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Price hike isn’t a way out for durables industry
Cash registers kept ringing in for them until last year. The flourishing optimism not only had a positive impact on their earnings but also prompted the consumer durables sector to crave more. In fact, according to a survey conducted by FICCI in 2007 the consumer durables market in India was projected to grow at about 12% this year.
However, with inflation touching a 13-year high of 11.42% coupled with an expected downturn in the economy & exchange rates, this seems to be almost like an unfulfilled wish for durable biggies. Forget the growth, the Rs.250 billion consumer durable industry is now finding it hard to pull back from the 20% fall in the sales that it witnessed during the first quarter of this year (FY 2008). All thanks to the rise in input costs! While the price of steel has gone up by 40%, copper and aluminum too boast a 20% increase. Even the price of oil (the basic material for all plastics) has shot to the roof ($144 a barrel). In fact, the average bill of materials (BOM) of an appliance has increased by about 15-25% across categories. This has left the durable biggies including LG, Godrej, Mirc electronics et al with no option but to hike the prices of their products by about 5-7%. Certainly an age old strategy to pass on some burden to consumers as George Menezes, COO, Godrej & Boyce Mfg. Co. Ltd. puts it, “What has been passed to the market is just about 3-5% increase which is a minuscule part of the overall cost impact.” But here comes the million dollar question. Will this increase in prices would be of any help to shrinking margins of manufactures (considering the segment sales are already on the verge of sinking)? “The price increase always comes with some objectives as you cannot do business at a loss and this slowdown is a temporary jiff which will soon fade away,” a top Electrolux official has been quoted as saying.
However, analysts believe that the major reason for the slowdown in this segment is the Euro’s meteoric rise against dollar. This in the last three months has alone taken up the cost of imported material by about 5-8%. “With interest rates likely to go up soon, further increase in product prices will adversely affect consumers,” avers Kalyanmoy Chatterjee, CEO, Consumer Research, GSK Mode. And this is not all! What seems as a solution for the companies - the price rise - is actually a curse in disguise! After registering negative sales in the quarter even big banks and finance companies have stopped funding aam admi for the purchase of such products.
But, remaining on a positive side, manufacturers still hope to tap the market amid rising prices. They plan to do it by creating a unique differentiation in the value proposition of their products “I believe manufacturers will try the age old practice of launching promos and schemes to cash in on whatever they can,” adds Chatterjee. But, what when everyone starts following the same? So, considering the current macroeconomic scenario, the only respite one can expect is from the government, else we can only hope that the durables prices don’t end the fate of fuel prices!
Neha Saraiya
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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