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Baron - Rewriting Indian Consumer Electronic Goods

Marketing: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.
Baron's 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
exchange1 offer on old music systems and TVs and freegift 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 Baron's 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
Akai's 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 hifi 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 dirtcheap 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 'oneupmanship' on the pricing and promotion fronts. However, they soon realized that it was not very
easy to match Baron's schemes and prices. The question on everyone's 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.
n the 1990s, the brand was virtually wiped out from the market. In 1992, Baron2 International
led by Kabir and Shakun Mulchandani (J.R.Mulchandani's 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 Akai's global competitor

Aiwa (a subsidiary of Japan's 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 Baron's '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 Akai's 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 mid-size 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 re-acquired 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 Hitachi's 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 TCL's 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 TCL's 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.
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 blackand-white to a color model. Based on these findings, Baron decided to build Akai's 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-and-white sets who want to go color and those who want
to trade up to a bigger model."

Baron's efforts to comprehend the Indian consumer's psyche resulted in identifying the
customer's 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.
Baron's 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, Akai's 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. Akai's 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 Baron's 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 Videocon's 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. 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 Sansui's cheapest model came at Rs 9000.

As before, Aiwa's 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.

Baron's Mantra - Low Costs


If one were to summarize Baron's secret of success, it would be all about keeping the costs on the
lower side and being able to sustain them. Baron's '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 89903. Also, BPL paid Rs 250 more in sales tax as compared to TCL.

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 Baron's
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's 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. Baron's plans to set up
a manufacturing unit were expected to further bring down the distribution costs.
Apart from the low prices, Baron's efficient and effective supply chain also contributed to its
success. The company's 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 company's 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 ship's 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 Baron's success story. Problems existed on all fronts dealers, customers and most importantly for the group itself. The mind-boggling 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%.

A common question in corporate circles was the one regarding Baron's 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 it's the same worldwide." The group's
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 Baron's products after the booking and the up-front payment. Baron's 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 centers5 across the country, the issue continued to be a major concern.

Baron's 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 Baron's 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.

Baron's 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
India's VP (Marketing), Rajeev Karwal had just this to say. "It is nothing but a mere gimmick."