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The Outperformers 2018

Rinse And Shine
A long-due portfolio revamp has put Whirlpool on a high growth trajectory. Now, it is looking beyond its core offerings

Himanshu Kakkar & V Keshavdev

"We have been judicious about expansion given that durables is a highly seasonal industry but we are now making the right investment" — Sunil D’Souza, MD, Whirlpool India

It’s close to 4 p.m. as the din on the street rises at Central Market, the busiest shopping destination in Lajpat Nagar, which is also home to a host of standalone and multi-brand electronic showrooms. As shoppers jostle and vehicles honk their way around, on one such arterial road, 40-year-old Jawahar Mohindru runs an exclusive showroom for Whirlpool of India, the US-based durables major which entered the country in the ’80s through a partnership with the TVS group. The Gurugram-headquartered company, which initially started out by selling only washing machines, entered the refrigerator market in 1995 following the buyout of Kelvinator India.

As customers mill around the showroom poring over products ranging from refrigerators to air conditioners, microwave to kitchen appliances, Mohindru sounds quite content when he says, “We have been an exclusive dealer for the past two decades, and never felt the need to engage exclusively with other brands as Whirlpool has been generating good business for us,” For a business that clocks an annual turnover of around 25 million, Mohindru is also happy about the profit. “Our margin is between 10% and 15%,” he reveals.

What is alRajeev Karwal Founder, Milagrowso driving footfalls for the dealer is a slew of launches across categories in recent years by the company, churned out of its Faridabad, Puducherry and Pune facilities. Steering the change is 50-year-old Sunil D’Souza, a PepsiCo veteran of 15 years who took over as the managing director in June 2015. Sitting out of his corner office on the first floor, D’Souza says, “We were very strong in the mass-premium segment but did not have a strong foothold either in mass or the premium segments.” The entry of Korean duo, LG and Samsung, in the late ’90s and early 2000s, saw them dominating most categories in India. Rajeev Karwal who spearheaded LG’s foray in 1997, says, “Whirlpool, like others, globally faces a challenge from Korean companies and even Electrolux as these companies don’t easily cede any space.” But in a move that would help the MNC plug the gap in its portfolio, D’Souza decided to introduce products both at the mass and premium end. The existing range in premium mass market was also upgraded. Prior to the launch spree, the company emphasised on margin expansion and cash generation at the expense of market share. That has since changed with the company growing at 14% over the past three years, even as it finds itself among the top five players in the durables space (see: Growth pool).

Cool upgrade

Amit Mahawar, analyst at Edelweiss who tracks the consumer durables space, says that it was operating like a typical American company until D’Souza came in. The company for long had relied on a few successful products to service a market which, unlike USA, was extremely diverse in tastes, habits, and demands. “It was facing issues on various counts. The product was not clicking, market shares were not moving. D’Souza made the parent realise, that you have to understand Indian consumer’s psychology,” mentions Mahawar. As a result, over the past two years, a number of SKUs across segments were launched, helping the company bridge the gap with bigger peers such as LG and Samsung. “For our single-door refrigerator, we introduced capillary cooling technology which retains cooling for 12 hours. This is for first-time buyers from lower income strata, living in the outskirts of metros and Tier-II or III cities where power cuts are still a reality,” adds D’Souza. Today, the company has the highest product offerings in the refrigerator category with over 180 products in the range of 10,000-75,000. Whirlpool is strong in the economy segment and direct-cool refrigerator sales account for 75% as compared with the industry average of 70%. A category head at Vijay Sales, a leading electronics retail chain, concurs, “In the single-door segment upto 300 litres, where the prices average around 25,000, the company has a strong brand pull.” 

HoweAmit Mahawar Analyst, Edelweiss Securitiesver, in the above 300-litre category, Whirlpool has to contend with the likes of Samsung and LG; in the above 500-litre category, where technology and looks play a critical role, besides the Korean brands, it has competition from Bosch, Electrolux and Hitachi. Though in the premium category Whirlpool has SKUs in the 50,000-100,000 range, winning over customers won’t be easy. “As the price point goes up consumers get choosy and any brand with a limited range will find few takers,” says the executive from Vijay Sales. Analysts feel that since Whirlpool is stronger in the economy segment and with frost-free refrigerators in more demand, the company will focus more on that category.

Besides refrigerators, the company is also looking to ramp up its share in the AC segment. It recently launched inverter ACs and in doing so, entered a segment that accounts for 15% of the overall AC market. The company also believes that with penetration level in this segment as low as 3%, there is enough room to grow. The company launched a premium side-split AC in the third quarter of FY18, taking the total SKUs to 20 in the split segment, which ranges from 31,000 to 52,000. The reason D’Souza is bullish on ACs, which contribute 13% to sales, is because among all durables he believes ACs will be the quickest to grow. “We believe as income levels rise, demand for ACs will increase as the number of rooms increase, but the same household will still need just one fridge and a washer,” he explains. 

Here again, given the highly competitive and seasonal nature of the market, building market share would be tough. Industry veteran Karwal feels that Whirlpool doesn’t have any disruptive product or technology in this space. D’Souza is dismissive of the observation. “We have a highly differentiated product and have launched intellisensors in ACs which sense humidity in the room and adjusts the AC accordingly,” he says. Next in line is an IoT-driven AC.

Similarly, the company has rolled out a range of front-loading washing machines that saw the company make its presence felt in a segment that accounts for 25% of the industry. Whirlpool currently has around 28 SKUs, of which 23 SKUs are in the top load segment and the rest in front-loading ranging from 10,000 to 47,000. With front-loading, Whirlpool aims to plug the portfolio gap in the washing machine segment. Value-wise, the fully automatic segment dominates with 61% share, whereas volume-wise, the semi-automatic machines have 58% share. “Semi-automatic is what a first-time buyer will opt for and that’s where we are seeing much more traction than top loaders,” informs D’Souza. Tier II and III cities contribute almost 40% to the total sale of washing machines in the country.

Earlier, the company would consider refreshing a product after three years, which came down to 18 months and now it is down to less than a year. What’s important to note is that besides relaunching SKUs, the company has also revamped its distribution structure.

Operation revamp

D’Souza repeats several times during our meeting that India is a penetration market — in essence, there are a large number of potential first-time buyers. It is just that the product hasn’t reached them. Even in their strong categories — refrigerators and washers — the penetration levels are hardly 27% and 13%. That is theoretically a lot of ground to cover. “Growth is coming, both in refrigerators and washers, from first-time buyers in Tier-II and III towns, outskirts of metros and lower middle class. So, Whirlpool has been expanding its reach over the past several years,” informs D’Souza. 

Today, the top 10 states account for 80% of its total distribution network in which Maharashtra, Madhya Pradesh and Tamil Nadu are the key markets. Its network of 3,500 dealers is spread across 150 towns. More importantly, the company also improved its distributor incentive structure to ensure that trade margins are in line with peers. The numbers reveal that: trade discounts as percentage of revenue went up from 11.6% in FY14 to 16.7% in FY17. “Of late, we have been getting good trade discounts, but that’s also because we sell their entire range,” says Mohindru. Despite the sharp rise in trade discounts, the company has managed to increase its profitability, led by better cost management and focus on average realisation. 

As things stand today, even as refrigerators (61%), washing machines (22%) and air conditioners (10%) are the biggest revenue drivers, the company is also banking on auxiliary businesses (microwave ovens, kitchen appliances, spares, accessories and income from services) to propel growth (see: Chill quotient). The company plans to take the contribution from auxiliary products from less than 10% now to 20% in the coming years. Of these, the management believes a potential growth driver could be cooking and built-in kitchen appliances.

What’s cooking?

In 2013, Whirlpool strategically entered the kitchen appliance segment with stand mixer, food processor, toasters and blenders under the brand name, Kitchen Aid, and two years later unveiled a new built-in appliance unit. Built-in units are pre-installed kitchen fixtures comprising hob and hood, ovens, dishwasher, washer & dryer and refrigerators. The domestic built-in appliances market is still nascent at around 20 billion, of which 80% is held by mass players and the rest is with premium players. Usually, built-in units are purchased at the time of house construction or during renovation. The company has tied up with DLF, Della, Lodha, Kalpataru, and Supertech, as growth in this segment is closely linked to that of real estate. The built-in units are priced at a premium. For instance, a specialised oven and dishwasher could cost around 70,000-80,000, hob and hoods are priced between 25,000 and 100,000, while chimneys could cost over 150,000. The company is targeting revenue of 6% in the near future from this segment.

While Kitchen Aid is an 100% imported brand in the super-premium category, the company, in a bid to tap the mass premium segment, bought a minority stake for 1.6 billion in Elica PB India, a subsidiary of Elica SpA Italy, where the parent, Whirlpool Corporation, holds 12.5% stake. Elica, which has been operating in India since 2010, will now distribute cooking and built-in appliances for Whirlpool too. The two companies expect the transaction to be sealed in the second half of 2018. The Italian company generates a majority of its revenue in India from kitchen hoods, followed by built-in hob.

“My cooking business has been growing at 50% for the past three years, but Elica’s turnover is 6x my cooking sales with 4x the touch-points. Besides their capability to manufacture and design products in India, the company has showed that they understand customer preferences well,” says D’Souza. In FY17, Elica generated revenue of 1.4 billion and profit of over 90 million. Rajesh Ahuja, who sold his modular kitchen business Sleek International to Asian Paints, says, “Elica has a strong presence in the mid-premium segment and does offer synergy for Whirlpool.” Post the sale, Ahuja has now started a new modular kitchen and wardrobe venture, Saviesa Home, targeted at the affluent segment unlike Sleek which was more of a mass offering. On whether Elica could be a contender in the premium segment post the acquisition, Ahuja says, “In the premium kitchen appliances category, Elica has to face up to the likes of Siemens, Bosch and Nagold.” D’Souza is unfazed though. “We believe the match can take us to the next level,” he says. 

Future forward 

While growth has averaged 14% over the past three years, the management is now looking to invest in capacity expansion in select categories. While the expansion at the washers unit in Puducherry is complete, the 3.5 billion brownfield investment at the refrigeration plant in Pune is currently underway. Given that Whirlpool hadn’t expanded capacity for the past seven years, all its plants have been running at full capacity. “We have been judicious about expansion given that durables is a highly seasonal industry but we are now making the right investment,” says D’Souza. Growth in consumer discretionary is highly correlated to GDP. Hiren Trivedi of Axis Direct mentions that over FY06-11, when GDP growth averaged 9%, Whirlpool India’s topline grew at CAGR of 20%. Going ahead, he believes, a confluence of factors — lagged effect of 7th Pay Commission payouts, two consecutive years of above-average monsoon to spur rural and semi-urban demand, and strong policy thrust on electrification — will prove to be a big driver. Agrees D’Souza: “As GDP per capita grows and consumer affluence increases, more first-time buyers in semi-urban and rural regions will buy entry-level products, while existing consumers will upgrade to premium products.”

With RoCE of over 33% and a decade high operating margin of 13%, Whirpool had managed a good performance with its stock doubling in two years from 834 to 1,674. “We have always ensured that topline growth is faster than inflation and organisational expansion. We kept costs on a leash and, hence, incremental topline growth translated into better profitability,” says D’Souza. Analysts continue to be bullish on the company given its negative working capital cycle, superior margin profile, and healthy return ratios. 

Given the current momentum, Whirlpool could well be on track to achieve its billion dollar revenue target by 2020 and D’Souza knows that. “While an element of probability is always out there, till such time you are feeling good about the odds, there is little to worry.”

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