An In-depth Study of Indian Consumer durable Industry

Wrote by : -

Saraswat Bhattacharya

MBA 09093

Amrita School Of Business

Introduction:

Durable goods are those which don‘t wear out quickly, yielding utility over time rather than

at once. Examples of consumer durable goods include electronic equipment, home

furnishings and fixtures, photographic equipment, leisure equipment and kitchen appliances.

They can be further classified as either white goods, such as refrigerators, washing machines

and air conditioners or brown goods such as blenders, cooking ranges and microwaves or

consumer electronics such as televisions and DVD players. Such big-ticket items typically

continue to be serviceable for three years at least and are characterized by long inter purchase

times.

Developing countries such as India and China have largely been shielded from the backlash

of the recession, as consumers continued to buy basic appliances. In fact, China has been

ranked the second-biggest market in the world for consumer electronics. Despite the

recession, their strong domestic economy and growing high-income population have buoyed

demand leading to aggressive market growth.

There is growing interest for new age products such as LCD-TVs and DVD players.

Meanwhile, the penetration of the basic, largest dollar items such as ovens, washing machines

and refrigerators is also increasing. India too, has witnessed a similar phenomenon, with the

urban consumer durables market growing at almost 10 %p.a., and the rural durables market

growing at 25% p.a. Some high-growth categories within this segment include mobile

phones, TVs and music systems.

The sector has been witnessing significant growth in recent years, helped by several drivers

such as the emerging retail boom, real estate and housing demand, greater disposable income

and an overall increase in the level of affluence of a significant section of the population..

Apart from steady income gains, consumer financing and hire-purchase schemes have

become a major driver in the consumer durables industry. In the case of more expensive

consumer goods, such as refrigerators, washing machines, color televisions and personal

computers, retailers are joining forces with banks and finance companies to market their

goods more aggressively. In addition, change in policy, such as the WTO FTA in 2005

resulted in zero customs duty on imports of all telecom equipment, thereby improving the

pricing and affordability of imported goods.

Overview of Consumer durable industry:

The Indian consumer durables industry has witnessed a considerable change in the past

couple of years. Changing lifestyle, higher disposable income coupled with greater

affordability and a surge in advertising has been instrumental in bringing about a sea change

in the consumer behaviour pattern. This industry consists of durable goods used for domestic

purposes such as televisions, washing machines, refrigerators, microwave ovens, mobile

phones etc. The growth in the consumer durables sector has been driven primarily by factors

such as the boom in the real estate & housing industry, higher disposable income, emergence

of the retail industry in a big way coupled with rising affluence levels of a considerable

section of the population. As per a survey conducted by FICCI on the Indian consumer

durables industry, a shift in consumer preferences towards higher‐end, technologically

advanced branded products has been quite discernable. This shift can be explained by

narrowing differentials between the prices of branded and unbranded products added with the

high quality of after sales service provided by the branded players. The shift has also been

triggered by the availability of foreign branded products in India owing to lower import

duties coupled with other liberal measures as introduced by the government.

The consumer durables industry can be broadly classified into two segments: Consumer

Electronics and Consumer Appliances. Consumer Appliances can be further categorised into

Brown Goods and White Goods. The key product lines under each segment are as follows.

White Goods Brown Goods/ Home Appliances

Consumer Electronics

Refrigerator Electric Fan Television

Washing Machine Mixer, grinder and blender Mobile phone handset

Air conditioner Iron Mp3 Player

Speakers and Audio/music system

Microwave/oven DVD Player

Cooking range Computer and Peripherals

Electric Kettle

Water Purifier

Pressure cooker

Water heater or geyser

Other electrical appliances

Indian Durable Industry:

Macroeconomic Analysis of Consumer Durable Industry:

Cyclical Trend:

Fundamentally, in the business cycle, consumer durable firms excel once the economy begins

its recovery from the trough of recession. These expensive consumer item companies become

attractive investments because a reviving economy increases consumer confidence and

personal disposable income. Once businesses recognize the economy is recovering, they soon

start developing, innovating or purchasing inventories to gain economies to scale to satisfy

rising demand, reduce operating costs and pass on the benefit to consumers in the form of

retail price discounts. Also, in these early stages of recovery, this industry provides a high

degree of operating leverage (a small change in sales causes a large change in operating

income) that arises from large fixed costs. Another economic variable that favours this

industry is inflation. This is because many of their costs are fixed in nominal terms whereas

revenues increase with inflation. Also, inflation leads to negative real interest rates. This

helps investment spending in consumer durables to hedge the interest risk. As we have seen,

India has just bounced back from the economic slowdown and is experiencing double-digit

inflation. This scenario matches the economic condition analysed just above. Thus, the

consumer durables market in India promises to be a lucrative investment option in the current

stage of rapid economic expansion. The following chart shows the high degree of cyclic

nature of the consumer durables industry with respect to the economic cycle.

6%12%

7%

19%

1%

5%20%4%

3%

2%

1%18%

1% 1% Air conditioners

Audio/video equipments

Components

Computer and peripherals

Electric fans

Industrial electrical and electronicsMobile phones

Other domestic appliances

Others

Demographics:

a) Income levels:

According to the World Wealth Report by Capgemini and Merill Lynch Global Wealth

management, the High Net Worth (HNI) population (individuals having at least $1 million in

investible wealth) in India grew unbelievably by 51% from 84,000 in 2008 to 1.26 lakhs in

2009. This growth exceeded that of China (31%), UK (24%), Russia (21%) and US (17%). A

study ―Bird of Gold: The Rise of India‘s Consumer Market‖ done by the McKinsey Global

Institute‖ estimated that Indian incomes are likely to grow 3-fold over the next 2 decades and

India will become the world‘s 5th largest consumer market by 2025.

The following chart shows a shift in density of Indian households towards high income and

affluent groups. There is a distinct migration from the destitute class (Income < Rs.90,000

p.a.) to the aspiring class (Income Rs.91,000 - 2,00,000 p.a.) and the consuming classes

(Income > Rs.2,01,000 p.a.). With the bracket of ―The Great Indian Middle Class‖ widening,

the average standard of living is rising and durables such as TVs, washing machines, home

appliances, computers, refrigerators and ACs are fast turning into utility goods rather than

luxury goods. Estimated and projected share of households in the various income groups have

been provided for the years 2009-10 & 2014-15, respectively.

However, one may argue that the income classification hardly provides as realistic a picture

of the consumption pattern in an economy as the Purchasing Power Parity (PPP). Even so,

here the scenario is brighter. The Indian Rupee has a much higher PPP compared to its

international exchange value. For example, an Indian might have to pay less than one-fifth of

the exchange value of US $1 in Rs. for equivalent goods or services in India. In fact, India

ranks 5th in the world in terms of PPP, despite having a relatively low per capita income.

This also allows domestic consumer durables companies, who export, to engage in price

discrimination between domestic and foreign markets (dumping in foreign markets) and

increase their profitability.

b) Age Profile:

The following chart shows how the proportion of the working class in India (15-64 years of

age) has been projected to increase according to National Commission on Population. This

demographic transition in the future augers well for the consumer durables industry since it

constitutes most of their customer base.

c) Income Distribution:

According to an NCAER report & MGI Analysis, emerging niche Tier-3 cities are

getting richer than most Tier-1 & Tier-2 cities (with respect to average disposable

income). Thus, there is a demand shift of consumer durables from metropolis to

smaller towns and cities due to a greater PPP. This shows that there is a lot of scope to

increase the penetration level and creating a wider customer base. Kerala has the

among the highest per capita incomes in the country, insignificant slum population,

greater education levels, etc. Not surprisingly, it indisputably has the highest durables

expenditure on a person basis. Punjab comes next, driven mainly by its high incomes

in both urban and rural areas owing largely to agriculture. Gujarat has a high

expenditure rate too due to its flourishing commerce, hot climate and high standard of

living. Small states like Uttaranchal, Himachal Pradesh & Union territories also have

above-average consumption on durables due to better infrastructure, low crime rates,

and fast-growing economies. States like Andhra Pradesh, West Bengal & Uttar

Pradesh are surprisingly below-average in consumption because of a large slum

population in these states. Although Maharashtra shows up slightly above average,

there is a great regional disparity in consumption. Most of the durables purchases are

concentrated only in Mumbai & Pune. The all-India per-capita consumption on

durables was Rs.42.7 per month in 2006-07.

Consumer Behaviour:

Consumer behaviour varies from region to region and purchasing pattern keeps on changing

with changing geographical and climatic conditions. A few years back, the average Indian

consumer‘s spending habits on durables were value-oriented, family-oriented, celebrity

influenced, and traditional. While these attributes are still prevalent in his image, he is also

fast turning brand-conscious and quality-oriented. The modern consumer is willing to shell

out extra bucks for style and durability.

Another factor that has played a major role in the changing consumer behaviour is the shift in

socio-cultural values. People are no longer averting to the risk of trying new products/brands

with innovative offerings. They are not sceptical about newer technologies. They are seeing

products as extension of their own personality. The emotional connect and loyalty to a brand

is slowly being replaced with rational selection and functionality. Indulgence in comfort has

overpowered the guilt in the consumer‘s mind when he splurges on convenience products.

Thus, a new liberal set of consumers is emerging in India, which does not hesitate to spend

extravagantly on the domestic appliances and electronics in exchange for comfort and luxury.

Shrinking Replacement Cycle:

The increasing demand for lifestyle and feature-rich products has also created a new

consumer tendency of up-trading (preferring high-end products over the basic ones) and

upgrading (moving to the latest but more expensive version of a product already owned).

According to joint report by Ernst & Young and Assocham, rising incomes and evolving

lifestyles have reduced the replacement cycle of this industry. The replacement cycle, nearly

9 years for televisions and 12 years for domestic appliances, has come down by

approximately 4-5 years for televisions and 7-8 years for domestic appliances. The chances of

owning a second television and air-conditioner within a single household have also increased.

Other Major Trends:

The consumption pattern and the propensity to consume in this segment of finished goods is

also increasing as a result of the following changing trends:

Growing western influence

Modern concept of nuclear and double-income families

Dire need for entertainment, leisure, comfort and luxury goods due to increasing work

pressure and stressful life

Huge urban influx (urbanization) and the resulting shift in lifestyle

Product awareness due to increasing literacy and tech-friendliness

Boom in the organized sector of retail, including online retail trading, which has

resulted in affordable wholesale pricing and bulk purchases

Retail chains like E-zone, Next, Croma, X-cite, Reliance Digital are driving the

growth

Festive season sales

Product innovation and aggressive advertising

Booming entertainment and media industry

Affordable and better service providers (for TV, internet, mobiles)

Proliferation of shopping malls which is streamlining the supply chain

Various consumer financing options and easy availability of credit

Increasing penetration of these goods into the semi-urban and rural areas.

Technology Driven Demand:

A survey, conducted by Accenture in eight countries, reveals that consumers in India are

among the highest spenders on consumer technologies. 18% of respondents spent more than

US $3,000 in 2009—more than double the percentage of respondents across the globe and

almost double the next highest country. Such a high level of spending is remarkable

considering that nearly 25% of the respondents had an annual income of less than US$

8,8001. India‘s high consumption of consumer technologies predominantly amongst educated

consumers in semi urban and urban markets has been attracting high-end consumer product

manufacturers to cater to this surging domestic demand.

Reducing Dependence on Agriculture:

Source: Central Statistical Organisation Although agriculture sector plays an important role in the India‘s GDP growth, the

dependence on the sector has been reducing over the years with the growth of the

manufacturing and services sector, as seen from the chart below. Further reduction in the

dependence on agriculture is bound to have a positive impact on consumption going forward.

The focus has shifted from core farming to value-added allied activities, which yield greater

margins. The share of cereals, pulses and grains has reduced from 46% in 1993 to 38% in

2003. The rise in the minimum support has resulted in rise in the disposable income levels for

farming community and has propelled consumption at the lower end of the pyramid.

Industry Life Cycle:

The consumer durables industry in India is in the transition stage between “accelerating

growth period” and “mature growth period”. The industry is building its productive capacity

to meet the rising demand. Also, the market is increasingly becoming price-sensitive i.e. the

price elasticity of demand is gradually increasing. Hence, even a small decrease in price (due

to technological advancement in manufacturing) would cause a major upward shift in the

demand curve. Thus, future sales growth rate is most likely to be above that of the overall

economy. Market shares in the durables market are expected to consolidate. However, the

pace of consolidation would decline due to increasing competition.

Current Domestic Demand and Demand Forecasting:

According to the government data on national income released in early June, the real per

capita disposable income (average income at fixed prices) of Indians grew by 5.6% from

Rs.31,821 in 2008-09 to Rs.33,588 in 2009-10 as against a 5% growth in the previous fiscal.

This real income is a better measure of the growth in purchasing power than the nominal

income (average income at current prices) is, as it broadly factors in inflation and thus

indicates change in spending power at the same price levels. Considering a modest average

growth of 9% p.a. in the all-India per capita average expenditure on consumer durables and

with almost 67% of population of 1264mn people in 2015 forming the consumer class, would

translate to a domestic demand rising to Rs.73, 256 crore in 2015 for consumer durable goods

indicating an industry CAGR of 18% - 20%.

Also this year, the expected normal monsoon is likely to stabilize inflation by decelerating

the price rise in food and commodity prices. This, in turn, will boost buying power. Thus, on

the whole, the consumer demand for durables will see a robust growth for the next few years.

The consumer durables index recorded 29.89% growth in February 2010 compared with

5.78% increase in the same month last year. Due to the crisis last year we have seen fall in

demand which resulted in nominal 4.50% growth for the year 2008‐09. However till February

2010 the index recorded 25.50% growth rate compared with 5.78% growth in April‐October

2008‐09.

BSE SENSEX v/s BSE CD (YTD returns chart)

Market Overview:

The market size (value) of the consumer durables industry has seen an exponential growth in

the past few years. The $27.38 billion electronics and Home Appliances Industry in India

could become a $ 40 billion Industry by 2012, growing at a CAGR of 15-20%, provided there

is support from the government, said a joint study conducted by Assocham and Ernst &

Young. The study titled 'Electronics and Appliances Manufacturing - the India Opportunity"

said the Industry has growth by 7.1% over the previous year in rupee terms.

As said earlier market is primarily categorized into Consumer Electronics and Consumer

Appliances. Consumer Appliances is further subdivided into Home appliances and White

Goods.

Consumer Electronics:

Production in the consumer electronics industry has been estimated at US$ 6.7 billion

in 2009–2010.

The segment registered a growth of 18 per cent in 2009–2010 from US$ 5.5 billion in

the previous year.

The consumer electronics segment contributes about 27 per cent to the total hardware

production in the country.

Consumer Electronic Products:

Consumer Appliances:

The consumer appliances market is estimated at US$4.34 billion, with imports valued

at US$ 1.22 billion.

Air conditioners (including industrial and office conditioners) constituted 38 per cent

of the consumer appliances market, followed by refrigerators at 14 per cent, electric

fans at 7.5 per cent, washing appliances at 7 per cent and sewing machines at 5 per

cent.

Most imports are in the finished goods categories such as watches, electric coffee

makers, food grinders, electric heaters, etc.

White Goods:

•Total market size Rs 10,050 Crores in 2008-2009

•AC segment growth declined in 2009.

•Split AC growth 22%, Windows AC growth 5%.

Air-Conditioner

•Total Market size was Rs 5324 crore in 2008-09

•Total Production increased by 27.28% from FY 09 to FY 10.Refrigerator

•High end segment- Fully automated and Front loaded; Low end segment- Semi automated and Top loaders.

•Total market size in 2008-09 was Rs 3337 crores

•Total production increased by 26.55% form FY 09 to FY 10.

Washing Machine

Brown Goods:

The major products constituting the brown goods market are mixers, grinders, irons,

microwave-ovens, rice cookers, water heaters or geysers, electric fans and exhausts. The

branded brown goods market has expanded at a significant pace and is expected to retain the

momentum into the future as well. While focus on price competency remains a key priority,

players have also started focusing on other product features such as safety and total cost of

ownership of the device. The electrical appliances industry, which had been focused on the

urban market, is now reaching out to semi-urban and rural markets as well, because of the

shift in living style of the population, increasing electrification of villages and relatively

higher purchasing power of consumers. As the market penetrates into the core middle class

segment in both urban and rural areas, it is expected to expand phenomenally.

Key Players in Industry:

Company Product Category

Blue Star Ltd Air-conditioner, Refrigerator, Specialty Cooling Products.

Daikin Air Conditioning India

Pvt.Ltd

Air-conditioning and Cooling equipment

Godrej & Boyce Mfg. Ltd Refrigerators, Washing machine, Microwave ovens, DVD

players, Digital imaging and Audio-Visual products.

Hitachi Home & Life Solution

(India) Ltd.

Air-conditioner and Refrigerator

LG Electronics Pvt Ltd. Television, Home theatre, DVD Players, Mobile phones,

Digital camera, Refrigerators, Air-conditioner, Washing

machine, Microwave ovens and Computers, Vacuum

Cleaners.

MIRC Electronics Pvt. Ltd.

Philips Electronics India Ltd. Television, Home theatre, DVD Players, Audio Product,

Personal Care Product, House hold Product, Computers

and Phones.

Samsung India Electronics

Pvt. Ltd.

Television, Home theatre, DVD Players, Mobile phones,

Digital camera, Refrigerators, Air-conditioner, Washing

machine, Microwave ovens and Computers

Sony India Pvt. Ltd. Television, Home theatre, DVD Players, Audio system,

Projectors, Digital camera, mobile phones, In-car

entertainment and Video gaming products.

Videocon Industries Ltd. Television, DVD players, Microwave ovens, refrigerator,

Washing machine, Air-conditioner, and Power back up

system.

Whirpool Of India Ltd. Refrigerators, Washing machine, Microwave ovens, Water

purifiers and Power back up solutions.

Two Recent Trends in Market:

Recent Upcoming Major Investments:

The high potential of the Indian market has encouraged the durables industry players to

expand their presence in several ways

Expanding production base in India.

Introducing new products in India from the global product basket.

Providing support to global projects from India.

Export- Import Scenario:

India is a net importer of electronics and appliances.

More that 70 per cent of Indian electronics market depends on import of both finished

goods and components.

India imported worth US$ 18.5 billion and exported worth US$ 3.69 billion of

electronics goods between April 2008 and February 2009(P)

100% FDI is allowed in Electronics hardware manufacturing sector.

Opportunity and Challanges:

Challanges:

About 65 per cent of Indian population that lives in its villages still remains relevant for some

consumer durables companies. This India, at least a large proportion of its constituents, still

buys black and white TVs and doesn't know what flat screens are.

Also, foraying into these rural markets has a considerable cost component attached to it.

Companies not only have to set up the basic infrastructure in terms of office space,

manpower, but also spend on transportation for moving inventory. Even LG and Samsung,

which are touted as having the largest distribution network in the country, have a direct

presence only in 15,000 to 18,000 of the around 40,000 retail outlets (for consumer durables)

in the country.

Poor infrastructure is another reason that seems to have held back the industry. Regular

power supply is imperative for any consumer electronics product. But that remains a major

hiccup in India.

On the demand side, customers have increasing choice from both domestically produced and

imported goods, with similar features. This homogeneity makes it difficult for players to

remain ahead of the competition.

MNCs hold an edge over their Indian counterparts in terms of superior technology combined

with a steady flow of capital, while domestic companies compete on the basis of their well-

acknowledged brands, an extensive distribution network and an insight in local market

conditions.

Opportunity:

The consumer durables market in India is entering a new phase driven by a young population,

with access to higher disposable income and easy finance options.

There is an opportunity for integrated product development in India, as the country is now

regarded as a preferred designing base for semiconductor and chip manufacturing companies.

The growing purchasing power of the rural community has encouraged companies to

introduce quality products targeting this low-income consumer segment (‗bottom of the

pyramid‘).

Penetration of consumer durables would be deeper in rural India if banks and financial

institutions come out with liberal incentive schemes for the white goods industry segment,

growth in disposable income, improving lifestyles, power availability, low running cost, and

rise in temperatures. While the consumer durables market is facing a slowdown due to

saturation in the urban market, rural consumers should be provided with easily payable

consumer finance schemes and basic services, after sales services to suit the infrastructure

and the existing amenities like electricity, voltage etc.

Earlier, replacement cycle for television was nearly nine years, and for domestic appliances,

it was 12 years. This has now reduced to approximately four to five years. Moreover, the

faster rate of technology obsolescence has reduced technology cost, thereby motivating

Indian consumers to opt for an earlier replacement.

Conclusion:

The consumer durables industry in India is set for sustained growth over the long term,

fuelled by favourable consumer demographics, overall growth in services and industrial

sectors and infrastructure development in suburban and rural areas. Several Indian and MNC

players are looking to strengthen their presence in India to leverage this opportunity. Success

in the long-term will require firms to develop a wide and robust distribution network,

differentiate their products in areas of relevance to the consumer and innovate in the areas of

promotion, product financing, etc. The product and approach to market need to be customised

to suit the unique needs of the Indian market.