The FMCG sector slowdown that everyone is talking about needs to be viewed in perspective. Is it really a slowdown caused by a deteriorating economic condition, or is it merely the morning-after, after a particularly good night before? I think it is the latter – what we are seeing is the concluding chapter of phase 1 demand, dying gasp and all. The fundamentals of Consumer India seem fine. In fact, it seems like urban India, at least, is definitely headed for consumption ‘take off’ in the next five years. However there are corrections that are happening now which are tough. As one CEO said recently, there is no doubt that the long term looks good. The short term is the difficult bit. One thing is clear – the golden days of runaway growth are over and slower growth rates are a fact of life. We need to re adjust our performance benchmarks.

Phase 1 growth was triggered by a confluence of ‘never happened before’ events that cannot keep repeating. Consider what all happened in phase 1: People’s incomes (especially the upper middle and upper income groups) grew tangibly, in a very short span, for the first time in their lives. NCAER’s MISH study has shown that a lot of the improvement in the income distribution is due to upward mobility and not just creation of new household units. IRS and NRS data shows that between 1990 and 1999, total annual household income (nominal) has increased by a factor of 2.5 to 2.7. This means that households have seen their incomes double in far less than one generation – something that had never happened in India before. Middle and Upper income children, especially urban children, have been able to start their households at the same affluence and ownership levels (often better because in the early years there are no real financial responsibilities).

Now for some more firsts that happened at the same time. There was an array of products (categories and variety) available for the first time in our lives. There was more credit available: ‘credit card welcome’ was not a lie, and financial services guys were actually chasing you to give you money – again for the first time in our lives. Consumption ideology was friendly signalled through cuts in income tax and taxes on ‘luxury items’ – again for the first time in our lives. Manufacturers showed consumers what the fine art of seduction was all about, bringing out of the closet deals that consumers had never seen before. Not only were price increases below inflation in many consumer goods categories, but real prices in some categories also dropped while competition improved. Added to this was a remarkable improvement in distribution depth, and more important, quality, as companies discovered that there was money beyond the big towns.

This set of circumstances led to the golden years of growth of consumer goods. But the party cannot last forever, and corrections have to happen, before the next phase of slow and steady growth can start. In the last decade consumer goods marketers have often said that disposable income will grow faster than total income, because beyond a point, expenditure on basic necessities of living does not grow at the same rate of total income. However the fact is that we have had more than a legitimate increase in disposable income, since costs were subsidised, and those with money already, benefited even more. We knew that this correction on the expenditure side would happen at some point – and its pay up time now. Electricity bills, LPG prices, railway fares, taxis, auto and bus fares, college education – all are costing more. So we will see a sharp shrinkage in disposable income, especially in the lower and middle income groups. Unfortunately, consumer goods giants, especially FMCG, are dependent on these income groups if they are to deliver the stunning top line growths that the stock market and industry analysts have come to expect of them.

What hits FMCG harder is the fact that there is a lot of far more exciting, important, and better value delivering categories competing for the same consumer rupee. Durables and two wheelers for one – about half of which are purchased from future income. Child’s educational aids for another (giving your child a better chance is the universal preoccupation, across all social classes). In the last year five million people travelled abroad, not all on company expense. Ready made small (relatively speaking) unit value jewellery and clothes is reporting growths. Eating out and entertainment avenues are on the increase. So where does the money for all this come from? The upper income consumers can manage a wider spending portfolio relatively painlessly. But even there, it’s cell phones vs. premium coffee. But the middle and below is ‘downtrading’ on fmcg. Yet in durables, we are finding that the cheapest, lowest benefit product segment is shrinking in share, with consumers opting to make the upward stretch.

What are the prospects for this sector in the next five years? Even at a relatively modest 5.8 to 6% growth, incomes will continue to rise, albeit slower than we would like. The roller coaster ride of agriculture and industry relative growths will continue, as will fragile consumer confidence, given the politics and the talk of “time to take hard economic decisions”. But that is a fact of life and flexible market strategies are critical for survival. All the other ‘fundamentals’ still look good. Urban housewifes and mothers are more literate, and more assertive of their rights for conveniences that make their household chores easier. One out of six urban households has a working woman, over 70% of families are nuclear. Child centricness is on the increase (and liberalisation children are big drivers of consumption), and aspiration to acquire is being continuously increased driven by increasing familiarity and comfort with what’s available makes the future look good. Rural India is morphing and looking at the projected shape of income growths, five to seven years later, there will be volume growths from those just entering the consumption arena – what NCAER calls the ‘aspirants’. The future of Consumer India will happen, even though it will be slow. But the battle for the consumer rupee will be bloody. Will the low end imported products now flooding our markets win, will it be the new retailers that capture the value, or will it be traditional FMCG companies playing the old game? I would put my money on the first two!