-known brands: Electrolux, Frigidaire, and GE.

The combined company harnesses three well-known brands: Electrolux, Frigidaire, and GE. In this morning's press conference, McLoughlin highlighted the strengths of each brand—including the fact that GE is the strongest home appliance brand for consumer consideration.

According to Dinesh Kithany, senior analyst for home appliances at IHS, it will be key for Electrolux to keep the brand values that GE Appliance is best known for.

"The most important element of this deal would be how the licensing agreement would be signed off because, knowing GE, they're very particular about the brand, the company, the employees, and also the consumers," he said.

Electrolux is certainly keeping the brand itself, and repositioning it amidst its own.

"There's now a good architecture and portfolio of brands that would allow us to serve the whole market," McLoughlin told Reviewed.com in an interview.

McLoughlin said that GE's budget brand Hotpoint will be targeted at the opening price point, and Frigidaire will be positioned as the volume seller. GE's brands will sit above Frigidaire but below Electrolux's own brand, which will be the combined company's flagship.

Though the global appliance market is growing—up 4.8 percent from 2013—individual markets continue to recover from the global financial crisis at different paces. That means its also becoming more difficult for manufacturers to compete in a single geographic location. Kithany says it makes sense for manufacturers to consolidate in order to steel themselves against market fluctuations.

Electrolux has been diversifying globally—a strategy similar to Whirlpool, whose recent acquisition of Indesit gives it an even greater presence in Europe.

Including its 48.8 percent stake in Mabe, a Mexican appliance manufacturer which also has a strong presence in Canada, GE Appliances currently has a minimal presence outside of North America. That ties the company's fortunes to consumer demand on a single continent. Electrolux has been diversifying globally, with growing operations in Europe and South America—a strategy similar to Whirlpool, whose recent acquisition of Indesit gives it an even greater presence in Europe.

Purchasing GE helps Electrolux diversify even further in the U.S. For as large as Electrolux is worldwide, and as much overlap as there is between the two companies—including manufacturing and product development—GE dominates in a few key areas where Electrolux struggles.

For instance, high-efficiency top load laundry is where the Frigidaire brand has minimal presence and Electrolux has entirely failed to compete. McLoughlin highlighted the category in the press conference, along with GE's strong position in upscale freestanding and built-in refrigeration.

Additionally, GE is a major player in the U.S. builder market. As housing starts increase, so do builder home appliance sales. GE also has a large sales presence at Home Depot, with lots of floor space to sell its product, while Electrolux floors a lot fewer products there. Electrolux does make many products for Sears' in-house brand Kenmore, but Sears' slipping sales make deals with other retailers more attractive.

GE and Electrolux also compete for a large portion of the market of cooking appliances, but Kithany doesn't see that as a problem. In fact, the two companies seem like a strategic fit when it comes to product as well.

"I think there is a good synergy that could happen in this case. I would say that large cooking appliance is seeing a growth in the home appliance market," he said. "Capacity from GE appliances would help Electrolux."

The combined company is expected to save $300 million annually.

Indeed, in this morning's press conference, Electrolux stressed how the companies complement each other, and seemed to be positioning GE as a mid-tier to mass-premium brand—above Frigidaire but below Electrolux. There could be room for all three brands in the market, as long as all three are positioned separately and marketed appropriately to consumers.

Additionally, Electrolux benefits from GE's recent $1 billion investment in its products, factories, and R&D. GE has a strong logistics and service presence, too, which would help the two companies streamline operations.

The combined company is expected to save $300 million annually by combining sourcing, logistics, and brands.

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