Some concepts have such intuitive appeal that their validity is often taken for granted. One such idea is that of the ‘first mover advantage’. We often rush to back any early movers just basis probably optimistic outcomes.
But while it sounds perfectly agreeable that the first mover gets a competitive edge in a new industry or product; it is the same first mover, who has to push the hardest, take the biggest risk and face the most challenges, in a resource-crunched environment.
Investing in such a theme typically follows a pattern - first comes the initial hype, then comes a trough of disappointment or pain, and finally, if successful, the company moves to making money for itself, its investors, and even its peers as it becomes an industry-trend.
One such interesting shift is taking place in ‘electrical’ companies becoming ‘electronic’ companies. The first-mover Havells has faced its own challenges for the last 5 years, but has also set in motion an industry-wide trend.
So while Havells and its competitors make money, how do we roll in the dough too?
Making Switches Cool
Back in the early 2000s, Havells had launched a campaign called ‘Shock Laga Kya’. This was probably the first time that products like RCCBs and MCBs got any attention at all - a big spotlight from being in a hidden corner of your house, only to be touched when it trips.
Most homes and offices even back then had these circuit breakers, which prevent short circuit, but these products were never advertised. This campaign was a pioneer in adding ‘brand’ to the decision making criteria for electricals.
What followed was not just meteoric sales for Havells in its electricals business (cables and switchgears); but also for the industry, as it triggered ad spending by peers, resulting in the entire market becoming more organised, commanding better pricing and seeing better financials.
From Electricals to Electronics
With its brand being established in the consumers’ minds, Havells took the game one step further by:
First getting into basic stuff like lights and fans,
Then launching basic domestic electrical appliances like pumps, water heaters, kitchen equipment and grooming tools,
And then into more complex electronics like washing machines, refrigerators, ACs and televisions
After a rocky road filled with teething issues, challenging acquisitions, experiments with branding and severely dipped profitability, Havells has finally proven that a company which was behind the walls, can successfully make it inside homes.
The numero uno advantage of this move is in just the sheer expansion of addressable market for Havells. The market for electricals stands at Rs. 1.25 lakh crore, and that of electronics, which has now opened up stands at Rs. 1 lakh crore, nearly doubling the arena for Havells.
A Turnaround Journey of 5 Years
Central to its success has been the acquisition of Lloyds in FY18, which it turned around by:
Launching new products - from Lloyds earlier being only in ACs to now being full-stack
Manufacturing in-house - by setting up plants across India
Aggressively ramping up distribution - including making products available in large chains like Croma and Reliance
Investing in the brand - and transitioning it from being mass-market and Tier-II/III focused to it being premium and present across the board
Investments and setbacks in Lloyd have cost Havells immensely in profitability over the last few years. Still, Lloyd’s profitability is a drag on the company as it contributes to 20% of revenue, but makes up just 8% of profitability.
What about Havells' Competitors?
With things finally settling at Lloyd, Havells has once again kickstarted a new wave in the industry, just like it did with cables and switches back in the 2000-10s. Only this time, the opportunity benefits from being a function of market expansion, and not just formalisation.
Havells’ peers however are in different stages of maturity in their journey towards electronics:
KEI hasn’t begun its expansion, and is focused on cables and EPC. It has been speaking about a foray into FMEG being 2-4 years away
Polycab and RR Kabel are still in nascency in their journey, with FMEG contributing to just 5-10% of total revenue. They are also very early in their product roadmap which both of them having launched pretty basic products like lights, fans, water heaters, irons and coolers
So, while Havells has seen its experiment go towards failure, bounce back, and now inch towards true success, the others are yet to live through the lifecycle.
Where to Invest?
Despite everything said so far, the base business of cables and switchgears itself has enough drivers by itself, with the market expected to grow at a 10% CAGR over the next 5 years - driven by higher electrification, rise in share of organised players, higher formal real estate, and increasing brand-driven decisions.
However, we prefer the consumer electronics play, given the host of advantages the value migration brings on the table:
Doubling of the addressable market
Diversification of revenue
Higher growth because of underpenetration
Potential of tapping into the trends of smart appliances, premiumisation and digital sales
Higher pricing power compared to cables and switchgear
Better potential on profitability and return ratios
Higher valuation potential by virtue of being consumer facing
However, any company venturing on this path, will also naturally have to go through some margin dilution on account of heavy investments in branding, product development, and marketing.
Given the fact that Havells is at the cusp of coming out of this trough, while the others are just about entering the tough part, Havells seems to be much better placed, if one is playing the consumer electronics theme.
The first-mover may have its set of challenges to overcome, but also definitely seems to be the first to reap the benefits, in this case!
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