Stuck in the Spin Cycle
Maytag, the all-American appliance icon, is learning a dangerous lesson: You can't manage a turnaround just by managing costs.
(Business 2.0) – Four years ago the stage was set for Ralph Hake to become the ultimate Maytag repairman. For decades the Iowa-based company had been the all-American brand for washers, dryers, and refrigerators. By the late 1990s, though, costs at the nation's No. 3 appliance maker had spun out of control, domestic and foreign rivals were clawing at its market share, and Wall Street was punishing the stock. Even worse, Maytag's prize brand assets--quality and dependability--had taken a dive. Hake was the operations wizard hired from outside who, as CEO, could return Maytag to its glory days.
So how did he do? Today, in nearly all of its product lines, Maytag's market share has hit all-time lows. Its stock price fell 55 percent between April 2004 and April 2005, and customer satisfaction surveys rank Maytag near the bottom of the appliance heap. With sales flat, retailers starting to drop its products, and debt load weighing the company down, one analyst figures Maytag "is a 2-inch putt from bankruptcy."
Even if Hake and Maytag can avoid that fate, a troubling question remains: How could a corporate giant that set itself on a turnaround course come up so far short of the mark? More than anything, it's because Hake followed a compass more attuned to Wall Street than to his loyal customers. He wrung out hundreds of millions of dollars in savings through a series of internal cost-cutting initiatives--and for a time, investors applauded. Yet Maytag was getting lapped by competitors on more complex issues that counted the most. Rivals like GE and Whirlpool had already begun reaping benefits from new low-cost factories in Mexico and Brazil before Hake even took up the issue of outsourcing with Maytag. Worse, Hake's austerity efforts all but ensured that Maytag couldn't innovate its way out of trouble: Between 2002 and 2004, Hake cut new-product investment in half.
Retailers and consumers have already weighed in on those decisions. Best Buy has stopped selling Maytag appliances altogether, and Home Depot has begun limiting its floor space in favor of more stylish offerings from rivals. "Maytag realized it too late," says Dave Collins, a former appliance industry executive and a lecturer at the University of Iowa's business school, "but innovation is the name of the game today."
Tackling the Wrong Problem
From his first day on the job in June 2001, Hake, a former Whirlpool exec, dived headfirst into the mess. To boost sales, he bought stove and refrigerator maker Amana for $325 million. To cut costs, Hake closed warehouses, consolidated IT centers, and trimmed the number of Maytag vendors, a move that saved $100 million.
At the time, shareholders loved the take-charge style. A year into Hake's tenure, Maytag's stock had climbed 40 percent. High-end, high-margin appliances boosted sales 12 percent. Beneath the rosy numbers, though, some of Maytag's more intractable problems were festering.
Take quality control. For decades, as alluded to in the lonely-repairman commercials, reliability set Maytag apart from its rivals and justified high prices. Yet well before Hake arrived, Maytag had begun to slip. The company's high-end Neptune washer, for instance, started off strong when it was introduced in 1997. But it quickly turned into a dud. The electronic control boards shorted out, and door leaks led to mold problems. Although Maytag made fixes in subsequent models, the company is still dogged by the experience. It's been forced to set aside $33.5 million for class-action lawsuits arising from the Neptune problems.
Hake and other Maytag officials declined to be interviewed for this story. But sources outside the company contend that Hake's cost slashing (including about 4,000 layoffs) effectively handcuffed quality-improvement efforts. One former Amana executive thinks Maytag overreached. Starting with the Neptune, he says, "they got into an area of design that they weren't expert in and it didn't work. And service department people now tell me that overall quality is worse than what most people know."
Consumers seem to agree. Since Hake took over, Maytag's ratings on the American Customer Satisfaction Index, the top industry performance scorecard, have fallen 7 percent. "Three constituencies are dropping Maytag," says Claes Fornell, creator of the ACSI and a business school professor at the University of Michigan, "consumers, retailers, and investors. But it started with consumers. Maytag used to be the leader in customer satisfaction. Now it's at all-time lows."
Too Late to Offshore
The great irony of Hake's fixation with the balance sheet is that he wasn't aggressive enough in the one area where it might have mattered the most: moving factories overseas. Even today, some 3,000 Maytag workers at four U.S. factories make 88 percent of the company's goods. To offshoring critics like Lou Dobbs, that's a red-white-and-blue mark of distinction. But in the appliance market, it's a death knell.
Top appliance maker Whirlpool, for example, began offshoring a decade ago. Today it runs factories in 13 countries. Sweden's Electrolux is spending $1.4 billion to build cheaper factories around the world, and its Frigidaire brand is the only one to gain market share in the past six months.
To be sure, Hake hasn't just been sitting around idly staring at spreadsheets. Last year, for instance, he opened a new refrigerator plant in Reynosa, Mexico, after closing Maytag's Galesburg, Ill., plant in the face of heavy union resistance--a move that has already saved the company $23 million. "We have sourced very little historically as a company, and we will continue to source more," Hake told investors at an analysts' conference in March. "The percentage will go up." But not fast enough, critics say, to make a difference.
Not Leading With Design
Meanwhile, on the other half of the income statement, Maytag has been hamstrung by a lack of innovation. It's not that Hake hasn't rolled out new products. They just haven't caught fire with consumers. And for a company battling for survival, that too can be fatal.
Consider how Nissan's new 350Z helped fuel its recent comeback, or how the Razr helped spark Motorola. Maytag's splashiest offering under Hake? The Neptune Drying Center. Maytag hyped the 6-foot-tall, $1,200 machine--which houses a drying rack above a standard dryer--as a breakthrough when it was introduced in 2003. Iowa, we have a problem: Because many people can't fit it in their existing laundry rooms, installing a Drying Center would require them to remodel the room or rewire another location with 220-volt current. Sales have been flat.
That the Drying Center emerged from one of Hake's biggest new-product initiatives--Maytag's laundry R&D center in Newton, Iowa--hardly inspires confidence. Maytag execs point to a line of Neptune washers and dryers, due later this year, with which they hope to regain market share.
One of the new products needs to be a hit, because Maytag's debt load hampers its ability to innovate its way out of trouble. R&D investment has fallen 52 percent since 2002. If Maytag continues to lose share, its stock price will continue to fall, and eventually the company could become cheap enough to be bought out by a rival. The most likely contender? According to analysts, it's Samsung, whose dishwashers and refrigerators are already pushing Maytag off the retail floor.
Falling Market Share
1) Worldwide. Includes dishwashers, dryers, freezers, ranges, refrigerators, and washers. 2) Maytag bought Goodman in 2001. Sources: Appliance Magazine; Business 2.0 research