Monday, April 15, 2024
HomeopinionMarket moves beyond cheap and best. Can businesses survive? 

Market moves beyond cheap and best. Can businesses survive? 

For the smooth functioning of any system, signs of abnormality should be analysed and corrected. Though obvious, sometimes the same signal can be interpreted differently, leading to different prescriptions. I shall illustrate this with an example from the automotive industry that has a bearing on the economy as a whole.

Over the years, there has been an increasing trend of vehicle buyers preferring larger and pricier vehicles. Now, for a full financial year, sales of utility vehicles (including SUVs and MPVs) at 20.03 lakhs have exceeded sales of passenger cars (sedans, compacts, hatchbacks, etc.) at 17.47 lakhs, and this trend continues vigorously. Costlier products are moving faster than basic products. Since consumers can afford and access higher levels, at first glance, this may be a cause for celebration. A different picture emerges if we delve deeper.

Multiproduct organisations build a product portfolio wherein basic products form the bread and butter through volumes, and this is topped by relatively smaller-volume premium products that add cream to the margin. As customers evolve, they tend to shift to the premium end, and new customers get added at the basic end. For the economy as a whole to function smoothly with maximum sales, there must be products and services at every price point; failing which, there will be a discontinuity that will stifle the logistics flow. Ratan Tata’s desire to position the inexpensive Nano between two-wheelers and cars was based on this principle. If the existing trend continues, most vehicles will be utility or premium vehicles, and first-time buyers will have to leapfrog from two-wheelers directly into this segment or buy second-hand vehicles, which is not an encouraging scenario. Recently, Chairman Emeritus Bhargava of Maruti Suzuki has also voiced his concern about the dwindling sales of basic vehicles and the consequent threat to future four-wheeler sales.

From 60,000 vehicles per year in the Fiat and Ambassador eras, India is now the fourth-largest automotive manufacturer, with annual sales of 38.90 lakh vehicles. This was possible through the humongous sale of entry-level vehicles to first-time buyers and their subsequent graduation to premium vehicles. The total sales of entry-level Maruti 800, Alto 800, and Alto K10 stand at 44.50 lakhs, which served as the bridge between two-wheelers and roomier cars. Today, almost all basic models are discontinued, and their volume is barely 12,000 in a volume of over three lakhs per month, the rest being much larger vehicles.

Motorcycles with an annual sale of around one crore vehicles also exhibit this behaviour. The last financial year shows that the top moving models are at the more expensive end, with vehicles such as the Hero Splendour, Pulsar, and CB Shine of Honda in the 0.80–1.25 lakh price range grabbing the top sales spots, with many modest models falling by the wayside. And mopeds, at half the price of a motorcycle, sell just four lakhs per year. This phenomenon seems to extend beyond automotive to other products as well.

During the current October festival season, on different sites, the sale of premium phones such as the iPhone 13, 14, and Galaxy S21 and S23 has recorded growth from 50% to 200%. An IDC observation is that models in the Rs 50,000 segment are showing the maximum growth, while the sub-Rs 15,000 segment is declining. They assess that entry-level smart phones are struggling, and the organic movement of customers from feature phones to smart phones is almost nil.

With customers interested in just high-end products, demand is concentrated at just a few levels. Several layers are not participating in purchases, possibly resulting in overall lower demand. With a restricted number of layers, the progression upwards will become too steep, which may affect the viability of the business in the long run. Is the economy being driven by just the rich minority at a few levels?

Automotive organisations must understand hidden customer behaviour through nuanced market research. The reasons for Nano’s failure, for instance, were somewhat unanticipated and revealing. Customers seem to be overstretching themselves to attain specific aspiration levels, with affordability not playing its part in the equation. For businesses, it is time to design products that will break through these barriers.

(The writer is an engineer and automotive industry veteran.)

(Published 12 November 2023, 18:35 IST)

- Advertisment -

Most Popular