With big brother Titan out, Timex watches is now on a lone path but not lost altogether. For Titan, its unburdening of expensive loans and easy expansion in the high-volume, low-price segment. A report
Timex is now on its own with Titan and Samrat Holding, an associate company of the Tata group, selling their stake of 30 per cent in Timex Watches to its US parent. In 1996-97, Titan had sold 4.5 million shares, half of its stake in Timex, to Samrat Holding for Rs 10.21 crore (amounting to Rs 22.69 a share, much below the ruling market price). The sale was probably a desperate move to generate easy liquidity for a cash-strapped Titan, which explains the price at which the transfer was made. The objective of the tie-up was to provide Timex with a readymade distribution network in India and to extend Titans range to the lower end of below Rs 1000, since it was offering watches only in the premium, high-priced segment. The alliance fulfilled the purpose of giving Timex an entry into the local market and suitably complemented Titans product line.
Timex
Timex, USA has an international reputation of being a watch maker for the mass market. The domestic counterpart is HMT which offers a variety of mechanical watches to the rural market. Initially, Timex Watches volume sales soared at a compounded annual growth rate (CAGR) of 50 per cent, but subsequently in 1996-97, it went down by 16 per cent. While the organised watch market size declined at a compounded rate of 3 per cent, Timexs market share grew from 4 per cent in 1992-93 to 24 per cent in 1995-96. The Titan name got them across only to the urban segment. Metros and the upmarket Titan showrooms contributed to a major part of its sales. It thus, grew fast to grab the small section in this segment comprising the younger crowd and the price conscious buyers reaching a saturation phase. So, expansion of the market was the only way to spur growth.
The unorganised market largely constitutes Indian Made Foreign Quartz (IMFQ) watches wherein, movements are illegally brought in and sold in local dials. It has grown three times from 6 million pieces in 1991-92 to a whopping 18 million pieces in 1995-96. Being cheaper and equally effective in fulfilling the purpose, this market is inaccessible to the organised players. The vast rural market has also been entrenched by HMT. That implies a huge market still untapped by Timex which is offering an upgraded quality product affordable by the same customer segment. But, with the tie-up it attacked the wrong target audience the upwardly mobile urban residents, through Titans outlets, giving it a premium look contrary to its international image and price range. This, to some extent explains the sharp drop in sales in 1996-97.
To expand its reach, Timex had to extend its retail network. So, apart from the 90 exclusive Titan-Timex showrooms, it sold in multi-brand outlets as well including TimeZones which were started last year. And now, with exclusive Timex showrooms also on the cards, the retail network will get a further boost.
The tie-up fulfilled the initial objective, continuing with it no longer served a fruitful purpose to Timex. The break-up, however, does not imply that Timex watches will be withdrawn from the exclusive outlets, the arrangement will cont-inue with Timex paying expenses to Titan. Moreover, the servicing of Timex watches by Titans engineers reportedly, has not been upto the mark, nega-tively affecting its market. This problem can now be taken care of suitably.
The company has shown better performance in the first half this year. Sales have grown 5 per cent over the previous corresponding period with a net profit of Rs 0.3 crore against a Rs 3.96 crore loss in September 1996. The parents involvement implies better managerial effectiveness and financial support.
Titan
For Titan, the focus was on the upper end of the market hence it was launching variants in the premium segment. This resulted in the gradual phase out of the lower variants leaving it with high-priced brands which had a limited market. Although, it did have lower end sub-brands like Exacta and Spectra which were doing quite well, the emphasis was always on the over Rs 1000 category. Timex was filling in this gap of cheaper watches. The growth is lower in the upper end of the market and normally stagnates beyond a particular level. In the lower end, growth is higher at 15-20 per cent, the market size being larger.
Consequently, Titans margins have been down, it is suffering from severe liquidity crunch and hence high cost debt. Mounting inventories and Titans recent expansion from 3.73 million pieces to 4.18 million pieces per annum have resulted in a huge interest burden which affected its bottomline in 1996-97. The impact would have been worse if the extraordinary income from the sale of 50 per cent of its holding in Timex to Samrat had not taken place. In fact, the profit before tax would have been 36 per cent lower than that of the previous year at Rs 17.58 crore.
Internationally, Titan has positioned itself as a mid-priced quality watch maker and its main market is the Middle East. These exports being the main contributors to growth, have slowed down over last one year from 99 per cent in 1995-96 to 48 per cent in 1996-97. To add to its woes, the Basle International Fair Organisers have barred Titan from exhibiting its watches and jewellery in its mid-1998 Expo. Titans price competitiveness vis-a-vis the Swiss manufacturers will affect the latters sales. The reason cited however, is lack of space and the Indian restrictions on free imports. This will foil Titans plans on expanding its presence in the European market. The fall in gold prices have made matters worse as it has bought gold at higher prices and has had to pass on the benefit to the consumers. This further explains the dwindling net foreign exchange (NFE).
With the scenario being so bleak, Titan was desperately in need of a growth driver, so it launched the Sonata range of economy watches. This move has pitched it directly against Timex, making the alliance redundant. Besides, a sale of the remaining stake this year will take care of Titans cash crunch. The upside thus, outweighs the downside and Titan has practically very little to lose from the severance of this alliance.
In the first half this year, Titan resorted to discounts to downsize the inventory and sales seem to have picked up in volumes but the value increase has not been significant. In addition, it has increased its reach through new multi-brand outlets and its recently launched TimeZone outlets. In the jewellery range, since 18 carat concept did not gel well with the market due to its lack of resale value, it responded fast by launching the 22 carat range. Sales picked up, largely through 40 Tanishq outlets across the country. Surprisingly, Titan has recently decided to route the distribution of this product through a subsidiary in which it probably has only a 30 per cent stake, the balance being with other Tata group companies. Such an arrangement could affect its returns. Once the shareholding pattern in this subsidiary becomes clearer, observations on the prospects of the company can be further sharpened.
Outlook
In the short term, Titan seems to have averted a financial crisis. In the long run, the expansion of its product line and distribution network will provide it with the much needed growth. For Timex, the competition is hot since an ex-ally has now become a competitor. Here, it enjoys support from the market perception about Titan watches being elitist and Timex being more affordable. This situation will trigger off aggressive selling and to some extent brake the fast expanding illegal watch market. Thus, the change in the corporate structure is not adversely affecting either of the two parties. It is just a precursor to a more active and growth oriented strategy by both companies.
