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Turning Up The Cool: Realising Untapped Potential in India's Room Air-Conditioning Market
Turning Up The Cool: Realising Untapped Potential in India's Room Air-Conditioning Market
AC
Deepak Sharma
Shiv Kumar Sharma
David Daniel-Sainteff
July 2012
kanvic.com
Acknowledgements
Kanvic would like to acknowledge the contribution of the team behind the report,
especially to Gehan Wanduragala and Vlad Flamind who provided editorial guidance.
Further information
We welcome your questions and comments on this report. For further information,
please contact us at:
Email: deepak@kanvic.com
Phone: +91 99283 77800
Contents
Foreword
Executive Summary
12
19
Conclusion
38
Foreword
Indias consumer durable industry has witnessed fast growth in recent years and it is
expected to grow at a similarly rapid rate for some time to come. However, Indias airconditioning industry has been something of a laggard compared to its peers. Despite
seemingly impressive headline growth rates, the penetration of room air-conditioners
remains strikingly low compared to other white goods, with a mere 3.8% of
households having adopted this product category.
In Turning Up The Cool Kanvic sheds light on the cause of this low penetration rate
and shows the shift in demand that occurred from the commercial to the residential
segment. In so doing we can see how the industry has struggled to adapt to serve this
larger but more complex consumer market.
Whilst the long-term growth outlook for the air-conditioning sector remains positive,
the late onset of summer in 2012 has combined with an uncertain economic climate to
expose weaknesses in the industrys current approach. In a growing market suboptimal strategies can survive for a time, but when they are buffeted by the chill wind
of an economic downturn, the entrance of new competitors or even the vagaries of the
weather, they are quickly blown away as a lot of hot air.
In this report we hope to provide the industry with practical strategy options that will
enable it to more quickly realise the untapped potential of Indias room airconditioning market.
Deepak Sharma
Director and co-founder
Executive Summary
The air-conditioning market in India has witnessed rapid growth in recent times
thanks to the countrys strong economic performance, rising household incomes and a
favourable shift in consumer perceptions towards air-conditioners (AC). The markets
compounded annual growth rate (CAGR) has run at 17% over the last three years. In
2011-12 air-conditioning sales reached around Rs. 17,600 crore 1. However despite
this rapid growth air-conditioners have still only reached a mere 3.8% 2 of Indian
households according to the most recent data. This low penetration rate illustrates the
huge opportunity the AC industry in India is yet to seize.
In recent years the Indian AC industry has been marked by a fundamental shift in the
source of demand for room air-conditioners. This shift has seen the bulk of sales move
away from the traditionally dominant commercial sector and toward the residential
sector, which now comprises 60% of the market. The AC industry in India has so far
failed to fully grasp the more complex needs and expectations of this newer, larger
and more diverse customer segment. This lack of understanding means that the AC
industry is behind the curve in areas from customer communication to easy financing.
As a result, AC penetration in India lags behind other developing markets as well as
other categories of consumer durables in India.
This report highlights the current low penetration level of AC in India and develops a
number of effective strategies the industry could adopt to accelerate growth and
thereby increase penetration. These strategies relate to financing, innovation,
communication and the selling approach. All of these strategies will need to be
targeted appropriately to both existing and emerging customer segments:
To begin with, developing easy financing options for customers will bring airconditioners within reach of a much larger percentage of the population. At present
the high up-front costs of an AC are a major barrier to adoption for many Indian
households. By following in the tracks of the automobile industry and making
financing the established means of purchase, AC manufacturers will be able to
increase penetration and accelerate market growth. However, simply providing the
financing options is insufficient, the industry needs to communicate their availability
and affordability more effectively.
RAMA, Francis Kanoi, MarketLine, Businessworld - Marketing Whitebook 2010-11, Kanvic analysis
Innovation will also play a central role in spurring industry growth if it focuses on
reducing the running cost of AC and increasing its benefits. Advances in technology
will help improve energy efficiency and therefore lower the currently high running
costs. This is particularly important in India where the traditional air-cooler offers a
cheaper substitute for households at a time when energy prices are rising.
Furthermore, by adding additional functions to air-conditioners like heating,
innovation can address the industrys problem of high seasonality by providing yearround benefits, while keeping the price-performance ratio aligned with customers
expectations.
Simpler and more effective communication by AC companies will help customers
overcome their current doubts about air-conditioners. At present AC manufacturers
rely too heavily on industry jargon and exhaustive lists of technical features in their
customer communication. This fails to illuminate the real benefits the customer will
derive from their product and makes it difficult for them to compare different product
offerings.
Improving the selling approach will help manufacturers to engage more effectively
with the customer. In this area there are three major points for improvement:
customer education, solution-selling and cross-selling:
Firstly, customer education will improve the level of awareness of the benefits of AC
and help dispel existing customer concerns. However, customer education must not be
limited to sales staff. Any employee who comes into contact with the customer, for
example service staff, must be engaged in this process.
Secondly, adopting a solution-selling approach will unveil new ways to engage the
customer. Rather than focusing on selling a product, companies should diagnose the
customers problem and suggest the appropriate solution. For AC manufacturers this
could mean conducting home surveys to identify a customers air-conditioning
requirements.
Thirdly, cross-selling will allow air-conditioners to reach the larger number of
customers who have purchased other white goods. Many AC players also manufacture
other consumer durables, therefore they can use these existing sales and service
networks to identify the need for an AC and recommend a suitable product to the
customer.
To successfully implement all of these strategies AC manufacturers must have a
strong understanding of their customer segments. The AC market is becoming more
heterogeneous as new customer segments emerge. Industry players need to be aware
of these segments and their specific needs and wants, and they need to tailor their
The Indian air-conditioning market reached Rs. 17,600 crore in 2011-12, rising from
Rs. 11,000 crore in 2008-09 at a CAGR of 17%3 . The room air-conditioning market
represents approximately 50% of the total market, with the other 50% comprised of
central and specialist air-conditioning systems. The room AC market can again be
divided into two sub-segments. On the one hand the residential segment which now
constitutes a majority 60% market share and on the other hand the commercial
segment which represents a smaller 40%4 (Exhibit 1).
Francis Kanoi
The faster rate of growth in the residential segment has been propelled by three key
growth drivers. Firstly, rapid growth in the stock of residential housing in India,
particularly the supply of multi-storey apartments and modern homes that has
dramatically increased the exploitable market for room ACs. In urban India around
3.85 crore new houses have come up in last 10 years from 2001 to 2011. Secondly,
increasing household income has brought a range of consumer durables including AC
within the reach of more consumers. Indias monthly household income has increased
by 14.7% in 2011 to Rs. 20,555 from Rs. 17,918 in the previous year6. Thirdly a
5Housing,
6
Closer to home, the wider Indian consumer durable sector is one of the countrys
fastest growing industries with a CAGR of about 15%. The industry is expected to
touch Rs.52,000 crore by 2015 9, fuelled by rising household incomes and increasing
urbanisation.
However, in spite of this high growth trajectory, the penetration of air-conditioning will
still be significantly lower than the level of penetration other white goods have already
achieved today. Presently more than 77% of households in urban India have a TV,
33% have refrigerators, 17% have an air cooler and 13% own a washing machine 10
(Exhibit 4).
Despite fierce competition and a sizeable market turnover in the room AC industry,
the fact that 97% of Indian households are still untouched by room air-conditioners while the adoption of comparable products have surged ahead - indicates that
industry players need to adapt their strategies to fully realise this opportunity.
9
10
To address the low level of room AC penetration in India, industry players should
adopt comprehensive strategies. Based on our research, we have identified five
promising axes of improvement (Exhibit 5) for the room air-conditioning industry. By
adopting effective strategies along these lines, the industry can reach out to target
customers to influence and strengthen their purchasing desire.
Furthermore, the availability of cheaper substitutes like air-coolers renders airconditioners less attractive for the mass market. The price of an air cooler starts from
as low as Rs. 4,00011, far less than the average price of an air-conditioner. The
penetration rate of air-coolers reached 17% in 2011 12, pointing out the high price
elasticity in the Indian consumer durables market.
Providing easy financing options can help address the issue of affordability. By
effectively boosting the purchasing power of a vast segment of consumers for whom
air-conditioning is currently out of reach, the industry can unleash a wave of untapped
demand. Realising this, most AC companies have recently introduced some easy
financing options for consumers, offering a specific low interest rate and an easy
payment process. For example, some manufacturers break the ticket price down into
easy monthly instalments (EMI) for credit card holders over a period of 10 to 12
months.
However, simply introducing such payment options is no longer sufficient. They need
to be conveyed to consumers through effective communication mediums. At outlets
and in advertising campaigns brands are not effectively communicating the available
financing options and consumers often have difficulty in obtaining the relevant
information.
The low level of sales finance is a challenge across the consumer durables sector, with
financing contributing a mere 5-7% of total revenues 13. By contrast, the automotive
industry has understood the leverage of financing options and it has quickly offered
them to customers in order to expand their market. In 2011 around 72%14 (Exhibit 7)
of cars purchased in India were bought on credit. Today, the possibility of buying a car
on credit is ingrained in the minds of consumers. Air-conditioning players should
follow this path, highlighting their financing options in their advertising campaigns to
appeal to the large number of consumers for whom the high up-front cost of an AC is
a major barrier to adoption.
11
12
13
Press clippings
14
Indeed, such financing options can effectively target the burgeoning middle and
upper-middle class consumer segments, which represent around 14%15 of the 242
million households in India (some 34 million households). These segments have the
growing desire and increasing means to improve their quality of life. Products like airconditioners that are designed to provide greater comfort appeal to the emerging
aspirations of these consumers and easy financing options will be an effective way to
convert these desires into actions.
15
Due to the high price of energy in India, the operating costs of an AC represent a
significant hidden expense for households. To better inform consumers about AC
running costs, the Bureau of Energy Efficiency (BEE) has introduced a star rating
system for air-conditioners, highlighting the efficiency of products in terms of energy
consumption.
Driven by both regulation and market forces manufacturers are developing and
marketing technologies that decrease the consumption of electricity. For instance,
inverter technology avoids peaks of electricity consumption and significantly reduces
the running costs of the air-conditioner. But this existing technology is not sufficient to
compete with the energy consumption of the substitute products in India. Therefore
manufacturers should continue to prioritise energy efficiency and integrating new
renewable energy technology (see below) in their research and development.
For instance, one companys brochure - which is typical for the industry - refers to the
MCC option, the BLDC compressor and UTR technology. None of these terms enable
the consumer to clearly understand the benefits embedded within the product. Plus, if
the customer decides to seek information directly online or in a brick-and-mortar
store, they will have to compare the available products. However, the complex
technical charts that are habitually used to highlight obscure performance data and
technical characteristics that make comparison difficult and time consuming.
AC manufacturers should assume the perspective of their target customer rather than
the perspective of their engineering teams to produce informative but jargon-free
marketing material. For example, when referring to the noise level they could
compare it to everyday products the consumer will be familiar and comfortable with like a ceiling fan - rather than in decibels.
Customer education
The technical nature of air-conditioners and their perception as high-cost are the two
greatest factors standing in the way of raising customer awareness about their
benefits. To deal with this situation customer education appears to be an effective
solution. By educating customers, the air-conditioning manufacturer helps them gain
insights about how their product better meets customers needs and expectations over
a competitors product or a substitute. Companies can train their own sales staff and
those of their retail partners to educate potential customers about their products and
their uses. However, other employees who come into contact with the customer - such
as service staff - can also play an important role. Manufacturers should re-educate
and re-orientate all their customer facing staff to understand their role in marketing
the brand and its products.
In addition to staff training and orientation, providing employees with simple tools can
help them to diagnose a customers problem and provide the best solution. These
tools can also be targeted directly at the customer. For instance BEE has introduced a
mobile phone based application called AC Power Saver that enables consumers to
calculate energy consumption and savings on their mobile devices. They have also
created a dedicated web site www.SaveEnergy.co.in with all the necessary
information including an energy calculator.
Implement cross-selling
Cross-selling is a powerful and well-established selling approach. It is a proactive,
ongoing sales process which seeks to provide customers with a full range of products
and services. Most of the AC manufactures in India also produce other white goods or
electronic items and these products are sold through the same distribution network or
by dedicated sales and service teams. Companies can use their existing infrastructure
to cross-sell air-conditioners.
For instance, a service person for products with higher levels of ownership - like
washing machines or televisions - could identify the necessity for an AC while
servicing or installing these products in the customers home. Their knowledge about
customers other purchases would also indicate customers ability to afford an AC.
Based on theses observations they can then suggest a suitable AC product and
financing option to the homeowner.
There is often a mismatch between consumers needs and wants and the areas in
which companies focus their efforts in product development, distribution and
marketing. An organisation cannot create value for customers unless it identifies and
satisfies their needs. In a competitive market, customer segmentation has become a
cornerstone for successful companies. Those companies that fail to satisfy their
customers needs often do so because they dont have a clear picture of their target
customers. Understanding the customer is equally vital for AC players if they are to
increase the adoption of room air-conditioners.
16
Increasing incomes and changing mindsets outside urban India offer air-conditioning
players a huge opportunity to leverage their current turnover and achieve a
breakthrough level of adoption. By focusing on small cities and towns now, players are
likely to catch the next wave of growth and promote their brands in a new and
untapped market. Nonetheless, the specific characteristics of these consumers have to
be completely grasped and the universe of potential customers needs to be accurately
segmented.
growth companies will have to design their products and services around these new
customer segments by catering to their exact needs and expectations. This will
require not only the correct identification of their profile but a deep understanding of
their behaviour. We have identified the four major customer segments that are
currently shaping the market (Exhibit 12). However, industry players should be alert
to the emergence of new segments as the Indian consumer evolves.
1. Price conscious
Consumers in this segment are attracted by low prices. Innovation and technology
play a fundamental role in offering affordable air-conditioners by lowering the cost of
production which can then be passed on to the customer through a lower ticket price.
Currently, Haier and Onida are among the cheapest brands in the Indian market,
focusing their research on providing affordable air-conditioners. Tapping this segment
requires a strategy towards economies of scale with a focus on obtaining cheaper
components and materials. However, the competition for this segment has intensified
with the arrival of Korean and Chinese players with their global production chains and
portfolio of low-priced products.
2. Efficiency seeker
In recent years a focus on high energy costs and ecological issues has driven
consumers toward more energy efficient products. Many companies have introduced
air-conditioners endowed with inverter technology that has shorter motor run-time
and therefore consumes less electricity. Although energy efficient products are
relatively more expensive than standard variants, a large number of consumers are
choosing them to reduce long-term costs. The choice of these consumers will be
shaped by the published energy consumption of the product and its star-rating label
given by the BEE. Alongside clearly displaying the running costs, manufacturers
targeting this group could compare their products with those of less efficient older
models to demonstrate the falling running costs to wary consumers.
3. Aesthetic design
This segment of consumers is seeking aesthetic and customisable products. Aesthetics
play an increasingly important role in Indians choice of products as they become
increasingly conscious of interior design. The decorative paint segment for example
has recorded an 8% average growth rate over the last five years17. With this aesthetic
trend, consumers are increasingly choosing air conditioners which suit their home
interiors. In order to tap this growing segment, manufacturers should offer wider
ranges of colours and more discrete designs that help the product blend in with their
home decor. Whirlpool for example has developed an innovative digital tool that
enables the user to recreate their interior online in order to find the model of AC that
most suits their aesthetic preferences.
17
4. Health sensitive
Another trend that offers many opportunities for the AC industry is the increasing
focus on health and well-being. Indian consumers are becoming more and more
aware of safeguarding the health of their families and are seeking items which provide
concrete solutions. Hitachi has quickly recognised this trend by introducing the i-Clean
system. This technology automatically removes the dust accumulated on the AC filter
that would otherwise be disbursed into the room.
Along similar lines Samsung markets a range of air-conditioners with Virus Doctor
technology which eliminates air-floating particles such as bacteria and viruses. This is
increasingly relevant with the recent H1N1 epidemic and the increase in allergy cases
due to increased air pollution. To be credible however, this technology must have
certifications and labels. For example, Samsung is working with academic research
centres in order to prove the efficiency of its technology. Manufacturers could take this
approach further by seeking endorsements from panels of doctors and other experts
in respiratory diseases.
Conclusion
Indias room air-conditioning market with its current low penetration rate offers huge
opportunities if the industry understand and cater to the shifting needs and wants of
Indian consumers. The penetration of other white goods at comparable prices is
substantially higher, pointing out several shortcomings in the current strategies of the
major AC players.
Through working along the five axes of improvement we have highlighted,
manufacturers have the opportunity to turn-up growth in the coming years. Better
financing options, well-directed innovation, new approaches to selling and more
effective communication can all be developed and effectively implemented through a
better understanding of established and emerging customer segments.
Manufacturers should not rely only on the strategies and customer segments that
were sufficient to drive growth in the past. As Indian customers become more
heterogeneous, persisting with the old approach runs the risk of neglecting the needs
of an ever larger number of consumers, and thus hindering overall industry growth.
kanvic.com
Bangalore
Ravindra Beleyur
M: +91 94481 46963
E: ravi@kanvic.com
Jaipur
Deepak Sharma
M: +91 99283 77800
E: deepak@kanvic.com
London
Bharat Vagadia
M: +44 7711 898089
E: bharat@kanvic.com