Bye, bye cheap; buy, buy pricey

Rajesh Shukla    February 21, 2024

OPINION I Times of India

Poised to end the first quarter of the 21st century, the Indian economy is being driven by a multitude of demographic, economic and consumer-related factors. These are already having an impact on the evolution of consumption patterns. Consider the fact that until recently (2022-23) rich households - which constitute merely 5 per cent of total households - have driven nearly one-third of all discretionary spending in India. But with per capita income levels expected to grow by 10 per cent CAGR to about US$ 5,200 in 2031 from US$ 2,400 in 2023, this scenario is about to change dramatically.

 By 2031, India will add about 75 million middle-class (₹5-30 lakh annual household income) and 25 million rich households (more than ₹30lakh), the total share of these segments will be 56% and higher per capita income levels will see these households command a higher share of discretionary spends. Middle-class households will drive 53% (US$2.7 trillion) of total consumption, and rich households will drive another 26% (US$1.3 trillion), compared to 48% and 17% respectively today.

The key changes that are being witnessed in the Indian economic and infrastructure space - including the thrust towards manufacturing, physical and digital infrastructure projects, logistics - are also shaping consumption patterns and driving spends leading to higher marginal propensity to consume. What this translates into is that the Indian consumption economy would add around ₹245 trillion (US$ 2.9 trillion) of incremental consumption expenditure in the 10-year period of 2021 to 2031.

PRICE studies have revealed that among the top 10 states with the highest concentration of super rich households annual earning more than ₹2 crores (USD 2,70,000), UP, Gujarat and West Bengal have seen the highest growth of such households (10.8 per cent, 9.8 per cent and 9.8 per cent respectively). Cities like Surat, Bengaluru, Ahmedabad and Hyderabad are similarly recording high growth rates in this category (11.9 per cent, 10.5 per cent, 9.5 per cent and 9 per cent respectively). These changes are also being felt across rural India where developed rural districts (top 25% rural districts) including Jalandhar, Ludhiana, Sonipat, Surat, Gandhinagar among others and Rest of Rural districts such as Firozabad, Gaya, Nellore, Jodhpur, etc. These are the districts that are contributing 55 per cent to the total incremental consumption.

The evolving consumer landscape thus offers huge opportunities for marketers. Households that are rising up the income ladder will spend two to three and a half times more on categories such as food, housing, transport and communication, apparel and personal care. Those who are upgrading to the middle-class and rich segment will drive 15 to 30 per cent penetration of consumer durables.

The trend towards premiumization – where consumers display a growing preference for higher quality premium products and services – will be driven primarily by middle class and rich consumers who will upgrade or expand their choices in apparel, personal care and food and beverages branded offerings.

Many of these choices are already being reflected in consumption patterns of metro and boom/niche cities that have access to better infrastructure. Half of the households in the top 63 million plus population cities are showing the impact of premiumization. By 2031, these cities will prove to be a hunting ground for brands that are focused on innovation and will form a US$ 1.6 trillion market that would be equivalent to 30 per cent of the total.

But branded players will have to recognise the ground reality – that consumption growth will be driven by ‘many Indias’. For instance, the developed rural households that are equally aspirational as their urban counterparts will be one of the primary growth drivers. By 2031, this cohort which is equally aware of and comfortable with digital media, and online product delivery will be 180 million consumers strong, translating into a large but dispersed 23 per cent of the total consumption market. Also, increased exposure to global trends, through travel, digital media, and international brands, has influenced consumer preferences. Indians are becoming more aware of global premium brands and are willing to pay a premium for quality and exclusivity.

Premiumization will therefore involve factoring in innovation and quality offerings that cater to the specific needs and wants of diverse and dispersed consumer groups. Higher price points alone will not make the cut. But the price-value equation will come into play for a much more evolved consumer cohort. These are already evident in the health and wellness category leading to a higher demand for premium products and services such as organic foods, fitness equipment and high-quality healthcare services. Changing cultural norms and a shift in values - such as an emphasis on experiences - are already contributing towards the premiumization trend. These can be witnessed in fine dining and luxury travel segments.

The country's economic growth has led to increased disposable income, especially in urban and developed rural areas, where changing consumer preferences and a desire for higher income growth contribute to a demand for premium products. Global exposure through travel and the internet has influenced consumers, and the rise of e-commerce has made premium goods more accessible. Additionally, innovation, demographics, and the expanding middle class play key roles in shaping consumer behaviour, with a growing emphasis on quality, uniqueness, and premium experiences. These are new opportunities for marketers, albeit not without its challenges.

 

Table: Share of premiumization to total incremental spend on select categories between 2021-31 (%)

Product category

Share of premiumization

Food at home

30%

Dining out

45%

Alcohol

60%

Personal Care

65%

Apparel

40%

Transport

20%

Communication

80%

Health & Fitness

30%

Entertainment

35%

Travel

25%