India’s consumption story: Why you just can’t ignore this opportunity

Current-News

The economic liberalisation way back in the 1990s had opened up the market in India and set the ball rolling, leading to a number of foreign brands entering the country and creating more choices for consumers.

However, the rural market was not looked at as a profit centre because of low income, lack of proper distribution channel, low awareness and stronghold of unorganised players.

The GDP in 1991 was $266 billion and per capita income was $300. Against this backdrop, there has been an improvement in the living standard of the rural population since last two-and-a-half decades. In FY18, the annual consumption growth in rural India stood at 9.7 per cent while the urban consumption grew 8.6 per cent. Rural Indian households are now spending more on consumer goods like durables, health and personal care, food and beverages and services than that a few years ago.

The economy is now set to be driven by rural demand due to rising income levels, changing lifestyle, habits, taste, increasing literacy level and increasing expectations of rural consumers.

The consumption habits of the rural consumer are also gradually mirroring those of their urban counterparts; still, the composition of the Indian rural market is different from the urban market on a number of aspects such as the physical environment, marketing environment, the consumer profile, etc.

Today almost all leading FMCG brands are available in rural parts of India and rural consumers are using them regularly. It is estimated that the rural FMCG market would grow to $220 billion by 2025 from just $23.6 billion in FY18.

The Indian FMCG sector has grown from $31.6 billion in 2011 to $52.4 billion in 2017, expanding at a CAGR of 8.8 per cent. The sector is further expected to post explosive growth of more than 20 per cent CAGR to cross the $100 billion by 2020.

FMCG’s urban segment, which contributes 55 per cent of revenues, is expected to post a steady revenue growth at 8 per cent CAGR in the near term, while the rural segment is expected to grow at mid-to-high teens on the back of good monsoon, GST implementation, improving infrastructure, distribution channels and reach of manufacturing and FMCG companies.

Thus, the rural segment is expected to grow at double pace compared to the urban segment. Compared with global consumption, the outlook for India’s consumer market looks promising. The demographics are certainly favourable. India has a population of 1.3 billion and half of those people are under the age of 25.

Incomes are ticking up; the per capita income has been growing at a consistent rate of approximately 8 per cent over the last 11 years. India’s per capita income is still very low compared with developed countries, but it grew by close to 8.6 per cent to Rs 1,12,835 in the financial year 2018 compared with that in the previous year.

Total consumption spends in India would rise three-fold to Rs 4 lakh crore by 2025 as per BCG, growing at more than double the global rate over the coming years.

As incomes rise, the shape of the country’s income pyramid is also changing dramatically. A large portion of the population is moving from desperate poverty to sustainable life.

India’s middle class is expected to increase multiple times, from 5 crore in 2007 to 58.3 crore people by 2025 and over 2.3 crore (more than the population of Australia today) will be among the country’s wealthiest citizens.

Consumption expenditure is already rising at 14 per cent annually with emerging cities, value for money orientation, better education and increasing participation of women in the workforce and would drive exponential growth in the economy. Furthermore, the new India is slowly shifting towards the nuclearisation of families due to job prospects, the standard of living and urbanization increasing the consumption spending by 20-30 per cent more than that of joint families.

About 34 per cent of India’s population is now urbanised (3 per cent increase since the 2011 Census) and would reach 36% by CY20 compared with 51.3% urban population of China in 2011. This presents a tremendous opportunity for companies to capture markets in the sectors that are bound to see explosive consumption growth.

Rising income and increase in awareness will fuel expenditure on health, education, communication, transport and entertainment. Thus, household, personal care, health care, food and beverages sectors are expected to receive a significant boost in the coming years.

Urbanisation and increasing value/brand consciousness among consumers augment for the rapid growth of organized retail. Automobiles would grow on account of low penetration and the increasing demand for energy would benefit power manufacturers.

The consumer durables/light electrical industry is expected to reach Rs 3 lakh crore ($46.54 billion) by 2020. To add to the growth of the sectors mentioned, financial services growth would be the catalyst.

Taking all these into account, an investor should look at the FMCG/ consumption sector as an opportunity to create his wealth by positioning himself in right stocks with reasonably good growth prospects and backed by visionary management.