In the past month, senior executives at Voltas' air-conditioning division have been busy travelling between major Indian cities, unveiling new products for the season and announcing the company's strategy to tap SEC B and C markets with a range of competitively-priced products.
Voltas is already among the top three air-conditioner brands in the country, but that's not nearly enough. The Tata Group company wants an even bigger piece of the pie than it has, and it wants its share of the growing action in the Indian AC market (which is clocking growth of more than 20 per cent a year).
The mood in Voltas today is aggressive - a welcome change from even a few years ago, when the company was being looked upon as a white elephant in a market that had been taken over by multinational brands such as LG, Samsung and Carrier.
The company had suffered significant losses and its market share dropped from a high of 30-40 per cent in the early 1990s to around 7 per cent in 2000-01. From being the No.1 player in the Indian AC market in 1992-93, Voltas was down to an also-ran No. 6. The wake-up call came as a directive from the Tata leadership - perform or perish.
Well, Voltas has clearly performed. the strategist takes a look at how the AC division restructured itself and returned to a leadership position.
Fall from top
For close to five decades (from its inception in 1954 to 1992), Voltas ruled the Indian AC market with close to 40 per cent market share. Of course, life was simpler back then - there was no multinational onslaught and the branded players in the market could be counted on the fingers of one hand: Voltas, Blue Star, Fedders Llyod and Arco. The unorganised small-scale industry was strong, tapping more than half the market.
All that changed in 1993, when the American AC giant Carrier (which had entered the Indian market in 1987) launched a new range of new generation ACs, which promptly knocked off Voltas from its leadership position. And between 1993 and 1997, with the entry of the Korean, Japanese and other global giants - LG, Samsung, National, Electrolux, Whirlpool and so on - Voltas' market eroded further. By 2001, its position slipped to No. 6 (LG emerged as No.1), with market share plunging to a low 7 per cent.
Says Raman Mangalorkar, head, consumer and retail, at management consultancy AT Kearney: "The MNC brands changed the rules of the game. The LGs and Samsungs came at a time when consumers were yearning for technologically superior and smarter products. They raised the quality levels, came with a plethora of choice options, and were able to drive demand."
Voltas wasn't prepared for the changing market dynamics. Before the entry of the MNCs, the AC market was primarily driven by sales in the institutional market (government and corporations) - the residential or retail AC market was minuscule. Even after the entry of the new players, Voltas's share in the retail segment hovered around 5 per cent.
Says K J Java, senior vice-president, Unitary Products Business Group, Voltas Ltd, "We made the mistake of not taking the retail AC market seriously. The MNCs had opened up this market and made deeper inroads. They were buying more shelf space, which Voltas never had."
That's when the Tata leadership came up with a directive to Voltas to either reclaim its position among the top three players, or exit the AC business altogether.
Do or die
Based on the recommendations of the Tata Strategic Management Group (the management consultancy that's part of the Tata Group), Voltas began an internal regeneration drive. A detailed study was made on how the market would shape up, the competitors, their offerings, strategies, the market spread - in short, everything related to the Indian AC market. The recommended solution: transform Voltas from an engineering to a marketing company.
To effect that transformation, Voltas planned a Big Bang strategy that spelled out ways to revive every facet of the company - product, channel, systems, service, costs and brand. While in the good old days, Voltas had earned profits keeping its margins high, the MNCs had changed the rules.
They had unleashed a price war - slashed prices and cut margins - with the result that getting ahead in the AC market now depended on volume generation. "Volumes became critical for survival," agrees Java. The key objectives of the "Big Bang" were, therefore, to increase revenues from sales achievements, and make Voltas the lowest-cost manufacturer. "Economies of scale were critical," he adds.
Product comes first
The first key initiative was to revamp the product itself. Market research by Voltas showed a less-than flattering customer perception of the company's air conditioners: the general consensus seemed to be that Voltas ACs were old-fashioned, outdated, bulky dabbas.
Voltas hadn't benchmarked its products against MNC offerings, which were superior both technologically and aesthetically, as well as competitively priced. The company had no model catering to the low-end market, nor any that marked the shift in ACs from premium to affordable, or luxury to comfort.
"The challenge was not only to come up with a range that matched competition, but to come up with it in a cost-effective manner. We needed a partner that could not only provide us with technology, but also help in keeping the manufacturing cost low," says Java.
That partner came up in Fedders International, a leading player in the US room AC market, with a worldwide presence, with whom Voltas signed a 50:50 manufacturing only joint venture in 2001. There were several immediate benefits from the JV.
First, it helped Voltas plug into Fedders' technology and design know-how to launch new-generation products - Voltas was allowed access to Fedders' R&D centres in Singapore and Florida. The result was the Vertis brand, with a range that matched competitors' offerings - it had features like purification filters, ionisers to kill bacteria, economy mode to save on electricity and so on.
In fact, between 2001 and 2004 Voltas launched over 74 new products, revamping its entire product line. This includes industry firsts such as a 1.5 tonne AC - now a staple product offering.
The global sourcing agreement also brought significant cost benefits to Voltas. Fedders sources all its components - from copper tube to compressors - by negotiating with manufacturers worldwide. The JV allows Voltas access to components from the same manufacturers at the same low price-points.
In fact, Voltas claims that global sourcing has helped it become the lowest-cost manufacturer in India. In the past five years, material costs for window ACs have dropped 20 per cent, from Rs 10,400 per unit to under Rs 8,000 a unit, while the conversion cost has come down by a remarkable 60 per cent, from Rs 2,000 a unit to Rs 650 a unit.
Another move - literally, this time - that helped Voltas was shifting its manufacturing base, in 2000, from Thane to Dadra, which is a sales tax-exempt zone. The company has passed on that 12.5 per cent saving to its consumers, which naturally has helped sales.
Channel revamp
Of course, it wasn't enough to just spruce up its offerings. Voltas also needed to reach out to new markets and new customers. Which meant shaking up its distribution network.
The first step was to weed out non-performing dealers. Voltas identified some 300 of its 650 dealers - close to half - as non-performing. They were given strict deadlines to clean up their acts - while 200 dealers upgraded their performance to meet the new, higher standards Voltas demanded, about 100 were shown the door.
They were promptly replaced by 200 new dealers, taking Voltas's dealer network to 750 by 2001. At present, the company has about 2,000 dealers, which will be hiked to 3,500 by the year-end, while franchisee spread will increase from 350 to 500 over the same period.
Back in 2001, dealer confidence was low and the default rate high. The trend was towards single-product dealers, who were "supported" through credit extensions. Now Voltas put in place a dealer-friendly policy that offered subsidies and incentives, but also raised the performance bar.
The company signed memoranda of understanding with the dealers, clear spelling out the operational procedures and norms to be followed and the scope of work between the dealer and Voltas.
Voltas set aside 1 per cent of its turnover for training and development of its channel partners. Money was pumped into dealer infrastructure, manpower training (with certification programmes for all employees), sharing costs of mobile vans, cooperative ads and so on.
Says a Voltas marketing executive, "Dealer satisfaction is important as we are no longer into direct selling and servicing in the residential AC market. Unless they are satisfied, they can't satisfy the customer."
Changes were also made in the after-sales part of the business. Voltas's earlier model was of direct servicing where the company sent out its own AC engineers to attend to complaints. Now, it made the dealers responsible for customer care - and in one stroke, cut its workforce by more than a third, from 370 to 216.
Even the dealers have strict guidelines on interacting with customers and responding to complaints. How many servicemen are required, what kind of servicing kit is required, what spare parts must always be there, the dress code of a servicemen - everything is spelt out for the dealer.
Time targets - under four hours in the metros - have also been set for responding to customer calls. And since the dealers and the head office are connected through a SAP system, all transactions are online and transparent.
Brand building
When the Tata management laid down its ultimatum, Voltas knew it needed to focus on the demand for ACs in homes. While room AC sales were growing at 26 per cent, household penetration was a mere 2 per cent - the potential was tremendous.
Say Manglokar of AT Kearney, "A long relation with the consumers can have its pros and cons. In Voltas's case the cons were more. It lacked the freshness that the MNCs provided." Voltas's Java agrees. "The brand recall was poor and we had a fuddy-duddy image. The task at hand was to transform Dilip Kumar into Shah Rukh Khan."
To do that, Voltas began by switching ad agencies - from O&M to Euro RSG, which came up with a new positioning platform: "Acs with IQ." The ads focused on defining features of Voltas's new product range such as uniform cooling, energy-saving, timers and air filters, with cues of performance and value-addition through technological innovation.
The campaign kicked off with the Vertis flagship, and went on extend the "ACs with IQ" proposition to every Voltas AC. A series of print ads spelt out what was "intelligent" about the range.
Subsequent promotions have focused on themes like customer service and low costs of ownwership. In 2004, Voltas changed its theme somewhat, staking claim to the aspirational product platform - campaigns focused on its new Rs 9,900 AC, a first in the market. Celebrities like Shah Rukh Khan and Shoaib Akhtar were also roped in to strengthen the brand.
Of course, all this doesn't come cheap: between 2001 and 2004, Voltas invested more than Rs 50 crore (Rs 500 million) in branding initiatives; last year, it spent Rs 17 crore (Rs 170 million) on marketing.
The figure for this year is somewhat higher: Rs 20 crore (Rs 200 million). But then, the theme has changed too. Since the focus now is on capturing a larger share of the mass market, Voltas's new campaign is aimed at the aam aadmi, and has been shot in a distinctly non-urban environment. The tagline, too, has changed - Voltas is now "India ka AC".
Did it work?
In a word, yes. Within a year of the Big Bang, Voltas's market share started rising. From 7 per cent in 2001, it climbed to 9.2 per cent the next year and is now at around 16 per cent. Exults Java, "The numbers that we were achieving in a year, we now get in a month."Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Discussion Group