Why Whirlpool Is Cleaning Up

After a great quarter, new CEO Jeff Fettig hails global manufacturing and American knowhow as the basis for a shiny future

What a terrific time to take over. After five years as Whirlpool's No. 2, Jeff Fettig was promoted to chairman and chief executive on July 1. Just three weeks later, the new CEO reported that profits rose 13% in the second quarter, to $106 million, on record sales of $3.26 billion. Whirlpool (WHR ) gained in every one of its continental markets, except Asia, its smallest.

Moreover, Fettig told industry analysts and investors that the Benton Harbor (Mich.) company should pocket at least $435 million for the full year, a 5% increase from 2003, on sales of $12.8 billion or more. Both would be all-time highs.

Whirlpool's secret? Under Fettig's long-serving predecessor, David Whitwam, who retired after 17 years as chief, the outfit grew to become a global manufacturer and marketer. Now the world's largest maker of big-ticket appliances has factories in 13 countries, including low-cost centers such as China and Brazil, and sells goods in more than 170. Its has 68,000 employees on its payroll.


  Whirlpool has also pursued innovation like never before. The results range from its front-loading Duet washer/dryer sets, which despite their $2,000 price tag are sellouts, to its Gladiator GarageWorks brand, an entirely new product line that brings Whirlpool beyond its traditional household nooks.

Of course, Fettig can't simply sit back. Whirlpool's biggest retailer in the U.S. is Sears, Roebuck & Co. (S ), and it has been losing market share to Home Depot (HD ) and Lowe's (LOW ). Whirlpool also sells through Lowe's, but Home Depot doesn't stock any of Whirlpool or KitchenAid appliances.

The economic cycle soon may work against Whirlpool, too. The Federal Reserve is raising interest rates, which could slow homebuilding and, in turn, the sale of appliances.

Fettig, 47, isn't worried. An Indiana native who joined Whirlpool in 1981 as an operations associate, he says Whirlpool is only at the start of what he believes could be a 10-year upturn. Shortly after announcing his first quarterly results as CEO, Fettig sat down in his office suite, across the highway from Lake Michigan, to talk with BusinessWeek Senior Correspondent Michael Arndt. Here are edited excepts of the conversation:

Q: The U.S. appliance market seems to be growing well, even though interest rates are rising and home sales may have peaked. Have appliance sales peaked as well?


The appliance market certainly has been very robust, more than we anticipated. But we don't see a bubble. If you look at the elements of what drives consumer demand for our products, about 20% is tied directly to the new-construction business. But the fundamental driver of appliance purchases -- 70%-plus -- is replacement, driven by wear and tear or old age. That doesn't change.

What has changed in the last couple of years is we're beginning to see consumers replace appliances before they wear out. It wasn't so long ago, if you bought a new washing machine, it almost looked exactly like the washing machine you had 10 years ago. But when people see our Duet washer/dryers, it's "Wow. It makes my old washer look old-fashioned." We're selling over 1 million of those products a year in the U.S.

Q: That leads to another topic, the premium segment of the market. That segment is growing faster than the overall market. How can that be maintained?


There's a lot to this. If you look at where people are putting their investments, a lot has gone into the home. The baby boomer generation is in full spending swing right now. Put that together with the construction boom and this whole nesting phenomenon after 9/11, and this is not a 2- or 3-year phenomenon, but a 10- or 15-year phenomenon. If we keep innovating, we'll keep growing.

Q: So how are you doing on innovation?


We've got hundreds of innovation projects in our pipeline. In the first three years, we commercialized 25 projects. In the next year-and-a-half, we're going to bring out another 25, so we've doubled the pace. And the first 25 were the most innovation we brought to the market in 20 years.

Over the next three years, we've set our goals of delivering $500 million of new revenue a year from innovation. You've got to have a decent degree of success and some big ideas to meet these numbers.

Q: Where do the ideas for these products come from?


Let's talk about Gladiator GarageWorks. To kick off this innovation process, we took 75 people around the world off their jobs about five years ago and put them on innovation teams. One of the experiments was how could we participate in every room in the house, not just the kitchen and laundry room. We had one team look at the garage. Just out of sheer brainstorming, they came up with the idea of garage appliances. That grew and grew ultimately to Gladiator GarageWorks.

It also led to a new brand. As we did this experiment, we tested whether the Whirlpool or KitchenAid brands appealed to consumers around this concept in the garage. But while those brands have great strength, consumers didn't view them as credible brands in the garage, and that's why we chose to create this new brand.

Q: Your No. 1 retailer is Sears, which has been slipping lately. What's the outlook for Whirlpool and Sears?


Sears has lost share in major appliances over the last three years. I think we need to put this in perspective, first of all. This is off their all-time high base of 40% of the entire retail market. They're now around 36%.

We also look at the market in terms of conversion and draw. Conversion is when somebody comes in looking for an appliance and buys one. Draw is simply how many people come in. The conversion side is outstanding. Sears converts more shoppers by far than anybody else in the industry.

The issue has really been a draw issue. Sears, for the first time, has been out-stored by its competitors. Sears is beginning to address a store-expansion program, and that will help the appliance business.

Q: In your conference call with analysts, you talked about raising prices. Can you give me more detail about this?


In September, we're going to raise prices on selected brands and selected models. It's basically on existing products that haven't been renewed in the last few months. It's around 2% to 2.5%.

Q: Do you have more price leverage with consumers today vs. a year or two ago?


I don't believe this is a consumer issue. Two percent on a $500 appliance is $10. I don't think that will determine whether a consumer buys or doesn't buy.

To your question on what has changed: Everybody is getting significant raw-material price increases that can't be absorbed any other way, other than passing it through the marketplace. I think we're a very productive company, but I don't think any company that can overcome the magnitude of raw-material increases with productivity.

Q: To keep costs down, one of the things you've done is move more production to China, to India, to Brazil, to Eastern Europe, where labor costs are much lower. What's the future in terms of offshoring at Whirlpool?


We haven't moved a lot. We have grown a lot in these low-cost countries, but it wasn't a transplant, per se. So we do have significant facilities in Mexico, in Brazil, in Central Europe, in India, and in China that serve domestic markets, and now, increasingly, are serving other markets around the world.

The second point is we don't completely subscribe to the belief out there that all manufacturing is going to move to low-cost countries. Let me give you an example: The largest washing-machine factory in the world is in Clyde, Ohio. It's ours. We produce probably 5 million washing machines a year, seven days a week, 24 hours a day. And there's no place in the world where we can make washing machines better.

Now some of the components that go into that washing machine which may have been made in the U.S. 10 years ago may be made in Mexico today and may be made in China or Malaysia or Poland tomorrow. Like building wire harnesses. We don't even do that anymore. We've outsourced that to a company that does that in Mexico. But we still do the final assembly in Clyde, Ohio. There's no one-size-fits-all for us.

Edited by Beth Belton

Before it's here, it's on the Bloomberg Terminal.