Feb 1, 1999
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CONSUMERISM Going Cheap Competition, excess capacity and a 30-month buying slowdown force companies to get realistic with pricing. By Shefali Rekhi
The Indian consumer has never had it so good. With prices of consumer durables tumbling at a fairly fast pace, a quiet revolution is on in the marketplace. And it's not even the seasonal bargain or year-end closing sales. With the 30-month buying slowdown continuing unabated, capacities being underutilised and competition unexpected, companies are losing their pricing power. At the same time, product features are getting better by the day. It began with colour televisions and computers initially but realistic pricing is becoming the order of the day in most consumer product segments. Not only that, it's spreading to the service sector as well -- like cell phones, holiday packages and credit cards. "At the end of the day, profitability matters to everyone. That is what is driving the trend," explains Jagdish Khattar, joint managing director, Maruti Udyog Limited (MUL), "And if the economy doesn't pick up, this will only intensify." Many products can be bought off the shelves at rates lower than those that prevailed in the mid-'90s when the economy was growing at 7 per cent plus, though inflation since then should have added to costs (see box). Baron International -- which markets the Akai and AIWA brands -- triggered the downward spiral in the colour TV segment. Selling at close to Rs 50,000 then, 29" colour TVs are now a more affordable Rs 27,000; even the popular 21" comes with a price tag that's at least Rs 2,000 less.
The trend soon hit other product categories and today refrigerator manufacturing companies are trying to lure buyers with tags that are 20 per cent lower, while prices of washing machines too have come down by at least 10 per cent. Three years ago, a top-of-the-line PC -- then a 486 configuration with an 8mb ram -- cost between Rs 60,000 and Rs 70,000. Today, Pentium machines with better features come for about half that price. Analysts believe it will get even better for consumers. Says J.D. Singh, professor of marketing at the International Management Institute, Delhi: "The margins that companies kept for themselves have been far too high. Even MUL is today conceding that its margins are three to four times higher than the 3-4 per cent for global auto majors. I think a good amount of price reduction is still possible without necessarily knocking the bottomlines of companies." With the economy showing no signs of improving dramatically, that may well be the case. Such is the competition that some are knocking off their prices just in anticipation. Barely a few hours before Tata announced the price of its Indica, MUL slashed its prices. The price of the basic Maruti model was reduced by almost Rs 25,000 to cost Rs 1,84,995, while there was a bigger surprise in store for the Zen. A stripped-down version of the Zen VX, without the air-conditioning and other accessories, was launched at Rs 2.95 lakh, lower by Rs 50,000 plus. Indica's selling price at Rs 2.59 lakh (ex-showroom Delhi) had further ripple effects. Ind Auto Ltd introduced newer versions of its Uno at Rs 50,000 to Rs 1 lakh lower. Premier Automobile Ltd effected a moderate cut of Rs 15,000 to Rs 53,000 on its Padmini models. The Padmini Status (diesel) will now cost Rs 2.75 lakh (on road in Mumbai) while the deluxe version will cost Rs 2.9 lakh. With many more launches scheduled, this is just the beginning of price wars in the car segment.
In the holiday packages segment, the fear of a drop in overseas travel in the summer of '99 has tour operators in a tizzy. While till recently they were offering freebies such as no charges for spouse and/or children, now they are simply giving free airfare to a select few. Bombay-based SOTC was the first to offer free air tickets for the first 1,000 who booked with it. Across the board too, prices are dropping -- by as much as 20 per cent for a destination like Europe. Says Ajay Bali of Thomas Cook India Limited: "The current prices are the best so far and with a number of players in the field, competition will only intensify." Inspired by the buying boom of the mid-'90s, most companies went in for capacity expansion and began to get ready for roll-outs from the middle of 1997. But by then the demand slump had set in. Competitors in fact believe that Maruti slashed its prices not only to counter the Indica but also to ensure that its new one lakh capacity addition did not become problematic. Many of these price cuts are designed to smash price barriers that exist in the consumer's mind. Take the case of colour televisions. The industry was in a slump till Baron came up with its aggressive pricing strategy. From a slower pace earlier, the growth rate is expected to be an amazing 30 per cent during 1998. Similarly, lowering of refrigerator prices pushed up growth to 22 per cent for April-September '98 from 13 per cent the year before. As K.S. Kim, managing director, Samsung India, says, "Only companies that can keep pace with ever changing dynamics of the market -- be it in terms of technology, pricing or features -- will survive." In the PC market, price knock-outs of '96 and '97 had the industry growing at 35-40 per cent on an average, though the base increased substantially, from 3.9 lakh units in 1995-96 to eight lakh PCs in 1997-98. Says Vinnie Mehta, director, Manufacturers' Association of Information Technology: "A price tag of Rs 50,000 was something like a mental block. Once that changed, sales shot up."
Figuring out the consumer's mental price barrier has become an obsession with marketers now. In the credit card segment, American Express extended that logic to its latest credit card by charging 1.99 per cent interest per month, which is roughly 1 per cent lower than its rivals. "Our research showed that high interest rates were actually an inhibiting factor," says Sanjay Rishi, country manager, American Express. Similarly, HCL's "Busybee", which was launched in September '98, has been doing fairly well because of the pricing strategy. The basic model carries a price tag of Rs 29,995 (market surveys showed that Rs 30,000 was the price barrier in the home computer segment) and the company claims it has notched up a market share of 45 per cent in the branded home computer segment since its launch. But it is not always a win-win situation. Price cuts work like a double-edged sword. Warns Hiromi Matsumoto, CEO, Sony India, who has had to live with tough price cuts in the colour TV segment: "Companies try and force immediate gains through attractive prices, which others have to follow to maintain market share. But then, the long-term effects can be damaging." The market has shown that companies that ventured without adequate groundwork have suffered. After initiating price wars in the PC market, with price cuts of as much as 40 per cent on some models, Pertech Computers couldn't keep its word as it ran into financial problems and lost out. But that's not the end of it. The consumer is precious and cannot be lost. That is the real bottomline. So if you're a buyer, watch as the market unfolds many a surprise for you. |
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