Havells' low-cost dilemma

Its entry into low-cost switches with Reo has teething problems; scaling up its network is one of the solutions

It is catch-22 for Havells India. Having made its fortune by playing the premium card, the Delhi-based electric equipment major is finding it tough to scale up Reo, its range of low-priced electric switches. Nearly a year after its launch, Reo remains restricted to select pockets in Bihar, Uttar Pradesh and Karnataka. Its revenue run-rate is also waning, making it tough for Havells to meet the target of making Reo a Rs 100-crore brand by the end of this fiscal.

Market experts attribute this to Havells' refusal to play by the rules of the mass market. "Success in the mass segment is all about thin margins and high volumes. Havells is used to a certain level of profit margin and is not willing to settle for less on Reo. This is making it tough to push the product through the channel," says an industry analyst on the condition of anonymity.

Havells' problem has been compounded by pre-emptive moves by competition. The incumbent, Anchor Electricals, refused to a take an expected price hike, thereby playing at par with Reo. It even provided additional credit to small retailers to stock more of Anchor's products, leaving them with little space to stock Reo.

Another handicap for Reo has been its limited range. "Retailers have been slow to push Reo as it comprises just switches, while Anchor offers a whole basket of products," says Anil Gupta, joint-managing director, Havells India. Anchor leads the low-cost switches segment with 40 per cent share, while the rest is accounted for by regional brands and the unorganised sector. The total size of the segment is pegged at around Rs 1,000 crore. Anchor did not reply to an email questionnaire.

"Havells should either scale up Reo or exit the segment," says an industry analyst. Gupta, however, refuses such an option. "Tier II and tier III cities are the fastest-growing and we want to have a strong presence there. Reo plays a key role in that strategy. Our first priority is to position Reo and that takes time," he adds.

After years of high double-digit growth in its bread-and-butter business of consumer electrical products such wire and cables, switches, fans, lighting and small appliances, the company is facing volume and revenue decline due to sobering consumer confidence (please refer chart).

  "There is a clear sign of consumers becoming budget-conscious, more pronounced among urban consumers as most of them work in the private sector that has been hit the most by the slowdown. There is still a demand growth in rural India though the pace has slackened," says Arvind Singhal, managing director of Technopak Advisors, retail consultancy.

This has pushed Havells' growth trajectory south. In the June quarter of this finacial year, the company's revenue growth slipped to 1.6 per cent from 17.5 per cent, recorded in FY-13 and 26 per cent the year before. While its cable and wire division recorded a 6.1 per cent revenue growth in the first quarter, its switchgear saw muted growth at 1.8 per cent. Its lighting fixtures reported 1.1 per cent decline in revenues. The trend is likely to persist for some time given the deceleration in GDP growth and other macro-economic factors such as currency depreciation, high consumer inflation and fiscal deficit.

The company, then, needs to widen its customer base beyond urban centres in the north, east and central India. "Unlike metros and top cities, consumer demand is still growing in rural areas due to robust growth in farm sector and government spending. Havells needs products that are 'value-for-money' for this audience," says a senior at IDBI Capital which has a hold rating on the stock. While the brokerage is optimistic about Reo's chances in the market, given Havells' past success in brand-building, it would like the company to dramatically expand its sales and distribution footprint for the bottom of the pyramid. "Despite the recent push, Havells has only a limited presence in smaller towns, especially in west and south India," says the analyst at IDBI Capital.

"We are deepening our distribution channel by appointing new dealers at the rate of around 50 per month and cover over 100,000 retailers. Our distribution network is now the third largest and we aspire to be the largest in few years," says Gupta.

He, however, is adamant in not towing the line. "We never aspire to be like the competition, most of whom compete on price points. Customers perceive our products to be of superior quality and priced accordingly. We don't want to lose that brand positioning in a bid to gain market share," says Gupta.

Harish Bijoor, CEO of Harish Bijoor Consults, says, "Havells owes its success to its brand positioning which it has built over the years. It would be suicidal if it attempts to emulate competition for the sake of short-term gains."

"In my experience, customers in smaller towns are willing to pay a brand premium as long as it is justified. Havells has managed this price-value equation quite well," says Devang Mehta, senior vice-president and head of equity sales at Anand Rathi Financial Services, who has a 'buy' advice on the stock.

Sceptics, however, worry about the gap arising between Havells and the price warriors in the industry. "Havells asks for a premium even in a commoditised segment like cables, while in appliances many of its products are often priced at double that of competition. I am not sure if such a pricing will work in rural India," says an industry observer.

Gupta believes he will crack the low-end market with Reo and prove sceptics wrong.