Rupee slide, demand slump double whammy for consumer electronics firms
3 min read 19 Jul 2022, 11:23 PM ISTBoth brands and retailers are counting heavily on the festive season to boost sluggish sales and reduce inventories
PremiumThe depreciating rupee has amplified concerns for consumer electronics brands and retailers already coping with a slump in consumer demand brought on by the economic slowdown.
The rupee breached the 80 mark against the dollar on Tuesday. The domestic currency has depreciated 25% since December 2014, finance minister Nirmala Sitharaman told the Lok Sabha on 18 July.
“The rupee slide is the biggest pain right now for manufacturers and brands both," said Arjun Bajaj, chief executive of Daiwa, a homegrown TV brand. Industry analysts said the slide in the value of the rupee has made it difficult for brands to lower prices.
“The strong dollar has had a clear impact on consumer electronics prices staying high due to high costs in the supply chain," said Navkendar Singh, research director at IDC India.
A high dollar price means components will become significantly more expensive, said Tarun Pathak, research director at Counterpoint. With a renewed focus on manufacturing, firms in India import components like integrated circuits, memory chips and displays. These components make up a significant part of the cost of manufacturing consumer electronics products.
For instance, for some smartphones, the display accounts for 80% of the phone’s total bill of materials cost. Since manufacturers have to spend more on procuring components, it eats into their margins for products.
That said, not everyone is sure that the situation is as grim as it seems. Anand Ramanathan, a partner at Deloitte India, said the rupee’s slide may not immediately impact consumer prices. He said the rupee depreciated by 5-7%, but it was offset by a 12-20% fall in the price of certain metals such as copper, steel, and aluminium— raw materials used in producing electronic components.
Bajaj said even though the cost of manufacturing may rise, “brands might absorb" this increase depending on the demand for a product.
However, demand, too, is at a low. Manish Khatri, a partner at Mahesh Telecom, a Mumbai-based electronics retail chain, said store footfalls are down since consumers are facing a cash crunch. He added that “a lot of hype" is needed for the festive season next quarter.
Both brands and retailers are counting heavily on the festive season to boost sluggish sales and reduce inventories. According to Pathak, India is sitting on an inventory of close to nine weeks for the overall electronics market, including smartphones, TVs, and appliances, which is much higher than its typical 3-4 week average.
Analysts said some brands may even run “pre-festive" sales to clear inventories. While they usually aim for Diwali, this year’s sales may begin in August and September only.
Product road maps for phone and laptop companies usually include new launches in August-September, which enter India just ahead of the Dussehra and Diwali. So it makes sense that older inventories are cleared beforehand to avoid cannibalizing new products.
More importantly, old products were manufactured and imported before the rupee’s current slide, which means the margins on these are higher. “Since the existing inventory did not bear the additional cost of the surge in dollar prices, retailers will attempt to clear this inventory with upcoming deals and discounts," Pathak said.
Festive season sales account for nearly half of all sales in consumer electronics, according to IDC’s Singh. If the festive season sales are weak and brands fail to clear inventory, demand for electronics may decline in the last quarter of 2022 and the first quarter of 2023.
To be sure, demand for smartphones has already declined. Deloitte’s Ramanathan said demand in May was 9% less than that seen last year. He added that the drop is more prominent in the budget segment since premium device buyers are “insulated against inflationary pressures".
