Mumbai: An expanding middle class, rising incomes and spending power, a youthful population, rapid urbanization—India’s consumption story seemed to have everything going for it in the years the economy was cantering along nicely at a near-9% annual clip.
Consumer product makers and analysts were effusive about the potential of the market in an increasingly aspirational nation of more than one billion people growing at a pace next only to China among the world’s major economies.
“During the first millennium AD, merchants referred to India as the ‘Bird of Gold’ due to the glittering dynamism of its market,” think-tank McKinsey Global Institute wrote in a 2007 report titled The Bird of Gold: The Rise of India’s Consumer Market. “Over the next two decades, that bird may take flight again.”
McKinsey predicted that India’s consumer market would quadruple to $1.5 trillion by 2025, overtaking Germany to become the fifth largest behind the US, Japan, China and the UK. To arrive at the estimate, McKinsey assumed a compounded annual average growth of 7.3% for India in 2005-25.
Then came the economic downturn, which took some of the sheen off the consumer market. The going has got harder. After slowing to 6.7% in the year ended 31 March 2012, India’s economy grew 5% in the following year—the slowest pace in a decade.
High inflation and borrowing costs, and job insecurity in the face of economic uncertainty have hurt consumer confidence, curbing spending on durables such as electronics and automobiles—sales of which have declined for eight months in a row.
The weakness of the rupee—which has fallen 7% in the year to date to a series of record lows, breaching the level of 60 per dollar—has made imported inputs more expensive for consumer product companies such as Hindustan Unilever Ltd, forcing an increase in prices.
The fallout from the downturn is set to linger. “Consumer spends are not going to improve for the next 12-18 months,” said Deep Mukherjee, director, corporate ratings, India Ratings and Research Pvt. Ltd, an arm of the international rating company Fitch. Even consumption in the rural markets, which helped shield the economy from the brunt of the 2008-09 global financial meltdown, is feeling the impact of rising prices. The Consumer Price Index (CPI) accelerated 9.87% in June from 9.31% in May while the Wholesale Price Index rose to 4.86% from 4.7%.
“The positive spread between rural wage growth and rural CPI inflation has progressively narrowed, impacting the purchasing power of India’s hinterland,” said a June report by Deutsche Bank analysts Manoj Menon and Gaurav Bhatia.
Still, the consumption story remains an attractive one even if it has lost some of its gloss. The retail market is estimated to grow 14-15% this year and the next, according to a June report by rating agency Crisil Ltd. This is higher than the 10% growth seen in 2012-13 but lower than the 20% growth recorded in 2011-12.
And when compared with the mature US and UK markets, a larger number of Indians are expected to increase discretionary spending, making the country attractive for multinationals seeking growth outside their home markets.
Close to 20% of Indians are expected to increase their discretionary spending in the next 12 months, compared with 11% of Americans, 8% of Europeans, and 5% of Japanese, said an October 2012 study by consulting firm Boston Consulting Group (BCG). Some 34% of Indian consumers are expected to trade up—switch to buying higher-value products from cheaper ones—said the BCG study. An equal proportion of them will trade down, or switch to less expensive products, in a trend that reflects the weak economic sentiment.
As consumer product makers and retailers look for growth during these uncertain times, they are taking several steps in the hope that something will work. Over the past few years, they have stepped up the pace of launches, added more premium products to their range and expanded deeper into the hinterland. They are also offering more discounts and freebies.
They have to contend with a consumer looking for more evolved experiences at the top end of the market and seeking to maximize value for money at the lower end, said Santosh Desai, managing director and chief executive officer of Future Brands India Ltd, an arm of the Future Group.
“There is an emergence of a new kind of consumer,” said Desai.
Experts said India’s consumer market will be defined by five emerging trends in the next three years:
* The middle loses ground
After focusing on the vast Indian middle class—estimated at 400 million people—for the past decade, marketers are now switching their sights to the so-called bottom of the pyramid—the vast sections of poor that are entering the consumer class for the first time—and the top of the pyramid that’s made up by the affluent.
This is already happening (see graph). For instance, in chocolates, the mass category saw its share increasing from 21% in calendar year 2010 to 31% in 2012. Likewise, the premium chocolate market share has increased from 18% to 26% in the same time frame. Meanwhile, the popular or middle-segment market share decreased from 60% in calendar year 2010 to 43% in calendar year 2012, according to Nielsen.
The trend is expected to be reinforced by the growing affluence of consumers and the changing consumer dynamics.
“Consumers are buying better or premium goods and downtrading at the same time,” said Abheek Singhi, partner and director, Asia-Pacific leader, consumer and retail practice at BCG. The trend started in the past 12-18 months and will continue for the next few years, Singhi said.
As such, ongoing trends like “premiumization”, wherein companies like Hindustan Unilever step up the pace of launching premium products, will co-exist with retailers and marketers increasing the number of sales and discounts across sectors—from automobile and electronics to food and groceries, and apparel and lifestyle products.
“It is expected that there will be an increase in the frequency of promotions and discounts,” said Gaurav Gupta, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd.
The distinction between rural and urban consumers is blurring. Rural consumers have aspirations similar to their urban counterparts and, hence, the term “rurbanization”, explained Singhi of BCG.
“Geography is history,” said Sameer Satpathy, executive vice-president and business head, consumer product business at Marico Ltd, citing the tag line of an advertisement for Iridiumsatellite telephones.
According to Satpathy, it does not matter where the consumer is located, the mindset is the same. “The challenge is to get access to these consumers,” he said.
In the past three years, Marico, which sells brands including Saffolacooking oil and Parachutehair oil, has seen its revenue from the rural markets increase from 34% to 38% of overall revenue. It plans to expand rural coverage by 40-45% in the next year and drive higher growth from these markets, said Satpathy.
Likewise for Godrej Consumer Products Ltd, the maker of Cintholsoaps and Hitinsecticides. Rural reach has increased to 50,000 villages from 35,000 three years ago and the company plans to further increase it to 70,000 villages in the next three years, said Vivek Gambhir, managing director, Godrej Consumer Products.
*New consumer segments
In an earlier generation, decisions about household purchases were made by the head of the joint family; the trend then switched to small, nuclear families and the parent decided what to buy.
For instance, teenagers are a new segment that marketers are trying to reach. Children are maturing a lot faster and influencing buying decisions from the time they enter their teens, compared with 17 or 18 in the past, said Satpathy of Marico.
The new category warrants a different marketing and communications strategy. Marico has taken on board a 16-year-old indie singer popular on youtube.com, Shraddha Sharma, as brand ambassador for its hair oil brand, Hair & Care. It’s targeting 13 year olds who spend a lot of time on the Internet and connect with people like Sharma, who is from a small town and somebody in her own right, said Satpathy.
Also, the number of single-member households is increasing. According to BCG, in the US, 27% of households have only one individual; it’s 35% in France. In India, this has more than doubled in the last 10 years to 4% from 1-2%. In China and Brazil, such households are 9-10% of overall households.
“India is moving towards that,” said Singhi, while explaining that this has a huge impact on categories such as consumer packaged goods and durables.
*New channels, new launches
The Indian consumer is open to new experiences, with close to 70% trying new brands and products, according to an Ipsos survey.
Categories such as deodorants, soaps and body lotions, and hair conditioners accounted for Rs.1,000 crore of Hindustan Unilever’s annual sales of Rs.24,167.7 crore in fiscal year 2013. The Indian unit of Unilever Plcexpects these categories to expand to Rs.10,000-15,000 crore of revenue in the next 10-15 years, Harish Manwani, chief operating officer, Unilever, said at an earnings press conference on 30 April in Mumbai.
New launches account for 14% of Godrej Consumer Products’s revenue and the firm expects this to increase to 20% of revenue in the next three years, said Gambhir.
As consumers look for new experiences, trade channels such as modern organized retail—hypermarkets, supermarkets, convenience stores—and online shopping are also gaining ground.
“Modern trade accounts for close to 7-8% of the overall retail market and (is) expected to grow to approximately 12-15% of the overall retail market in the next three years,” said Gupta of Deloitte.
Even the digital marketplace is growing rapidly. The number of Internet users in India is expected to more than double from 125 million in 2011 to 330 million by 2016, said an April report by BCG titled From Buzz to Bucks.
Currently, online purchases make up a small portion, less than 1%, of commercial activity. However, the Internet’s influence on buyers before, during and after the purchase of a product is increasing.
For instance, in air travel, online booking accounts for 21% of total online purchases, but the digital influence is nearly double at 42%.
The BCG’s Centre for Consumer and Customer Insight surveyed 25,000 Indian consumers aged 18 to 55 living in 26 locations across metropolitan areas and a mix of tier-I, tier-II and tier-III cities. The survey explored how consumers used the Internet during the product purchase cycle. The analysis assessed the use of technology across 10 touch points within the three stages of the purchase cycle—pre-purchase, purchase and post-purchase.
In categories such as personal computers, laptops and tablets, it’s even higher with online purchases accounting for just 5% of overall purchases but digital influence accounting for 38%.
“The digitally influenced purchases represent $30 billion of consumer spending in India today—as much as five times that of e-commerce alone. This digital impact is expected to grow fivefold to $150 billion by 2016,” according to the April BCG report.
With the increase in the number of Internet users and smartphones, marketers are looking beyond print and television to interact with consumers.
“We will increase our spends on the digital medium from 10% of our overall spends to 15-20% in the next three years,” said P. Balendran, vice-president of automobile maker General Motors India Pvt. Ltd.
Consumers have a wider choice of media to access information and entertainment and marketers are only being consumer-centric by increasing spending on advertising through new and emerging media, said Satpathy of Marico.
“The consumer has changed and we are following the consumer,” he said.