By Suranjana Roy
Let us take a person X, who is 29 years old. He lives in Noida and works at a multinational firm. He owns an apartment where he lives with his parents. His house is installed with the latest electronic appliances like a washing machine, a refrigerator, an air conditioner, etc. to meet his daily needs. He also has a fancy smartphone which enables him to communicate in ways other than just mere telephonic calls. He buys his daily groceries from the nearby supermarket and is planning to purchase a car to ease his travels.
The aforementioned account is that of an average metropolitan youth, whose consumption expenditure has risen over the decade. We talk about India as a story of growth—probably the biggest story of growth. The changing dynamics of our consumer economy has found its place in reports (by Boston Consulting Group) as well claiming India to become the third largest consumer economy by 2025. Our country is mainly consumer driven, and thus understanding changing consumer patterns is a key to predicting economic growth.
Factors influencing the change in the consumer markets
India has gotten younger and currently, it has one-third of its population below 35 years of age. The youth has defied slowdowns like that of drought (in 2014 and 2015), demonetisation (in November 2016) and rural distress and continued to increase its consumption expenditure. This has helped the economy to steadily prosper. This trend also coincides with the phenomenal rise of social media, smartphones, and technology over the last decade.
These rapid changes in the consumer market are due to substantial increase in the per capita income from ₹29,524 in 2006-07 to ₹103,219 in 2016-17, given a PCI growth rate of 8.3 percent. This increase in PCI has increased the propensity to consume for both staple and discretionary goods.
With emerging cities, consumption expenditure is already rising at 14 percent per annum. This is combined with strong value-for-money orientation, better education, the participation of women in society and workforce, etc. It is expected to drive exponential growth in the economy. Furthermore, the great Indian joint family structure has given way to more nucleated family units over the past 2 decades. Nuclear families spend 20-30 percent more on consumption compared to joint families. The rise of easily accessible information via the internet, along with these factors, has led to consumers make informed purchases. Digitally influenced spending is currently about $45 billion to $50 billion a year, and that figure is projected to increase more than tenfold to $500 billion to $550 billion—and to account for 30% to 35% of all retail sales—by 2025.
What does this mean for companies?
“The last few years have seen central and state governments devote more attention to building infrastructure, improving roads, rail and air connectivity as well as increasing focus on housing and providing electricity to people. Greater attention has also been given to the rural areas, with welfare schemes and better price to key agricultural crops,” says Deven Choksey, managing director of KR Choksey Investment Managers. An economy on a growth path, as summarised by Choksey, is always good news for consumer-facing businesses.
Given the fundamental changes in the consumer market, companies would be required to shed conventional wisdom, try multiple business models simultaneously, and be prepared for rapid change internally to adapt to changing consumer needs and behaviours. Companies need to identify breakout opportunities in micro markets of emerging cities for their products, therefore understanding the changing notions of markets and competition. Given e-commerce and digital business models, companies need to develop their own innovative offerings to consumers.
The statistics of the last decade are an evidence of how companies have been reacting to the changes in consumer behaviour. From 2006-07 to 2016-17, for instance, top 25 fast-moving-consumer-goods (FMCG) and durable companies grew at a compounded rate of 13 percent. The next decade could see compounded annual growth rate in terms of net sales cross the 13-percent mark, with net profits increasing at an equivalent rate. This is re-enforced with companies taking up excessive advertising and sales expenditure. Tax rationalisation on consumer goods, post the implementation of the Good and Service Tax, is probably the biggest stimulator in exponentially improving sales growth. This is because more of the consumer goods now fall under the 12 percent and 18 percent tax slabs, which are lower than the pre-GST tax rate of 23-24 percent. “Between 2002 and 2007, the FMCG market was marked by intense competition between rivals and multinational players such as Hindustan Unilever, Procter & Gamble and Colgate, who were all looking to consolidate their position in the marketplace. The period from 2008 onwards, however, has seen the emergence of Indian FMCG players such as Dabur, Marico, Emami and Godrej Consumer, which grew on the back of acquisitions,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory.
These trends of structural reformations in the consumer markets as well as in companies suggest that consumption is expected to almost triple over the next decade from the current $1.4 trillion to $4 trillion, according to the report titled ‘The New Indian: The Many Facets of a Changing Consumer’. India is thus set to become the third largest consumer economy, trailing only the United States of America and China. Currently, India is the sixth largest consumer economy after the US, China, Japan, the UK, and Germany. The rising affluence of households has, in turn, made companies consider superior propositions and manage consumer advocacy. India is already the second-largest smartphone market in the world after China. Its FMCG market is already worth ₹2.5 trillion and the durable markets are worth ₹700 billion, making the largest markets in the world in these categories. The growth rates of India have already marked themselves in history, yet the current analysis tells us there is a long way to go. It a matter of few years that we see India in its economic boom and glory.