The Indian consumer has never had it so good.

Higher disposable incomes, the development of modern urban lifestyles, expansion in the availability and choice of products and services and an increase in awareness and access to information have significantly impacted buyer behaviour in cities, smaller towns and even rural areas.

With economic growth projected to surpass 8% annually and the number of people in the Indian middle class (population 400-500 million) set to treble over the next 15 years, India’s consumer market is forecast to become the fifth largest in the world by 2025. (Ernst & Young report 2011; Spencer Stuart Report)

This growth is accompanied by key demographic shifts, including in consumer patterns which are changing from being largely necessity based purchases of basic goods, to greater spends on discretionary items. A 2007 McKinsey report predicts that by 2025, discretionary spending will account for 70% of all purchases



(exhibit 5 page 16 of McKinsey Report)

In addition, four new segments have emerged as being the main drivers of this evolution in the consumer market --- youth, the urban woman, children and the vast rural population of India.

Youth Market

With half of its population (570 million) under the age of 25, India’s upwardly mobile youth has become the primary target of every consumer goods company. This younger group are defined by their greater purchasing power and higher aspirations. This generates greater spends on leisure and personal gratification. Their preference for aspirational brands and for gadgets and technology are also key factors.

The New Age Woman

Economic empowerment has given rise to a newly independent urban woman who, whether she is a homemaker or a professional, is carving her own niche in the Indian consumer market. Her role and therefore priorities have shifted, with her domestic needs. Spending on personal items, such as clothes, jewellery and cosmetics are now balance. Even in the domestic space, the modern woman is shifting from traditional consumption and trying for example processed foods.  

Kids as Influencers

There are 300 million children aged between 4-14 years in India who are significantly influencing their parents’ decisions. A higher degree of exposure and ease with the Internet has led to increased awareness amongst this group which enables them to have an impact on the choices made by their families.

Rural India

Favourable economic conditions have led household income growth to research beyond India’s cities to penetrate its vast rural hinterland, which has consequently emerged as a high potential market – one not to be neglected. Home to the bulk of the country’s population (almost 70% live in over 600,000 villages of varying sizes), rural areas have historically accounted for more than half of Indian consumption. Industry statistics indicate that the rural segment currently accounts for approximately 60% of current consumption as compared to 40% in the cities, and is expected to generate 30% more expenditure in the next 20 years.





(fig 4.1 pg 80 of McKinsey Report)

The aspirations of populations in the semi-urban and rural areas are also much greater than their urban counterparts especially because they are being exposed to a range of products and services that they have never seen before. (Spencer Stuart Report) The challenges of accessing and serving rural markets mean that much of it has not yet been penetrated by major companies and is served by the informal economy instead. In addition, technology has opened doors for rural India, enabling it to overcome the physical constraints of poor infrastructure and lack of access to basic facilities.

Understanding the Indian Consumer

The Indian consumer pyramid is complex, multilayered and brimming with potential. An in-depth understanding of its unique characteristics is crucial for companies looking to access this opportunity.

Individuals at the top end of the consumer pyramid seek emotional satisfaction and are willing to pay more to get it. Those at the mid level prefer good value at a reasonable price. The large block at the bottom of the pyramid while still aspirational, are realistic about the quality that their smaller disposable income can buy. Thus, drivers behind purchasing decisions are the same but different. i.e. in urban areas, aspiration is the key driver followed by quality and then price. Whereas, the reverse is true in rural India; which is driven primarily by price followed by aspiration and then quality.  (Spencer Stuart Report)

However, it is also worth noting that Indians, no matter where they stand on the income ladder always look for a good bargain.

In addition, Indian consumers today are becoming more demanding and want greater value for their money. Technology has altered the price/value equation and premium products no longer need to be expensive.  “There is so much choice today and people do not accept poor service. We cannot make any excuses but need to gear up our systems to provide that level of service.” (Narayanan Vachul Chairman ICICI Banking Corporation Spencer Stuart report)

Thus, companies looking to enter the Indian market need to adapt their marketing strategy and their price points to suit their customer and take into account the new trends that are changing the face of the Indian consumer market landscape.

Trends shaping the Indian consumer market  

•    Western aspirations and the escalating number of working professionals have led to a surge in the demand for branded ready to eat foods, encased in modern packaging, which are replacing loose staples and locally produced food.
•    Food continues to be the largest consumption category, while the communications sector is growing the fastest.
•    Fear of debt and credit is steadily decreasing. Today, the Indian consumer is more comfortable taking credit to make an immediate purchase rather than saving up to buy it in the future.
•    The behavioural change in the consumer is reflected in the proliferation of new shopping complexes and malls springing up across the country in the last decade.
•    The ecommerce revolution is gaining momentum, fuelled by the easy availability of broadband services, increasing internet penetration, escalating demand for new technologies, and greater ease with online transactions. Domestic e-commerce players such as Flipkart.com (India's largest online bookseller), Bigshoebazaar.com, LetsBuy.com and Myntra.com have come up with innovative solutions to tackle the existing challenges of fraud, personal security issues and unreliable delivery channels, and are consequently enjoying strong business growth in smaller towns, villages and tier two cities.
•    Increasing use and dependence of mobile platforms in rural India to perform commercial transactions.
•    Niche cities are providing new opportunities in sectors such as cosmetics, jewellery and apparel, such as the tier 2 and tier 3 towns of Eastern India.

Conclusion

The evolution of the Indian consumer market has created major opportunities and challenges for Indian and multinational businesses alike.

Opportunities

Opportunities abound for UK companies across the food, apparel, cosmetics, packaging, ecommerce and supply chain logistics sectors, both in the metros and second and third tier cities.  Smaller towns offer first mover advantage, cost savings and larger market share to foreign investors due to less competition from big brands, lower costs and a vast pool of consumers that have been largely ignored till date. The attractiveness of the Indian market is further enhanced by predictions that domestic demand will escalate at a CAGR of 9.2 % between now and 2030.

Challenges

Challenges include attracting and educating large numbers of new consumers, establishing and retaining brand loyalties, and introducing high value products and services at sufficiently low prices to be accessible to the emerging middle class.  Constant reinvention is required to keep pace with fluctuating customer demands.

Strategy for Success

UK companies can succeed in this complex and vibrant scenario by leveraging their British heritage to build a strong brand identity. Evidence indicates that Indian consumers respond positively to British brands. Thus, those UK brands which focused on their quintessential Britishness as their core USP enjoy a competitive edge over other international brands. Take for example the case of Pavers England, a renowned UK shoe retailer with a widespread and fast growing presence across India.

FDI in single brand retail to rise to 74%

Following a proposal put forward by the Commerce & Industry Minister Anand Sharma, the foreign direct investment ceiling for single-brand retail trading is expected to increase to 74% from the current cap of 51%.

Minister Sharma is pushing this move to improve the perception of policy paralysis, encourage employment, and provide a boost to local sourcing. If approved by the Union Cabinet, the move will benefit retail companies like Mothercare, Marks & Spencer and Zara that are operating with local partners.

Industry experts are optimistic that, if approved, this proposal will be closely followed by the long awaited green light for multi-brand retail to allow international retailers such as Tesco and Carrefour to open outlets. On multi-brand retail, something that has been in the pipeline for over seven years, all that the government is willing to say is that consultations are underway.

Wills Lifestyle to expand into tier 2 and tier 3 cities

Wills Lifestyle, the ITC-owned premium apparel brand that has registered strong growth in metropolitan and tier I cities, is now eyeing the smaller towns, especially the tier II and III cities. The apparel brand plans to open 20 stores in cities such as Mangalore, Mysore and Jodhpur in the next 12 months. The company has already entered 10 new cities including Jalandhar, Coimbatore and Guwahati in the last year-and-a-half.

Currently, Wills Lifestyle owns 80 stores, of which 30 were set up in the last 18 months. Their strategy is to bring Wills Lifestyle products close to their consumers in both the metros and the smaller towns. The company also plans to create different collections for different cities, bearing in mind the tastes and preferences of customers in the cities they are set to enter.

“Our supply chain and design needs to be in sync with the type of requirements of the city. We will introduce new collections every six weeks,” said Atul Chand, divisional chief executive of ITC’s Lifestyle Retailing.

PAVERS ENGLAND

Stuart Paver

Sector: Retail, Food and Supply Chain Logistics

 


Pavers England store, Phoenix Mall, Pune

1.    Tell us about your business – its origin, offering and coverage?

Pavers is a family company started by my mother, Catherine Paver, in 1970 when she could not find comfortable shoes to wear. She borrowed £200 from the bank to set up her company and started selling shoes and other products via house parties. It has since grown to 100 stores across the UK and Ireland with a sizeable web business as well as the world’s first 24 hour shoe TV shopping channel.

2.    When and where did you make the first investment in India? In which cities do you currently have business relationships and/or business activity in India?

Pavers had been buying product from India for a number of years, but it was four years ago when I noticed a huge gap in the market for an international brand at prices above the local competition but well below major international brands such as Ecco and Geox. We currently retail in 20 Indian cities with 15 of our own single brand stores and 70 concessions with major department store groups.

3.    What were the main drivers of your decisions to foray into India?

Our main drivers were focused around the opportunities supplied by such a rapidly expanding middle class. I had seen how domestic demand had driven the rapid growth of retail companies in China and was convinced that the same factors would drive domestic demand in India over the next twenty years. A lot of the domestic brands and retailers were fairly disorganised.

4.    What was your business strategy for entering India?

Our business strategy largely focused around creating a rapid response model to domestic demand from the top 5% to 10% of the population. This meant we had to invest heavily in research and development within India whilst focusing our brand values on our UK heritage. This means we are able to run a more efficient and leaner operation than our competitors whilst charging a higher price because of the benefits and prestige associated to an international brand.

5.    What business model did you leverage for market entry into India? (Local partnerships, outsourcing, direct exports, local manufacturing, etc.)

Having worked in India for a couple of years I understood the need for a strong, well connected local partner whom you could trust implicitly. We were lucky that our local agents for footwear were a similar family business with strong financial resources and incredibly trustworthy, so we had to look no further for a local JV partner. I decided it was far better to work with and train a group of people we trusted rather than form a relationship with an established retail group who might not want to adjust their business culture to match our needs.

6.    Has the market met with your expectations?

The opportunity has been even larger than we imagined when we first set up the JV. Things are rapidly falling into place after three long years of setting up the foundations.

7.    What key factors would you attribute your success in India to?

I had worked with a company in China that went from being a small factory 20 years ago to having over 14,000 shops in 2011. They have been incredibly helpful in highlighting the best way of maximising the potential in India and have taught us what worked and what didn’t for them in the same stages of their domestic growth cycle 10 years ago.

8.    What have been your biggest practical challenges of entering and operating in India? (Infrastructure, identifying suitable partners, hiring suitable staff, etc.)

The biggest practical challenges have all been around domestic red tape. Anyone who complains about red tape in the UK does not know how lucky they are because by comparison, things in India are quite complex. In some ways every district and sometimes every town has a different tax structure that affects your margin which means that you have to employ a small army of bookkeepers to handle all the paperwork. Such is the growth rate in retailing that recruiting experienced people is almost impossible so you have to train staff, but as soon as you do that they become very attractive to your competitors.

9.    From a regulatory perspective, what have been the main barriers to doing business in India? (Regulatory framework, bureaucratic impediments, legal or taxation issues, corruption). Are any of these impediments specific to the sector you operate in?

Foreign Direct investment regulations are complex in India and they prevent us from operating multi brand outlets in the country. However all the issues that we face are exactly the same as those experienced by domestic brands and retailers.

10.    Does your business operate in Tier-II cities of India? (cities other than New Delhi, Mumbai, Chennai, Bangalore or Kolkata). In what ways is it different from doing business in a metro? (better/poorer infrastructure, better/poorer skills availability, ease/difficulty in local travel, low/high operational cost, untapped opportunities, easy/difficult business culture)

We are increasingly selling more shoes in Tier-II cities through partners such as Lifestyle Department stores and Reliance Retail. There are certain Tier-II cities where the spending power of people for each store is actually higher than in metro cities due to lower competition.

11.    What is your candid view on future opportunities within India for your business?

I believe that for many UK companies India is the largest opportunity that they will ever come across, especially over the next two decades.

12.    What advice would you give to other businesses in the UK looking to do business in India?

Find the right local partner, find the right local partner, spend some time in the country and finally find the right local partner

References

Reports

Spencer Stuart Report – “The Indian Consumer Market, A roundtable discussion.”
Ernst and Young’s 2011 India Attractiveness Survey – “Reaching towards its true potential”
McKinsey Report 2007 – “The Bird of Gold: The Rise of India’s Consumer Market.”

Online Articles

http://timesofindia.indiatimes.com/business/india-business/FDI-in-single-brand-retail-may-be-increased-to-74/articleshow/10598949.cms
http://info.shine.com/Article/Industries/Wills-Lifestyle-now-eyes-smaller-cities/5434/cid1.aspx