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Baron - Rewriting Indian Consumer Electronic Goods Marketing

I will not rest until I drag Joe (J.R.Mulchandani, Chairman, Baron International) to the streets. -Venugopal Dhoot, Chairman, Videocon Group in the mid-1990s. SHAKING THE MARKET The Baron group entered the Indian consumer durables market in December 1994, and the markets were never the same again. Over the next few years, at the corporate offices of competitors like Videocon, Philips and Mirc Electronics, it was the same story - they were all making frenzied attempts to hold on to declining market shares. Barons initial product offering, an Akai color television (CTV), was priced at Rs 13,000 - while the market price was Rs 16,500. This was clubbed with an exchange [1] offer on old music systems and TVs and free-gift schemes whereby 14-inch CTVs, mobile-phones, refrigerators and Bajaj Sunny mopeds were offered free on the purchase of a 21-inch CTV. These moves, combined with Barons full-page advertisements that appeared regularly in the national media, lured buyers all over the country. The move changed the CTV market share pattern very soon, with Akais sales increasing from 2500 CTVs in 1993-94 to 4.29 lakh CTVs in 1997-98.

In December 1998, Baron repeated the success story with the Aiwa brand in the hi-fi audio systems segment. Within 5 months of the launch, Aiwa replaced Philips as the segment leader, garnering a 45% market share, as compared to Philips 17.2% share. The launch of the TCL range of consumer electronics in 1999 also took the market by storm as the China based TCL was known for its dirt-cheap products. With almost every new scheme and every new tie-up, Baron unleashed a new war in the Indian consumer electronics market. A majority of the players began indulging in one-upmanship on the pricing and promotion fronts. However, they soon realized that it was not very easy to match Barons schemes and prices. The question on everyones mind was the same. How did Baron do it?

THE BARON GROUP The Mulchandani family had started its consumer electronics business in the 1970s. The group began with marketing and distributing products under the Bush brand name. Under the leadership of J.R.Mulchandani, Bush emerged as one of the top brands in the audio cassette player market. However, in the next two decades, Bush failed to withstand the onslaught of companies that were financially superior and had greater marketing savvy. In the 1990s, the brand was virtually wiped out from the

market. In 1992, Baron[2] International led by Kabir and Shakun Mulchandani (J.R.Mulchandanis son and wife respectively) tied up with the Akai Electric Co., owned by the US based Semi-Tech Corporation, for marketing its CTVs and audio products in India. In August 1998, Baron tied up with Akais global competitor Aiwa (a subsidiary of Japans Sony) for a similar marketing arrangement through a new venture, Baron Electronics. Asked whether Akai and Aiwa brands would cannibalize each other, Kabir said, Both the brands will compete, there will be no preference for any particular brand. He said Barons value for money marketing approach would be extended impartially to both the companies. While with Akai, Baron offered a low-priced product to maintain volumes, with Aiwa the gameplan was to target the mid-priced segment to earn higher margins. However, Akai was reported to be unhappy with this development. In November 1998, differences intensified between Akai and Baron when Baron International refused to take delivery of completely knocked down (CKD) CTV kits from Akai. The next month Kabir visited Akais Yokohama headquarters as well as its Hong Kong offices to talk things out. However, this did not yield any positive results and eventually Baron and Akai parted ways. Baron held that Akai did not have the size that its global competitors had, and hence its competitiveness was getting eroded. Hence Akai was unable to bring down the prices of its kits to the extent Baron desired. It thus became difficult for Baron to continue with Akai. Moreover, Aiwa was giving Baron CKD kits at lower prices that were 10-15% lower than those of Akai.

Also, unlike Akai, Aiwa had a wider range of products, comprising midsize hi-fi systems, VCPs, home theatre systems, car audios, and hybrid products. Baron saw more potential in the Aiwa venture to generate additional income for the group. Though Akai re-entered the market in a tie-up with Videocon, it failed to generate the kind of volumes it achieved during the Baron tie-up days. In October 1999, Baron reacquired the 10% stake held in it by Akai. In 1999, Baron entered into a deal with another Japanese consumer electronics company Hitachi Home Electronics Asia Ltd. However, pressure from Aiwa and Hitachis failure to generate volumes resulted in this venture being terminated in 2000. In the same year, Baron transferred the Aiwa business from Baron Electronics to Baron International, in which Aiwa picked up a 5% stake. In addition to equity participation, the two partners agreed to extend the strategic relationship from 2003 till 2007. In May 2000, Baron Electronics entered into another marketing and distribution joint venture with the China based TCL Holdings. The 51:49 venture (TCL: Baron) was for TCLs CTVs, cellphones and other consumer electronic items. Initially, TCL products assembled through OEM dealers were sold by Baron International through an

exclusive marketing arrangement. But there were plans to set up a manufacturing base later on in India. Commenting on the TCL venture, Aiwa sources said TCL was no competition to Aiwa. Also, as TCL was to be handled through a separate joint venture unlike the earlier arrangements, Aiwa believed it could afford to relax. Baron promised that it would not dilute either Aiwa or TCLs equity, as they were targeted at different segments. While Aiwa was targeted at the top and middle level consumers, TCL targeted the lower end consumers. However, TCL sources said that the company planned to target the middle level consumers as well, in the long run. FIGHTING IT OUT The 5 million unit, Rs 75 billion CTV market was characterized by cut-throat competition, with over 15 major brands competing fiercely with one another. CTV penetration levels in India were extremely low in the early 1990s. This factor, coupled with the proliferation of satellite channels offering incredible choice by way of software, and the large number of brand and model options available, resulted in a compounded growth rate of nearly 28% for the industry over the decade. FIGHTING IT OUT Contd.. Baron, being a late entrant in an already crowded market, in January 1995, believed that it needed innovative thinking and aggressive selling to succeed. At the time, Videocon, Onida and BPL dominated the market, controlling a 75% share amongst them. Baron also knew that the Akai label alone would not attract buyers because there were a host of other players like Sony and Samsung entering the market at the same time. Besides putting in place a well-developed marketing and distribution network, Baron conducted a careful study of CTV sales, which revealed that of the estimated 1.7 million units that were sold in 1995-96, over one fifth were exchange sales. Also, a major portion of the sales (1.1 million units) was made to people upgrading from a black-and-white to a color model. Based on these findings, Baron decided to build Akais brand equity on the basis of exchange schemes and attack every possible segment. Kabir said, Our targets are the second TV buyer, owners of black-andwhite sets who want to go color and those who want to trade up to a bigger model.

Barons efforts to comprehend the Indian consumers psyche resulted in identifying the customers need for attractive consumer durable replacement offers. Baron adopted a combination of 3 products for the price of 1 offers, exchange schemes with huge price-offs and free bundled software to raise the value of the product without charging more for it. The group made the consumers believe that they were striking a good bargain on these high-value products. Barons exchange schemes were launched with great fanfare all over the country. Offers of a free cellphone, alone with a connection on its 21 CTV in Hyderabad (April 1997) meant that the effective price of the Rs 23490 TV was about Rs 11000.

In other parts of the country, Akais offers ranged from a Rs 20000 off exchange scheme for a new 29 model to a free 14 CTV with every 21 CTV. Interest free installment schemes with no down payment were offered in association with Countrywide Finance. Akais sales soon jumped from 75000 to 180000 and it became the largest selling brand with a 17.7% market share in just 4 years reaching the third slot in the market. Not only the other marketers of consumer durable but the consumers were also completely taken aback by Barons modus operandi. In a bid to regain lost market shares, almost all the major players adopted the Baron method and began offering discounts, free gifts and exchange offers. Under Videocons money-back offer, besides getting a Videocon TV in exchange for an old CTV with remote, the customer was also promised that the amount paid would be returned after a specified period of time. For instance, under the Own a Bazooka 21 free scheme, the customer had to pay Rs 14,990 and give in an old CTV (20 or 21) with a remote. The company promised to return the sum of Rs 14,990 after six years. The scheme was extended to other models as well. BPL also introduced two exchange offers - Exchange with Confidence and Home-A-Loan Twin Offer. In the first scheme, customers could choose from four models (ranging from Rs 27990 to Rs 7990) in exchange for their old CTVs. In the second, BPL, in association with Countrywide Consumer Financial Services Ltd., provided interest-free finance, both for exchange and purchase, on a monthly installment basis. A host of other brands including Toshiba, Kalyani Sharp, etc all entered the fray with attractive schemes. FIGHTING IT OUT Contd.. With the Aiwa tie-up, Baron moved on to repeat its CTV success story. The company began offering free software alongwith its products by entering into arrangements with companies like Sony and BMG Crescendo to buy their music CDs and offer them free to customers, alongwith the audio systems. For instance, the actual cost of a Rs 8000 Hi-Fi CD system effectively worked out to be Rs 6000, as Rs 2000 worth of free software was bundled alongwith the system. During this period, the cheapest Philips model carried a Rs 11000 price tag, and Sansuis cheapest model came at Rs 9000. As before, Aiwas entry triggered a price war in the market. Philips, Sony, Panasonic, Kenwood and other players not only slashed prices, but began offering free software as well. In the CTV segment, Baron repeated its Akai approach, resulting in Aiwa attaining a 10% market share in CTVs in 2000. Baron followed a similar strategy with the TCL offerings being made available in the market in 2000-01. BARONS MANTRA - LOW COSTS If one were to summarize Barons secret of success, it would be all about keeping the costs on the lower side and being able to sustain them. Barons low maximum retail price (MRP) plus other charges package was a major factor responsible for the smart pricing tactics. For instance, TCL products were imported in the form of CKD kits. The MRP of Rs 6490 on the 14-inch CTV attracted an excise duty of Rs 1162 as compared to the Rs 1618 on a 2-speaker model from BPL priced at Rs 8990[3] .














Unlike manufacturers such as BPL and Videocon, Baron outsourced its assembling, and this helped it to keep its costs on the lower side. All this was possible essentially because Barons collaborators (Akai, Aiwa and TCL) were low cost manufacturers. Efforts on part of the joint venture partners to continuously reduce component costs helped Baron to come out with lower prices. Volumes were the main driver for all the parties concerned, as economies of scale facilitated cost reduction. Baron also worked towards entering into agreements with its assemblers to keep their margins on the lower side, when compared to industry standards.


Baron Videocon BPL International Personnel Costs/Sales 1.00% 1.70% Mirc Philips Electronics 7.20%

1.60% 3.90%

Mfg. & Admin 1.00% Costs/Sales Net Working 24 days Cap. Turnover Debtors/Sales 29%


2.60% 4.70% 61 days 40%


201 days 78%

97 days 43%

32 days 52%

Source: Business Today, January 22, 1999. BARONS MANTRA - LOW COSTS Contd.. Barons distribution costs were just 2.5% of sales, as compared to 5-6% for competitors. For other brands, the retailer margin was around Rs 1500 per set, while Akai had offered a fixed margin of Rs 1000 per set plus the old TV set, which the retailer could sell in the secondary market. This practice was followed for other products and brands later on. Barons plans to set up a manufacturing unit were expected to further bring down the distribution costs. Apart from the low prices, Barons efficient and effective supply chain also contributed to its success. The companys inventory management system for instance, ensured that the finished goods and net working capital turnover were 5 and 24 days respectively as compared to 23 and 61 days respectively for major rival BPL.

Baron kept stocks of less than 2 days at its assembling units. The companys assembling and administrative costs were only 1% of sales, compared to 2.60% for BPL and 3.60% for Videocon. The group worked very hard on maintaining this efficient supply chain setup. The

components were tracked right from the day the shipments arrived from Hong Kong. Advance clearance ensured delivery of the components within 4 days of the ships docking at the Indian port. Within the next 11 days, the finished products were dispatched. The average credit offered was 29 days, with the average inventory time being 5 days. Thus, adding the 13 days taken to ship the components, the total time elapsed from the time components were dispatched to the time the sale proceeds were received was just 62 days. THE OTHER SIDE OF THE STORY However, there was a darker side to Barons success story. Problems existed on all fronts - dealers, customers and most importantly for the group itself. The mindboggling success came at its own cost as Baron had to bear the interest under the installment schemes and also had to settle for lower profit margins in the exchange schemes. After Baron entered the industry, the average price of a 20-inch set dropped from Rs 65000 in 1992 to Rs 10000 in 1999. Similarly, the average price of 29-inch sets fell from Rs 65000-Rs 80000 in 1992 to Rs 27000 in 1999. This invariably meant an increasing dependence on volumes on part of the companies. A disgruntled competitor remarked, The profit margin of all players has come down from 15-20% to 5-6%[4] . Baron itself was working on a net margin as low as 3-4%.


We have a focused market policy and dont believe in gimmicks or selling volumes by first jacking up prices and Panasonic then giving freebies. Onida does not believe in offering its products on a Onida regular freebie basis. Onida customers are imageconscious and not in a discount frame of mind. The demand that these marketers are generating is forced. This cannot lead to any real growth in volumes. For one, you cannot target the lower-end segment through exchange offers and two, you are converting the LG prospective two-TV households into single-TV households. Exchange schemes stymie the scope for innovation. For companies offload old stocks and technical innovations then take longer to find a market. Barons strategy cannot be sustained in the long run. It A begins to flounder the moment your rivals manage to CEO reduce your competitive (cost) advantage. rival

A common question in corporate circles was the one regarding Barons profitability, the argument being that a company operating at such low margins was unlikely to sustain itself in the long run. Baron, however, claimed to be making healthy profits. When Akai was launched, Akai had lent money to Baron at low interest rates. Having

generated a handsome surplus on this money, Baron put in this very money for the Aiwa venture. Thus, it had no interest burden. Also, Aiwa offered Baron credit for much longer term than what Baron offered to its own dealers. Kabir said, This is basically a thin margin business. It is volume-driven and not value-driven business, and its the same worldwide. The groups excessive thrust on cost cutting led its assemblers to believe they were being taken for a ride. One of the assemblers, Dixon Utilities, assembling the Akai 14 CTVs, parted way with Baron after disagreements on the margin issue. Atul Lal, Director, Dixon Utilities said, We felt that the kind of manufacturing charges we were getting were not worth it. They gave us 65-70% of what others give.

On the customer front, there were frequent complaints regarding the 2-3 week gap in the delivery of Barons products after the booking and the up-front payment. Barons after sales support and service network was also reported to be very poor. Though the group took various initiatives like providing mobile service vans and setting up customer support centers[5] across the country, the issue continued to be a major concern. Barons dealers were also an unhappy lot, as in the exchange scheme setup, the dealers ended up losing the most. In 1996, a Delhi based Akai dealer commented, The company is not compensating us for the Rs 10000 trade-off we give to the consumers. Instead, it pushes on us two more sets, albeit at a discount, to sell. As the dealers did not want to block their money like this, a majority of them even stopped offering the exchange scheme. A leading dealer in Chennai commented, In any exchange scheme, it is the customer who gains. There is nothing much in it for the dealer. Our margins during an offer fall from Rs 1500-1000 to anywhere between Rs 300-500 per unit. The only advantage of an offer being backed by the company is the advertising and visibility in the media. Apart from this, the dealers found it difficult to sell the old units, as the second hand market was unable to absorb the high volumes generated by the exchange schemes. According to the dealers it was the customers who were getting the best deal. But Barons competitors thought otherwise. They claimed that the actual cost of its products worked out to be much higher than what Baron claimed. For instance, the 29-inch TCL television being sold for Rs 16900 worked out to be much costlier if one added the freight, local levies and sales tax amounting to Rs 2000. Also, there was the cost of the old television set to be considered. Thus, the prices of Baron products were in effect, similar to that of competing products. Barons rivals also cited the example of the 14-inch TCL CTV at Rs 7139 being much less attractive than the Rs 6990 BPL CTV, or the Rs 7200 Videocon CTV. Countering this, Sanjay Chimnani, COO, Baron International commented, Since this is a 2-speaker model, there is still a price advantage over competing models, which cost upto Rs 8500. Reacting to this, Philips Indias VP (Marketing), Rajeev Karwal had just this to say. It is nothing but a mere gimmick.

By March 2001, Baron had established around 150 Baron points to support its 3000 strong aler network.
QUESTIONS FOR DISCUSSION: 1. Baron forced radical changes in the marketing strategies of companies in the Indian consumer electronic goods market. Write a brief note on how Baron changed the market dynamics. 2. Explain how Baron managed to price its products so low. Do low pricing and exchange schemes lead to a poor brand image? Give reasons to support your answer. 3. Could Barons plans of becoming a multi-brand marketer result in a lack of focus for any of the brands involved resulting in a poor overall performance? Is Baron aiming at reaping only short-term benefits, moving from one brand to the other? Justify your stand. ADDITIONAL READINGS & REFERENCES: 1. Bansal Shuchi, and now, heres swap and carry, Business Today, July 10, 1996. 2. later, 4. 27, Akais Gala Bakul, Freebies galore, Line, reduction, Business India, April 20, March 27, 21, 1997. 1998. 1998. 1998. 3. Ghosh Partha, Baron floats new outfit to market Aiwa range-may offer equity Business price September Business Line,

5. Devasahayam Madona, TV makers in a dog-eat-dog battle, Business Line, March 6. Ghosh Partha, Bush brand is a dead asset, Business Line, October 10, 1998. 7. Dubey Rajeev, From Akai to Aiwa: The barons last stand, Business Today, January February 1999. 10. Surender T., First it was TV, not its audio, Business World, May 24, 1999. 11. Sarkar Ranju, The Baron plays the price card again, Business Today, October 7, 1999. 12. Husain Arwa, Aiwa range launched, Baron re-acquires 10% stake from Akai, Business 1999. Line, October 27, 1999. 13. Chhaya, Is the Baron-Aiwa love story souring?, Business Today, November 7, 22, 22, 1999. 1999. 8. Majumdar Nanda, Will Akai turn Videocon into the new Baron?, Business Today, 9. Baron pact with Hitachi to market audiovisual products, Business Line, March 24,

14. Ghosh Partha, Baron may part ways with Hitachi, Business Line, January 24, 2000. 15. Ghosh Partha, Baron, TCL to set up production venture, Business Line, May 2, 2000. 16. Krishnamurthy Narayan, Well focus on Iotech, A&M, September 30, 2000. 17.