Consumer India has always been pretty tricky to double guess. Just when we believed that consumer spending was firmly on a high growth trajectory – based on the wonder years of 1993 – 98 – it spluttered and slowed to a crawl. For the next few years, marketers tried everything they knew to speed it up again. They dropped prices while improving product and service quality. “Buy-one-get-one-free”, they offered. But that only helped them get volume growth at the expense of operating margins. The fast-moving consumer goods (FMCG) sector had a terrible time with some product categories actually shrinking in size, while consumer durable manufacturers struggled to reconcile capacity with demand. Sure there was a fast growing yet minuscule population of the very rich, which continued to lap up everything from plasma TVs to Mercedes cars – but that was cold comfort for the majority of the marketers.
After much agonising, marketers came to the conclusion that the five-year boom of 1993-08 was a one-time star burst, unlikely to be repeated in the near future. The growth spurt of those years was attributed to a confluence of events – release of pent-up demand of the rich who always had money but nothing much to buy before this: a television boom that fuelled aspirations: a distribution boom that brought products and services within easier reach; the discovery of the sachet strategy that made everything affordable to more people; and finally, a string of good monsoons.
They also shelved the idea of the huge homogeneous mass market made up by the great Indian middle class, which would be a tireless engine of growth. And, having come to terms with the new reality of the market, exhausted marketers worked hard on tactical actions to stimulate growth even while turning their gaze inwards, focussing on operational performance improvement and financial restructuring to keep the bottom line growing.
Meanwhile, a lot of little changes were taking place in the market. Each change, when viewed in isolation, could easily be rejected as not being particularly significant. But over time, and taken together, they have provided a critical mass of change. And created a deep and distinctive consumer market.
It is a market whose potential and desire to consume has perhaps moved ahead of the marketer’s mental model of it. It continues to be a multi-tiered market, with the bicycle and the business class co-existing. It continues to require a portfolio of price/performance points. But it is a market that is now unified by certain common demographic characteristics and consumption desires. And which has enough mass to act as the springboard for the next stage of the consumption cycle. The question is: are there enough relevant products and services available to take advantage of this? In short, it does appear that the Great Indian Consuming Class has arrived, and is waiting to be served.
Before we get into what this new class looks like, a quick look at some of the important changes that have taken place:
Income growth: Between 1995-97 and 2000-01, per capita income on an aggregate basis grew by a compounded annual rate of 3.2%. But high-income households grew much, much faster – by about 20% year after year – between 1995-96 and 1996-99, according to the National Council for Applied Economic Research (NCAER). Upper – middle – income households grew by 10% on a compounded annual growth basis during that period. In urban India, the trend is even more pronounced (See “Upper Classes On The Fast Track”).
Affordability growth: Supply-side changes also shape a market’s buying power, and there have been a host of them – falling interest rates, easier consumer credit, increase in variety and quality of products and services at every price point….
The liberalisation children grow up: The post-liberalisation generation is coming of age. This year there are a 100 million, 17-21 years olds in India, and six out of 10 households have a liberalisation child. This is a generation, which has grown up with no guilt about consumption.
The morphing of rural India beyond agriculture: Rural India has reduced its dependence on agriculture. A little less than half of rural GDP is from non-agricultural activities. This is creating a different kind of rural market. NCAER occupation data shows a decline in cultivators and there is enough evidence of dual – sector households. Add to this the exposure levels of the top end of rural society through television, and the rural market is becoming closer in its mindset to the urban market. This is already happening in the more developed higher-income states.
The rise of the self – employed: Rural India has always been largely self-employed. But now the proportion of the self-employed in urban India has risen to 40% plus, replacing the employed salary earner as the new mainstream market. A Hansa Research Group (HRG) study shows that even in the ‘creamy layer’, comprising the top two social classes in towns of 10 lakh plus population in urban India, 40% of chief wage earners of households are shop owners, petty traders, businessmen and self-employed professionals.
Unlike the salary earner, the self-employed use products much more to signal success and are also fast adopters of any productivity tools, like cell phones and two-wheelers, that can help them earn more.
Environmental changes drive aspiration: Better connectivity and communication, and the literacy leap, are together increasing the aspiration of the Indian consumers at every level. The reason why these changes drive aspiration is lucidly explained by the well-known anthropologist, Arjun Appadurai, of Yale University. “Imagination is not about individual escape, it is a collective social activity. Informational resources are needed for people to even imagine a possible life, weave a story and a script around themselves, and place products in emerging sequences. Imagination may not always lead to action, but it is a prelude to action.”
Consumer India now has enough informational resources to concretely imagine a better life.
Plurality of income, singular mindset: When marketers were waiting for the Great Indian Middle Class boom, its key trigger was expected to be a significant number of households above a certain level of income, which would become the critical mass of consumption. But what is being increasingly apparent now is that what unifies Consumer India and gives it the consumption push is not so much its income level, but its key characteristics. And these are:
Striving: Most Indian consumers, whether rich or poor, want to get ahead in a hurry. From being destiny-driven and resigned, they are now destination-driven and striving to grasp opportunities to earn more in order to construct a better life for themselves and their children. If one were to segment the country into the Arriving, the Striving and the Resigned, the proportion of Resigned has definitely decreased and become geographically concentrated, rather than well – dispersed, as it was earlier.
“I can”: The rise of the self-employed and the service economy requiring less capital and more sweat has changed the mindset of the Indian consumers from one of demanding social justice to one of grabbing economic opportunity.
“The rise of the women”: Like the self-employed, women too are saying, “I can and I will”, and emerging as partners in family progress. Not so much from earning the second income (a mere 23% of Indian households have working wives and that proportion decreases as incomes increase) but by being CEOs of households and intellectual nurturers of their children.
Education – and health – driven: Indian consumers are obsessed with giving their children the education and skills that will provide the escape velocity to move to a higher station in life – and they have seen enough evidence of this to know it is possible. Health is the other magnificent obsession – probably because ill health adversely impacts earning ability. (In fact, the less affluent are more concerned about staying healthy than the more affluent). A study conducted by HRG in 2003 for the Media Research Users Council (MRUC) among 2,000 households in Mumbai shows interesting differences in households expenditure between the top social class (SEC A) and the lowest social classes (SEC D/E). Education and clothing attract the same proportion of expenditure in both the income groups, but the poor probably spend a bit more (proportionately) on medical expenses than the rich. (This could indicate a big time bottom -of -the -pyramid opportunity for nutrition and health building in the preventive rather than the curative area.)
Pragmatism in consumption and preference for ‘real value’ products and services: In the past, marketers assumed that progress and evolution of a market meant adoption of ‘feel good’ products, susceptibility to razzle-dazzle branding, a Westernised self-image and identity, and bountiful days for FMCG categories. But the latest trends show that consumers are going more for real, ‘life quality’ improvement products and services. Consumer India wants a visibly better quality of life for themselves and their children, described in terms of durables that make life better; education, healthcare; transportation and communication. (NSS data shows that these are the three big growth areas in consumption expenditure). Other priorities seem to be owning decent homes, better clothes (not necessarily better brands) and the like. Status is signalled through the things that are visible to others.
They are not beguiled by brands that are low on functionality and high on image. Pragmatism and functionality is the hallmark of their consumption expenditure. And the threshold of their expectations of how this functionality is delivered is high: low-priced motorcycles must look like motorcycles and deliver enough power. Basic cell phones must be small, even if they aren’t feature – rich. And low – priced garments and footwear cannot get away with antiquated styles.
Entertainment: Entertainment is becoming big, the country has traditionally been starved of family entertainment, with the only options being watching television or going to places of religious worship. But family entertainment is becoming a big issue for consumers as they try to find avenues of bonding in an era of nuclear families.
Comfort with borrowing to fund future consumption: Being in debt used to be an area of high discomfort for everybody, but the very poor, who had not other choice but to borrow for survival. Now, however, the concept of EMI (equalised monthly installment) is legitimising borrowing in other groups too, especially to fund future consumption. EMI provides a certain discipline with predictable and planned outflows, and that is probably making indebtedness more acceptable.
Comfort with consumption: Economists talk about the wealth effect – wherein it takes time before consumption decreases in response to decreasing income. Equally, it takes a while for comfort with consumption to happen, and consumption typically lags income increases. One reason for this could be that the country has celebrated abstemiousness for so long that it takes a supply explosion to spark desire, and then translate that desire into actual consumption. However, that has now happened.
Comfort with technology: Infotech awareness, whether it is Infotech power (what a computer can do to solve problems or improve life) or Infotech-driven employment opportunities, has sunk in to the lowest social classes and to much of the rural population. It has happened through the demonstration effect of model projects of the NGO (non-government organisation) kind. And it has happened by watching the rich use it and prosper. It has also happened because of the mushrooming of call centers and other computer – related services offering employment. As these are located in geographical clusters, they got noticed and talked about. Cyber grandmas from upper-middle and upper classes, who have become email literate to communicate with their scattered flock, is one example of this new comfort.
Enough of a Consumption Base Now Exists To Create A Springboard For More Consumption
Current levels of penetration influence the pace of future penetration. Penetration increases are not linear, instead they accelerate as base penetration increased till a point where saturation sets in. If only one out of 20 households in a given affluence grade have a washing machine or a two – wheeler, adoption will be slow. But when one out of every 10 has it, it becomes something that gets on the radar screen of aspiration for the rest. And when it gets to one in five families, it serves to rapidly penetrate the remaining households because it now becomes a ‘must have now’ product for them.
For consumer durables, the top (in terms of affluence grades) 40 million households in India – 24 million in urban India and 17 million in rural India – based on their penetration levels would constitute the core consuming class. The magic number of 200 million consumers (assuming five members to a household) has arrived at last! (See ‘Consumer Durables Reaching Saturation’).
Within rural India, there are two different grades of overall affluence, which we can call the developed and the developing states. The developed states comprise Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Kerala. They account for about one-third of the rural population and have shown higher penetration in most categories.
The increase in penetration levels between 1997 and 2002 have been very impressive. ‘Reaching Far And Wide’ compares the two and shows the speed with which penetration increase are happening in Consumer India across income groups, although, obviously, differently for different products.
For FMCG penetration is certainly not an issue. NCAER data shows that for 1998-99 for a basket of 22 FMCG products it tracks, a total of over Rs 91,500 crore was spent. Of this 37% was spent by the two lowest-income groups in rural India, and only about 20% by the top two income groups in urban areas. This is, perhaps, the best and only statement of the structure and potential of the Indian market.
Changing Shapes Of Income Distribution Will Create A New Consumption Push By 2006-07
Why does the changing shape of income distribution herald a change in consumption behaviour? A traditional bottom heavy triangle with most people in the lower income group and a few in the top indicates that the center of gravity of market consumption and of the reference group, which defines aspirations, is very low. As the shape of income distribution starts bulging in the center, both the center of gravity of what is consumed, and of who the ‘majority’ that defines aspirations should be, shifts.
NCAER income distribution data of what has happened so far and their modelling of the future of income distribution is invaluable. It is the only ‘single source’ data that also looks at inflation – indexed income and reliably shows shifts in shape. The projected shape of urban India in 2006-07 (See ‘Getting Top Heavy’) shows that the centre of gravity will be the upper-middle-income group and that there will be a large consumption push. Taken as an aggregate, the projected shape of income distribution in 2006-07 suggests that the centre of gravity of consumption and aspiration rests with those who have ‘just escaped poverty’.
To understand the full impact of the urban change, it is necessary to compute the arithmetic of increase or decrease in each income group as well as the increase (or decrease) in penetration in each group. Only when viewed together do we get the full picture. In some categories, depending on supplier strategies and starkly lowering price-performance points, the results could be counter-intuitive. However, for the rest, this is likely to be the typical arithmetic. The tale goes like this, NCAER estimates the number of households to increase by 8.6 million in the high-income group and 7.3 million in the upper-middle-income-group, while the middle-income number grows by 4.3 million and the bottom two income groups will decrease by about 2.3 million and 7.5 million, respectively. (The total number of urban household is set to increase from 49.1 million to 60 million). A 10% increase in the top income group penetration, a 15% increase in the second income group, and a 10% increase in the third income group could give incremental volumes of 7.5 million in the highest income group 5 million in the next income group and a mere 2.7 million in the third income group. The urban market is indeed on the periphery of a huge consumption push.
Rural India will have two points of significant household increases – 4.6 million high-income households and 13 million middle-income households will be added by 2006-07 (total number of rural households will increase from 122.8 million to 139 million). Let me present a sampler of the same typical arithmetic for a well-penetrated category, which has 45% penetration in the high-income group, 25% penetration in the upper-middle-income group, and 10% penetration in the middle-income group. By 2006-07, a reasonable estimate given the current penetration base and past patterns from urban areas is that it would increase to 60%, 30% and just 13%. Therefore, the incremental volumes would be 3.3 million from the upper-income group, and 2.3 million from the middle-income one.
Given the increasing urban exposure of rural India, the urban and the rural upper-income groups can form an interesting continuum market, giving it a scale of 23 million households, or 115 million population. In 2006-07, the consuming class as we defined it earlier, would be about 60 million households, or 300 million consumers.
However, a state-wise look at rural income shapes, show a totally different pattern (See ‘Shape of Rural Income Distribution’). It shows that in states that account for about half the rural GDP of the country (as defined by the Crisil Centre for Economic Research Analysis), the centre of gravity of consumption and aspiration has already moved towards the middle / upper-middle-income classes, again suggesting that there is another inflection point of consumption that is about to happen. And that perhaps these states are far more ready for sophisticated consumption than we imagine them to be.
Implications For Marketers I have said in the beginning that there is a new Consumer India waiting to be served with relevant products and services. Let us now look at some implications for marketers.
Required: Mature market strategies. Two-wheelers have penetrated about 12% of all households. By this metric, it is clearly an underdeveloped market that should grow from first-time buyers and should not be lapping up (or even accepting) higher-level features. Yet, half the sales in a year are from repeat buyers and half from first-time buyers, and about half from small markets (with populations below 1 lakh). In many categories, consumers exhibit plus one level up behaviour – whatever you think they should be buying given their affluence and the state of market development, they buy one level better than that. Outdated tech, low performance and plain looks are rejected, no matter how attractively priced. The answer to this puzzle is in the differential levels of penetration. Urban penetration is about 24%. But in the top 30 million households by affluence, penetration is 52%. And the trend of two-wheelers giving way to cars in this top urban affluence grade is expected to be picked up by the second affluence grade as prices of small cars drop further.
In the case of refrigerators, the overall penetration is 10.4%, suggesting an underdeveloped market. But one out of every two of the top 30 million households have one.
Therefore, while many companies are focussing on bottom-of-the-pyramid strategies to increase penetration and drive future growth, the current market, where much of the value today resides, needs to be viewed with a new pair of lenses.
Maturing supply shifts the basis of competition and, hence, drivers of brand choice. Improved supply, ‘performance, features and quality’ partly of all major brands and the near price partly between them shifts the basis of competition to the augmented product from the basic product. Add-on services (like removing pain points, and not piped music in showrooms), and buying experience will be the driver of brand choice. Can the air-conditioner be fixed without the usual hassle of chipped paint five different contractors, broken walls etc in just a day? Does your cell phone company view your bills online when you call them so that it can advise you on what is the best tariff plan? Can the family be given 12 lessons at home after the personal computer arrives? These will be the issues based on which choices will be made.
Changing markets need new bases of segmentation. As the market matures, and is subjected to multiple changes at the macro level and in related categories, segmentation has to go beyond the product-centric paradigm. Instead of looking at ‘Premium, popular, discount’ price-performance bands, it is time to look at consumer groups, how they view the market and what drives their choices. The question to ask of research is not ‘how is the market segmented?’ (the answer to that is that it is segmented the way marketers have segmented it so far), but what is the new way in which to cut it up so customers can be served better? Take refrigerators. The context in which the category exists has changed. There’s more eating out, more phone call deliveries of food and groceries; women are changing and reorganizing their time and their household chores… Clearly, there are segments beyond the modern mum and the good health-conscious housewife, which need to be identified (again on a functional usage and attitude basis rather than on whether she wears her hair short or gives parties – the lifestyle kind of variables).
The same is true for almost any category. Usage patterns are now so different that they form a good basis for segmentation, product design, pricing and service design. From a mere psychographic point of view, Young and Rubicam has, in a cross-cultural study done years ago, identified groups that we see clearly in Consumer India, which could form a useful basis for segmenting the market.
The study categories people (and consumers are people first) into the Resigned, whose main goal is survival; the Struggling, whose objective is improvement and escaping hardships; the Mainstreamers, who are looking for security, conformity and honorably discharging family responsibility (the archetypal provider); the Aspirers, who want to be seen as successful and attain status and a lifestyle that they so envy in others; the Succeeders, for whom material success and recognition are the key; and the Explorers (I am not sure we have too many of those), who are in search of self-identity and self-satisfaction.
These categories are linked to income, of course, but not driven by it. The Mainstreamers, Succeeders and Aspirers are correlated to occupation, to age and life stage and to geography. Qualitative researches say cities can be characterized this way too, hence, they show different Consumption quantities and character even for a given income distribution.
This is not just applicable to classical consumer goods. Doctors are also caught in a web of change (e-empowered patients, more professional alternative medicine, changing patient behaviour from the self-employed and younger generation). Within them, too, there is the cutting-edge doctor who treats with leading-edge medicines; the conservative curer who is into holistic healing; the ‘time-saving effort-saving’ add-on services, computerised doctor…. And each requires a different strategy. The same logic applies to B2B business too.
Consumer value processing needs to be studied anew. The way consumer process value inside their heads – benefit worth and cost worth and, hence, overall worth – has changed. The EMI, the ‘ plus one level up’ mentality self-employed ROI processing.
(“Will this investment help me earn more?”), the family-bonding need, the changing identities of women, the ‘beyond farmers’ market in rural India, the maturing of evaluation parameters – all point the fact that we need to discover the new value processing, of different groups, anew.
In fact, it is time to revive the discipline of Consumer Behaviour, so little practised and so little taught in the Indian Ivy League business schools. Market structures are easy to figure out. Yet, consumer behaviour, the second part of the puzzle, is far from understood. This is, perhaps, because we look for changes in the model we know, while consumers make much larger strides.
New opportunities to serve. If one were to look at the new Consumer India and the consuming class through the lens of ‘what is not there but ought to be’, several gaps show up. Here are some examples:
Home utilities: I do not believe we have enough depth in offerings. Take the need for better living. The new home is characterised by less space and more things. In the US today are some interesting products: stoppers to place under beds to raise their height, and storage receptacles that fit under the bed smoothly with castors, thereby acting as extra cupboards! Tents with zips on the side, which become temporary cupboards when relatives come visiting. Modular furniture, Event the humble pegs that can be stuck behind doors. We need more those here too.
Women’s liberation: When frozen food took off in the US long ago, it was because it gave voice to a woman who saw her life being beyond the kitchen stove. We have a similar situation here today. As an FCB Ulka study recently said: “This Annapurna hates to cook.” Yet we do not have a reasonable ready-to-cook / ready-to-eat product range. It is easy to blame consumers for not adopting. But now there’s evidence that she is ready for it because she has more productive things to do with her time. Watchmakers tell us that wristwatch penetration is low among women – conversations with women show they are more time-bound and schedule-bound than we think they are. In urban India, in the top three income groups, what can we do to help them get better organised? There is technology comfort. Is there another durables revolution waiting to happen?
Self-employed: Are the financial services products we have varied enough, innovative and comprehensive enough for this group? I suspect not. Are there enough products to signal social and economic mobility? What can we offer them by way of productivity devices? This market is probably deep for B2B services, but these are micro enterprises, and need specially-designed services.
Health foods, educational toys, simple cheap computers for women and children – it’s time to revisit these again. Is there a large opportunity for functional, high-prestige, low cost hotels? Is it time for a boom in budget holidays, in domestic tourism with an education focus for children? I would suggest that every idea that was dumped in the past 10 years because it was ‘ahead of its time’, and the ‘consumer was not ready’, be brought out of the closet. The consumer may just be ready for it now – if he hasn’t already gone past that stage!
Conclusion
The market has enough scale to offer, and enough desire to consume. The consumer is ready and waiting to be served. The new Consumer India will pose a huge challenge to marketers because it offers a difficult revenue model of large but not enormous volumes, modest prices and high benefit expectations. It will reward real innovators and ignore marketing hype. Most of all, it will continue to comprise many markets at different stages of evaluation, demanding a complexity of strategy that is far in excess of its worth. And yes, it will continue to throw up unexpected answers to the arithmetic of (medium penetration) x (large size of consumer base) x (low price-willing to pay) x (modest per capita consumption).