Indian Consumer Report_ibmi

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Simplifying the Indian Consumer Market Introduction Most developed economies in the world are facing the prospects of an ageing population and a shrinking consumer market. There is therefore an urgent need to identify and tap larger markets abroad and make inroads into them as soon as possible. The growing Indian consumer market offers the prospects of becoming one of the most attractive consumer markets of the world in the near future. There are immense opportunities in terms of mere scale and over time it is only natural that it will offer prospects similar to those of a more mature market. The large Indian consumer market, while immediately attractive, can pose quite a conundrum as it is marked with wide diversity and innumerable factors that subtly segregate its population. There are about 6 major religions in India and about 15 official languages and hundreds of dialects spoken across India. The Indian geographical terrain is extremely diverse and at any given time of the year there is an entire range of temperatures and weathers to contend with. In addition, there are large differences in incomes, expenditure patterns, education levels and cultures across people. All these factors combine to make India a difficult market to tap. This report attempts to simplify the Indian market by cutting it across various factors that differentiate the Indian consumers. It must be noted that while the Indian consumer market can be divided into many segments, each segment is large in itself and holds the potential of becoming an attractive market for a range of products.

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Indian market is not much smaller than China Currently

the

Indian

population

is

estimated

to

be

about

1,169,016,000 people. This is about ten times the current Japanese population. In China, the population is only slightly larger at about 1,328,630,000. According to estimates from the United Nations’ World Population Prospects of 2006, India is slated to overtake China in terms of the total size of the population by 2025.

Total Population ('000s) 1,750,000 1,400,000 1,050,000 700,000 350,000 0 1950

2007 India

2015

China

USA

2025

2050

Japan

Source: United Nations’ World Population Prospects, 2006

About 51 percent of the Indian population is male. In the Indian patriarchal society, the head of the household is generally the oldest male who is also the main earning member. The women of the household are responsible for taking care of the family and are generally the ones who make the decisions relating to food and other non-durable items.

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Population by Gender ('000s) 1750000 1400000 1050000 700000 350000 0 2001

2005

2010

Males

2015

2020

2025

Females

Source: Population Projections for India and States, 2001-2026, Census of India

Working population in India is mainly accounted for by males According to the latest population census in India (2001), only about a quarter of the female population works in India while about 52 percent of the males are workers.

Women in India are generally

home makers and are involved in non-economically productive work within the household. Working Population in India Millions 600 500 400 300 200 100

Total population

-

Worker population

Male

Female

Source: Census of India, 2001

More males in India are literate than females Even as India continues to touch new heights in terms of economic growth, its performance in terms of social indicators such as education continue to remain dismal. According to the 2001 census,

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about 63 percent of males and only 45 percent of the females in India are literate. Literacy rates in urban India are far better than in rural areas in case of both males and females. Literate Population in India Millions 600 500 400 300 200 100

Total population

-

Literate population

Male

Female

Source: Census of India, 2001

India has a large rural base A large differentiator in the Indian consumer market is also the factor of urbanization. About 70 percent of the Indian population currently resides in rural areas of India. However, merely the urban population of India is about thrice the size of the total Japanese population. Moreover, with rapid economic growth in India, rural areas are quickly urbanizing with a strong purchasing power present even in the rural areas of India. Population by Area ('000s) 1750000 1400000 1050000 700000 350000 0 2001

2005

2010 Urban

2015

2020

2025

Rural

Source: Population Projections for India and States, 2001-2026, Census of India

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With the completion of the golden quadrilateral (a network of highways connecting the 4 large metros of India—Delhi, Mumbai, Chennai and Kolkata) and progress of the east-west and the northsouth corridors across India, smaller towns are increasingly evolving into attractive consumer markets with a large and affluent middleclass. India is a young country with a median age of about 24 years In 2005, the median age in India was about 24 years, which is much lower compared to the median age in China, USA and Japan. Moreover, even as late at the year 2050, India will be a fairly young population with a median age of 38 years. By that time, Japan would have a much older population with median age of about 55 years. It is no wonder then that the Indian workforce is being heralded as the future workforce of the world. Median Age (Years)

36.0 41.1

USA

23.8

India

42.9

Japan

36.5

China

28.0

World

0.0

2005

38.6

2050 54.9 55.5

38.1

10.0 20.0 30.0 40.0 50.0 60.0

Source: United Nations’ World Population Prospects, 2006

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Children

account

for

about

one-third

of

the

current

Indian

population. This figure would, by 2050, translate into India accounting for the world’s largest working age population. This revelation has led to the notion of India enjoying a 'demographic dividend' that is expected to sustain a growth rate of over 3 percent even as late as 2050. Age-wise Classification, 2005

100%

100%

80%

80+

60%

60+

60%

40%

15-59

40%

20%

0-14

20%

0%

Age-wise Classification, 2050

80%

0% World

India

China

USA

Japan

World

India

China

USA

Japan

Source: United Nations’ World Population Prospects, 2006and IBMI calculations

India is soon to have the largest middle class market in the entire world According to a recent study conducted by MGI, the Indian consumer market is set to undergo a major transformation. By 2025, India is estimated to climb from its current position as the world’s 12th largest consumer market to become the world’s 5th largest consumer market. More than 291 million people are expected to move out of abject poverty to a more sustainable lifestyle and the size of the middle class is expected to swell by over ten times from its current size of 50 million to 583 million people. Moreover, more than 23 million Indians will get added to the group of the country’s wealthiest citizens by 2025. This well-being is expected to spread across the rural areas as well, with annual real rural income growth per household expected to accelerate from 2.8 percent (since the past 2 decades) to 3.6 percent over the next 2 decades.

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As the incomes in India continue to grow on the back of strong overall economic growth, income dynamics in India are expected to set in. According to MGI, in 2005, the Indian middle class was still relatively small comprising 5 percent of the population or 13 million households (50 million people). By 2025, the Indian middle class is expected to reach 41 percent of the population or 128 million households (583 million people). This would come along with households with real earnings of more than 1,000,000 Indian rupees a year (that is about more than global $21,890 or $117,650 at PPP) comprising approximately 2 percent of the population but earning almost a quarter of its income. Aggregate Disposable Income (USD Billion)

No. of households (Millions) 100% >$10940

3.6 10.9

48.1

78.8

42.6

80%

Aggregate Consumption (USD Billion)

67.8

932.2

367.6

669.6

46

669.6

275.7

538.3

94.9

2

48.1 $4380 46 670 276 538 313 - $10940

<$4380

60% 40%

192.4 143

20%

312.9

356.7

0% 2005

2005

2025

2025

2005

2025

Source: The 'Bird of Gold', The Rise of India's Consumer Market, MGI, 2007 and IBMI calculations

Indian spending patterns will also change as a result of the increased affluence. From spending on basic necessities such as food and apparel, the expenditure will shift to more sophisticated expenses such as communications and health care.

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Clear rural-urban distinction in spending pattern Rural and urban India are distinct in terms of the extent of average expenditure, with the urban areas exhibiting a higher cost of living. According to the 2004-05 data from the National Sample Survey Organisation of India, rural India spends Rs. 560 on an average in terms of monthly per capita expenditure (MPCE). However, urban India spent almost double the amount at about Rs. 1052 per month per person. The current pattern of consumer expenditure is depicted in the following chart: Monthly Per Capita Expenditure (Rs.) 81

1000

43 49 108

800

Misc. consumer goods & taxes Durable goods Clothing & footwear

59 69 74

600

400

200

34 19 30 52 3 21 21 57

Medical & education Rent

105

Conveyance Other consumer services Fuel & light

464

Food, pan and intoxicants

323

0 Rural (Rs. 560)

Urban (Rs. 1052)

Source: National Sample Survey Organisation, India

Food products account for a large share of the consumption basket in both urban and rural areas of India. Fuel and light and rent

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account for a larger share of urban expenditure than in rural areas. Rural and urban India are not very different in terms of the extent of expenditure on clothing and footwear. Urban India, with its higher incomes, spends more on miscellaneous consumer goods and other consumer services than its rural counterpart. However, with increasing income across India, spending pattern is expected to change across the board. Increasingly the average Indian consumer will be spending more on discretionary items than on basic necessities. The share of food products is expected to reduce from about 42% in 2005 to about 25% by 2025. The share of expenditure on health care, education and recreation and personal products and services is in turn expected to increase. The retail market in India which was estimated to be worth USD 230 billion in 2005 is projected to reach USD 310 billion in another 3 years. The Indian government appears to be consistent towards opening up its doors to foreign investment in almost all sectors of the Indian economy. The Indian government has allowed 51% FDI in single brand retailing in India. The benefits of such a policy can be best enjoyed by the nascent retail sector. The time is right for international retail companies to enter the Indian market and gain first mover advantage. Wal-mart has already entered into a joint venture with Bharati Group of India. Itochu of Japan has already set up cash and carry wholesaling operations in India which entails the building of distribution infrastructure to assist local manufacturers. Almost 95 percent of Indian retail market is still unorganised and offers great potential for increased investment, especially given the increasing prosperity of the average Indian consumer.

Large global retail brands such as

McDonalds, Adidas, Dominos, among many others have already established a strong presence in the Indian market.

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With India topping the list of emerging markets for global retailers and expectations of becoming the third largest economy after China and USA by 2032 it is only natural that brands and retailers across the world are seeking to make their presence felt in the large and diverse Indian consumer market. ----- Next Publication Plan ----1. Regional Consumer Report1: Northern India—August 31, 2007 2. Regional

Consumer

Report2:

Western

India—

Report3:

Southern

India—

Eastern

India—

September 3, 2007 3. Regional

Consumer

September 4, 2007 4. Regional

Consumer

September 5, 2007

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Report4: