Royal Appliance Manufacturing Company History

Address:
650 Alpha Drive
Cleveland, Ohio 44143-2123
U.S.A.

Telephone: (216) 449-6150
Fax: (216) 449-7806

Public Company
Incorporated: 1905 as P. A. Geier Company
Employees: 685
Sales: $280.12 million (1994)
Stock Exchanges: New York
SICs: 3635 Household Vacuum Cleaners; 3589 Service Industry Machinery, Not Elsewhere Classified

Company History:

Best known for its Dirt Devil brand vacuum cleaners, Royal Appliance Manufacturing Company is one of the world's oldest vacuum makers. After languishing for decades, a new management team and a redesigned product line took the firm to the top of the hand-vacuum heap in the late 1980s. Fueled by sales of its devil-red hand-vacuums, Royal rose to the number-three spot among vacuum companies, behind Hoover and Eureka. But Royal's sales and profits declined precipitously in the early 1990s, as the hand-held segment matured and Royal encountered intense competition in the hotly contested upright vacuum market. The company suffered a net loss in 1993 and CEO John A. Balch resigned in mid-1995. He was succeeded by Michael Merriman, the 38-year-old chief financial officer who had come to Royal just three years before. Merriman and his team of "young turks" hoped to parlay the Dirt Devil brand's 90 percent awareness level into consistent sales and profitability in the mid-to-late 1990s.

Royal was founded as the P. A. Geier Company in 1905. Company namesake Philip Geier established the business in his garage, where he made some of the earliest vacuum cleaners by hand. Geier diversified into washing machines, hair dryers, mixers, and other small electric appliances, and was soon able to move his growing company into a four-story headquarters. In 1937, the company introduced what it called "the industry's first hand-held vac," known either as "the Princess" or the "Royal Prince."

Geier's appliance production continued unabated until World War II, when the company's facility was drafted to make military goods like aircraft fittings, tank transmissions, and even some incendiary devices. Geier continued to make vacuums in the postwar era, expanding his product line to include such eclectic devices as peanut roasters and hydraulic devices.

The company experienced the first of many management shakeups in 1953, when it went bankrupt, was acquired by the Walter E. Schott Organization, and was renamed Royal Appliance Mfg. Co. Widely known as the owners of the Cincinnati Reds professional baseball club, the Schotts were more interested in what would now be called Royal's "breakup value" than in its viability as a manufacturer. In 1954, Stanley E. Erbor led an employee buyout and became president of the rejuvenated company. According to a company history, Royal "thrived under Erbor's leadership," moving to a modernized, suburban headquarters in 1969. Nevertheless, by the late 1970s Royal was little more than a niche player in the national vacuum industry, having eschewed the plastics revolution for its traditionally durable, but costly and awkward metal machines. When Erbor died (reportedly at the company water fountain) in 1979 at the age of 82, the company's fate once again came into question.

Royal had been on the market two years when John A. Balch led a $4.5 million leveraged buyout of the venerable vacuum manufacturer. Raised in rural Coshocton, Ohio, Balch had graduated from that state's Miami University in 1953 with a degree in accounting and had gone to work for the Arthur Andersen accounting firm. He entered the Navy's officers candidate school in 1958 and returned to Arthur Andersen in 1961 after completing a tour of duty in the Mediterranean. Balch lost his job as an information manager with a medical equipment manufacturer in a 1978 takeover. When the opportunity to purchase Royal arose, Balch borrowed $40,000, rounded up 12 other investors, and bought Royal from Erbor's estate in 1981.

CEO Balch and his new management team overhauled the company from top to bottom. They started by making slight revisions to the Princess/Prince, but failed to change its metal construction or its high price. Balch quickly changed gears, reserving the heavy-duty Royal brand for the industrial market and creating an entirely new product for the consumer market. His company's second stab at the design resulted in the eye-catching, lightweight, red plastic model dubbed the "Dirt Devil" by Wyse Advertising agency. Although it was a latecomer to the hand vac segment (which was created with Black & Decker's 1979 DustBuster launch), the Dirt Devil's 1984 launch caught a swelling wave of replacement sales. Customers were drawn by the model's low price (about $30), its old-fashioned styling, deep-cleaning revolving brush, and large capacity.

The transformation of Royal included operational changes in manufacturing, distribution, and marketing techniques. The company outsourced parts manufacture, maintaining assembly plants instead. This strategy enabled Royal to stay fast on its feet in the rapidly changing, highly competitive vacuum market, and greatly reduced its overhead. The company moved its distribution from independent "mom and pop" vacuum shops to mass retailers like Wal-Mart, KMart, and Target. New marketing strategies included point-of-sale displays, cooperative advertising, a toll-free customer service number, and a 30-day return policy. Chairman John Balch appeared in a new television advertising campaign with Sam, the Dirt Devil dog. Advertising became a keystone of Royal's program; the company's ad budget burgeoned from less than $6 million to $40 million by 1991.

The Balch-led revitalization was wildly successful: Royal sold 50,000 Dirt Devils in 1984 alone and had captured a whopping two-thirds share of the hand-held vacuum segment by 1986. Sales increased from less than $5 million in 1981 to more than $120 million by 1990 and profits grew to $11.7 million during that period. Royal worked to capitalize on the Dirt Devil success with product line and geographic expansions in the late 1980s. Although the brand dominated the hand-held segment, hand vacs constituted only less than one-third of the overall vacuum market. The real sales potential resided with uprights, which made up 70 percent of U.S. vacuum sales. Royal launched the Dirt Devil Broom Vac, a lightweight upright, in 1987 and began offering a canister model the following year.

Balch and his fellow executives took Royal public in 1991 with one of the year's most successful offerings, a $100 million stock floatation. Business Week reported that the stock opened at $15.50, climbed to $35 within a month, and peaked at $59 in February 1992, shortly after sales and profits for 1991 were reported at $273.3 million and $32.8 million, respectively. But after this exhilarating performance, the stock began to slide, dropping to $37 by the middle of May 1992. The decline was precipitated by a combination of rumors and disappointing reports. Some analysts believed that the stock had risen unrealistically high and fast and that it was going through a predictable correction. Others blamed Wall Street's rumor mill for the drop.

Royal's guaranteed sales policy was a major bone of contention. Guaranteed sale can be defined as the direct sale of product to the retailer with the provision that any unsold merchandise will be repurchased. The company reported that a strong 1991 holiday season had fueled a 128 percent year-over-year increase in sales. But some analysts and shareholders began to question that robust figure early in 1992, when they found that Wal-Mart, a retailer that accounted for more than 10 percent of Royal's sales, had returned $5 million to $10 million worth of Dirt Devil vacuums under the guaranteed sales policy.

Although Dan Carasso, a pro-Royal analyst with Goldman Sachs & Company (not coincidentally the lead underwriter for Royal's initial stock offering), noted in a June 1992 Business Week article that the company had accounted for the returns in the fourth quarter of 1991, some shareholders were not reassured, and with good reason. Two consecutive quarterly earnings declines went over like lead balloons: Royal's stock market value dropped by $309 million in one day in July 1992 as shareholders left in droves. The ones who stuck with the stock filed a dozen class action lawsuits, charging that Royal executives used guaranteed sales to inflate earnings figures, did not maintain a reserve against returns, and mischaracterized the company's financial health.

Richard Ringer of The New York Times blamed the company's stock problems more on CEO Balch's apparent disdain for stockholders than deliberate deception. In the years after Royal went public, Balch was quoted more than once as saying, "I'm not in the business of selling stock, I'm in the business of selling vacuums." In fact, Balch had no qualms about telling Ringer that "he did not want to take Royal public in the first place but was persuaded to by his partners." The CEO subsequently cut off communication with the media, leading several investment firms, including Goldman Sachs, to drop their coverage of Royal.

Although the stockholder suits were dismissed in 1994, Royal's problems continued throughout the early 1990s. Royal's low stock price, which had shrunk to about $5, attracted unwanted investors. Richmont Capital Partners I, the Dallas partnership that had previously acquired Mary Kay Corporation, bought 7.2 percent of Royal for more than $10 million in September 1993 and increased its stake to 9.4 percent by the end of the year. Richmont was thwarted in its attempt to gain a seat on Royal's board of directors, but increased its investment in the vacuum company to 12.5 percent in 1995.

The fourth quarter 1992 merchandise returns came back to haunt Royal during 1993's holiday selling season, when retailers cut back their orders by 50 percent to avoid a repeat performance. Royal's sales declined from $395 million in 1992 to $313.9 million in 1993 and net dropped from $20.2 million to a loss of $8.3 million. The company blamed its poor performance on high European advertising expenses and competitive pressure to lower prices.

Royal was also stung by losses in market share on both its hand vac and upright fronts--its share of the upright market declined from 24.3 percent to 17.2 percent during 1992 and its share of the hand-held segment slid from more than 60 percent to about 50 percent by 1995. In 1993, the company moved its battle with primary competitor Hoover to the courtroom, challenging the latter's "Cleaning Efficiency Rating" as "misleading advertising." Hoover countersued mid-year, with charges of false advertising and defamation. Royal and Hoover continued to wage this part of their "floor war" through 1995.

Analysts agreed that the company needed a hot new product to resume profitability and growth. In the early 1990s, Royal introduced the Dirt Devil Cyclone carpet shampooer, a wet/dry vacuum, a cordless rechargeable hand vacuum, and a car vacuum, and even strayed from its signature red color to make green and black models. On the operations side, Royal cut 125 jobs, closed a plant, and shaved 30 percent from the domestic advertising budget. The company appeared to have effected a tentative turnaround by 1994. Although sales declined to $280.1 million, Royal chalked up a $1.6 million profit; it was less than 1988's net, but a profit nonetheless.

The company dipped back into the red in 1995. In July, after two consecutive quarterly losses, Royal's board of directors asked for and received John Balch's resignation. Balch and company had promoted CEO Michael Merriman to president and the new position of chief operating officer earlier that year, and the 38-year-old executive advanced to the top position after just three years at Royal. Merriman had spent his entire career at Arthur Andersen, and had been senior auditor of Royal's account there since 1981. Louis Schneeberger, an outside director, was elected chairman.

Merriman publicly revealed his strategy to revitalize Royal during his first month at the helm, thereby taking a first step toward one goal, "re-establishing ties to Wall Street." He decided to place Royal's European subsidiary, which had racked up $30 million in cumulative operating losses in its brief five-year history, on the auction block. The new CEO continued the new product rollout, focusing on high margin appliances like the Dirt Devil Impulse, "a light upright retailing for $79," and the Dust Devil, a cordless rechargeable challenge to Black & Decker's DustBuster. Late in 1995, Royal used its first-ever infomercial to promote the new cordless Dirt Devil Broom Vac, which combined features of a broom for hard surfaces and a vacuum for carpets in an appliance that retailed for less than $50. The company added an ingenious on-board tool, a leaf blower, to its Dirt Devil Wet Dry vacuum. Merriman also hoped to continuously raise product quality and improve productivity.

Royal continued to struggle through the second half of 1995, eventually recording a $13.8 million loss on the year. The company blamed much of the loss on charges related to the pending sale of its European operations, but some of the shortcoming was also due to sliding gross margins. In spite of its persistent difficulties, Royal had at least one undeniable strength: its widely known Dirt Devil brand. Merriman and company hoped to use that valuable tool to return to profitability and growth in the late 1990s.

Principal Subsidiaries: Royal Appliance International Co.; Dirt Devil, Inc.; Royal Appliance FSC Inc.

Further Reading:

  • Abdeddaim, Michelle Nellet, "The Reign at Royal Now Cleft in Twain," HFN--The Weekly Newspaper for the Home Furnishings Network, January 2, 1995, p. 58.
  • Canedy, Dana, "CPA Moving to New Realm as CEO of Royal Appliance," Cleveland Plain Dealer, April 21, 1992, p. 4F.
  • ------, "Group Buys $10 billion Worth of Royal Stock," Cleveland Plain Dealer, October 1, 1993, p. 1E.
  • ------, "Lawsuits Against Royal Dismissed," Cleveland Plain Dealer, February 10, 1994, p. 1C.
  • ------, "Royal Appliance Earnings Drop," Cleveland Plain Dealer, February 22, 1994, p. 1C.
  • ------, "Thanks, But No Thanks, Royal Tells Its Suitor," Cleveland Plain Dealer, May 19, 1994, p. 1C.
  • ------, "New Floor Plan," Cleveland Plain Dealer, December 20, 1994, p. 1C.
  • ------, "Royal Appliance Manufacturing Returns to Profitability," Cleveland Plain Dealer, February 18, 1995, p. 3C.
  • "Company Backgrounder," Cleveland: Royal Appliance Manufacturing Co., 1996.
  • Frinton, Sandra, "Hand Vac Faceoff," HFN, May 22, 1995, p. 35.
  • Mallory, Maria, "The Dirt Devil Made Royal Do It," Business Week, August 26, 1991, pp. 30-31.
  • McLoughlin, Bill, "Turning Royal Around: New CEO Draws Up His List of Tasks," HFN, July 31, 1995, p. 27.
  • ------, "Dust Devil, MVP Star in Royal Ads," HFN, September 4, 1995, p. 52.
  • ------, "A Royal Revamp: Vac Maker Aims for a Turnaround," HFN, November 13, 1995, 45.
  • ------, "Infomercial for Royal's Broom Vac," HFN, December 25, 1995, p. 33.
  • Narisetti, Raju, "Royal Appliance To Study Plan of Investor Group," Wall Street Journal, May 16, 1994, p. A11D.
  • Phillips, Stephen, "Royal Investor Increases Share," Cleveland Plain Dealer, February 21, 1996, p. 1C.
  • Pledger, Marcia, "Royal Appliance Co. Hoping Its New Broom Will Clean Up," Cleveland Plain Dealer, January 16, 1996, p. 1C.
  • Ringer, Richard, "Dirt Devil Disappoints Investors," New York Times, August 12, 1993, pp. D1, D20.
  • ------, "Investor Group Purchases 7.2 Percent Royal Appliance Stake," New York Times, September 22, 1993, p. D4.
  • "Royal Incorporates Dirt Devil," Cleveland Plain Dealer, January 30, 1996, p. 4C.
  • "Royal's Colorful History," Dirt Devil News!, November/December 1994.
  • Sabath, Donald, "Royal Puts European Unit Up for Sale," Cleveland Plain Dealer, October 31, 1995, p. 1C.
  • ------, "Three Experts Join Royal Appliance Team," Cleveland Plain Dealer, December 2, 1995, p. 2C.
  • Thompson, Lynne, "The Royal King," Cleveland Magazine, November 1993, pp. 36-37.
  • Yerak, Becky, "Royal Appliance CEO Resigns as Company's Financial Losses Grow," Cleveland Plain Dealer, July 25, 1995, p. 1C.

Source: International Directory of Company Histories, Vol. 15. St. James Press, 1996.