Royal Philips Electronics NV (PHIA) Chief Executive Officer Frans van Houten said the consumer unit’s first double-digit sales gain in seven quarters shows that his strategy of adapting products to local needs is working.
A soupmaker introduced in Europe in the first quarter and originally developed as a soy-milk maker in China was an “instant success,” the CEO said yesterday when the Amsterdam- based company reported first-quarter results. While shares dropped 5.2 percent on sluggish lighting and health-care sales, he said the “SoupMaker” is an example of how he’ll cut costs and boost revenue in all parts of the company.
“What consumer lifestyle is now showing is actually the precedent of what we can also do in the rest of Philips,” the executive, who took over in April 2011, said on a conference call. The company said another example for the successful local adaption of a product includes a three-headed rotary shaver developed in the Netherlands that was turned into a two-headed shaver for Asian men with thinner facial hair.
Van Houten told his engineers to focus Philips’s manufacturing strategy on specific needs in local markets after he concluded the company lacked speed and lost sight of customers’ wishes. Philips said yesterday that profitability excluding restructuring costs at the consumer unit, which also makes rice cookers, coffee machines and electronic toothbrushes, widened to 9.9 percent in the first quarter from 6.7 percent a year ago.
“If they could pull off the same thing at the health-care and lighting businesses, similar to what they did in consumer lifestyle, Philips would have some very satisfied investors,” Patrick Beijersbergen, who represents shareholder group VEB, said by phone.
Philips yesterday reported a first-quarter profit that missed analysts’ estimates. Van Houten said the current economic slowdown is making it harder to transform the company.
“The world is an uncertain place right now,” he said in an interview with Bloomberg Television. U.S. hospitals are holding back on spending amid the country’s health-care reform, and in the lighting business, sales were hit as European construction companies cut orders and investment, he said.
Even after yesterday’s decline, Philips shares have risen 3.2 percent this year, while the Bloomberg EMEA Electronics Index dropped 1.3 percent. Siemens, which competes with Philips in lighting and health-care, lost 7.1 percent while General Electric (GE) rose 1.7 percent. SEB SA (SK), the French company that competes with Philips in household appliances, declined 7.3 percent.
Seeking Higher Margins
As part of his push into higher-margin areas such as lighting products, health-care equipment and wellness offerings, Van Houten also sold consumer assets such as the DVD and music- player businesses for which the company was known in the past.
Van Houten’s overhaul aims to save 1.1 billion euros in overhead costs and eliminate 6,700 jobs. Van Houten said yesterday he also started a new program in the first quarter to save another 1 billion euros between 2014 and 2016 by cutting material expenditures and simplifying manufacturing processes.
“Customizing the core technology is what we’re doing now,” Antonio Hidalgo, Philips’ chief innovation officer, said in a March 22 interview. “Once you get the technology right, you just have to add local accessories.”
At the lighting unit, the push into the light-emitting diodes requires a knowledge of clients’ needs, Rogier van der Heide, chief design officer of Philips Lighting, said in an interview this month.
“You cannot just deliver a pile of lamps at the customer anymore,” he said. “You have to understand what they want.” Philips predicts 45 percent of the general lighting market will come from LEDs by 2015 as consumers and companies seek to cut energy expenditure.
Especially in emerging markets such as Asia, Russia and Africa, product adjustments are crucial as local consumers often have lower budgets, according to a February research note by Roland Berger Strategy Consultants.
Philips’ first-quarter sales dropped 0.9 percent to 5.26 billion euros, missing the 5.48 billion-euro analyst estimate. On a comparable basis, health-care sales declined 1 percent while lighting revenue were little changed. Sales at the consumer business surged 10 percent.
“The consumer lifestyle unit results were very strong. What you see is the initiatives Van Houten are taking are kicking in,” said Jos Versteeg, an Amsterdam-based analyst at Theodoor Gilissen Bankiers.
To better analyze and target consumers, Philips started four regional product manufacturing hubs in China, India, Europe and Brazil. The company also bought local kitchen appliances makers Povos in China and Preethi in India.
William Mackie, a London-based analyst at Berenberg, said van Houten had to move away from Philips’s old approach of “sitting in Amsterdam developing a slow cooker, or sitting in Eindhoven developing a light,” adding that the new approach should help to develop better products for less money.
“Philips spent 1.8 billion euros on research and development last year and they need to use that in the most efficient way,” he said. “This is about getting the best return for your expenses.”
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