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.