Consumer is king we've heard often enough. But in India, the consumer is the very engine of economic growth. Be it the Asian crisis of 1997 or the global financial crisis of 2008, India has managed to weather most global storms with relative ease because of a large domestic economy. Powering the world's fastest-growing economy is private consumption, which accounts for 60 per cent of India's GDP. In contrast, consumption accounts for 40 per cent of China's economic growth, while 60 per cent is investments. It is the domestic consumer that has come to the rescue of companies and investors in the worst of times. Given that the contribution of investments in India's growth trajectory is erratic, consumption is the only reliable engine of growth. And herein lies both the opportunity and threat for investors as the consumer's preferences and behaviour are fast changing, as are cravings.
First, the good news. India is set to become the world's third-largest economy in the next five years from the world's sixth largest at present. Domestic consumption is expected to be a $3 trillion opportunity by 2030, according to the World Economic Forum's insight report on the future of consumption in India (dated January 2019). As urbanisation gains pace, India's households will consume more goods and services. And the opportunity is not limited to any particular economic segment or age group. The opportunity is going to be huge and spread across different income groups. McKinsey believes that India will have 100 cities with a population of one million plus and this population will account for 49 per cent of India's total household expenditure by 2030. In contrast, India had 68 cities with one million plus population and accounted for 33 per cent of the country's household expenditure in 2016.
The opportunity is undoubtedly huge, but the path to this proverbial pot of gold is going to be littered with many disruptions. In an era where technology will pretty much define how we live, work and consume, often referred to as the Fourth Industrial Revolution, the consumption space too will be shaken up as consumer expectations from brands and consumption patterns change. The early signs are already visible. Shared mobility is already impacting automobile sales in urban markets. From Bengal to Madhya Pradesh, consumers are increasingly looking for exciting food items online. Food is the most searched consumer category on Google, followed by hair care and skin care. And 26 per cent diaper sales and 16 per cent of cereal sales in Bangalore are happening through e-commerce.
Undoubtedly, technology shifts and e-commerce will determine how consumers consume, but another theme seems to be silently emerging in India. Newer brands and categories are likely to emerge because consumer patterns are no longer uniform. Over the next few years, Indians born in liberal India (those born between early 90s and early 2000s) will come of age economically. These 700 million plus Indians will not only consume more compared to the previous generation but will demand differentiated products. This will be the first challenge for existing consumer companies as these consumers are more open to experimentation. The World Economic Forum's report on India says, "One of the most challenging and exciting implications for companies in India is the opportunity to shape consumption patterns - in terms of categories consumed, brands purchased or ways of accessing products and information."
One of the themes that is playing out even now is the emergence of new categories and brands that are breaking away from the one-size-fits-all products. Premium yogurt maker Epigamia and Paper Boat are two such examples. Launched in 2013, Paper Boat is a preservative-free alternative to aerated drinks. It has both traditional and unique flavours, like 'Aam Panna' and 'Chilli Guava'. Its revenues grew 71 per cent year on year in FY18. Danone's investment arm has invested Rs 170 crore in Epigamia, after exiting the dairy business last year. The general understanding is that the traditional FMCG players that continue to do the same old stuff will lose market share of up to 10 percentage points in coming years as consumers turn to new brands. Currently, category leaders have 40 per cent market share but this will be challenged by newer brands in the future.
What's changing consumer behaviour very rapidly is media penetration, changing aspirations and focus on well-being. And the value-conscious Indian consumer may veer towards private labels that meet the aspirational needs at affordable ticket prices. Not surprisingly that newer categories like 'masstige' products are making their way on shelves and e-commerce marketplaces. Masstige products are those that are between mid-market and super luxury but have affordable prices. Nyka, India's premium beauty-products retailer, is adding new products under the private labels after its nail-colour range found acceptance. While 75 per cent customers come to Nyka through its app, its offline stores, too, are doing well. Each store currently clocks revenues of Rs 3 crore a year and Nyka's October 2018 sales stood at Rs 108 crore, up 40 per cent from September 2018.
What will tip the scales will be the connected Indian consumer. With 750 million Indians expected to be connected to high-speed internet, the demand for products and services will go through the roof as will expectations from existing brands. Shreyash Sigtia, Industry Head, Consumer Packaged Goods, at Google, recently said at a consumer conference that the share of searches from metros has declined from 45 per cent prior to Jio to 36 per cent now. Almost 28 per cent searches through the Google app are now voice-based. So what are Indians searching on Google when it comes to consumer products? There were 2.5 billion searches annually on food, ranging from desserts, chocolates, fruits and vegetables. Hair care has seen 750 million searches, while skin care has seen 650 million searches annually. According to a Google-BCG study, 40 per cent FMCG sales by 2020 would be influenced by the digital medium.
India's consumption story is set to be rewritten by new-age and tech-savvy consumers. It's a big opportunity for sure, but there are risks to this story as well. A big bet is on India's per-capita GDP will be going past $2000 in a year or two, which has been a tipping point for consumption in most other economies like Singapore, Russia, China and Brazil. As per-capita GDP goes past $2000, consumption booms.
The World Economic Forum's consumer report estimates that by 2030, India will add 130 million middle-income households and 21 million high-income households, overall doubling the share of these households to 51 per cent. But all this hinges on job creation. Indians need at least 100 days of reskilling to be prepared for the jobs of 2022. Only 2.3 per cent of India's workforce is skilled compared to 40 per cent in China. To keep Indians relevant in an evolving economy, at least 125 million Indians will need to be skilled. While some companies like Honda, IBM, Lenovo and Motorola are skilling Indians, the scale is enormous. IBM, under Atal Innovation Mission, is set to train high-school graduates for careers in artificial intelligence, block chain and cybersecurity. If the reskilling of Indians does not go as per plan and new jobs are not created, then the consumption story could easily be minus 100 million households from the middle-income pyramid. And that would derail India's gravy train.
The author is the editor of Value Research Stock Advisor