What’s the Indian Consumer Upto?

1. Overview of The Indian Consumer Market

It is needless to say the Indian consumer market has gone through a complete paradigm shift in the last decade. An average Indian consumer has gone from the value fight (read: price fight) to the convenience fight. While there is a cocktail of factors at play here, a lot of this change has been driven by urbanization, increased disposable incomes, and digitalization. 

Now, when you talk about the consumption space, there are a myriad of things that fall under this umbrella. However, for the purpose of this write-up, we will specifically focus on two sectors – Retail (Grocery & Fashion) and Restaurants. 

2. Overview of the Industry

1. Retail: 

Over the past decade, retail (grocery & fashion) has witnessed a revenue CAGR of ~23%. This is an impressive number, given there were multiple disruptions in the form of demonetisation the most severe being the COVID-19 pandemic. As per market reports, the market size of the retail industry (covering grocery, apparel, and personal care products) in India stands at about $660+ billion and is expected to double in size by 2030. 

According to IBEF reports, the potential for growth in organized retail is immense, as 90% of Indian retail is still dominated by traditional stores and family-owned businesses.

No prizes for guessing, but if you prefix any term with the letter ‘e’ and it starts to shoot up. Quite similar has been the story with the Indian e-commerce market which has sort of become the backbone of the retail market in India and across the globe. Take a look at the growth in the e-commerce market.

If I were to pick one aspect which has completely transformed retail in India, it has to be e-commerce. We shall discuss the effects of e-commerce on today’s Indian consumer later in the write-up. 

2. Restaurants:

Over the past decade, restaurants have witnessed a revenue CAGR of ~13%. With respect to the industry size, restaurant space is pretty fragmented. The primary fragmentation is in terms of cuisine. Well that would be first-order fragmentation and then the second level of fragmentation comes in from the perspective of food delivery apps which have brought about a fresh layer of disruption in the market.  

This fragmentation is very well captured by a chart from the Bernstein report that breaks down the food services industry in India into different food categories in order to highlight the varied cuisines which make the entire pie.

What this does is compels restaurant businesses to venture into multi-brand and multi-cuisine setup which requires such businesses to cough up huge sums of money. Additionally, there are extra levels of expertise required in order to run multi-cuisine outlets. 

3. Evolution of the Indian Consumer

From unbranded to branded, from price-sensitive to time-sensitive, from kirana to e-commerce, that has been the evolution of the Indian Consumer. 

The Household Consumption data released by the Government of India indicates that from FY 1999-00 to FY 2022-23, household expenditure has increased at a CAGR of 9.6%. This expenditure has also shifted from basic food items (CAGR 8.1%) to discretionary areas like Packaged Goods/ Eating Out (+13%), Consumer Durables (+14%), Entertainment (+12%), Conveyance (+13%). This is a good sign as your economy is becoming broad-based and the populace is moving away from basic consumption to discretionary consumption.  

Well this is one half of the coin. Alongside the expansion in consumption categories India is also witnessing an expansion in the consumption class. While the top 10% of India is known for its purchasing prowess, many analysts believe that it’s time for consumption-facing companies to focus on the Next-30 i.e. the next 30% in the income pyramid who are graduating into a reliable consumption class. They have been displaying an increased propensity to spend and consume driven by the influence of social media and enhanced exposure to the Western world through cheap internet. 

As per Bernstein reports, this Next-30 has a population cohort of about 43 crores representing a GDP of about $1.4 trillion. This section captures a whopping 41% of India’s total household spending and roughly 38% of India’s discretionary household spending. Cumulatively the top 40% of the Indian income pyramid spends approximately about $600 billion with an incremental addition of $50 billion per year. Those are big numbers and an even bigger opportunity for companies to tap into. 

Now let’s talk about some interesting changes that have been adopted by an average Indian Consumer in turn changing the consumption landscape in India – 

• Unbranded to Branded – India has been perhaps one of the largest consumers of unbranded products in the world. To date, a large section of society consumes unbranded/loose products. However, as a consumer evolves in his/her journey, the trade-up takes place from unbranded to branded. This has led many retailers to introduce private labels. Private Labels are beneficial for both buyers and sellers. For buyers, they get to experience the sense of affluence with the move from unbranded without having to face a higher pocket pinch. For sellers, private labels are business accretive as they offer better margin profiles and help retain customer loyalty. Additionally, the retailers have control when it comes to the production and supply of their private-label products. 

Take a look at the graph below. Albeit, it represents the wedding market in India specifically, however, the trend is broadly the same, which is a transition from unbranded to branded. 

• Affinity towards homegrown brands –  Earlier, western brands were a mark of affluence for Indians. But things have been changing now. With the wave of entrepreneurship in India and shows like Shark Tank India making business conversations common at dinner tables, the new consumption class, especially Gen-Zs have realized the importance of supporting homegrown brands. Brands that are built in India for India. This trend lends itself to the point mentioned above, in terms of how the preference for private labels has increased over time. Companies like Trent with their private labels (such as Zudio) have far outpaced the growth of a company like Aditya Birla Fashion Retail which has had a western brand placement like Peter England, Allen Solly, Louis Phillippe and the likes. 

• Adoption of Quick Commerce – Quick commerce has indeed remained true to its name as the adoption of quick commerce has rather been quick. Though you could argue that quick commerce is majorly used by the top 10%, the pace with which it has spread, tier 2/3 towns have also joined the bandwagon. ChatGPT defines quick commerce as a new form of online retail that focuses on delivering goods to customers in the shortest possible time, typically within 10 to 60 minutes. It is a rapid evolution of traditional e-commerce, driven by consumer demand for instant gratification and convenience. Q-commerce primarily operates in densely populated urban areas where logistics infrastructure can support ultra-fast delivery. While it began with food staples and ancillary items and now it’s reached the stage where iPhones are getting delivered within 10 minutes.  

4. What opportunities are available?

It goes without saying that with the country poised to witness a significant expansion in its consumption class, the potential opportunities are staggering. We’ve previously mentioned the Next-30, and in order to cater to this new wave of consumers, businesses must establish extensive distribution networks across the country to meet the growing demand. Market reports based on primary research reveal that 95% of India’s pin codes, or 89% of its population, remain underserved or unserved by organized retail.

This is a broad perspective, and much of the progress we’ve discussed has been concentrated in metro areas and tier 1 cities. However, there is a vast untapped market in tier 2/3 towns and rural areas.

The puzzle of this low market penetration is especially striking given that the new consumption class, particularly in rural regions, is gaining increased access to affordable internet. When you combine this with the emerging opportunities in the Direct-To-Consumer (D2C) space, the lack of penetration becomes even more puzzling. Notably, over half of the country’s internet users are based in rural India.

After quick commerce, the D2C segment has been the next big opportunity. As per industry reports, the Indian D2C market is expected to grow at a very rapid pace. And it goes without saying that this growth in D2C will be fueled on the back of cheap data. 

To close this section, the next infographic would be apt. Every 1 in 4 online shoppers in Urban India have shopped from social media apps in the past 1 year. Hence, 

Future Opportunity = Underpentration + Internet

5. What are companies in this space doing?

There are a whole host of companies that would fall under the consumption category. However, for this article, let’s focus on a select few to see how they are battling competition and in what way they are trying to be ahead of innovation and disruption. 

1. Avenue Supermarts – 

DMart is India’s second-largest grocery chain with one of the strongest brand affinity. It has been unique in its own way because, through this entire internet disruption, DMart has strictly remained a brick-and-mortar player. And they intend to remain so. They have made a case for the co-existence of brick-and-mortar and quick commerce. Blinkit’s management has even alluded to this fact.  

A few interesting observations from their business: 

i) They have made a case for the co-existence of traditional brick-and-mortar and quick commerce. The brand/category awareness in the minds of the management is very clear, where they say that value-conscious customers will prefer DMart while time-conscious customers will prefer quick commerce. 

ii) This is well corroborated by a Bernstein report. Therein, they compare a basket of a few household items and ascertain that the bill value in DMart will be ~17% cheaper than the MRP, which is the maximum in the value chain. It explains the value-conscious stand. 

iii) DMart has got the customer experience game. They offer a one-stop shop, wherein they offer both loose and branded goods. What this does is de-sensitise the customer, because the general perception is that any place that only sells branded/packaged goods is expensive. 

2. Trent

Trent has been that poster boy business in the Indian fashion segment. Fast growth, fast execution, fast sales, and fast store openings. Their private label (Zudio) has taken the fashion segment in the country by storm with its accurate price point and design offerings. Everything inside a Zudio store will be under ₹999, hitting just the right sweet spot for Indian customers. 

As far as the pace of the brand is concerned, in FY24, Zudio sold 90 t-shirts per minute (+125% YoY), 20 denims (+100% YoY), 19 fragrances, and 17 lipsticks per minute respectively. It has added close to 700 stores in the last five years with a whopping CAGR of 31%. One of the KPIs for retail businesses is revenue per square foot. Trent tops the chart in its segment, take a look.

The company has never relied on external or Western brands and has always been a pro-private label player whose dividends it is reaping today. Amongst the Tata group, Trent has been the best performer in the last five-year period, rallying nearly 15 times or 1,500 per cent, while it has gained 27,000 per cent in the last 20-year period. The current valuation of the company is around ₹2.9 lakh crore.

3. Jubilant FoodWorks

Jubilant Foodworks is the franchisee partner for Domino’s (DPZ covered by Danilo Gargiulo) in India and is also the largest QSR company with over 2,000 stores in the country. Given the competitive intensity of the QSR space, Domino’s has always been at the forefront of innovation. In line with Indian consumers, Domino’s has carried out an immense level of menu innovation with a focus on value. 

An interesting aspect of Domino’s business has been the focus on repeat customers. In the restaurant space, capturing customer loyalty is extremely difficult. However, Domino’s has been running one of the most successful loyalty programs in the QSR space. The loyalty program has also scaled up quickly since its launch 2 years ago. For context, loyalty programs help companies drive customer retention by encouraging repeat purchases and in turn offering some benefits to those customers. 

In spite of this continuous innovation, Jubilant has been struggling with growth because of parameters such as lacklustre customer demand, high raw material inflation, intense competition and the likes. 

6. Closing Thoughts

With respect to the Next-30 which is going to enter the consumption space, the change from unorganized to organized, unbranded to branded, from loose to packaged products. What this is doing is essentially expanding the TAM of all organized players across categories, be it retail, grocery, apparel, or restaurants. 

The other aspect is how ready these players are to absorb this new gush of demand. Over the past 2 to 3 years, almost all the companies in the consumption space have undertaken massive footprint additions. This addition has been primarily done to service the enhanced demand. Additionally, in line with this influx of Next-30, many of these companies have been aggressively expanding into Tier-2 & Tier-3 towns where the next real potential actually lies.  

The slew of changes occurring in the Indian consumption space is pretty interesting. With the evolution and growth of our economy, the Indian consumer is also evolving himself. As new companies keep entering the market, the incumbents will be forced to innovate. Moreover, in today’s world, a company has more than one way to sell to customers. That can be online, offline, direct, through distributors and the list goes on.  As competition intensifies, it will be fascinating to witness the different varieties of innovation which will come through.       

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