Consumer Durables : All Set To Charm Again
With sales of consumer appliances picking up in the unlock phase during the ongoing pandemic, companies are hoping that the festive season will witness a spurt in demand, especially for home products like like air conditioners, refrigerators, washing machines and microwave ovens. But there is a flip side too on account of the unemployment caused by the lockdown. Join Anthony Fernandes as he takes into account how these factors can affect this sector.
Amidst the present dismal macroeconomic prospects unleashed by the pandemic crisis, there remains one sector that is banking on the crucial festive season to recoup losses – consumer durables. The sentiment is largely held across the industry with leaders of a few consumer durable players believing that the pent-up demand, especially for appliances, during the unlocking period, had been phenomenal, and this will show in the quarters ahead. Says Vijay Babu, VP (Home Appliances) at LG Electronics India, “The company achieved 30 per cent sales last year during the festive season and is expecting more than 30 per cent growth this time.”
Major consumer durable players in India have been banking on this opportunity to jump-start growth by advancing production plans, expanding rural outreach and even planning attractive offers, hoping to achieve sales growth during this period after a lacklustre month of May and a near wipe-out in April. However, the current situation is playing into the hands of the industry to some extent. According to Kamal Nandi, Business Head and Executive Vice President, Godrej Appliances, with the work from home situation and reluctance in hiring domestic help due to pandemic fear is leading to a spike in demand for home appliances like air-conditioners, refrigerators, washing machines and microwave ovens.
His company expects further uptake in sales due to pent-up demand with the onset of the festive season and reopening of the markets. The festive year may see some of the lowest discounts in recent years. Typically, festive sales contribute 35-40 per cent of the annual sales for the industry. Owing to the loss in sales during the lockdown months, the industry is projected to see de-growth of 10-12 per cent in the current financial year, states Nandi, who is also the president of Consumer Electronics and Appliances Manufacturers Association (CEAMA).
Ultimately, the pandemic and extended lockdown period has taken a toll on the country, and despite the heavy promotion and deep discounts offered during the festive season, it is quite likely that the optimism surrounding the festive season sales may not live up to expectations. While media reports have suggested that millions lost their jobs due to the lockdown, this would disproportionately affect daily wage earners and low-income households. Information compiled by the Centre for Monitoring Indian Economy (CMIE) showed that the unemployment rate in both rural and urban areas rose sharply in late March.
The rate of unemployment relatively remained high in April before showing signs of improvement starting in the month of May when some industries started to open up. Urban and rural unemployment rose to 9.83 per cent and 7.65 per cent, respectively, in August as the formal sector shied away from hiring amid the pandemic and jobs in rural areas remained stagnant. The overall unemployment also jumped to 8.35 per cent as against 7.43 per cent in July, according to monthly unemployment data by the CMIE, released on September 1, 2020. Thus, spending power for big-ticket items like refrigerators, air-conditioners and televisions are likely to be cut down.
Consumer Behaviour: Paradigm Shift on the Cards?
Indian consumers experience a fundamental change in behaviour driven by health, privacy and hyper-localization, according to the latest EY study titled ‘Life in a Pandemic’. The study explored areas where a major shift occurred on account of the pandemic in the general behaviour of consumers, transforming the way we work, study and live. This includes digital acceleration, hyper-localization and online communities, healthy living, digital content consumption and privacy and safety.
According to the survey, 80 per cent of respondents stated they are eating healthier and strictly eating only home-cooked meals; about 94.5 per cent of respondents have accepted work from home (WFH) as the new normal with 55 per cent stating that they are likely to advocate for WFH post the pandemic; and about 80 per cent students have shifted to online education while 46 per cent are open to continuing with online learning post the pandemic. The findings are based on the survey responses of 2,033 Indian consumers across the urban, adult population across India. A majority continue to feel overwhelmed by uncertainties clouding the future. Nevertheless, they indicate an intention to continue their newly adopted behaviours post the pandemic.
Shashank Shwet, Partner, Customer Experience and Design Thinking, EY India, says, “There is a clear paradigm shift in consumer behaviour towards online, even in traditionally offline categories. Consumers are ‘cocooning’ at home to keep themselves safe from the pandemic. To win in adversity, companies need to tailor strategies to today’s unique context. Brands that will be nimble enough to capture the pulse of these changes, make timely alterations to their modus operandi and add digital and convenience as a service will thrive in these unprecedented scenarios.”
According to the report, the lockdown has brought in a slew of changes in consumer behaviour such as:
1. Sensitivity to anxiety caused by the pandemic is the need of the hour. Up to 70 per cent of the population continues to grapple with fear and anxiety. Therefore, brands must exercise caution and practice empathy while serving customers.
2. Health and fitness are top of mind. With mental wellbeing becoming a major priority, there was a steep uptick in the consumption of online fitness and health programs. Online doctor consultations gained momentum too, with 32 per cent of respondents having availed these services. Up to 80 per cent of the population continues to focus on improving their eating habits with 56 per cent engaging in housework and 32 per cent participating in in-home workouts.
3. There are increasing interactions with the local community. While consumers are leveraging digital tools to stay connected, it was observed that 55 per cent of the respondents encouraged each other to adhere to the lockdown. Local communities are back in the spotlight with one-fifth wanting to be more connected to their neighbours.
4. Consumers are postponing big-ticket expenses. Around 43 per cent of respondents stated that they will reduce big-ticket spends across categories like automobile, travel and consumer durables.
Financial Performance of Consumer Durable Companies
In the first quarter of the fiscal year, companies faced unprecedented operational challenges due to the strict imposition of the lockdown. The quarter began with the complete shutdown of manufacturing plants, distribution networks and retail outlets. As a result, gradual resumption was only visible mid-May once the relaxations had been announced by the government in select places. The consumer durable and electrical sectors saw negligible sales in April, while May sales were down by 75-80 per cent and June sales down by 20-30 per cent. Commodity prices remained benign during the quarter, but hardly lifted earnings due to lower procurement.
To conserve cash, companies have had to resort to significant cost rationalisation to minimise the impact of a sharp revenue fall. These may include a reduction in advertising, logistics, product warranty, travel, power and fuel costs. Since the peak season for air-conditioners and air-coolers is during the summer, the summer season categories of air-conditioners and air-coolers were impacted the most. Companies such as Havells India, Crompton Consumer, Orient Electric and V-Guard Industries reported a reduction in net sales of 45.40 per cent, 46.53 per cent, 68.54 per cent and 42.26 per cent respectively. Orient Electricals faced the worst brunt of the lockdown period, reporting net losses of `15.26 crore during this period. On a QoQ basis, net sales of Orient Electric fell by 68.25 per cent.
Dixon Technologies, a contract manufacturer for Samsung, Xiaomi and Panasonic, plans to expand capacity for washing machines and televisions by up to 40 per cent. During Q1FY21 however, the company saw sales de-growth of 54.93 per cent on a YoY basis and a 39.71 per cent drop on a QoQ basis. The profits of the company took a significant hit during the quarter as well. The demand for electrical fans reached 75 per cent of the pre-pandemic levels by June, led by entry-level products. In the case of the lighting segment, demand reached 55 per cent of the pre-pandemic levels since there was only B2C replacement demand in rural areas.
On the other hand, sales for kitchen appliances were up by 10 per cent, higher than the pre-pandemic levels in June due to pent-up demand. Demand for washing machines was low as the season starts in July. The segment benefitted from pent-up demand too. Companies such as Whirlpool, although negatively impacted, saw a decline in revenues of 47.98 per cent on a YoY basis and 24.13 per cent on a QoQ basis. The company reported net profit of `16.47 crore in Q1FY21 with a PAT margin that stood at 1.60 per cent.
Since the start of August, the S&P BSE Consumer Durables has outperformed the bellwether index, recording modest gains of 7.61 per cent against 3.86 per cent gain recorded on the BSE Sensex.
Outlook
Since the start of August, the S&P BSE Consumer Durables has outperformed the bellwether index, recording modest gains of 7.61 per cent against 3.86 per cent gain recorded on the BSE Sensex. The start of the festive season is likely to bode well for companies in this space. After many quarters of urban growth outstripping rural growth, the trend is set to reverse in the near term. While utilisations are back up, the managements remain uncertain on the overall pick-up in demand as the impact of the lockdown is expected to trickle down in the coming quarters.
Rural demand has received support in terms of cash transfer and a good monsoon leading to good agricultural output. The major lack of clarity remains in the lower strata of urban India in the near term. Companies in the consumer durable space that have a strong presence in rural India, such as Bajaj Electricals, are likely to fare better as compared to its peers. The demand for durables like refrigerators and consumer electronic goods is likely to witness an upward spiral in the coming years in tandem with the government’s plans to invest significantly in rural electrification.