Saturday, September 14, 2013

Opinion: Consumption story in India: A dark cloud or a silver lining?

Retail space in India observed a meteoric growth in the last decade. It created new billionaires in the likes of Kishore Biyani and made many multinationals open stores here. Spending long hours in the malls during weekends became part of life. Feeling depressed? Go shopping. So wrote newspapers. Shopping became favorite time pass for housewives more than ever. Everyone opened their purses and spent. From buying clothes to having pizza’s for lunch and traveling to faraway destinations during holidays. Consumption looked like an unstoppable for train, almost.

 Consumption growth was lot higher than income growth for a longer period. But we are noticing signs of it slowing down now. Car makers reported sales dropping Year on Year basis from January to July in 2013. Mall operators are complaining that incoming crowd is increasing but it is not tuning into sales. New companies entering into retail space are reducing in the middle of intensifying competition. Few retail chains are up for outright sale. So what changed so quickly, is it a temporary phenomenon? When do we see uptick again?

Well, before looking into what changed, let us look into what were the growth drivers behind consumption during the last decade. India’s per capita income rose by 6.7% during 2004-2012 (Source: The Financial Express; Link: http://www.financialexpress.com/news/indias-per-capita-income-rose-by-6.7-during-20042012/1159884). But the retail stores were clocking a much higher revenue growth rates during the same period. Some of them doubled their revenue in 3-4 years period. How consumption growth was higher than income growth? Following factors would have helped.

  1.   Pent-up demand: The rich class in India had spending power but had very few options in acquiring finer things in life. If we take example of Sports Utility vehicles, there existed an unmet demand.  But there were no wide range of SUV available here in India ten years ago. Import duties for an SUV like Hummer were prohibitive. As the products in this segment started coming in, like Mahindra’s Scorpio, they saw unprecedented success.                                                                      
  2. Easy access of credit and EMI: The middle-class India always had desires to acquire goods which will better their lifestyle but had a limitation in their upfront spending. This opportunity was unlocked by spot distribution of loans at the shops and easy payments through EMI, the term which was not well known before. When the consumers walked into retail shop and found that the latest refrigerator they wanted to own is available on easy installments, they went ahead in acquiring it many months ahead of what they had planned earlier. So they not only spent their savings on hand but borrowed from their future earnings as well.                                                   
  3. Reaching the semi-urban & rural market: Majority of India’s population lives in rural area. Even though demand for luxury goods was non-existent there, but the necessary goods were not in easy reach for middle class consumer. Traveling to towns to buy them would mean additional costs and efforts. In the last decade this gap was widely filled. You can find a Hero motors showroom in a town having less than 50,000 populations these days. But it was not the case a decade ago. Maruti gets significant sales from towns which are not part of top 20 towns of India. As they expanded, their sales also grew linearly and for market leaders, it was exponential growth.                                                                                                                                
  4. Rise of high income jobs & trickle-down effect: Thanks to boom in IT & Pharma sector which became new employment generators for booming India. Top 5 IT companies employ more than 10 lakh engineers in India whose starting pay is higher than what their parents earned during their retirement time. One high paying job in this sector, almost created 3 jobs in the service sector in the form of services provided by banks, hotels, transportation, housing, education, healthcare etc. These globe-trotting engineers were also messiah of globalization. The set new trends in consumption, creating a new segment of consumer class.

So, the run in consumption too, like all good things in life had come to a pause. Higher interest rates, stubborn inflation, global economic slowdown, local Govt.’s inaction had an impact on India’s economy. GDP growth rates have reduced, so is consumption. But all is not bad to bring things to a halt. This too shall pass. But the drivers of consumption would be different. First movers had an advantage in serving the pent-up demand during the last decade. But that does not work again as consumers are aware of the choices they have now. Here is what I think will be the drivers of next wave of consumption.

A.  Affordability: A basic digital camera is now available for Rs. 5,000 while the same was costing at least Rs. 10,000 few years ago. This kind of driving down in the prices with innovations in technology, supply chain optimization and passing the benefit to end customers will make products affordable to larger consumer base. This would break the relationship between income growths of consumers to the kind of goods or services they consume.

B.  E-commerce: Flipkart is here. The biggest market place of the world, Amazon, has also arrived. e-Bay is seeing consistent growth in user base. E-commerce is set to make it big, at least in the urban India. I wonder when I see the books I ordered reaching me 1-2 days in Bangalore even though their inventory base is Delhi, Mumbai or Kolkata. My wife buys the designer sarees from sellers based in Surat without having to stepping out of the comforts of the home. Of course, touch and feel experience is missing but consumer has more options than ever. The inventory these e-commerce platforms offer are unmatched by local malls. So whatever you want, you can buy it without going around the world, like in the past years. Consumer is king, as always. E-commerce is another enabler for that.

C.  Younger generation joining the workforce: Unlike Europe or Japan which have a major share of citizens enjoying their pension than paying income tax, India has a majority of population who are in their twenties and getting ready to join the workforce. They would take up the per capita income growth to double digits in the years ahead. They would create a virgin market, both in electronic goods and fashion & lifestyle market, rejecting all the influences of former generations.

D.  More people moving out of poverty: The trickle-down effect of economy will continue, may be at a higher pace, as witnessed in the history of developing economies as they turned developed nations. That would put more people who are living on the edge of poverty line into middle class that would fuel the consumption.

Caveat to this expectation is a recession for prolonged times leading to job losses, and causing destruction in quality of life. But as an optimist, I see the next wave of consumption beginning in a year’s time.