2009

AMIT KUMAR

RECENT TRENDS IN THE CONSUMER BUYING BEHAVIOUR IN HOUSE APPLIANCES IN INDIA

OVERVIEW

India in its 62 years of journey ghas seen manifold increase in the income of its denizens

(Rs.38,084 as on 2009) and this has led to paradigm shift in the purchasing behavior of

the people here. There is a discernible shift in the consumer’s preference in favour of

higher end , technologically superior branded products, the demand being spurred by

increasing consumer awareness and preference for new models.

This shift is also because of the increase in manufacture of branded products and

narrowing down of price between branded and non-branded goods. Competition has

forced the companies to offer efficient after sales service and support and this, in turn,

has swayed customer preference for branded products.

Post liberasition there has been inundation of goods transcending the borders and the

customer has a wider choice; breaking the shackles of the consumers regarding

limitations of choices. Indian consumer durables market used to be dominated by a few

domestic players like Godrej, Allwyn, Kelvinator, and Voltas. But post-liberalization

many foreign companies have entered into India, dethroning the Indian players and

dominating the market. The major categories in the market are CTVs, refrigerators, air-

conditioners and washing machines.

The rural market is growing faster than the urban markets, although the penetration

level in rural area is much lower. The CTV segment is expected to be the largest

contributing segment to the overall growth of the industry. The rising income levels,

double-income families and increasing consumer awareness are the main growth

drivers of this industry. In addition to them the young nature of population and easy

finance options are also fueling the market and its dynamics.

Consumers today are more indulgent in market place than their predecessors. There has

been shift in the definition of needs and wants. For example a mobile phone is more of a

need today then a want. Westernisation has influenced the psyche of the Indian

customers to a degree.

This report is an attempt to reflect the changes in the consumer buying behavior in the

Indian Market especially in home appliances buying .

CONSUMER CLASSES

For the purpose of study I am using the classification given by NCAER .According to the National Council for Applied Economic Research (NCAER), India’s premier economic research institution, based on consumption indicators, which is more relevant for ascertaining consumption patterns of various classes of goods there are five classes of consumer households, ranging from the destitute to the highly Affluent, which differ considerably in their consumption behavior and ownership patterns across various categories of goods. These classes exist in urban as well as rural households both, and consumption trends may differ significantly between similar income households in urban and rural areas. Structure for Indian consumer market: Consumer classes

Annual income

1996 2001 2007 Change

The rich 215,000& more 1.2 2 6.2 416% The consuming class

45 – 215,000 32.5 54.6 90.0 179%

The climbers 22 – 45,0000 54.1 71.6 74.1 37% The aspirants 16 – 22, 0000 44 28.1 15.3 65% The destitute Below Rs-

16,0000 33.2 3.4 12.8 61%

Total 164.8 180.7 199.2 21%

FACTORS AFFECTING CHANGING CONSUMER BEHAVIOR

CONSUMER BUYING PROCESS

INDUSTRY CLASSIFICATION

The consumer durables industry can be broadly classified as consumer electronics and

consumer appliances. The consumer appliances category can be further segmented as

white goods and brown goods.

THE KEY PLAYERS AND THEIR PRODUCTS

MARKET ANALYSIS

Industry sales were US$ 4.5 billion in value in 2006-07 and more than 7 million units in

volume terms.

Plasma display panels and liquid crystal display TVs have registered an average growth

of more than 250% 2006-07 and the trend is expected to continue.

Split ACs have been growing at a much faster rate than window ACs- growth of 97% in

the year 2006-07 and the trend is expected to continue.

Mobile phone production is expected to grow at a compound annual growth rate of

28.3% from 31 million units in 2006 to 107 million units in 2001 The sectors which have recorded excellent growth rates of more than 20 per

cent in terms of quantity produced are Air Conditioners (25 per cent), Split Air Conditioners (42.6 per cent) Micro Wave Woven (27.3 per cent), DVDS (25 per cent) VCD/MP3 (20 per cent), Color Picture Tube (23 per cent,).

The sectors which have recorded high growth rates between 10 and 20 per cent

in April-March 2004-05 over the corresponding previous period are Color Television (12%), Window Air Conditioners (18.8 per cent), Washing Machines (18.1 per cent Watch (10%), Frost Free Refrigerators (13.8%),

Some sectors which have recorded moderate growth of 0 to 10 per cent are refrigerators (5 per cent),), clock (8 per cent), Direct Cool Refrigerator (2.8 per cent)

The sector recording negative growth is B&W TV (- 16.7%)

The Refrigeration Industry has reached 3.9 million units in 2004-05 from 3.7 million units in the last year with a growth of 5 per cent.

The Air-Conditioners Industry has reached at 1.2 million units during 2004-05 with a growth of 25 per cent from 9.8 lakh units in 2003-04.

Washing Machines is estimated to have grown by 18.1 per cent from 1.35 million units in 2003-04 to 1.6 million units in 2004-05.

Microwave ovens has grown by 27.3 per cent growth with 3.5 lakh units compared to 2.75 lakh units in 2003-04.

The Indian Colour Television industry has grown by 12.1 per cent in 2004-05 by reaching 9.25 million units in 2004-05 from 8.25 million units in 2003-04.

The B&W TV has recorded a negative growth of 16.7 per cent from 3 million units in 2003-04 to 2.5 million units in 2004-05.

Watch and clock have registered growth of 10 per cent and 8 per cent from 20.6 mn units and 26.3 million units in 2003-04 to 22.6 mn units and 28.4 mn units in 2004-05.

The VCD/MP3 industry has registered 20% growth and has achieved production of 8.4 million units. The unorganized sector has occupied a major share in manufacturing and supplying VCD/MP3.

DVD Players are estimated to have grown by 25 per cent in 2004-05 with the volume estimated to be 625000 units.

The first half of the year and the first quarter of the financial year, 2005 has seen a little setback for the domestic consumer electronics and durables industry with the two largest segments of the industry - color televisions (CTV) and refrigerators facing decline in production and sales during the period. But the Air conditioners and washing machines market have grown at the rate of 20% .

The de-growth seen in the first quarter of the current fiscal has been mainly due to the value added tax (VAT) regime introduced in April, 2005, as held by the industry representative.

Overall, the refrigerator segment had achieved a negative growth of 4.3 per cent in volume terms and two per cent in value terms during the period.

Production of consumer durables:

Production item unit 2003-2004

2004-2005 % growth

Consumer durables/white goods

Refrigerator Lakh units 37 38.85 5.0 Frost free Lakh units 7.33 8.34 13.8 Direct cool Lakh units 29.67 30.51 2.8 Air conditioners Lakh units 9.8 12.25 25 Window Lakh units 7.22 8.58 18.8 Split Lakh units 2.58 3.68 42.6 Washing machines Lakh units 13.55 16 18.1 Microwave ovens Lakh units 2.75 3.5 27.3 Consumer electronics

Value overall 14500 156600 8.0 Color television Lakh units 82.5 92.5 12.1 Color television Rs Crore 7000 7580 8.0 B&W TV Lakh units 30 25 -16.7 B&W TV Rs crore 482.55 361.5 -25.0 VCD MN units 7.2 8.4 16.7 DVD Nos 50,000 62500 25 Watch Lakh units 206 226 9.7 Clock Lakh units 263 284 8.0

KEY GROWTH DRIVERS FOR CONSUMER DURABLES

Rise in disposable income: The demand for consumer electronics has been rising

with the increase in disposable income coupled with more and more consumers falling

under the double income families. The growing Indian middle class is an attraction for

companies who are out there to woo them.

Availability of newer variants of a product: Consumers are spoilt for choice when

it comes to choosing products. Newer variants of a product will help a company in

getting the attention of consumers who look for innovation in products.

Product pricing: The consumer durables industry is highly price sensitive, making

price the determining factor in increasing volumes, at least for lower range consumers.

For middle and upper range consumers, it is the brand name, technology and product

features that are important.

Availability of financing schemes: Availability of credit and the structure of the

loan determine the affordability of the product. Sale of a particular product is

determined by the cost of credit as much as the flexibility of the scheme.

Rise in the share of organized retail: Rise in organized retail will set the growth

pace of the Indian consumer durables industry. According to a working paper released

by the Indian Council for Research on International Economic Relations (ICRIER),

organized retail which constituted a mere four percent of the retail sector in FY07 is

likely to grow at 45-50% per annum and quadruple its share in the total retail pie 16% by

2011-2012. The share will grow with bigger players entering the market.

Innovative advertising and brand promotion: Sales promotion measures such as

discounts, free gifts and exchange offers help a company in distinguishing itself from

others.

Festive season sales: Demand for color TVs usually pick up during the festive

seasons. As a result most companies come out with offers during this period to cash in

on the festive mood. This period will continue to be the growth driver for consumer

durable companies.

Consumer Durables: Industry size, growth and trends

During FY07, volume share of the single largest consumer durable was color TVs at 30%, followed by refrigerators and air conditioners at 18% and 13% respectively. Washing machines and other assorted consumer durables captured a share in the total volume by 5% and 34% respectively.

Television Sets: Growth in sales FY07 witnessed the highest number of TV sets being sold when compared to the previous two corresponding years. As per CMIE, growth in sale of TV sets was slower at

14.3% during FY07 when compared to a 21% growth in the previous year. On the demand side, domestic consumption of refrigerators declined by almost 4% between FY05 and FY08, while imports climbed. The imposition of anti-dumping duties on import of colour picture tubes will hit the manufacturing costs of CTVs produced in India. Further, the reduction in the general rate of excise duty (CENVAT) from 16% to 14% as proposed in the Union Budget for FY09 will not have any effect on the selling price of colour TVs. This is

because the combined effect of rising input costs and a higher interest burden will negate the effect of such reduction.

REFRIGERATOR: DEMAND AND SUPPLY SIDE DYNAMICS

According to CMIE statistics, domestic consumption of refrigerators witnessed a decline between FY05 and FY08, while exports grew. From 3% of the total consumption in FY05, exports grew to7% of the total consumption in FY08. On the supply side, domestic production of refrigerators in the total supply remained at the same levels in the past three years ended FY08. At 99% each in FY06-08, the share of production reported a mere 100 basis point increase over FY05, as imports slided. The refrigerator industry posted a sluggish performance

since the beginning of FY09 on the back of volatile steel prices. The first quarter saw a production growth of a mere 50 basis points to 2.18 mn units, as per CMIE.

Sales of Consumer ElectronicsCompanies

The consumer electronic goods industry underwent a slowdown during the last quarter of FY08. According to CMIE, the industry witnessed a slower 10.5% growth in the Mar 08 quarter compared to a substantial 17.4% growth in the previous corresponding quarter. Domestic consumer electronics companies together reported a subdued sales growth of almost 17% in FY07, on the back of a robust 40.5% growth in FY06. While the larger companies reported robust growth in sales, it was the smaller ones whose sales were negatively affected that eventually brought down the industry sales growth.

INDUSTRIAL GROWTH

The industrial sector grew in moderation during FY08 at 8.5% on the back of a comparatively higher growth of 11.5% during the previous fiscal. The country’s real GDP grew by 9% during FY08; a tad lower than 9.6% in the previous fiscal. The consumer durables segment witnessed a fall in production particularly for items where consumer preferences have shifted towards newer products. Shifting in the consumption pattern coupled with rising input costs of steel, iron ore etc, may further affect the production levels of these goods. On the supply side newer variants of consumer durables on the back of technological advancements have flooded the market, whereas on the demand side it is the prospering middle class and consumerism which have led to changing demand patterns.

Foreign Direct Investment The net Foreign Direct Investment (FDI) inflows to India increased from US $ 22 bn in FY07 to US $ 32.3 bn in the following fiscal. During 2007 and 2008, the share of FDI in the electronic goods segment remained flat at 0.2%, coming on the back of a 1.5% share in CY06.

CHANGING ATTITUDES OF TODAY’S CUSTOMERS

Today customer likes to indulge in buying spree. No more the customers buy only to

fulfill their basic needs and emphasise on savings itself.

Indian consumers have become value sensitive and are not much price sensitive as was

the case earlier. If they feel that a particular product offers them more value and its price

is high, even then they are willing to buy the product.

The Indian consumers strictly follow their culture, tradition and values, as a result of

which foreign companies were forced to give an Indian touch to them in order to

succeed in India. McDonalds, MTV, Pepsi, Star TV, Coca Cola India and many more had

to Indianise themselves to flourish in India. Karva Chauth is celebrated with more zeal

and enthusiasm than the Valentine Day.

The Indian consumer of today gives preference to features of a product rather than its

brand name. The trend that higher segment consumers only buy the top brands has also

come to an end.

Even after liberalization Indian companies and brands are doing very well. It is clearly

evident from the fact that despite many foreign brands being sold in India, Raymond is

still India’s largest textile company and Haldiram is doing well despite the presence of

McDonalds and Pizza Hut.

The consumers today are not confined to a single brand and prefer change rather than

sticking to the same brand. Not often do we see any home with cars of the same brand or

household products of the same brand.

The use of credit card for shopping is a new emerging trend in India. Also consumers

are availing credit or loan from banks and other financial institutions to fulfill their

needs and wants.

The Indian consumers are spending thick and fast on premium and luxury products.

The Indian consumers have shown another major change in their buying behaviour.

They just don’t want availability of products, they also want better experience, services

and ambience. This has led to the growth of shopping malls where shopping,

entertainment and better facilities are all available under one roof. To a great extent

the presence of heavy weight such as the pantaloons, big bazaar, croma , nilgiris etc has

given a huge fillip to the growing market by not only selling products but also the

experience. The Indian consumer are much more inclined to the organized sector.

The rural Indian consumers are also showing signs of change. They have all the modern

amenities at their home and their standard of living is fast improving. The rural

households have earned huge money due to price rise in real estate. They are also

shifting towards industrial and services sector, hence their purchasing power is

increasing. It is reflected in their living standard and possession of all electronic gadgets

and luxury cars.

There is a stiff competition in the Indian market today and it has become a buyer’s

market from seller’s market. Customers are the ultimate beneficiary of the fierce

competition in the market. Competition has reduced prices to a great extent and has

forced the manufacturer to maintain product quality to sustain in the highly competitive

market.

Though in a small way internet and and telemarketing have also caught the attention of

the Indian customers. Dell. Amazon .com, etc have carved a good niche for them in the

sector.

The consumers today do not mind availing credit as when needed. So credit availability

has become a key factor for determination of a buying a good. Consumers are also

availing the information available on net through various forums and websites.

MARKETERS REPONSE TO CONSUMER ATTITUDE

With change in consumer buying behaviour the companies also made necessary changes

in their marketing strategies. The changes include:

1) Launching of premium products by companies to fulfill requirements of high class

consumers.

2) Since purchasing power of rural India has increased, the companies have started

shifting their focus towards rural India to capture untapped rural market. This has

reaped huge benefits for companies like in cases of PepsiCo, Coca Cola India and other

FMCG companies.

3) Companies not only aim to sell their products but also aim to provide better after

sales services to its consumers. For example companies have provisions to send their

technicians to repair the cars struck at highways or other outer locations due to

technical failure or in case of a mishap. This improves the company’s credibility and

helps to build its customer base .

4) Companies design their products on the basis of market segmentation so that they

have products to suit every pocket and requirement.

5) Due to sharp growth in the communication sector, companies are providing many

schemes and plans to attract customers. For example mobile service providers provide

lifetime option and free calls to other mobile users under a specific plan of the company.

6) Due to fierce competition in the electronics market and people’s willingness to

purchase hi-tech products the rates of LCD and plasma TVs have been slashed by 25%-

30%. Through this strategy electronic companies received very good response from the

consumers in the recent past and were able to build a considerable market for their

products.

7) Indian consumers have developed a liking for foreign tours and holidays. This has led

to development of many travel agencies that provide a planned foreign tour at a

reasonable price. What is even more interesting is that the customer does not have to

pay the amount in lumpsum, instead, he has the facility to make the payment in

monthly installments according to his convenience.

8) Consumers of India have developed a tendency to save travel time. For such

consumers low fare or low cost carriers are available that provide air travel facility at a

very affordable price.

9) Consumers of India want better housing facilities. The construction companies are

fulfilling this requirement of consumers by providing them luxurious houses, exquisite

interiors, round the clock water and electricity supply, full time security, club house,

gymnasium, etc. within the premises.

10) Indian consumers are increasingly becoming aware of the importance of health and

hygiene. Hence companies are making products to suit their health like low calorie, low

fat food. As far as hygiene is concerned companies have fully mechanized their plants to

maintain hygiene and pack the food in such a way that it remains fresh for longer period

of time and does not lose its nutritive value before consumption.

11) The need for internet is fast growing. To fulfill this need of consumers, mobile

manufacturing companies are providing internet access facility on mobile phones. This

has revolutionized the communication sector and provided a means of communication

that was never ever in anybody’s dreams till a few years back.

12) Indian consumer’s liking for credit is also increasing rapidly. Hence many financial

institutions have come into existence in India and are flourishing. Banks have also

become liberal in their loan and credit policies.

THE ROAD AHEAD

The rising rate of growth of GDP, rising purchasing power of people with higher

propensity to consume with preference for sophisticated brands would provide constant

impetus to growth of white goods industry segment.

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.

Currently, rural consumers purchase their durables from the nearest towns, leading to

increased expenses due to transportation. Purchase necessarily done only during the

harvest, festive and wedding seasons — April to June and October to November in North

India and October to February in the South, believed to be months `good for buying’,

should be converted to routine regular feature from the seasonal character.

Rural India that accounts for nearly 70% of the total number of households,

has a 2% penetration in case of refrigerators and 0.5% for washing

machines, offers plenty of scope and opportunities for the white goods

industry.

The urban consumer durable market for products including TV is growing annually by 7

to 10 % whereas the rural market is zooming ahead at around 25 % annually.

According to survey made by industry, the rural market is growing faster

than the urban India now. The urban market is a replacement and up

gradation market now.

The increasing popularity of easily available consumer loans and the expansion of hire

purchase schemes will give a moral boost to the price-sensitive consumers.

The attractive schemes of financial institutions and commercial banks are

increasingly becoming suitable for the consumer. Consumer goods

companies are themselves coming out with attractive financing schemes to

consumers through their extensive dealer network. This has a direct bearing on

future demand.

The other factor for surging demand for consumer goods is the phenomenal growth of

media in India. The flurry of television channels and the rising penetration of cinemas

will continue to spread awareness of products in the remotest of markets.

The vigorous marketing efforts being made by the domestic majors will help the

industry.

The Internet being now used by the market functionaries that will lead to intelligence

sales of the products. It will help to sustain the demand boom witnessed recently in this

sector.

The ability of imports to compete is set to rise. However, the effective duty protection is

still quite high at about 35-40 per cent. So, a flood of imports is unlikely and would be

rather need based.

Reduction in import duties may significantly lower prices of products such as

microwave ovens, whose market size is quite small in India. Otherwise, local

manufacturing will continue to stay competitive. At the same time, there will be some

positive benefits in the form of reduction in input costs. Washing machines and

refrigerators will also benefit from lower input costs.

According to a study by the McKinsey Global Institute (MGI), Indian incomes are likely to grow

three-fold over the next two decades and India will become the world's fifth-largest consumer

market by 2025. In the given scenario, urban markets will continue to fuel the Indian economy

for quite some time to come.

Moreover, expenditure by the middle class accounts for the bulk of India’s urban

consumer expenditure. About 61 per cent of total urban income comes from households

that can be classified as middle class—earning between US$ 1,493 and US$ 9,955 a year.

Further, India is likely to see rapid urbanisation, with around 45 per cent of Indians

living in urban areas by 2050, up from 30 per cent in 2007-08, according to a study co-

authored by National Council of Applied Economic Research's (NCAER) Rajesh Shukla

and Future Capital Research's Roopa Purushothaman.

According to a report by McKinsey, India's overall retail sector is likely to grow to US$

419.93 billion by 2015.

According to global real estate consultant, CB Richard Ellis, India has moved up to the

39th most preferred retail destination in the world in 2009, up from 44 last year. The

turnover of the organised retail segment in India is pegged at around US$ 8.1 billion. It

is expected to reach US$ 51 billion by 2010.

Retail opportunity is slated to rise by about US$ 160 billion in India in five years. In

urban India, modern retail is likely to grow from the current 9.6 per cent of total retail

to 26 per cent in the next five years, as per Technopak Advisors

The Indian consumer durables market seems to be relatively untouched by the

economic slowdown. The consumer durable goods output witnessed a 2.5 per cent rise

in durables output in the first quarter of 2009, according to a report by the Development

Bank of Singapore (DBS).

Colour televisions have seen an increase in sales, growing 2 per cent to 2.8 million units

in January-March 2009, according to the figures released by ORG-GFK.

Whirlpool is on the expansion mode and is targeting a 22 per cent share of the US$

423.28 million washing machine market in India by the end of 2009, and is launching a

range of new products with an investment of US$ 4 million for the same.

Moreover, a large number of hi-technology durables are expected to flood the US$ 4.03

billion Indian durables market in 2009. Samsung, LG, Haier and Videocon are among

companies planning new product launches in the coming months

CONCLUSION

The Indian consumer remains one of the most upbeat globally. The Nielsen Global

Consumer Confidence study, conducted by Nielsen, a market research company

revealed that Indians are "the most optimistic lot globally who think that their country

will be out of the economic recession in the next twelve months."

In fact, it is widely believed that the Indian market will fuel the growth of multinational

companies in the coming years. While most leading companies are cutting costs in the

US and Europe, they see India as a strategic market, which can fuel their growth.