“Mahindra has launched a new variant of the KUV100. The KUV100 Trip, as it is called, is aimed at fleet operators.” – Media report (13th March 2018)
This product strategy sounds similar to Maruti Dzire Tour and Hyundai Xcent Prime, where mainstream product got an update and older version or generation was stripped down and relegated for fleet operators.
Dzire is one of the best-selling cars in India, also very popular among fleet operators. So, Maruti has launched older version rechristened as Dzire Tour to protect the brand image of mainstream Dzire, by not letting it get a Taxi Tag. However, case of Hyundai Xcent Prime is different. Sales started flagging due to competitive heat, so, Hyundai found a way to prop up the sales numbers and save the initial investment by selling vehicle where demand is – Fleet operators. Sales number suggests KUV 100 story is similar to Xcent and not Dzire.
KUV 100 was launched in December 2015 and was pitted against Swift and Grand i10. But sales were nowhere close to segment bestseller. It couldn’t even reach 5000 per month mark, so Mahindra quickly tried to address the concern by launching refreshed version within 2 years of launch (generally it happens after 3 years) followed by grand advertisement campaign. As a first ground up attempt from Mahindra to develop a hatchback, it has few rough edges. Apart from quirky side profile design, it isn’t that refined and buyers are spoilt for choice with refined products since long time.
Tata is silently phasing out Indica and Bolt (modified Indica Vista). Former was a fleet operator’s favorite, later was deliberately targeted at fleet operators, however, due to pricing debacle it was never able to catch up. Also, Tata is not letting Tiago go the Indica way. So there is little likelihood that the vacuum created by Indica might get filled up by KUV 100 Trip. Well they have some similar attributes, like – undercutting segment leader’s price by huge margin etc.
It’s a belief, that if product is introduced to or adopted in the commercial segment, it loses aspirational value, Toyota Innova is an exception. Notion is, several personal car buyers have stayed away from Tata Indica for very same reason. However, Mahindra is overlooking this notion. Possible reason could be lower than initially expected volumes, flagging sales number in past 2 years and initial product development investment of ₹ 1000 Crores.
So, we did a very conservative estimate of product’s profit center, for illustration purpose only, based on certain very broad assumptions. Actual figures can be on higher or lower side (may have wide variation).
For illustration purpose following are the assumptions :
- Revenue : base price (excluding GST/Excise/VAT/Dealer Margin) is considered and Petrol/Diesel volume split is factored in
- Depreciation and amortization (D&A) rate for product development cost is considered at 20% per annum. So every year fixed cost of ₹ 200 Crore will hit the product’s profit center
- Other fixed cost is not taken into consideration which could only inflate the cost
- Variable cost at 75% of revenue is considered
- Annual volume follows a downward trajectory, in 2018, sales dip to 20,000
If sales dip further, forget operating losses, company will not be able to recover the initial product development investment in full product life cycle run (Industry average is roughly 6 years).
One way to prop up volume is offering discount, but again in long term, it hurts the bottom line badly. Moreover, discount’s effect could be inconsistent if product falls short to meet the need of consumer. For sustainability, one possible way is to find new revenue stream for existing product, thus comes fleet segment into picture.
It seems, in Mahindra’s automotive dictionary, letter ‘R’ section starts with the word “ruggedness”, which is proven with abuse friendly products like Bolero. However, for hatchback segment they need to adopt the word “refinement”.
(The article is written by Rohan Rishi. You can connect with him at email@example.com)