Greetings from Team Carnelian!
Beyond Narrative – Is consumption slow? Are we looking at the right data points or falling for narratives?
We recently wrote a letter “Beyond Narratives” on how at times common narratives get formed in the market influencing investors and leading to erroneous investment decisions; and how an unemotional approach towards data / events / common sense, accompanied with a steadfast focus towards risk-reward and courage to handle public perception can help avoid falling for narratives.
In recent times, the most common narrative we come across is :
There is a slowdown in consumption, across both rural and urban
There is no volume growth in consumer companies
Public is not eating out as much, as reflected in earnings of QSR companies etc.
Ironically, when one looks all around, there doesn’t seem to be any slowdown in consumption – this dilemma led to us explore what’s leading to this narrative. We did some deep thinking about this, based on available data - on one hand, real estate sales (across price points) are at an all-time high across cities, cable companies demonstrated a robust 18-20% growth, but tile companies reporting any growth! How is that possible from a (real estate) consumption point of view?
Before we share our observations with you, let’s explore a concept called ‘Death by a Thousand Cuts’. This concept encapsulates how incremental change can go unnoticed until it reaches a tipping point. Change usually often appears remarkable if it happens overnight. But change that is incremental, often goes unnoticed until a new status quo is established.
With the help of an example, let us understand how it plays out in business: Blockbuster & Netflix during the period of 1997 till date:
Blockbuster v/s Netflix
Blockbuster was the undisputed leader in video rentals, with over 9,000 stores worldwide at its peak. Customers would typically browse the store's selection and then take the desired video to the checkout counter to pay for the rental. They would also charge late fees to customers, if the videos were not returned in time, which formed ~18-20% of their revenues.
Netflix, founded in 1997, pioneered a subscription-based model in which consumers paid a flat monthly fee to rent a fixed number of movies. They innovated a “DVD by mail” model, which ultimately spelled death for Blockbuster - DVDs were delivered the next-day at your doorstep and with no late fees! As digitization caught on, Netflix started streaming services in 2007.
Here’s how Blockbuster & Netflix fared:
This case beautifully highlights how a disruptive change in an industry led to a slow-down in growth. If one were only analyzing the data of Blockbuster and similar players, one would have arrived at a conclusion that consumption of movies is slowing down. But the underlying subtle change led to a disruption risk for one and an opportunity for the other. The key point is that “consumption did not slow down”, consumption patterns changed.
Coming back to the Indian landscape, one can say the same thing, whether it was for the telecom business of fixed line or cinema business. Let us see how business has panned out for incumbent’s v/s new players in different pockets of the market.
Indian cinema
Is India consuming less movies? Surely not. But how movies are consumed is changing with OTTs, thereby significantly impacting the growth and profitability dynamics of the industry and players.
Traditional QSR v/s new chains
While QSRs have historically grown well in India due to newness and under-penetration, they are now facing challenges from new entrants in the market. These new entrants are predominantly cloud kitchens that are leveraging Zomato and Swiggy’s vast network to tap consumers. These new-age companies continue to grow nearly twice as fast as the traditional QSR chains, eating away incremental growth and thereby market share.
Let’s see what’s happening with the Beauty & Personal Care segment (BPC)
The last decade has seen emergence of several D2C brands in India catering to beauty and personal care segments. These companies have each targeted a niche segment in the industry and have gone onto becoming prominent players in their respective categories. When compared with market leaders in their category, they are still far away but are eating into incremental growth of the large companies.
Let's consider the example of fans - Atomberg Technologies Vs Incumbent ECD players:
The fan industry was one which had not seen any innovation in a long time. Atomberg Technologies thought of applying the long-existing BLDC motors to fans, recognizing the growing demand for energy-efficient appliances leading to ~65% less energy consumption vis-a-vis traditional fans. Moreover, they offered the convenience of a remote control to customers, thereby replacing traditional regulators.
With this thoughtful and innovative product offering, from being a ‘nobody’ in the segment, Atomberg now commands a market share of ~7% in the overall fans market and ~35% market share in the premium fans market. Today, Atomberg is the largest fans brand on Amazon. Of course, it has eaten into the incremental growth of the incumbent... but has consumption slowed down?
Let’s look at Real estate
The last few years have seen a tremendous pickup in real estate, which is evident from the staggering all-time low inventory and 40%+ CAGR in the pre-sales numbers for the top real estate companies. Obvious beneficiaries of this have to be companies in paints, tiles, cables & wires, plywood and many related industries.
However, this is not the case! Since FY17, listed cable and wire players have grown at a ~17% CAGR, the listed tiles players have grown at a lower CAGR of ~7% only, during the same period. This tells you a story of big change.
Players such as Simpolo have emerged to be beneficiaries of this cycle. It is likely that some other regional players would have also grown disproportionately, eating into the market share of marquee names.
Let’s examine a hypothesis we have:
Traditionally 3 things were huge moat for any consumer company:
Distribution
Access to quality manufacturing and packaging
Brand/Capital
With democratization of technology, distribution and quality manufacturing, these are changing rapidly. We see a few trends which are redefining the consumer companies and any opportunity should be evaluated with these lens rather than the lens of the narrative that is largely created by incumbents (understandably), that “consumption is slowing down”.
Traditional distribution as a moat is getting challenged: With the advent of e-commerce / quick commerce / organised retail, this moat has started to get diluted. E-commerce gives one access to customers in every nook and corner, at the click of a button! This has given birth to online brands and D2C business models. What’s interesting is that players which control distribution, both offline and online (Amazon/Flipkart/Dmart/Reliance Retail), have in-house brands which they sell to consumers based on their direct knowledge of customer insights and the most profitable products. Needless to say that this eats into someone else’s market share and growth!
New Competition: Incumbent consumer companies are facing two types of competitors.
Regional smaller players / Start-ups: This segment is often undermined. With democratisation of all three resources (distribution / manufacturing / social media), it has become relatively easier for entrepreneurs in smaller cities to deliver similar or even better-quality products at a cheaper cost in the most efficient manner. They are far more agile in sensing the local / regional taste and preference. They have far lesser overheads compared to large players and have far more hunger than larger organisations. These players obviously eat into the incremental growth of the industry.
New foreign players: With India coming on the global radar, many new foreign players are tapping Indian markets more aggressively than before, with their penetration strategy, which could be a better product or better price, they are challenging the incumbent’s growth. Zara and Uniqlo have clocked ~INR 2,700crs & INR 800 crores turnover in last 5-6 years, has eaten into growth of industry and incumbents. Same thing can be said for car companies.
In fact, e-com giants like Amazon offer the infrastructure necessary to compete with bigger brands without the need to invest in logistics, warehousing, or customer service at a large scale. This service significantly lowers the entry barriers for global retail.
Changing customer preference / loyalty: The new generation is becoming less brand conscious and more open to experiments, focusing on functionality. The rise of social commerce and influencer marketing has further impacted this trend. Platforms like Instagram, TikTok, and YouTube allow brands to reach potential customers directly, while influencers provide a personalized touch that helps to establish trust. Also, the younger generation is spending on more experiences than ownership. Customer’s share of wallet will move from traditional consumption basket to new baskets like electronics / travel / adventure / fitness / health etc. We are quite sure that the share of electronics in the consumption basket is far higher today than it was 5-10 years ago. This is obviously eating into someone’s share.
Access to Quality manufacturing: With Make in India focus, many companies are manufacturing products or outsourcing locally. Availability of technology and access to B2B manufacturing earlier was limited to only larger players. This has changed significantly. New players’ packaging and aesthetics often are far catchier / trendy compared to incumbents, giving them a tough fight. The rise of many regional snack brands (namkeen /chips / sweets), regional ice cream brands validate this trend.
Access to Capital: In recent times, accessibility and availability of capital has become far easier than what it used to be. This used to be a major entry barrier. Only time will tell who and how many will succeed, if any. In the interim, there are surely many of them who are eating into industry growth of incumbents.
We are not saying that all incumbents will face challenge and get disrupted. We are trying to say that this narrative of consumption slowing down may not be correct in all cases as is being made out. The REAL STORY may be something else. Consumption is directly linked to, depending on category, income and wealth. We do not see any slowdown in either of them nor do we believe that “Consumption is slowing down”
In fact, we believe, as India’s per capital income grows along with economic growth during Amritkaal, Consumer is & will remain the biggest opportunity. Indian consumer will consume MORE, NEW & BETTER.
We are investing in Consumer with this thesis and re-iterate our dis-belief in the narrative that consumption is slowing down. We believe real money lies in investing BEYOND NARRATIVES.