Consumer Market: Scaling New Heights

Scaling New Heights

With rapid socio-economic changes taking place in India, the country is witnessing the creation of many new markets and a further expansion of the existing ones. With above 300 million people moving up from the category of rural poor to rural lower middle class between 2005 and 2025, rural consumption levels are expected to rise to current urban levels by 2017. Such developments in India’s markets are expected to create major opportunities for Indian companies and MNCs alike and further fuel consumer demand in India.

According to a study by the McKinsey Global Institute (MGI), Indian incomes are likely to grow three-fold over the next two decades and India will become the world's fifth-largest consumer market by 2025, moving up from its position in 2007 as the 12th-largest consumer market. Further, according to data released by Visa, (the world's largest retail electronic payments network), annual commercial spending in India was estimated at US$ 2.3 trillion in 2007, an increase of 23 per cent from 2006. According to Visa's Commercial Consumption Expenditure (CCE) index, India was ranked in terms of the size of total business and government expenditure as the fourth fastest growing market in the Asia Pacific (APAC) region.

In spite of the rising inflation and fears about a slowdown, consumer demand in India is still upbeat. In an analysis (carried out by Economic Times) of the top 50 consumer goods and services firms, it was seen that the June quarter saw a sales growth of 24 per cent (year-on-year) compared to last year. The firms included in the analysis were from sectors like automobiles, textiles, fast moving consumer goods (FMCG), consumer durables, liquor, airlines, telecom services, footwear, and retail among others. Sales of daily consumption items went up by 5-10 per cent and the FMCG business increased by 18.8 per cent, while the consumer durable segment also recorded strong volume growth in the second quarter of the 2008-09 fiscal.

Moreover, approximately 315 hypermarkets are expected to come into existence in Tier-I and Tier-II cities across India by the end of 2011, riding on the boom in organised retail sector, says a joint study by consultancy firm KPMG and industry body, ASSOCHAM. The study states that 212 Indian towns are capable of sustaining the development of such hypermarkets in 2008.

FMCG

The FMCG sector has been registering double-digit growth in sales since the last couple of years. Currently, with annual revenues of US$ 14. 74 billion, it is the one of the most promising sectors.

Interestingly, the FMCG sector is witnessing rapid growth in rural areas and is estimated to grow by 40 per cent compared to the growth of 25 per cent in urban areas. Companies like ITC, Godrej Agrovet, DCM Shriram among others are growing rapidly in rural areas and in fact they may outdo their urban counterparts like Reliance Fresh and the Future Group-owned Food Bazaar chain.

Tremendous growth is being recorded by the value added and aspirational products. These products are estimated to propel the FMCG industry to grow by 16 per cent (in sales) during 2008-09, compared to 14.5 per cent during 2007-08.

Another promising trend is the growth of ‘out-of-home consumption’, which is emerging as a new section in the FMCG sector. With changing lifestyles, the concept of three core meals fast vanishing, companies like Coke, ITC, and Dabur are venturing into this market and are bringing out new product packaging for the segment.

The segment is likely to see a lot of fresh investment in the days to come. PepsiCo has announced a US$ 500 million investment in India over the next three years. Having already invested US$ 700 million in the country, the new investment would push the company’s investments above the US$ 1 billion mark. PepsiCo is also working on developing a nutritious product targeted at young women.

Significantly, several Indian FMCG companies have also been aggressively exploring global markets through both acquisitions and alliances. In the past three years, they have acquired about 15 companies and have spread their presence in more than a dozen countries.


Luxury Products

With the rapidly increasing number of millionaires in India, the market for luxury brands is growing annually at a compound average growth rate (CAGR) of about 35 per cent.

According to a FICCI-Yes Bank report, India is set to become a manufacturing hub for global luxury brands over the next four to five years. The report stated that with the core strengths in India's manufacturing sector, the manufacture of luxury items in India can grow to US$ 500 million. The luxury products market in India was estimated in excess of US$ 500 million and is likely to grow at a CAGR of 28 per cent to reach US$ 1.2 billion by 2010. The market is expected to double by 2015, touching US$ 2.5 billion.

Global brands like Louis Vuitton and Frette are planning to set up their manufacturing base in India. In the luxury automobile segment, BMW has also seen a good run in 2008, having revised their sales target for the year to 2,800 cars from 2,000. Audi registered a 123 per cent rise in sales in the first quarter of 2008, while Mercedes-Benz has set a target of 3,000 cars for 2008.

Industry experts believe that the top-end consumer electronics segment in India is growing by 8-10 per cent annually.

Consumer Durables

A combination of changing lifestyles, higher disposable income, greater product awareness and affordable pricing have been instrumental in changing the pattern and amount of consumer expenditure leading to robust growth of consumer durables industry.

According to a snap poll carried out by the Confederation of Indian Industry (CII), 92 per cent the CEOs surveyed were expecting sales to increase by 10 per cent during the current financial year

According to ORG-GfK data, the combined size of five big-ticket product categories-colour television, refrigerators, washing machines, air conditioners and microwave oven-rose from US$ 4.1 billion in 2006 to US$ 5.1 billion in 2007.

The higher growth in the sales value compared to volume growth rates can be explained by the surge in the sales of high-end consumer durable goods. Products like split air-conditioners (60 per cent), frost-free refrigerators (54 per cent), fully automatic washing machines (35 per cent), microwave ovens (35 per cent), high-end flat panel TV (100 per cent) recorded impressive growth rates in 2007-08.

Despite the global slowdown, Indian consumer goods companies have decided to augment manpower, and also increase their research and development (R&D) expenditure. LG Electronics plans to invest US$ 50 million to increase its manpower and R&D in India by 2009, whereas Samsung plans double its R&D team in India to 4,000 by 2010. According to ITC's sustainability report, ITC's payroll spend increased from US$ 110.52 million in fiscal year 2006 to US$ 149. 75 million in fiscal year 2008 and the company remains upbeat on hiring.

Consumer Electronics

According to the Consumer Electronics Association, the global consumer electronics revenue is estimated to grow by nearly 10 per cent in 2008 to reach US$ 700 billion.

In fact the rapidly growing consumer electronics market in India has spurred many leading manufacturers of the world to get into partnerships with local companies to set up shop in the country. Companies planning to enter India include Japanese testing firm Saki, Hong Kong’s surface mount technology (SMT) company WKK, Singapore’s Mydata (SMT) and USA’s Indium (solder paste).

iSuppli, an electronics market research firm, has projected that the Indian audio/video consumer electronics industry will grow to US$ 6.59 billion by 2011, growing at a compound annual growth rate CAGR of around 10 per cent.


E-commerce

Thanks to the broadband revolution, an increasing number of Indians are spending more on the web.

According to the Telecom Regulatory Authority of India, Broadband Internet connections touched 4.73 million at the end of August 2008. The increase in the PC and internet penetration along with the growing preference of Indian consumers to shop online has given a tremendous boost to e-tailing-the online version of retail shopping.

According to a global online survey by A C Nielsen, a staggering 78 per cent of Indians (who access internet) make purchases online, with credit cards being the preferred mode of payment. In fact, Indians have emerged as the third biggest credit card users globally for online purchases.

A new niche segment has emerged in this sector-on-demand personalisation of products. Online start-ups like Myntra, Dilsebol and Pringoo are some of the first movers in this area, which provide products, which are customised according to the client’s demand.

Automobiles

The Indian auto industry has grown at a CAGR of 14 per cent over the last five years with domestic sales of vehicles touching around 10.1 million vehicles in 2006-07. During April 2008, sales rose by more than 17 per cent in the car segment, while sales in the utility vehicle segment rose by 31 per cent, compared to the corresponding month last year. Presently, India is the second largest two-wheeler market in the world, the fourth largest commercial vehicle market, the 11th largest passenger car market and is expected to be the third largest automobile market by 2030.

Maruti Suzuki, India’s leading automaker registered a 20 per cent net sales growth for the June 2008 quarter and it also posted 12 per cent growth in volume terms. Even Hero Honda registered double digit growth in its volume shipment.

Consumer Confidence

The Indian consumer remains one of the most upbeat globally. According to the AC Nielson Consumer Confidence and Opinion Survey, India is placed second in the 51-nation global survey. Also Indians are the most optimistic people regarding their personal finances (79 per cent) and second most optimistic people with respect to job prospects (86 per cent)-which opens attractive avenues for industries planning to tap the Indian consumer market.

Furthermore, Indian consumers are also more becoming more aware about the finer nuances of nutritional panels and labels. According to the study, around 59 per cent Indians said that they noticed packaged goods' labels containing nutritional information. With 59 per cent, India tops in the Asia-Pacific region in its understanding of nutritional labels. The Nielsen global online consumer survey was carried out by Nielsen in April 2008, in 51 markets from Europe, Asia-Pacific, North America and West Asia.





Copyright © 2004-2008 India Brand Equity Foundation

Not Above Us All

Public anger — against the perceived ineptitude, pettiness, and failure of our political class — brimmed over when Mumbai was savagely attacked last week. The outpouring of angry messages and public demonstrations suggest that the citizens of this country might finally be fed up of just picking up the pieces and moving on, till the next bout of terrorist brutality rips apart their homes and lives all over again. The vociferous demands for accountability being made by citizens from the political class are understandable, given the circumstances. 

The attacks only ignited a long-simmering resentment among the citizenry about the deportment of its elected representatives and public officials. It is the attitude of the ruling class — bureaucracy and judiciary included — that gets to our people. The attitude that somehow — by virtue of being elected to Parliament, promoted to the top of the bureaucratic heap or elevated to the highest benches of the judiciary — they are above the rest. It betrays a colonial hangover and has no place in a democratic republic. 

The power play manifests itself most visibly in the security arrangements provided to the so-called VIPs. An unjustifiable number of people are designated as VIPs and VVIPs in this country, and are provided with an army of security personnel to protect them round the clock. For instance, in Delhi alone, about 14,000 police personnel are assigned to VIP duty, apart from special security forces like the National Security Guard (NSG) and Special Protection Group (SPG). The problem is acute in Delhi because it is the national capital, but this is a pan-Indian phenomenon. This, when police forces in many states are understaffed. 

Precious resources — of men and money — are spent on protecting those who face no reasonable threat, at the cost of stretching out security apparatus, putting the nation’s safety at risk. For instance, the ‘rangers’ arm of the NSG is mainly devoted to VIP duty. Our elite forces must have a single brief so that their efficiency is maximised. Instead, we have a ludicrous situation where ex-PMs and other no-so-vulnerable individuals — for instance, Amar Singh and Murli Manohar Joshi — are protected by the NSG. There are a few public officials — like the PM, president, home and defence ministers and the chief justice — who need solid security cover. The rest must promptly be stripped of their VIP status and accompanying security paraphernalia. If their safety is at stake, let them — not the taxpayers — pick up the tab.

TIMES OF INDIA

5th DEc, 2008

Case for a bold fiscal stimulus

IT HAS now become clear that Indian economic growth has slowed down considerably in the current year after recording a robust rate of nearly 9% average over the past five years. While the global financial crisis, the most severe since the 1930s, has done much of the damage, the growth momentum was also affected adversely in first half of 2008-09 by the tight money policy of the RBI to contain inflation. 

Growth is flagging in many sectors especially the labour-intensive, export-oriented ones. With exports shrinking, vulnerable sectors such as SMEs (like those making handicrafts or apparel) feeding export markets are finding it hard to survive. Larger companies are cutting production and postponing capital investments, in turn adversely affecting the jobs. The stock markets have crashed because of foreign institutional investors (FIIs) pulling out from India, which has also exerted pressure on the rupee. It has become difficult for enterprises to raise capital in India and in international markets. 

Although the Indian economy may still manage to grow at 7%, one has to be prepared for further downside risks associated with deepening of recession in the west. The IMF is projecting the G-3 economies, viz., the US, EU and Japan, will actually be shrinking in the next few quarters. Hence, emerging economies like India will have to look inwards for the growth stimuli. 

The policy response of the government has so far been limited to easing liquidity by reducing CRR and repo rates. A Rs 50,000 crore fund is also being contemplated to lend to infrastructure projects. Some more initiatives to subsidise home loans and provide incentives to exporters of labour-intensive goods, among others, are under consideration. While all these steps are in the right direction and should be expeditiously taken, there is need for propping up the growth momentum. 

What is needed is a fiscal stimulus of the order of $50 billion (or roughly Rs 250,000 crore). Such a package of additional spending over the next twelve months will go a long way in reviving the demand and restoring the growth sentiment. The package should target the weaker sections of society to make the growth process more inclusive by paying special emphasis, for instance, on the development of rural infrastructure — rural roads and housing, primary and secondary education, health and sanitation — which would have high pay-offs in terms of growth and inclusiveness while having low import content. 

A part of the package could be an adjustment fund for assisting the affected SMEs and workers. The expansion of NREG schemes could be another priority. Spread over two financial years, viz., 2008-09 and 2009-10, in a ratio of 40% and 60%, this package would entail stimulus of $20 billion and $30 billion respectively (i.e., 2-3% of GDP) in the two years and could be monetised rather than funded by public borrowings. The public investments tend to crowd in private investments and foster growth. Hence, the package may expedite the revival of the economy. 

Sceptics would be concerned about the effects of such a package on fiscal balance and hence on inflation, keeping in mind the already stretched fiscal deficit in the current year after including off-budget expenditure. There are two redeeming features to these concerns. Firstly, the more than 50% decline in crude oil prices in international markets since the onset of the crisis has provided the much-needed fiscal space to the government by reducing the cost of oil and fertiliser subsidies. Secondly, there is little risk of inflationary expectations in the present scenario of declining demand and depression around the world. The commodity prices have already come down by more than 50% on the back of poor demand. 

The policy response in different countries has included large fiscal stimulus packages ranging from the government distributing vouchers for promoting spending as in Japan to an ambitious $580-billion fiscal stimulus package announced by China. 

Another lesson that needs to be learnt from the trends of the past year includes the need for moderation of FII inflows. Volatility of FII inflows over the past year has caused wide variations in the exchange rate of rupee creating hardships for exporters besides bringing wild fluctuations in the stock market indices. These flows are also very expensive in terms of their servicing burden vis-àvis other capital flows such as FDI, NRI deposits and external commercial borrowings. 

To sum up, the time has come for taking bold steps to revive the growth momentum of the economy in the wake of the worst crisis of the world economy. India should seize the moment before it is too late, to inject a stimulus by building an all-party consensus in national interest while enhancing the inclusiveness of the growth process.

ET: 5th Dec, 2008