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Electrolux, the world’s second largest major appliances manufacturer, announced on June 13th its intention to increase the prices of its appliances by 5-7% across Europe. The price hike is due to come in effect from October 1st 2011, in response to the rising cost of raw materials.
Electrolux’s move comes only months after it announced its plan to raise prices in North America. The Swedish company however is not the only appliances manufacturer suffering the increase in raw material cost, especially in steel, plastic and copper. Early this year Whirlpool was the first manufacturer to put up its prices in North America and it is probable that the impact of its rocketing cost base will soon spread into Europe too.
The pricing decision taken by Whirlpool and Electrolux is very likely to be followed by other manufacturers in Europe, especially those with a consistent share of production still located in high labour cost countries, and therefore more susceptible to see their profit eroded.
The increases will apply to the manufacturer’s selling price (MSP) and it is yet to be seen whether already squeezed retailers will be prepared to pass it on to price conscious consumers. Nevertheless, should all major appliances manufacturers apply a similar increase in an attempt to protect margins, it will be difficult for retailers to absorb the increase entirely.
So what would be the impact of a broad increase in retail prices in major appliances across Western Europe? Euromonitor International’s proprietary econometric scenario planning model suggests a very gloomy outcome.
Assuming that on average a 5% retail price increase would effectively be passed to consumers in 2012 and assuming that this increase would be implemented across all retail channels, volume sales of major appliances would experience a double dip, falling by 1%, and reversing the gradual upward trajectory the market has sustained since 2009.
This of course is just one hypothetical scenario, but one that confirms very clearly the fragility of the recovery in Western Europe. What is more, our analysis in this revised forecast uses the most current macro and socio-economic indicators. What would it happen if the EU’s bail-out strategy failed to rescue Europe’s peripheral economies?
In Western Europe competition within the consumer appliances market has become increasingly fierce, with promotions and price cuts used as the main instrument to generate volume sales in a time of tepid and uneven demand. Consumers are struggling, squeezed between government austerity measures, rising inflation and tighter access to credit. In this context, should for example South Korean manufacturers Samsung and LG hold their existing price levels, Whirlpool and Electrolux would risk seeing their volume shares eroded. Nevertheless it appears that even for the South Koreans it will be difficult to hold on to the existing price tags too much longer.