2. Regal Electrogas: Price Leader or Price Follower M-315 p. 2
cooler sales to a grinding halt. All unsold desert coolers stayed put in the retail showrooms.”
May and June were, therefore, the “make-or-break” months for desert cooler sales.
The sales cycle for hot water geysers and gas cooking stoves were not nearly as seasonal. Gas
cooking stoves were entirely unaffected by weather variations throughout the year. Geyser sales
did peak in winter, but continued to sell round the year. Their sales were mainly tied to the
construction of houses because the units were installed at the time the house was built.
CONSUMER PROFILE
Desert coolers generally were purchased by the middle class and the public sector. Consumers in
the lower middle class could often not afford to buy air conditioners (Rs 9,000 to Rs 13,000), and
so instead they settled for desert coolers (Rs 1,200 to Rs 2,200). The upper middle class usually
supplemented an air conditioner with one or two desert coolers. The public sector made bulk
purchases for installation in government offices. Geyser and stoves had a much wider customer
base.
MARKET HISTORY OF DESERT COOLERS
In the early and mid-1970s, competitors were few, production costs were low, and profit margins
were high. Competition commenced in the late 1970s as a few new manufacturers entered the
field. Through the 1980s, competition became increasingly intense as new entrants proliferated,
in spite of rising production and labor costs. By 1987, the market was flooded with a variety of
brand names and products. Ultimately, the saturated market, along with escalating production
costs, significantly reduced contribution margins. Ali estimated that production costs had tripled
since 1980, whereas retail prices had fallen by 50 percent.
COMPETITION
Competition was based primarily on price, established image, and product appearance.
According to Ali, 60 percent of the consumers could not judge quality and, hence, purchased
either established brand names or the cheapest alternative with an attractive outer appearance.
End-users were typically willing spend an additional Rs 100 to Rs 200 for impressive-looking
panels and switches, regardless of the quality and efficiency of the internal electric motor and the
cooling system.
The industry leader in the Punjab province was Ambassador, one of the pioneers in the field.
Ambassador had an established brand name and sold its products at a premium. Ambassador
desert coolers alone had a sales volume of approximately 4,000 units a year, which sold for Rs
2,200 each. Ali was of the opinion that customers who came to a retail shop with the purpose of
purchasing an Ambassador product would not take another brand. They would haggle about the
price with the retailer, but would not consider other brands, even though some manufacturers
such as Regal were using better material. Everybody was familiar with the name Ambassador in
desert coolers, geysers, and stoves. Regal, as well as most other brand names were not as well
known.
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3. Regal Electrogas: Price Leader or Price Follower M-315 p. 3
Delite, Pascra, and Cannon were the other manufacturers with significant desert cooler sales
volumes. All of them were early entrants in the field. However, Pascra had shifted its
concentration almost exclusively to the public sector. With several lucrative government
contracts and a steady base of business, some critics believed that the company had ceased to
concern itself with the quality of its product. Delite also had begun focusing on the public
sector, and had received a few important contracts. Cannon, on the other hand, concentrated on
the private consumer market, and ran a close second to Ambassador in price and volume.
Regal was situated in the middle of the segment’s price and volume ranges. Its desert cooler
units retailed for Rs 1,700. During the last several years, sales amounted to 1,000 desert coolers
a year (see Exhibit 1). Ali aimed to increase the volume to 1,500 units a year over the next two
to three years. General was another desert cooler brand in the same price range as Regal.
However, General’s sales recently had been dwindling as a result of questionable competitive
activity. Several low-quality manufacturers had introduced products using names such as
Generel and Genural in an effort to confuse consumers and accelerate their own sales by
capitalizing on the reputation of General’s established brand name. At the lower end of the price
spectrum, reliable brands sold for Rs 1,400. However, low-quality brands sold for as little as Rs
1,100 to 1,200, although they typically appeared in the market for a short while and then
vanished as consumers became wary. These one-shot dealers usually manufactured products in
their own backyards, were not registered, and paid no taxes.
PRICING POLICIES
The lead to reduce prices usually came from the one-shot dealers and the manufacturers at the
low-end of the price spectrum. Most companies followed suit in an effort to sustain their sales
volumes. Only Ambassador stood relatively firm on its prices. Ambassador reluctantly made
reductions only at the last possible moment, and continuously tried to move the market toward
higher prices. In 1983, Ambassador came out with a new style cooking range that swept the
market even though it retailed for Rs 4,200. Ambassador had fixed its wholesale price at Rs
3,900 which gave the company an estimated profit margin of Rs 1,200. Eight months after this
cooking range was launched, a competitor introduced a similar product, which had a retail price
of Rs 3,000. Despite its inferior quality, this new model captured a significant market share.
Even though sales of Ambassador cooking ranges were reduced considerably as a result, the
company remained firm on its price and suffered losses for a year. Finally, Ambassador cooking
range sales did pick up again, as the quality difference became known through customer use.
Ali had followed a similar strategy with a new kind of gas stove that Regal had introduced for Rs
350 in 1985. Sales started off strong, but when a competitor produced an inferior copy, priced at
Rs 300, sales of Regal's stove tapered off drastically. However, because the stove was not one of
the mainstays of his business, Ali decided not to lower his price. Eight months later, sales picked
up again as quality differences became apparent to the consumer. Despite this success, Ali
maintained that he would think twice before following a similar strategy with any of his primary,
cash-generating products such as desert coolers or geysers.
The per-unit variable cost of the desert coolers to Regal was Rs 1,200. They were sold to
retailers for Rs 1,400 on immediate cash payment, and for Rs 1,500 on a full credit basis. Half
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4. Regal Electrogas: Price Leader or Price Follower M-315 p. 4
cash and half credit terms made Ali price his units at Rs 1,450. The geysers provided him
margins of Rs 200 to 300 (see Exhibit 2).
DISTRIBUTION POLICIES
Regal followed the general industry practice of selling products through three or four retailers in
every major market center. Only Delite had its own retail outlet, in addition to selling through
other retailers. The price of the Delite units was the same at both company stores and other retail
outlets. However, another competitor clandestinely had begun selling directly to end-users at
lower prices than those available in the retail showrooms. When retailers found out, they were
disgruntled, although they continued carrying this manufacturer’s products.
The Punjab province accounted for 85 percent of desert cooler sales in Pakistan. Yet, some
manufacturers had moved into less saturated markets outside the Punjab. In 1986, Regal sold
some of its products under the brand name of National in one such market. In 1987, it gave its
Punjab retailers both Regal and National brand desert coolers at the same price. This resulted in
higher sales from April to May in 1987, compared to the same period in the previous year. Ali
found that retailers wanted to provide choice to the consumer, and variety gave the retailers more
flexibility in their sales approach. Since retailers generally did not have links with more than
three to four manufacturers, they appreciated the variety that Regal offered to them. Most of
Regal's retailers operated on a credit basis, and Ali was paid for each consignment at the time the
next consignment was delivered. Traditionally, if a manufacturer exited from the market, the
retailer did not pay the manufacturer for the last consignment it received, demonstrating the level
of power that retailers exercised in the channel.
CURRENT SITUATION
The 1987 government budget, announced on June 5, contained an unprecedented number of new
taxes, which caused prices of most goods to escalate in the market. Ambassador had taken the
opportunity to raise its prices to retailers by Rs 100. Other manufacturers followed suit, as they
felt that the peak season, as well as consumers’ expectations of general price increases,
warranted the upward trend. Following suit, Regal had increased the prices of its desert coolers
and geysers to retailers by Rs 65, and the retail prices of its products had gone up by Rs 100 in
the market. Sales did not slacken. However, just three weeks later, the Prime Minister rescinded
the taxes in a late-night speech. Ali had to negotiate terms with his retailers in the morning
immediately following this announcement. This was the last major consignment for the 1987
season for desert coolers. Hence, the pricing decision on desert coolers was critical. The geyser
and gas stove pricing decisions could wait. Thinking of the factors involved, Ali considered
market share as his main long-term objective and cash flow as the primary resource constraint.
The Prime Minister's announcement put Ali in a quandary. As he switched off his bedroom light
following that evening’s speech, Ali ruminated on the pros and cons of immediately reducing his
price. He also attempted to gauge the response of other manufacturers, and whether Ambassador
would be reluctant to relinquish the opportunity for maintaining higher prices in the market.
Additionally, Ali wondered whether Regal's overall marketing plan needed revamping to carve
out a more profitable niche in a market that was rapidly becoming saturated.
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5. Regal Electrogas: Price Leader or Price Follower M-315 p. 5
Exhibit I
1986 Retail Price and Volume Figures
For Desert Coolers
Company Price Sales Volume
(Rupees) (Units)
AMBASSADOR 2,200 4,000
CANNON 2,000 2,500
PASCRA 1,800 2,500
GENERAL 1,700 1,200
REGAL 1,700 1,000
BRITO 1,600 700
ASIA 1,500 1,000
DELITE 1,500 2,000
ENGLISH 1,500 500
ROYAL 1,400 300
GENURAL 1,300 300
OTHERS 4,000
Source: Information provided by Regal Electrogas.
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6. Regal Electrogas: Price Leader or Price Follower M-315 p. 6
Exhibit 2
Regal Cost and Margin Figures
(in Rupees)
Product Regal Cost Wholesale Price Margin
DESERT COOLERS 1,200 1,400 - 1,500 200 - 300
GEYSERS 1,300 1,550 - 1,650 250 - 350
STOVES 200 230 - 250 30 - 50
Source: Information provided by Regal Electrogas.
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