Baron - Rewriting Indian Consumer Electronic Goods Marketing

Details

Themes : Innovation
Period : 1994-2002
Organization : Baron
Pub Date : 2001
Countries : India
Industry : Consumer Electronics

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Case Code : MKTG007
Case Length : 7 Pages
Price: Rs. 200;

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Baron's Mantra - Low Costs Contd...

Baron also worked towards entering into agreements with its assemblers to keep their margins on the lower side, when compared to industry standards. Baron's distribution costs were just 2.5% of sales, as compared to 5-6% for competitors. For other brands, the retailer margin was around Rs 1500 per set, while Akai had offered a fixed margin of Rs 1000 per set plus the old TV set, which the retailer could sell in the secondary market. This practice was followed for other products and brands later on. Baron's plans to set up a manufacturing unit were expected to further bring down the distribution costs.

Apart from the low prices, Baron's efficient and effective supply chain also contributed to its success. The company's inventory management system for instance, ensured that the finished goods and net working capital turnover were 5 and 24 days respectively as compared to 23 and 61 days respectively for major rival BPL. Baron kept stocks of less than 2 days at its assembling units. The company's assembling and administrative costs were only 1% of sales, compared to 2.60% for BPL and 3.60% for Videocon.

The group worked very hard on maintaining this efficient supply chain setup. The components were tracked right from the day the shipments arrived from Hong Kong. Advance clearance ensured delivery of the components within 4 days of the ship's docking at the Indian port. Within the next 11 days, the finished products were dispatched. The average credit offered was 29 days, with the average inventory time being 5 days. Thus, adding the 13 days taken to ship the components, the total time elapsed from the time components were dispatched to the time the sale proceeds were received was just 62 days.

The Other Side of the Story

However, there was a darker side to Baron's success story. Problems existed on all fronts - dealers, customers and most importantly for the group itself. The mind-boggling success came at its own cost as Baron had to bear the interest under the installment schemes and also had to settle for lower profit margins in the exchange schemes. After Baron entered the industry, the average price of a 20-inch set dropped from Rs 65000 in 1992 to Rs 10000 in 1999.

Similarly, the average price of 29-inch sets fell from Rs 65000-Rs 80000 in 1992 to Rs 27000 in 1999. This invariably meant an increasing dependence on volumes on part of the companies. A disgruntled competitor remarked, "The profit margin of all players has come down from 15-20% to 5-6%⁴." Baron itself was working on a net margin as low as 3-4%.

A common question in corporate circles was the one regarding Baron's profitability, the argument being that a company operating at such low margins was unlikely to sustain itself in the long run. Baron, however, claimed to be making healthy profits. When Akai was launched, Akai had lent money to Baron at low interest rates.

Having generated a handsome surplus on this money, Baron put in this very money for the Aiwa venture. Thus, it had no interest burden. Also, Aiwa offered Baron credit for much longer term than what Baron offered to its own dealers. Kabir said, "This is basically a thin margin business. It is volume-driven and not value-driven business, and it's the same worldwide."

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4] In hindsight, the companies did not seem to lose much as the new price/promotion schemes expanded the market itself, resulting in each company selling either the same number of sets or more.