A Sales Surge for Generator Makers

WHITEWATER, Wis.—November 6 -- In the days before Superstorm Sandy slammed into the East Coast, Generac Holdings Inc. Chief Executive Aaron Jagdfeld accelerated the company's distribution operations, emptying the company's warehouse of generators for big-box retailers and the company's dealers.

At the same time, Generac opened the throttle on the company's production of consumer-level generators to replenish the truckloads of generators streaming away from the company's distribution center.

"This is the first time since we became a public company [in 2010] that we experienced something of this magnitude," said Mr. Jagdfeld in an interview.

Generac's main competitors in the emergency-generator market, Kohler Co. and Milwaukee-based Briggs and Stratton Corp., BGG +2.09% experienced a similar surge in storm-related demand.

"We have absolutely ramped up to meet the demand in the short-term and the demand we anticipate in the future," said Todd Teske, chief executive of Briggs and Stratton.

Immediately before and after Sandy's onslaught, manufacturers concentrated on supplying portable gasoline-powered generators. But in the storm's aftermath, Generac, Briggs and Stratton and Kohler, based in Kohler, Wis., are emphasizing permanent residential generators, which are wired directly to an electrical system and activate automatically when there is a loss of power. It is a market the companies are counting on to generate significant growth. Manufacturers believe that prolonged power outages following Sandy will transform homeowners' view on permanent generators to a necessity rather than a luxury item.

"It's basically people saying: 'I never want this [power outage] to happen again.' The awareness of it really changes behaviors," said Melanie Tydrich, Kohler's senior channel manager of residential generators.

Generac alone accounts for 70% of the permanent-residential-generator market. With Kohler and Briggs and Stratton, the three companies combined account for 90% of the U.S. market.

"There's a unique opportunity to really turn this into a big market," said Mr. Jagdfeld of Generac, whose shares jumped more than 20% when U.S. stock markets reopened Oct. 31. "We've got to be thinking bigger," he added.

Before the storm, Generac, based in Waukesha, Wis., was only using about two thirds of its production capacity. Mr. Jagdfeld expects production lines to be running full steam over the coming weeks.

The company expects to hire at least 100 more temporary and permanent workers over the next 60 days to boost production, lifting its workforce by about 5% to 2,300 people.

To relieve the expected stress on its existing assembly lines, Mr. Jagdfeld said the company will begin using 250,000 square feet of factory space in Wisconsin acquired this summer. It also began building its own alternators in Wisconsin last year after relying on a contract manufacturer in China for several years.

"We're controlling more of the critical components of our generators, which helps us react very quickly to an increase in demand," said Tim Hearden, Generac's vice president of operations.

Unlike portable generators that transmit electricity to lights and appliances through plug-in extension cords, a permanent standby generator is wired directly to a home's electrical system. The generator consists of two main components: an engine and an alternator. The engine causes the alternator to rotate, creating electricity.

The engines draw fuel from a home's natural-gas line or a liquid propane tank, allowing the generators to operate uninterrupted for days. The cost of a generator depends on its power output, but most residential generators average $5,000 to $8,000, including installation.

Just 1.25 million U.S. households have permanent generators, or 2.5% of the 50 million homes that Generac estimates as the potential size of the permanent-residential-generator market.

Adding one percentage point to the penetration rate of permanent generation would represent 500,000 additional homes. Industry analysts say this growth is achievable, given that the market size was below 2% five years ago. Industry sales of home generators have been growing about 17% a year.

Moreover, each point of market growth creates an opportunity for about $2 billion of new revenue. With Generac's 70% share of the permanent-standby-generator market, the company would be in line to capture about $1.4 billion from each percentage point of industry growth. That is nearly 2.5 times greater than analysts' revenue forecast for Generac's permanent-residential-generator business this year.

For homeowners still without power though, buying a permanent standby generator won't bring immediate relief. An electrical contractor is needed to install the backyard units, which typically require multiple permits to comply with municipal building codes.

Joann Davi, vice president of Long Island Emergency Power, a Generac dealer and installer in Deer Park, N.Y., predicts her company will have steady work for the next two years based on the orders and the hundreds of inquiries about permanent residential generators she received in the past two weeks.

"They're becoming more common because on Long Island we're surrounded by water and overhead power lines," she said.

 professional.wsj.com