Changing India, Changing Consumption, Changing Consumers

Background Factors Contributing to a Dynamic Economy Changing Priorities in Consumer Spending Impact of the Changing Consumption Patterns Conclusion 02 02 03 05 10

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Background
As India changes and reinvents itself at a remarkably accelerated pace, the private consumption patterns of its population have been transformed. What is new about these changes in the consumer behaviour of 1.15 billion individuals? Historically, change has been a gradual and largely predictable process, allowing industry experts to reasonably forecast consumption patterns and consumer behaviour in the near future based on the current and immediate past. Those days are history. The fundamental shifts in consumer spending patterns have far-reaching implications not only for manufacturers, marketers and retailers of consumer 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 for manufacturers, marketers and brand owners, and retailers. The key lies in understanding the nature of this change in consumer behaviour and consumption patterns and thereby the change in the wallet-share of Indian consumers. Todays reality consists of many new, unique and disparate factors that have come into play simultaneously.

Factors Contributing to a Dynamic Economy

First, India has seen a very strong economic growth (averaging around 6.5 per cent) for almost 18 years on the trot, with the last five showing an even stronger growth trajectory. With the size of the economy hitting a US$ 1,000 billion mark about two years ago, its scale can now support myriad new consumption categories that 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 below US$ 1,000, the annual household income is now almost US$ 4,000, and if purchasing power parity is to be applied, then it is over US$ 12,000 per year. Further, it is quite likely to more than double in the next 10 years, 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 economic activity and in consumption, with almost 550 million consumers across urban and rural India in the 15+ age group (excluding the 250 million or so who are still, unfortunately, below the poverty line). Of these, about 400 million are in rural India while the remaining live in urban India. Of the latter, about 100 million reside in the top 100 cities alone, and there is a very positive geographic broad-basing of this consuming class. As the dependency ratio continues to drop in India (in marked contrast with the developed economies where it 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 domestic output, encouraging broad-basing of geographic spread of economic activity, and well-founded optimism on broad-basing of the nature of jobs that match the populations current skill-sets.
Exhibit 1:

Current Break-up of Indias 480 Million Jobs

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) ,

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

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Manufacturing is already seeing signs of a renewed boom in investment in diverse industries including defence, 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 and mini-metros unless there were backward area benefits or other incentives, this time around manufacturing investments are spread almost all across India. This is, of course, after evaluating attributes such as the availability of raw material, manpower and its relative costs, environment issues, supply chain and logistics issues, and market factors which render availability of fiscal incentives as just one of the many variables in the manufacturing location selection grid. The services sector is also moving beyond IT. The largest growth in the coming years will be in a host of new services including retail, healthcare, leisure and recreation, education and coaching, construction and other 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 the workforce. Further, these sectoral jobs are even more spread out across the length and breadth of both urban 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 to support the really underprivileged, the quantum of funds allocated in the first 55 years of independence was very small compared to the size of the economy, as a result of which there was limited impact in the overall context of spending power and its broad-basing. Under UPA (I), and now continued under the current 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 have allocations exceeding US$ 695 million per year generating additional spending incomes across small town and 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, economically important urban centres emerging beyond the traditional top-8 or top-20. By 2011, over 60 Indian cities will have 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 consumption of a scale currently that of, say, Belgaum or Gwalior or Meerut or Kolhapur, which belong to the 500,000+ population towns.

Changing Priorities in Consumer Spending

Let us now look at the size and composition of consumption in India. Notwithstanding the current concerns of the truant monsoon impacting consumer spending, India is expected to have seen a spending of almost US$ 435 billion at current prices in 2009 (assuming a GDP growth rate of 6 per cent). Further, factoring in 5 per cent inflation and assuming that GDP will further grow at 6 per cent, consumer spending is likely to cross US$ 485 billion in 2010. Hence, all those who have been talking about the recession in India, or even a downturn in consumer spending, should consider looking at these broad economic indicators that show a very robust growth in consumer spending over the last 12 months and point to a similar trend for the coming year (and years). A deeper analysis of this gross data on consumer spending throws up some very interesting insights. For as long as we can remember, roti, kapada aur makaan have been the primary needs and drivers of private consumption. 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. While food and grocery continue to account for the largest quantum of spending (about US$ 260 billion in 2009),

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followed by healthcare (about US$ 34 billion) and then textiles and clothing (about US$ 31 billion), the surprise inclusions on this list in 2009 have been spending on mobile phones and talk-time (about US$ 25 billion), jewellery and watches (about US$ 25 billion), and personal transport, comprising two/four-wheelers and related spending on fuel and repairs/maintenance (about US$ 24 billion). More interestingly, spending on non-basic needs is growing much faster now and so it is likely that by 2012 spending on textiles and
Exhibit 2:

Size of Consumption in India

GDP US$ 1,161 Billion Non-retail Spend Covers: Transport Communication Recreation Cultural Services Education Rent & Utilities Other Services The following account for 94% of retail spend: Food & Grocery Apparel Footwear CDIT Home Health & Wellness Jewellery & Watches Books, Magazines and Entertainment

Private Consumption US$ 680 Billion - 59% Retail US$ 435 Billion - 64% Urban US$ 201 Billion - 46%

Public Spending & investment US$ 481 Billion - 41% Non Retail US$ 245 Billion - 36% Rural US$ 234 Billion - 54%

Organised Retail US$ 21 Billion -10% of Urban

Organised Retail Negligible

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 the official data since it includes some level of spending through the parallel economy, but is more reliable since 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 on higher education was about US$ 2 billion in 2008-09. The estimated revenue of the higher education coaching market (including preparation for entrance examinations like JEE, CAT, GRE, and GMAT) is about US$ 2 billion. If tutoring and other self-learning is included, the guesstimated private spending would be is almost US$ 10 billion! Spending on domestic leisure (and religious) travel and tourism would be US$ 12.5 billion, 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 3:

India: Consumer Spending, 2009

Consumer spending (excluding institutional and government spending) Food and grocery Healthcare Apparel and home textiles Education (K-12, higher education & vocational) Telecom Jewellery & watches Personal transport (vehicles + fuel + repairs) Travel and leisure Consumer durables and IT products Home (furniture, furnishings, etc.) Personal care Eating out Footwear Health and beauty services Size in 2009 (in US$ billion) 260 34 32 28 25 25 240 12 11 10 10 5 4 1 Size in 2014 (in US$ billion) 325 55 43 45 41 34 37 20 17 15 14 7 5 2 Likely Ranking in 2014 1 2 4 3 5 7 6 8 9 10 11 12 13 14

S. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14

*Estimated figure

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the personal and home care FMCG industry! Other fast-growing categories of consumer spending include personal computing (including Internet) amouting to US$ 2 billion, and personal grooming services where the 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 to see how Indian consumers spending priorities have changed over the last 18 years and how they may further change in the next five. Based on a tracking of consumer spending patterns over these years, we find that in 1991, the average Indian household* spent 80 per cent of its discretionary income across just seven categories (Exhibit 4). In 2009, there are as many as 19 categories that account for this discretionary spending budget. The next five years may see further additions of two or three more categories to this spending basket.
Exhibit 4:

Categories of Consumption
1991 1. 2. 3. 4. 5. 6. 7. Food and Grocery Clothing Footwear Consumer Durables Home Linen Movies and Theatre Eating Out 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 2009 Food and Grocery Clothing Footwear Consumer Durables Expenditure on DVD and VCDs Home Linen Home Accessories Accessories Gifts Take-away/RTE meals Movies and Theatre Eating Out Entertainment Parks Mobile Phone and Services Household Help Travel Packages Club Membership Computer Peripherals and Internet Personal Transport 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 2015 Food and Grocery Clothing Footwear Consumer Durables Expenditure on DVD and VCD Home Linen Home Accessories Gifts Take-away/RTE meals Movies and Theatre Eating Out Entertainment Parks Mobile Phone and Services Household Help Travel Packages Club Membership Computer Peripherals & Internet Beauty and Spa Gaming Personal Transport Coaching/Training/Learning

Impact of the Changing Consumption Patterns

These shifts in consumer spending patterns have several implications. Though income levels have been growing in the country, they have not kept pace with aspirations and desires. As a result, competition now and in the future will not only be from businesses that are operating within the same category but also from those in other categories. For example, a soft drink brand will need to understand that its competition will come not only from the rival brand or a local substitute like lemon water but also from across categories like 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 business strategies reoriented. This has major implications for categories such as food and grocery, clothing and textiles, and others.

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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 proposition and delivery channels for their basket of goods and services. Entrepreneurs and businesses seeking to diversify into new areas need to understand that there are incredibly large new business opportunities, but these require new business models (product, channel, consumer connect, delivery). Those planning to enter the workforce would be well advised to study these new emerging sectors and plan accordingly. As is evident from the earlier discussion, the sectors likely to create the most jobs (besides retail, since most of 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 and fitness. The Government too needs to better understand these shifts since they have implications not only for its own 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 and their consumption habits. We could classify two types of mass consumption.This consumption class excludes those under 15 years of 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)-leaving a core of about 550 million consumers. This classification would be: Need-based merchandise and services Aspiration/lifestyle-based merchandise and services
Exhibit 5:

Consumption Classification 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

Need-based Consumption Giving Way to Commoditisation

Need-based consumption categories are increasingly becoming low-involvement items for these core consuming 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

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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 largely based 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 such categories, leading to a steady loss of branding and pricing power. Further, as these products and services become generic, they will offer limited room for differentiation. In the past, some differentiation was feasible on the basis of proprietary technology, cutting-edge design, exclusivity of retail channel and, of course, on the 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 universally accessible to most manufacturers and brand marketers, leaving them with a rapidly diminishing opportunity to differentiate brands. Finally, this will also lead to fickleness-or no brand loyalty-of the average consumer for 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 branding and 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 product or service becomes generic, and at that time, consumers buying behaviour undergoes a fundamental change 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 developed markets when mass retailers first experimented with brown-bagged products (the early precursor to what are now known as private labels) in categories such as sugar, wheat flour, breakfast cereal and several other FMCG 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 FMCG product 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 the demise of some of the biggest US and European (especially many German brands) businesses and the rapid consolidation of the survivors, leaving just about five major global players (which include LG and Samsung) 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. Kitchen appliances such as mixers, grinders and electric irons have already been commoditised, as has been the DVD player with retailers like Wal-Mart selling millions of units per year with just about no history as a brand in such categories. Music systems, with the extremely disruptive impact of digital music distributed through the newer mediums and stored in a plethora of devices including the computer and the cellphone, have seen 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 superlative effort 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 the categories which should see (at least in the Indian context) very disruptive changes in consumer behaviour include colour televisions, digital cameras, and mobile telephones. This is to add to the list that already includes 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 combination of factors (some of which have already been elaborated upon earlier): demographic shifts that are leading to 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

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technology and of manufacturing leading to open-source availability of product design, technical knowhow, 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. At best, they can slow down the process in order to give themselves some breathing time to re-jig their current business 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 years steadily 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 has made 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 Indian consumers too. Point of purchase (POP) will become more important, and will be the moment of truth for brands and retailers if they are to deliver their promise to the consumer. Hence, smart brands and retailers will spend more 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 strong increase in the trend of going shopping as a family which, in turn, is on account of the increasing time poverty for most Indians in this core consuming class. Shopping together saves time for the family while also providing some additional time together. Modern retail (of which more details appear later) which offers all under one roof options, optimises for this core consumer-many dimensions including saving of time, 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 and its impact on the Indian consumer, as well as on manufacturers and brands. Notwithstanding the many stories of gloom and doom about the fate of organised retailers, and of modern retailers currently in the fray, the modern retail sector continues to grow steadily. In fact, there has been exceptional broad-basing of the sector in the last three years in particular, and an extraordinarily steep learning experience for most of the serious players in the fray. Yes, there have been some casualties on the way, and there are many still grappling with the challenge of achieving desired profitability levels. Nevertheless, many are poised to achieve rapid growth in the next five years while concurrently improving their profitability levels.
Exhibit 6:

Size and Scale of Modern Retail

600 500 400 300 200 100 0 2005
Total Retail Sales

2009

2014
Organised Retail

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

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On a pan-India big-scale level, there are at least 10 credible players in India who have the requisite experience 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 determination and commitment to succeed in this particular sector. While the Future Group continues to be Indias largest retailer and continues to experiment, learn and grow very steadily, not many recognise that the Tata Group is already the second-largest retail group in India, and perhaps poised to be the most formidable (or among the most formidable) in the country in the coming years. With many successful retail formats and businesses within the group (Titan/Tanishq, Westside, Croma, Landmark, and Star India Bazaar to list the major ones), and some solid global partners (Woolworths of Australia, Tesco, and Inditex of Zara and many others), they are not only already profitable to a degree but also have a very interesting portfolio of businesses 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 made exceptional progress since its first launch not more than three years ago, and is well poised to pick and choose formats to focus on from the wide repertoire they launched. They also have a formidable array of 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 near future. 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 the most successful ones, if early results from their first 40-odd retail stores are anything to go by. Metro (of Germany), having established a solid presence in the country, is now poised to grow rapidly. There are also 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 retail businesses 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 and players as shown in Exhibit 7. If the Government were to, finally, take a pragmatic view of the overarching benefits 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 even stronger and the positive impact even more far-reaching.
Exhibit 7:

Key Players in Speciality Retail

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.)

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

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Conclusion
In conclusion, the following messages stand out There is a fundamental shift in the consumption and buying behaviour of the core Indian consuming class. There is a positive broad-basing of economic activity in India in terms of geographic reach and jobs being created, and this will make growth much more inclusive than what many political commentators would admit. There is a case for segmenting consumption categories along just two dimensions: need-based and aspiration/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, an option which balances the variables of price, quality, convenience, consistency, innovation and shopping experience. And finally, modern retail is already reaching a stage of maturity in India with several formidable players making steady progress. Hence, the coming years will see solid, determined expansion by all serious players, giving them both scale and profitability.

Author Arvind Singhal, Chairman & Managing Director I arvind.singhal@technopak.com

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