Red-Hot White Goods
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In 2004, Home Depot (HD ) Chief Executive Robert L. Nardelli was making the early morning rounds at the Kitchen/Bath Industry Show in Chicago, on the lookout for a new tieup with an appliance manufacturer. Among the brushed-nickel faucets, granite countertops, and maple cabinets, a porcelain-topped washer-dryer set with a chrome-rimmed glass door caught his eye. The maker? Korea's LG Electronics Inc., once known for low-end appliances with little sex appeal. But Nardelli was impressed, LG executives recall, and asked his team to contact the Koreans. "We knew we wanted to add another high-end brand," says Craig Menear, Home Depot's merchandising chief. "LG products are very fashion-forward.... We felt they would be a great addition to our mix."
The alliance with Home Depot Inc. helped LG break into the big leagues. The Korean company's washers, dryers, refrigerators, and more already were selling well in Best Buy Co.'s (BBY ) 700 stores. Then in 2005, LG's appliances hit Home Depot's 1,800 locations, bringing to 3,000 the number of outlets where Americans can buy LG's wares. That has helped the brand grow from no U.S. sales in 2002 to 5.5% of the market for refrigerators and 5.9% for washing machines in the first half of this year. Aided by this stateside success, global sales of LG's white goods hit $10 billion last year, up from $8.8 billion in 2004, propelling the Korean company to the No. 3 spot in the industry, after Whirlpool Corp. (WHR ) and Electrolux. (ELUX )
Even more remarkable is that LG has fueled its growth by going upscale. The Korean manufacturer has targeted consumers willing to spend a few hundred dollars extra for snazzy designs and high performance. LG's sleek washing machines, for instance, now command a 14.1% share of all washers priced above $1,100. One top LG seller is the Tromm, a $1,600 energy- and water-saving washer equipped with a "refresh" function that uses steam to remove odors and wrinkles from clothes. To appeal to design-conscious homemakers, the machine comes in titanium, blue, "wild cherry red" -- and even plain white. LG's Whisen air conditioners, meanwhile, are thin enough to hang on the wall and double as picture frames.
These products are a quantum leap from the cheap GoldStar microwave ovens and toasters that LG used to churn out. "We've concentrated on the premium segment with strong attention to a high-tech look and feel," says James Park, LG's vice-president for overseas marketing. To underscore its technological prowess, LG has deliberately avoided top-loading washing machines to focus on more expensive front loaders, although the market for the former is triple that of the latter. It has also launched a $3,500 refrigerator with a built-in TV screen and a $1,300 combination convection-microwave oven sporting a four-inch screen that lets cooks browse through scores of recipes.
Another key strategy has been bending over backward to accommodate retailers. After Nardelli's "aha!" moment in Chicago, Home Depot wanted a guarantee that its customers would receive their LG machines within 48 hours of ordering. So the manufacturer spent millions of dollars to establish or expand warehouses at a dozen key locations across the U.S., and set up a nationwide computer network and a call center. Within six months, it was able to meet Home Depot's requirement.
LG could use the lift it's getting from appliances. Though it achieved a world-beating profit margin of 5.9% in white goods last year, topping Whirlpool's 5.5%, the Korean company has been beset by problems at its handset unit and a liquid-crystal display joint venture with Philips Electronics (PHG ). Because of these weak spots, Woori Investment & Securities expects LG Electronics' net profit to fall to $245 million this year, from $736 million in 2005. And with rival Whirlpool's takeover of Maytag Corp. (MYG ) now complete, LG will have to fight harder to make its target of capturing 10% of the U.S. market in both washing machines and refrigerators by 2010. "Whirlpool has a lot of muscle in the industry, and we'll have a hard time attracting customers unless we keep rolling out innovative products," says Young Noh, a senior LG manager in charge of U.S. marketing. In other words, there's no getting by on looks alone.
By Moon Ihlwan, with Brian Grow in Atlanta