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Feeling the heat

Starting this week, Brandwagon launches a five-part series on changing trends in the consumer durables market. The monthly column from Ipsos Business Consulting, the consulting division of global market research firm Ipsos in India, will take up one consumer durable and analyse the market dynamics, changing consumer preferences and sales trends. This week we look…

Starting this week, Brandwagon launches a five-part series on changing trends in the consumer durables market. The monthly column from Ipsos Business Consulting, the consulting division of global market research firm Ipsos in India, will take up one consumer durable and analyse the market dynamics, changing consumer preferences and sales trends. This week we look at how air-conditioners are faring this summer.

The first quarter of 2012 calendar year has not been very encouraging for the residential air conditioner (AC) market. Consumer demand is yet to pick up in southern markets where AC sales typically rise as early as January. In northern and western region, usually sales pick up in February but the industry is expecting it to happen in May due to the extended winter season. Companies saw 20-30% decline in their sales to dealers in January, 2012. Trade loading has been witnessed during the first quarter; dealers anticipate that the existing inventory build-up at their end would lead to limited off-take. Dealers are also concerned that the recent price rise would pull back/ delay consumers? purchase of ACs this season.

Growth peters out in 2011

The residential AC market declined by approximately 3% volume wise in 2011 compared to 2010. The residential AC market constitutes 80% of the total AC market and stood at 2.5 million units with LG, Voltas, Daikin and Panasonic cornering around 60% of the market.

Hitachi, Daikin, Toshiba and Panasonic ? brands that were considered to be premium ? started focusing on the mass market and ate into the share of leading brands. On one hand where a majority of players saw de-growth, Panasonic saw stupendous growth over the year due to launch of Cube AC, a split model with window looks, which created a great demand, particularly in tier II and tier III markets. Tonnage wise, 1.5 ton split AC has maximum sales which accounts for 60-65% followed by 1 ton which is around 15-18%. Preference of inverter technology unit is yet to evolve in India and currently contributes to less than 3% of the total split units with higher price being the key barrier.

Residential AC market saw a drop in sales mainly due to lower temperature in summers followed by early winters. All leading players have experienced dip in their sales at the end of 2011. Decline in the real estate sector and incremental price hikes are other key factors that affected sales. Sales for northern and eastern region were flat compared to last year but western and southern region saw drop in sales.

Window ACs fading

Over the years window ACs have significantly lost market share to split mainly due to the decreasing price difference between the two and also because of the aesthetic look and high energy efficiency of split AC. There is fear among consumers over the safety aspect of fixing the window ACs which provide easy access point for burglary. Gone are the days when the demand for split ACs came only from the institutional segment or affluent consumers. A shift is happening from being a luxury product to a necessity. In the residential AC segment, split AC has 80% market share. Northern region is the only key market for window AC now.

Are Window ACs going out of the window? There seems to be divergence over the same. Some experts are of the opinion that it may happen in the coming 5-6 years whereas others feel that time frame would be more than 10 years. And there is another set of leaders who feel that it may never happen due to non-penetration of ACs in the Indian market (current penetration is hardly 3-5%). First-time buyers from tier II and III cities would probably go for window ACs. Also, the current change in BEE (Bureau of Energy Efficiency) star rating for split AC has led to increase in the price. Windows ACs are cheaper than split by Rs 6,000-7,000 and it is still considered a sizeable amount for an Indian middle-class household. Perhaps it?s too early to predict the future scenario. However, the declining share of window ACs forced Samsung to close this unit and focus entirely on split unit business. On the other hand, a few are still bullish about window ACs and are planning to launch new models in the current year.

Rupee volatility adds pressure

The Indian AC industry is bleeding due to continuous increase in the price of ACs mainly because of depreciating rupee value, increase in the prices of raw material, i.e., copper and tin and increase in fuel prices that tend to increase freight cost. Last year, the industry witnessed a price increase of 12%-15% in multiple iteration.

The picture is gloomy for this year also as the industry expects price hikes by 10-15% mainly due to rupee-dollar fluctuation and increasing raw material cost. Almost all AC manufacturers in India import majority of AC components which is impacted by rupee volatility. Interestingly, Japanese companies were able to offer competitive price because they import AC as CBUs (completely built units) from countries like Thailand with which India has an FTA (Free Trade Agreement). As the pact does not include sourcing of components hence companies that import components did not get any benefit in such scenario.

The change in BEE star rating in January 2012 which increased the efficiency norms for the highest rating of 5-star to a new level also led to increase in the prices. But since BEE star rating was only meant for split AC, a first-time buyer may find solace in a window AC.

The finance minister?s proposal to increase duty on ACs is expected to push up prices by 2-4%.

In the current scenario, renting could be an option and a new business model for AC companies. However it?s probably too early to predict the success for such a model because renting is viable if it is required for shorter time and for ad-hoc purposes.

What does the future hold?

The Indian residential AC market is still at a nascent stage as compared to other countries such as China and USA and is bound to grow in the coming years. Based on census-2011 figures, there are 330 million households in India and current penetration is hardly 3-5% compared to 30% of China and around 90% of USA, which makes India an attractive market for ACs. With increase in incomes, the buying behaviour of Indian consumers will also change.

China based company Midea has announced its entry into India through a joint venture with Carrier which will make the market more competitive. There are other potential entrants which may look at India in the coming year.

Companies will have to look for new business models for selling their products to excel in a highly competitive market and will have to take various initiatives to increase sales and brand awareness ? increasing product portfolio, increasing budget for marketing activities, investing in research and development), etc. Having said so, this scenario sets a perfect platform for Indian marketers to don their thinking hats and strive at maximizing returns on their marketing efforts with a new business strategy.

Suheil Murgai is an associate director at Ipsos Business Consulting, while Abdul Aziz is a consultant there

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First published on: 22-05-2012 at 03:42 IST
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