February 7, 2007
Buoyed Economy Driving Consumerism in India
By Ritesh Gupta
Consumerism in India, which is based on around 208 million households, is buoyed by current GDP growth in the region of seven to eight percent.
Of the total households, only a little over six million are “affluent” – that is, with annual household income in excess of 215,000 Indian rupees (INR), the equivalent of $4780 in U.S. dollars (USD). Another 75 million households are considered “well-off,” earning between 45,000 INR and 215,000 INR ($1000 – $4780 USD).
In the recent past, the organized consumer goods sector has concentrated almost exclusively on the affluent category. The challenge for organized retailers, distributors and consumer goods manufacturers is to capture more rupees from consumers in the much larger well-off category, as well as increasing penetration and returns among the affluent.
One noteworthy demographic is that India’s consumers are predominantly young: 54 percent of Indians are under 25 years of age. That means public finances will come under less strain than in most other countries, making infrastructural investment easier and allowing the economy to continue growing well above the global trend.
According to the National Council of Applied Economic Research (NCAER), this pro-growth demographic factor will be an important contributor to the expansion of consumer markets in India. The NCAER forecasts that the number of consumers driving growth will rise from 46 million households in 2003 to 124 million in 2012.
On the other hand, India still has a relatively narrow middle-class, reflecting a lower proportion of urban households compared to some Asian countries. It is estimated that around 70 percent of Indians live in the countryside.
Rural India consists of 720 million consumers across 627,000 villages. It is estimated that 17 percent of these villages account for 50 percent of the rural population and 60 percent of the rural wealth, implying the need to reach over 100,000 villages to address even half of this rural opportunity.
Discussion Question: Going by the urban-rural consumer divide in India, how can international players map out a retailing format and distribution strategy?
For the organized sector, distribution would be the key. Poor quality of infrastructure coupled with poor quality of the distribution sector, results in logistics costs that are very high as a proportion of GDP, and inventories, which have to be maintained at an unusually high level.
Food
and beverage offer the greatest organized retail growth opportunities, say
companies. The main growth opportunity in the segment is in processed foods:
rapid growth in the processed food segment is already apparent; changing lifestyles
and food habits are resulting in the rapid expansion of branded food outlets
and café chains.
In terms of product categories, it is estimated that food, beverages and tobacco currently account for $195 billion out of $300 billion in retail sales. The apparel category follows with $21 billion. Two categories – personal care, and jewelry and watches – each account for $15 billion currently. Consumer durables and IT together are currently estimated to be worth $14 billion in the organized sector.
Roger Corbett, independent consultant, Woolworth’s, says the Indian consumer has a high understanding and desire for the latest in technology.
One interesting example is Infiniti Retail, a 100 percent subsidiary of Tata Sons, which owns and runs Croma, a countrywide consumer electronics and durables chain. It opened its first store in October 2006. In an effort to help consumers make informed decisions, Croma has been equipped with trained professionals who are undergoing an extensive training program that will equip them with in-depth knowledge of the products and brands available at the store, thereby allowing them to provide the right kind of guidance to the customer.
Considering the potential of growth of organized retailing in India, tipped to touch $637 billion by 2015, there are strong indications that the market can accommodate all the new stores and higher-end products. But for foreign product manufacturers, the possibility of dominating the shelf space would largely depend up on their understanding of consumer choice, buying behavior and distribution strategy.
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The disparities in India seem almost impossible to comprehend. It is difficult to understand how a democracy can endure such a large underclass. Having said that, the opportunities follow the textbook list of human wants and needs outlined by Maslow. First there is food and water, then shelter, and finally you get into the more creative needs. You combine this with the comment by the former chairman of Netscape describing an “ever expanding universe of wants and needs” and you see how large the opportunity becomes.
The challenge is the same one Henry Ford faced when he started the assembly line. Now that he was able to produce all these cars he needed someone to buy them. He was smart enough to realize that the only way to sell a “car for the masses” was to make sure the masses had enough money to buy one. As the article outlined, the place to start is with the food, beverage, and tobacco categories. But to really get a strong consumer base in place is going to take some political and general economic help. India is going to continue to provide services to outside companies that need support services which can be delivered over the network. When the income from these jobs gets distributed to others in the country the demand will build.
Retailers can support this evolution by supporting and merchandising products from companies that have production plants in India. By recognizing the need to raise the economic level of much of the population and giving them an opportunity to earn a wage that allows them to buy products, the retailers can only help themselves.
Consumerism in almost all developing nations is spurred by the young who have little or no responsibility. When you are not paying for shelter or food, it’s much easier to spend all of your time and resources working to buy an iPod or motor bike. As the youth age, they tend to gravitate to urban areas and live together, sharing expenses, which allows for increased disposable income and more consumerism. All of this progression is underpinned by the fact that a growing economy allowed the mothers and fathers of the current generation to support the family without having to press their children into a forced labor situation.
Yes, currently on the top of the list of the Retailing Industry throughout the world.
For a person with 15 years of experience with Nestle, 3M India and Coca-Cola India and Middle East experience, I have decided to take break in the career and joined Management School, to specialize in Retail Management as a full time student; a head start to represent the FMCG majors in Category Management.
There is a unique trend growing in India wherein the Retail majors are lining up to get their act together through JV entry mode.
The key 18-30 age group is on the increase and likely to grow in the next 10 years, along with the rapidly increasing disposable income from this age bracket…India is a market for all the manufacturers.
The keys to succeed are:
1) Choose your entry mode going by the characteristic of your product–high involvement or low involvement.
2) India is a very fragmented market and the culture varies from place to place. Hence, what is applied in one region do not try to replicate on an as is/where is basis…understand the local nuances and adapt it.
3) Trade Marketing is a key tool. Being fragmented, it calls for judicious spending on ATL and BTL. Trade marketing is an important, effective tool and hence localization of the promos is the order of the day. Spend the money where the target customer is.
4) Capability: Attrition is a major issue and hence managing knowledge workers in terms of senior management and the front line sales force is a challenge. Performance-based pay can be a useful tool but try to show the color of the coin as frequently as possible which can be a great motivator to the front line/sales advisers.
5) Logistics & SC: Supply Chain is going to be another great area wherein the organizations need to understand the local terrain. For the start up movers, third part logistics outsourcing can be an effective and efficient tool. Over the long run, it can be decided based on the volume and value and dynamics of each Region
6) Pricing: Of late, you have local manufactured products which are making great success due to adaptation of the local need and it’s increasing everywhere. Hence, peg your pricing according to the market reality.
7) Retailer Own Brands: Reliance Fresh which has opened so far 40 outlets in the last three months has decided to go into high volume Category products like Milk, CSD & juices into their branding with 30% to 40% less than the market leaders like Coca-Cola & Pepsi…they might follow the trend to other categories. Similarly, other retailers will be moving towards this idea. Hence, FMCG companies need to understand and position their category clinically, understanding the retailers’ position in the Category matrix and what USP tag is going to differentiate yours.
8) CSR: Be proactive and connect your brand with local community. This is very important initiative that needs to go into the minds of FMCG majors or Retailers.
9) Distribution: With the increase in the Supermarket penetration the volume contribution is bound to increase drastically and that calls differentiated distribution mechanics. Based on the characteristics of the product you can be mean and slowly penetrate to other markets. Be careful to take the wholesale route.
10) local law, tax: Understand the local tax and direct and indirect and its implications. Understand local law and regulations.
Trust the above will give some insight into some of the challenges…it may not coherent and in order of difficulty…but the whole premise is to give you a flavour of Opportunity and Underpinning issues….
Welcome to the new golden Economy…it’s there for you to take as long as you do it by understanding your Consumer…Good luck….
In my view, India and China are two countries that can change companies.
Most analyses of “consumer India” are led by affluent analysts primarily based in the biggest cities. These incomplete analyses are followed avidly also by international companies to draw up their India strategy. Most do not even scratch the surface of the diversity of the country, let alone customize the approach.
There are reasonably large and distinct consumer segments in India–many are alien to most companies based in the developed markets, because they have been extinct there for several decades. The companies that seem to be succeeding are the ones who don’t come in expecting a billion-plus market (or even a “percentage” of that) hungering for their brand/product just as it is sold in the US or Europe. They are the ones who take the time, and show the patience, to understand the specifics that their target segment in India is looking for. They are the ones who are prepared to to the extra mile in tailoring their offering to India. Some may even launch new products in India and then take them elsewhere.
For more views–and possibly some useful information–see http://www.3isite.com/articles.htm.
It’s hard to even contemplate adding anything to Rajan’s excellent commentary. My own experience with India is both limited and dated–and comes from the Pepsico days. At that point (early 90s) we were pegging “availability” as the key to reaching the mass market with snacks and CSDs. Unless things have evolved substantially, the first company (third party or otherwise) to establish an effective network for delivering shorter shelf life goods to the villages will win. At least in the “less than hi-tech” sector of the market.
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The disparities in India seem almost impossible to comprehend. It is difficult to understand how a democracy can endure such a large underclass. Having said that, the opportunities follow the textbook list of human wants and needs outlined by Maslow. First there is food and water, then shelter, and finally you get into the more creative needs. You combine this with the comment by the former chairman of Netscape describing an “ever expanding universe of wants and needs” and you see how large the opportunity becomes.
The challenge is the same one Henry Ford faced when he started the assembly line. Now that he was able to produce all these cars he needed someone to buy them. He was smart enough to realize that the only way to sell a “car for the masses” was to make sure the masses had enough money to buy one. As the article outlined, the place to start is with the food, beverage, and tobacco categories. But to really get a strong consumer base in place is going to take some political and general economic help. India is going to continue to provide services to outside companies that need support services which can be delivered over the network. When the income from these jobs gets distributed to others in the country the demand will build.
Retailers can support this evolution by supporting and merchandising products from companies that have production plants in India. By recognizing the need to raise the economic level of much of the population and giving them an opportunity to earn a wage that allows them to buy products, the retailers can only help themselves.
Consumerism in almost all developing nations is spurred by the young who have little or no responsibility. When you are not paying for shelter or food, it’s much easier to spend all of your time and resources working to buy an iPod or motor bike. As the youth age, they tend to gravitate to urban areas and live together, sharing expenses, which allows for increased disposable income and more consumerism. All of this progression is underpinned by the fact that a growing economy allowed the mothers and fathers of the current generation to support the family without having to press their children into a forced labor situation.
Yes, currently on the top of the list of the Retailing Industry throughout the world.
For a person with 15 years of experience with Nestle, 3M India and Coca-Cola India and Middle East experience, I have decided to take break in the career and joined Management School, to specialize in Retail Management as a full time student; a head start to represent the FMCG majors in Category Management.
There is a unique trend growing in India wherein the Retail majors are lining up to get their act together through JV entry mode.
The key 18-30 age group is on the increase and likely to grow in the next 10 years, along with the rapidly increasing disposable income from this age bracket…India is a market for all the manufacturers.
The keys to succeed are:
1) Choose your entry mode going by the characteristic of your product–high involvement or low involvement.
2) India is a very fragmented market and the culture varies from place to place. Hence, what is applied in one region do not try to replicate on an as is/where is basis…understand the local nuances and adapt it.
3) Trade Marketing is a key tool. Being fragmented, it calls for judicious spending on ATL and BTL. Trade marketing is an important, effective tool and hence localization of the promos is the order of the day. Spend the money where the target customer is.
4) Capability: Attrition is a major issue and hence managing knowledge workers in terms of senior management and the front line sales force is a challenge. Performance-based pay can be a useful tool but try to show the color of the coin as frequently as possible which can be a great motivator to the front line/sales advisers.
5) Logistics & SC: Supply Chain is going to be another great area wherein the organizations need to understand the local terrain. For the start up movers, third part logistics outsourcing can be an effective and efficient tool. Over the long run, it can be decided based on the volume and value and dynamics of each Region
6) Pricing: Of late, you have local manufactured products which are making great success due to adaptation of the local need and it’s increasing everywhere. Hence, peg your pricing according to the market reality.
7) Retailer Own Brands: Reliance Fresh which has opened so far 40 outlets in the last three months has decided to go into high volume Category products like Milk, CSD & juices into their branding with 30% to 40% less than the market leaders like Coca-Cola & Pepsi…they might follow the trend to other categories. Similarly, other retailers will be moving towards this idea. Hence, FMCG companies need to understand and position their category clinically, understanding the retailers’ position in the Category matrix and what USP tag is going to differentiate yours.
8) CSR: Be proactive and connect your brand with local community. This is very important initiative that needs to go into the minds of FMCG majors or Retailers.
9) Distribution: With the increase in the Supermarket penetration the volume contribution is bound to increase drastically and that calls differentiated distribution mechanics. Based on the characteristics of the product you can be mean and slowly penetrate to other markets. Be careful to take the wholesale route.
10) local law, tax: Understand the local tax and direct and indirect and its implications. Understand local law and regulations.
Trust the above will give some insight into some of the challenges…it may not coherent and in order of difficulty…but the whole premise is to give you a flavour of Opportunity and Underpinning issues….
Welcome to the new golden Economy…it’s there for you to take as long as you do it by understanding your Consumer…Good luck….
In my view, India and China are two countries that can change companies.
Most analyses of “consumer India” are led by affluent analysts primarily based in the biggest cities. These incomplete analyses are followed avidly also by international companies to draw up their India strategy. Most do not even scratch the surface of the diversity of the country, let alone customize the approach.
There are reasonably large and distinct consumer segments in India–many are alien to most companies based in the developed markets, because they have been extinct there for several decades. The companies that seem to be succeeding are the ones who don’t come in expecting a billion-plus market (or even a “percentage” of that) hungering for their brand/product just as it is sold in the US or Europe. They are the ones who take the time, and show the patience, to understand the specifics that their target segment in India is looking for. They are the ones who are prepared to to the extra mile in tailoring their offering to India. Some may even launch new products in India and then take them elsewhere.
For more views–and possibly some useful information–see http://www.3isite.com/articles.htm.
It’s hard to even contemplate adding anything to Rajan’s excellent commentary. My own experience with India is both limited and dated–and comes from the Pepsico days. At that point (early 90s) we were pegging “availability” as the key to reaching the mass market with snacks and CSDs. Unless things have evolved substantially, the first company (third party or otherwise) to establish an effective network for delivering shorter shelf life goods to the villages will win. At least in the “less than hi-tech” sector of the market.