Business - Will it be festive?

Come September, it’s festive season again. As consumers plan their shopping, durables majors are working overtime for a share of their wallets. This is precisely when the durables industry rakes in the most, every year. Tardy industrial growth not withstanding, the consumer durables sector is bullish about its growth this year too. And if industry players are to be believed, the sector will continue to attract consumers’ attention despite the current inflationary trend, dearer money, limited finance options, slowdown in the housing sector and general slowing of the economy.
However, the story so far is not so good. With the north-bound interest rates continuing to drag down manufacturing, industrial growth slowed down to 5.2 per cent in the first quarter of this fiscal from 7.1 per cent a year ago. And, from the consumption point of view, the consumer durables sector is no exception. According to industry sources, though the industry, across categories, has registered around 25 per cent growth in this calendar year, the growth rate is lower than what was during the January-June 2007 period. Figures from ORG-GFK substantiate this trend in the industry.
According to ORG data, there is a perceptible drop in growth rate in certain categories. For example, the CTV segment registered a lower growth rate at 18 per cent during the January-June 2008 period compared with 21 per cent growth registered during the same period last year. DVD players registered 15 per cent against 30 per cent; air-conditioners posted 18 per cent (51 per cent) and refrigerators grew by 6.6 per cent against 15 per cent during January-June 2007.
Owing to inflationary pressures, most durables majors including LG, Samsung and Onida have increased prices of various products from 3-7 per cent in the last six months to protect bottomlines. According to Ravinder Zutshi, Deputy Managing Director, Samsung India, there was 6-12 per cent increase in input costs. Besides, a weakening rupee also added to their woes.
V. Ramachandran, Director (Sales and Marketing), LG Electronics India, says most brands import the top-end models of washing machines, refrigerators and air-conditioners as CBUs (completely-built units) or SKDs (semi knocked-down kits) and assemble them here. As there has been almost a 9 per cent swing in the rupee value against the dollar in recent months, the landed cost of these products went up as much.
While the extent of imported components may vary, at the minimum, they account for more than 5 per cent in products across categories.
Besides the price correction, major financial institutions are no longer offering direct credit to consumers for durables. Institutions such as ICICI Bank and Citibank now offer credit only through credit cards, unlike earlier, when the consumer did not have to possess the bank’s credit card. Another major player in this segment, GE Money, also withdrew from the scene, leaving only Bajaj and Shriram in the fray.
From the financial institutions’ point of view, this is a small portfolio compared with segments such as commercial lending, housing and automobiles, which are much larger. However, for durables majors finance-led sales contribute close to 30 per cent on an average. Now finance-led sales have shrunk to nearly 5 per cent. That apart, as pressure on margins builds due to increasing input costs and logistics, companies do away with offers such as “interest-free instalment schemes”.
According to C. Ravishankar, Manager (Strategic and Commercial Intelligence, Transaction Services), KPMG, ‘financed sales’ typically account for 20-40 per cent of durables sales in India, depending on product category, and the durables manufacturer.
However, the financing continues to be available through the credit card route, and much of durables financing in India remains “informal financing”. “Look at small durables retailers in any class of towns, they flourish in spite of having higher prices than the organised retailers, simply because they are able to give 3-12-month instalment-based finance. While credit card-based loans are almost twice as expensive as the earlier direct finance, credit card companies have in the past lowered the normal rate of 40 per cent to encourage large ticket spends on durables and other purchases and offered EMI-based payments,” says Ravishankar.
Certain big players in the industry say the growth story so far is really encouraging, though. They believe the ensuing festive season will register better growth. Though they admit financed sales will be hit, they say the damage may not be as acute as it seems. At the macro economic level, the Pay Commission revisions and the overall growth in salaries are major factors that bode well for consumer household surplus. In the short term, growth rates may be hit, but longer-term prospects for the industry remain good. Penetration of several durables remains low, aspirations remain high, and household surpluses are likely to grow, in spite of negative blips, they argue.
LG’s Ramachandran says the slowdown exists only in a few categories. For example, for LG, where sales improved in certain categories during the period, CTV and air-conditioners were slower. “Last year, CTV sales were good because we had the Cricket World Cup during the period. And, air-conditioners did not perform as well as last year, maybe because of intermittent showers during the period this year,” he says.
Samsung’s Zutshi says, at Samsung, “We were able to register a growth of around 30 per cent in the first six months of the year linked with the Samsung sales infrastructure and channel expansion and our marketing activities.”
To offset the sluggish trend, companies rejig marketing strategies, revamp distribution channels and launch new models and products. “Product differentiation is our key focus. We have introduced crystal design in LCD TVs, Silver Nano in semi automatic washing machines, stabiliser-free refrigerators,” says Zutshi. It also introduced additional features in some of its existing models. For example, in flat-screen TVs, it recently introduced facilities such as channel grouping (where one can group channels by genres) and pop-up messages. In DVDs, features such as USB, CD ripping and FM Radio were added. In air-conditioners, it added new capacities such as 0.8, 1.1 and 1.6 tonnes.
To boost sales through modern retail outlets, the company has now created a separate management vertical. Zutshi says the industry expects sales contribution from modern retail to touch 8-10 per cent from the present 2 per cent. He is confident that increasing inventories in the hospitality industry will also give the industry a shot in the arm.
On finance-led sales, he said they accounted for around 25 per cent for Samsung. “As the consumer’s aspirations are very high, one will find a way out to buy what he/she wants,” he says. However, as a note of caution, he adds that any further hike in interest rates will have a negative impact on this and may lead to a postponement of purchase decisions.
For its part, LG plans a new range of refrigerators in different capacities, and plasma TVs. According to its Managing Director, Moon B. Shin, LG will “heavily promote” plasma TVs soon. “We are working on strategies to make plasma TV more affordable,” he said. It also plans new products such as wine cellars and high-power vacuum cleaners.
Sony India Managing Director Masaru Tamagawa said the best way to better sales is through customer segmentation. “Our target consumer is one with an annual income of Rs 5 lakh and above. According to official statistics, India will have 40 million such households by 2010. This will be our core target audience for our products.”
Noting that the company did not perceive any slowdown, he said, “We don’t see any slowdown in the television and camcorder category. The demand has been steady. However, the depreciating rupee has made the import of electronic components dearer. We have, however, not passed on the burden to the consumer so far.”
Overall, major players are bullish about the coming festival season and have even started building strategic inventories by expanding capacities. Industry sources say factors such as increasing penetration levels, growing aspirations, Sixth Pay Commission (arrears), farm loan waiver announced by the Government coupled with increased procurement price for certain agricultural commodities, which is expected to leave surplus funds in the hands of farmers, augur well for the industry.