The Hindu Business Line : Growth at the top of the value chain

EVEN as overall growth in the consumer durables industry has slowed down over the last few months, primarily due to the prevailing confusion over the implementation of the value added tax (VAT) regime, the growth in the high-end of the segment has brought some cheer to the industry.

Incidentally, flat colour televisions, frost-free refrigerators and fully-automatic washing machines have emerged as the growth drivers for the industry over the past year, and industry watchers predict that the trend will only strengthen in the coming years.

Consider this: the contribution of flat CTV sales to total industry sales has grown from 12 per cent in January 2004 to 28 per cent in December 2004. While flat TVs, in terms of volume sales, still lag behind the conventional ones significantly, the situation is different when comparing the market shares in value terms. According to industry data, in the April-February period, while flat TVs accounted for 28.2 per cent (with sales of 20.39 lakh units) of total volume sales, the figure was 40.3 per cent in terms of value.

For several bigger players (particularly the multinational companies), flat TVs are already contributing upwards of 60 per cent of total volumes.

"The gap between the 20" curved and 21" prices a year ago was in the range of 60-70 per cent. Today, the gap has decreased to 30-35 per cent. The range offering in flats by manufacturers like us, at different price points, is motivating the customers to upgrade," says an official from Samsung India. Incidentally, flat TVs accounted for about 70 per cent of Samsung's total CTV sales in December 2004.

According to D. Shiv Kumar, Executive Director and Senior Vice President, Philips India, the flat CTV segment currently contributes about 40 per cent of the company's total CTV sales. The figure would go up significantly in the forthcoming months, he says. The price differential, depending on the screen sizes, varies from 25-30 per cent between the flat and the conventional models.

Further, according to the Consumer Electronics and Television Manufacturers Association (CETMA), while the CTV industry is expected to grow at a steady pace of 12-15 per cent this year, the momentum in flat TVs would continue, with the segment accounting for 35 per cent of total CTV sales by the end of this year.

"The movement up the value chain will continue as easy availability of finance, falling prices of higher end variants like 29" TVs, refrigerators and cheaper DVDs and cameras are available. Income-tax structures will leave more disposable income at the low and middle-income groups starting April — which will further aid the sales," points out R. Ravi Shankar, Senior Vice-President, TNS India.

In fact, market watchers point out that the average price of a flat television has decreased to about Rs 14,300 in 2004 from about Rs 19,750 in 2002.

Further, in some cases, the price difference between a flat and a conventional television is only about Rs 1,000.

Similarly, prices of frost-free refrigerators have declined by over Rs 2,000 over the last couple of years.

The result is that while total refrigerators sales increased 8.4 per cent in the April-February period, sales of frost-free refrigerators jumped 50 per cent in the same period.

Further, the category accounted for about 22 per cent of total refrigerator sales in the 11-month period.

"People are increasingly going in for better technology. The frost-free segment is seeing high growth despite the price difference between it and the direct cool segment," says Anil Arora, Product Group Head-Refrigerators, LG Electronics.

In fact, while a consumer can purchase a direct cool refrigerator for Rs 6,500, a basic frost-free model would cost around Rs 13,000.

Growth in the industry could, however, be subdued in the forthcoming months with sales dropping by at least 10 per cent in March and a price revision of about 7-14 per cent in recent months. LG Electronics, for instance, has increased prices by about 12 per cent since February and would be implementing a further price hike of about 5-10 per cent in April.

However, industry analysts are upbeat the long terms growth prospects for the industry.

"The segment will continue to grow at a pace slightly lower than in the last years but the volume will be bigger as the base has widened. The extension of the winter in the North and milder temperatures in March has kept the refrigerator and air-conditioner sales low in February and March. It is, however, likely to pick up later in the year. The economic indicators of a growing middle-class with higher incomes and lower taxes will ensure robust sales," says TNS' Shankar.

Another interesting aspect is that semi-urban and rural areas are driving a bulk of sales for the industry and even for the high-end models with higher income levels and price reductions fuelling purchases. While data on the contribution of these areas to the sales of high-end products is not available, the importance can be gauged from the fact that more than 60 per cent of CTV sales come from semi-urban/rural areas.

Further, even the washing machine segment, which has a low penetration level and has been seeing largely stagnant growth over the past few years, has seen high double-digit growth over the past few months (barring March, which saw a de-growth in the durables industry due to VAT). According to industry data, the category grew by 17.1 per cent in the April-February period, with the fully automatic segment seeing volume growth of 62.4 per cent. Further, the fully automatic segment accounted for 27 per cent of the total volume sales and 44.8 per cent of value sales in the period. The volume market share for fully automatic washing machines is estimated to go up to 35 per cent by the end of this year.

Meanwhile, a delay in the onset of summer may have given a slow start to air-conditioner sales this year, but consumer durables majors are not revising their growth outlook for the fast-growing category. Once viewed as a luxury item, the air-conditioner segment has been growing at a consistent 15-20 per cent over the past few years, and is expected to maintain this momentum.

"Though industry sales are yet to take off this summer primarily due to uncertainty about VAT and late onset of summer in the North, we expect to grow about 20 per cent and reach a level of 12 lakh units this year," says Kamal Nandi, Sales Head, Godrej Appliances.

In fact, K. J. Jawa, Vice-President (Operations), Voltas Ltd, says though the growth in the segment had been slow through most part of March, there was a rush in purchases in the last 3-4 days of the month. "The industry is doing well. In fact, we are targeting growth of about 30 per cent this year to 200,000 units," he says.

Analysts are of the view that the growth in the higher end of the market will continue as consumers upgrade to new technology and features. Further, the very definition of high-end is changing with consistent price declines bringing product categories such as flat TVs and frost-frees within the reach of the consumer.

"This trend will continue. As the consumers evolve, their needs and wants also evolve. For example, consumer preference for better quality picture and sound has led to emergence of flat TV replacing the non-flats quicker than expected as well as better quality sound delivery systems in TVs. The increased demand for flat TVs has also led to economies of scale leading to reduction and rationalisation of pricing — making them more affordable," says Anang Dev Jena, Associate Director for Synovate India.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
What's marketing B-schools all about

Nalli gets out of nine yards

Discover a sales culture

`Cola wars alive and kicking'

Mumbai year-end

Growth at the top of the value chain

It takes only 3.5 seconds to walk by your booth