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Akai: Dissecting A Discount Brand

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If those prices havent made you smile, you must be a competitor to Kabir J Mulchandani, the 25-year-old Stanford University drop-out who has been striking terror in the electronics goods industry. Mulchandani is the managing director of Baron International, which markets Akai TVs in India, and he has pushed up the market share of his TVs from under 3 per cent to over 17 per cent in 24 months. His offers have progressed from the merely eyebrow-raising to the truly jaw-dropping.

Between July 95 and February 97, the 21-inch Akai model, CT 2167, sold for anything from Rs 24,990 to Rs 17,500. At the lowest price, you just got the TV and nothing else. At Rs 24,990, a 14-inch colour TV came free (December 96). In between were many other prices Rs 19,990 (a free stereo, July-August 95), Rs 20,990 (a free gold coin, December 95), Rs 22,490 (a pager free, January 96-March 96). Some of these freebies came under the exchange offer where the customer gave in his old television set.

The model CT 2167 was withdrawn and a new one, the 21W9, introduced in March 1997 at an initial price of Rs 22,990. Soon, prices tumbled. At its lowest, the model sold for Rs 9,990. Akais competitors say disparagingly: This is the true price of that TV. Akai has been confusing consumers about the price and taking advantage of that. Mulchandanis reaction is almost philosophical: Price is a perception, the marketed value of the product. Then he accuses his competitors of overpricing their products. The same 29-inch TV that is now selling at Rs 35,000 to Rs 40,000 was being sold around Rs 60,000, he says, Do you think they are selling at a loss now?

When Mulchandani says price is perception, that isnt just a smart retort. Thats the heart of a strategy. There are other companies today that offer prices similar to Akais (Crown, Texla, Bestavision, Uptron), but their prices dont raise the kind of excitement that Akai does. The secret to Akais success lies in the way it positioned its product when it was introduced priced up there along with the Panasonics and Sonys. The Japanese brand name also helped maintain perceptions.

Mulchandanis competitors, however, offer other reasons for his success. One story originating from a Japanese competitor goes like this: There was a massive exchange scheme in China. Baron picked up those second-hand sets and is marketing them in India after replacing the picture tube. Another, slightly less damaging one, goes like this: Colour TVs sell for as little as $160 (Rs 6,400) in China. Baron is importing these in completely knocked down (CKD) condition through multiple companies and assembling them in India. (Import of colour TV CKDs below 29 inch is not allowed, hence the import through multiple companies.)

The third version is almost charitable by comparison: Akai has got out of the TV business. But it has a large inventory of components which it had committed itself to buying from its suppliers in Hong Kong and Taiwan. These, it supplies to Baron dirt cheap.

Mulchandani refutes the first two accusations. The only thing he admits is that he gets preferential prices because of the volumes he promises. Last year, the total 29-inch market was 6,000 units. This year, we alone have done over 60,000. How can you compare import prices for such disparate volumes, he asks.

He seems to like betting on volumes. He is said to have committed 20,000 cellphones to Tata Telecom before starting his cellphone-with-TV scheme. Similarly, he bought 30,000 Whirlpool refrigerators for the refrigerator-with-TV scheme. Its a question of having an appetite for risk, says Mulchandani. He also points out that Akai carves out 17.5 per cent of the market covering just 17 per cent of retail outlets while Videocon reaches out to 30 per cent of outlets for its 17.2 per cent market share. That helps cut costs.

Not everyone buys these arguments. In the first half of 1996, the Department of Revenue Intelligence (DRI) suspected Baron, along with Reebok and Nike, of importing components in CKD form. But the investigation hasnt made headway. DRI officials say they dont have the wherewithal to take such cases to their logical conclusion and no case has been registered against the company.

However, the Central Board of Customs and Excise (CBCE) has served a joint notice on Baron and its manufacturer J R Engineering (JRE), asking them to pay Rs 27.5 crore. According to the show-cause notice, JRE was only a captive manufacturer devised by Baron for tax evasion. JRE sold TV sets to Baron for Rs 6,500 and this was the price on which excise was levied. The excise department now holds that the transactions between Baron and JRE were not on a principal-to-principal basis but on a principal-to-agent basis. It alleges that Baron had arranged for JREs working capital requirements, transportation and freight, technical assistance and even indenting of materials. Mulchandani insists that the two are separate companies and that Baron was charging interest at the rate of 18 per cent on the working capital it provided to JRE. In any case, JRE has now been disbanded and now the issue is not transfer pricing, but the maximum retail price (MRP) on which excise is levied.

The excise should levy tax on the MRP of Rs 9,990 minus 30 per cent, the usual rebate, according to him. The experts disagree. They claim that the definition is clear enough. It defines MRP as the maximum price that the company realises from the customer anywhere in the country. Therefore, the authorities feel that the value of old TVs that the company gets should be included for assessment. Mulchandani wants it treated separately and since he sells it at Rs 1,500 to the dealer, excise should be levied on that. Though he admits that old CTVs sell for close to Rs 4,000, Baron does not get that money as it goes to dealers. The point, however, is that the 30 per cent rebate is given to take care of such things. As the remaining amount is dealer commission in disguise, it comes under the MRP fold. As of now, Baron has paid Rs 2 crore under protest.

But in this, Baron is not alone. BPL and Videocon have large sums marked up for contingent liabilities in their balance sheets. And the illustrious Sony too has been served Rs 47 crore bill by the tax authorities.

The question then is: what prevents others from following in Akai footsteps? Some have tried, without success, while others are worried about running regular discounts and risking their brand equity. Akai is estimated to have spent close to Rs 20 crore on advertising. Even its fiercest critics admit that its advertising has been sharp, using price comparisons effectively. Its offer timing has also been well thought out.

For instance, it introduced a hire-purchase scheme in March when liquidity is low. Similarly, to cash in on the marriage season, it came up with a TV-cum-fridge deal in November-December. Its Bajaj Sunny offer is meant to take it to small towns; the scheme is valid in Tamil Nadu minus Chennai. Sources in the industry point out that it will be tough for any one else to source components at such low rates. And they concede that it was largely because of Akai that manufacturers have begun transferring benefits to the consumer. Akai has pioneered the concept of a discount brand in India, says a market analyst.

But the discounting hasnt harmed Barons profitabililty. Between April 96 and June 97, the company notched up sales of Rs 494.7 crore and net profits of Rs 28.5 crore. This year, Mulchandani is confident of touching Rs 800 crore in turnover. His goal: to be the number one CTV marketer in the country by 2000.

Five years ago, things were much bleaker. That was when Mulchandani, studying industrial engineering, got an SOS from his father. The company which his father had helped set up, Bush, was going out of business and Mulchandani was told to get back and start something new or finance himself at Stanford.

Mulchandani came home. I knew I needed a brand. Since Bush had marketed Akai products for a while in the 80s, at least the door wasnt shut, he recalls. The brand was crucial to his strategy of pricing high and then offering discounts. A Japanese brand was ideal to establish whatever price-value perceptions he wanted. Once I could chhapo Akai, things would roll, he admits.

How Kabir Mulchandani took Akai to the top of the TV market

Today, Akai is happy enough with Mulchandani to increase its shareholding in Baron to 26 per cent from the current 10 per cent. Akai has also tied up with him to market its Sansui brand of TVs. Next on Mulchandanis agenda are Web TVs (with which you can hook on to the internet without a PC), large screen and wide screen TVs. Watch out for the price tags. - Vikas Kaul

First Published: Sat, January 03 1998. 00:00 IST