After tying up with Videocon for TV, Philips wants to focus on smaller segments of the consumer electronics market where the Koreans aren’t aggressive
Philips wants to grow at double the rate of the country’s gross domestic product. With the government confident of 9 per cent growth in the current financial year, the task for Philips is cut out: It has to grow its business at least 18 per cent. Philips has three businesses in India: Lighting, healthcare and consumer lifestyle. It is the largest player in the lighting industry and has ambitions to grow healthcare — it has selected futuristic products from its global portfolio for India, and has grown through acquisitions. The challenge is in the third category of consumer lifestyle. While lighting grew 12 per cent and healthcare 22 per cent, consumer lifestyle declined 11 per cent in 2009, pulled down by Philips’ TV business.
Well said, but Philips’ record inspires little confidence. As recently as a couple of years ago, its share in the TV market had dwindled to low single digit. It played second fiddle in the DVD player market and had been unseated by Sony in the audio segment that it had ruled in the analogue days. But this is where Philips’ recent moves are coming to the rescue. It had to stop selling 19- to 26-inch TVs because it got overrun by the Korean chaebols who weighed in with quality products and low prices. The ill-effects were felt even in the last financial year. Its remaining business of TVs above 31 inches dragged down the operating profit of the company by Rs 21.2 crore. Its graded exit from the TV market began in early 2008 when it pulled out of the mass end and culminated in early 2010 in a five-year licencing agreement with Videocon. According to the deal, Videocon will manufacture, market and distribute Philips TVs in the country. Philips will earn royalty and keep a tab on the quality, product design and the imagery used in branding. Customer care will also be done at Philips’ end.
Sharper focus
With TV out of the way, Philips can now concentrate on its other audio-video multimedia products which are more profitable for the company. Analysts point out that market leaders LG and Samsung concentrate on display devices rather than smaller home appliances, including DVD players. This leaves scope for other players to grow. Thus, Mirc Electronics’ Onida and Philips have been the only companies to advertise their DVD players. Videocon’s direct-to-home telecast arm, d2h, also counts its integrated DVD player in its list of bestsellers. “It makes sense to play in the categories the Korean giants are not aggressive in, because with one stroke they can slash margins and drive you out of the market. It doesn’t make sense to play in TVs without at least a 10 per cent share. Smaller categories have low turnover but healthy margins,” points out an analyst who does not wish to be named.
Philips gained leadership in the DVD player segment in July 2009 and now has over 24 per cent share of the market, according to ORG-Gfk, up from 21.9 per cent in early 2009. DVD players make up 20 per cent of Philips’ consumer lifestyle turnover. The DVD player market in India is valued at Rs 1,368 crore and over half a million sets get sold every year. “For three years we had been trailing LG but now we can concentrate on innovating more for these segments,” says Krishnan. To differentiate itself, Philips included a speaker and an FM tuner in one of its DVD players last year that played on its core expertise in audio. This innovation was based on research on consumers. “It was received very well in smaller cities and towns. The first-time buyer of a DVD player found it a deciding factor,” claims Krishnan.
Philips also hauled up its distribution to be in tune with its product innovation. It went deeper to places where first-time buyers of DVD players could be found. “We figured out that while we were concentrating on the big metros, the DVD player market was moving into Tier I and Tier II cities. In the bigger cities, people already had a DVD player. Many of them also had other devices like computer drives. Even though DVD player penetration is low overall, it is lower in places outside the metros,” says Krishnan. But how small is the small-town market? Philips has gone with its DVD players to towns which have a population of as low as 10,000.
The challenge was to get the distribution network right. Instead of reinventing the wheel, Philips decided to leverage its lighting network to sell DVD players as well. Being the market leader helped. Thus, around 80 super-stockists with 2,100 distributors under them began to sell Philips appliances — not just DVD players but also electric irons and mixer-grinders. Rivals also point out Philips slashed trade prices by 5-10 per cent in order to recover the market share it had lost. Philips admits that this strategy was used but claims that it played a small part. At the other end, Philips began to train its shop-floor assistants about product features, an exercise that Krishnan says most players do only during product launches. Philips has also started to interact with retailers directly rather than leave it to distributors, feedback from whom has led to its decision to make all its DVD players USB-enabled. It has incorporated six new people in its senior sales team to consolidate distribution across its businesses.
However, observers question if a lead in DVD players would help Philips in the days to come. They point out that DVD as a storage format is being passed over for flash drives (USB drives) and that will eventually shrink the demand for DVD players. “It has become a commodity market now with Chinese products available for less than Rs 1,000, which match branded products feature for feature,” says one. “The DVD player is a dying product. With DTH, digital cable and the internet, it could lose relevance soon. But what would keep on being important is a display device, which Philips is trying to shake off. India is slated to become the third- largest market for display devices such as TV in a few years’ time,” adds Milagrow Business and Knowledge Solutions Founder and CEO Rajeev Karwal who was in the past Philips’ head honcho in India.
At the moment, Philips is putting its money on DVD players. It, by shoring up its distribution and including customised features such as wallpapers in DVD players and USB ports, hopes to stay ahead of the curve. What could work in its favour is that its DVD players can play any file format of video and audio, while DVD players of rival brands recognise only a few formats.
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Home theatre edge
Philips’ lead in DVD players could also help it gain a bigger share in the home theatre segment, which has come to form 72 per cent of the audio market. “Philips’ legacy of high-quality audio systems has been transferred as credibility in the home theatre space that has come to replace standalone audio systems,” admits a rival. It has lined up five new products with a choice of both BluRay and DVD players to strengthen its position. It ranks second to Sony with a share of 22.6 per cent. “For every 100 LCD TVs, there are only two home theatres. So, the opportunity to grow is a lot,” says Krishnan. With price tags of over Rs 40,000, the products are geared to tap the higher end of the market because, says Krishnan, “We are already strong in the Rs 10,000-15,000 home theatre market”.
Philips has beaten most players in introducing BluRay-enabled home theatres. “BluRay means high-definition content. That is what people buy it for. However, while the HD visual output is taken care of by LCD TVs, the audio is no match for conventional TVs. Therefore, we are offering users the option of a home theatre to do justice to the audio of a BluRay disc,” says Krishnan. The key would lie in Philips pushing its BluRay products, ensuring that it can take over from where DVD players would eventually leave. “We are working with production houses to bring out more titles and create libraries in this format so that there is no shortage of content,” informs Krishnan. Last year, Philips had tied up with Yashraj Films to co-brand the movie New York’s BluRay discs. More such tie-ups are in the offing.
With its DVD player and home theatre business among the top two brands in their respective segments, Philips also plans to spruce up its MP3 offerings. From an inbuilt camera, and touchscreens to HDMI output-enabled (that allows the players to connect to a TV, for example), the gadgets come loaded. Philips is banking on seven products to lessen the gap between it and the market leader, Apple (selling iPods) which has more than double of Philips’ market share. That may not be the end of the story. It is being said that Philips’ move to request an increase in its borrowing capacity from Rs 400 crore to Rs 1,000 crore is to enable both organic and inorganic growth. It could certainly go for acquisitions in home appliances with the extra funds.