The Shining, Growing Tip of the Iceberg

Economic Times November 21, 2005

At my last two speaking engagements, people said they were surprised by my non-optimism (read that as 'gung ho' ness) about what's happening in Consumer India. One of them was on whether values in India are changing (answer: some changes, mostly morphing change, "this as well as that" compromises, new ways of doing old things; let's not confuse changes in ritual with changes in religion). The other was about what I saw as the latest in Consumer India, viewed through the economic - demographic - consumption lens. I said that none of the data that I had seen had fundamentally changed my view of the past few years that it was forging ahead on the consumption track, with all lights green and no stop signs visible; But though full throttle, it was a large mass moving at a modest speed with modest and modestly increasing acceleration; few rich getting richer and increasing in numbers, lots of poor getting less poor) The speaker after me, from the largest market research agency in India said the he totally disagreed with my characterization of upwardly creeping, slow burn consumption.

He felt that there was going to be a mega consumption explosion just around the corner. I was seriously concerned that maybe the insidious Indian consumer market had sneakily changed when I wasn't looking, as it is wont to do.

But having looked at all the numbers once again, I think we need to get some perspective here. We are getting carried away with the tip of the ice berg looking better and larger than before - forgetting that it is just the tip of the iceberg and that the rest of the ice berg does not look like the tip. Sure, the tip of a large iceberg is large. The top 10% of India is a little over a 100 million people, and that's three times the size of Canada, five times Australia, a little les than double of France etc. Mostly urban, they harbour approximately 40% of the total income. Again, blurring the precision a bit of the income metric a little, this lot having a per capita GNP of 60% of Malaysia and 80% of Brazil (with a population equivalence of about 60% of Brazil). But then we all know that India is a land of conflicting truths. Yes, all of Consumer India is unified in its deep desire to consume and information about what to consume. But the actual quantum of consumption is limited by income and availability of appropriate price - performance products.

For higher end, more sophisticated durables and consumer products categories, the Socio economic Class A and B of Urban India (the SEC classification of the Indian market, used by most consumer businesses, is based on the occupation x education of the Chief Wage Earner) is a very ripe target. This group of about 15 mn. households, a bit less than 10% of all Indian households, is a high education and exposure group, an explosive growth consumption machine, ready to snap up whatever sensible price - value equation is available. Their general orientation is to pay more to get higher order benefits, rather than to pay less for lower benefits. For this group, share of the premium segment ( higher levels of benefit and price than the category average) to total product category purchases is already high, ranging from 35 to 50% for most categories, and is rising, fuelled by more frequent upgrading replacement. By the sheer statistics of what happens to the rich tail when the mean of an income distribution improves, we will see premium products and consumption of more 'mainstream" international norm products grow very fast. A lot is said about the BPO brats fuelling consumption, the number is expected to touch 1 million in 2006. That is still quite small, and while it is an interesting youth market niche in an otherwise ageing world, it is not Youth India - just a tiny fragment of it.

Durables like Cell Phones, 2 Wheelers and Colour TVs, which have managed the transition in peoples minds from "nice to have" to "necessary to have", whether for emotional or functional reasons, have already achieved substantial penetration in lower SECs also. For such products, the target market is larger, comprising SEC A, B and C as well as rural RI (marketers classify rural SEC as R1 to R4 based on type of house and education of the Chief Wage Earner) . This consumer segment comprises about 30 mn. Households, and is growing in numbers and income. That's the good news. The bad news is that it is still under 20% of Indian households. Yes the consuming upper and upper middle class of India has arrived, and is igniting consumption - but it is a poorer class of consumers than most other countries, as suggested by the Living Standards Measurement Survey scale developed by World Bank.

What will cause a discontinuous growth in consumption across the entire iceberg? Availability of affordably priced, adequately performing products and services. Whenever any such offering has happened, be it in healthcare, televisions, retail formats, financial services, cell phones or apparel , the market has always discontinuously grown. This does not mean that Consumer India has suddenly got discontinuously rich. It just means that some smart suppliers have got their consumer value equations right, and have a cost base that enables them to still make a profit.

So overall, am I optimistic or pessimistic? I think I am realistic. Let us celebrate the opportunity of a growing Rich India. But let us not make the mistake of extrapolating their growth in size, affluence, consumption habits to the Rest of India. Then we will have a repeat of the Great Indian Middle Class muddle all over again.

The analysis of SEC and consumption has
been taken from the IRS Survey of research
agency HRG, conducted for the Media
Research Users Council.