Underlying optimism is biggest driver of consumption growth

In a recent global BCG survey, nearly 80% of Indians felt their lives will be much better 10 years from now and this confidence in a better tomorrow is what makes consumer loosen the purse strings

 

Aggregate consumer expenditure is likely to increase from Rs.45 trillion in 2010 to nearly Rs.150 trillion by 2020—a more than threefold increase in 10 years. This is accompanied by an increase in affluent and aspirer households from 48 million to more than 100 million in the same time period.

Rakesh Sahu runs a small restaurant—Sahu Bandhu Restaurant—on the outskirts of Lucknow. He migrated to Lucknow in the mid-1990s from his village in Pratapgarh district, where he lived with his extended family. Sahu started out selling snacks under a tarpaulin sheet and only earned about Rs.90,000 per year—barely enough to cover all his necessities. Now, married and with a 14-year-old son, he earns nearly Rs.5 lakh a year. His life over the past 15 years has been, as he puts it, “a rocket”. Sahu’s story also highlights three key drivers behind the rapid consumption—increase in income, nuclearization and (r)urbanization.

Income increase has a straightforward and significant impact on consumer spending. As shown in the chart, the ability and willingness to spend rises at higher income levels. It also shows that the nature of spending changes from only the base necessities of food and shelter to greater discretionary spending. In 2010, affluent and aspirer households were 6% and 14% of India’s population, respectively, and accounted for 24% and 19% of the consumption spending, respectively. By 2020, these two segments would joi

ntly account for nearly 36% of households and 63% of spending.

Many TV soaps highlight the triumphs and travails of the great Indian joint family. However, in real life, nuclear families have been gaining share. Since 1993, the nuclear family structure has increased from 56% to 66% of all households. Boston Consulting Group (BCG) consumer research shows that at similar income levels, nuclear families spend nearly 25-40% more per capita than joint families. This higher spending is individual categories such as clothing and fashion. Nuclearization of families has also resulted in multiple brands being used by different members of the family (which creates both an opportunity and challenge for the marketer). In my view, the rise of the nuclear family is accompanied with “no clear family decision maker”.

The third key driver of consumption (and probably the most complex to explore) is urbanization. Urbanization has increased in India over the last two decades from 26% to 31%. This is significantly lower and slower than in other emerging markets such as Brazil or China. Urban consumers do spend more—in many consumer goods categories, the penetration levels in urban areas are two-three times that in the rural areas. Ownership levels for televisions in urban areas are nearly 80% compared with nearly 40% in rural areas, while for some other categories the gap is even wider. Even in the fast-moving consumer goods categories, rural consumption levels are lower—partly driven by lower penetration levels and significantly due to lesser usage.

Only part of the lower consumption in rural India can be attributed to lower income levels. National Sample Survey Organisation data shows that even at the same income deciles, spending on non-food categories in urban areas is on an average 8 percentage points higher than in rural areas. The question then is what is driving this difference and will it continue? This difference historically has been driven by the gap in media exposure, physical access and infrastructure between urban and rural India. Lack of adequate last-mile access made physical distribution in rural areas more expensive and difficult to execute.

In the last few years, the gap between rural and urban is blurring rapidly. In our visits to rural India, we have been struck by the improved media and physical access. Access to small villages in many parts of the country is now significantly better and faster than in the past. One can also observe the mushrooming of the set-top boxes in village houses—a clear signal that cable and satellite TV penetration is on the rise. These two factors lead us to believe that there is a greater convergence between rural and urban—and the rise of (r)urbanization—which is going to be the driver of consumption.

In addition to these structural factors, there is something else that is driving this consumption as well.

Ten years ago, Sahu ate cheap rice, avoided fruits because of the cost, and could never afford the medicine prescribed by his doctor. Now he buys branded refined oil, basmati rice, and eats all the fruits and vegetables he wants. His son studies at the City Montessori School—an English-medium private school—and he has money for an occasional film and gifts for his wife. He can even save one-quarter of his income for a rainy day. And he does not forecast many gloomy days ahead. He expects to see continued prosperity. “My life is good—more than I could ever have expected,” he says. “My life will not go backwards, only forwards. Progress will be everywhere.”

This underlying optimism is the biggest driver towards consumption growth. In a recent global BCG survey, nearly 80% of Indians felt their lives will be much better 10 years from now. This confidence in a better tomorrow is what makes consumer loosen the purse strings.

The size of consumption: a tale of two countries

Consumption by the Indian consumer has increased threefold and there are few parallels in history of this kind of increase in income and consumption

 

Govind Singh’s weather-beaten face tells two stories. The broad toothy smile tells the story of a man who is now happy with life; the lines around his forehead hint to the fact that life has not always been easy. Singh, who has spent all his life in Jaipur, is a 40-something who has moved from abject poverty to middle-class prosperity in the last 20 years.

“My family was really poor and I started working as a daily labourer when I was about 16 doing odd jobs at construction sites on days when the contractor needed an extra hand,” he recalls. “The hours were long and punishing; the work itself was physically exhausting, the working conditions were harsh and unsafe, and the daily wages a pittance. But I had no other opportunities, and so I did this for a few ye

ars.”

Today, he earns more than Rs.6 lakh per annum, more than a 10-fold increase in 20 years. And middle-class symbols of early consumption success are all around him: a TV by LG, a refrigerator by Godrej, a Hero motorcycle. Singh is a recent addition to the Indian consumptive middle class.

Throughout history, India has had a small elite class at the very top, the overwhelming majority at the bottom and nothing much in the middle. Most people, whether in the cities or the villages, were really living at subsistence levels. According to estimates by the National Council for Applied Economic Research, in 1995 nearly 80% of Indian households were “deprived” (or having income below Rs.90,000 per annum) and the middle class was still a small fraction of India’s households.

This picture has changed dramatically in the last two decades and is expected to continue in the same direction. According to Boston Consulting Group estimates, the number of aspirer and affluent households increased from less than 15 million in 2000 to 48 million by 2010. It is this middle class with its new-found earning power that is underpinning the dramatic growth in consumer spending. The aggregate consumption by the Indian consumer has increased threefold from Rs.15 trillion during 2000-2010. There are few parallels in history of this kind of increase in income and consumption.

In this context, it is instructive to examine the one country that has witnessed a similar increase in its economy—China. Comparisons with China tend to focus on infrastructure—roads, ports and the high-speed trains, and how India lags China by 20-30 years. The picture on the consumption side is somewhat different. At an aggregate level, China appears to lead India by seven-eight years. India’s gross domestic product per capita (by purchasing power parity) was about $4,100 per annum in 2013—nearly the same as China’s $4,180 per annum in 2005. The same trend holds true for personal disposable income and private consumption as well. We then plotted the per capita consumption of fast-moving consumer goods (FMCG) and durables in the two countries, and here the gap is closer to 10 years.

Our work shows that the increase in consumption in China has been driven by similar stories like India’s Singh. Ma Guojun is typical of the middle class in China. Born near Xining, the capital city of Qinghai province, he grew up in a poor family, the eldest of three boys. His father worked for the local electricity company. As it turned out, Ma performed only modestly in his gaokao, the national college entrance examination, secured a place at a university in Shenyang and completed his postgraduate studies from Beijing. Ma then got a job as a researcher with a manufacturer of metallic products in Beijing. His annual salary was 60,000 renminbi, or about $9,400. Four years later, he moved to his hometown of Xining at a salary of 80,000 renminbi. He now owns a small apartment—thanks, in part, to a gift from his parents—and he has many of the things that he wanted: a TV, a computer, a mobile phone. He has a strong appetite for more: more goods, more savings, more comforts. He has achieved “the first half of his dreams” and is eager for more.

As the stories of Singh and Ma illustrate, the rise of the middle class and consumption has many parallels (and some differences) across the two countries. We estimate that the number of aspirer and affluent households is likely to nearly double from 48 million to 103 million from 2010 to 2020. Our cross-country/category analysis suggests that the aggregate consumption is likely to increase from Rs.45 trillion to more than Rs.150 trillion in the same time period—a nearly 3.5-fold increase.

The next step is to examine what really are the drivers behind this consumption increase, how it varies across categories and what role digital technology plays in this entire scenario.

Consumption pie: food to stay No.1 item on family shopping list

Food will remain the largest spend category even in 2020 with spending of Rs.40 trillion, followed very closely by housing and consumer durable with spending of Rs.35 trillion

Most Indians, even those with incomes of $3,000 (around Rs.1.8 lakh) per annum or lower, consume basic products such as cooking oil, bathing soap, washing powder, and tea. But, as they get richer, they start to purchase durable goods, with the typical hierarchy being TV and cooking gas as the top focus. Photo: Mint

Ten years ago, Rakesh Sahu, who runs a small restaurant on the outskirts of Lucknow, ate cheap rice, avoiding fruits because of the cost involved. Now, he buys branded refined oil, basmati rice, and eats all the fruits and vegetables he wants because he can afford the extra spending.

“I don’t think twice before buying good food for my family today,” says Sahu, whose income has increased more than five times in the past 10 years from Rs.90,000 per year to Rs.5 lakh now.

He used to get clothes stitched for the family for special occasions earlier. These days, he buys readymade garments —though he does not spend extra for brand names.

The amount Sahu spends on consumer goods and what he chooses to spend his money on fit into a pattern that has accompanied rising incomes in India. The aggregate consumer expenditure is likely to increase from Rs.45 trillion in 2010 to nearly Rs.150 trillion by 2020—an over-threefold jump in a decade.

Sahu, for instance, does care about brands in the durables space. His television set is an LG, which he bought after watching a programme on a neighbour’s LG. He has moved his son from a government school to the City Montessori School—an English-medium private school. “I want my son to have the best education possible”.

Where once he had no money for leisure or entertainment, Sahu now takes his wife out for an occasional movie and even the spot of jewellery shopping.

We analysed consumer spending across different categories and how it is expected to change with rises in income levels and over time. Today, the No.1 item on the family shopping list is food, accounting for nearly one-third of the total consumer spending. Second on consumers’ spending list is housing and household appliances, closely followed by transport and communication.

Interesti

ngly, the spending across different income segments is quite different and has changed with time.

To monitor this transition, we use a tool we call consumption curves. This helps us establish how consumers change their spending habits as they earn more. Different types of products have differently shaped curves—and this demonstrates that consumer demand for different products and categories changes at varying rates.

For items such as household goods, the consumption curve is an upward line, indicating a steady rise in spending as incomes rise. Other consumer categories that rise steadily, if less steeply than household goods, are transport and communication, as well as education.

Expenditure on health, another major category, only really starts to rise as people enter the upper middle or affluent classes, with only the tail end of the consumption curve bending upwards. By contrast, the consumption curve for food follows a gentler trajectory, and actually flattens out as people get richer. You can only spend so much and consume only so many calories.

Exhibit 1 shows the consumption curves for broad categories across different countries for the three different types of curves for household goods, health-care and food. We find that the consumer offtake pattern changes with increase in income—even within the same broad category.

Exhibit 2 show the three patterns observed in India. The first type of increase is “inflection point”—observed in the mass FMCG (fast moving consumer goods) categories such as toothpaste—which also have low-cost substitutes such as toothpowder. In this situation, category consumption changes dramatically as the consumer enters the middle class and then remains largely flat.

The second pattern is “continuous growth”, which holds true for most durable goods and more premium FMCGs. Here, the consumption increases steadily with increases in income.

The third pattern is “stable with income”, observed in highly penetrated FMCG categories such as biscuits and vanaspati. In this case, the level of penetration is not significantly different across income segments.

Our research indicates that as people enter the middle class, they switch their focus to consumer goods that enhance their quality of life far beyond subsistence. Most Indians, even those with incomes of $3,000 (around Rs.1.8 lakh) per annum or lower, consume basic products such as cooking oil, bathing soap, washing powder, and tea. But, as they get richer, they start to purchase durable goods, with the typical hierarchy being TV and cooking gas as the top focus.

Beyond this, they prioritize goods and services relating to the family, especially children. We have calculated that 37% of the middle class household’s expenditure is devoted to children, mainly their food and education. One young couple we met in Mumbai, earning about Rs.15,000 per month and living in a one-room chawl, spends nearly Rs.1,000 per month on the school fees for their only daughter. “We want the very best we can afford for her,” they explained.

We have estimated how the shape of consumption is likely to change for India in the future, based on the consumption curves from 2010 to 2020.

Food will remain the largest spend category even in 2020 with spending of Rs.40 trillion, followed very closely by housing and consumer durable with spending of Rs.35 trillion. The fastest growing categories are related to education, entertainment and leisure, increasing more than four times in the 10-year period.

It seems clear that both the size and shape of consumption is going to undergo dramatic changes going forward.

The Secrets to Making Anything Go Viral

The Secrets to Making Anything Go Viral

Creating a 'viral video' is like setting out to produce 'an Oscar-winning film'.

You can look back at some of the most-shared videos, trying to fathom some sort of recipe for success, but if you try to replicate those vital ingredients your video will most likely feel flat and formulaic. If a movie producer tries too hard to re-create an award-winning film, putting together a big budget, an epic storyline, some top names, it can still be a flop. What movie-goers want is passion, great acting and a sense that everyone involved loved what they were doing: they want to feel something. Movies that make people feel something win awards. Videos too must speak to a brand's followers if they are to be shared.

Content is shared because it provokes an emotional response

Two University of Pennsylvania professors analyzed the New York Times' most-emailed list, and came up with a list of factors that contributed to content going viral. They discovered that posts inspiring feelings of awe, anger or anxiety are shared more often than others. Now, businesses will want to stay away from inducing anger in their audience, but awe clearly works well, if it is appropriate to the brand, and humor is another strong emotion that is safe for brands to play with. For brands, making people gasp in astonishment or laugh out loud are safe and popular goals.

But the material to inspire these emotions has to be original. Once something has been done before, move on: don't imitate. Think back to your company's history, your company's mission, why your loyal customers love you--and draw from that.

Originality is everything: there is no second place

One of the most incredible branded viral videos is still Red Bull's supersonic freefall starring Felix Baumgartner. One year on, it has been seen 36 million times. It would be possible for another brand to re-create a stunt like this... but my guess is that it would be accused of being derivative--and that it would only be shared by people to show the brand's failure to come up with anything original themselves. In short, copy-cat videos will make a brand look bad. You can only jump from the edge of space once--and we were all their on the edge of our seats with Felix, hands to our faces, hearts in our throats. You just can't recreate that feeling.

That said, your brand has so many other ways to connect with audience. It doesn't have to be something elaborate or expensive like the space jump. Just be human, make it your objective to get to know your customers, and show them that you appreciate them.

Inspire your followers

The Red Bull Stratos jump worked so well because it was a perfect partnership between a brand that stands for adrenaline and boundary-pushing, and a dare-devil stuntman. For Samsung, a marketing video to promote LED televisions needed to mirror the brand's ethos of quirky, innovative technology to capture their followers' imaginations. The result--'Extreme Sheep LED Art' was both relevant to the brand and to the product they were trying to promote. It was surprising (who would have thought of making art by herding flocks of sheep?), original, and it reflected the brand's personality and the product they were trying to draw attention to.

Tip: Use ideas that are relevant to your brand and you will strike a chord with your followers.

Build a community: 'viral' is a team sport

'Viral' is rarely an overnight phenomenon, especially when brands are creating something that is part of their wider marketing strategy. Growing your communities takes time and dedication--but this hard work behind the scenes can be vital to a video's success. Too many marketers want to run out there and 'create a viral video', without realizing the effort that goes into building a loyal following first.

Old Spice has half a million subscribers on YouTube, 2.6 million followers on Facebook and two hundred thousand followers on Twitter. Building an audience this size takes a long-term strategy of great content, original visuals and true engagement with fans. It also takes a content strategy that reflects the brand's core philosophy, so when Old Spice releases a video like the hilarious 'The man your man could smell like', it resonates with fans--and they want to share it more widely.

Tip: Lay the foundations first. Your community and loyal fans will share videos--success isn't a solo pursuit; it takes a community of passionate people to get the word out.

Re-think your goals

'Viral' shouldn't be your goal. Building your brand's reputation through engagement and great content is a goal that can lead to a piece of content going viral, but more importantly it will give you a loyal, dedicated follower base. A video should reflect your core philosophy as a brand; it should resonate with your audience and be a part of a wider strategy to build trust and commitment over time. Having a viral hit is great, but you have to ask yourself: "What will translate into sales over the longer period of time, a one-off gimmick or long-term brand advocacy?"

Leave 'viral' gimmicks for the cute baby pandas, kittens and singing toddlers, and concentrate on a content strategy that is in it for the long haul.

How to Get Rich: Paul Graham on Money vs. Wealth

How to Get Rich: Paul Graham on Money vs. Wealth

The article talks a very important aspect is mostly forgotten by all of us. The Difference between Money and Wealth. We are running to create wealth and Money is just the intermediary. While running we forget the Goal that is wealth and are just deep inside making money....