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 Consumer Electronics

Appliances
Refrigerator Electric Fan Television

Washing Machine Mixer, grinder and blender Mobile phone handset

Air conditioner Iron Mp3 Player
Speakers and Audio/music Microwave/oven DVD Player
system

Cooking range Computer and Peripherals

Electric Kettle

Water Purifier

Pressure cooker

Water heater or geyser

Other electrical appliances

 1% 1% Air conditioners
1% 6%
18% 12% Audio/video equipments
2%
7% Components
3%
Computer and peripherals
19%
4% 20% Electric fans
5%
Industrial electrical and
electronics
Mobile phones
1%
Other domestic appliances

Others

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.
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:

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

•AC segment growth declined in 2009.
Conditioner •Split AC growth 22%, Windows AC growth 5%.

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

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

•High end segment- Fully automated and Front loaded; Low end
Washing segment- Semi automated and Top loaders.
•Total market size in 2008-09 was Rs 3337 crores
Machine •Total production increased by 26.55% form FY 09 to FY 10.
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 Air-conditioning and Cooling equipment

Pvt.Ltd
Godrej & Boyce Mfg. Ltd Refrigerators, Washing machine, Microwave ovens, DVD
players, Digital imaging and Audio-Visual products.

Hitachi Home & Life Solution Air-conditioner and Refrigerator

(India) Ltd.
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 Television, Home theatre, DVD Players, Mobile phones,
Pvt. Ltd. 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.