Learning To Compete Against The Unorganised Sector

When your main product becomes a generic, and unorganised sector manufacturers have a clear price advantage, you have to rethink your business. Faced with a similar situation in steel cupboards, Godrej & Boyce has rejigged its manufacturing, distribution and designing capabilities to adapt and remain competitive

One ever-present danger in the Indian marketplace is the fear of being kicked upstairs by price players. With the unorganised sector enjoying huge tax advantages and low overheads, in many sectors they rule the roost on the basis of a price advantage. Branded players are forced into small niches with a steadily declining marketshare. Storage is one of them. Luggage is another.

The traditional answer to the price challenge is to offer better value to the customer. But how do you do that when you are in a segment where the purchase is expected to last a lifetime. Most customers buying steel cupboards do not expect to replace it for several years, if not decades. So a customer lost to the unorganised sector is a customer lost forever. Almost.

A focus on quality sometimes helps. But often quality adds to costs in the price-sensitive segment of the market. For what the customer wants is not quality as defined in a quality manager's lexicon, but quality that is acceptable to him. You can use the most expensive steel for my cupboard, but I am not storing the Reserve Bank's gold in it.

The disadvantages don't end there. A large-scale manufacturer also faces the distribution cost obstacle: for economies of scale, he may prefer to manufacture at one or two plants. But the regional or unbranded segment manufacturer can make luggage or cupboards closer to the market: with obvious transport cost advantages.

Today, pressure from the unorganised sector and changing market dynamics are forcing cupboard manufacturer Godrej & Boyce to reorient its selling strategies. This is the story of what it is doing to change the current reality of declining marketshare and loss of customer franchise.

GODREJ CUPBOARDS: A CASE STUDY

If you were to enter any Mumbai store to buy a Godrej steel cupboard, there's little chance that you'll actually buy one. The person holding the key to this shift in loyalty is none other than the Godrej dealer. Take this scene straight out of a Mumbai dealership. Even as the store sign mentions "Dealers in Godrej cupboards", locally-manufactured variants are displayed right at the entrance. A plain vanilla offering of the Godrej cupboard rests in a distant corner. If you still insist on a Godrej, the dealer launches into a sales spiel for local brands.

The high point of the dealer's pitch is the huge price differential between Godrej cupboards and the rest. The Godrej sticker price starts at Rs 7,000, commanding a price premium of more than 50 per cent over the unorganised sector. So what do these local cupboard brands offer? Twisting the doorknob of a local cupboard, the dealer proudly displays three chunks of steel that pop up in a mighty show of security. Trust the dealer to point out that the tongue-and-groove locking arrangement of a Godrej cupboard is pale in comparison.

Watch the unveiling of concealed shelves to stash away prized possessions, which are only featured in local cupboards. And do not miss the parting shot of the dealer, that the quality of local cupboards is as good as a Godrej. It's not difficult to guess the reason for the dealer's zeal in pushing local brands. For locally-manufactured cupboards, dealers command their own margins, while Godrej offers them margins that range from 6 to 12.5 per cent. And often, the retailer is also a manufacturer.

Instances like these have hit Godrej Storwel. Today its monopoly strength, gained over eight decades in the segment, has become its weakness.

Godrej is suffering on two counts. One, it has been a successful market creator in a business with low entry barriers. Two, its Goliath-like status has made it vulnerable to threats from the Davids. Today, as the unorganised sector is breathing down upon the Rs 850 crore Godrej & Boyce, smaller brands like Gadre from the Mumbai-based Gadre Steel "" claiming a national presence with a network of 90 dealers "" are shaking Godrej Storwel out of its complacency.

For Godrej, which turned the staid steel almirah into a status symbol (till recently it was a much-coveted dowry item, and its name was generic to steel cupboards), times couldn't be worse. Its marketshare is at a low of seven per cent in the approximately 1.7 million units, or Rs 800 crore, segment. Compare this with the scenario in 1992 when Godrej had a 34 per cent share in a 3.5 lakh units market.

After three years of stagnation in sales volumes, Godrej's sales have remained around one lakh units per year, when the rest of the industry has grown at 5-15 per cent per annum. What went wrong? And how does Godrej plan to pull itself out of the closet?

To be fair, part of the reason the unorganised sector thrives is a substantial tax differential. Every Godrej cupboard comes bundled with a 31 per cent tax component (16 per cent excise duty plus 15 per cent sales tax). Compare this to the local brands which do not pay excise duty and also give customers the option of not paying sales tax, provided they do not insist on a receipt.

If the tax structure makes the Godrej cupboard expensive by 30-odd per cent, the manufacturing process increases costs even more. For instance, Godrej's brass-locks are eight times more expensive than the steel locks used in locally-made cupboards. While local cupboards are spray painted, Godrej cupboards boasted an oven-baked painting finish till 2001, after which it shifted to a powder-coated paint finish to enhance scratch resistance and to obtain a superior finish. This increased painting costs by another 10 to 15 per cent.

Since this painting process cannot camouflage steel defects, it was mandatory for Godrej to procure steel with a good surface finish. And tested steel of a certified quality costs nearly Rs 300 more per cupboard. This commendable focus on quality, however, hindered the company's ability to focus on costs. It could not, for instance, consider the option of contract manufacturing, which could have helped bring down overheads. This is because its manufacturing process "" for instance, its anti-rust treatment "" required large investments. Contract manufacturing could also present a substantial share of risks if the contract manufacturer passed on his knowledge of the processes to the unorganised sector.

If you want to control quality and specialised knowledge, you had better manufacture your cupboards yourself. But this meant that logistics costs were high. Godrej manufactures cupboards in Mumbai and transports them throughout the country, thus incurring another set of costs. The cost of transporting a single cupboard to Kolkata, for instance, costs the company roughly Rs 1,500. The problems are a handful and more.

At the 2.25 lakh sq ft production facility of Godrej & Boyce in Mumbai's north-eastern suburb of Vikhroli, Anil S Mathur commands a ministerial following. Workers interrupt him at frequent intervals with problems on hand. As vice-president and business head of the company's Storwel division, Mathur is leading the renaissance of the product. By September 2002, with the launch of a new range of cupboards, Godrej will take on the unorganised sector with cupboards that retail in the Rs 5,000-5,500 range. The current range of Godrej cupboards runs from Rs 7,000 to Rs 18,000.

But wooing customers from the unorganised sector would amount to winning only half the battle: another reason for the drop in sales has been the changing consumer preference. Over the years, with an increase in security threats, urban customers have been storing valuables in banks, thus reducing the importance of steel cupboards at homes. Instead, aesthetically appealing wooden storage is being favoured as nearly 80 per cent of the storage space in cupboards is used to keep clothes.

SHIFTING PREFERENCES

If the domestic urban market was under pressure, it was a similar scene in institutional sales. Earlier, institutional sales accounted for 20-30 per cent of Godrej's cupboard sales. Some housing companies built homes furnished with Storwels. Such opportunities have vanished and institutional sales have tapered off to 10 to 15 per cent of total sales.

This reduction, according to Mathur, is directly related to the advancement of information technology. In the past, offices used cupboards to store dozens of box files containing documents and records. Today, the increasing use of computers to store data and other reasons like escalating real estate prices are compelling companies to make optimum use of commercial space. Naturally, space-consuming Godrej cupboards are the last priority. This has virtually sealed out most opportunities for Godrej to make a killing with institutional sales. The consumer segment is also beset by its own clutch of uncertainties.

Admits Mathur, "One segment of the market is highly price-sensitive and another segment looks at aesthetics and customisation. Our products did not have the facility of customisation, while the unorganised sector had an advantage on the price front." While Godrej had approximately six models, the unorganised sector presented the consumer with infinite possibilities.

For Godrej, it was again the production facility that restricted flexibility in operations. "The plant had the limitation of a big batch size," says Mathur. For instance, earlier Godrej had to make 2,000 cupboards in a batch. As a result, the company could not introduce new models at short notice since economies of scale dictated that the manufacture of one batch stretched over three or four days. "When demand patterns changed, we were not able to respond faster and customers were not prepared to wait for long periods of time," he adds.

In early 2000, as Storwel's fortunes grew worse, the company turned its attention to its manufacturing operations. "The objective was to provide value-additions and not penalise customers for any inefficiency that we may have had in our system," points out Mathur. With the help of a Japanese consultant, Takao Kashara, the company started restructuring its manufacturing operations. "The manufacturing had to be compressed and made simpler and more flexible," he says.

To this end, the plant implemented a "cell concept" through which each cell is able to make a particular product. Today, in the assembly line there are three platforms with each cell manufacturing a single product rather than the entire shopfloor, making a high volume product for a week and then moving on to another line. As a result, today, the batch size is down to 100 cupboards per batch.

The current manufacturing processes, coupled with the implementation of an Enterprise Resource Planning (ERP) package "" which was implemented in 2001 "" enables the company to respond to changes in just 48 hours, instead of the earlier timeframe of four days.

Even inventory levels tell their own story. Earlier, the company maintained four to six weeks' inventory levels in the Mumbai facility. Today, the inventory level in Mumbai is down to two weeks. Overall, Mathur claims that lead times to the customer have been cut down by 50 per cent "" from four weeks to two weeks.

The flexibility offered by the new plant was mirrored in the product introductions that hit the market soon. To appeal to urban tastes, the company launched cupboards with a wooden finish in September 2000. Called the "Wood and Steel Storwel", this range retails in a price range from Rs 8,700 to Rs 18,000. But competitors say that these offerings compromise on the cupboard's strength as the steel used is thinner.

In October 2001, the company conducted a consumer study, which threw up a significant conclusion. Customers were willing to go in for a second cupboard provided they got flexibility in the accessories like optional drawers, hangers, lockers and so on. This was something that Godrej had been unable to provide its customers in the past. "The consumer's expectation is no longer about plain storage, but how efficient the storage is," feels Mathur.

TOWARDS CUSTOMISING

The consumer study was followed up with the formation of numerous prototypes of Godrej Storwel that could be presented as options. Today, the company is in the process of rolling out a project called "Configure your dream storage" (CYDS). The prototypes will be test-marketed soon in each market and customer feedback from showrooms will be taken into account before the final range of options is available in showrooms by August 2002. "Our entire strategy is moving towards having a customer-driven design," says Mathur. At the point of purchase the customer can design the interiors of the cupboard "" either through a computer at the outlet or through a book with various options. "Even if the customer wants to incorporate changes in the cupboard's design after two years of purchase, it can be possible," says Mathur.

But offerings like these would only add to the cost of the product. So how is Godrej introducing cupboards at a price point of Rs 5,000-5,500 and aiming to penetrate the economy segment?

Mathur insists that it would be possible without compromising on the quality of the product. True, the thickness of the steel used will be 0.8 mm while the normal Godrej cupboard has a thickness of 0.9 to 1.2 mm. But the company will save production costs with the no-frills design of the storage. For instance, the cupboard would have sharp edges which are easier and cheaper to manufacture compared to rounded edges.

Transportation is another area that is expected to receive some attention. To reduce the cost of transportation, the company is test-marketing a "knock-down flat pack" which can be assembled at the point of sale. For instance, the company can send 27 cupboards in a truck today. With a knock-down pack, it'll be able to send 71 cupboards. Then the cost of transporting a cupboard to Kolkata will be only Rs 500. "Today, I'm literally transporting air," says Mathur. (A built-up empty cupboard takes up a huge volume of space on trucks). The company would be test marketing this range in July in the eastern and western markets of the country. Mathur says this is being done to take into account the diversity of the marketplace.

On another front, Godrej is also working at strengthening the alliance with its dealers. As Mathur says, "Our emphasis is slowly moving away from dealer margins, to looking at the dealer as a channel partner whose return on investment (ROI) should be protected and guided by the company." In six months, the company expects to get back into contention at the same dealerships where the Storwel brand is out of favour at the moment. According to Mathur, the current ROI for dealers is 10 to 15 per cent and the company is looking forward to improving it steadily.

The current exercise has been initiated in 300 out of the 500 Godrej dealerships. Considering that each dealer has his own peculiar expenses in terms of real estate costs and administrative expenses, the company is looking at various ways to increase the turnaround of investment with an increase in the sales support activity at dealerships. For instance, with the CYDS project, the number of stock-keeping units (SKUs) will come down drastically, even as the number of options increase from the 55 SKUs that Godrej currently has. This is because if Godrej has six models available in five colours, the dealer has to keep 30 SKUs currently.

But when the CYDS project is rolled out, the dealer can keep only five SKUs as the interiors will be designed to customer specs. Simultaneously, the company is also looking at increasing its presence to 700 dealers over the next two years. It is also targeting a 35 per cent increase in volumes over the next one year. Already, the communication for the brand has been revived after a lull of three years when financial constraints led to a freeze on advertising expenditure. Today, the company claims to target young couples who are setting up nuclear families in order to bring in a new set of users.

Earlier, the communication focused on the heritage and quality of a Storwel and evolved on family occasions like marriages, births and so on. The company plans to increase advertising expenditure for the Storwel range in the next financial year from the current Rs 4 crore to Rs 6 crore to focus on the new products being launched in the coming months.

And keeping in line with international trends where steel cupboards are unheard of, Godrej is closely looking at introducing walk-in wardrobes and closets in the next one-and-a-half years. As for its current strategy, it expects the results to show on the bottomline in the second half of the next fiscal.

NOTE

(This article has been adapted from an earlier version published in The Strategist, Business Standard. It was published in the July 2002 issue of Indian Management magazine)