MAYTAG ? BUNGLING A PROMOTION IN ENGLAND
In August 1992, Hoover Limited, Maytag?s British subsidiary, launched this travel promotion: Anyone in the United Kingdom buying more than 100 U.K. pounds worth of Hoover products (about $150 in American dollars) before the end of January 1993 would get two free round-trip tickets to selected European destinations. For 250 U.K. pounds worth of Hoover products, they would get two free round trip tickets to New York or Orlando.
A buying frenzy resulted. Consumers had quickly figured out that the value of the tickets easily exceeded the cost of the appliances necessary to be eligible for them. By the tens of thousands, Britishers rushed out to buy enough Hoover products to qualify. Appliance stores were emptied of vacuum cleaners. The Hoover factory in Cambuslang, Scotland, that had been making vacuum cleaners only three days a week was suddenly placed on a 24-hour, seven days a week production schedule?an overtime bonanza for the workers. What a resounding success for a promotion! Hoover managers, however, were unhappy.
Hoover had never ever expected more than 50,000 people to respond. And of those responding, it expected far less would go through all the steps necessary to qualify for the free trip and really take it. But more than 200,000 not only responded but qualified for the free tickets. The company was overwhelmed. The volume of paperwork created such a bottleneck that by the middle of April only 6,000 people had flown. Thousands of others either never got their tickets, were not able to get the dates requested, or waited for months without hearing the results of their applications. Hoover established a special hot line to process customer complaints, and these were coming in at 2,000 calls a day. But the complaints quickly spread, and the ensuing publicity brought charges of fraud and demands for restitution. This raises the issue of loss leaders?how much should loss leaders be used as a promotional device? (Leader pricing is a type of promotion with certain items advertised at a very low price?sometimes even below cost, in which case they are known as loss leaders?in order to attract more customers. The rationale for this is that such customers are likely to purchase other regular price items as well with the result that total sales and profits will be increased. If customers do not purchase enough other goods at regular prices to more than cover the losses incurred from the attractively priced bargains, then the loss leader promotion is ill advised. Some critics maintain that the whole idea of using loss leaders is absurd: the firm is just ?buying sales? with no regard for profits.)
Maytag dispatched a task force to try to resolve the situation without jeopardizing customer relations any further. But it acknowledged that it?s ?not 100% clear? that all eligible buyers will receive their free flights. The ill-fated promotion was a staggering blow to Maytag financially. It took a $30 million charge in the first quarter of 1993 to cover unexpected additional costs linked to the promotion. Final costs were expected to exceed $50 million, which would be 10 percent of UK Hoover?s total revenues. This for a subsidiary acquired only four years before that had yet to produce a profit.
Adding to the costs were problems with the two travel agencies involved. The agencies were to obtain low-cost space available tickets, and would earn commissions selling ?packages?, including hotels, rental cars, and insurance. If consumers bought a package, Hoover would get a cut. However, despite the overwhelming demand for tickets, most consumers declined to purchase the package, thus greatly reducing support money for the promotional venture. So, Hoover greatly underestimated the likely response, and overestimated the amount it would earn from commission payments.
If these cost overruns added greatly to Maytag and Hoover?s customer relations and public image, the expenditures would have seemed more palatable. But with all the problems, the best that could be expected would be to lessen the worst of the agitation and charges of deception. And this was proving to be impossible. The media, of course, salivated at the problems and were quick to sensationalize them.
Heads rolled also. Initially, Maytag fired three UK Hoover executives involved, including the president of Hoover Europe. Mr. Hadley, at the annual meeting, also indicated that others might lose their jobs before the cleanup was complete. He likened the promotion to ?a bad accident? and you can?t determine what was in the driver?s mind.?
The issue receiving somewhat less publicity was why corporate headquarters allowed executives of a subsidiary such wide latitude that they could saddle parent Maytag with tens of millions in unexpected costs. Did not top corporate executives have to approve ambitious plans? A company spokesman said that operating divisions were ?primarily responsible? for planning promotional expenses. While the parent may review such outlays, ?if they?re within parameters, it goes through.? This raises the issue of how loose a rein foreign subsidiaries should be allowed.
Background on Maytag
Maytag is a century-old company. The original business, formed in 1893, manufactured feeder attachments for threshing machines. In 1907, the company moved to Newton, Iowa, a small town thirty miles east of Des Moines, the capital. Manufacturing emphasis turned to home-laundry equipment and wringer-type washers.
A natural expansion of this emphasis occurred with the commercial Laundromat business in the 1930s, when coin meters were attached to Maytag washers. Rapid growth of these coin operated laundries took place in the U.S. during the late 1950s and early 1960s. The 1970s hurt Laundromats with increased competition and soaring energy costs. In 1975, Maytag introduced new energy-efficient machines, and ?Home Style? stores that rejuvenated the business.
The Lonely Maytag Repairman
For years Maytag reveled in a marketing coup, with its washers and dryers enjoying a top-quality image, thanks to decades-long ads in which a repairman laments his loneliness because of Maytag?s trouble-free products. (The actor who portrayed this repairman died in early 1997). The result of this dependability and quality image was that Maytag could command a price premium: ?Their machines cost the same to make, break down as much as ours?but they get $100 more because of the reputation,? grumbled a competitor.
During the 1970s and into the 1980s, Maytag continued to capture 15 percent of the washing machine market, and enjoyed profit margins about twice that of competitors. Whirlpool was the largest factor in the laundry equipment market, with a 45 percent share, but this was largely because of sales to Sears under the Sears? brand.
For many years, until his retirement on December 31, 1992, Daniel Krumm had influenced Maytag?s destinies. He had been CEO for eighteen years and chairman since 1986, and his tenure with the company encompassed 40 years. In that time, the home-appliance business encountered some drastic changes. The most ominous occurred in the late 1980s with the merger mania, in which the threat of takeovers by hostile raiders often motivated heretofore conservative executives to greatly increase corporate indebtedness, thereby decreasing the attractiveness of their firms. Daniel Krumm was one of these running-scared executives, as rumors persisted that the company was a takeover candidate.
Largely as a defensive move, Krumm pushed through a deal for a $1 billion buyout of Chicago Pacific Corporation (CPC), a maker of vacuum cleaners and other appliances with $1.4 billion in sales. As a result, Maytag was burdened with $500 million in new debt. Krumm defended the acquisition as giving Maytag a strong foothold in a growing overseas market. CPC was best known for the Hoover vacuums it sold in the United States and Europe. Indeed, so dominant was the Hoover brand in England that many people did not vacuum their carpets, but ?hoovered the carpet?. CPC also made washers, dryers, and other appliances under the Hoover brand, selling them exclusively in Europe and Australia. In addition, it had six furniture companies, but Maytag sold these shortly after the acquisition.
Krumm had been instrumental in transforming Maytag, the number-four U.S. appliance manufacturer?behind General Electric, Whirlpool, and Electrolux?from a niche laundry-equipment maker into a full-line manufacturer. He had led an earlier acquisition spree in which Maytag had expanded into microwave ovens, electric ranges, refrigerators, and freezers. Its brands now included Magic Chef, Jenn-Air, Norge, and Admiral. The last years of Krumm?s reign, however, were not marked by great operating results. Revenues showed no gain in the 1989-1992 period, while income steadily declined.
Although the rationale for internationalizing seemed inescapable, especially in view of a recent wave of joint ventures between U.S. and European appliance makers, still the Hoover acquisition was troublesome. While it was a major brand in England and in Australia, Hoover had only a small presence in Europe. Yet, this was where the bulk of the market was, with some 320 million potential appliance buyers.
The probabilities of the Hoover subsidiary being able to capture much of the European market were hardly promising. Whirlpool was strong, having ten plants there in contrast to Hoover?s two plants. Furthermore, Maytag faced entrenched European competitors such as Sweden?s Electrolux, the world?s largest appliance maker; Germany?s Bosch-Siemens; and Italy?s Merloni Group. General Electric had also entered the market with joint ventures. The fierce loyalty of Europeans to domestic brands raised further questions as to the ability of Maytag?s Hoover to penetrate the European market without massive promotional expenditure, and maybe not even then.
Australia was something else. Hoover had a good competitive position there, and its refrigerator plant in Melbourne could easily be expanded to include Maytag?s washers and dryers. Unfortunately, the small population of Australia limited the market to only about $250 million for major appliances.
Britain accounted for half of Hoover?s European sales. But at the time of the acquisition its major appliance business was only marginally profitable. This was to change: after the acquisition it became downright unprofitable, as it struggled to expand in a recession-plagued Europe. The results for 1993 reflected the huge loss for the promotional debacle. Hardly and acquisition made in heaven.
Maytag?s earlier acquisitions also were becoming soured. Its acquisitions of Magic Chef and Admiral were diversifications into lower-priced appliances, and these did not meet expectations. But they left Maytag?s balance sheet and its cash flow weakened. Perhaps more serious, Maytag?s reputation as the nation?s premier appliance maker became tarnished. Meanwhile, General Electric and Whirlpool were attacking the top end of its product line. As a result, Maytag found itself in the number three or four position in most of its brand lines.
1. How could the promotion of UK Hoover have been better designed? Be as specific as you can.
2. Given the fiasco that did occur, how do you think Maytag should have responded?
3. Comment on the following statement: ?Firing the three top executives of UK Hoover is unconscionable. It smacks of a vendetta against European managers by an American parent. After all, their only ?crime? was a promotion that was too successful?.
4. Do you think Leonard Hadley, the Maytag CEO for only two months, should be soundly criticized for the U.K. situation? Why or why not?
5. Why do you think this UK Hoover fiasco happened in the first place? What went wrong?
6. Evaluate the decision to acquire Chicago Pacific Corporation (CPC). Do it for the time it happened and for the present moment when the facts are known. Defend your conclusions.
7. Look for updated information on the Maytag case. Relate the information you get to the events portrayed in this case.
Hartley, R.F. (2001). Marketing Mistakes and Successes. New York: John Wiley & Sons.