Turnaround: On The Up, But...

TURNAROUND
On The Up, But...

Behind Videocon's comeback lie a smart sourcing strategy, a restructured organisation, and an emphasis on price. But the last, as the group once discovered, is a double-edged sword.

By Ranju Sarkar

PRADEEP DHOOT: Authoring the comeback script

This story starts with a near-sale. In 1998, the brothers Dhoot who run Videocon-Venugopal Nandalal Dhoot, Rajkumar Nandalal Dhoot, and Pradeepkumar Nandalal Dhoot-were divided over the sale of the group's loss-making glass-shell manufacturing facility in Vadodara, Videocon Narmada. VND and RND, as the brothers are referred to within the group, were all for selling it, but PND, the youngest of the three, and the man in-charge of Videocon's high-profile consumer durables business demurred. Videocon Narmada, he argued, was critical to the group's core business, the manufacture of colour televisions (CTVs), and took on the responsibility of turning its fortunes around.

That he did. Today, the glass-shells contribute their significant mite to the group's cost-leadership position in the CTV business. And PND has been able to author a comeback script for Videocon, which, if marketing wunderkind Kabir Mulchandani's published age is correct, built its reputation as a price warrior when the latter was still in school.

To attempt a quick recap of those glorious days: Videocon boasted the largest share in the colour television market for eight years running, and at its peak, in 1994, the company's marketshare was 26.7 per cent. Then, other price warriors like Baron International-whose first offering, Akai, is now ironically part of the Videocon stable-and Aiwa entered the market, as did transnationals like Sony, LG, and Samsung, and it found itself caught in a rapidly shrinking middle. By June, 1999, Videocon's once impressive share had shrunk to 12 per cent.

It wasn't just external forces that contributed to Videocon's winter. In the mid-1990s, the group embarked on an ambitious diversification programme. The Dhoots are silent on this, but the move may have been prompted by the need to have enough businesses for the three brothers to manage-it isn't unknown for family managed groups in India to diversify into a new area, just to provide another member of the family with a business to run. Or, it could have been the group's response to the realisation that its competitiveness in the consumer durable business would soon be undermined by competitors.

The diversifications didn't pay off: Videocon burnt its fingers in real estate and power. Precious cash was diverted to these projects, but they did not yield the expected returns.

Just as everyone was writing off Videocon, the group bounced back. On the strength of a restructured organisation, a new distribution network, a clutch of new launches, manufacturing-plus-marketing arrangements with transnational brands like Akai and Sansui, and aggressive pricing, it has cornered a third of the CTV market by its own estimates. Its eponymous brand has improved its share from 12 per cent in 1999, to 15.5 per cent in 2000, and 18 per cent in the first half of this year; Sansui has a 7 per cent share of the market (up from 5.5 last year), and Akai, 6 per cent (4.5 per cent in 2000). Even figures put out by ORG-MARG grant that the group's share of the CTV market have increased.

Through this period, Videocon has managed to retain its grip on the markets for refrigerators (market share: 15.5 per cent) and washing machines (40.9 per cent), and Kenstar-the group's small appliances brand-has managed to make inroads in a predominantly unorganised market.

Videocon International's revenues for the year ended March 31, 2001 were a respectable Rs 3,251.23 crore; its earnings, Rs 151.44 crore. Better still, estimates for 2002 are an impressive Rs 3,500 crore in sales and Rs 150 crore in profits. Says V.N. Dhoot, Chairman, VIL: ''Margins are coming down. Only those who can increase sales and retain profits in the next three years will survive".

Chronicle of a comeback

The comeback has, predictably, brought out the worst in competitors. ''When you cut prices, you gain market share. We can also do the same, but what's the point?'' asks one. But PND thinks that factors other than price helped Videocon regain marketshare: ''Forty per cent of the gains come from the restructuring of the organisation, 25 per cent from price-cuts, and 10 per cent, the new media strategy we have adopted.'' The rest? Well, put that down to Dame Luck smiling on the Dhoots. Numbers lend credence to PND's version. Despite the drop in prices, VIL was able to retain its net profit margins of around 5 per cent.

PND's comeback blueprint had all the ingredients of typical restructuring plans and then some. Branch offices that had in the past had their targets laid out for them by the corporate centre, suddenly found themselves free to define their own sales objectives and dealer incentives (within a prescribed limit). A sap ERP package helped improve business processes. And PND realised that he couldn't take all the decisions, not when it involved producing 1,200,000 CTVs a year, and managing four brands and eight sub-brands. So, he appointed a Chief Operating Officer for each of the manufacturing operations (consumer electronics, washing machines, and airconditioners), and each of the three brands, Videocon, Sansui, and Akai. For good measure, he also appointed a COO in-charge of exports, which account for 9 per cent of the group's Rs 3,218 crore revenues. ''I don't handle everything,'' says PND. ''The coos draft their own business plans. I just monitor them.'' But corporate finance is still handled by VND, and PND keeps a close tab on operations and cashflow.

By focusing on its channel organisation, Videocon has been able to increase the proportion of sales that come from dealers it reaches directly from 40 per cent to 60 per cent. The higher the ratio, the better it is for the company's bottomline: all consumer durables manufacturers give their dealers cash discounts and a credit period of between 30 and 45 days; the more the proportion of sales that happen through direct dealers, the higher the efficiency of the collection process. Explains S.K. Palekar, the Senior Vice-President in-charge of marketing at Eureka Forbes, and a former chief of marketing at Mirc Electronics: ''This isn't a marketing business, but a financing one. The skill lies in rotating your money.'' And any increase in the efficiency of the collection process, provides Videocon with that much more leeway to cut prices.

Everything adds up: the group produces key inputs that account for 37 per cent of the cost of a television in-house, and this contributes a 6.5 per cent savings on raw material costs, and that's just the direct tax component. More than backward integration, though, it is smart sourcing-imports account for 25 per cent of the cost of a CTV-that helps Videocon be the cost leader it is. Taking a leaf from the auto business, Videocon sources all its imports through a Tier 1 supplier, Nissei Sangyo, a Japanese company that services the consumer electronics major from its hub in Singapore. The result? Videocon, which used to stock 35 days of production as inventory, now does 17.

The marketing game plan

The focus on costs extends to Videocon's marketing efforts. For one, the group has come up with a new advertising strategy: less is more. Thus, its ads no longer appear on all television channels and print media across the country. Instead, they are carried in specific channels, magazines, or newspapers, depending on the sales objectives in those geographies. ''There is a direct relationship now between media planning and product planning,'' says Sunil Tandon, Head, Advertising and Brand Development, Videocon International. On the strength of this approach, the group proposes to reduce its advertising budget from Rs 110 crore in 2000-01 to Rs 65 crore in 2001-02.

All about fleet-expansion

The Dhoots are again at it. This time, they want to buy a 26 per cent stake in Indian Airlines. Unless of course, they are debarred on account of SEBI's action against them for a 1998 operation on the stockmarket. What's the synergy? Explains Venugopal Dhoot, Chairman, VIL: '''Both are in consumer-oriented businesses, and we are good at handling labour. We have 15,000 workers, but we haven't lost a single man-day of work because of a strike.'' But the group doesn't seem to have learnt from its real estate foray where a Rs 400 crore investment is now worth half that. And instead of working on large projects, Videocon's construction arm has largely had to be content with office complexes and hotels. The only success the group has achieved outside the consumer electronics domain is with its oil exploration joint venture with ONGC, Cairn Energy and Marubeni. Videocon has a 26 per cent stake in the venture, and has already recovered its investment of $72 million. But Videocon had very little to do apart from putting in the money. Even in the case of Indian Airlines, the Dhoots plan to rope in a foreign airline as a marketing consultant if their bid is accepted. Fine. But how do they plan to fund the acquisition or the much-needed fleet expansion? Experts believe that a 26 per cent stake in Indian Airlines could cost Videocon around Rs 250 crore. With much of its internal cash flows earmarked for expansion plans, the Dhoots may have to borrow this amount. They also speak vaguely of leasing as the solution to all fleet-expansion woes. Still, things may not be as easy as they sound. And, learning from experience, Videocon would do well to consolidate its core consumer durables business.

Videocon has also tried to do in the CTV business what FMCG major HLL does in the toilet soaps one: have a presence in each segment of the market through a different brand. As competitors started chipping away at the eponymous brand's 26.7 per cent share of the CTV market (circa: 1994-95), Videocon set out to build relationships with transnational brands like Toshiba, Sansui, and Akai, which were willing to give manufacturing and marketing rights to an Indian company in return for a royalty (2-3 per cent). ''No single brand could hold on to a 26 per cent share,'' says Eric Braganza, Senior Vice-President, Marketing & Sales. Adds Nabankur Gupta, now President, Raymond, and Videocon's chief of marketing till 2000: ''It's a great strategy if you play it right.''

Doing that involves managing each brand independently. Toshiba bombed as the group's offering at the premium end of the market (Videocon is planning to relaunch the brand) but two out of three isn't a bad score. While Braganza claims the positioning and the pricing of the three brands are distinct-Akai, Sansui, and Videocon form a continuum from the low-end to the high-end with a few overlaps in the mid-range-the competition thinks otherwise. ''All three are low-end brands. And each cannibalises the other.''

Pradeep Dhoot couldn't care less about uniqueness of positioning. The three brands allow him to enjoy economies of scale in sourcing, manufacturing, and advertising; they help in dealer-management; and if Videocon hadn't forged relationships with the likes of Akai, someone else would have. By his own admission, the multi-brand strategy has resulted in a 7 per cent cost benefit across the group.

It is here that Videocon Narmada plays a part. ''Only if we buy a large number of picture tubes will we have enough clout with picture tube manufacturers to make them source glass-shell from us,'' says Rajkumar Dhoot. And volumes, in an intensely competitive market, can only come from a multiple-brand strategy. In return, cash flows from the glass-shell business-Rs 250 crore in 2000-01-help feed the group's expansionist ambitions like the compressor-line it is building for its white goods business at a cost of Rs 200 crore.

Despite everything the Dhoots would like to believe, they are essentially price-players. And the exit of Nalankar Gupta, widely known as the strategic thinker behind the group's marketing initiatives, has left a vaccum of sorts. While they have benefited from the multi-brand approach and a smarter sourcing strategy, they have used the gains from the two to slash prices. Early this year, when Baron was facing problems getting enough of the Aiwa brand of CTVs to the market, Videocon slashed prices by between 5 and 10 per cent. Says Rajeev Karwal, Senior Vice-President, Marketing (Consumer Electronics), Philips: ''Their gains in marketshare have come from a reduction in the prices of low-end products.''

Pradeep Dhoot pooh-poohs this, but in the same breath says that he can slash prices by another 15 per cent if required. What Videocon has done is to cut costs, and pass on some of the benefit to the customers. Conventional marketing wisdom would suggest using the gains to fund brand-building initiatives and that could well be the perfect way for Videocon to build a sustainable advantage. Instead, the company has chosen to play its favourite card, price, and gained share in a flagging market. Old habits, it would seem, die hard in the consumer durables business.

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