ROBAM Electric Appliances has become the king of gross profit in kitchen appliances, with range hoods being the most profitable

We have previously updated two in-depth research reports on ROBAM Electric Appliances and found that more and more friends are interested in it. In the third issue, we will start with the high-end positioning and brand premium of ROBAM Electric Appliances to tell you why ROBAM Electric Appliances maintains high profitability and does not need to worry about threats from big brands such as Midea!

The top ten household appliance industry gross profit margins from high to low

【Review of previous issues】

March 26th Range Hood & Real Estate Cycle: "Rom Electric Appliances, which focuses on high-end products, has been hit by the sluggish real estate market and the decline in e-commerce dividends. Will it make a comeback in 2019?"

April 4th Robam Electric & Blue-chip Stocks Strategy: "The blue-chip stocks that plunged in 2018 brought the index back to 3250! A researcher's perspective teaches you: How to trade blue-chip stocks? "

The source of the boss’s high profitability

1. Industry - Good competition landscape

The first reason can be explained from the industry dimension, that is, the good competitive landscape in the range hood industry enables ROBAM Electric to have higher profitability.

The two leading companies in the range hood industry are ROBAM and FOTILE. The two companies account for about 52% of the range hood market share, controlling half of the market.

In terms of concentration, the concentration of the kitchen appliance industry (range hood industry) is actually not very high. The CR3 is about 62%, which is lower than that of the air-conditioning and washing machine industries.

However, ROBAM and FOTILE in the kitchen appliance industry have a higher product premium than the leaders in the air-conditioning and washing machine industries ( Gree and Haier).

Gree, the leader in the air-conditioning industry, has a premium of only 12.35% compared to the industry average.

Haier, the leader in the washing machine industry, has a premium of only 10.37% compared to the industry average.

Although Siemens' product premium can reach 49.70%, its market share is relatively low and it is not considered an industry leader.

The leader in the range hood industry, ROBAM Electric Appliances, has a premium of 30.28% over the industry average; FOTILE also has a premium of 33.50% over the industry average.

What is the significance of observing the product premium of these leading brands?

First, think about how a brand gets its premium. I personally like to understand it from two dimensions: internal and external.

Internal (industry competition):

The industry is developing well - new players are constantly added to the market - manufacturers launch price wars to grab market share - the fittest survive and the leaders emerge - the leaders receive corresponding product premiums (lower)

External (consumer positioning):

Investigate the market and consumers - the company thinks about its own brand strategic positioning - position high-end brands to occupy consumers' minds - brands that win consumers' high-end minds get product premiums (higher)

Let me be a little more verbose here and take a look at the industry average price simulation under these two business ideas:

A. If the equilibrium price of an industry (manufacturing) is 3,000 yuan (gross profit is about 35%), the companies with competitive thinking within the industry will first seize market share through price wars, leading their peers to lower their product prices by 2,000 yuan, and then eliminate lagging competitors in a bad profit environment. After winning market share, they will raise prices to 3,500 yuan and obtain a small premium. Other strong companies will return prices to 3,000 yuan, while weaker companies can only stay at around 2,000 yuan and be at the mercy of others.

B. Companies with an external (consumer-oriented) business mindset will not engage in internal fighting through price wars. If the equilibrium price of an industry (manufacturing) is 3,000 yuan (gross profit is about 35%), companies with a consumer mindset will first find their own brand positioning. Companies with a high-end positioning will use a series of brand building projects to make their brand image high-end, and increase their product prices accordingly, to 4,500 yuan.

Of course, this process requires the company to have extremely strong operational capabilities and brand power, otherwise it is likely to lose market share at a premium (such as Siemens in the washing machine industry).

Some other companies in the industry may feel that they have passively gained price advantages and choose to continue to maintain their original prices. Other companies with weaker strength or wrong strategies continue to engage in price wars and reduce their product prices to 2,000 yuan.

The above is a simulation of two scenarios. It can be found that even if the leader in scenario A obtained a premium, it first destroyed the original profit structure of the industry and then obtained a small premium (2000+1500=3500). The profitability did not increase much.

The leader in scenario B, under the original profit structure of the industry, directly obtains brand premium (3000+1500=4500) through brand building and positioning and a series of efforts to enhance consumer utility, thereby significantly improving profitability.

The corresponding real-life case is the air conditioning, washing machine and range hood industries we mentioned above.

Although both Gree and Haier have corresponding brand premiums, they are relatively low. The reason is that they both adopt the internal industry competition mentality, and only obtain brand premiums after they win the throne of industry leadership through price wars and snatching work from other customers.

However, ROBAM and FOTILE adopt an external thinking (consumer thinking). By continuously meeting customer needs and positioning their own brands, they have won consumers' high-end minds in the range hood category and ultimately obtained a product premium.

It is precisely because the leading enterprises in different industries have different business ideas that the competitive landscape and profit environment in different industries are different.

The price wars that break out from time to time in the air-conditioning industry have destined the long-term increase in the average price of air-conditioning products to be lower than that of the range hood industry. The average price increase in the past eight years has been more than three times higher.

PS: The above are all logical viewpoints, providing a way of falsification - comparison of industry gross profit margins dominated by other high-end brand companies.

If you find an industry whose leader also takes the high-end route and where there are few price wars, but its profitability is relatively weak, it can be said that the competitive landscape may not be the main factor leading to high profitability.

2. Industry: The price comparison effect under the decoration attribute reduces the price sensitivity of products

The second important reason why the kitchen appliance (range hood) industry can achieve higher profitability is to think from the industry dimension - the price comparison effect under the decoration attributes.

To understand the reason, we must start with the consumption process and scenarios of kitchen appliances.

First, let’s think about a question: Are there any special features when we consumers buy kitchen appliances (mainly range hoods, stoves and hoods)?

Answer: It is very likely that we have just bought a house or renovated it. (This part of the discussion is also explained in detail in our first article, "Rom Electric Appliances, which focuses on high-end products, is hit by the sluggish real estate market and the decline of e-commerce dividends. Will it make a comeback in 2019?").

This involves the consumption process of kitchen appliances. People generally have a similar consumption process: buying a house (changing houses) or decorating - selecting and purchasing decoration and home design - selecting and installing kitchen appliances and other built-in appliances - purchasing other appliances and small furniture.

Under this consumption process, the purchasing process of products such as kitchen appliances and home furnishings is closer to the purchase and decoration of a house, and even occurs at the same time as the purchase of a house.

A house can easily cost hundreds of thousands or millions (even renovating it can cost tens of thousands), and after purchasing such a large sum, homebuyers can easily lose their price sensitivity to other "low-priced" products (just like people like to haggle over a few cents in the vegetable market, but are too lazy to spend a little more time to get a few-dollar coupon when buying a mobile phone).

Therefore, for home appliances, the stronger the decoration attributes and the closer they are to the home buying stage, the lower the consumers' price sensitivity will be, and the easier it will be to achieve a high profit level.

Decoration attributes and consumption process ranking: kitchen appliances > white appliances (air conditioners > refrigerators and washing machines) > black appliances

Therefore, we can see from the figure below that in the home appliance industry, the gross profit margin of kitchen appliances is significantly higher than that of white appliances, and the gross profit margin of white appliances is also higher than that of black appliances (of course, this is only one of the factors, and the difference in gross profit margins between industries must consider many other factors).

Although the high gross profit margin of the customized home furnishing industry is mainly due to its excellent business model, the gross profit margins of Qumei Home Furnishing and Dongyi Risheng, as leaders in finished home furnishings, are significantly higher than those of white appliance leaders such as Gree and Midea. This is already representative and explanatory to a certain extent (however, the net profit margins of Qumei and Dongyi are lower than that of Gree, and their operating efficiency is far lower than that of Gree).