changing india changing consumption changing consumers

7/31/2019 Changing India Changing Consumption Changing Consumers

1/11


2/11

ChangingIndia,

Changing

Consumption,

Changing

Consumers

Background 02

Factors Contributing to aDynamic Economy 02

Changing Priorities inConsumer Spending 03

Impact of the ChangingConsumption Patterns 05

Conclusion 10


3/11

| Volume 03perspectivel 1l

| Changing India, Changing Consumption, Changing Consumers2

BackgroundAs India changes and reinvents itself at a remarkably accelerated pace, the private consumption patternsof its population have been transformed. What is new about these changes in the consumer behaviour of1.15 billion individuals? Historically, change has been a gradual and largely predictable process, allowingindustry experts to reasonably forecast consumption patterns and consumer behaviour in the near futurebased on the current and immediate past. Those days are history. The fundamental shifts in consumerspending patterns have far-reaching implications not only for manufacturers, marketers and retailers ofconsumer products and services, but for all of India and Indian society as a whole.

This article highlights and analyses these shifts in consumer spending patterns and the implications formanufacturers, marketers and brand owners, and retailers. The key lies in understanding the nature of thischange in consumer behaviour and consumption patterns and thereby the change in the wallet-share ofIndian consumers. Todays reality consists of many new, unique and disparate factors that have come intoplay simultaneously.

Factors Contributing to aDynamic EconomyFirst, India has seen a very strong economic growth (averaging around 6.5 per cent) for almost 18 years onthe trot, with the last five showing an even stronger growth trajectory. With the size of the economy hitting aUS$ 1,000 billion mark about two years ago, its scale can now support myriad new consumption categoriesthat go much beyond traditional needs and desires. More details on some of these new categories of

consumption are discussed later. While Indias annual per capita income in absolute terms remains belowUS$ 1,000, the annual household income is now almost US$ 4,000, and if purchasing power parity is tobe applied, then it is over US$ 12,000 per year. Further, it is quite likely to more than double in the next 10years, creating the potential for a sustained boom in consumer spending in the decades to come.

Second, the demographic profile is turning extremely favourable towards sustaining growth in economicactivity and in consumption, with almost 550 million consumers across urban and rural India in the 15+ agegroup (excluding the 250 million or so who are still, unfortunately, below the poverty line). Of these, about400 million are in rural India while the remaining live in urban India. Of the latter, about 100 million reside inthe top 100 cities alone, and there is a very positive geographic broad-basing of this consuming class. Asthe dependency ratio continues to drop in India (in marked contrast with the developed economies whereit continues to rise, creating the spectre of social challenges in the decades to come), and as more Indians

get educated, their consumption aspirations will continue to change very markedly.

Third, there is a very encouraging broad-basing of the different sub-components of overall gross domesticoutput, encouraging broad-basing of geographic spread of economic activity, and well-founded optimismon broad-basing of the nature of jobs that match the populations current skill-sets.

An estimated 90+ million jobs will be created over the next five years, of which almost 50 per cent areexpected to be in the services sector (45 million). Of these, an estimated 7-10 million are expected tobe created in modern retail, healthcare, and hospitality alone, adding to the 10+ million who are alreadydirectly employed in these three high-growth services sectors.

Agriculture: 18 per cent of GDP, 56 per cent of the workforce (270 million)

Manufacturing: 26 per cent of GDP, 14 per cent of the workforce (65 million)

Services: 56 per cent of GDP, 29 per cent of the workforce (145 million)

Exhibit 1: Current Break-up of Indias 480 Million Jobs


4/11


3Changing India, Changing Consumption, Changing Consumers |

Manufacturing is already seeing signs of a renewed boom in investment in diverse industries includingdefence, heavy engineering, power, transportation including automobiles, petroleum and petrochemicals,textiles, and food processing. Unlike in the past, where manufacturing came up in the proximity of metros andmini-metros unless there were backward area benefits or other incentives, this time around manufacturinginvestments are spread almost all across India. This is, of course, after evaluating attributes such as theavailability of raw material, manpower and its relative costs, environment issues, supply chain and logisticsissues, and market factors which render availability of fiscal incentives as just one of the many variables inthe manufacturing location selection grid.

The services sector is also moving beyond IT. The largest growth in the coming years will be in a host ofnew services including retail, healthcare, leisure and recreation, education and coaching, construction andother real estate, grooming and well-being, and travel and hospitality. This, in turn, has many dimensions,with the most important being the certainty of unprecedentedly large numbers of women entering theworkforce. Further, these sectoral jobs are even more spread out across the length and breadth of bothurban and rural India and a lot of these jobs will employ people even without any professional degree (like

engineering, management etc.), thereby leading to a further spread of purchasing power.

Fourth, there is a huge multiplier effect in the offing on account of the dramatically increased social/electoral politics-inspired spending. While political formations have always come up with schemes tosupport the really underprivileged, the quantum of funds allocated in the first 55 years of independencewas very small compared to the size of the economy, as a result of which there was limited impact in theoverall context of spending power and its broad-basing. Under UPA (I), and now continued under thecurrent UPA (II), schemes such as NREGS, Bharat Nirman Yojana, Nehru National Rural Health Mission,Jawaharlal National Urban Renewal Mission and Pradhan Mantri Gram Sadak Yojana and others now haveallocations exceeding US$ 695 million per year generating additional spending incomes across small townand rural India. (Irrespective of the leakages in the system, the funds are still being disbursed.)

And, finally, there is a very fundamental shift in urbanisation patterns across India, with new, economicallyimportant urban centres emerging beyond the traditional top-8 or top-20. By 2011, over 60 Indian cities willhave a population above 1 million, up from 35 in the 2001 census. By 2021, this figure may increase to 100,with another 100 cities having a population between 0.5-1 million all capable of supporting consumptionof a scale currently that of, say, Belgaum or Gwalior or Meerut or Kolhapur, which belong to the 500,000+population towns.

Changing Priorities inConsumer SpendingLet us now look at the size and composition of consumption in India. Notwithstanding the current concernsof the truant monsoon impacting consumer spending, India is expected to have seen a spending of almostUS$ 435 billion at current prices in 2009 (assuming a GDP growth rate of 6 per cent). Further, factoringin 5 per cent inflation and assuming that GDP will further grow at 6 per cent, consumer spending is likelyto cross US$ 485 billion in 2010. Hence, all those who have been talking about the recession in India, oreven a downturn in consumer spending, should consider looking at these broad economic indicators thatshow a very robust growth in consumer spending over the last 12 months and point to a similar trend forthe coming year (and years).

A deeper analysis of this gross data on consumer spending throws up some very interesting insights. Foras long as we can remember,roti, kapada aur makaan have been the primary needs and drivers of privateconsumption. Now, with the impact of the sustained economic growth of the last two decades, it seems

that for a large part of the population, consumption has moved beyond these basic survival needs. Whilefood and grocery continue to account for the largest quantum of spending (about US$ 260 billion in 2009),


5/11



followed by healthcare (about US$ 34 billion) and then textiles and clothing (about US$ 31 billion), thesurprise inclusions on this list in 2009 have been spending on mobile phones and talk-time (about US$ 25billion), jewellery and watches (about US$ 25 billion), and personal transport, comprising two/four-wheelersand related spending on fuel and repairs/maintenance (about US$ 24 billion). More interestingly, spendingon non-basic needs is growing much faster now and so it is likely that by 2012 spending on textiles and

clothing could be relegated to the sixth spot (from the current third) and the hierarchy (excluding healthcare)will be roti, mobile, personal transport, and jewellery and watches. This data is at some variation with theofficial data since it includes some level of spending through the parallel economy, but is more reliablesince it has been arrived at bottom-up sector by sector, by considering their reported sales/size.

The shift in consumer spending priorities does not stop here. The total Central Government outlay onhigher education was about US$ 2 billion in 2008-09. The estimated revenue of the higher educationcoaching market (including preparation for entrance examinations like JEE, CAT, GRE, and GMAT) is aboutUS$ 2 billion. If tutoring and other self-learning is included, the guesstimated private spending would be isalmost US$ 10 billion! Spending on domestic leisure (and religious) travel and tourism would be US$ 12.5billion, while spending on consumer durables and consumer electronics would just to about US$ 11 billion.Spending on leisure and entertainment would be is about US$ 11 billion, nearly equalling the entire size of

Exhibit 2:

GDP US$ 1,161 Billion

Private ConsumptionUS$ 680 Billion - 59%

RetailUS$ 435 Billion - 64%

Urban

US$ 201 Billion - 46%

Organised RetailUS$ 21 Billion-10% of Urban

Non RetailUS$ 245 Billion - 36%

Rural

US$ 234 Billion - 54%

Organised RetailNegligible

Public Spending & investmentUS$ 481 Billion - 41%

Non-retail Spend Covers:TransportCommunicationRecreationCultural ServicesEducationRent & UtilitiesOther Services

The following account for 94% of retail spend:Food & GroceryApparelFootwearCDITHomeHealth & WellnessJewellery & WatchesBooks, Magazines and Entertainment

Size of Consumption in India

S. No Consumer spending (excluding institutional and government spending)Size in 2009 (in

US$ billion)Size in 2014

(in US$ billion)Likely Ranking

in 2014

1 Food and grocery 260 325 1

2 Healthcare 34 55 2

3 Apparel and home textiles 32 43 4

4 Education (K-12, higher education & vocational) 28 45 3

5 Telecom 25 41 5

6 Jewellery & watches 25 34 7

7 Personal transpor t (vehicles + fuel + repairs) 240 37 6

8 Travel and leisure 12 20 8

9 Consumer durables and IT products 11 17 9

10 Home (furniture, furnishings, etc.) 10 15 10

11 Personal care 10 14 11

12 Eating out 5 7 12

13 Footwear 4 5 1314 Health and beauty services 1 2 14

Exhibit 3: India: Consumer Spending, 2009

*Estimated figure


6/11



the personal and home care FMCG industry! Other fast-growing categories of consumer spending includepersonal computing (including Internet) amouting to US$ 2 billion, and personal grooming services wherethe spending was over US$ 830 million already in 2008-09 and growing in strong double digits.

However, beyond these broad estimates of spending by Indian consumers in 2009, it is interesting tosee how Indian consumers spending priorities have changed over the last 18 years and how they mayfurther change in the next five. Based on a tracking of consumer spending patterns over these years, wefind that in 1991, the average Indian household* spent 80 per cent of its discretionary income across justseven categories (Exhibit 4). In 2009, there are as many as 19 categories that account for this discretionaryspending budget. The next five years may see further additions of two or three more categories to thisspending basket.

Impact of the Changing

Consumption PatternsThese shifts in consumer spending patterns have several implications. Though income levels have beengrowing in the country, they have not kept pace with aspirations and desires. As a result, competition nowand in the future will not only be from businesses that are operating within the same category but also fromthose in other categories. For example, a soft drink brand will need to understand that its competition willcome not only from the rival brand or a local substitute like lemon water but also from across categorieslike mobile services. A young consumer with limited pocket money is being equally targeted by Airtel/Vodafone/Coke/Pepsi, etc. This category collide has to be dispassionately understood, and businessstrategies reoriented. This has major implications for categories such as food and grocery, clothing andtextiles, and others.

Exhibit 4: Categories of Consumption

Food and Grocery1.Clothing2.Footwear3.Consumer Durables4.Home Linen5.Movies and Theatre6.Eating Out7.

1991

Food and Grocery1.Clothing2.Footwear3.Consumer Durables4.Expenditure on DVD and VCDs5.Home Linen6.Home Accessories7.Accessories8.Gifts9.Take-away/RTE meals10.Movies and Theatre11.Eating Out12.Entertainment Parks13.Mobile Phone and Services14.Household Help15.Travel Packages16.Club Membership17.Computer Peripherals and Internet18.Personal Transport19.

2009

Food and Grocery1.Clothing2.Footwear3.Consumer Durables4.Expenditure on DVD and VCD5.Home Linen6.Home Accessories7.Gifts8.Take-away/RTE meals9.Movies and Theatre10.Eating Out11.Entertainment Parks12.Mobile Phone and Services13.Household Help14.Travel Packages15.Club Membership16.Computer Peripherals & Internet17.Beauty and Spa18.Gaming19.Personal Transport20.Coaching/Training/Learning21.

2015


7/11



Implications for Manufacturers and Marketers

Manufacturers and marketers need to gain a deeper understanding of consumer and shopper behaviour(going beyond traditional consumer/market research), and then work out the appropriate value propositionand delivery channels for their basket of goods and services. Entrepreneurs and businesses seeking todiversify into new areas need to understand that there are incredibly large new business opportunities, butthese require new business models (product, channel, consumer connect, delivery). Those planning toenter the workforce would be well advised to study these new emerging sectors and plan accordingly. Asis evident from the earlier discussion, the sectors likely to create the most jobs (besides retail, since mostof this consumption will be facilitated through modern brick-and-mortar retail channels) include healthcare,telecom, travel and leisure, education and training, media and entertainment and personal grooming andfitness.

The Government too needs to better understand these shifts since they have implications not only for itsown revenue generation opportunities through direct and indirect taxation, but also in dimensions such as

vocational and higher education, and infrastructure (such as retail).

Redefining Consumption

The most important implication is still for manufacturers and marketers of consumer goods and services.The starting point should be to come out with a fundamentally different way of segmenting consumers andtheir consumption habits.

We could classify two types of mass consumption.This consumption class excludes those under 15 yearsof age (350 million); the ultra rich, who comprise about 5 per cent of the total population (about 30 million);and BPL families, who comprise about 28 per cent of the population (about 225 million individuals)-leavinga core of about 550 million consumers. This classification would be:

Need-based merchandise and services

Aspiration/lifestyle-based merchandise and services

Need-based Consumption Giving Way to Commoditisation

Need-based consumption categories are increasingly becoming low-involvement items for these coreconsuming classes. Low involvement, in turn, implies that consumers will be zeroing in on just one or two

attributes for taking the buying decision such as, for example, the size of the LCD panel for the TV, the

Need-based Merchandise and Services

Food and grocery

Prepared food/food services

Textiles and apparel

Footwear

Medicine and reactive healthcare services

Air/train travel and other public transportation

Consumer durables (white and brown goods)

Consumer electronics (select categories such as DVD players)

Kitchen appliances

Mobile telephone handsets

Aspiration-based Merchandise and Services

Home and home dcor

Education for children

Personal transport vehicle

Jewellery and watches (both for women and men)

Accessories (handbags, pens, others)

Grooming

Well-being and preventive healthcare

Coaching and learning for self and for children

Leisure and recreation

Socialising and other lifestyle

Exhibit 5:

Consumption Classification


8/11



capacity of the refrigerator, the fibre composition of the garment/apparel and the confidence in the retailer/brand. For these categories of consumption, the majority of consumers will optimise their purchases largelybased on simple attributes of price and convenience (time efficiency) in order to release more resources(money, time, mental involvement) for the aspiration/lifestyle-based consumption categories.

This, in turn, would result in the rapidly diminishing power of manufacturers brands operating in suchcategories, leading to a steady loss of branding and pricing power. Further, as these products and servicesbecome generic, they will offer limited room for differentiation. In the past, some differentiation was feasibleon the basis of proprietary technology, cutting-edge design, exclusivity of retail channel and, of course, onthe basis of an emotional appeal through advertising and through role models and brand ambassadors.With the rise of global and regional giant mass merchants, technology and design become more universallyaccessible to most manufacturers and brand marketers, leaving them with a rapidly diminishing opportunityto differentiate brands. Finally, this will also lead to fickleness-or no brand loyalty-of the average consumerfor products and services falling in this need-based consumption segment.

Thus, with the commoditisation of a product or a service category-with the concomitant loss of brandingand pricing power-it shifts in the consumers mind from being aspirational to becoming just another need.At some point, the differentiation between competing brands becomes so indistinguishable that the productor service becomes generic, and at that time, consumers buying behaviour undergoes a fundamentalchange as they shift their aspirations to other product or service categories.

This process of commoditisation started in the early 1970s in the US and then other select developedmarkets when mass retailers first experimented with brown-bagged products (the early precursor to whatare now known as private labels) in categories such as sugar, wheat flour, breakfast cereal and several otherFMCG products. Over the last 40 years, the share of these no-name generic products (or, more correctly,the private label products) has moved up to almost 40 per cent in the most intensely branded FMCGproduct categories, at times even more than 50 per cent in some markets. As a result, while behemoths

such as P&G, Unilever, Nestle and a few others have still managed to hold their ground and even expand,countless other brands and producers have disappeared or have become terminally weakened.

Consumer durables and kitchen appliances were the next category to get commoditised, leading to thedemise of some of the biggest US and European (especially many German brands) businesses and therapid consolidation of the survivors, leaving just about five major global players (which include LG andSamsung) still in the pink of health. Even within these brands, categories such as washing machines,microwave ovens, stoves, and even refrigerators have seen rapid commoditisation at the mass end. Kitchenappliances such as mixers, grinders and electric irons have already been commoditised, as has been theDVD player with retailers like Wal-Mart selling millions of units per year with just about no history as a brandin such categories. Music systems, with the extremely disruptive impact of digital music distributed throughthe newer mediums and stored in a plethora of devices including the computer and the cellphone, haveseen rapid commoditisation. The MP3 player category, including the ultra-successful iPod, have probably

also reached their zenith and should see rapid commoditisation soon (notwithstanding the superlativeeffort that Apple continues to put into new product development year after year).

Which are next in the list of endangered species (from the perspective of branding and pricing power)?The owners and marketers of these currently iconic brands will vehemently disagree, but I believe that thecategories which should see (at least in the Indian context) very disruptive changes in consumer behaviourinclude colour televisions, digital cameras, and mobile telephones. This is to add to the list that alreadyincludes most FMCG products, branded apparel, and health and wellness products.

As far as India is concerned, the phenomenon is somewhat easier to explain. It is on account of a combinationof factors (some of which have already been elaborated upon earlier): demographic shifts that are leadingto massive shifts in consumption aspirations; entry of over 300 million new consumers to the consuming

class in the last 20 years and the expected entry of another 200 million in the next 10; commoditisation of


9/11



technology and of manufacturing leading to open-source availability of product design, technical know-how, and manufacturers; and changes in modern retail formats and multiplicity of retail channels that not

only include the internet, direct selling, catalogues, and even TV shopping channels.

Unfortunately, there is not much that the owners of the current power brands can do to reverse this trend. Atbest, they can slow down the process in order to give themselves some breathing time to re-jig their currentbusiness to ride the next big growth opportunity area(s).

Shifting Priorities Influencing the Buying Behavior

To this core Indian consumer, though low price is still of primary importance, it will in the coming yearssteadily shift to a price-plus platform. Here, the consumer will seek a greater balance of price with quality,convenience, consistency, innovation and shopping experience. The recent economic slowdown hasmade the Indian consumers mindset more conservative, and this will remain so for some more years to

come. Further, the shift to thrift is redefining value-in terms of price, brand and quality. This trend is global,and most likely to stay long after the recovery of the global economy, and will be very applicable to Indianconsumers too.Point of purchase (POP) will become more important, and will be the moment of truth for brands andretailers if they are to deliver their promise to the consumer. Hence, smart brands and retailers will spendmore effort in-store in terms of improving not only store interiors but also the overall shopping experience,even if they are high value-seeking ones. So far as shopping behaviour is concerned, there is a strongincrease in the trend of going shopping as a family which, in turn, is on account of the increasing timepoverty for most Indians in this core consuming class. Shopping together saves time for the family whilealso providing some additional time together. Modern retail (of which more details appear later) whichoffers all under one roof options, optimises for this core consumer-many dimensions including saving oftime, enhanced shopping experience, and combining shopping with leisure and recreation. Hence, given

a choice between traditional shopping markets and a well-planned, well-tenanted shopping centre (mall),this consumer is more likely to opt for the latter.

The Changing Face of Modern Retail

Let us now take a closer look at modern retail andits impact on the Indian consumer, as well as onmanufacturers and brands.

Notwithstanding the many stories of gloom and doomabout the fate of organised retailers, and of modernretailers currently in the fray, the modern retail sector

continues to grow steadily. In fact, there has beenexceptional broad-basing of the sector in the lastthree years in particular, and an extraordinarily steeplearning experience for most of the serious playersin the fray. Yes, there have been some casualties onthe way, and there are many still grappling with thechallenge of achieving desired profitability levels.Nevertheless, many are poised to achieve rapidgrowth in the next five years while concurrentlyimproving their profitability levels.

Size and Scale of Modern Retail

2005 2009 2014

Total Retail Sales

Modern Retail is expected to grow to 3 times its current size by 2014, and addUS$ 45 Billion. Unorganised retail would add close to US$ 150 Billion in this period

Organised Retail

0

100

200

300

400

500

600

Exhibit 6:


10/11



On a pan-India big-scale level, there are at least 10 credible players in India who have the requisiteexperience of retailing in India (with some having formidable global experience), have the management

and financial strength to deploy for sustained growth in the coming years, and also have the determinationand commitment to succeed in this particular sector. While the Future Group continues to be Indias largestretailer and continues to experiment, learn and grow very steadily, not many recognise that the Tata Groupis already the second-largest retail group in India, and perhaps poised to be the most formidable (oramong the most formidable) in the country in the coming years. With many successful retail formats andbusinesses within the group (Titan/Tanishq, Westside, Croma, Landmark, and Star India Bazaar to listthe major ones), and some solid global partners (Woolworths of Australia, Tesco, and Inditex of Zara andmany others), they are not only already profitable to a degree but also have a very interesting portfolio ofbusinesses in some of the most promising categories of future consumption growth (food and grocery,apparel, consumer durables and electronics, books, music and gifts, and jewellery). Reliance has madeexceptional progress since its first launch not more than three years ago, and is well poised to pick andchoose formats to focus on from the wide repertoire they launched. They also have a formidable arrayof partners-which include Marks & Spencer, Vision Express and Hamleys to name a few-to support their

speciality ventures. It would surprise no one if more such partnerships are announced by them in the nearfuture. Defying naysayers, Aditya Birla groups retail ventures (More, Madura Garments different brands,and others) show strong growth potential. The Bharti/ Wal-Mart partnership also promises to be one of themost successful ones, if early results from their first 40-odd retail stores are anything to go by. Metro (ofGermany), having established a solid presence in the country, is now poised to grow rapidly. There arealso reports of an expected launch of Carrefour (the worlds second largest retail business after Wal-Mart)in India sometime in 2010. Completing this pantheon of capable and potentially successful big-scale retailbusinesses are Spencer, Shoppers Stop, and the Landmark Group (from Dubai).

The growth in speciality retail has been no less spectacular in terms of product categories and formats andplayers as shown in Exhibit 7. If the Government were to, finally, take a pragmatic view of the overarchingbenefits of modern retail (not only to the Indian economy but also the average Indian consumer) and

open up the sector to foreign direct investment (both FDI and FII), the growth of this sector would be evenstronger and the positive impact even more far-reaching.

As these players expand in the coming years, they will provide a much anticipated and much needed boostto consumer spending. Many of these players operate in the value segment and will contribute to the rapidincrease in consumerism across India.

Next (Videocon)

The Mobile Store (Essar)

Apollo Pharmacy, Guardian Lifecare, Medplus

Tanishq, Gitanjali (jewellery)

Reebok, Nike, Adidas (footwear and clothing and accessories), Esprit, Tommy Hilfiger, Raymond, and many others

Welhome, Rosebys (home furnishings)

Fabindia

Ethos (watches)

Carplus (car accessories)

Landmark (books, music, and gifts)

Carnation (car repairs and servicing)

Mom & Me (Mahindra & Mahindra), Mothercare (mother and child)

Brands own stores (LG, Sony, Samsung; tiles/paints/home hardware companies, etc.)

Exhibit 7:

Key Players in Speciality Retail


11/11


| Ch i I di Ch i C ti Ch i C10

Conclusion

In conclusion, the following messages stand out

There is a fundamental shift in the consumption and buying behaviour of the core Indian consumingclass.

There is a positive broad-basing of economic activity in India in terms of geographic reach and jobs beingcreated, and this will make growth much more inclusive than what many political commentators wouldadmit.

There is a case for segmenting consumption categories along just two dimensions: need-based andaspiration/lifestyle based.

Those products and services categorised as need-based face the risk of rapid commoditisation, posing

a big challenge for the till-now successful brands and marketers.

Consumers are looking for value options which are increasingly becoming price plus, that is, anoption which balances the variables of price, quality, convenience, consistency, innovation and shoppingexperience.

And finally, modern retail is already reaching a stage of maturity in India with several formidable playersmaking steady progress. Hence, the coming years will see solid, determined expansion by all seriousplayers, giving them both scale and profitability.

Author

Arvind Singhal, Chairman & Managing Director I [email protected]

changing india changing consumption changing consumers

Documents