Godrej Appliances has been a household name in the country. However, stiff competition from both domestic and international players has seen the company up the ante with a slew of launches in the air-conditioner category that are energy efficient, eco-friendly and technologically advanced. Santosh Salian, Product Group Head – Air Conditioners, Godrej Appliances throws light on what the company is doing right to achieve a growth rate of 20 per cent for the category this financial year.
How do you view the current market scenario for Air-conditioners in India?
The Air-conditioner industry has seen a substantial change in the past couple of years. Once considered a luxury, air-conditioners are now perceived as a necessity in Indian households. Moreover, air-conditioners were previously considered as a seasonal product, used mostly during summer months. However, with the changing consumption behaviour and climatic extremities experienced, manufacturers have now started offering heating/cooling options so that it could be used throughout the year.
In terms of cities, we see higher penetration in metro markets to the tune of 9.0 per cent, but abysmally low in rural markets at 1.6 per cent. Overall, the penetration of ACs in India is 3.6 per cent, whereas in China, the AC penetration is almost 70 per cent, which gives this industry great opportunity for growth.
Moreover, Air-conditioners are still in the highest tax slab, at 28 per cent. Lowering the tax slab would make Air-conditioners more affordable and give an upward push. There are many positive steps taken by the government, such as the Energy efficient norm regulations, move by BEE to freeze temperature at 24oC, and many more.
Today, India has the highest energy efficiency norms across the world. However, these norms have been changing frequently, posing a challenge for the industry in terms of R&D investments/manufacturing upgrades and a huge impact on the material cost as well, which ultimately gets passed on to the end customer. With this short window of every two years, there is too much pressure on the overall supply chain deliverance, plus huge impact on the average ticket value of the product. Since India is already there in the top countries, where EER norms are stringent, there is a strong case for upgrade and, hence, the change in the energy efficiency norms to be extended to once in five years.
The move of the BEE to encourage running ACs at 24 degree C is also a welcome move, especially in a country like ours where there is a gap in demand and supply of electricity. The optimum temperature setting for the human body is 24 degree C and, hence, such settings will be beneficial to consumers, both in terms of financial saving and personal health.
But, the implementation needs to be backed by benefit-based information sharing with end consumers so that penetration is not hampered, and the industry sees steady business revenue.
What are the key drivers for AC sales in the country?
In line with the climate change debate happening around the world, 18 of the 19 hottest summers have been from 2001 onwards. So, we are looking at progressively hotter summers, year after year. India has been no exception either. The Indian Meteorological Division (IMD) has warned of above-normal temperatures this summer season across most parts of the country.
Given the tropical climate, the soaring temperatures are likely to drive demand for air-conditioners in 2019 even though penetration remains low. That’s not all, we also experienced an extended winter, which is usually followed by a harsh summer, making the upcoming season promising for air-conditioners.
Increasing disposable incomes, better financing options, and lower operation costs with energy efficient ACs, are expected to further drive demand for AC segment in India.
The air-conditioner industry witnessed several headwinds during FY18-19, led by GST transition, no relief on the tax front which kept AC prices elevated, and the change in energy efficiency ratings. Moreover, the festive season too fared lower than expected. How have you been impacted in terms of demand and growth?
In the previous summer season, consumer off take was not as per expectations, especially in the AC category. Although, the 10 per cent GST rate reduction from 28 to 18 per cent in July was a welcome boon, but the market experienced a slump thereafter due to macroeconomic factors like rupee depreciation, fuel price hike and custom duty increase, which hit the input cost for the industry. This led to an increase in MRP, but the price hike undertaken in September did not really get implemented in true spirit, as brands were trying to garner maximum share in the market place during the crucial festive season. Festive did see a spike in demand for about a week ahead of Diwali.
Post the festive season, brands gradually withdrew the inputs and support, making the earlier price hike effective, going up to 3–4 per cent for indigenous products and 5–7 per cent for imported products, with the steepest price hike in AC category, as a result of which demand did suffer for the AC category. Despite all the macroeconomic factors in play, for AC category, we experienced a growth of 10 per cent over last year. (GFK YTD DEC 2018).
According to industry reports, the RAC industry is said to decline by 2.0 per cent in FY19. Do you see a similar dent in your growth as well? If not, what are the factors driving growth at your end?
Yes, 2018 saw a depressed summer, with unseasonal rains in April 2018, across the country, which saw de-growth in secondary sales of Air-conditioners. And, Godrej was also affected by this in the year 2018 and we experienced a mild de-growth in our AC sales too.
Our strategically timed product launches, exciting offers and promotional efforts drove our sales. Moreover, our focus is primarily to get higher tractions at the shop floor level and better shop level conversions with emphasis on trained shop level sales force, technology-enabled selling. We believe in making our products and services accessible to the customers wherever they live.
We do this with the help of our wide network with over 8,500 touch points stretching from Kashmir to Kanyakumari, and from Gujarat to Arunachal Pradesh. We also have 100+ exclusive brand outlets across tier 2 and 3 cities to showcase our entire range of thoughtful appliances.
Taking into consideration the weak demand growth, most manufacturers have not been able to pass on the increase in costs over to customers. Do you see prices to increase going forward?
As I mentioned earlier, post the festive season last year, most brands gradually withdrew their inputs and support, making the increase in prices effective. Although hike in import duties may push the prices up for the category, but with further strengthening of the rupee value and stability in commodity and fuel prices, we do not foresee any further price increase in near future.
Considering that maintenance and after-sales costs have increased more than the actual cost of an AC, how are you differentiating – and growing your market share – your brand amidst stiff competition?
The maintenance and after-sales costs are on the rise for ACs, which is a challenge for the consumers. With more than two decades of experience in designing, supplying, installing and servicing air-conditioners, the brand realized the importance of providing efficient cooling with minimal power consumption leading to a lesser ownership and operational cost – offsetting the increase in after-sales and maintenance costs, to meet Indian consumer expectations.
We are constantly increasing our spends in R&D and with new product offerings every year, we still hold the baton of bringing to our consumers – India’s most energy-efficient air-conditioners.
Moreover, our service arm – Godrej SmartCare – through its extensive network of 660 service centres across India, and more than 4,500 Smart Buddy technicians on the field, provide preventive services and conducts free service camps round the year for our AC consumers, thereby increasing efficiency and longevity of the machine, giving some respite from the increased cost, due to aging life cycle of the product.
Would you throw light on your dealer touchpoint network? To what extent has it increased?
Long before omni-channel gained currency, Godrej Appliances has been running a separate direct sales network, in addition to the offline store-led channel. Today, we are available online via our own e-store, marketplaces like Amazon, flipkart and via 16,000 retail outlets across the country along with 100+ Exclusive Brand Outlets and 150+ Preferred Brand Outlets.
Would you throw light on Godrej’s EBO initiative?
The brand has been expanding, its presence with Exclusive Brand Outlets spread across the country to cater to customers in every nook and corner, with wider choice. We recently opened the 100th EBO in the country. EBO is a strategic brand initiative – the channel is important not just for growing revenue and reach but also for displaying the brand better and offering a holistic brand experience to our customers. We first began selling our products through EBOs about five years ago, and we picked up momentum from 2014 onwards.
Would you throw light on your current manufacturing set up?
Both of our manufacturing units – in Shirwal (Maharashtra – near Pune) as well as Mohali (Punjab, near Chandigarh) are considered benchmarks in their respective regions and are also Platinum Green Co. rated by CII (Confederation of Indian Industry). In fact, this month, our Mohali plant is also adjudged with the prestigious ‘Green Factory Platinum’ certification by Indian Green Building Council (IGBC). The ethos of green and environment friendly goes beyond products to our processes as well.
Recently, we strengthened our manufacturing capacity in Mohali as part of the `400-crore capacity expansion plans that we announced recently.
Currently, we manufacture 1.5 lakhs air-conditioners, at both our Mohali and Shirwal manufacturing locations. This is besides the other equipment that we manufacture at these plants, like Washing Machines, Refrigerators, etc.
Would you throw light on your import component of raw materials in your ACs? What is the percentage of imports of raw materials?
Unlike other categories, some key components, like compressors for ACs, are largely imported. The hike in import duties is bound to lead to a significant rise in the AC prices, more so in the forthcoming summer season, affecting the demand for ACs. The category is already under huge pressure as 2018 summers did not see growth.
Would we see a decline on this front going forward considering the increased import duty on raw components levied by the government coupled with a volatile rupee?
Aligned with the government’s initiative of ‘Make in India’, the increase in customs duty from 10 per cent to 20 per cent on Air Conditioners, will go on to promote domestic manufacturing. This, in turn, should considerably reduce the bulk of component imports, thereby creating an upward push for development of capacity and promote indigenous manufacturing.
Inverter ACs are rapidly making inroads. Would you throw light on your offerings in this segment – in terms of the number of models on offer in comparison to competition, sizes, etc?
Considering the country’s sustainability goals, we recently launch a slew of 38 new Godrej AC models – India’s most eco-friendly ACs with lowest Global Warming Potential. This new range of ACs use world’s greenest refrigerant – R290, along with R32, thereby offering zero ozone depleting potential and minimum global warming potential.
Packed with multiple features and technology, be it green inverter technology or blue fin anti-corrosion protection, or Smart IoT-enabled diagnosis, or twin motor rotary inverter compressor, the ACs deliver powerful cooling, energy efficiency and least global warming. With over 30 per cent of the range in the 5-Star Inverter segment, we have ensured that both consumers and the environment gain by using these eco-friendly Air-conditioners.
Overall, our 2019 AC product portfolio is heavily skewed towards Inverter Split ACs for Godrej Appliances. We will continue to do better than the Industry Ratio for Inverter Splits, which is currently hovering around 52 per cent of the total split AC Segment.
Would you let us know the percentage sales from Inverter ACs and Non-inverter ACs?
The Current Ratio Mix between Inverter and Fixed Speed is 52:48 for the Industry. For Godrej, we outperform the Industry mix, and our current ratio between Inverter and Fixed Speed is 55:45.
There is a marked shift in preference of Split ACs over window ACs. What has been the case in terms of Godrej ACs? Would you let us know the percentage sales from Split ACs and Window ACs?
Yes, the preference for Window ACs is stagnant over the past five Years, and going forward, we foresee the Window AC segment being restricted to North Market only. The Industry mix between Split and Window is 88:12. For Godrej, it is 90:10.
Do you plan to continue or introduce Window ACs going ahead?
Till the point there is demand in the market for Window ACs, especially for North market, we will continue to meet consumers’ requirement, with more efficient and eco-friendly variants of the same.
What is the growth that you hope to see on this front?
With the introduction of eco-friendly and energy efficient product offerings in AC category, driven by the anticipated scorching summer, we expect to achieve a growth rate of 20 per cent for the category this financial year.
Would you provide us an understanding on your regional strengths in terms of sales? Where do you see a high growth in the country – the Northern region, Western...?
As far as the revenue is concerned, the southern region contributes the most for us, followed by northern region, western region and eastern region, in the descending order of contribution towards revenues. An upward trend in preference for 5-Star Inverter ACs is observed in the southern region of India.
And, although our overall market share in AC category is 4.0 per cent, our market share in the 5-Star Inverter AC segment alone stands at 12 per cent, with southern region contributing the most.
What is your present order book?
We plan to reach 6.0 per cent market share for FY19–20.
Are there plans to enter newer verticals in the AC market, such as Central ACs, Central Plants, Packaged/Ducted systems, VRF systems, etc.?
Yes, we plan to introduce Cassette Split ACs, Floor Standing Split ACs, and Big Flow Hi Wall Split ACs to cater to the Light Commercial Segment for Air-conditioners.
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“Overall, our 2019 AC product portfolio is heavily skewed towards Inverter Split ACs for Godrej Appliances. We will continue to do better than the Industry Ratio for Inverter Splits.”
“The Current Ratio Mix between Inverter and Fixed Speed is 52:48 for the Industry. For Godrej, we outperform the Industry mix, and our current ratio between Inverter and Fixed Speed is 55:45.
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