If the world is moving towards a ‘contactless’ lifestyle and people are spending more time online, how will they buy consumer durables? Edelweiss Securities has released a research note in which they it has shared new emerging trends which might be seen in how people shop for durables. These are:
1. While Tier 2 and Tier 3 towns would continue to rely on the traditional distribution set-up, the top 25 cities, which account for 30–40% of the total market, might adopt online buying more quickly. This would lead to a significant change in the cost structure for the industry.
2. Brands with better digital/online preparedness and excellent customer experience would out-score competitors as fast-changing industry dynamics disrupts weaker players.
3. Low-ticket recurring items are most resilient while those exposed to new construction (especially residential) are likely to face greater challenges. (Refer Fig. 1)
Industry cost dynamics set to change:
Online distribution is likely to increase as consumers will prefer to shop away from large crowded physical stores. This shift might force brands to re-think the high channel distribution costs.
However, top brands would have to increase their spending on digital ad spends for a mind share of click-happy consumers, according to Edelweiss. Hence, it is possible that a partial re-allocation of the cost budget (from distribution to ads & promotion spends) might happen. (Refer Chart 6)
While consumer durable and light electrical brands attract a higher allocation towards advertising & promotion and distributor-related expenses, Edelweiss anticipates a shift in budgets towards higher digital content due to higher online preference with changing habits among the prime decision makers, who mostly fall in the 20–45 year category.
The charts 5 and 6 imply a shift over the last 10 years towards higher allocation for A&P, selling & other dealer commissions, higher employee expense (larger sales teams), etc.
Traditional distribution channels might get into a stormy weather
For a long time, physical distribution competency has been a benchmark to gauge a consumer brand’s dominance. The larger or deeper the physical distribution network, the higher a brand ranks on competitive positioning. This is likely to change, says Edelweiss.
In the post-covid-19 era, companies that have already made their presence in online distribution (Charts 7, 8) will out-score. It is likely that we might see aggressive online entry by other brands but the first-mover advantage would help the incumbents.
Low-ticket recurring items more resilient; realty-exposed more vulnerable
As consumers struggle with health concerns, potential job losses and pay cuts, high ticket discretionary purchases would be deferred. The real estate sector – looks set for painful times due to lack of demand and liquidity constraints.
The research report has presented a four-tier approach for demand recovery in the Consumer Durables industry.
1) Low-ticket, recurring items to show resilience in demand as other segments feel the pain.
2) Low real estate exposure, low ticket size likely to see a gradual revival.
3)Low real estate exposure, mid-to-high ticket: Gradual pickup as the segment’s demand is mainly driven by unpredictable weather.
4) High real estate exposure: There is no optimism for realty sector and hence this too looks set for a deep stress. The stress may take time to wear off.
Edelweiss is suggesting being cautious with respect to companies with high revenue exposure to real estate
This emerging trend of online buying is also echoed in what we are currently seeing. Earlier this week, Paytm Mall (owned by Paytm Ecommerce Private Limited), shared that it has been getting an overwhelming number of requests for non-essential items since lockdown started.
With most of the people working from home and students studying from home, India seems to be now running low on electronics as well as assorted accessories. Paytm Mall said in a statement that consumer electronics topped the wishlist with over 1.3 lakh requests, mobile phones which are important parts of life are seeing upwards of 75,000 requests, while 50,000 of Paytm Mall users are waiting for the lockdown to end to buy laptops.”
The company added that they have received over two lakh e-mails and 3.5 lakh requests in the comments section for delivering laptops, mobile phones, headphones, trimmers, chargers, academic books and other study materials, consumer electronics as well as white goods since the lockdown. Money Life