Consumer durables - High-margin products, cost control measures to the rescue

Japanese electronics major Panasonic India’s Managing Director Manish Sharma is not particularly worried about the slowdown in the consumer durables market. Several months ago, foreseeing a possible decline in demand, Sharma and his team took two crucial decisions — to focus on B2B (business-to-business) products to keep up profit margins; and to increase local production, especially India-specific products, to maintain volume growth.

“The B2B segment can help expand our margins and lead to better profitability. The costs are lower as there are no ad budgets and distribution expenses,” said Sharma.

The company is putting more efforts on its enterprise product line targeted at the healthcare, security and education space. To drive cost efficiencies in the consumer space, Panasonic has increased production capacity at its plant in Jhajjar, Haryana at an investment of $200 million over a five-year period.

Other players in this segment too, are re-jigging their plans to balance out the slowing demand. Whirlpool, for example, is trying to boost exports and substitute imports, wherever possible.

While a number of factors, including inflationary trends and macroeconomic headwinds, are hurting the once growing consumer durables business, it is the volatile currency which has sent the industry into a tizzy. Most manufacturers had to hike up product prices three to five per cent beginning July.

According to Pradeep Bakshi, Chief Operating Officer, Voltas, the weather did its bit to depress demand.

“The AC category has witnessed a de-growth of 20-25 per cent as the weather has played spoilsport with intermittent rains,” he said.

Margin protection

Consumer product makers have made it their top priority to protect margins and deal with cost pressures by focusing on segments such as smart phones, as these remained unaffected by the slowdown. According to GfK India Retail Audit (Urban India), flat panel TVs and smart phones did see unit growths of 19 per cent and 100 per cent, respectively, in the January-June 2013 period over the previous year period. But, washing machine sales declined. Shantanu Dasgupta, VP, Corporate Affairs & Strategy, Whirlpool India, said: “While some segments and categories and companies may be growing for different reasons, e.g. low base of a company, the general trend has been one of decline in all home appliance categories at an industry level.”

Companies are therefore shifting focus to categories that have not been impacted by the sluggish buying trends. For instance, Toshiba is moving away from the home appliances category to higher margin products like laptops. Recently, it unleashed the ‘Satellite’ series of laptops targeting youth in the 18-35 years age group.

Consumer product companies are also keeping a tight control on discretionary spends. For instance, they are cutting down on air travel and using video-conferencing instead. While new hiring has not been frozen, it is being done only where necessary.

But the biggest challenge for these companies is to induce buying decisions. Offering financing options to consumers is one way of sprucing up demand.

LURING CUSTOMERS

Products that give consumers a sense of making savings elsewhere in return for the initial investment are being introduced.

LG, for example, has introduced “Power cut ever cool refrigerators” whose technology keeps them cool even during long power cuts.

Sanjay Chitkara, Head-Corporate Marketing, LG India, said: “We have seen double-digit growth in major categories i.e. ACs, flat panels and refrigerators. Consumer sentiment is a concern but we are optimistic and we are witnessing good growth in most categories.”

While such schemes seem to be paying off for now, most consumer durable product makers admit that the slowdown this time is severe and could last longer.

“These efforts take time to yield results. We will not invest on expansion until growth returns, as our installed capacities are adequate to meet current demand,” said Dasgupta. Products priced at typically bought by middle-class households were the worst affected, he pointed out. These include mid-capacity frost-free refrigerators and fully automatic washing machines besides ACs.

The last time the market went through such a phase was in 2008. But then a combination of events, including the government’s stimulus package, crash in commodity prices and the payment of arrears on the Sixth Pay Commission, put money in the hands of consumers, making 2009-10 a great year. But this time around, there are no such things on the horizon.

Nilesh Gupta, Managing Partner of Vijay Sales, fears higher prices of durables, along with dampened consumer sentiment, will take a toll in the coming months.

The only hope for the consumer durables makers now is the festive season, when demand usually picks up. Companies like LG, Godrej Appliances and Panasonic are readying up with a slew of new products for the festive season. Sonu Ahuja, who runs a consumer appliances and electronics store in the posh Khan Market area of Delhi, said: “Some of my customers have put on hold their decision to upgrade their washing machine or buy new refrigerators after prices went up in June. I hope people start buying consumer electronics once the festive season starts.”

But not all are as hopeful. Gulu Mirchandani, CMD, Mirc Electronics, said: “Even festive season sales may not compensate for the low consumer sentiment as consumers will continue to feel that the price rise is too high.”

>meenakshi.v@thehindu.co.in

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