It was summer of 2009 that I got into air cooler industry as Product Group Head. New to this business quickly learnt its nuances as to how it operates and what are logic & factors which form basis of entire business methodology.
At that time it were primarily 02 brands leading which were cyclic in leadership (I happen to be with one of these) and another 02 were merely present. Total industry estimated was around 350 Cr which today stands somewhere at 1600 Cr posting a CAGR of above 25% in volume and value (self estimates), with industry leader having pretty attractive bottom line & it is beyond doubt that this leader has contributed a lot in shaping of this industry in many ways.
So what’s special about this business – 100% advance collection means very low capital involvement for manufacturers & almost nil for brands thru trading route, high bottom line as derivatives of demand and supply gap which was on account of brand’s fear of carrying forward heavy stocks leading to high storage costs and a bit deliberate may be.
So trade invested early and ruled high margin during season at sell out time. Leader worked at creating consumer pull with various experiments like ATL in winters, exchange offers etc. idea was to make it a whole year business like water heater is today to a large extent. The 2nd brand leading, always depended on trade relations and allowed them to flex margins with temp going up. Distributors operated retailer MOPs basis season trends and availability. Kind of seller’s market then. Being in 2nd leading brand, it turned out to be a prudent decision to go pretty aggressive for advance booking backed up by advancing production to improve availability which lead to almost 100% increase in sales with still stock shortage, emboldened, taking similar lead in next year and registering growth of ~70% again with still shortage. Industry leader was also expanding thus increasing market size. This clearly indicated that there was huge potential in this industry but then players were either fearful or deliberate in creating demand vs supply gap.
Why this piece of communication?
Today many brands worth their mettle that have entered and are entering into this industry for business growth, least entry barrier – thru trading route, mostly lured by least capital requirement & attractive bottom line being posted by leader.
Definitely air cooler industry is on cusp of major shift / change the way it operated thus far, so thought of pointing out warning signals to evoke a thought process amongst all business heads and marketing managers involved with this industry & we all work towards grooming this industry further the way it has thus far grown – profitably.
Air cooler business – what attracts
- Low entry barrier
- Easily available products thru suppliers
- Trading route – least capital requirement
- Expanding market size -CAGR of >25% since 2009 onward (self estimates)
- Amazing bottom line posted by industry leader consistently thru optimized procurement costs, operational costs and maximized product price realization thru extensive and intensive brand building.
Potential Risks
Excess supply vs demand may lead to huge impact on 100% advance collection business practice.
Above all, under pressure if some brand/s start to offer credit then the business fabric would get further damaged, as it would lead to increased interests costs on capital, risk of unsold inventories & increased warehousing costs etc.
Entire value chain from company to distributors and retailers make money on account of reducing scheme regime by investing quite early at peak scheme. This has been driven on account of shortage theory during actual selling period.
With ample stocks available all the time at various price points, over next 2 to 3 seasons, trade may shift from early & 100% advance investment practice. This shall surely impact companies’ bottom line. Further, they shall have to doll out higher pay out to compete during peak season just the reverse of current reality wherein during peal selling season company realization is at peak. Retail trade margins shall by and large remain intact since they have options of switching brands any time. Distributor retention shall get impacted thus their investment.
Currently, almost all brands have entered thru trading route, which means, no product differentiation in terms of offerings and in many cases it is same product with different color and facia. Thus for discerning customers, all brand’s air coolers are same and thus no brand preference which shall lead to pressures on price points. After all an air cooler is an air cooler giving cool air.
What’s the way to go?
To only maintain sheen of air cooler industry but also value add, brands can consciously work at –
Creating product differentiation by improving product offering to discerning users so that they are able to command their market & shelf space.
Do not get tempted for larger business pie thru credit as tool to increase business volume. Develop shock absorbing capabilities to handle a bad season or excess stock flowing into next season & not diluting prices in market to off load. This can happen only with deep pockets & black bottom line.
To build deep pockets, industry’s current nuances & practices to be followed and further strengthened.
Last but not the least – all brands must work at expanding market size so that demand vs supply gap does not get reversed.
Well friends, a lot could be written about this fascinating business but being brief, would conclude here, hoping that this industry’s charm increases every passing season and with entry of every brand.
Thank you for your mind share & triggered thoughts. Do not hold them, please write them.
Life Kraft 