Everyone is heaving a sigh of relief that the dark clouds of sluggish consumer demand are finally lifting. However, the mood in corporate corridors is one of qualified optimism. There seems to be a consensus that while there is a clear resurgence in consumer demand, the heady growths that we saw in the first half of the nineties will never return - happy times are here again, but the golden days are gone forever.
According to me, the main challenge going forward, is not about learning to be pragmatic and accepting the inevitability of slower growth rates; nor is it about changing the definition of what good corporate performance is, or building muscle and redoubling marketing effort to try and achieve past growth rates. The main challenge stems from the fact that the source and nature of future consumer demand growth will be quite different from that of the past. All recent data on consumer demand points to this. The main challenge therefore is to understand the drivers of change in market structure and consumer characteristics, build new mental models of the market, and respond with perhaps, a whole new market strategy. The best analogy I can think of is the now familiar concept of "second generation or phase two reforms", where it is recognized that the task on hand is not just to complete unfinished business from earlier, but to define a new strategy and action plan to meet the new challenges ahead.
Phase One of consumer demand growth came from mopping up ready consumer demand that was lying on the surface. Now that is done, we need a drill and not a mop to access the next source of demand growth, which is like the water table lying below hard rock. For example, distribution expansion to smaller towns and rural areas succeeded in capturing the pockets of money which were 'all dressed up and nowhere to go". However such pockets are now fewer, more remote, and less concentrated, and the power of this distribution expansion weapon to drive demand growth is now considerably blunted. An analysis of penetration by income group of select FMCG and durables shows that there is now not much of a difference in product penetration in comparable income groups, no matter what the size of the town or village. The rural rich, for example, that were waiting to be served ten years ago, now have been served and will not drive growth in the powerful way in which they did earlier.
The same point is made by an analysis of product penetration for most of the well penetrated durables and FMCG products. Penetration growth in social class B and C (the "have somes") fuelled Phase One demand. Today, penetration is almost uniform in social class A to C, falling sharply in social class D and E. (This, incidentally, is the same story for literacy in Generation Next, where the % illiterate among 12 to 19 year olds is very low in SEC A to C and rises sharply in SEC D and E). The 'so what' of this is that with the current price levels we have a well penetrated "can afford" market. High demand growths can only come from penetrating what's left, which requires a significant lowering of price thresholds. The television market has shown us this, where significant lowering of price thresholds has provided sustained growth even during the so-called slowdown.
The lever of consumer finance drove Phase One demand very well, making available finance to the good credit risks, and increasing their purchasing power. However the easy targets in terms of those willing to be in debt and able to afford being in debt are now almost gone. What's left are those with money and the wrong attitude (who settle credit card bills promptly!) and a much larger number of those who have the attitude but not the money. The 'have somes' in the rural areas (small farmers and petty traders for example) are a source of demand growth that can be drilled with consumer finance, but someone still needs to find the formula to manage the operational details of disbursement and collection in the hinterland. There is also a school of thought that says that because of the recency of the consumer finance business, the defaults are yet to happen and when they do, there will be a huge slowdown in consumer credit disbursement, putting the brakes on demand growth.
One of the fruits (or the fall outs) of Phase One of demand growth is the creation of new price - value equations, which will result in a whole new market structure and consumer value paradigm for Phase Two. For example, the two wheelers buyer today, has a real choice between a second hand Maruti 800 at Rs. 60,000 and a motorcycle at Rs.45,000. In EMI terms (and now you can get financing for second hand cars), it is really not as huge a gap that needs to be bridged as it appears. The implications will be the slowdown of top end two wheelers and the rise of higher value cars as people flog their old cars and upgrade, triggered by more choice, more financing and the 'haves' getting richer.
Let's take another example - Phase One of FMCG demand growth was fuelled by disposable income rising faster than total income, consumer durables and financing industry that had not yet got its act together. Today, the consumer durables industry is simultaneously pressing all the demand growth levers - increasing distribution reach lower and lower down the pop strata, provided high benefit high cost offerings for the "all dressed up and nowhere to go" rich, dropping price thresholds and providing consumer credit. The result is that since the TV set or the washing machine is always more desirable than the detergent or the shampoo, there will be a migration of value in phase two from FMCG to durables. Further, 50 to 60% of many durables are bought with financing, consumers are pledging future income, leaving less disposable income for the FMCG sector to tap. As for disposable incomes rising faster than total incomes, we are going to see a withdrawal of many subsidies in the future, the reverse may happen, further crippling FMCG growths. On the other hand, the NCAER income projections show that urban India is going to get richer, with more people crossing over from the "have somes" to the "haves' category. Maybe then, Phase Two of FMCG growth will come from well heeled urbanites.