The Prognosis for Consumer Demand

The Economic Times - July 28, 2008

After the last edition of this column about the human face of the economy, and its implications for economic policy, someone asked why a consumer markets person was writing about the economy now. That is exactly the point that was attempted to be made in my last column and re iterated again here – that The Economy is not just about invisible macro forces or numbers like exchange rates and indices of industrial or agricultural production; but that it is also about how different people or groups of people actually get affected, how they think about their situation, and the spending / saving / investment choices they make as a result of that.

When conference rooms debate whether there is an economic slowdown, if they are B2C companies, they are speculating about the spending and saving / investment choices and compulsions of rich and poor individual people; and if they are B2B companies, the spending and investing behaviour of big and small companies, who, in turn, make their choices taking into account how consumers and customers are likely to behave. Whenever slide 1 of a business outlook presentation says "expected slowdown in GDP growth" and slide 2 goes on to say that there will therefore be a slowdown in soaps or shampoo business, it does beg a two minute contemplation, at least, on how exactly GDP growth is connected with how often people bathe or wash their hair, and what they use to wash it with. The same way that a fall in the stock market is assumed to mean bad news for all other markets too, like the refrigerator market or even the housing market that is driven by aam janta . There is some connection, of course, but not in a simplistic way. A very small fraction of consuming Indians are directly or indirectly connected with the stock market and the behaviour of those not connected with it does significantly swing the performance of the economy. It could work in the reverse direction too - right now, a lot of non participants in the stock market are pleased with the near 10% interest on fixed deposits, and feeling a lot more secure about spending. Another example - with correction in real estate prices, many more people will be able to rent cheaper, and for those that are planning to buy, cheaper real estate and distress sales may make their entry into the market easier. Today's column is therefore a consumer-side view of what's happening in the economy – a worms eye view comment on consumer demand.

The state of the economy is confusing. As usual we have mixed verdicts and many truths – all true - about the state of the economy and the state of consumer demand. Two days ago, in an interview with a newspaper, the finance minister said that on the back of agriculture and services growth, "I think 2008-09 will also be a good year in terns of overall growth, however it will be a year when growth will be accompanied by inflation." Further, early data is showing that planned investments with committed funding is proceeding according to plan, and no one is pulling the plug on these plans. Therefore work creation for aam janta (not job creation, because we need to remember that a large part of India is self employed now) will continue to grow for now, and people who choose to work harder and smarter will get rewarded with their incomes rising, because there will be enough work for all. There seems to be no let up in the shortage of appropriately skilled people, and since the education ministry is not about to remedy that in a hurry, we will see incomes of a certain section continue to rise.

Early data on corporate results this quarter are also showing that top line growth is strong, but margins are getting squeezed because of raw material and interest costs going up. Whether consumer demand will or will not slow down will depend on whether they choose to take the hit on margins themselves (and incur the wrath of the stock market) or whether they choose to pass it on to the consumer, in which case demand will slow down because belts will be tightened and consumption will be more deliberate and thought through (do I really need this bigger screen TV or do I really need to buy this new model of cell phone now or should I wait for diwali, maybe it is time to stop frivolous buying and go in for that 26000 rupee computer for the kids because that has to be bought some time or the other, so why bother tom postpone it). Because of the competitive intensity being high in every consumer industry, companies are not in a mood to cooperate with each other and raise prices together. The dominant logic seems to be that holding and growing market share is very important now, because the cost of building back lost share is likely to be greater than the cost of a temporary margin hit. In fact companies are seeing this as an opportunity to work on operating efficiency improvement and going in for IT driven investments in a big way. So if you are a supply chain efficiency or CRM or data mining or video conferencing expert then this is a good time for you to scale up. (In any case, even as far as the corporate's relationship with the stock market is concerned, from the point of view of quite a few corporates, there seems to be a bit of relief that crazy valuations have got corrected and companies can tell long term business health and potential for profitable growth stories and profit from it.)

So, if the prognosis is that the middle class and above urban aam janta's incomes will rise, and that agricultural incomes could rise too, but equally that the things to buy will be more expensive, then we will see very value conscious spending behaviour happening. There will be a return of category fights – health insurance because I am feeling vulnerable versus an upgraded lap top and expensive skin creams because they are cheaper than a facial at a beauty parlor, and in any case, my foreign holiday is not happening. Assets will do better than experiences, children's education will continue to prevail, productivity tools like personal transport and telecom will continue to get used, though not upgraded as often. Some sectors will lose and some will gain, depending on which segment of Consumer India we look at. The value conscious Indian consumer will be even more value conscious since he has to make choices; however the algorithm in his head of Value = benefit minus cost, will process benefit and cost differently from what companies think he would.

Rama Bijapurkar is an independent market strategy consultant