Manufacturers Focus on High-End Products to Offset Costs

Manufacturers Double Down on Pricey Products

From Whirlpool (WHR) to Weber (WEBR), manufacturers across the world are pushing their higher-end products as supply-chain problems slow production and send shipping costs skyrocketing. To offset a hit to their bottom lines, these companies are focusing their attention on higher-cost products.

Take Whirlpool, which makes washing machines and other home appliances. The company said in July it would begin shifting production and marketing toward products which cost more, in order to offset some of the rising expenses associated with manufacturing. Meanwhile Weber, which makes grills and barbecues, has more inventory of higher-priced items because its cheaper grills are made in China, where supply-chain issues are prevalent.

A Focus on Pricier Vehicles and Lawnmowers

The lawnmower maker Toro (TTC) is reducing the number of products it produces due to component shortages. The company is selecting which products to make based on volume and profitability.

US automakers are also focusing on their pricier vehicles after months of supply-chain slowdowns and semiconductor shortages which caused companies to curb production at plants. Car companies are shifting focus away from their less popular, often cheaper models. For example, GM (GM) stopped making its Chevrolet Malibu sedan but is keeping its factories at full production for its high-priced SUVs. In September the average new vehicle sold for $42,800, which is up about 19% compared to last year.

High-End Products Drive Profits

Manufacturers’ move to focus on high-end products is not the only way they are dealing with rising costs and supply-chain slowdowns. For everything from toilet paper to televisions, manufacturers are raising their prices, reducing their range of products, and placing limits on the amount of items which retailers can sell.

It makes sense that manufacturers would choose to focus on their most profitable products amid so many supply-chain challenges. But with inflation continuing to rise and consumers’ bank accounts getting pinched as a result, it will be interesting to see if manufacturers’ focus on their upscale products will pay off or leave them with inventory they won’t be able to sell.

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Volvo Eyes a $2.86 Billion IPO

Volvo Could be Valued at $25 Billion

The Swedish vehicle maker Volvo Cars is aiming to raise $2.86 billion in an initial public offering in Stockholm. The vehicle maker, which is owned by Geely (GELYF), could be valued at $25 billion in the transaction.

In addition to Volvo selling an unspecified amount of shares equal to $2.86 billion, Geely could also unload some of its stake. It is not clear what percentage of Volvo Cars Geely will own once the IPO is complete, but the Chinese company has said previously it wants to be a major shareholder in the public company. Volvo plans to use the money from the IPO to shift production to electric vehicles, boost its supply of batteries, and enhance its production of electric motors.

Volvo’s IPO Has Been in the Making for a Decade

It has been a long journey to Volvo’s impending IPO. Ford (F) sold Volvo to Geely in 2010 for $1.8 billion. Over the next decade Geely poured money into the business so it could revamp the brand’s lineup and grow business in China. All of those efforts have paid off: Volvo is now profitable and is ahead of many of its rivals in the EV race.

Volvo has also gained popularity in the US. Stateside, it competes with other premium brands such as BMW (BMWYY), Audi (AUDVF), and Mercedes-Benz (DMLRY). For the first nine months of 2021, Volvo sold 530,649 vehicles—an 18% year-over-year increase. The carmaker is aiming to sell more than one million cars per year in the coming years.

The EV Race Heats Up

If Volvo is able to garner a $25 billion valuation, it would surpass Europe’s largest vehicle maker, Renault (RNLSY), which has a market capitalization of over $10 billion.

At $25 billion, Volvo will still be tiny compared to the largest vehicle makers including GM and Ford, as well as the leading EV maker Tesla (TSLA). Still, Volvo does provide a way for investors to bet on the EV market outside of the biggest players.

The EV market is heating up and vehicle makers are pouring billions of dollars into their EV efforts. Volvo may be relatively small, but with a potential warchest of $2.86 billion, it will be interesting to see what the vehicle maker does once it goes public.

Declining Home Affordability Weighs on Buyers

Buying a Home Is Still Really Expensive

Low interest rates and rising salaries are not enough to offset soaring prices for homes, making it even more difficult for would-be buyers. As it stands, to purchase the median home in the US, a buyer would need about 32% of their income for the monthly mortgage payment. It marks the highest portion of income needed for a monthly mortgage payment since November 2008 when mortgages accounted for 34.2% of homeowners' paychecks.

As of July, home prices set new highs for four months in a row. Higher home prices mean a bigger loan for buyers and thus larger mortgage payments each month. First-time buyers are expected to be impacted the most from declining home affordability—they will be forced to either shoulder larger monthly mortgages, purchase cheaper homes, or exit the real estate market until it cools off.

Homebuyers Look to New Locations

The lack of affordable homes is also prompting homebuyers to purchase in areas they may not have considered in the past. For example, homebuyers who are shut out of the suburbs of New York City are setting their sights on New Jersey’s Hudson County, home to Hoboken and Jersey City. Through the middle of September, sales in those areas increased 35% compared to a year ago. Across New Jersey, home deals are only up 1% in the same timeframe.

The pandemic drove buyers out of the cities and into the suburbs as they sought more space to work and learn remotely. But with home prices soaring and inventory low, homebuyers are looking beyond the more popular suburbs in their areas.

Low Interest Rates Can’t Offset Costs of Owning a Home

Home affordability has dropped over the course of 2021. At the start of the year, homebuyers needed roughly 29% of their income to pay their monthly mortgage. That jumped to 32% by July. The increase has erased any benefits borrowers would get from record-low interest rates.

Homebuyers appear to be recognizing this. A Fannie Mae survey from August found that 63% of consumers said it was not a good time to purchase a home. That is up from 35% a year earlier.

Low interest rates and a desire to get out of cities during the pandemic spurred a huge boom in the real estate market. Those high prices may come down a bit as we head into the winter months.