Appliance Recycling Centers Of America, Inc. Business Information, Profile, and History

Company Perspectives:

As the leader of the appliance recycling industry, ARCA pioneered the development of environmentally-sound appliance recycling systems. Today, ARCA provides a complete range of large-scale collection, processing and recycling services that will help you comply with federal, state and local appliance disposal regulations.

History of Appliance Recycling Centers Of America, Inc.

Appliance Recycling Centers of America, Inc. (ARCA) provides appliance recycling services for customers in Minnesota, Ohio, and California. The company has developed large-scale systems for the proper disposal of appliances such as refrigerators, freezers, room air conditioners, dehumidifiers, and vending machines. These appliances contain refrigerants and other materials that are subject to environmental regulation. ARCA removes and reclaims the harmful substances in accordance with federal law and sells the remaining material to scrap metal companies.

ARCA's customers include major appliance retailers, appliance manufacturers, property managers, waste management companies, and the general public. Contracts with electric utilities, primarily in California, are another major source of appliances for ARCA's recycling centers. In addition to recycling old appliances, ARCA operates a chain of retail stores, under the ApplianceSmart name, that sell new special-buy household appliances. The ApplianceSmart stores are an outlet for the reverse logistics services that ARCA offers to appliance manufacturers and retailers. Reverse logistics relates to the handling of products that do not fit into a company's normal distribution channels, including manufacturer closeouts, factory over-runs, returned items, and scratch and dent appliances. ARCA purchases and resells these virtually new appliances at a discount at eight ApplianceSmart stores in three states. The stores carry Whirlpool, Kitchenaid, and Roper brands and offer customers a 100 percent money back guarantee and warranties on parts and labor.

Developing Responsible Disposal Methods: 1976–92

ARCA was founded by Edward "Jack" Cameron in 1976 and was initially known simply as Major Appliances Pick-up Service. The company contracted with major retailers such as Sears, Montgomery Ward, Dayton's, and J.C. Penney to remove old appliances from the homes of customers. The appliances were either reconditioned for sale at stores in the Minneapolis-St. Paul area or were sold to scrap metal companies for recycling. In the absence of environmental regulations, processing old appliances was a fairly simple matter in the early days of the company's operation.

In the 1980s, increasing concern about the environment led state and federal governments to adopt regulations related to appliance disposal. The Environmental Protection Agency banned the production of polychlorinated biphenyls (PCBs) in 1979 because of their suspected role as carcinogens, and landfills subsequently refused to accept PCB capacitors. Publicity about the potentially thinning ozone layer led some states to enact more stringent regulations relating to chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs), chemicals found in refrigerants. Other sources of concern were mercury, lubricating oils, and sulfur dioxide, all of which were found in appliances.

In response, the Major Appliances Pick-up Service began to refine its disposal systems. In 1987 the company developed a reliable method for separating PCBs from old appliances. The new focus on large-scale processing methods was marked in 1988 with a name change to Appliance Recycling Centers of America, Inc. By 1989 systems were in place to recover CFCs, which could be recycled and sold to the appliance and automotive repair markets. In 1991 ARCA was able to recover sulfur dioxide refrigerant as well. The company was also responsible for ensuring that mercury components were delivered to a proper facility. Only after all harmful substances were removed was the metal shredded and sold.

Positive publicity for ARCA's environmentally responsible activities helped the company win contracts with the utility industry. Utilities hoped to reduce energy consumption through demand-side management programs, in which consumers were offered incentives to trade old appliances for more energy-efficient models. In 1989 ARCA established an appliance processing center in Milwaukee to support a contract with a Wisconsin utility. That year also brought a structural change, when the company merged with a public shell that had existed since 1983. Energy-efficiency programs for utilities were to be the focus of ARCA's business efforts through the early 1990s. In November 1991 the company made its first public stock offering, hoping to generate funds for opening more recycling centers. The offering through the NASDAQ small-cap market earned $2.3 million. By 1994, ARCA had opened nine recycling centers in the United States and Canada, largely in support of its partnerships with utilities.

Continuing environmental legislation provided an impetus to ARCA's activities. In 1990, amendments to the Clean Air Act called for a phasing out of the production of CFCs. In July 1992, a prohibition on the venting of CFCs during the maintenance, repair, or disposal of an appliance went into effect. The Federal Energy Policy Act of 1992 had a mixed impact on ARCA. The act encouraged energy efficiency and set mandatory energy performance standards for major household appliances. However, the act also provided for the deregulation of utilities, a step that ARCA feared would lead to fewer contracts with electricity providers.

Restructuring During Difficult Times: 1993–97

Concerned about a possible reduction in demand-side energy efficiency programs, ARCA began to seek a new focus. Contracts with appliance retailers, waste management companies, and property management companies could make up for some of the potential loss of business with utilities. Another possibility was to increase the sale of reconditioned appliances in company stores. But ARCA went through some painful years of experimentation and restructuring as it looked for a profitable mix of services.

In 1993 the company moved into a new facility in Excelsior, Minnesota, with 24,000 square feet of office space and 100,000 square feet of warehouse space. The expanded headquarters helped bring geographically scattered departments under one roof. A new facility in Los Angeles, however, was less successful. A recycling center was being built there to support a contract with Southern California Edison (SCE). Unfortunately, the center opened several months late, contributing to a drop in revenue for the year and a loss of 13 cents per share.

The next year brought more trouble from California. An earthquake disrupted appliance recycling programs, and processing volumes were lower than expected. The company took a loss in the first quarter. However, contracts with some customers guaranteed minimum recycling volumes, and the company was able to post a net income of $868,000 for the year.

The next year saw a continued decline in demand-side recycling programs through utilities. Reduced business led to a loss of $943,000 for 1995. In response, ARCA made a move to promote its retail business. The company introduced Encore Recycled Appliances, an outlet for ARCA's reconditioned refrigerators and freezers. ARCA purchased Gateway Appliance Center Inc., a used appliance retailer and recycler in St. Louis, Missouri, planning to convert the facility to an Encore store and open two more stores in St. Louis. ARCA began extensive restructuring to focus resources on the Encore used appliance concept. In addition, the company broke new ground by signing a recycling contract with GE Plastics of Pittsfield, Massachusetts. ARCA agreed to use its fleet of trucks to pick up scrap industrial plastics and discarded auto bumpers in the Rochester, New York area.

The aggressive expansion of the Encore chain continued into 1996. Unfortunately, the used appliance concept proved to be unsuccessful and ARCA retreated late in the year. In the fourth quarter, 12 retail stores and three recycling centers were closed. The combination of early expansion and later reconsolidation led to a $7.26 million loss for the year. One positive development was the extension of a contract with Southern California Edison, whose recycling program was now on solid footing after the initial delay in completing the recycling center. The contract increased from 22,500 to 30,000 the number of refrigerators and freezers that SCE was expected to provide.

The after effects of a consolidation of the Encore stores and the closing down of several recycling centers caused another loss, of $748,000, in 1997. By the end of the year, ARCA had greatly reduced its sphere of operation, with only 13 stores and four recycling centers, down from 30 stores and seven recycling centers a year earlier. As the Encore chain was faltering, a new style of retail offered hope for better years ahead. A pilot program with Whirlpool began in 1997, in which ARCA agreed to handle the manufacturer's returned, discontinued, and scratch and dent appliances. This new approach, of dealing in new appliances acquired through reverse logistics services, would prove to be more profitable than selling used appliances.

A New Focus and New Contracts: 1998–2001

The pilot program with Whirlpool proved successful, and in 1998 ARCA entered into a contract to provide reverse logistics services for the company, agreeing to purchase the appliances that Whirlpool was unable to sell through its normal channels. Whirlpool initially supplied appliances from distribution centers in the Midwest and western states. In late 1998, ARCA found it had a more than ample supply of like-new appliances and scaled back the contract to acquire appliances primarily from Whirlpool's Ohio distribution center. ARCA decided not to expand its used appliance retail business.

ARCA's strategy for the ApplianceSmart venture was to have fewer but larger stores in selected markets. Accordingly, the company closed the entire St. Louis operation, consisting of two stores and a recycling center. One store in the Minneapolis/St. Paul area was also closed. The company was now operating eight stores in Minnesota, Ohio, and southern California. The store closings led to a loss of $3.06 million for 1998, but perseverance with the ApplianceSmart concept was to pay off in the long run.

The company continued to trim and focus its retail operations in 1999, closing one store in Minneapolis and another in California. Another small Minneapolis store was converted to a superstore. ARCA's efforts finally began to show results. Despite having fewer stores in operation, sales rose 2 percent in 1999 from the previous year and the company reported a net income of $505,000. ApplianceSmart was on solid footing and ready for expansion in 2000.

A new store in Dayton, Ohio, set the standard for future ApplianceSmart stores. The store, opened in May 2000, was larger than ever, had less of a warehouse atmosphere and was located in the middle of a retail area. Meanwhile, a smaller Minneapolis/St. Paul area store was closed. Larger stores and improved advertising contributed to a net income of $927,000 in 2000. More new stores followed in 2001. In January a large store opened in the eastern Minneapolis/St. Paul metro area, and in March a second large store opened in Dayton. Concentration on already established markets allowed ARCA to leverage existing support systems and advertising for the new stores. In May a small Columbus store was replaced with a larger store. As of August 2001, ARCA was operating eight ApplianceSmart stores: three in Minneapolis/St. Paul, two in Dayton, two in Columbus, and one in Los Angeles. Sales generated by the ApplianceSmart operation accounted for over half of ARCA's revenue. The company stated its intention to open more stores, possibly in new markets, without being so aggressive as to damage overall profitability.

Meanwhile, the energy crisis in California generated new contracts with electric utilities. After a slowdown due to utility deregulation, residential energy efficiency programs once again gained support. In October 2000, Southern California Edison more than doubled its contract with ARCA by arranging to recycle refrigerators and freezers in the service territories of Pacific Gas & Electric and San Diego Gas & Electric. This contract, dubbed the "Summer Initiative," was expected to generate about 36,000 appliances annually for ARCA's recycling centers.

In June 2001 a new one-year contract with the California Public Utilities Commission was announced. The program was modeled on the Summer Initiative but would accept room air conditioners, as well as refrigerators and freezers, from San Diego and surrounding areas. The California legislature, looking for a way to deal with energy blackouts, agreed to fund the program. It was expected to reduce peak residential summer electricity demand by about 21 megawatts, equal to the output of a small power plant.

In 2001, ARCA appeared to have found a profitable mix of business ventures. Founder Jack Cameron, who continued to lead the company as president, chairman, and chief executive officer, had kept ARCA intact through 25 years of changes, first capitalizing on environmental regulations, then persevering as utility deregulation and a faltering used appliance retail business threatened the company's bottom line. In the end, the ApplianceSmart operation filled a profitable niche with its reverse logistics services for appliance manufacturers. Moreover, the company's two decades of experience in appliance recycling made it a sound choice for any organization seeking to dispose of old appliances.

Principal Competitors: Best Buy Co., Inc.; GE Appliances; Philip Services.

Chronology

• Key Dates:
• 1976: Edward "Jack" Cameron launches Major Appliances Pick-up Service.
• 1987: Company develops a method for separating PCBs from old appliances.
• 1988: Business is organized as Appliance Recycling Centers of America, Inc.
• 1989: Recycling contracts expand to the utility industry.
• 1991: Company goes public.
• 1992: Utility deregulation becomes law and makes further contracts uncertain.
• 1995: Encore retail chain is opened, selling used appliances.
• 1998: ApplianceSmart chain begins selling new special-buy appliances.
• 2001: California energy crisis brings new contracts with utilities.