India’s consumption story to be led by urban mass: Goldman Sachs

The Indian consumer market story will be driven by categories like packaged snacks, baby products, personal care, SUVs and jewelry


India’s urban middle is much smaller at just 27 million working people, or 2% of the population. Photo: Mint
India’s urban middle is much smaller at just 27 million working people, or 2% of the population. Photo: Mint

Mumbai: Urban Mass, a category that includes people with undergraduate degrees in non-labour intensive work, blue collar workers and migrant workers will propel consumption in India in the next decade, a Goldman Sachs report said, adding this is quite different from the way the consumption economy developed in next-door China.

According to the Asian Consumer, India Consumer Close-Up report released Wednesday, the China consumption story during 2002-12 was powered by its 150 million urban middle workforce and 1.4 million wealthy “Movers and Shakers.” However, India’s urban middle is much smaller at just 27 million working people, or 2% of the population.

“We believe most of the new generation of India’s youth will first fall into Urban Mass, a cohort that is 130 million people today, earning $3,200 on average. The expansion of Urban Mass, both in size and income level, will be the key driver of India’s consumption story in the coming 5-10 years,” said analysts Joshua Lu, Anita Yiu and Aditya Soman in their report.

The report focused on seven key areas of consumption desire that captured 96% of total consumption expenditure across areas like—Eating better; Looking better; Better home; Mobility and Connectivity; Having more fun; Well-being and luxury. It also took into consideration the “Uniquely Indian” consumer where almost half the population is vegetarian, sales of whisky dwarf that of beer, and families save for years to spend on children’s wedding.

The report identified eight consumer segments or cohorts—movers and shakers, government employees, urban white collar or small and medium enterprise workers which comprised the urban middle; the urban mass made of the educated urban mass, urban blue collar and migrant workers; the rural mass segment made of rural landowners and the rural emerging segment made of rural land labourers and rural casual labourers.

These different segments were classified based on their income and percentage of population. The movers and shakers comprise 0.43 million or 0.08% of the working population. The income per capita per annum is $250,000 on an average for this segment. Government employees across the states and Centre account for 10 million or 2% of the working population with an average annual income of $11,439.

The Indian consumer story will be shaped by its 440 million millennials and 390 million Gen Z, those born after 2000, the report said. The country’s GDP per capita—at $1,650 in 2015 is comparable to China in 2005. However unlike China which had a large urban middle, investors in India need to be careful in calibrating the potential addressable market for companies targeting the urban middle cohort, given that it’s just 2% of the overall population. The urban white collar/ SME category is 3% of the workforce or 17 million people with an average annual income of $11,250.

The urban mass segments include educated urban mass and urban blue collar/ migrant workers constituting 6% and 19% of the working population, with an average annual income of $5385 and $2500 each respectively. The remaining three segments earn much less and are 70% of the working population.

As such, brand investing will be a big theme in everything as the urban mass will trade up. However, companies need to be careful as consumers will trade up into brands that offer the most incremental value, but may not readily jump to aspirational brands. This is already seen in categories like automobile where the consumer’s first criterion while buying a car is the brand’s reputation for fuel efficiency.

The Indian consumer market story will be driven by categories like packaged snacks, baby products, premium personal care, scooters, SUVs and jewelry. But one profit pool may grow faster than them all: restaurants, said the report. While India lags China and the Us in most segments, the country will leapfrog in the areas of mobile connectivity and e-commerce, the report said.

To be sure, challenges on payment systems and supply chains remain. However, they are not insurmountable. Improved mobile connectivity will also challenge the domination of television as a primary source of household entertainment over time, creating a bigger profit pool for content providers and mobile gaming.

Meanwhile, the growth of luxury and high end sectors in general will be limited. Culturally, India’s affluent consumers tend to shy away from ostentatious display of wealth. One area where Indians do splurge on is weddings. The number of weddings and household formations will increase over the next five years, given India’s demographics—peak birth reached 22-23 years ago.

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