The Consumption Journey

The Economic Times, Mumbai - January 30, 2012

Think local; it's pointless to use western standards to measure India's consumption base.

India's domestic consumption story has been told in terms of income based number crunching on the size of India's middle class, and sales data from companies. After rural consumption came to the rescue in 2008-09-10, the story of rural consumption being the bulwark of future consumption has gained currency, almost as if the urban frontier has been conquered. Facts viewed through the lens of households help to do a reality check on existing mental models and numbers about India's consumption story but are hard to get. We therefore welcome the new 2011 edition of the Indian Readers Survey (IRS) report, Guide to Indian Markets. Based on a rolling annual all India sample of 250,000 households, it is a standard market planning database, vetted by the Media Research Users Council (MRUC) and conducted by Hansa Research for over 10 years now.

Before we look at yet another set of numbers, let us recap recent thinking on the concept and size of 'middle class' India. Population numbers exaggerate size, and households (HH), the basic unit of consuming power and consumption decisions, are intuitively easier to think about. India has about 71 million urban HH and about 166 million rural. Marketers find that regular consumption of a wide range of new age amenities and indulgent habits that they call middle class consumption, is in the top 30% by income (Sec A and B) urban HH. That's about 21 million HH in urban India, 10 million in the top 20 cities in 2010. The Mckinsey middle class estimate was 10 million HH, urban plus rural India, in 2007, defined by clubbing a very wide range of so called disposal income- Rs 2-10 lakh a year; fact is that there are huge differences in social class and hence spending patterns between those who earn less than Rs 20,000 a month and those that earn Rs 80,000. Times of Indiarecently reported on how a World Bank proposal to define the middle class as earning more than $10 per day and excluding the top 5% would leave India with no middle class, only a "mythical class".

Let us now move away from income based 'middle class' manipulations to understanding the progress of our consumption story in terms of how many HH have what durable as of today, (table 1), how much rural and all India HH penetration of consumer goods has increased between 2005 and 2010 – a mix of 'good' and 'average' GDP growth years (table 2)

If you took a stab at defining the middle class based on durable ownership lifestyle and use TVs, refrigerators and two wheelers ownership as the basis, (table 1), 40 million households or 200 million people, about half in rural India, is the number. If you consider just TV and mobile phone ownership, at least 122 million households qualify, with ownership numbers tipping towards rural India. In the days gone by, we would use watch, bicycle and pressure cooker ownership to determine those who cross the 'baseline' to be counted as consumers. It is interesting to think that now it is the TV and cell phone that define baseline consumption. Refrigerators, two-wheelers and even washing machines define the next higher tier of consumption, and cars PCs and ACs define 'rich' consumption. Based on all these, perhaps we should think of the size of "upper class consumers" to be 6 million HH today; "middle class consumers" to be 40 million HH; and "consuming class consumers" to be 125 million HH (all classes include the class higher them, i.e are cumulative.).

If we stop obsessing about the label of the middle class, we can see that each consuming group will increase its income substantially in the next decade, with the rich increasing the most.

The Household Consumption Story

  HH Having
Urban Rural Increase in HH Penetration
05 to 10 (% of Rural HH)
  Split 1312
TV 122.0 47 53 Biscuits +20
2W 42.5 51 49 Shampoos +21
Fridge 39.7 68 32 Edible oil +15
Washer 14.2 82 8 Mobile +20
Auto 5.6 73 27 Cable TV +18
PC 5.4 84 16 TV +10
AC 2.8 93 7 Refrigerator +4
        Motorcycle +5
Source : HansaResearch, MRUC (+10% points approx equal 16mn HH)

Table 2 shows that the rural juggernaut is rolling, throwing up masses of new consumption. The magic of rural India is that every 10 percentage points increase in rural HH penetration adds 16 million consuming households. So India added one or more Australia of consumers of packaged biscuits, shampoos, mobile phones in five years.

All this co exists alongside increasing inequality of consumption. The IRS report calculates an ownership and consumption index called HPI based on penetration of a large number of categories.

Between 2005 and 2010, the richest 5% or so of Indian households have increased their HPI (consumption) by a CAGR of about 14%; the next 20% or so by 10%, the next 35% of income by 8% and the last 40% or about 93 million households, most rural, by just 3%.

All of consumer India does not have to leap over a notional income bar of the “international middle class” to qualify to participate in the domestic consumption story. That assumes that price and product features are fixed, and consumers must grow to qualify for it. That is the exact opposite of what business is supposed to do i.e. design the product-price coat to fit the consumer cloth. Different groups are at different parts of the income growth and consumption journey offering abundant opportunity in every part of consumer India for every sector. Those who transplant developed market strategy to India should obsess over the size of the so called international middle class. For those ready to make for India, that is a nice statistic to have but not a necessary precondition for the game to begin.