The major shifts in the global economy last year have triggered a sharp reaction among consumers in developed markets. While India has proved relatively resilient, the slowdown in gross domestic product (GDP) growth and the wide reporting of economic hardship elsewhere have, in turn, affected consumer sentiment.
A dampener: A Big Bazaar store in the New Delhi suburb of Noida. The report shows that while the crisis has not necessarily affected incomes, Indian consumers are spending less, driven by a decline in sentiment. Harikrishna Katragadda / Mint
To better understand this, and to suggest how marketeers in India should react, McKinsey and Co.’s consumer and shopper insights practice launched a research effort to establish how consumers have been affected by the slowdown—both in terms of their personal financial health, their sentiment with regard to spending and saving, and their ultimate buying behaviour.
We find that while consumers remain optimistic about the overall economy, their confidence in their own financial future has significantly reduced. Importantly, this sentiment is also shaping their spending behaviour. We found clear evidence of consumers choosing value-oriented brands, seeking out smaller sizes, accepting reduced product features, deferring major purchases and, in some cases, significantly reducing usage. These patterns vary widely across categories and consumer segments; however, the net impact is that consumers claim on average to be saving more and spending less than they would have otherwise done.
However, the news is not all bleak for brand owners. We have also found evidence of many growth pockets that well-positioned brands can tap into, and a uniquely optimistic group of consumers that is determined to spend more despite the economy. In such an environment, we believe good marketeers will succeed by using the opportunity to reprioritize portfolios, sharpen value propositions to match consumer sentiment and build executional capabilities.
Peter Haden is a partner and Laxman Narasimhan is a director in McKinsey and Co.’s New Delhi office.
Crisis? What crisis?
Compared with other countries, the Indian economy has faired relatively well to date. Economic growth has dropped, but many analysts forecast a recovery towards 5-6% growth through 2010 and a return to growth in the range of 7-9% in subsequent years. India also enjoys a number of structural advantages versus other economies that have helped it to weather the credit crunch. In particular, its strong demographics, lack of external debt, relatively small exports, and mixed investment and consumption growth model leave it well placed for a more rapid recovery.
Also See Indian Economy’s Report-card (Graphics)
The impact of the crisis on the underlying financial health of most consumers of branded goods and services has also been mixed. Our research has focused on households earning in excess of Rs1 lakh a year—roughly half the population that collectively consumes the vast majority of branded goods and services. These households typically worry about three aspects of their financial health—wealth, income and affordability:
Net wealth has decreased for many, particularly the better-off consumers, as the value of their real estate has reduced and any investments linked to the equity markets have deteriorated. While a relatively small number of consumers own shares outright, some have secondary exposure to the financial markets (for instance, through insurance products) that have delivered poor returns over this period. However, Indians are relatively less reliant on wealth; the ratio of financial assets to national income is 1.1 for India versus 1.7 for China and 3.4 for the US.
Income: Consumer outlook on income has changed over the last year, but it is still positive, with most private sector employees expecting a more modest increase compared with previous years and the public sector enjoying the large pay rise recommended by the Sixth Pay Commission. Unemployment levels have not yet increased significantly.
Affordability, in contrast, has improved for most. Inflation has declined versus the highs of last year, for example, with reductions in energy prices. However, food inflation remains high and is a worry for some poorer consumers, while the weakening of the rupee has increased the costs of some imported goods for richer consumers.
Sentiment driving spending
The underlying financial health of Indian’s consumers is relatively sound. Our research also suggests that consumers are relatively confident about the outlook for the economy as a whole. At least 50% of the consumers surveyed said they believed that the economic crisis would last no longer than a year.
Also See Consumer Confidence (Graphics)
However, in sharp contrast, there has been a significant decline in consumers’ sentiment about their own financial future. Proprietary research conducted by the McKinsey Consumer and Shopper Institute suggests that the proportion of consumers who believe they will be much better off five years from now has declined from about 60% in 2006 and 2008 to about 14% in April 2009. This represents a dramatic decline in what had hitherto been among the most economically positive consumers in the world.
In the face of an uncertain future, almost 85% of Indian consumers feel they need to save more, resulting in an increase of 20% in bank deposits. Our research indicates that 70% of consumers see their jobs at some risk, and roughly two-thirds of Indian households claim that they will not return to spending in the same way as they have done over the last two years.
Thus, while the crisis has not necessarily affected incomes, consumers are spending less, driven by a decline in sentiment.
Interestingly, concern about the recession seems strongest among the relatively less well off—the segment that is also least affected by the crisis. Sixty-four per cent of households earning Rs1-3 lakh indicated that they had reduced spending due to concerns about the downturn, as opposed to 40% of households earning Rs15 lakh and above. Less well off households have, perhaps, the most to lose in terms of changes to lifestyle and security if their personal finances do take a turn for the worse.
However, brand owners need to understand these choices against the backdrop of strong underlying growth drivers in India that will not be affected. Consumers are trying to reduce their expenditure in several key categories versus what they would have done pre-crisis, to take account of the slowdown.
Underlying drivers of consumption growth: While the short-term effect of the downturn will shape the decisions consumers make, this is in the context of almost inexorable growth. For the majority of categories and, certainly, for consumption overall, total value will continue to increase, albeit at a reduced rate versus expectations.
This “strong tailwind” of growth is driven by three additional underlying factors:
Shifting demographics: India benefits from the largest number of young people in the world (one in 10 of the global population is an Indian under 30 years). This, coupled with a population growth of 2.1% and steady urbanization, will drive underlying growth in almost all consumer categories.
Improving incomes: As indicated by McKinsey’s research, changes in the underlying shape of the Indian income pyramid will fuel explosive growth in the number of “consuming” households—particularly in the “seeker” segment of households earning between Rs3 lakh and Rs5 lakh.
This long-term improvement, driven in large part by changes in education and rising employment, is predicated on a long-term GDP growth rate of 7.3%—very much in line with the post-crisis forecasts for India. This growth will also form an important backdrop for short-term sentiment-related effects.
Penetration: The underlying penetration of many categories is still extremely low in India, even after accounting for lower incomes. This is particularly true in rural areas, where the headroom for growth is huge. As a result, rural markets are among the most robust in terms of continued growth during the crisis—although sentiment is affecting the brand choices consumers are making in rural areas, too.
In the majority of cases, these changes will reduce the rate of growth, and shift spending patterns in key markets and categories, rather than reverse it. The research suggests that consumers have broadly three types of categories in mind. First, there are clear discretionary items— such as holidays, luxury goods, eating out and entertainment—where most consumers are simply cutting back or deferring spending until confidence is rebuilt. Second, there are categories that make up a sizeable chunk of spending where the slowdown will shape spending patterns, but where consumers will remain in the market. These include mobile telephony, personal care and two-wheeler sales. Lastly, there is a third category where consumers on average intend to spend more—both on critical “social” items such as healthcare and children’s education, and on basic necessities such as grocery products. Perhaps appropriately, the grocery category that is the most recession-proof in India appears to be milk.
Also See The Recession Impact (Graphics)
In addition, consumers are choosing to save more, and favouring the financial institutions that they have trusted for the longest time. Consumers clearly indicated a preference for saving more and for doing so in bank deposit accounts. This is also reflected in actual data on bank performance that shows a continuation of growth in deposit accounts as investments in mutual funds and higher risk options drop.
Finally, consumers appear to be reflecting on “where” they should spend, as well as on what. Our data suggests that as a result of the downturn, consumers are temporarily turning back towards traditional retail, cutting their spending in kirana stores far less than with modern retail. This has been accompanied by a decline in many of the positives around organized retail— especially in terms of regarding shopping in malls as a fun, positive experience. Rather, consumers appear to be concerned to avoid the temptation that such stores inevitably create, rejecting mall shopping as a form of entertainment and returning to traditional stores—even though in reality the prices may be higher.
Slowdowns lead to shakeouts, and this one will be no different. Research in brand leadership during the previous recession showed an acceleration of changes in market share during the slowdown, with around 40% of brand leadership positions changing over two years. It is therefore critical for marketeers to react appropriately, whether they are in charge of an attacker or defending a brand leader.
Also See Signs of Recovery (Graphics)
We believe there are three important mantras to adopt:
Follow the value across categories: Consumers are down-trading or moving to less expensive products in the same category where options are available. In the consumer products industry, for instance, firms are witnessing slower growth for their top-end brands and are thus reducing prices.
Similarly, consumers are choosing smaller packages, reducing product features and accepting entry-level offers. For instance, within two-wheelers, the smaller bikes are back in fashion, with a resurgence in demand for entry-level 100cc (engine capacity) models rather than larger models.
Given this trend, marketeers must reprioritize their portfolio of brands, products, prices and packages to better reflect the new sentiment. This doesn’t require a complete reversal of marketing strategy. More typically, it will involve brand owners simply restructuring or refining different aspects of their portfolios and resetting their sales targets and spending plans accordingly. Short-term changes may be required in pricing—or at least postponing price increases—and introduction of new sizes as appropriate. A leading Indian consumer products firm, for example, recently introduced a 100g pack of a very popular ayurvedic health supplement, while another leading multinational company reduced the size of packs of a popular washing-machine powder from 1kg to 850g.
McKinsey’s worldwide experience shows that a shift to value may stick, even after the end of the downturn. Opinion on the same happening in India remains divided. Half the chief marketing officers McKinsey spoke to said that a shift to value in India will not be permanent, while the other half said consumers will never return to spending levels seen before the downturn. Our view is that the real pressure will be applied to categories where value options deliver a consumer experience as good or similar to others, for instance, within mobile telephony or consumer electronics, where consumers may not have to compromise too much on product features and quality if they move to cheaper brands.
Target growth hot spots: McKinsey’s consumer research indicates that pockets of strong growth exist across categories and segments, even those worst affected by the crisis. These pockets exist both at the consumer level—for instance, there has been relatively less change in sentiment or spending among public sector workers, younger consumers and richer consumers—and geographically—rural areas, tier-I cities and New Delhi are doing relatively better, while tier-II and Chennai are doing relatively worse.
In fact, while these segments highlight groups of consumers who are on average faring relatively better or worse, there is a huge variety of sentiments within each. Many rural consumers are concerned and pessimistic; and, in contrast, there are self-employed consumers in tier-II cities and towns who are extremely positive.
The biggest driver of spending behaviour appears to be the underlying attitude of consumers, as shown in the following simple segmentation driven by combining our questions on concerns about the economy with apparent real impact experienced so far. Unusually for India, we’re seeing clear evidence of an attitudinal segmentation driving behaviour more than income or demographic factors.
For example, among the affluent segment in India, we have seen three kinds of segments emerging: survivors, who have been materially affected and who have reduced spending across categories and cut down on eating out by 13%, telecom by 9% and groceries by 5%; unaffected worriers, who have reduced spending “just in case”, cutting down on eating out by 7%, communication by 2% and groceries by 4%; and unruffled optimists, who have only reduced spending on eating out by 2%, while increasing spend on other categories such as communication by 6% and groceries by 7%.
Brand owners can exploit these differences if they can both identify a hot spot of growth and realign their spending and distribution systems accordingly.
Similar qualitative research done in India shows growth hot spots among the rural affluent and within traditional retail channels. The rural affluent segment is exhibiting strong growth in spending across categories such as telecom and automotives. Brand owners that can combine these insights with an attitudinal segmentation that will create different solutions for the optimists as well as those who are concerned will deliver strong growth.
Create real points of difference: Lastly, marketeers should focus their next set of brand initiatives on real differentiation—a truism, maybe, but particularly important at this time.
Over the last three-four years, the challenge for many has been to build sufficient supply chain scale to keep up with demand. As consumers become much more choosy, and start to look more sharply at the value that brands offer, it is important for marketeers to go beyond the tailoring mentioned above and provide genuinely differentiated benefits and new expressions of value. We would highlight the recent efforts of one chocolate maker to create differentiated products both at the top and bottom of the price ladder as a strong example of rethinking differentiation based on a new value equation. Similarly, in banking, we have identified savvy, self-directed banking customers, who could be targeted with an online offering that bundles extremely high service levels with a menu of options for customizing their banking products. This could be done in a low-cost manner through the use of online and telephone channels. This model, currently missing in India, would be low cost-to-serve while delivering high value.
On the up?
In recent months, there does appear to be somewhat of a recovery in some aspects of the economy, and encouragingly the equity markets have regained some of their lost ground. In addition, several large consumer players have recently announced strong earnings, benefiting in particular from a sharp reduction in some input costs. However, we believe that loss of consumer confidence and the more concerned sentiment referenced above will take time to fully recover. In the coming months, we are planning to run this consumer sentiment survey again to track this recovery when it occurs and playback the implications for spending and brand owners accordingly.
The research approach
The research has been carried out by McKinsey’s consumer and shopper insights practice. Centred on a recent quantitative survey of consumers across India, the researchers have taken into account five inputs for the work:
• Detailed macroeconomic analysis of the crisis and its effect on consumer finances and industry performance
• Qualitative research across segments to understand what consumers think and feel about the slowdown, how it has affected their underlying financial health, and its implication for spending and saving
• Quantitative research in April-May across a representative sample of rural and urban Indians covering at least 650 consumers, with around 240 questions per participant covering multiple sectors. This research covered households earning Rs1 lakh and above (just over half the population that accounts for the majority of consumer spending) and was carried out in eight locations
• Category “deep dive” analysis to understand the true impact of sentiment of spending in a few key categories—fast moving consumer goods, two-wheelers, consumer electronics, financial services and mobile telephony
• A wide range of expert interviews with consumer sector leaders across multiple industries, including round-table discussions with at least 25 of the top marketing professionals and consumer experts in India.
Graphics by Sandeep Bhatnagar and Ahmed Raza Khan / Mint
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