Whirlpool finds ingredients for growth in the kitchen

The acquisition for kitchen appliances maker Elica India is part of its strategy to achieve its $1 billion revenue target by 2020

On June 1, the board of directors of Whirlpool of India was meeting to discuss a prospective M&A deal. A day later, the firm informed the Bombay Stock Exchange in a regulatory filing that the eight-member board, chaired by Arvind Uppal, had decided to acquire 49 per cent stake in Elica PB India, a company dealing in built-in kitchen appliances. The deal would cost approximately Rs1.62 billion.

Whirlpool Corporation – the American appliances major and parent of the local subsidiary –  holds 12.5 per cent stake in Elica PB India's Italian parent company Elica SpA. And the latest move by Whirlpool of India could have been just another step towards tightening the global firm's grip over the Italian entity. However, there is more to it.

Elica PB India, which sells a range of premium kitchen appliances like hoods, hobs, built-in ovens, refrigerators, built-in microwave ovens, dishwashers and the like, had a revenue of Rs 1.38 billion in 2016-17. And, it has been growing by over 20 per cent annually.

The industry estimates the Rs 40-billion premium built-in appliances space in India to be growing at over 30 per cent a year. Whirlpool's investments appear to be directed towards a segment that continues to grow at high double-digit rate. There is a lull in other appliances categories like stand-alone refrigerators and washing machine, which are growing between eight and 12 per cent.

However, experts say, the deal has more to do with the appliances major's newly-found vigour for growth and expansion. According to Sunil D’Souza, managing director, Whirlpool of India, "Whirlpool aims to expand its portfolio of innovative products with Elica's impressive capabilities in consumer insights, design, manufacturing and also broaden its distribution."

Kitchen appliances are not the only area Whirlpool has shown an appetite for in recent times. To tap the growing restaurants and out-of-home eating market, the firm brought in commercial appliances from its European business to India earlier this year. It also underwent a makeover as it introduced a new brand logo a year ago.

Whirlpool entered the local market 31 years ago with its global range of compact washers in search of new markets. It started out in India in partnership with Madurai-based TVS Group and later set up a local subsidiary in 1996 after acquiring refrigerator maker Kelvinator India. Over the years, while it managed to become a household name, Asian rivals like Samsung and LG that entered the market in the mid-1990s went well past riding on their wider range of products.

Sunil D'Souza MD, Whirlpool of India

Whirlpool's rejuvenation came after three decades, when the firm took up the challenge of shedding its inhibitions to meet the management's new goal of turning the local arm into a $1 billion (Rs 68 billion) entity by 2020-21. To achieve that, it was required to double its 2015-16 revenue of Rs 34.88 billion by growing at 14.5 per cent CAGR. Since then, however, Whirlpool's performance has been at par. During the two financial years during 2016-17 and 2017-18, its operating revenue has grown by 19.56 per cent CAGR.

D'Souza is now confident that his firm will achieve the stated goal. But success won't come easy, given the macro-headwinds the sector is facing at present. And he is well aware of that.

Availability and visibility on the retail floor is one of the most crucial aspects of the highly competitive Indian consumer durable space that houses all global brands. D'Souza, thus, is focused on expanding the distribution "significantly". While he is not willing to share any number, estimates suggest Whirlpool has covered all the 50,000-odd large format stores in the country and increased its total retail footprint by 20 per cent in past two years. D’Souza says the firm has “almost doubled the number of branch offices to 40, got more field personnel in place, and roped in more distributors to push our products”.

To meet any sudden increase in demand, it is planning to leverage Whirlpool’s tie-up with China’s Hefei Royalstar Sanyo (a joint venture between Japan’s Sanyo Electric and Hefei State-Owned Assets Holding Company). Hefei Royalstar Sanyo’s excess capacity would feed Whirlpool of India’s supply chain. The firm has also lined up Rs 4.3 billion in investment for the next five years to cover capacity expansion at its plants in Pune and Puducherry and new product development.

 Even though the initial hurdles on the road to achieving its new goal owing to demonetisation and the goods and services tax (GST) have since waned, challenges remain. The two events have pushed back the recovery of demand in the consumer market, especially in urban areas. Rural market continues to perform better than urban regions but growth rate has so far failed go beyond 10 per cent, which is considered subdued given the poor penetration of home appliances in rural India.

Moreover, a sliding rupee, rising crude oil price and, consequently, higher prices for raw materials like plastic and resin have made things worse. All major companies, including Whirlpool, have increased prices twice since September last year by three to five per cent in aggregate. And D’Souza is now staring at another round of price hike as rupee and oil continue to play spoilsport. Also, “Steel is in short supply, which is a headache. If these trends continue, we may have to go in for a third round of price hikes shortly,” he said.

While the firm so far has managed to improve its margins during the past few quarters – from 12.63 per cent in March 2017 to 13.03 per cent in March 2018, maintaining the balance of growing revenue and offering dividends to investors will be a tough tightrope walk.