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Betting on rural India… - Views on News from Equitymaster
 
 
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  • Sep 30, 2000

    Betting on rural India…

    Come the festive season and the Indian durable market is all set to witness the revival of brand wars. The demand is expected to skyrocket given the fact that monsoons have fared better than expectations. Added to this the fact that consumers have a plethora of brands to choose. If one takes a closer look, prospects of this industry are looking even more attractive.

    Despite the fact that consumer durable industry is growing at the rate of 12 percent per annum, penetration levels continues to be sluggish. The market geographies throw some light on the colossal hidden wealth in rural areas. Just 30 million households in India own television sets while penetration levels of refrigerators, washing machines and air conditioners are hovering around 12, 3 and 1 percent respectively. Almost 70 percent of the population is rural based and agriculture accounts for about 35 percent of national income. To underscore the demand potential, rural markets have much buying power. Consider that premium models, be it in colour televisions, refrigerators, washing machines, have sold more in rural areas. As against the general perception, demand for economy brands is higher in urban markets. The recent findings by National Sample Survey Organisation indicate that almost 61 percent of urban households own television sets compared to 18 percent in urban areas. No wonder these companies are shifting focus towards rural India.

    However a notable shift has taken place in the durables market. The most important, being the entry of multinationals like Philips, Electrolux, Whirlpool, LG and Samsung. They exposed Indian consumers to sophisticated products as a result of which consumers have become more demanding than ever before. With their strong ability to innovate models, multinationals have cornered their Indian counterparts across segments. While the overall market share of Indian companies in the colour television segment has dropped from 48 percent in 1998 to 35 percent in 2000, the market share of multinationals has gone up from 52 percent in 1998 to 65 percent in 2000.

    Setting new highs…
    (Rs bn) FY95 FY97 FY99 CAGR (%)
    Air Conditioners 6.5 10.0 14.0 21.2%
    Refrigerators 12.8 16.8 20.7 12.7%
    Vacuum cleaners 0.7 1.0 1.2 11.9%
    Washing machines 6.4 8.8 12.3 17.8%
    Audio equipment 10.3 11.9 14.8 9.5%
    Television 28.7 43.1 65.4 22.9%
    Total 65.4 91.6 128.4 18.4%
    Source: CMIE

    The second reason is the rising per capita income of the country. The recent statistics indicate that the Gross Domestic Product (GDP) per head has gone up to US $ 370 (Rs 17,020). The reason is the changing profile of various income groups. More and more low middle class income groups are maturing to the higher income bracket with the ratio of double income families moving up sharply. Though the current credit penetration level at 8 percent compared to 70 percent in automobile sector is not encouraging, easy availability of finance has also been one of the important factors that have driven volumes in recent years. Further, until now, the average replacement period of television, for instance, was around 8 to 10 years. But, as newer products start rolling out in the market, this is expected to drop significantly. Assuming that the replacement period would drop to 7 years, volumes would grow atleast by 6 to 8 percent.

    To meet the growing demand and withstand competition, companies are gearing up to mark their presence in the market. BPL India, Philips and Samsung are spending millions of rupees in advertising and sponsoring events. The adspend during the first six months (January-June) of the current year has gone up by 13 percent compared to the corresponding period in the previous year. Companies are widening their geographical coverage, especially targeting the rural market.

    So, where is the durables industry heading? With the advent of Internet, convergence is expected to drive growth in future. Convergence, for example, would be a combination of conventional television embedded with the power of Internet and telecommunications. Samsung has already launched set-top boxes for surfing the Internet. Videocon, BPL, Philips and MIRC have launched web-enabled television and it is slowly gaining acceptance among consumers. Other segments like refrigerators, washing machines and microwaves are also expanding at a faster pace. Though overall volumes have slowed down in the first quarter of the current year, they are expected to perk up in the third quarter.

    Not only do the products matter, but better operational efficiency also would determine the market leader in the long run. Companies with minimum lag-time, better distribution network and lower rejections would enable them have a command over overheads, even if prices come under pressure. Therefore, companies who gain market share by undercutting prices are not likely to succeed in the longer term. Only those with strong product innovation, customers focus, brand building and sound manufacturing facilities are expected to emerge as market leaders.

     

     

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