Next, Vijay Sales and other retailers go slow on Samsung after margin cut


April 24, 2012

Writankar Mukherjee and Sarah Jacob, The Economic Times

Kolkata/Bangalore, April 24, 2012

More than 750 electronics outlets have either stopped selling Samsung products or cut back on fresh orders after the Korean brand slashed dealer margins on its televisions and home appliances early this year.

Samsung has initiated talks with several retail chains to resolve the issue, but says the development will not impact its sales.

Videocon-owned Next Retail, the country’s largest electronic retail chain, and large regional chains such as Vijay Sales, Kohinoor, Girias, Adishwar and Great Eastern all say Samsung’s new terms are unacceptable in an industry that is struggling with high operating costs and wafer-thin margins.

These chains, which sell more than 500-crore worth of Samsung products a year, warn that Samsung’s move may benefit its rivals, particularly LG.

"There is a strong possibility of rival brands increasing their share due to the scenario," said KS Raman, director at Next Retail, which has reduced its order book with Samsung. But Samsung said its overall business plans are in place and that besides a couple of channel partners, all key dealers continue to maintain healthy stocks.

"Given the fact that our business is growing very strongly, we need to keep evolving and strengthening our channel policies so that channel partners sustain their healthy growth," Samsung India VP (Home Appliances) Mahesh Krishnan said. "We are confident that these couple of channel partners will soon be getting back on the growth track with Samsung," he added.

A team from the firm’s South Korean headquarters visited India during March-April to draw feedback from its key dealers.

Samsung cut dealer margins by 3-8% early this year after a tough 2011 when soaring raw material prices and depreciating rupee drove up input and import costs, and sales took a hit. Retailers say they work on a net margin of 5-7% and face high operating costs from rentals, promotional expenses and manpower payouts. Samsung’s margin cut has significantly dented their profitability.

"Smaller dealers can survive but big ones with high overheads are already bleeding and will bleed more due to Samsung," said BA Kodandarama Setty, CMD of Vivek’s Retail, a Chennai-based electronic chain with more than 50 outlets.

"We are evaluating the scenario, even though we have not reduced Samsung business till now," he said.

Adishwar India, which operates a chain of 50 stores across Karnataka and Andhra Pradesh, and Vijay Sales, which operates 43 stores across Maharashtra, Gujarat and New Delhi, have stopped fresh orders from Samsung since February.

Samsung accounted for 120 crore of Vijay Sales’ business of around 1,500 crore last fiscal.

Vishal Mewani, director of Kohinoor Televideo, a 12-store chain in Mumbai, said that although it is not possible to avoid a brand like Samsung, the retailer has stopped pushing the brand. This may help rival brands such as market leader LG. The two Korean firms together control almost 50% of the 38,000-crore Indian consumer electronics market.

LG India, which lost out to Samsung in overall revenue for two consecutive years, tempered its margin cuts to 1-2% to take advantage of the situation, retailers say.

"LG is also undertaking changes in the market system and talking the same language, but the margin cut is not hurting us and its much more gradual," Mewani said.

Nitesh Giria, director of Girias, which runs 27 durable stores in Karnataka and Tamil Nadu, said: "As most product features are similar across brands, it is not hard to draw customers to other brands if they are displayed well in a large store."

Giria said his chain is in talks with Samsung and although a deal is yet to be signed.

Girias stopped stocking Samsung products since January. It raked in 90 crore worth of business from Samsung in 2011, on a turnover of 550 crore this fiscal.

Under its new channel policy, Samsung reduced the direct dealer margin and added norms such as uploading details and serial numbers of each Samsung product sold, retailers said. The dealer also has to assure greater in-store display for the brand. If these norms are met, margins can be increased by 1% for each parameter.

Samsung India’s Krishnan says the objective is to ensure healthy sales momentum and profitable growth for the channel and the company.

"The policies are now more oriented towards driving sales to end customers and growing the business in a healthy manner through joint business planning with our channel partners," he said.

The idea is to increase average sales price, which will benefit dealers. "If we can increase the average selling price of the company’s products, the margin cuts will be some what compensated," said Pulkit Baid, director of Great Eastern, a 13-store chain based in Kolkata.

This is probably the first time in India that retailers have joined hands to put pressure on a consumer goods company for better margins. Earlier, there were some individual cases, like Future Group boycotting some products. The trend shows the growing importance of modern trade.

Analysts tracking the sector say there is a possibility that Samsung may lose some market share. "But it is not clear whether consumers would trade up to higher-priced brands or trade down," Devangshu Dutta, CEO of retail consultancy Third Eyesight, said.