Prolonged inflation mutes consumer spending, says report
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New Delhi/Mumbai: Consumers across urban India have been postponing major purchases over the past 12 months, spending only on essential items, in response to the prolonged inflation, according to a report by consulting firm KPMG and the Retailers Association of India, the apex body representing retailers of India.
Because of increasing prices, urban consumers have reduced discretionary spending in several categories and value-conscious consumers have been opting for bulk buying, according to the report, titled Emerging Consumer Segments in India, to be released on Wednesday at the Retail Leadership Summit 2014 in Mumbai. Reduced purchasing power has impacted a large segment of consumers, the report indicated.
The Reserve Bank of India expects inflation as measured by the Consumer Price Index to top 9% in the three months to 31 March, and range between 7.5% and 8.5% a year later. Consumer prices rose 9.87% in December, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
In the 12 months to March, the central bank expects the economy to grow by a little less than last year’s pace of 5%, the slowest in a decade. Growth averaged 4.6% in the first half of the fiscal year.
One of the outcomes of the economic slowdown being stretched over such a long period is that consumers have become a lot more open to trying out new brands, said Sandip Tarkas, president (customer strategy) and chief executive officer (Future Media and T24) at Future Group. This, in turn, has given traction to smaller and regional brands.
A January report by India Ratings and Research Pvt. Ltd, a Fitch group firm, said the outlook for urban consumer sentiment is likely to remain subdued in fiscal year 2015 amid reduced affordability.
Private final consumption expenditure, an indicator of consumer spending in the economy, for the quarter ended September 2013 grew to 2.2%, from 1.6% in the quarter ended June 2013—the second slowest growth in the last 37 quarters.
India, said Ian Woodcock, senior vice-president for international sales at American watch retailer Timex Group, has been a difficult market for the past 12 months. “It’s been difficult market for everyone—not just us, but for consumer goods generally,” he said.
“I don’t think people were down trading, there is serious money in this country and even at the lower level people want to spend, but what we saw was that there were changes in footfalls in stores…and everybody was affected by that,” Woodcock added.
The Consumer Confidence Index, an indicator of consumer outlook towards the economy and personal spends, also reflects the subdued mood.
Until 2012, this index in India was the highest among countries included in Nielsen’s quarterly Consumer Confidence Index, but it has been steadily slipping since. In the September quarter of 2013, it fell six points, pushing India to third spot behind Indonesia and the Philippines.
Anand Ramanathan, associate director at KPMG Advisory, said that a significant amount of brand switching is another outcome of the current economic situation. While at the lower end of the consumption base consumers were “clearly down trading”, on the upper end, there will be more bulk purchases, he said.
The categories which have been most affected are consumer durables and automobiles, big-ticket purchases where consumers tend to wait for a longer period before deciding to buy, said Ramanathan.
The auto industry has been going through one of the most sluggish periods in over a decade. In December, Mint reported that slowing economic growth and the high cost of finance and fuel had made car ownership more expensive, impacting buyer sentiment. Car sales fell 5% to 1.2 million between April and November, according to the Society of Indian Automobile Manufacturers, an industry lobby.
At electronics retailer Ezone, part of Future Group, that operates 41 stores, slowing demand in newer homes has impacted sales of home furnishings and electronics items.
“Home business will be under pressure, as there are fewer newer customers,” said Rajan Malhotra, CEO of Ezone.
Growth, he added, is largely being driven by existing consumers, who are upgrading to better products.
“For most brands that have been around for over a year, anywhere upwards of 25% of business comes from new consumers buying the brand— and this has slowed down. The super loyal and loyal consumers who buy a brand have held on,” he said.
Promotions, driven by both retailers and brands, have helped keep demand afloat, said Malhotra of Ezone. “You have to create demand, stimulate it,” he added.
KPMG’s Ramanathan suggested that while demand in urban India had sputtered, growing aspirations and brand awareness were helping online retailers and smaller retailers reap the benefits.
Firms with presence across smaller towns and cities have benefited, agreed retailers.
Lalit Agarwal, chief managing director at V-Mart Retail Ltd that runs 89 value format departmental stores across tier II cities and non-metro regions, said demand had been within expectations. The retailer that offers apparel, footwear and accessories saw a 12% growth in revenue from a year earlier.
India Ratings expects overall median revenue growth for the retail sector to be in the range of 8-10% in fiscal year 2015. It notes that post the economic slowdown in fiscal year 2013, the median revenue grew 18.6% in the first half of fiscal year 2014, partially on account of the lower base effect, but also because of improved volumes, especially in the second quarter of the fiscal year—due to extended discounting.
The report added that muted consumer spending due to prevalent economic uncertainties will likely drag into fiscal year 2015, affecting same-store-sales growth for the year.