With more competition and more cautious consumers, companies will need smart marketing moves
It is business plan season again. Most managers will argue for their new targets based on some rule of thumb linking overall market growth of their sector to GDP growth. Aiding them will be analysts' views - mostly people who believe that all markets follow the same logic as the stock market - on whether consumer demand is 'still strong' or 'softening' based on quarterly results of companies and year-on-year comparisons. Using the health of consumer demand to assess the health of GDP growth, and using that, in turn, to predict consumer demand, is a bit confusing to some of us. Intuitively, the idea is sound that even with low GDP growth, companies can find healthy consumer demand for their business by persuading consumers to buy from them.. That is why our IT companies have healthy top line growth despite US' GDP growth number. Corporate sales are not a sacrosanct indicator of the intrinsic health of consumer demand in an economy, and especially when viewed year-on-year, are often a reflection on how companies have behaved.
The slowdown in telecom company top line growth will be the result of government policy confusion, stuck past investments and suppliers making the obvious choice to not increase capacity further. It will not reflect consumer being ready and willing and desperate to consume more, especially of value-added data services. A hard-selling, hypercompetitive banking sector some years ago pushed two-wheeler sales beyond its natural healthy consumer demand level, given the income and occupation profile of this country. This went on for a few years until everyone decided that there were other ponds that offered better return on effort, and so, they started going prudent and tougher on lending norms to two-wheelers. Sales growth slowed down and the pundits opined that slowing down of 'consumer demand' for two-wheelers was a serious sign that consumer demand, a key pillar of the India story, was showing signs of stress. Valuation-driven reckless geographic expansion, absorbing margin hits for playing an aggressive market-share game and more are all top line improving games companies play. But their hung over state as a result of immoderate bingeing shouldn't be automatically, unquestioningly, be equated with a consumer problem.
Common sense tells us that consumer spending is about people having money to spend-their own, government given and what they borrow-and then choosing whether to spend it or not. Since we are still a salivating society as far as material goods go, they more likely will choose to spend if they feel confident that they can keep earning in future. Will people have more money to spend in the year ahead? How many Indians' incomes will a manufacturing slowdown effect, and how much?
A lot of Indians, as we know, are not even tangentially connected with this sector, and how the wheels of manufacturing indices and the services economy are enmeshed is not clear in data. A consumer based understanding might be clearer. Think about consumer income growth in terms of Kishore Biyani's construct of India, 1-2-3. Significant government schemes aimed at India 3, if they are implemented and here to stay for a while, means that perhaps one-third of Indians will see incomes grow and necessities spending decrease, boosting their spending power. The India 2, as Mr. Biyani labels those that serve India 1, driven by inflation, are demanding increases in income at least in many of the big cities and there is a transfer of income happening, which will not reverse. They are the bottom end of the consuming class, variously called Strivers, and Sangharshis, by research agencies, and are highly acquisitive to make life better.
Will people borrow to spend? Today, consumers are doing more due diligence on this decision, "Do I need thisnow or can it wait a bit?", "Do I have money left for EMI payment after paying higher prices for food, petrol and essentials?" However, their intention and planning to do are still fine. The repressed desires will explode sales when interest rates and prices come down, as we were pleasantly surprised by car sales after 2008. Have incomes shrunk, will they take time to recover?
The top 40% income earners who account for a huge chunk of all Indians' earning, saving and spending, from income increases, access to low-interest credit, prices going down and quality went up, thanks to imports, competition and decreasing duties these last 20 years, are now reconciled to lower surplus and paying more for everything, including services that they had taken for granted as being good and cheap. They will take some time to readjust to the fact that they now have to think a bit before replacing a six-month-old iPhone or driving 30 km to check out a new mall. But this too shall pass. The top 20% have been disproportionate gainers and will continue to be big spenders. All these patterns translate into still healthy consumer spending but the sources of spending are changing yet again.
Companies will be safer if they think of how growth in consumer spending happens economy-wide and for their category: will people who earlier could not afford to consume start doing so for the first time because they can now afford; or when people already consuming are increasing their consumption through quantity increase or frequent replacement (think durables, eating out and so on); or when people consume the same amount but spend more on it, either due to price inflation or due to quality upgrading. Inter-category competition will be severe.