Second quarter of the financial year is the dullest quarter for Air Conditioner manufacturers where sales will be the lowest. In fact, this year’s first half is a period of reasonably good growth and considering the fact that economy is passing through one of its worst phases in recent times, this is not an under achievement. The AC market typically has seen a trend wherein volumes grow at a healthy rate for 2-3 years at a stretch and then slow down for about 2 years following.
Benign commodity prices help industry
Rupee depreciation was the main worry for the industry but import of AC components has become negligible due to series of customs duty hikes announced by the government in recent months. Further, benign commodity prices were good news for AC manufacturers which helped them to maintain/improve their margins despite a moderation in sales. Copper prices have stabilized over the last four quarters. Similarly, aluminum prices continue to remain benign from the last quarter of previous financial year. All these factors have helped the AC manufacturers to keep the cost of production under control.
No price hike foreseen in near future
Despite demand staying reasonably strong since April 2019, the manufacturers are hesitant to implement price hikes due to rising competitive intensity as the number of players in the Room AC category have been increasing. Further, rising online sales and minimal product differentiation are also forcing the manufacturers on the defensive. Discounting and cashbacks have now become the normal feature of the market. Though, of-late, price cuts have almost vanished, especially in last two months, established brands are wary of any price hikes at this juncture.
Emergence of e-commerce
One of the important developments which the AC manufacturers in particular and consumer durables in general should be ready to face is the emergence of e-commerce as an important channel for pushing the products. AC sales through online platforms have inched up at a faster pace over the last 2-3 years and now contribute 11-12% of total sales. Though the percentage of e-commerce sales (out of the total sales) looks good, it is still below the global average of 40%. In other words, there is further scope for capturing the wider audience through e-commerce and in the coming months this segment is expected to pick up quite rapidly. Industry captains expect that online sale of ACs will reach 22% of the total in India by 2022-23 from current levels. In the coming days, offline brands will make concerted efforts to increase their presence on online platforms through own websites or marketplaces such as Amazon and Flipkart.
It’s estimated that in the recently concluded festival season Walmart-owned Flipkart has sold 1 in every 5 ACs in India. However, disruptive pricing strategies adopted by e-commerce companies have been driving a strong increase in online sales of ACs and consumer durables. The share of online sales have now increased to more than 10% from 3% a couple of years ago. It’s believed that rising data usage penetration, disruptive pricing, acceptance of the online platforms beyond large urban towns and the entry of private-label products should continue to drive online sales.
The entry of new players (especially Chinese), reducing entry barriers, private labeling by e-commerce companies and retailers, and rising online sales at discounted prices are leading to intense pricing pressure. The most recent announcement is from Reliance Retail which signed a 10-year brand licensing, contract manufacturing, marketing and distribution deal with the consumer durables brand Electrolux to re-launch the Kelvinator brand refrigerators, and other appliances such as Washing Machines, Air-conditioners and Microwave ovens in a phased manner.
Increasing price differential
Meanwhile, the pricing differential has been increasing between offline and online players, and even between offline brands’ online prices and offline prices as well. Private labels’ online product pricing is 22-31% lower than that of established brands. Competitive intensity is expected to rise further with product expansion by both established brands and private labels. The increasing price differential between online and offline is enticing consumers to move toward online purchases as free delivery, installation and cash backs, along with EMI schemes, are also available on e-commerce platforms.
Going forward online sales may not be restricted to entry-level products and may spread to premium products too. Currently, a majority of the premium product sales happen through offline retailers but changing consumer behavior should shift the purchase of products between entry and super premium products to online.
After sales service holds the key
However, private labels may find the going tougher unless they improve their after sales services. Product quality and wide after sales service network hold key for their survival and expansion. It’s believed that large e-commerce companies are planning to set up after-sales service network similar to the logistics channel they set up for product delivery across the country.
Faster product penetration
Intense competition which has kept price hike under check and the rapid growth of e-commerce have helped the expansion of the market and much faster product penetration. In addition, continued distribution/dealer expansion and new category launches by established players have been the key driving forces of healthy growth. With replacement cycle becoming shorter and premiumization trend accelerating in urban markets, the pace of product penetration is expected to further pick up in the coming days.