For Yogendra Kumar Srivastava, a 37-year-old salaried individual who lives in Faridabad, his car is his lifeline. There’s no other way of reaching his office, a telecom company in Okhla Industrial Estate in Delhi. Srivastava, who heads a family of six (including his parents), wishes there was some other way. His monthly petrol bill is steadily rising, moving from Rs 2,800 to Rs 3,000 in quick time. This is at a time when his equated monthly installment (EMI) on a housing loan is set to go up by Rs 2,000. Srivastava has no choice but to cut back. The number of dinner outings has come down from twice to once a week. “Even if there is a sale in the malls, we think twice before stepping in. We constantly ask ourselves— do we really need new clothes? Can we postpone any kind of big-ticket purchase—like a flat-screen television, for instance— for some time,” shrugs Srivastava.
As you read this, engineers at the Indian manufacturing facilities of Korean consumer durables major Samsung are pulling out all stops to bring down costs. Just one of those initiatives involves reducing the number of screws in a colour TV mould by going in for “locking-type” moulds. “This has resulted in some cost savings,” says R. Zutshi, Deputy Managing Director, Samsung India.
Feeling the squeeze: Petrol prices of almost Rs 56 per litre are eating into his spending power
Action: Shares a cool cab to work, along with a few other colleagues who live in the vicinity
Suddenly the Great Indian Middle Class—all 300 million of them—isn’t looking so pretty after all. Touted for their propensity to spend brazenly, their mounting aspirations, and their burgeoning purchasing power, these Children of Consumerism have been the toast of a shining India over the past sixseven years. Their rampant consumption did its fair bit to boost economic growth, and provided a huge fillip to service-oriented and consumer-targeted businesses. More and more cars have been hitting the roads; more Indians discovered the joy of flying (if it is a joy, that is); international vacations are no longer Bucket List-like wishes, trawling malls and marching into multiplexes became almost a constitutional right in urban India; eating out was a religion; and credit card marketers and loan providers laughed all the way to the bank (their own).
So what’s gone wrong now? To put it simply, the cost of goods and services has increased as manufacturers and marketers have no choice but to pass a part of the higher cost of doing business to the consumer; at the same time the cost of loans for buying homes, cars, consumer durables and vacations has climbed, leaving Consumer Joe significantly lighter in the wallet; a dismal picture is complete with investors’ portfolios getting eroded, and the virtuallyassured returns of yesterday no longer flowing in.
With consumers preferring to tighten the purse-strings, marketers clearly have their task cut out. Their #1 priority in such climes is to get the price-value equation right. This means justifying a higher price tag on their products with added attributes (in terms of quality or quantity).
A marketer’s checklist in inflationary times…
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Alternatively, they need to take a close, hard look at their entire supply chain, and see where costs can be shaved off; or get into the research labs and innovate to bring down costs. At times when prices are less affordable, the not-so-cash-rich consumers are likely to defer purchases, or even opt for cheaper brands. “It (high inflation) is a challenge because one would like to minimise the price increase so as to not disturb consumer’s buying sentiment,” says Samsung India’s Zutshi. Adds V. Ramachandran, Director, Sales & Marketing, LGEIL (LG Electronics India): “In an inflationary environment there’s pressure on certain sections of society and their potential access to highvalue products.”“Businesses need to be resilient to manage the situation,” says D. Sundaram, Vice Chairman, Hindustan Unilever. If marketers anticipate demand to slow down as a consequence of rising prices, they have two options ahead of them: To either go slow on advertising and promotions and wait for the slowdown to tide over; or to continue with the regular marketing activities— or even step up spends—and gain market share. Most companies have chosen the latter option—of aggressively pushing ahead with innovative offers and discounts. Here’s a rough sample of who’s doing what across sectors.
No gain, more pain
Rising interest rates and plunging stock prices compound consumers’ woes.
V.N. Kulkarni runs Abhay, a loan-counselling centre in Mumbai. Over the past few weeks, Kulkarni has been deluged by visits and calls from individuals saddled with home loan debt, huge credit card bills and high-interest personal loans. It doesn’t help that the stock markets have been brought down to their knees—in 2008, the 30-share BSE Sensex has crashed by 36 per cent from its peak, leaving investors’ portfolios in tatters. Investors who’ve taken the mutual fund route may not have lost their shirts but they are unlikely to have escaped without scalding their fingers.
For retail brokerages and asset managers, it’s indeed a grim period, what with investors naturally reluctant to put their money in equities simply because there’s not much of an investible surplus in their hands. “Investors haven’t stopped their existing systematic investment plans (SIPs) in a big way, but they are not making fresh investments either,” says Mehul Jhaveri, a financial consultant in Mumbai. Investors like Ketan Dalal, a salaried individual in Mumbai, are moving away from stocks.
Dalal has reduced his stock portfolio by a fourth and parked money in fixed deposits and gold exchange-traded funds. As investors choose to sit on the sidelines, financial services firms are devising strategies to woo them. Mutual funds and their distributors, for instance, are focussed on SIPs. “We have been aggressively pushing SIPs to our customers. We plan to bring value-addition to the SIP options in various funds,” says R.S. Srinivas Jain, Senior VP & Chief Marketing Officer, SBI Mutual Fund. Some mutual funds like Reliance MF, Birla Sun Life MF have bundled an insurance cover along with the SIP option and are promoting it in a big way.
For higher-net worth individuals, brokerages and banks are peddling capital protection products based on stocks, commodities and gold. “While investors haven’t put in fresh money, we are telling them that it’s the right time to build a portfolio. Our major branches have a specific counter that is advocating the concept of SIPs as well as other asset classes such as gold and commodity-based products to customers,” says Kanwar Vivek, Head -Retail Liabilities Group, ICICI Bank. Clearly, the retail investor has got to weigh his choices carefully now—should he take that weekend break or is that money better off in a mutual fund? It’s getting increasingly difficult to do both.
“The only strategy (in such a situation) is to keep working on cost control,” says D.D. Rathi, Director & CFO, Grasim Industries. The best way to cut costs is to expand— by setting up new plants closer to the market, to save on transportation costs; and by generating captive power to bring down the electricity bill. Grasim is spending Rs 7,000 crore on these expansions over a three-year period that ends next March.
“We are cautious, but don’t forget that multiplex footfalls also depend on the (quality of) films being released” - Atul Goel, CEO, Fun Republic
The second reason for optimism amongst marketers is the still-low penetration levels—particularly in semi-urban and rural areas—in many categories, particularly newer ones like mobile telephony. As Kohli points out, penetration of mobile services is still only 25 per cent in the country, the heady growth of the sector not withstanding. “A majority of the population still doesn’t have a phone of their own. After food, clothing and housing, communication is the next important human need; it is not a luxury,” adds Kohli.
Clearly, as customers shift into the cut-back mode, marketers have one of their biggest challenges in recent times on their hands. Random, across-the-board promotions and discounts may appear an obvious reaction, but just lower prices may not be what the consumer is looking for. When they are not in a mood to drive, or in a mood to ditch their favourite brands in favour of some cheaper labels, companies have to be able to convince them about their value proposition. And in case it’s not good enough, there may be no better time than now to redefine it.
Additional reporting by Suman Layak, T.V. Mahalingam, Kushan Mitra & Shamni Pande
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