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.
The transformation of the country’s consumer economy will be similarly dramatic – consumption has increased more than threefold in the past decade.
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.
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. 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 modernizing 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. The big change so far has been 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 yogurt, 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, 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. 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 seen of 20% with lots of new products becoming available.
As Indians choose to spend a growing share of their disposable incomes on entertainment, 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 is a very strong desire among the population for more data on the go.
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 enter the Indian market, there will be a downward push to the price of smartphones. Reliance recently launched a new service costing 4,000 to 5,000 rupees, or just under US$100 which is a significant game-changer in terms of access.
The launch of 4G services in India is also imminent and 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. 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.
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. People will still go to bricks and mortar stores and tablets and laptops will 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, 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 is 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. 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.
Incoming businesses must also be alive to the quirks of the Indian consumer market. It is important that they understand their markets and targets. India shouldn’t necessarily be viewed as just one country. Rather, it has diverse consumers across different regions. Tailoring the product offering to the Indian market is very important.
Establishing a capable team to build a skill base and training capability will be essential. 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.
Adapting to the local market is key. Consumers in India are price conscious and they demand value, but it’s not just about price. Even IKEA has had to adapt. DIY furniture doesn’t appeal so the company has people that install the furniture. McDonald’s is another example, it omits beef from its products and offers a high proportion of vegetarian dishes. Taking time to understand the market and to identify the right business model, whether franchised, own entity or a joint venture with local partners, is vital.
In a number of cases, incoming brands have successfully secured bridgeheads by acquiring local brands.
Buying a local brand takes out local competition and takes ownership of local products the consumers understand. In some cases it could be the best way to enter this new market rather than launching your own brand.
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 modernizing 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.