The world’s second most populous nation is fast becoming one of the most dynamic consumer markets – and the big brands are taking notice.
Emerging economies have fallen out of fashion, as Brazil and Russia struggle with recession and China adjusts to a ‘new normal’ of slower economic growth. Yet in a global economy fraught with uncertainty, India is still booming. Over the next decade to 2025, India’s GDP and its contribution to world trade will almost triple to 6% and it will become the world’s third largest economy. Its population of 1.29bn will grow by 2% a year and annual gross income is expected to double between 2009 and 2030.
Rajat Wahi, Partner and Head of Consumer Markets for KPMG in India, says the transformation of the country’s consumer economy will be similarly dramatic – consumption has increased more than threefold in the past decade.
|“India is not one country. It’s more like Europe with different consumers in different regions”|
“Overall consumer spending was US$0.22tn in the year 2000 but reached US$1.3tn in 2015. It is expected to grow by seven times in the next 15 years to reach US$7.3tn in 2030,” says Wahi.
This growth will be driven to a large extent by India’s fast-emerging middle class. By 2025, 70% of households will be classed as middle income, up from 54% today. And, says Wahi, the consumer economy will be defined by its youth: “Around 70% of the population is below the age of 45. In the next 10 years among the BRIC markets, India will have the lowest average population age.”
The future will be an ever-more urban one too: 38% of Indians will be city dwellers, and there will be 18 megacities by 2025 compared to four in 2014. The demands of these city regions will be immense; Mumbai’s GDP alone will rise from $80bn to around $380bn by 2025.
Over the same period, the number of households in the urban economy will increase from 150m to 350m. But there will be other developments too. The hitherto binary urban and rural markets will blur into multi-tiered ones of mega regions, urban, semi-urban and rural ones.
The implications of all this are that market segments and niches will proliferate, stock- keeping units and product options will multiply, and entirely new product categories will emerge as consumers spend more on lifestyle and other non-food categories.
These opportunities are becoming increasingly accessible to overseas brands and retailers as the modernising Janata government of Narendra Modi rolls back protectionist barriers, simplifies the tax structure and cuts red tape.
|Jewelers, such as Tanishq, Malabar Group and Gitanjali Gems, all opened new stores across India in 2016|
Perhaps the greatest beneficiaries of these changes will be food brands, says Wahi. “The big change we are seeing is the rise in on-the-go consumption of food and drink. More people are out of their homes more of the time and this has allowed the growth of new categories across the landscape.”
Among the growth areas are dairy, including differing types of yoghurt, such as probiotic, along with biscuits, crackers and healthy food categories such as rice cakes. Increasingly, this trend is spreading beyond India’s cities. “Rural consumption has been strong in the last few years,” says Wahi. “Rural consumers are buying basic staples, packaged goods, chips and soft drinks.”
The rest of the average Indian shopping basket is undergoing dramatic change too. “Personal care has seen strong growth over the last four to five years and that trend is likely to continue,” adds Wahi. “There are lots of new categories, including hair gels and accessories.”
Homewares are another hot category. The arrival of Swedish brand IKEA, which plans to open 25 stores in India by 2025, is an indicator of the perceived potential. This mid-end segment is becoming hotly contested by other incoming global brands such as Muji, which has also opened its first store.
Non-essentials for the home are also booming in line with the overall growth of disposable incomes. Other burgeoning categories include air purifiers and insecticides. “That category has been seeing absolutely amazing growth of 20%, with lots of new products,” says Wahi.
As Indians choose to spend a growing share of their disposable incomes on entertainment, he adds, this will have a dramatic impact in the next decade. “With the rise of smartphones and the ability to download information, a lot of consumers will use services like Netflix. Mobile connectivity will be a big enabler.”
But probably the most significant new segment in the consumer market in the past 2-3 years has been digital. “There’s a very strong desire among the population for more data on the go,” says Wahi.
In India, 100m people are online via smartphones at any one time, devouring and generating huge amounts of data and taking up a significant share of discretionary consumption. Many phones are still relatively rudimentary but smartphone penetration is likely to grow by four times over the next decade, meaning an additional [350m] smartphone users. Online banking should explode as a result.
“As more and more Chinese players come here, there will be a downward push to [the price of] smartphones,” says Wahi. “Reliance launched a new service over the last month [costing] 4,000 to 5,000 rupees, or just under US$100. That’s a huge game-changer in terms of access.”
The launch of 4G services in India is also imminent. “That will have a massive impact in terms of driving the use of online services.”
The next step will be the advent of mobile commerce. Although currently a relatively small – 2% – segment of transactions in India, it is growing fast. M-commerce transactions are expected to grow from US$2bn in 2014 to US$19bn by 2019, according to market research firm Zinnov. Boosted by smartphone- enablement, this could rise to US$120bn by 2020, according to Morgan Stanley.
|“Consumer spending is expected to grow by seven times in the next 15 years to reach US$7.3tn in 2030”|
The promise shown by e-commerce in India is evident from the fierce competition developing between global and domestic sellers. Worldpay expects the online shopping market to grow by 28% a year in the next four years and be worth $63.7bn by 2020. Other experts are even more bullish. This is being driven by increased access to the internet, the fact that India is the world’s fastest growing smartphone market and rising wages (which were up 10% in 2016).
Though the Indian government would prefer local players Flipkart and Snapdeal to flourish in a contest with foreign e-commerce giants, it will not intervene in the market as decisively as the government has in China, so there is everything to play for. The potential of the market is borne out by the many battles going on to improve on and dominate last-mile fulfillment to handle the surge in online sales, even in food retail.
But India’s rural populations stand to benefit just as much from the rise of digital communications, says Wahi. “Mobility and connectivity enable them to be better connected to markets and to get better prices.
In India, a farmer only gets a quarter of the final price or less. The rest is taken by middlemen. As infrastructure and communication improves, this will increase the availability of information and have a huge impact on farmers’ incomes.
“The rural economy [has recently been] outgrowing the urban economy, assisted by government spending a lot of the time and enabling better technologies for online payments and banking, again removing the cut of many middlemen. That will have a big influence on the rural economy. It’s going to be a game-changer.”
While mobile-commerce will become ever more dominant, there are lots of consumers still close to or below the poverty line for whom the delivery of products is a big challenge, says Wahi. “People will still go to bricks and mortar stores. Tablets and laptops will also still have a role.”
Not every sector that has enjoyed dramatic growth in Western and Asian markets in recent years will share such explosive growth in India as food or digital. The country’s middle class is relatively poorer than its Western or Asian counterparts, so luxury remains a small segment.
“The rich travel to spend,” says Wahi. “They prefer to go to London or Dubai. The government is also cracking down on the cash economy, with an increasing need to show tax documents [for large purchases]. That has made luxury more challenging and it’s nothing like the markets in Asia or the Middle East.”
Despite growing public health problems associated with poor environments and the increasing adoption of Western diets, expectations for the health and wellness consumer sectors are similarly muted. Organic produce, for example, remains decidedly niche.
Only the wealthiest Indians participate in these sectors to any significant degree. “By and large it’s not that much of a priority. Although the government is talking about high levels of obesity, diabetes and heart disease, companies will find they will not be able to get a premium on their products,” says Wahi.
Incoming businesses must also be alive to the quirks of the Indian consumer market. “It is important to understand what are their markets and target segments,” says Wahi. “India should not be viewed as just one country. It’s more like Europe with different consumers in different regions.
“Understanding the consumer and shopper will be important. There are lots of variants needed to make products more relevant to the Indian market. That could be the size of product or type of packaging. It’s also a highly price-sensitive market.”
Establishing a capable team to build a skills base and training capability will be essential, says Wahi. It is also worth exploring how to apply local research and development and innovation to product development, as well as bringing in appropriate adaptations from other developing markets.
“You have to adapt locally here. They are very price conscious and they demand value, but it’s not just about price. Even IKEA has to do lots of adaptation. People are not big on DIY in India and people come and install the furniture. McDonald’s is another example, omitting beef from its products and with a high proportion of vegetarian dishes. “Identifying the right business model, whether franchised, own-entity or a joint venture with local partners and taking the time to understand the market is important too,” he adds.
In a number of cases, incoming brands have successfully secured bridgeheads by acquiring local brands.
“They are buying them to take out local competition but also to take ownership of local products the consumers understand,” says Wahi. “In some cases that is the best way of entering this new market than to launch your own brands.”
70% of India’s population is below the age of 45. This will create a consumer economy defined by its youth, with big opportunities across all markets. At the same time, people are increasingly urbanizing, creating an emerging middle class.
Markets will be multi-tiered. As well as the rise of immense megacities, there will be areas defined as urban, semi-urban and rural. This will allow market segments and niches to proliferate, allowing entirely new product categories to emerge.
Consumer preferences are changing. On-the-go consumption of food and drink is on the rise. This presents a big opportunity for oversees brands and retailers, as the modernising Indian government starts to cut red tape and allow more new products in.
The rise of digital communications will transform how India buys and sells. Online banking and e-commerce will explode over the next decade as an additional 350m smartphone users enter the market.
Companies that come into India must recognize its quirks. Every region of India is different – companies need to do their homework on consumer preferences and business practices to hit the right spot.
Based on a survey of over 400 consumer industry executives the Consumer Executive Top of Mind Survey 2016 reveals their priorities and areas of...