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Advent International and Temasek, which teamed up to purchase Crompton Greaves' (CG) consumer products arm from Avantha Holdings on Friday, have their task cut out - ramp up products and promotions and increase consumer connect.
The consumer business unit, which manufactures fans, lighting appliances, pumps and kitchen appliances, is profitable and contributed half the company's standalone pre-tax profit in FY14. The company is number one in the fans and domestic water pumps segments and number three in lighting appliances. But in other areas, growth has been limited.
Challenges are aplenty. Competition is stiff as the consumer electrical goods sector is crowded with established companies and new entrants such as Eveready (in LED lights) and Luminous (fans). While Havells is aggressively pushing its identity as a consumer electrical goods company with multiple brands, players like Bajaj Electricals are premiumising with separate brands such as Morphy Richards. With the companies getting ready to fight for market share, it will certainly be a battle to watch out for.
Also, while CG's strength lies in engineering and manufacturing, it lags peers in advertising and brand building. "CG has managed its working capital cycle and distribution well and ensured that the product quality remains good. But in areas such as consumer connect and brand building, there has been inadequate focus in the past. I expect the new investors to make significant investments in distribution, rural penetration, brand building and product portfolio enhancement," said R Ramakrishnan, group CEO of Polycab Wires.
The new investors may find it easier to drive growth as the consumer business performance will not have an overhang of the slowdown in the domestic power business or the sluggish overseas business - the two factors that impacted CG's overall business performance.
Comparing advertising spends of various companies in this sector, Barclays observed that while CG spent 3 per cent of its revenue on advertising and promotions, Havells and TTK spent 9 and 12 per cent of the revenue for the same purpose. Other companies like Voltas, Bajaj, Philips and Blue Star spent 3-7 per cent of revenue on promotions.
Over the last couple of years, CG has taken a number of steps to expand reach. It expanded its distribution network to 134,000 outlets in the last financial year and started its own exclusive shops. Of this, 22,000 retailers cater to rural India. "CG's strength has been the distribution network it has built over the years but it is not a vibrant brand because of low advertising spends," said Rajeev Karwal, founder-director, Milagrow, a consultancy firm.
"Given that the category is low-involvement unlike big-ticket durables, it all comes down to the brand perception and styling of the products. Hence, all brands in the category are ramping up their ad spends. They also get to leverage their distribution networks (as Havells, Bajaj Electricals and Orient have done)," Karwal, who has had stints at LG Electronics, Philips, Electrolux and headed Reliance Retail's consumer durables arm, had told Business Standard after the company announced the demerger of its consumer business.
An industry expert said CG had a dominant position in fans and the domestic water pumps business but was facing competition from Havells which dominates in high-end fans. "The new investors have an opportunity to grow the lighting and kitchen appliance businesses," said an industry expert.
Shweta Jalan, managing director at Advent International, said "Crompton's consumer business is an attractive business that we believe will thrive as a standalone company as it had leading positions in several fast-growing product categories with strong brand names and extensive distribution capabilities. "Post completion, we look forward to driving growth by investing in sales and marketing, distribution and enhanced product offerings."
