Small towns are warming up to ACs in a big way, says B Thiagarajan

In its platinum jubilee year, air conditioner manufacturer (AC) and commercial refrigeration company Blue Star will be unveiling a slew of breakthrough products. Joint managing director of the company B Thiagarajan, in conversation with Ashish K Tiwari, speaks about the overall industry scenario, company’s business, growth plans and more.

Could you give us a sense of how the last couple of years have been for the industry in general and Blue Star in particular?

The industry size for air conditioning products in India is around 5.5 million units and market penetration is still at 5%. In value terms, the market size this year is Rs 12,000 core but that number is a GST-adjusted figure. The compounded annual growth rate for the market has been maintained at around 10% after providing for the energy label change. Generally, people are getting used to ACs in a car, cinema theatre, restaurants, offices. Rising mercury levels, especially during summer months, are now pushing people to have ACs even at home. Bigger homes have multiple AC units, which is contributing to the growth of this durable.

Power consumption and cost associated with using ACs have come down significantly with almost 95% reduction, particularly when it comes to inverter ACs. Interestingly, Tier-III, IV and V towns are also warming up to ACs that is why you saw growth even in a demonetisation year and goods and services tax (GST) transition year. In fact, around 52% of Blue Star’s room AC sales are from smaller towns since consumers in these markets are aspirational and prefer premium brands.

This year, the market should be growing by 12% or so and Blue Star will end up at around 18%. In the coming year, we expect at least 20% growth in the summer season while full year will be between 15% and 20%. We entered the residential segment in 2011 and had a market share of 2.5% then. Our aim is to grow from a market share of 11.5% to 12.5% next year.

Tell us about your recent product introductions and your promotional plans for the same.

We launched 100 products to meet every price point depending on the feature being offered. These include 40 new models of highly energy-efficient three-star and five-star inverter split air conditioners that are designed to deliver extraordinary benefits. These will be sold via 4,500 outlets in 550 locations. Presently, we have 150 exclusive product stores in the country and we plan to increase it to 200 by the end of FY19. We have increased advertising and promotions (A&P) spends to Rs 55 crore in the forthcoming summer season as against Rs 45 crores in FY18. We also intend to enhance digital marketing efforts across social media platforms.

Industry players have started focussing on inverter ACs since last year.

Inverter ACs have certainly become a major player in the market. Of the total number of ACs 25% is inverter AC and this number will grow to around 35% this year. By 2020, inverter ACs will be over 60% of the total AC market. In fact, most international markets have totally moved to inverter ACs. The India target of 60% by 2020 is a good goal.

Does being in a competitive and fast-growing category also become very challenging for established players to maintain/acquire market share?

Competitive intensity is high in every other consumer product category. And since the market is growing, new players are bound to enter. That’s not so much of a problem. Is it challenging? Well, if you are in this business then you have to cope with it. A lot also depends on how you’re positioning yourself in the market. We clearly have a very distinct market positioning and do not compete with new market entrants. We have been in the top-end and we want to be there. Our goal is not to somehow grow the market share. We have to be a premium player delivering value with a reasonable market share. Our goal eventually is to reach 15% market share by 2021.

There has also been a price increase of 5% to 6%.

There are many factors. Prices of copper, steel, refrigerants have gone up. Secondly, energy label change has happened as a result a five-star AC becoming three-star from January 1, 2018. Some adjustments have been done to position the products. Compared with December 2017, prices would have gone up by 5% to 6%. However, there were also some benefits owing to the goods and services tax (GST) roll-out so we have stayed neutral and did not reduce or increase prices apart from for this (differentiation) 5% to 6% across different models. And if the summer demand is good we will be able to hold this margin.

Is the consumption growth also happening because of financing schemes?

Consumer finance schemes have certainly played a catalyst. We offer 0% finance with attractive EMI options via tie-ups with leading banks and finance firms. Over 25% sales are through such consumer finance options and are hoping this number will increase drastically in the coming years.

There was some talk about increasing production by 15% to 20% keeping in mind the demand during this summer season.

There was some kind of pessimism during December – January and we knew that this summer will be good because there were weather indications with extremely hot summer. Both the developments are good for an economy. Last year was so uncertain because of GST, nothing was happening. Despite all that, the year is ending on a very positive note. Therefore, I don’t foresee any problems this year. It could be a year where there could be shortages, even during summer. People are saying we have doubled the capacity. In a manner of speaking, one has to plan four months in advance for the supply chain as various components, compressor, PCB, packaging material are accounted for. The plan is that you have only a 5% window i.e. you plan for a 25% growth and you can take it to 30% or you can take it to 20%. If I’ve planned for 25%, I can’t make 50% growth, it is impossible. I can attempt for it only in the month of June now. Double the capacity is a bit of an exaggeration unless, one is sitting idle with the raw material, which is not the case. The truth is that it is going to be a great summer. And all of us will be on full steam.