It's the 'Who' that Counts

Economic Times - February 15, 2008

Consumer demand is now no longer about undesirable habits of rich folk but about driving GDP growth. Being morally purified, it now attracts a great deal of discussion and analysis, especially as we run up to another budget, a key theme of which is about stimulating consumption. Yet most of the discussion and analyses are totally supply sided and product-centric and obsessed with WHAT is being spent on, rather than on WHO is spending and how they decide to. Consumer demand is about how much people choose to spend, on what their consumption ability, aspiration and priorities are, in turn determined by their world view and life stage and socio cultural group.

It is therefore simplistic to think about stimulating consumption in terms of spread sheet projections of past sales trends, suggesting how much excise duty to cut on what product categories or about cutting income tax (given that most people who consume don't pay any way), or making credit flows easier. Understanding consumption at the level of people or consumer segments and not product segments could yield a range of new initiatives to stimulate consumption beyond the usual. This article provides a perspective from the other side of the consumption equation i.e. the consumer. It also clarifies the incorrectness of the assumption in some quarters that India has 2 classes – consumer and the non-consumer (poor), and that stimulating consumption will help one but upset the other.

The first cut with which B2C companies think about consumer segments is in terms of the socio economic class (SEC) of a consumer. Closely correlated with income and also a good determinant of what kind of consumption priorities a person or a family has, the SEC system is based on occupation and education of the chief wage earner in urban and rural India, on the education of the chief wage earner and type of house lived in.

Hansa Research, using IRS data, measures aggregate consumption of each SEC consumer segment, based on penetration (consumption) levels in the segment for 50 consumer durables and FMCG products and 4 services. Comparing IRS 2003 and 2007 data shows that while the richest consumers have increased their consumption the most (by 49%), consumption increases have happened right across the board (the least growth being 28% in R4, the poorest 30% of Indian consumers). The structure of consumption is clear. There is consumption weight up and down the SEC. Poorer segments drive consumption because they have larger numbers of consumers though lower consumption intensity, and the richer ones do the opposite. The potential to drive national consumption comes from one as much as it does from the other.

There are four broad SEC-based consumer segments that most B2C companies implicitly work with:

Premium hyper consumers:
A and B1, flag bearers of our new consumer culture, 11.6 million families, accounting for 20% of India's consumption, made money in the past few years, and very high on consumer confidence. They already own most amenities and are poised to replace and upgrade them and will drive sharp growths of the premium segment of most categories, from apparel to personal gadgets to skin care. They have a considerable untapped spending potential, are more benefit-sensitive than price-sensitive, and will lap up the supply of everything from barber shops to home theatres to organic food to short get-aways to exotic corners of the country. They are also ready for second home and one car for each family member. Greater income tax relief on interest payments for this group and more innovative loan products would incite this segment to consume to their fuller potential.

Mainstay mass market:
B2C (in urban India) and R1 (in rural India) together form the core consumption mass market – 25 million households, accounting for 25% of India's consumption. They drive high-end popular or mid-priced product and service consumption, will pay for productivity and functionality products and provide the necessary volumes for manufacturing economies of scale. Today, their confidence level is quite high with half of them planning to buy durables and one third of them planning to buy a vehicle in the next one year. Aspiring and curious though cautious consumers, this segment will reward you the most with volume spurts for an across-the-board reduction in excise duties. However, at least half of them have loans to repay and an increase in EMI and / or perceptions of rising prices will have this segment press the brake on consumption real hard and go back to cautious thought through agonized purchases.

Urban India '2' and rural new consumers:
About 55% of the consumption is with the remaining 80% of consumers. De1E2 account for 34% of all urban households and are classic examples of what Kishore Biyani of the Future Group calls "India 2" i.e., those who provide services for India 1. If India 1 stays confident and consumes, this segment stays confident and consumes too.

Rural India consumers, whom we call R2, have consumption levels equivalent to SEC D of urban India, and will buy low-end products if companies are in a market development mood and mode. Easier credit flows could stimulate this segment.

The base of the pyramid consumers: The rest of the consumer segments – R3, R4 are large (almost 110 million families), and while they may not be big in terms of consumption intensity, they collectively account for about one-third of consumption expenditure, primarily for FMCG and very basic consumer durables. This is the time to provide incentives or concessions to companies with offerings targeted at this segment (BOP benefit, conceptually similar to backward area benefits for manufacturing units).

An ITES slowdown will affect consumption. Primary dependents on this sector are 1.6 million very young people and their families who spend on gadgets, entertainment, travel and clothes. Another 3 million people and their families who provide goods and services to this sector will also be affected. However, the good news for durables and financial products could perhaps be the Sixth Pay Commission bonuses that will put money into the hands of 10 million central and state government employees.

Rama Bijapurkar is an independent market strategy consultant and author of 'We are like that only: Understanding the logic of Consumer India' (Analysis from Hansa Research based on IRS 2007, Round 2 data).