Consumers in India

Prepared By:
Courtney Williams MAP 453 Dr. Gupta Spring 2006

Overview This report examines the current trends and patterns demonstrated by Indian consumers. Studying the trends of consumption in India will assist in gaining knowledge about the potential of Indias economy, both currently and in the future. Not only do consumption patterns provide insights into the future areas of strength in the countrys economy, but they also paint a picture of the relative standard of living levels that are likely in the future. In addition, understanding consumption habits of the countrys consumers will also serve to explain the reasons for recent multi-national companies successes and failures in the region. Statistical Snapshot Marketers are just beginning to understand the full potential of the Indian market. First and foremost, the economy of India is growing rapidly at the rate of 6% each year 1. In comparison to the growth rates of Western Europe and the USA at 2 and 3%1, respectively, the Indian market demonstrates notable growth. From the principles of macroeconomics, economic growth suggests an improvement in the standards of living. This is true; however, the increase in economic growth and output has also brought about an increase in inflation: consumer prices increased by 5.3% in 2004, compared to 3.2% in 20034. Foreign direct investment, a good indicator of confidence in the potential of a countrys economy, also serves to demonstrate Indias importance as a globally significant market. Foreign direct investment in India, as measured in inflows of US dollars, has increased from $3.6 billion in 2000 to $4.6 billion in 2003 and $5.3 billion in 20044. The population of India is comprised of over 1 billion people in 164.8 million households2. As a result of Indias growing population, now 35 cities in India have over 1,000,000 citizens7. Indian GDP reported in the Atlas method measured $620 per person3 in 2004, ranking 159th in the world. As a basis for comparison, the USA per capita GDP ranked as the fifth highest in the world, with $41,4403. Despite the comparatively lower GDP per capita, statistics on phone and internet usage suggest an increasingly sophisticated and technologically-savvy population. The amount of internet users has increased exponentially since 2000: from 5.4 users per 1,000 members of the population, to 17.4 users per 1,000 in 2003, to 32.4 users per 1,000 in 20044. The same exponential growth also applies to land line and cellular phone usage in India. In

2000, 35.4 per 1,000 members of the population utilized phone technology4.

This figure

increased to 64.0 per 1,000 in 2003 and further to 84.5 per 1,000 in 2004 4. In addition, according to the MATRADE7 report published in October 2005, e-commerce in India represented $0.1 million in revenues in 2000. By the end of the current year, this number is expected to climb to $5.8 billion, $5.41 billion of which will be spent in the business-to-business sector7. Clearly, the use of both mobile phones and the internet is contributing to the increasing sophistication of the Indian population. Population Segmentation According to The National Council of Applied Economic Research 5, Indias population of 1.1 billion is considered to consist of five distinct socio-economic segments. The largest of these population segments is the Climbers. About 54.1 million households who earn between 22,000 and 45,000 Rupees annually are members of this segment5. This segment is followed in size by the Aspirants, who make up a total of 44.0 million households that earn 16,000 to 22,000 in income each year. Destitutes, the poorest of the socioeconomic segments, earn below 16,000 Rupees each year and comprise 33 million of Indias households5. The Consumers make up 32.5 million households who earn 45,000 to 215, 000 Rupees each year, and the Rich, who earn over 215,000 Rupees each year, constitute just 1.2 million households5. Please see below:
India's consuming class
Table I Estimated households by annual income Annual income (in Rupees) at 1994-95 prices Table II Structure of the Indian consumer market (1995-96) Number of households (in million) Urban Rural Total

No. of Annual income households (in (in Rupees) at million) 1994-95 prices

Classification

<25,000 25,001-50,000 50,001-77,000 77,001-106,000 >106,000

80.7 50.4 19.7 8.2 5.8

<16,000 16,00122,000 22,00145,000 45,001215,000 >215,000

Destitutes Aspirants Climbers Consumers The rich

5.3 7.1 16.8 16.6 0.8 46.6

27.7 36.9 37.3 15.9 0.4 118.2

33.0 44.0 54.1 32.5 1.2 164.8

Total no. of households: 164.9 million

Total no. of households

Source: National Council of Applied Economic Research (NCAER).

The following graph, Figure A, demonstrates the relative sizes of each of the five Indian socioeconomic population segments. The graph clearly depicts the Indian middle classs dominance over the other population segments, particularly The Rich. Below, Figure B depicts the growth of the five socioeconomic population segments from 1994 to the current year. A5. Population Segments:

The population segments of current-day India.

B6. Population segment growth of Indias socioeconomic classes:

Socioeconomic class growth in India from 1994-2006. As shown in Figure B, the Destitutes segment has nearly halved in size over the past decade, while The Rich, Consumers, and Climbers have all doubled in size. From these trends, it can be deduced that the economic growth India has been experiencing is evening the distribution of wealth in the country, enabling more of the population to partake in consumption activities. Consumer Spending Specifics Increases in disposable incomes throughout the population represent significant opportunities for marketers. According to the MATRADE Report7, the middle and lower income classes combined constitute 60% of the aggregate value of the Indian market. Also reported in the MATRADE Report7, the growth of the Indian middle class has caused discretionary incomes and consumer spending to increase. In 1992-1993, the typical Indian consumer spent just $133.60.

Proportion of consumer goods purchased in India in 2003.

In contrast, just a decade later in 2002-2003, the typical Indian consumer spent a total of $350.747. This represents a 10.13 compound annual growth rate. Not only have consumer expenditures increased, they have also evolved in their nature. Whereas previously, the majority of discretionary incomes have gone towards food expenditures, current trends suggest that this pattern is dissipating. The more available discretionary income Indians allocate to non-food expenditures, the more pronounced the development of the population. Currently, according to the MATRADE Report7, Indian consumers have decreased their share of food expenditures from 54.07% of total disposable income in 1992 to 44.8% of disposable income a decade later in 2002. As detailed in the chart to the left found in the KPMG Indian Consumers Report7, in 2003, Indian consumers still spent the bulk of their income on food purchases (41.1%). Other sizable expenditures included personal care items, which comprised 8.8% of consumer expenditures, footwear, which comprised 7.6% of consumer expenditures, and clothing, which constituted 6.6% of total consumption expenditures7. According to the MATRADE Report7, growth of Indian consumer expenditures is closely linked with the growth of the countrys output and economy. The Compound Annual Growth Rate of consumer spending in India has measured a consistent 12% each year, rate which has increased in tandem with the GDP7. Rural vs. Urban Consumer expenditures have great variance at the rural and urban levels. Rural Indians spent an average of $12.34 each month per capita on food and non-food expenditures, $6.78 and $5.56, respectively. The most significant non-food expenditures for rural consumers were $3.45 or 28% spent on clothing and footwear, and $1.11 or 9%, spent on energy7. At $23.53, the monthly amount of money spent by inhabitants of urban areas in India was double the expenditure of the rural level. Only $10.00 or 42.4% of their consumption involved food purchases, compared to the 54.9% of their rural counterparts. While energy expenditures were higher, $2.11, this expenditure still represented 9% of the total money spent on the urban level.

As an interesting contrast, however, only $1.65 was spent each month by the average urban Indian, which is significantly lower than the $1.11 spent by rural dwellers. While the distribution of wealth currently suggests an overall shift from greater consumption at the rural level to the urban level, the rural Indian population represents an important market. According to the Malaysia External Trade Development Corporation7, 75% of the Indian population is dispersed in rural regions. These rural residents represent a market that grows 34% annually, adding 1 million new members to its ranks every year. These rural residents represent a large portion of the countrys non-durable items consumption, which is currently valued at $11.6 billion. This figure is projected to increase to $23.25 billion by 20117. Unique Trends According to the MATRADE report7 Indian consumers are particularly attracted by free gifts with purchases. The most popular free items are personal goods items, such as toothpaste and soap. Another unique aspect of Indian consumption habits centers around the desire for ecologically-responsible packaging. According to the MATRADE report7, Indian consumers are more sensitive to the environmental impact of their consumption habits than their other global counterparts. In addition, while India has historically been famous for its town market businesses, the current trend in Indian consumption is away from habitual visits to the smaller town markets and toward larger purchasing on a more infrequent basis in hypermarkets 7. As a result of increasing urbanization, bulk purchases have increased, and so too has the popularity of larger supermarket stores. Means of Consumption: The Indian Retail Industry The unique nature of the Indian retail industry reflects the trends of middle class growth and discretionary spending growth. Demand for retail sector growth is currently fueled both by the increasing middle class, increasing proportion of the population living in an urban setting, and by the rise in discretionary income among all population segments. According to the Images Report 2005 on shopping center development in India9, the middle class makes up 200 to 250 million citizens. These citizens spend over $300 million each year, which is significant, in light of the fact that consumer spending in India increases on average 6% annually9.

Forty million or 3.6% of Indias population of 1.1 billion have the same purchasing power as Americans and 75% of the population is under the age of 40 9. These young, increasingly technologically-inclined members of the population represent the future of Indias labor force and its consumers. The Indian retail industry, including both the organized and unorganized sectors, is currently valued at $292 billion annually, according to KPMG6. This industry is significant to the Indian economy in that it is the greatest contributor to the Indian services sector. Retail makes up 14% of the countrys annual economic output10 and consists of 11 million outlets dispersed throughout the country10. The value of the retail industry in India was reported in the Hindu Business Line10 to have doubled in value in 2005. In comparison to just 0.9 million retail employees in the US, it is clear that the Indian retail industry serves not only to serve the population with consumer goods, but also as a key source of employment. An estimated 42 million Indians are employed by the retail sector, which constitutes 7% of the total workforce10. As recently as 1998, the retail industry employed well under 178,000 total employees10. Thus, the industry has experienced growth of over 220% in the past eight years. Indias retail environment is unique in that it is best understood when divided into organized and unorganized sectors. The organized sector specifically refers to retail establishments employing ten or more employees10 which includes hypermarkets, supermarkets, and shopping malls. The organized sector constitutes just four percent of retail activity in India. Only about 500,000 people employed in the Indian retail industry are involved in the organized sector. Not only is the amount of employees in this portion of the industry expected to grow, but so too is the amount of actual organized retail space. The amount of retail space devoted to organized retail is projected to grow by 20 to 25% in the next four years9. The unorganized retail setting is defined by the Hindu Business Line 10 as a retail establishment including fewer than ten employees. The unorganized sector includes the traditional formats of low-cost retailing such as the local kirana shops, owner-manned general stores, paan/beedi

shops, convenience stores, and handcart and pavement vendors 10. The majority of Indians who work in the retail sector are members of the unorganized portion of the industry. In fact, about 39,500,000 people are employed in this portion of the retail industry10. Another unique aspect of Indias retailing industry is its immunity to business cycle changes. Most industries must contract and expand in a reactionary nature to macroeconomic environmental issues. However, as demonstrated in the chart below, Indias retail industry remains consistent in its percentage of output each year14 (with the exception of the effects of a natural disaster, which explains the spike from 1960-1962):

1951-2002 GDP of Services in India. This immunity to the cyclical nature of economic activity in the country suggests the growing strength and importance of the retail industry in India. The Shopping Mall in India The entrance of international retailers has increased the presence of the shopping mall format. The diagram above, taken from the Images Report 20057, shows a breakdown of the amount of commercial shopping mall space throughout the country. Clearly, the northern-most part of the country contains the greatest number of shopping malls to date. By 2008, 150 new shopping malls will be constructed9, which represents an investment of 4-12 months of building time and

10

at least $128 billion Rupees to adequately fund each project 9. Most of the current retail spaces, as much as 96%, consist of just 500 square feet of retail space.

Western department stores are also rising in popularity.

Currently there are around 100

department stores in India6. The amount of department stores in the country continues to grow at a rate of 24% each year and the sales volume of department stores grew 34% during the period from 1999 to 20026. The increase in the department stores has been echoed by the similar increase in the presence of hyper and supermarket stores.

11

A unique trend that is developing in India with regard to retail space centers on the utilization of high-end hotel space in Indias most urban settings. Noted particularly in 2004 and 2005, highend hotels such as the Oberoi Hotel Delhi, the Taj Mahal in Mumbai, the Imperial Hotel Delhi, and the Maurya Hotel Delhi have all converted 10,000 to 220,000 square feet of the lower levels of their accommodation to retail space9. Potential Obstacles While significant growth is forecasted in the Indian retail industry, there are also potential obstacles to the further success of the industry. The Hindu Business Line reports that one of the greatest disadvantages of the retail sector at present is its propensity to underemploy its workers. Many members of the unorganized sector are forced into retail by unsuccessful agricultural endeavors and often have neither the training, nor the means nor inclination to succeed in retail10. This phenomenon can serve to explain the habitual problems that members of the industry experience in gaining access to capital equipment, human capital, or staff, and viable real estate selections10. Another potential obstacle to the successful growth of the Indian retail industry is the relative rates of job growth in proportion to industry growth. At the beginning of 2005, 413.800 lakh were unemployed and covered by pensions. However, during the past decade, the organized sector only grew by 30,000 jobs. This disconnect between willing and employed workers creates an obstacle for retail industry growth. An additional obstacle to the growth of the Indian retail sector is the potential entrance of multinational, multi-billion-dollar Big Box retailers, such as Wal-Mart. As the following quote from Mohan Guruswamys article in the Hindu Business Line10 suggests, multinational retail corporations, specifically Wal-Mart, could stagnate the growth of Indias retail industry by displacing thousands of workers in the unorganized sector: India has 35 towns each with a population over one million. If, hypothetically, Wal-Mart were to open a store in each of these cities and they reached the average Wal-Mart performance per store, it would mean a turnover of over Rs 8,033 crore with only 935

12

employees. Extrapolating this with the average trend in India, it would mean displacing about 4,32,000 persons. This would mean an employment of just 43,540 persons, displacing nearly eight million persons employed in the unorganised retail sector. 10 When weighing the costs and benefits of the entrance of multinational retailers, most see expansion of giants such as Wal-Mart as a positive way to contribute to the growth of the Indian economy. However, one must question the contribution of such giants to the economy if so many workers are to be displaced and the very nature of the retail environment is to be altered. Foreign Direct Investment The impact of foreign direct investment on the future of Indias retail sector is significant. According to the Hindu Business Line10, of the 30 emergent economies, Indias retail sector is ranked as second only to China as the attractive retail sectors in which to invest. Hindu Business Line reports foreign direct investment as being one of the sole forces to push the value of the Indian retail industry to a potential of over $300 billion per year by 201010. During the first half of this fiscal year, the amount of foreign investment in India increased to $7.96 billion. This growth is significant in comparison to the period of 2004-2005 where foreign direct investment stood at $2.38 billion11. The primary medium of foreign direct investment in India is through portfolio investment. Portfolio investments of GDRs, ADRs, and FIIs contributed a total of $5.10 billion in investment into the Indian economy. Recent government reforms mentioned on the India Brand Equity Foundation website11 point to an increased loosening of foreign direct investment regulations in the retail sector. According to the IBEF organization, 51% foreign direct investment will now be allowed in a single brand of products in India. The opening of many previously closed industries to foreign direct investment will serve to boost Indias economy in the long run. Foreign direct investment could increase Indias standing as the fifth largest economy in the world and its standing as the third largest GDP in Asia12. There are many arguments for the liberalization of foreign direct investment in Indias retail trade. First and foremost, increased investment in the countrys retail industry is thought to

13

increase the quality standards of all retail outlets throughout the country. Not only is quality believed to be improved by greater foreign direct investment, so too is product selection for consumers, as well as more competitive pricing structures13. Higher standards of quality can lead to the increased acceptance of Indian products in the world-wide market for consumer goods. According to Business Standard, however, the Indian retail industry would most benefit from the liberalization of foreign direct investment without the current bureaucratic and governmental interventions that hinder the attractiveness of foreign direct investment in so many other sectors of the Indian economy. Future Predictions The growth of the middle class will revolutionize consumption habits in India. The sheer numbers and spending power of this group of consumers will assist in raising the GDP and living standards of the country in the coming years. In addition, increasing technological knowledge and sophistication of consumers will cause sales of technologically and electronically complex consumer goods to spike in the coming decade. The growth of the Consumers and the Climbers segments and the decline of the Destitutes and Aspirants will ensure increasing disposable income and purchasing power for the majority of the population. In the future, fewer consumer dollars will be spent on non-durables such as food, and a growing amount of emphasis will be placed on services and durable goods purchases. Conclusions The nature of Indias expanding economy reflects not only the growing buying power of the Indian population, but also the large-scale effects the rising middle classes in India are having on the economy. As the GDP of the country increases, so too does the importance of the countrys domestic retail industry. With the trend towards growth in the organized retail sector, shopping malls and hotel retail space are becoming more common in Indias urban areas. With large multinational companies attracted by Indias burgeoning economy, many in India are wondering if job growth in this industry will also follow. In the future, Indias consumers can expect more choices, higher quality, and more purchasing power with which to make their purchase decisions.

14

Endnotes 1. Consumer Markets in India the next big thing? KPMG International. 10 April 2006 <http://www.kpmg.com/Rut2000_prod/Documents/7/Consumer%20markets%20 In%20india.pdf>. 2. Product Market Study: Consumer Behavior in India. Malaysia External Trade Development Corporation. 10 April 2006 <http://edms.matrade.gov.my/domdoc/Reports.nsf/615e1bdfe4f5af4d48256 f980018b4e2/2f841b9f6d04d5944825709000263441/$FILE/PMSChennai05ConsumerBehavior_1.doc> 3. GNI per capita 2004, Atlas method and PPP. World Bank. 24 April 2006 <http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf>. 4. India Data Profile. The World Bank Group. 24 April 2006 <http://devdata.worldbank.org/external/CPProfile.asp?PTYPE=CP&CCODE=IND>. 5. Indias Consumer Markets: identifying a plausible market size for products. India One Stop. 10 April 2006 <http://www.indiaonestop.com/consumermarkets.htm>. 6. Consumer Markets in India the next big thing? KPMG. 10 April 2006 <http://www.kpmg.com/Rut1000_prod/Documents/7/Consumer%20Markets %20in%20india.pdf>. 7. Product Market Study: Consumer Behavior in India. MATRADE CHENNAI. Malaysia External Trade Development Corporation. 10 April 2006 <http://edms.matrade.gov.my/domdoc/Reports.nsf/615e1bdfe4f5af4d48256f980018b4e2/ 2f841b9f6d04d5944825709000263441/$FILE/PMSChennai05 ConsumerBehavior_1.doc>. 8. Rai, Saritha. India Boom Spreads to Smaller Cities. The New York Times [New York City]. 4 Jan. 2005: C5+. 9. Images Report 2005 on shopping centre development in India II. Express Textile. 10 April 2006 <http://www.expresstextile.com/20051115/apparelbiz02.shtml>. 10. Guruswamy, Mohan. FDI in retailing Short-changing the kiranan store? The Hindu Business Line. [New Delhi]. 6 Jan. 2005. 11. Foreign Direct Investment. India Brand Equity Foundation. 25 April 2006 <http://www.ibef.org/economy/fdi.aspx>. 12. Investment in India Investing in Inddia Venturing into the Indian Market. Government of India: Ministry of Finance. 25 April 2006 <http://finmin.nic.in/foreign_investment/fii/index.html>.

15

13. Thomas, T. Why FDI in retail is good news. Business Standard. 26 April 2006 <http://www.rediff.com/money/2005/jul/22spec1.htm>. 14. Mundle, Sudipto. Indias Economic Outlook. Asian Development Bank Organization. 26 April 2006 <http://www.adb.org/Documents/Presentations/INRM/SM_ind_eco_outlook.pdf>.

16