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Suresh Krishnamurthy

THE washing machine and refrigerator markets were expected to grow by around 10 per cent in 2001. But those expectations were belied. They were not merely a product of the imagination but based on several parameters such as the low penetration levels of washing machines and refrigerators, households' purchasing power and so on. The demand from the growing middle-class was expected to bolster growth. In this backdrop, the gap between the actual performance and the estimates can be considered a setback. Especially, in the case of washing machines where the estimates have gone completely wrong for the second year in a row.

A lot rides on market size estimates. The investments to be made in the beginning of the year, such as those on the introduction of new product models, are based on market size estimates. In addition, marketing-spend allocations also depend on such estimates. As such, when the estimates fail for two years in a row the impact on the financial health of the company is sure to be significant.

According to Mr Kwang Ro Kim, Managing Director, LG, the investment on moulds required for introducing a new washing model is around a million dollars or about Rs 4.8 crore. If a couple of models are to be introduced in the semi-automatic and fully automatic segments, the investment required would be around Rs 15 crore. The marketing-spend would also be enormous. Sans commensurate demand, it could translate into losses especially when estimates fail for two consecutive years.

Value of estimates

In today's intensely competitive market, detailed estimates are required for companies to plan their marketing strategy and investments. For example, take the market for televisions. According to the data provided by LG Electronics, six States — Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Gujarat, Kerala and Orissa — registered double-digit growth rates in 1999-2001. In contrast, Maharashtra, West Bengal, Rajasthan and Haryana registered negative growth rates in the same period.

The divergence in growth rates between the various States clearly indicates the need to know the potential for growth in each State. Without such information, there is a possibility that marketing efforts would go waste. On the other hand, it may be difficult to obtain such information even from informed sources. In addition, while the value of such estimates could be significant, actions based on estimates that do not materialise could have an equally significant adverse impact. Nevertheless, companies cannot afford to work with out estimates.

Against this backdrop, issues such as brand strength and the ability to respond to market changes assume relevance. If the brand were strong across all States and across various price segments, then a company would be able to take advantage of a surprising rise in demand. Similarly, the company should be able to meet the demand when it surfaces. LG Electronics' move to outsource the production of televisions to places closer to the market also needs to be seen against this backdrop. Philips India had also embarked on such an initiative a couple of years ago.

These factors — brand strength and closeness to the market — can mitigate to some extent any inability to anticipate market trends. However, in the case of brand strength, it is again a question of trade-off. Companies can reduce prices and push products. Alternatively, companies can invest in brand, let prices stay and expect the brand pull to work. Evidently, it is not a mutually exclusive set of options and companies normally attempt to strike a balance. A reliable estimate of growth would make things easier, though it is virtually impossible in a complex market such as India.

Rosy expectations

Two successive years of sluggish growth have raised hopes that the market for consumer durables will grow in the next year. In the case of televisions, expectations have been bolstered because of forthcoming events such as the World Cup Soccer.

Companies are also expecting the favourable monsoon this year to have a positive impact on rural incomes and, therefore, fuel demand. An eye is also on the Budget — the Finance Minister may lower duties and help in raising demand.

On the negative side, the rate of growth in the economy continues to be sluggish and will have its impact. In addition, if the incidence of taxation on individuals is increased in the forthcoming Budget then it can restrict growth. In addition, the moot point is whether the growth will materialise in the absence of any reduction in prices.

This is especially so in the case of products such as frost-free refrigerators, large-sized televisions and fully-automatic washing machines. The gap in price between these categories and the low-priced and mid-priced segments is still quite significant.

In this backdrop, it is reasonable to expect modest growth in sales of consumer durables in the year ahead. In addition, direct cool models in the case of refrigerators, semi-automatic washing machines, and low-priced televisions are more likely to contribute to market growth in the year ahead.

This is mainly because the ability of companies to drop prices is more or less exhausted as companies across all segments are facing pressure on their cash flows. This is true for even companies such as LG and Samsung, which are now adequately leveraged.

In this context, action in the following year can be relatively higher in the low-priced segments compared to the high-priced segments.

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