For consumer goods makers, the market's pure nightmare

Television screens across homes are getting larger and flatter, refrigerators taller and washing machines faster and smarter.

Everything, it seems, is going in favour of the Rs35,000 crore consumer durables industry in India — except the most crucial one — margins.

So much so durables makers expect to clock sales growth in excess of 30% this New Year, but at the botttomline level, there is just no ear-to-ear cheer.

Blame it on a relentless rise in raw material costs, ever-fiercer competition, trade channel partners that play one company against the other, and, lastly, a more enlightened — and therefore more demanding — consumer.

YV Verma, president of the Consumer Electronics and Appliances Manufacturers Association (Ceama), said the industry in India has witnessed an overall growth of 12%-13% in calendar 2010.

“But raw material prices are continuing to rise,” Verma, who is also the chief operating officer of LG Electronics India, said.

The secretary general of Ceama, Amitabh (he uses just one name), said input costs have climbed rapidly in the last six months, but the pace has stabilised somewhat of late.

“So there is a possibility of consumer durables companies hiking prices,” he said.

But that’s easier said than done due to the ultra-competitive nature of the business.

A little less than a year ago, LG and Samsung Electronics had announced price hikes across categories citing rising input costs.

Some others tried, too, but they couldn’t hold on to the priceline for long because of intense competition. So much so, many companies rolled back hikes by 10%, said an industry analyst, who did not wish to be named, said.
“Even as these companies are seeing huge growth in sales, the margins have come down drastically,” this person said.

Every player in the category is facing margin pressure, KS Raman, director, Next Retail India Ltd, a division of Videocon Industries, which owns the Next brand of large-format electronics stores, said.

“We work on 12-14% margins. Given a choice, most manufacturers would want to hike product prices, but consumers may not want to pay more as there is more supply than demand,” Raman said.

Rajiv Bajaj, chief financial officer and company secretary, Panasonic India, said as companies continue to grapple with multiple challenges, they are trying adopt newer technologies to save costs.

“Some are also moving to alternate raw materials. For example, using aluminium instead of copper to save costs,” said Bajaj, who is a Ceama secretary.

Compounding the issue is the disparate nature of the trade channel, where the modern retail makes up for only 11% of total sales of the consumer durables sector.

As much as 89% of the business comes from the traditional retailers who rule the roost from stores as small as 200 square feet in size.

Yet, despite the tough conditions, India and other emerging markets continue to draw in the global players.

TCL India Holdings, a subsidiary of Chinese electronics manufacturer TCL, is aggressively looking to strengthen presence, mostly through its high-end television products.

“Globally, competition is like a bloodbath, it is terrible. Everywhere, everybody is talking about price — every corner of world is like that. This creates big pressure for every player,” said Yi Hao, president - overseas business centre and chief sales officer, TCL Multimedia.

Developed markets have long saturated and growing at just 2-3% year-on-year; while markets like India promise growth in excess of 10%.
There is also enormous headroom in terms of penetration.

Ceama data show refrigerator penetration in India at just 18% of the potential market, washing machines at 6%, air-conditioners are less than 3% and microwave ovens at about 1%.

Not surprisingly, Hao says India as one of TCL’s most strategic markets, apart from Russia and Brazil.

LG’s Verma said the industry has immense growth potential in the years to come. “It can grow at more than 15% in 2011,” he said, adding that the only way to battle and tackle the challenges are through product leadership by means of innovation, building consumer trust through after-sales service, and brand-building.

Ceama said sales of flat panel display category products such liquid crystal display televisions (LCDs) and plasma display panels (PDPs) rose phenomenally by 45% in 2010 in India as consumers upgraded to high-end models.

Air-conditioners (ACs) posted sales increase of nearly 12%. The sales of home appliances surged 23%.

The market size for flat panel displays in 2010 was estimated at 2.8 million units in India, and is expected to rise to 4.5 million units by 2011, Ceama said.

The market size of refrigerators is set to increase to 12 million units from 9 million units now, that of washing machines is likely to increase to 6 million units from 5 million units, and air-conditioners is estimated to reach 4.4 million units from 3.4 million units.