September 25, 2007
sponsored by Tavant
ISSN 1550-9214         

New Home & Appliance Warranties:

At the midpoint of 2007, sales are falling faster than claims can be reduced, driving claims rate percentages upwards for many companies in the building trades. But unlike in the automotive or computer industries, claims in this sector were always rather evenly distributed among new home builders and their suppliers.

Rounding out our midyear 2007 product warranty report, this week we take a look at the new home, appliance, tools, fixtures, and furniture industries. For lack of a better term for all the ingredients that go into the making of a home or office, let's call this sector of the warranty landscape the building trades.

The September 11 newsletter looked at the automotive sector while the September 18 edition looked at the computer and telecom equipment sector. In both those cases, the well-known brand names -- the consumer-facing OEMs -- ended up paying the lion's share of the warranty claims, while their suppliers paid noticeably less.

This is decidedly not the case in the building trades. The 32 publicly-held companies building new homes and reporting warranty expenses in their financial filings paid out only 18% of the $2.5 billion spent on claims this year by all manufacturers in the building sector. In contrast, the 42 publicly-held manufacturers of heating, ventilation, air conditioning, refrigeration, food preparation, and other appliances accounted for just over half the total, and the 73 companies manufacturing warranted building materials, tools, fixtures, and furniture accounted for just under a third of the total.

Figure 1
New Home Builders, HVAC, Appliance & Furniture Manufacturers:
Quarterly Warranty Claims Paid, 2003 to 2007
(in $ millions)

Figure 1

Some of these companies are also counted in either the automotive, aerospace, or computer sectors, so it would not be quite accurate to say that the building trades account for about 17% of the overall $14.4 billion in first half claims total reported by all U.S.-based manufacturers. Because the product lines of some companies straddle multiple sectors, it would be impossible to assign such a definite share to each sector. But in round numbers, automotive is about half the total so far, while computers/electronics are around a third and the building trades described here have a share in the low-to-mid teens. Everything else -- aerospace, sports equipment, mining equipment and other warranted products -- comprise the single-digit-percentage remainder.

Percentages vs. Dollars

More important than their share of the total warranty pie is the relative percentage of product revenue each category of warranty consumes. Most manufacturers spend anywhere from 1% to 5% of their total product revenue on warranty claims, though a significant number spend less than 1% and a handful spend more than 5%. The weighted average for all manufacturers continues to meander around 1.8%, though the median is somewhat lower.

The pattern seen in the auto and computer industries is that the consumer-facing brands such as Ford and Dell are the ones with warranty spending rates towards the middle to high end of that scale, while their suppliers are usually found towards the low end of it. That is not the case in the building trades.

As can be seen in Figure 2, during most of the past four years the HVAC and appliance companies paid out the highest percentage of their revenue to honor warranty claims, while the companies making building materials, fixtures and furniture usually paid the least. The new home builders were usually somewhere in the middle, though this year their claims rates have soared.

Figure 2
New Home Builders, HVAC, Appliance & Furniture Manufacturers:
Quarterly Warranty Claims Paid, 2003 to 2007
(as a % of sales)

Figure 2

Warranty Week took a detailed look at this phenomenon in the August 8 newsletter, finding that it had more to do with declining home sales than with soaring claims costs. Indeed, Figure 1 shows that new home warranty claims as measured in dollars are actually down so far this year, to $446 million for the first half of 2007 from $514 million in the first half of 2006. But the claims rate as of the middle of the year was up from 1% in June 2006 to 1.3% in June 2007, because of falling sales.

Makers of HVAC systems and other appliances paid out nearly $1.28 billion during the first half of 2007, but their collective claims rate at the midpoint of 2007 was only 1.17%. Makers of building materials, fixtures and furniture stood at $800 million for the first half of 2007, with a claims rate of 0.9%.

Like Strands of a Rope

But as Figure 2 illustrates, the three sectors have more or less been tangled like strands of rope for the past 18 quarters. New home builders had the highest claims rate eight times, while HVAC/appliances came out on top nine times and the building materials sector took the lead by a nose once, during the third quarter of 2003.

Each of these three sectors is a simple weighted average of the companies within it. The weighted average of all three sectors is slightly below 1%, meaning that the typical company engaged in the building trades spends around 1% of its product revenue on warranty claims. There's quite a bit of variation around this average, but as we'll see, it's a typical claims rate for several of the largest brand names in the business.

In the August 8 newsletter, we spotlighted D.R. Horton and Pulte Homes. This time around, we'll take a closer look at KB Home and Lennar Corp. In Figure 3, it's clear that KB Home's claims and accrual rate are now climbing (the red and green lines, respectively). Yet the blue bars make it clear that the claims total in dollars is actually falling. The unseen factor, of course, is falling sales.

Figure 3
KB Home
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 3

In Figure 4, we can see that Lennar's claims have also fallen off, though the claims rate percentage is up, once again because of falling sales. But notice that the company has managed to keep its accruals more or less constant at 1.1% despite the sales decline. Also notice that both the claims and accrual rates have been intertwined for much of the past four years. Both these traits are signs of a well-managed warranty department.

Figure 4
Lennar Corp.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 4

In the building materials sector, sales are also down, though not by as much as is the case with new homes. At Masco, for instance, sales of the company's faucets, cabinets, locks, and other gear are down around 6%. But the claims and accrual rates, instead of rising, have actually fallen slightly, meaning that claims paid and accruals made were cut by slightly more than 6% over the same period.

Figure 5 details how Masco paid only $28 million in claims during the first half of 2007, down from $30 million in the first half of 2006. As of the end of June 2007, though, the company's claims and accrual rates were both at 0.6%, derived by dividing that $28 million total by the corresponding sales figure of $4.68 billion.

Figure 5
Masco Corp.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 5

The story is not much different at Fortune Brands, though both the revenue and claims numbers are somewhat lower and the percentages are somewhat higher. Much of the company's revenue is derived from non-warranted sources such as alcoholic beverages, so these product sales must be subtracted out of the percentage calculations. Still, that leaves $2.2 billion in first half sales, to be divided into almost $20 million in claims, for an 0.9% claims rate.

Figure 6
Fortune Brands Inc.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 6

Fortune's warranted product sales are down only 2% for the half-year, and its claims and accrual rates are much steadier, in a narrow range of 0.8% to 1.0%. La-Z-Boy, meanwhile, has seen sales of its furniture fall by 16% in the fiscal year ended April 28. Yet its claims and accrual rates have risen by only a few tenths of a percentage point, as can be seen in Figure 7.

Figure 7
La-Z-Boy Inc.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 7

A year ago, La-Z-Boy's claims rate was 0.6% and its accrual rate was 0.7%. Now both are at 0.9%. Given such a large decline in sales, that's not much of an increase. Claims of $12.4 million in fiscal 2006 rose to $14.9 million in fiscal 2007, while sales fell from $1.9 billion to $1.6 billion.

Sealy Corp., a major bedding manufacturer, has shown more volatility than most in its warranty expenditures. Back in 2004 its accrual rate approached 1.5% while in 2007 it's been closer to 0.7%. The claims rate, however, has somehow managed to stay close to 1%. This is all the more amazing given that the accrual rate can be managed and adjusted than the claims rate. The accrual rate is what you make happen while the claims rate is what happens to you.

Figure 8
Sealy Corp.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 8

Switching gears, if you'll pardon the pun, to the mechanical sector of the building trades, we'll take a look at three representative manufacturers of heating and cooling systems. Lennox makes central heating and air conditioning units for buildings. Fedders is best-known for its room air conditioners, though its product line is actually much wider. And TurboChef is an up-and-coming manufacturer of commercial ovens.

Lennox has demonstrated an ability to maintain its warranty expense ratios within a very narrow range, not only by closely monitoring claims and adjusting accruals, but also by maintaining constant quality levels. It's so predictable: the company puts aside around 1% of its revenue to finance future warranty claims, and warranty claims consume around 1% of revenue.

Figure 9
Lennox International Inc.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 9

It hasn't been so predictable for Fedders, with claims ranging from 1.7% of sales to 8.5% of sales over the past four years. Actually, those extremes were set in back-to-back quarters. Sales in the first half of 2007 are down 61% from 2006, though claims have also fallen from $3.5 million to $2.6 million during the same period. The saddest news is that the company filed for bankruptcy protection from its creditors on August 22.

Figure 10
Fedders Corp.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 10

TurboChef, meanwhile, continues to amaze observers with its ability to absorb warranty shocks that would have closed down most other small companies. As can be seen in Figure 11, there was a point on this roller coaster ride at which almost half the company's sales revenue was going back out the door to finance warranty repairs of its commercial ovens.

Now the claims rate is down to a more manageable 2% level, and sales are once again growing by leaps and bounds. But this time around the company won't be so reliant upon one customer.

Figure 11
TurboChef Technologies Inc.
Quarterly Warranty Claims & Accruals, 2003 to 2007
(in $ millions and % of sales)

Figure 11

The company's problems began when the Subway sandwich chain became envious of the heated sandwiches served by rival Quiznos. TurboChef made a quick-heating oven that was just perfect for Subway's sandwiches, and so thousands of storefronts rushed to install their own units. After an initial surge in sales, orders declined.

Meanwhile, the heated sandwiches were a big hit with customers. The quick-heating ovens were used so heavily that they required frequent repairs. And they were so new that most of those repairs came in as warranty claims. So what happens when claims soar just as sales plummet? Your claims rate goes to 48%.

Now, however, some of that first batch of ovens are being replaced, and TurboChef has diversified its customer base so it's no longer so reliant upon Subway. Only 19% of its sales now come from that sandwich vendor, and sales to other commercial customers besides Subway have more than tripled.



This Week’s Warranty Week Headlines

Lawn equipment dealers and contractors face off over warranty work.
Lawn & Landscape, September 25, 2007
Blogger writes about Sony's denial of girlfriend's next-day onsite warranty service for laptop.
Wall Street Journal, September 25, 2007
Extended warranty companies foresee robust 4th quarter despite current headwinds.
This Week in Consumer Electronics, September 24, 2007
Apple warns unlocked iPhone users that future software updates may disable their handsets.
CNET, September 24, 2007
Apple says adding third-party software to the iPhone voids its warranty.
iPhone Atlas, September 24, 2007

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Warranty Headlines (cont’d)

RightNow Technologies launches customer relationship management solution for consumer electronics.
Press Release, September 24, 2007
United Car Care Inc. launches free F&I and sales management training seminars for auto dealerships.
Press Release, September 24, 2007
Ford, General Motors and Chrysler beef up their warranties to win back customers.
Newhouse News Service, September 23, 2007
Canadians who buy new cars in the U.S. often run into problems getting warranties honoured.
Vancouver Sun, September 21, 2007
Moto Morini lengthens UK warranty on all motorcycles sold since 2005 to three years.
London Bikers, September 21, 2007

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Warranty Headlines (cont’d)

Freightliner division that handles warranty service in Portland may be on the move.
Oregonian, September 21, 2007
BluWood offer lifetime no mold warranty that pays up to $6 million per house.
Roanoke Times, September 21, 2007
N.E.W. Customer Service Companies begins selling wireless handset insurance and warranty programs.
Press Release, September 20, 2007
Circuit City blames margin decrease partly on a 38 percent drop in extended warranty sales.
This Week in Consumer Electronics, September 20, 2007
Hathaway Bridge, still under warranty, needs a bit of tending to, engineer says.
Panama City News Herald, September 20, 2007

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After Warranty Analytics


Warranty Headlines (cont’d)

Computer Association of Eastern India seeks to clarify warranty policies for its members.
Channel Times, September 19, 2007
PC Power & Cooling lengthens power supply warranties to seven years.
Press Release, September 18, 2007
Ducati North America and GE Money Warranty Services team to sell service contracts for motorcycles.
Press Release, September 18, 2007
Intel is working on a sales specific warranty model to improve post sales support in India.
Channel Times, September 17, 2007
Mazda of Oman's Ramadan Lucky Strike Offer includes five-year unlimited mileage warranty.
Times of Oman, September 16, 2007

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Warranty Headlines (cont’d)

Car salesman warns of unsolicited mailings selling extended warranties on new cars.
Glenwood Springs Colorado Post Independent, September 14, 2007
Luzerne County asks Election Systems & Software for discount on voting machine extended warranties.
Wilkes-Barre Times Leader, September 13, 2007
Trilogy by Shea Homes ranks highest in J.D. Power active adult community home builder survey.
Press Release, September 12, 2007
Home warranty claim filed days after policy was set to renew is denied as policy is cancelled.
WTVD-TV Raleigh, September 12, 2007
ARI chief financial officer Timothy Sherlock resigns effective September 10.
Press Release, September 12, 2007

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Warranty Headlines (cont’d)

Service Contract Industry Council touts extended warranties im era of shrinking manufacturers' warranties.
Press Release, September 11, 2007
HP ProCurve switch gets a transferrable lifetime warranty.
PC World, September 11, 2007
Asus Computer adds free year of accidental damage protection to laptop warranties in US/Canada.
Press Release, September 10, 2007
Fulcrum Warranty Solutions announces eXclaim Intelligent Claims Analyzer tools.
Press Release, September 10, 2007
Delphi seeks approval from bankruptcy court of a warranty claims settlement with GM.
Reuters, September 10, 2007
Better Business Bureau calls home warranties a "problem industry" due to denied claims.
Charlotte Observer, September 9, 2007's new warranty and service industry talk show reports 3,000 Internet downloads.
Press Release, September 9, 2007
Judge orders Ford and Navistar to mediate engine fight.
Bloomberg News, September 8, 2007
Over 20 auto manufacturers part of BBB Warranty Dispute Settlement Program.
Press Release, September 8, 2007
Domestic & General accepts £524m bid from private equity firm Advent International.
Times of London, September 7, 2007
Nortel Networks wins $10 million judgment in warranty fraud case against two companies.
Reuters, September 7, 2007
C&D Technologies increases warranty reserves because of higher raw material costs.
Press Release, September 7, 2007
Son of judge in Honda odometer case withdraws as counsel in similar lawsuit against Nissan.
Southeast Texas Record, September 6, 2007
Gateway to sell Professional Business Segment, including warranty support role, to MPC Corp.
Press Release, September 5, 2007
TV station compiles dozens of complaints against American Home Shield over denied claims.
WREG-TV Memphis, September 5, 2007
Electrical motors for power steering could cut warranty costs and raise fuel efficiency.
Associated Press, September 5, 2007
Dell opens new regional distribution hub in the UAE for warranty services in the Middle East.
Bahrain Tribune, September 5, 2007
SigmaQuest CEO Nader Fathi to conduct workshop Sep. 24 at Warranty Management Summit in Chicago.
Press Release, September 4, 2007
Unscheduled shutdown of Australian nuclear power plant seen as a warranty issue.
Australian Broadcasting Corp., September 3, 2007
Illinois gets part of $16.7 million payout by Boston Scientific Corp. over Guidant pacemakers.
Peoria Journal Star, September 3, 2007
UK buyers of new Kias to get one year of Kiassist free roadside recovery, down from three years.
What Car? September 3, 2007
Error 41 is the codename for an alleged defect in Brother inkjet printer heads.
New Zealand Press, September 3, 2007
Jacky's Electronics to offer extended warranties in the United Arab Emirates.
Press Release, September 1, 2007
N.E.W. Customer Service Cos. Inc. to hire 300 work-at-home call center agents in Wichita Falls TX.
Dallas Business Journal, August 31, 2007
Better Business Bureau gets complaint about company not honoring 500% money back guarantee.
Inside Tucson Business, August 31, 2007
Wyoming gets part of $16.7 million payout by Boston Scientific Corp. over Guidant pacemakers.
Associated Press, August 31, 2007
Boston Scientific, Guidant, and Cardiac Pacemakers settle 35-state lawsuit for $16.7 million.
Press Release, August 30, 2007
Zenn Motor Co. picks 4CS iWarranty and iParts software solutions for warranty claims processing.
Press Release, August 30, 2007
Zale Corp. says jewelry extended warranty sales topped $111 million in fiscal 2007.
Press Release, August 30, 2007
Mazda UK adds 12-month warranties to its ZZ+ Approved Used Car Programme.
Press Release, August 30, 2007
Chrysler searches for dealer with the most creative and informative Lifetime Powertrain Warranty-themed TV commercial.
Press Release, August 30, 2007
Fujitsu Telecommunications Ireland launches out-of-warranty laptop support in UK.
Press Release, August 30, 2007
Lemon laws don’t always protect car buyers from vehicles moved across state lines.
New York Times, August 29, 2007
Maxol service stations across Ireland to pump 5% ethanol; auto warranties unaffected.
Irish Examiner, August 29, 2007
Homeserve walks away from Domestic & General takeover talks.
Times of London, August 29, 2007
Smith & Wesson to repair new California Highway Patrol handguns under warranty.
Associated Press, August 29, 2007
AT&T and Apple may face an uphill battle prosecuting hackers who unlock iPhones.
Business Week, August 28, 2007
Rumor has it that Microsoft Xbox 360 repairs now take six weeks because of increased volume.
Kotaku, August 28, 2007
Workers' advice raises Ford quality, lowers warranty claims at pilot plant.
Detroit Free Press, August 28, 2007
Australian army general downplays TV reports of defects in weapons used in Iraq.
Australian Associated Press, August 28, 2007
Home warranty company delays replacement of air conditioner's compressor for a month.
KJRH-TV Tulsa, August 28, 2007
Anaren Inc. identifies accounting errors with warranty expense and allowance for sale returns.
Press Release, August 28, 2007
Costco CEO discusses two-year warranties replacing unlimited return policy.
Wall Street Journal, August 27, 2007
Acer to acquire Gateway for $710 million, derails Lenovo plan to acquire Packard Bell.
Computerworld, August 27, 2007
BenQ-Siemens mobile handset owners in Russia lose warranty coverage as of August 2007.
CNews, August 27, 2007
Asus Technology opens warranty center in Ho Chi Minh City.
Vietnam Net, August 27, 2007
Retailers find HDTV profits fading away, so top-line electronics and warranties being pushed.
New York Times, August 26, 2007
City council votes to sell "lemon" fire engine back to its manufacturer.
Russellville News-Democrat & Leader, August 24, 2007
Snap-on Business Solutions says GM Electronic Parts Catalog in final phase certification process.
Press Release, August 24, 2007
Apple sells refurbished iPhones backed by one-year warranty.
Computing, August 24, 2007
Apple is just the latest company warming to the idea of selling refurbished mobile phones.
Business Week, August 23, 2007
GE Money’s Warranty Services Division to work with AppOne’s Internet-based auto finance platform.
Press Release, August 23, 2007
NPD says game console sales up 140% in July; Xbox 360 down 18%, smaller drop than expected.
Reuters, August 23, 2007
Consumer goes through three refurbished handsets then cancels mobile phone contract.
KYW-TV Philadelphia, August 23, 2007
Attorney Glenn Killoren joins Barnes & Thornburg LLP’s Elkhart office as a partner.
Press Release, August 23, 2007
Tampa residents get suspicious over auto extended warranty telemarketing calls from Nevada.
WTSP-TV Tampa, August 23, 2007
Fedders Corp. files petition for Chapter 11 bankruptcy reorganization.
Press Release, August 22, 2007
Samsung Electronics America uses ServiceBench to optimize its North American service network.
Press Release, August 22, 2007
New AIAG guidelines aim to improve quality of automotive parts and reduce warranty claims.
Press Release, August 22, 2007 (PDF file)
SigmaQuest posts two return-on-investment calculators online to highlight possible payback.
Press Release, August 22, 2007
Kenworth ranks highest in J.D. Power heavy-duty truck customer satisfaction survey.
Press Release, August 22, 2007
Land Rover dealer Alfardan Premier Motors in Qatar lengthens warranties to five years/150,000 km.
Press Release, August 22, 2007
Discounted bicycle helmets come with 12-month crash replacement warranty.
Oxford Mail, August 22, 2007
To highlight manufacturing quality, Renault equips new Laguna with three-year warranty.
Press Release, August 21, 2007
Anti-theft "immobilizer" units mandated in Manitoba may affect vehicle warranties.
Winnipeg Sun, August 21, 2007
Nokia will replace 300,000 Matsushita-made mobile phone batteries in India.
Bloomberg News, August 21, 2007
Great Wall Motor Co. vehicles in Botswana carry one-year warranty; two-year warranties for sale.
All Africa, August 21, 2007
Chrysler's warranty costs may be down, but they still top competitors’ warranty costs.
Automotive News, August 20, 2007
Consumer seeking refund on an unused vehicle service contract gets the runaround.
KOVR-TV Sacramento, August 20, 2007

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