Repairing The Cracks

In the last financial year, profits for Rs 83-crore Timex Watches Ltd crashed by nearly 80 per cent. After a dream start, when the company did a zero-two million watches in just four years, for the first time, the sales graph is also southward-bound.

The first signs of trouble were evident last year. Retailers started complaining of mounting stocks of Timex watches. At the Noida factory of the company too, inventory grew at an alarming rate. Stocks worth Rs 40 crore were lying at the factory godowns at the beginning of this (calendar) year. In response, in December 1996, Timex slashed production drastically.

Why has the $600 million US watchmaker hit the roadblocks? The problem, ironically, lies in its greatest strength when it started out: one of the best retail networks in the country courtesy its tie-up with Titan Industries.

The network of 4,500 dealers and around 60 exclusive showrooms in India, certainly gave Timex the reach it needed. But as its sales now show, relying only on reach has its limitations. The nature of a distribution channel can count just as much. And that is precisely where the problem lies. As Timex is now discovering, its marketing strategy is not in sync with its business model.

Timex is a cost warrior that earned its spurs in the low-price, high volume segments of the watch market worldwide. But in India, the distribution channel available to the company barely scrapes the mass market.

The problem lies in Timex' arrangement with its joint venture partner. This partnership, in which bothhave a 28.5 per cent stake, has forced the company to operate within a narrow price band. While Timex sells primarily below the Rs 1,000 price level, most of the Titan sales fall in the Rs 1,500-3,000 bracket.

While the price cap prevents Timex from seeking better realisations through costlier watches, the retail network of its local partner does not give the volumes. Titan's retail channel is not geared to tap the lower end of the market effectively for Timex. The network is primarily large dealer/retailer oriented.

Sources in the industry affirm that some modifications in the partnership agreement is on cards, and that talks with Titan have reached a "sensitive" stage.

For the moment, Timex has devised a few short term strategies. "We have to build volumes, but at the same time cut costs to increase the profit contribution per watch," says R J Masilamani, managing director, Timex Watches Ltd. (See box: "Every bit counts" on how Timex is attempting to get its profitability targets within sight once again.)

But apart from pinching on costs, eventually, Timex will have to address its key problem: How to crack open the mass market?

When the Timex-Titan joint venture came about in 1990, the two partners had envisaged distinct roles for themselves. Timex trained its sights on the thriving grey market, then estimated at about 6 million pieces. Timex, then an all-plastic watch, would chiefly operate in the sub-one thousand rupees segment, and directly compete with the grey market.

Titan, on the other hand, was positioned as a more premium watch selling upwards of Rs 1,000. Titan watches, it was calculated, would appeal appeal more to the formal office goer, or it would be watch for special occasions. Timex was a tough, sporty watch for the adventurous.

A lot of planning and care went into building distinct identities for the two brands. It was important, to avoid confusion at the retail outlets, which were common for the two companies.

To be sure, Titan's retail channel played a crucial role in estabishing Timex as a credible brand in the initial years. Especially so, since an all-plastic watch has a very low acceptability in India. Admits Masilamani, "Despite being a cheap watch, the image of Timex is premium."

Timex exploited its position of an international brand, which was retailed through posh showrooms of the largest seller of premium watches in the country. Titan provided instant market access to the new brand. "The brand gained acceptability in the market especially among the younger lot. Even among the older lot it attracted 'the young at heart' or the highly price conscious," he adds.

Timex sales grew steadily from 0.4 million watches in the first year, to 2 million in 1996. It notched a 15 per cent share of the organised market, which translated into a comfortable 25 per cent share of the urban market.

But as it turned out, at these volume levels, Timex was hitting the upper limit in terms of what it could push through the existing retail channel. Bcause the next year, when it tried to do more, it could manage only 1.6 million pieces.

An industry analyst comments: "It was a rather simplistic way to carve out market segments. Titan's retail network was geared to attract a certain customer segment, the one buying metal watches in the price range of Rs 1,500-3,000. So then, how could the same retail outlet attract a customer wanting a watch for Rs 500?" In fact, nearly 75 per cent of Timex' sales were for watches priced less than Rs 500.

The growth rate has flattened out, not just for Timex but for Titan as well. It has been hovering around the 3.5 million pieces mark for last couple of years. According to Timex, the segment that is really booming is the Indian-made-foreign-quartz (IMFQ) segment or the grey market.

Estimated at 18 million pieces a year, this segment is growing at the expense of the organised quartz watch market. In the last five years, oragnised quartz market in which Titan and Timex operate has shrunk by nearly 17 per cent. The IMFQ category is driven solely by price, with most of the watches falling in the Rs 200-400 price band.

A market that should be an ideal hunting ground for a mass marketer like Timex, if only it had the right channel to tap this mass-market. Says a Titan dealer, "Titan outlets do not cater to the buyers of IMFQ watches. Not just that, we have a tough time servicing Timex watches also."

A marketing group within Titan handles sales and support activities for both Titan and Timex. Dealers complain that the engineers from Titan do not have enough training on Timex' movements, and are unable to repair Timex watches. So much so that Timex was beginning to to be

percieved as a watch which could not be repaired. Masilamani assures that the problem has been taken care of and the the engineers are now being trained on

Timex' movements.

But such conflicts will come into sharper focus now that the two brands are getting wedged closer in the market segment they operate. Says a Timex insider, "When the joint venture was forged, the assumption was that Titan, over the years would move up the price ladder while Timex will saddle the lower price segments."

Today, Titan is finding it difficult to garner volumes for its higher priced watches. It launched Insignia, priced at Rs 4,000 and above but it has had limited impact in the market. Most of its sales still come from the models in the Rs 1,500-3,000 price band.

The industry was surprised with Titan's launch of PSI2000, almost a Timex lookalike. Timex insists that the price differential is large enough to ensure that PSI2000, which is priced at Rs 2,000 plus, does not eat into Timex' markets.(See box:Avoiding the split dial)

Timex insiders also allege that Titan's marketing group, which also handles Timex' marketing, was repsonsible for flooding the market with Timex watches last year. At the end of the last financial year, receivables from the trade was a whopping Rs 7 crore. Their emphasis has always been on sell-ins rather than sell-outs, they point out.

What are the options before Timex then? It is clear that should aiming at the IMFQ segment because it needs the volumes. On a watch that it sells to the trade for Rs 450, Timex manages a non-existent margin of 0.7 per cent per watch. The IMFQ segment accounts for nearly 18 million pieces annually.

But how will Timex compete with players who smuggle watch movements from East Asia, and then put them into in locally made cases and dials? "Cost cutting is our forte," says Masilamani. Our per hour assembly costs are half of the Timex plant in Phillipines," he adds.

Recently, Timex introduced a "Basic" range of watches priced at Rs 345. "There are plans to add more styles to this range which has done very well," claims Masilamani. The company has also made its first foray into the 3 million rural market with a quartz watch with scratch resistant crystal and battery that lasts for 7 years.

But this is HMT's forte, where it sells most of its 3.5 lakh mechanical watches every year. And to break into this market, Timex will have to reach out to small retailers in smaller towns. Unless that happens, Timex will be unable to leverage its cost competencies.