Innovation, not price, will create winners in VAT era

The UAE saw bumper sales by consumer goods and home appliance manufacturers in the month of December, primarily in anticipation of a VAT-induced increase in the price of products.

dubai - Leading home appliance brands have accelerated innovation efforts to meet the needs of tech-savvy consumers

By Mohamad El Yassir

Published: Wed 24 Jan 2018, 4:07 PM

Last updated: Wed 24 Jan 2018, 7:55 PM

The Greek philosopher Heraclitus once said the only thing constant is change.

The onset of 2018 has seen the single biggest change in the economy of the UAE. The introduction of value-added tax (VAT) has opened up a new source of federal revenue, which will support liquidity in the economy and enable long-term benefits to residents in the form of infrastructure and public spending. It is a move that all businesses agree will boost long-term institutional productivity and reward innovative thinking among companies.

The tax, which is to be applied on all goods and services, must however be carefully assessed by businesses for its impact on consumer stair action and sales momentum. There are no two views on the fact that any increase in price carries a certain risk in the form of lower consumer spending.
This is particularly true in the case of consumer appliances, where purchase decisions can often be deferred.

In the UAE, we saw bumper sales enjoyed by consumer goods and home appliance manufacturers in the month of December - primarily in anticipation of a VAT-induced increase in the price of products. While all companies were equal beneficiaries of this seasonal momentum, the road ahead in 2018 looks much different. In the current context, consumer appliance companies are essentially left with two choices - adapt to the new price/sale dynamic or create a product that is qualitatively superior to its substitutes.

While on the face of it, this seems like an easy decision, it has long-term implications for the future of the company, its product suite and importantly its brand perception. What we have seen in the past few weeks is the growing trend of companies absorbing the percentage of taxation into their selling, general and administrative (SGA) expenses in order to offer competitive prices to consumers and alleviate their resistance to purchase.

While this might bring temporary relief in terms of sales volume, the reduced margin and risk of quality compromise makes it unsustainable and financially less than optimal. Moreover, this region has always led the way in terms of its adoption of premium quality goods and lifestyle offering.

I believe the companies that will lead the regional industry in time to come will do so through the development of an innovation-based strategy that will inspire consumers and spur the next wave of technological evolution in home appliances. We have already seen this phenomenon play out in other sectors such as smartphones and automobiles.

The home appliances industry is currently witnessing a renaissance. Consumers are moving away from standard equipment and looking to make smart purchases. The smart home appliances market is expected to witness a significant growth in the coming years due to technological advancement and the growing need for energy efficiency. Additionally, increasing purchasing power and improving lifestyles are fostering the demand for smart home appliances around the world, especially in the UAE where residents are known to embrace lifestyle gadgetry.

One of the innovation trends that is likely to dominate consumer uptake is the Internet of Things. The growth and penetration of the Internet has made it possible to interlink seemingly unrelated devices and enjoy the benefit of single-source control through convergence technologies. I believe this theme will only become more pronounced in the home appliance space in the coming months.

Already, the world's leading home appliance brands have all accelerated innovation efforts to meet the ever-growing convergence and convenience needs of tech-savvy consumers at highly affordable price points. To create this superior product while continuing to be price-competitive is only possible when companies create an innovation culture where research and development is an ongoing investment. At Whirlpool, we are driven by innovation while creating value for money, we have geared our product innovation to adapt to this changing landscape, combined with long life features that serve the needs of all consumers. Annually, we spend approximately $1 billion on R&D so we can constantly enhance our products and technologies and provide consumers with best solutions.

There is good reason to believe this approach to sales and marketing will reap much higher rewards in the coming years - a view that is borne out by statistics available for the local market.

According to figures compiled by Euromonitor International, sales of home appliances in the UAE reached nearly three million in 2016 and are expected to touch four million by 2019.

While we have seen that the UAE tends to prefer well-known global brands, purchasing decisions are often shaped by price promotions. Achieving optimal balance between price competitiveness and product innovation will be the key determinant of the game. Companies that are able to hybridise these two factors will emerge as the future home appliance giants in the region. The VAT will only be a catalyst in rewarding the best performers.

The author serves as regional managing director for MEA region at Whirlpool. Views expressed are his own and do not reflect the newspaper's policy.