When Manjula Lal, publisher and freelance editor, wanted to buy a second car, she thought it would be a breeze. Five years ago, she and most of her friends had bought their first cars almost involuntarily, giving in to persistent agents from various banks pushing lucrative loan offers. But interest rates had climbed meanwhile, so all she got this time from lenders were polite shrugs or queries about guarantors.
Finally, one bank, known for its aggressive retail marketing, agreed to offer her a car loan at a steep 13.75% for three years.
Lal is lucky, even if she doesn’t know it. Most retail loans are now ruling at 16-18%, and the car companies, too, are finding it tough to push up sales. As credit becomes more expensive, growth in car sales has dipped to 12.63% in the first four months of this fiscal from 21.95% in April-July last year. Two-wheeler sales have actually declined in the same period, falling from 17.78% last year to -9.18% this year.
And the slide is not limited to the auto sector—real estate has also seen a sharp tightening. Already, homes have gone beyond the reach of many, thanks to sky-high prices, and also the fact that banks are not readily disbursing big or second-home loans. According to a study by the industry body, The Associated Chambers of Commerce and Industry of India (Assocham), the number of home loans has fallen by 6% since the last fiscal, and the real estate market has already seen a drop of 60% in sales.
Vipin Pandey, 27, with an annual income of Rs6-7 lakhs wanted to buy a three-bedroom apartment in New Delhi’s suburbs, but has now postponed the buy because of high prices and unavailability of bank loans
Vipin Pandey, who works for Freescale Semiconductors (which supplies to Motorola), is aghast at the prices in even the suburbs of New Delhi. “I want a three-bedroom apartment, and this segment has simply gone beyond the reach of the middle class. At these prices, some of which must be paid under the table, which bank will possibly lend to me?” he asks. Pandey is still to find a suitable home, and fears he might have to settle for a two-bedroom set.
More such buying decisions are being downscaled or postponed, given the rising prices of credit. Even when banks are ready to lend, consumers have baulked at the high interest component of the equated monthly instalments (EMIs). This has had a cascading effect on all other purchases. Says M. Parameswaran, executive director, FCB-Ulka Advertising: “Many middle- and upper-class families have taken loans to buy a home or a second home. The dramatic increase in the EMIs on home loans has had a dampening effect on all other durables,” he adds. Harish Bijoor, CEO, Harish Bijoor Consults, agrees. “The first reaction to such a monetary tightening is to either downgrade the brands consumed or reduce the consumption of those brands,” he says.
And the monetary tightening— which began when the Reserve Bank of India increased the short-term lending rates in January, and then again in March—is not likely to slacken in the immediate future. To control the inflation (the WPI or wholesale price index was rising at 6-6.6.7% from December through March), the central bank took a series of measures to stem the credit flow in the economy. Starved of cash to lend, banks raised the interest rates on consumer and retail loans. This did help in controlling inflation and curbing retail credit expansion from 30% last year to 25% now, by crimping the consumer’s buying power.
Although experts say the interest rate rise is bottoming out, the credit climate in the country is yet to turn benign. As Sanjay Nayar, Citigroup country officer, India, bluntly told a recent meeting where finance ministry officials were present: “The interest rate structure is changing as we speak. While the triple-A corporates would manage a rate less than 11.5%, the small and medium enterprises will get squeezed out.”
The credit squeeze is more visible in the consumer segment. Consumer sentiment, which describes the attitude and propensity of customers to make purchases, has been impacted by rising costs and loan rates. Advertisement bookings, usually the first casualty when consumer sentiment is hit, have slowed, with some companies reporting a “relook at business”, says Bijoor.
The impact of depressed consumer sentiment on sales, however, is dependent on various other factors that dictate demand and purchasing power—as also the marketing strategy of the companies.
The typical response of companies to combat dipping demand is to offer discounts. To keep buyers within their fold and retain market positions, consumer durable companies are ready to take a hit on their bottom lines. “There’s no seasonality for factories. We can’t take a hit in numbers, so we bleed in other areas,” says Sandeep Tiwari, head, product marketing, LG Electronics India Pvt. Ltd. For the white goods company, cash discounts are not feasible, thanks to the reducing margins in this segment, but “real” zero-per-cent-interest schemes, where even file charges are waived, have become routine. Unlike in the case of autos, it is the company that has to absorb the real discounts offered to consumers on durables, and such schemes are becomin “quite prohibitive and expensive to run”, says Tiwari.
LG’s competitor, Whirlpool of India Ltd, is fighting slowing sales with a mix of incentives, from free gifts to lucky coupons to zero-per-cent schemes, to meet a Rs60-crore sales target. Whirlpool is spending Rs70 cr this year on ad and marketing. Samsung India Electronics Pvt. Ltd, meanwhile, has come up with a whole lot of new launches, aimed particularly at markets such as Ludhiana, Solapur, Nagpur, and so on.
For consumer durable companies, these are critical times as the festival season accounts for 35-45% of annual sales, and a depressed market in this period could cripple sales targets. Other sectors, too, are treading the discount path. Maruti Udyog Ltd is offering cash discounts and easy credit options even as its sales have been steady.
Manjula Lal, 47, with an annual income of Rs6 lakhs faced problems getting a loan for a second car. Finally had to borrow at a steep rate of 13.75% for three years, when she had budgeted for 11-12%
Lal says that in these tough times, dealers come to the aid of consumers more often than bank agents. And such freebies mount in the case of followers of the market leader; smaller car companies have already seen a drop in sales figures.
Deepika Nath, who is looking to buy a General Motors car, is expecting a Rs60,000 discount on a Rs5.3 lakh car, provided she puts down about 30-40% in cash.
Many marketers, however, believe that the discount strategy has only a limited impact in boosting consumer interest. In the long run, price cuts affect the brand’s credibility, unless it’s a high-value item. Jagdeep Kapoor, CMD, Samsika Marketing Consultants, says that since consumers always go in for the “perceived value” of a product, value addition through well-targeted emotion-oriented campaigns would help.
The demand prop
Fortunately for these companies, the slowdown in consumer purchases is yet to pick up pace. Sure, motorcycle sales are falling, but that is also due to what Rajiv Bajaj, managing director, Bajaj Auto, calls a “lack of excitement and new product launches”; however, overall vehicle sales, including those of scooters, are higher. The frenzy in home acquisitions might have been dampened by what many consider unrealistic prices but few new housing projects remain under-booked. This is partly because the slowdown has yet to be felt in overall sales and bookings, and the gigantic economic growth machinery still hums along.
An economy that is growing at more than 9% has fuelled a healthy demand in the market. Just before the interest rate hikes began telling on sales, ORG-Marg Research Ltd reported that, in the January-June period, the TV market was growing by 21%, refrigerators by 15%, ACs by 51%, DVDs by 30% and microwave ovens by 42%.
In a recent study, Assocham forecast more than 12% growth in white goods sales in 2007-08, to Rs23,000 crore. These bullish trends may, to some extent, cushion the impact of depressed consumer sentiments.
On the production side, however, the slowdown is palpable. In the first quarter of this fiscal, output of consumer durables, as captured in the Index of Industrial Production, slowed from 5.2% in April to 0.6% in June. It is the only segment in the index that is decelerating so fast. Last fiscal, the growth in this sector averaged 15.3% in the first half.
Yet, producers say sales on an average have grown, and high-end products have grown in double digits. “The economy may be slowing down, but it will work with a lag on consumer goods sales. Moreover, the job market is exploding and salaries are increasing. So far, we have not seen a slowdown in sales, and high-end products have even grown at double digits,” says Shantanu Dasgupta, vice-president, marketing, Whirlpool of India.
And one cannot forget the stock market, which has climbed steeply in the past year to inflate the investment yield kitty of the average retail investor. During fiscal 2006, retail investors earned Rs4,800 crore as dividend on their shareholdings, or nearly double of what they got three years ago.
The necessity factor
For the consumer then, things get better before they get worse. “This festival season could be their best chance to strike a good bargain for durables, or even a two-wheeler or a car, where most purchases are on credit,” says Arvind Singhal, chairman, Technopak Advisors Pvt. Ltd, a marketing consultancy.
Singhal says motorcycle sales have been the worst affected because that’s a purchase of necessity by consumers in the lower end of the market, who have been caught in the pincer of costlier credit and inflation. “The typical mobike customer is also a first-time vehicle buyer,” he says.
That necessity effect could work positively for car buyers as it is still an upper middle class purchase, and a smaller loan or tough bargaining can alleviate the interest rate burden somewhat. In fact, Maruti, which has a share of more than half the passenger cars market, has continued to report a healthy 20% sales growth in the current fiscal, even though other car companies have seen declines.
Interestingly, a mix of factors has helped companies offset the depressant on consumer sentiment. Cheaper import, for one, has triggered the sharpest drops in prices of high-end products. Ruchika Batra, general manager, corporate communications, Samsung, says LCD television sets are now at least 25-30% cheaper than they were a year ago. So are air-conditioners, and giant side-by-side refrigerators. The rupee’s rise against the dollar has helped companies quite a bit, partly offsetting the recent rise in raw material cost.
The other factor is the rising consumer awareness of, and desire for, a qualitatively better lifestyle, says Singhal. In such a situation, “companies should take a leaf out of the book of brand marketers,” says Samsika’s Kapoor, “and ensure that consumer interest overpowers bank interest, by adding value to the brand or by raising consumer curiosity.”
That could help, as the overall consumer mood is yet to turn negative. FCB-Ulka’s Mind and Mood study says consumer behaviour is also dictated by the mood of the nation, which is still very positive, says Parameswaran. It could turn suddenly—even though the economy is still growing strongly, analysts expect growth to moderate in the second half. Inflation, too, is expected to go up again. Till then, both companies and consumers may profit from making the most of whatever’s left of the good times.