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AMJ, a dark quarter for consumer durables

The recent lockdown in most parts of the country to fight the second wave of COVID-19 has yet again brought consumer durable sales to a halt. This time round, brands and retailers are not sure if the customers would return as fast as they did last year, after the lockdown was lifted. The consumer durable sector was among the first to bounce back after the lockdown in 2020. This time the number of people impacted are much more than last year. The death rates are high too, and this has impacted and may further disrupt consumption.

Sales again hit by pandemic in peak season
Normally, the April-June quarter in a year, as mercury rises in the peak summer, witnesses around 30 to 35 percent sales of compressor-based cooling products. However, for the second consecutive year, sales of ACs and refrigerators have been hit during the peak season of April and May on account of the localized lockdowns and restrictions. So much so that the pandemic situation has forced companies to recalibrate their target and go for pre-COVID sales number without being too aspirational.

Leading players in the segment have reported almost 75 percent dip in April sales this year when compared with the same month of 2019 performance. Moreover, May 2021 has been a complete washout so far for them. For some companies, sales in March 2021 began on a positive note. They had targeted a double-digit growth this fiscal but now the second wave and subsequent restrictions have led to a recalibration of targets.

Retailers expect sales for white goods to be halved in the June quarter. They saw business drop 31 percent in April, according to Retailers’ Association of India (RAI). Many retailers had created omni-channel strategies over the past year, especially with support from brands. However, for some retailers, price differences between online and offline sectors remain a challenge. Additionally, they have to invest in logistics as compared to regular e-commerce platforms, who have wholesale deals with courier services.

Disruption in production
Manufacturers across sectors are idling production as lockdowns to contain an explosive surge in COVID infections have decimated sales, and diversion of industrial oxygen to hospitals has crimped production of raw materials such as steel.

Production of steel has suffered because of the shortage of medical-grade oxygen. This, in turn, has affected industries that use steel as raw material, including consumer durables. Domestic steel consumption fell 26 percent to 6.72 million tons in April from the preceding month as demand in auto and consumer durables have been hit due to local lockdowns.

CEAMA estimates that the industry has lost Rs. 10,000 crore in a year. As monthly sales continue declining since April, several brands have gone maintenance shutdown of their plants as they see no point in manufacturing products and putting workers at risk when markets have been shut. Some brands have also been planning to reduce the production. Meanwhile, some of the brands are already carrying inventory.

In anticipation of witnessing increased footfall in markets, companies are gearing to ramp-up production as the demand rebounds post the lockdown and are also closely working with the third-party suppliers to ensure timely availability of components.

Consumer sentiment weakens
The COVID-19 second wave had a detrimental impact on household sentiments in April, according to the Center for Monitoring Indian Economy (CMIE). There is widespread anguish that is spilling over into the anxiety concerning the long-term well-being of households.

Consumer sentiments have been particularly battered during the last 3 weeks of April, wherein, the index dipped by 4.3 percent in the week ended April 18, then by 4.5 percent in the week ended April 25, and further by another 5.4 percent in the week ended May 2. This brought the weekly index to its lowest since November 2020. The index of consumer sentiments plunged by 3.8 percent in April, its sharpest fall since May 2020, it is also an unusually large fall by historical standards. The fall in consumer sentiments in April reflects a substantial worsening of household income.

Another worrying factor is that in the second wave, the share of rural centers in the infection curve is higher. This could also mean additional pressure on rural employment. This is consequently impacting consumption not just in cities, but also in rural regions. With the second wave compelling higher medical expenses, elevated precautionary savings, and possible uncertainty with respect to jobs and incomes, recovery in big-ticket consumer durables, which saw renewed purchases after the first lockdown, may remain limited in FY22 as a part of the pent-up demand may have already been exhausted in these categories.

Hence, consumer sentiment has been further hit amid reports that there may be a third wave of the pandemic, which further dampens chances of a recovery in sales of consumer durables as people are preferring to keep expenses on hold till the time COVID situation improves.

 

Outlook
The world economy is experiencing diverging fortunes after being uniformly battered by the pandemic last year. Most advanced economies and some emerging economies are witnessing a strong recovery, while the rest of the world, including India, has fallen behind. The second wave has hit India hard. Though the second wave is officially in decline, the virus is spreading to the hinterlands, pushing the economic recovery to uncharted territory. Most forecasters have slashed their growth projections for India to below 10 percent for FY22, with JP Morgan and Barclays paring it to 9 percent and 9.2 percent, respectively.

Since most consumer durables resolve specific needs of the consumers and are not vanity products in nature. Hence, the consumers may postpone or down-trade in case of steep inflation, but they still need to consume the durables. Pent-up demand for consumer durables and exports of manufacturing goods and services might act favorably, but other components will be far less supportive.

There is a possibility of hike in prices for residential ACs on account of continued inflationary pressure on inputs, which may hinder the recovery. Some states are still under restrictions. Even though large states are moving toward a gradual unlock, the demand is expected to remain tepid throughout the quarter.

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