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Coming out of the whirlpool… - Views on News from Equitymaster
 
 
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  • Sep 30, 2000

    Coming out of the whirlpool…

    Having entered Indian market in 1994, it has taken nearly five years for Whirlpool of India (WOI) to become market leader in the Indian refrigerator segment. Things were not smooth, as the company would have expected, atleast not for the last three years. But a strong commitment from its parent, Whirlpool Corporation, coupled with its vision, have led the company to become the largest appliances company in India. It has posted a net profit of Rs 192 million in the first half of the current year (January-June 2000) compared to a loss of Rs 72 million in the corresponding period of the previous year.

    When it entered in Indian market it had two major issues on hand to tackle. One, it had committed to set up a plant for manufacturing frost-free refrigerators at Rs 3.5 billion for which Whirlpool had to make substantial investments. Second, it had to build its own brands since Kelvinator, as a brand, was slated to pass on to Electrolux Kelvinator. This hurt the company’s market share as well as financials and pushed it into the red. Whirlpool posted a loss of Rs 278 million in financial year 1995. The losses surmounted further in 1996 to Rs 640 million.

    The company decided to merge Whirlpool Finance, a subsidiary of the company that was set up to provide factoring and credit management services for WOI. The merger brought in Rs 1430 million via equity. The company also made a rights issue, which helped it, to fund its manufacturing facilities and repay high cost debt. To increase its operational efficiency, it initiated cost cutting measures and employee strength was pruned by 55 percent. Though it posted a net loss of Rs 147 million in 1999, it was far better compared to the previous year (Rs 699 million in 1998). This was backed by better capacity utilisation and robust export revenue, which stands at US $ 4.4 million. It continues to be the leading exporter of refrigerators and washing machines in India. The average unit realisations for refrigerators and washing machines have gone up by 2 percent and 35 percent respectively.

    This was well augmented on the marketing front as well. The company currently has more than 5,000 dealers and its spends atleast 5 percent of total revenue for brand building every year. Whirlpool set up its first call centre in Delhi for Rs 5 million for simplifying its distribution structure and minimizing the role of intermediaries. About 20 more of these are expected this calendar year, in all major cities which account for up to 70 per cent of total industry sales.

    The result of these initiatives is apparent from the recent survey on consumer durables industry. Its overall market share has gone up from as low as 20 percent in 1998 to 29.3 percent in 1999 in the refrigerator segment. Whirlpool has maintained its market share for financial year 2000.

    Apart from its fully automatic washing machines, Whirlpool has launched semi-automatic machines (this enjoys the largest market among washing machine category) recently, which is expected to add substantially to topline growth. The market share in washing machines, which currently is at 21 percent, is expected to go up to 24-25 percent with the launch of new variants. Moreover, as a part of its five-year plan to be the market leader, it has already launched air conditioners and microwaves in the market.

    The company has framed a three-fold growth strategy to achieve turnover target of Rs 30 billion by 2004. One, launching new products in the premium segment that caters to niche groups. Second, to beef up its export revenue for which it has targeted Rs 450 million by the end of the current year. Third, venturing into new business avenues such as services and selling accessories.

    Needless to say that, the facet of the consumer durable industry has changed with the entry of Korean majors. Within two years, both LG and Samsung have captured more than 15 percent market share in all segments. So, realisations are expected to come under pressure forcing Whirlpool to depend on higher volume growth. Besides, the company is liable to pay a royalty of 5 percent on domestic sales and 8 percent on exports to its parent company from 2003. This would definitely hurt the bottomline of the company. (On a turnover of Rs 30 billion, royalty would amount to Rs 4.3 billion, assuming that exports would be 10 percent of total revenues from 2 percent in 1999). Moreover, the rising oil prices would have an inflationary effect, which may scuttle growth, atleast in the near term.

    Nevertheless, Whirlpool has shown aggressiveness in the past, when it comes to rolling out new models as well as targeting niche segments in the market. Besides, microwaves and dishwashers are yet to badge their presence in India. This coupled with changing aspirations of consumers should enable the company to emerge as the coolest winner.

     

     

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