Demand for consumer durables such as televisions, refrigerators, washing machines, kitchen appliances, digital cameras et are expected to a see a slowdown in 2013 if energy prices are increased, according to Fitch Ratings Lanka Limited.
Coincidentally the anticipated electricity tariff hike will come into effect from April 20, slapping hardest the households (nearly 50 percent)—the segment which generate the most demand for consumer durables.
Although Fitch did not quantify the impact on revenues and profitability of the sector, Fitch’s Vice President Hasira De Silva said if the economic downturn is prolonged, the impact could be felt by market players, in terms of lower profits, higher working capital requirements, and higher delinquencies in in-house hire-purchase debtors (HP – credit sales).
“But I don’t see a serious threat to profits of larger players in the short-term as they can still generate sales through HP which is profitable. But the players may not be able to generate the sales as they did during the last two years immediately following the duty reduction in mid 2010,” he said.
Further it is impossible for the market players to maintain profitable sales through HP if the economy fails to show any signs of recovery over a prolonged period.
“This can be done for a year or so but not for much longer. But if the economy continues to falter, people will start defaulting and this could add pressure on working capital,” De Silva added.
The margins can further be squeezed if the slow moving stocks have to be discounted to increase sales.
When asked whether the saturation in the Sri Lankan consumer durables market could also be a possible reason for the slowdown in demand, he confided that still there is enough scope for penetration, in line with per capita income growth in Sri Lanka over the long-term.
“Although there could be a TV in a majority of Sri Lankan households, there are still households without a refrigerator which is also a necessity”, he illustrated.
Medium term prospects for the consumer durables sector is expected to be better than any other sector with the rapid pace in the rural electrification, peoples’ desire to consume latest technological items (e.g. from black & white TV to color TV to LCD & LED TVs etc.) and improved quality of living.
Meanwhile Asoka Pieris, the Group Chief Executive Officer of Singer Sri Lanka PLC-market leader in the consumer durable industry said in the 2012 annual report that the current year was challenging.
Highly crowded consumer durables market in Sri Lanka is dominated by three big players, Singer, Abans and Softlogic. In recent times the industry saw players such as Damro and Sinhagiri entering the market leveraging their retail network, considered a critical success factor for the industry.