Maytag's Big Mess at Hoover

Despite losing sales to cheap imports, CEO Ralph Hake swears he can get the vacuum unit back on its feet. Others aren't so sure

By Michael Arndt

The giant sucking sound investors have been hearing at Maytag is its Hoover floor-care subsidiary vacuuming away profits. Chairman and CEO Ralph F. Hake has his repair kit out, but he's taking longer than investors want.

For years, Hoover had been a small but powerful unit. Thanks to its well-known name and top-notch products, Hoover boasted steadily rising sales and income, which was just what Hake needed. New to Maytag (MYG ) in mid-2001, Hake had his hands full with its core business, major household appliances. The problem: Under his predecessors, costs had ballooned while quality had slipped.

Hake, now 54, also had to get up to speed himself. Granted, he had spent 12 years in finance at Whirlpool (WHR ), leaving in 1999. But right before moving to Newton (Iowa)-based Maytag, he had been chief financial officer at Fluor (FLR ), an engineering and construction outfit.


  While Hake was busy fixing Maytag's big-ticket appliance operations, the vacuum-cleaner business began to develop problems. For three years, competitors have been shipping cheap products from China. Hoovers with price tags of $200 and higher have been piling up in retailers' storerooms while consumers cart off imports priced at $79 or less. These low-end models already have 40% of the market, and Hake complains that people have begun treating vacuum cleaners as throw-away commodities. Welcome to the global economy.

Many analysts seem fed up with Maytag's inability to respond to the changing competitive environment. Michael T. Regan of Credit Suisse First Boston chided Hake about Hoover during his third-quarter conference call, particularly for chasing after high-end consumers when price tags in the floor-care market are rapidly deflating. "We have not performed up to the standard we had hoped," Hake says. "That's pretty widely known." (Maytag reports fourth-quarter results on Jan. 29.)

Like most analysts who cover the stock, Regan has a neutral rating on Maytag, which closed Jan. 5 at $28.46 a share. That's virtually unchanged over the last year, even though the broader market produced gains of 25% on average in 2003.

Hake has a three-part plan, unveiled last spring, for getting Hoover back on track. He moved more production to low-wage factories in Mexico, China, and South Korea -- a move rivals had done earlier. And he began chopping jobs in the States while installing new managers.


  Hoover -- begun in 1907 and a Maytag subsidiary since 1989 -- had more than 1,800 unionized employees at its facilities three years ago in North Canton, Ohio. That number has shrunk to just over 1,500 today. The employees, members of the International Brotherhood of Electrical Workers (IBEW), also approved cuts in health-care and retirement benefits in mid-December, after Maytag threatened to pull out entirely by 2005.

White-collar payrolls have been lowered even more substantially. Maytag won't give out its head count but confirms it has chopped the number of salaried workers at Hoover by 25% in the last year. Hake also installed new managers at Hoover, and he wants it to come up with new vacuum-cleaner features that will persuade people to pay premium prices.

So far, Hake's countermeasures haven't helped. Operating income at Hoover plunged 80% in the third quarter on a 20% sales drop, and Hake has warned that Hoover would pull down Maytag's fourth-quarter results, too, reducing full-year earnings by 30% from 2002. Maytag profits in 2004's first quarter should be essentially flat from a year earlier, Hake has also said.


  The CEO takes the blame for Hoover's mess. "We did it to ourselves," he acknowledged during a teleconference with industry analysts recently. But he added: "I believe we are pushing the right buttons at Hoover." He predicts unit sales of vacuum cleaners will increase 2% to 3% industrywide in 2004. That may be wishful thinking.

The rank and file, working in tandem with the new managers, sure hope the company will pull through. "Most people are starting to understand what we need to do to keep this plant open," says James Repace, president of IBEW Local 1985. At the same time, the union is bracing for layoffs if sales keep sliding. Says Repace: "China is just about killing us."

Meantime, market leader Whirlpool is up 38% and just boosted its 2004 profit outlook. What separates the two? For one, Whirlpool no longer sells vacuum cleaners.

Arndt writes for BusinessWeek in the Chicago bureau

Edited by Beth Belton

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