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End of Ride-the-Wave Growth

The Economic Times - March 26, 2012

Consumer demand is still a large pie, and the bigger share will go to agile consumer-centric businesses

Is consumer demand alive and well, even after the Budget? Prices will go up, driven by service tax and excise duty increases; cost of fuel, freight and utilities, and EMIs too, have shot up. India Inc will most likely take a one-shot price correction and pass on even past-absorbed cost increases to consumers in for a penny, in for a pound being their logic. And, in any case, the stock market is too woebegone to react too much. Of course, the absolute truth is that when prices go up, demand comes down, and it is tempting to conclude that consumer demand is heading for the ICU and tough times lie ahead.

However, business logic should not be as simplistic as that, and before FY13 business plan targets are slashed, consider this: the total size of India's economy will grow close to $2 trillion, and a large chunk of it will be consumer spending. As we know, in most of the consuming class, food is well below half of the household expenditure. This means that the pie is large and who gets a share of it will depend on how good the relative product-price-pitch to the consumer is. Some sectors will suffer as they pricecorrect, like voice telecom, but on the other hand, there is galloping demand for vanilla and value-added data services, and there is a large enough segment that will pay more for better speeds and quality of services. And if airfares go up the way they threaten to, high-quality video conferencing will be in demand.

The only roadblock will be suppliers' agility and energy to deliver. Offer a home maintenance, home décor-trained service force and easy-to-fit range of things and many upper-class homes will do up their homes more often than they have and add more things than they have had before. Offer better Class X and XII online coaching and practice testing, and laptop and internet sales will zoom. Offer easy trade-in services (only possible by businesses who know how to profitably sell older consumer durables) and many households will upgrade their televisions to make up for not splurging as often in the multiplexes. Offer quicker home delivery from restaurants and impulse purchases will increase - even paying more for a single dish works out cheaper for households than eating out. The consuming class has got used to all these indulgences. They just need to be delivered in a slightly different way now to keep consumer spend going.

The focus has to be on category fight for wallet share, not industry growth rate as a given, and a brand fight within. Increased prices of both air-conditioners and electricity will dampen consumer enthusiasm; but past 'ride-the-wave' growth rates, driven by prices tumbling as taxes decreased and competition increased, as incomes grew and electricity stayed the same, are over. The air-conditioner market growth, however, need not decline. People are now used to air-conditioning in public spaces and cars, live more strenuously and still have enough money for discretionary expenditure - so, growth rates depend on whether companies can make the customer choose this as spending priority.

Consumer businesses have lazily used GDP growth rates as a basis to decide their own growth rates for the year; however, a realistic bottomup estimation of market opportunity, as in the number of people who could potentially afford it and have a need for it, will show that most consumer businesses have plenty of headroom for growth, if they work smarter and with more concern for how customers think and process value, and offer and communicate superior customer perceived value. B2B businesses understand this a lot better than B2C businesses.

The current mindset is that economic growth ensuring business-as-usual growth of 25-30% or higher consumer demand has collapsed and there isn't a clear idea of how to deal with it. This mindset is going to miss out on a lot of perfectly good business growth opportunities that India offers. This is an underserved market, especially in the upper classes, and there is much that is possible - in fact, fairly low-hanging fruit exists! Marketers have got lazy in the land of plenty; while it is still a land of plenty. Having to work harder for a larger share of a growing pie is a mindset that needs to be embraced again. There are always the many silver linings of demand in the apparently ubiquitous dark clouds. There is a lot of money with the top 20% income households that are getting richer and still have a lot of money to spend. Household savings will fetch higher interest, so, even as borrowers groan, savers smile, both are often the same people when it comes to large ticket items. Consumers will be far less likely to switch if they get continued value than in the hectic bargain-hunting days when suppliers recklessly fought price wars.

It is a good time for customer-centric businesses who believe in creating value advantage with consumers, and it is time for brand-building because customers are also pausing a bit in their hectic acquisitive and experimental mode (as are suppliers). Rural-urban mass markets have scale at last and are similar in character - the true middle market is here at last. Try selling televisions with built-in UPS or inverters, and better-quality roofing cover for monsoons, or more convenient-to-fix-on roofs in large modest-income settlements throughout the country; sell even the humble, but good quality corn caps and feet pads for the multitude of Indians who have troubled feet! And, if they deliver value, large brands will be created.