It's a hot Tuesday afternoon at Anant Honda, the largest dealer of Honda motorcycles in Gujarat's Anand district. Yet, the showroom is abuzz. Salesperson Karan Shah says the beeline of customers for test rides hasn't abated since the Central government announced a new pay scale for its employees. After a 20 per cent dip in sales last year, this year's festive sales may hit a new record. "I have sold 30 bikes to government employees in the past one month, which has never happened earlier," says Shah. The Seventh Pay Commission recommendations raised the basic salary of four million government employees and six million retired employees by 2.57 times. And One Rank, One Pension directly benefits 1.8 million ex-servicemen. Shah says Honda's attractive Rs 2,000 discount (3-5 per cent) scheme for government employees was the game-changer. Clearly,with the additional salary disbursement starting to take place, the feel-good sentiment has set in.
In West Bengal, Durga Puja sales have just concluded. Most retailers claim significantly higher sales than last year. According to Vasanth Kumar, Executive Director, Max Fashion Retail, like-to-like growth this year across its stores in West Bengal and Kerala (which recently celebrated Onam) have increased by 30 per cent, compared to 16 per cent last year. Anirudh Dhoot, Director, Videocon Industries, says that sales from Durga Puja and Onam grew by 15 per cent: "By Diwali, I expect 25-30 per cent jump in sales." Videocon's festival sales last year grew barely 10 per cent.
After three consecutive years of sluggish growth, the consumption story, at least in urban India, is on an upward trajectory. Could this be the trigger the economy needs to get back into its stride? Here's some evidence: India's auto industry recorded the highest ever monthly sales of 2.26 million vehicles this September. Cars grew at 12.34 per cent, and two-wheelers, 17.47 per cent, in the past six months, against 6.22 per cent and -0.36 per cent in the same period last year. Consumer durables sales are nearly 25 per cent higher after years of single-digit growth. Just five days of e-commerce festival sales this year clocked $1.2 billion against $1.5 billion in the whole of October last year. In hospitality, hotel occupancy this year is the highest in the past six years. In banking, retail loans are growing upwards of 20 per cent against 16 per cent last year.
This spurt in demand has raised capacity utilisation at manufacturing facilities in industries as diverse as auto, cement, durables, steel? and now, feebly though, FMCG (see graphic What's Aiding the Boom). With GDP growth projections getting revised to 7.95 per cent, consumer price inflation (CPI) rate stabilising at 5 per cent and commodity prices softening, the disposable income of the average Indian is looking up. Besides, with near normal monsoon this year, barring unforeseen circumstances, inflation should remain in the 4-6 per cent targeted band. It would be the ideal macro-economic scenario for RBI to continue to cut interest rates and aid consumption.
Virendra Singh, owner of WinWin Automobiles in Bhopal (an exclusive dealer of Mahindra & Mahindra), is optimistic. Auto sales had dipped by 35 per cent in Bhopal between April and September 2015. "We target 10 per cent growth annually, broadly linked to the GDP growth. This did not happen in the past two years, but the good monsoon may just help us," he says.
Amarjeet Singh, CEO of consumer durable manufacturer Intec Group, which has a significant presence in Tier II-III markets, says sales during Navaratri have increased 30 per cent. "Usually before Diwali we predict 10-15 per cent increase in sales, but we have doubled sales in Navaratri itself." Similarly, Kanwaljeet Jawa, MD & CEO of Daikin India, claims the company recorded 60 per cent growth in the first 14 days of October.
The mood in rural India is, however, laced with hope and a fair bit of scepticism. After three years of drought, the rain God has been generous, and rural folk are now anxiously awaiting the harvest season. Until then, consumption will continue to be flat - neither are consumers willing to acquire new assets, nor are retailers prepared to stack up their stores with new stock.
This explains the anxiety of Nana Bodke, a farmer of village Phoolambri, a 45-minute drive from the industrial city of Aurangabad. While the drought ruined the villagers in the past few years, this year the problem is excessive rain. "The rains have delayed harvesting, and I hope to do so soon to get money before the festival begins," he says. Sanjay Kale, owner of Sri Ganesh Farm Products, a pesticide and fertiliser store in the same village, says that his business will pick up after the harvest and the festival season.
Islavath Rajanna, a pesticides retailer in Maqdumpur village of Telangana's Warangal district, says he can finally see light at the end of the tunnel after two tough years. "Even though farmers have not yet got their earnings in hand, there has already been a better off-take of pesticides."
Compared to last year when there was an over 50 per cent deficit in the monsoons, the distribution of rainfall this year as per a recent Crisil report has been the best in three years. Only 33 per cent of districts have received deficient rain, raising hopes of consumption increasing manifold in rural markets, too. "Consumption was walking on one leg for a while, which will get corrected now. Agriculture, which was growing at an average 0.5 per cent for the past two years, will grow by 4 per cent, and this will definitely spur consumption," says D.K. Joshi, Chief Economist, Crisil.
Time to Upgrade
Traditionally, Diwali, which is round the corner, sees consumers buying new household items, clothes, even cars, bikes and homes. This year's uptick has given rise to a surprising new trend - upgradation - with urban markets in particular flocking to higher-end products.
"Growth is happening (in urban centres), but it's high time it is consistent and grows upwards month after month"
Sales India, a consumer durable store in Vadodara, claims that the bulk of its consumers this year are upgrading. "A consumer who bought a flat-screen TV three years ago is more than willing to upgrade to a smart TV that costs Rs 50,000," claims the store manager. Adds Dhoot of Videocon: "The mood is upbeat and we are seeing consumers wanting to upgrade both in urban and rural areas." Agrees Anil Verma, President, Godrej & Boyce: "People want to invest in big-ticket items such as frost-free refrigerators, five-star rated (energy saving) air conditioners, etc."
The return of consumption in semi-urban areas is new, says Shekhar Bajaj, Chairman & Managing Director, Bajaj Electricals. "It is primarily because of the change in mindset of the younger generation who are exposed to trends in the bigger cities. The new pay commission, availability of credit cards and direct subsidy benefits have also helped."
"There is a certain amount of optimism in retail products, especially auto and two-wheeler loans in urban and rural centres"
A prominent trend in today's consumption story is EMI (equated monthly instalment). Suresh Desai, who runs an LG showroom in Vadodara, says almost 40 per cent of his consumers today prefer EMIs - compared to 15 per cent two years ago - especially for big-ticket items. In fact, the consumer durables story has attracted bankers to test the market for retail loans for small-value products like TV, refrigerator and mobiles. RBI data indicates consumer durable credit, at Rs 17,800 crore, grew 20 per cent in the past five years.
Retail Banking Piggy Rides
At a time when new corporate loan disbursals are in the negative territory, consumer sales have been the saviour for the banking industry. While overall bank credit is growing at less than 10 per cent, retail banking (loans for home, car, two wheelers and consumer durables) has grown by 20 per cent. The largest private bank, ICICI Bank, grew its retail book by 23 per cent. The largest bank, State Bank of India (SBI), matched this growth figure. The story is the same for other banks, too. "There is a certain amount of optimism in retail products, especially auto and two-wheeler loans in urban and rural centres," says Paresh Sukthankar, Deputy Managing Director at HDFC Bank
"Since we entered, larger brands either reduced their prices or started promotional offers; the beneficiary is the consumer"
E-commerce is Back
The e-commerce shopping frenzy is also back with a bang. After witnessing steady growth in 2015, the e-tailing industry's numbers had dipped, mostly because of the Department of Industrial Policy & Promotion's (DIPP) decision to cap total sales originating from a group company or one vendor at 25 per cent. Aggressive discount schemes were barred and online consumption slowed down. According to a report by advisory firm RedSeer Consulting, the e-tailing industry witnessed a sequential dip of 19 per cent in the March quarter of 2016 and a dip of 5-10 per cent in the June quarter in terms of overall gross merchandise value (GMV).
That has changed. "Festive discounting has brought people back to e-commerce," says Anil Kumar, Founder, RedSeer Consulting. "While October 2015 recoded an overall GMV of $1.5 billion, just the first five days of October 2016 saw sales worth nearly $1.2 billion."
"Rural consumption has not picked up yet. The reason is two back-to-back droughts. It would pick up after this year's harvest"
The 'Triple M' category - Metropolitan Male buying Mobile phones - is driving most GMV for India's largest marketplaces, including Flipkart, Amazon and Snapdeal. Amazon's 'Great Indian Festival Sale' was 3X bigger this year than last year's - the company claimed it sold over 15 million units. Apart from phones, other segments that grew well include large appliances, televisions, and fashion products. Says Ananth Narayanan, CEO, Myntra: "We're up almost 60 per cent from last year. For all the talk of non-consumption, at least in fashion and lifestyle, we've seen a fair amount of growth."
Similarly, Snapdeal recorded its highest ever daily sales on Day 1 of its 'Unbox Diwali Sale'. Overall, it sold more than 11 million units during the sale.
E-commerce's rise has helped others, too. "Heavy decibel advertising by e-tailers is also helping our sales. Whenever they advertise, our traffic goes up," says Ritesh Ghosal, CMO, Infiniti Retail, which owns the Croma chain, adding that Croma has been clocking 15-20 per cent growth compared to 4-5 per cent growth last year.
"Agriculture, which was growing at an average 0.5 per cent for the past two years, will grow by 4 per cent, spurring consumption"
A lot of the e-commerce volumes this festival season has been driven by Tier II and III cities. Amazon, for instance, said its Festival saw a 30X increase in orders from Tier III and below geographies compared to last year. "Consumers in smaller towns have aspirations. They are looking for products that are not accessible in their locations, but at a certain price point," says Sanjay Sethi, CEO of marketplace ShopClues. "In smaller towns, fashion, home and kitchen have taken a larger share."
An eBay spokesperson confirms volume growth being driven by smaller cities and towns. In 2015 (January-September) its split between metro and non-metro buyers was about 50-50. But in 2016 (January-September), the split was 58-42 in favour of non-metros.
Dont Write-off Malls Just Yet
Last year, malls had experienced a drop in footfalls and sales. Categories such as fashion suffered badly. But not this time. Categories such as fashion and shoes are growing as fast as 30-35 per cent in malls. "The ticket size of the average shopping bag has gone up. More people with larger wallet size are coming in," says Rajneesh Mahajan, Executive Director, InOrbit Malls, adding that footfalls during Navaratri increased by over 12 per cent.
"The lower numbers we saw in FMCG is more of an aberration than a trend of the consumption story"
Apart from the hit from e-commerce, several malls closed last year also because of issues such as oversupply, poor management and inability to attract the right kind of tenants. The past one year, though, has seen a correction, especially in Tier II-III cities. A market like Surat has three large malls (5 lakh sq. ft each). But in the past year, most of the brands have been moving into one of them, VR Mall, whose occupancy is now close to 98 per cent and rentals have gone up by 25 per cent. Similarly, Nashik has one big 5 lakh sq. ft City Centre Mall, apart from numerous 60,000-70,000 sq. ft smaller malls. There, too, brands are moving into the larger mall, with its rentals rising over 40 per cent. "Rentals of malls are going northwards because there is a correction in the supply, but there will soon be a shortage of quality retail space in the country as the consumption story will unfold," points out Harminder Sahni, CEO of retail consultancy Wazir & Co.
Mahajan of InOrbit says that he has been getting requests from existing tenants at his malls for additional space. "So, if a retailer has 800 sq. ft, it wants to take an additional 800 sq. ft," he explains. His rentals have risen 25 per cent in the past one year. Future Group's Group CEO Kishore Biyani says he has never taken as much retail space as in the past year. "By end of this year, we will take at least 3 million sq. ft of additional space," he says.
Hospitality sector is thriving, too. Hotel occupancy this year is the highest in the past six years. "The occupancy levels in 2010 stood at 66.8 per cent. It reached 70.2 per cent in 2014 and 71.4 per cent in 2015. In the first half of 2016, the occupancy levels have improved over 2015," says Ashish Jakhanwala, Managing Director & CEO, SAMHI, a privately owned hotel asset company that has a development portfolio of 25 hotels, comprising 3,800 rooms in 12 cities. Average room rates (ARRs), too, have improved.
The airline industry, which was registering growth of around 9 per cent till 2014, has grown 20 per cent in the past year. In fact, passenger growth between January and August this year has been above 22 per cent.
Food and Beverage (F&B) services, which grew about 7.5 per cent between 2013 and 2015, are expected to grow 10 per cent this year, according to Riyaaz Amlani, President of National Restaurant Association of India (NRAI), and CEO & MD of Impresario Entertainment & Hospitality. "We are transitioning from going to a restaurant to celebrate, to a more everyday activity," he explains. "In urban areas, we are going out eight-nine times a month now. In 2013, it was about four times a month."
However, not all segments of the F&B services industry are growing equally. While casual dining - pubs, bars, cafes and lounges - is growing at about 22 per cent a year, growth has been slower for fine dining and quick service restaurants (QSR).
Fine dining, says Anurag Katiar, CEO of deGustibus Hospitality (which owns the Indigo and Indigo Deli formats of restaurants), which was growing till about 2013 by 10 per cent, dipped to around 2 per cent. "When the economy didn't do well, corporates stopped entertaining at exclusive restaurants. In fact, a lot of the fine dining crowd moved to our casual dining format."
The decline of QSR segment, according to Amit Jatia, Vice Chairman of Westlife Development, the franchise partner for McDonald's in West and South India, is to do with the decline of impulse buying when the economy got into a downturn. "Everybody whose business is based on impulse buying, like ours, got impacted. We relooked at our cost structure and developed more modern stores, brought down the cost of building a restaurant by 25 per cent, and the operating cost by 20-25 per cent."
Consumption is on the rise, but it is skewed towards urban consumption. Says Pronab Sen, Economist and Former Chairperson, National Statistical Commission: "Rural consumption has not picked up yet. The reason is two back-to-back droughts. However, consumption would pick up after this year's harvest."
Future Group's Biyani points out that growth hasn't been consistent in urban markets either: "I am not seeing all-round buoyancy. April sales were fantastic, May was weak, June, July and August were good. September started very well, but suddenly became flat. We never understood why it dipped. Growth is happening, but it's high time it is consistent and grows upwards month after month."
While consumption across most urban markets is looking up, markets such as Jaipur are yet to see signs of revival. Jaipur, whose economy is largely dependent on jewellery and diamond trade, has been under a lot of pressure of late. While Hatinder Bhatia, store manager at Raymonds in Jaipur's posh GT Tower mall, says people mostly walk into his store during a sale, Poran Balathia, store manager at the Bata store, says the walk-ins into his store have reduced by 50 per cent in the past year. The good news for both Bhatia and Balathia is that their conversions have gone up by 30-40 per cent.
Certain sectors are bucking the consumption trend, such as real estate (see box Cracked Concrete) and FMCG. This April-June quarter, FMCG showed the lowest growth in the past 10 quarters - just 4 per cent, compared to 7-8 per cent even in the drought-hit quarters. Unlike the other sectors, in FMCG, it's the rural market that is holding out. Prasun Basu, President, Nielsen (South Asia), attributes the dip in consumption to the inflationary tendencies and the late arrival of monsoons. "The lower numbers we saw in FMCG is more of an aberration than a trend of the consumption story being down. The way the July quarter is going, it doesn't look like growth is down," he assures.
But FMCG CEOs are a worried lot. "The past 18 months have been extremely tough and the past nine months have been tougher," says Sunil Kataria, Business Head (India & SAARC), Godrej Consumer. Adds Harsh Agarwal, Director, Emami: "While there are green shoots visible, the actual growth seems to be still a few quarters away."
When rains come after a prolonged period of drought or when market sentiments improve after a lull, most consumers tend to indulge in big-ticket purchases like cars or consumer durables, which they would have put off. "In the bargain, FMCG products get least priority," explains B. Sumant, President (FMCG), ITC.
As the FMCG majors wait for consumption to grow, they are investing in improving their distribution and reach across the country. Hemant Rupani, Director (Sales), Mondelez India, says the next level of growth for the chocolate category would come from new consumers. "We have reached out to 50 per cent of villages with population over 5,000; now our endeavour would be to reach all such villages in the next two to three years."
Similarly, Varun Berry, MD, Britannia Industries, says that he has not only stepped up distribution in villages with a population of even less than 5,000 people, but has also started selling premium biscuits such as Good Day and Chunkies in smaller pack sizes and affordable price points in those markets.
The FMCG majors are also increasing their production capacities rapidly. ITC, says Sumant, has 25 new projects coming up in the next couple of years. "The idea is to manufacture closer to the market, take the cost saving from supply chain, and put it into serving additional grammage to the consumer." In fact, FMCG - especially the food sector - has seen the highest addition of production capacities this fiscal. While Q1 of 2016/17 saw 57 per cent growth in capacity, in Q2 it was 80 per cent.
Angshuman Bhattacharya, MD, Alvarez & Marsal, says the investment appetite is back. "It's not only from the growth outlook but also with an inflationary and stability outlook. In 2012-2014, everything had slowed down. People generally talked about the demand side of it, which is a function of income, employment, sentiment etc., but there was a huge inflationary impact also, which indirectly impacted the investment mood of most companies." Today, Bhattacharya says inflationary pressure has eased as commodity prices and oil prices are under control.
However, Biyani attributes the lacklustre growth of the Indian FMCG companies to lack of innovation, which is seconded by Debashish Mukherjee, Partner (Consumer Practice), A.T. Kearney. "One of the reasons people have cut back on consumption is clearly due to the lack of innovative products," says Mukherjee. Alpana Parida, CEO of marketing consultancy DY Works, says the same for the rural market: "Mainstream brands haven't figured out that this is a market worth going after."
Manjari Upadhye, Country Manager (Dairy Business), Danone India says the brands need to do a deep dive to figure out whether the innovation is sizeable and incremental by way of bringing new opportunities. "I see a lot of innovations happening in the FMCG space, but the question is, how incremental are they? Most of it either ends up cannibalising one's current business or it fizzles out because it wasn't relevant enough." In fact, the bigger challenge for FMCG companies is competition from low-end, local brands, which are doing a better job of creating disruptive products (see box Local Punch). Acharya Balkrishna, CEO of Patanjali Ayurveda, says local brands have forced the bigger ones to innovate. "Since we entered the market with the right kind of pricing, the larger brands either reduced their prices or started doing promotional offers such as one for one free. The beneficiary at the end has been the consumer."mosimage
Coming back to the larger discussion around consumption, there is no doubt that the Indian consumer's appetite for consumption is on the rise. However, if the economy has to ride on the back of consumer goods, consumption will not only have to be consistent, but also more widespread across sectors such as real estate, FMCG and F&B services as well. And that seems to be a few quarters away.
Additional reporting by Dipak Mondal, Sonal Khetarpal, Goutam Das, Manu Kaushik, Chanchal Pal Chauhan, Anand Adhikari, Nevin John, P.B. Jayakumar, E. Kumar Sharma and Rahul Noronha