Greetings from Team Carnelian!
Almost all of us have gone through economic transition in our lives in the last 2-3 decades. Please go through your memory lane and observe the changes in your consumption pattern with the change in your economic profile. Zoom out and apply those changes at an aggregate level to the country, you will find glimpses of India consumption story and trillions of dollar worth of opportunities.
In this letter as a part of Bharat Amritkaal Series, we will discuss broader trends that will shape opportunities in consumption space as India see transition towards being developed nation during AmritKaal.
Experiences from other countries like USA, China, Thailand, Indonesia have shown that a nation’s consumption pattern changes dramatically as per capita income crosses the inflection point of USD 2,500. Just like an individual, spending and consumption pattern changes as her disposable income increases.
After crossing per capita income of USD 2,500 in 2006, China’s witnessed significant growth in discretionary spend. Residential Acs (RAC) sale grew at a CAGR of 15.5% from 12 million units to approx. 90 million units by 2015. Luxury car sales zoomed 10.7x from 0.14 million units to 1.5 million units, with a growing preference for SUVs. Luxury watches sales grew 3.5x from USD 1.2bn to USD 4.2bn.
A similar trend was witnessed in footwear, where significant growth happened in the premium sports and athleisure segment. Footwear sales doubled from 1.8 bn pairs to 3.6 bn pairs, whereas sports and athleisure grew 3.3x. International brands like Nike, Adidas, Puma along with domestic brands such as Anta, Li-Ning and 361 Degrees captured the market with innovative designs and marketing. Healthcare spends in China increased from 3% of the GDP to 7% of the GDP during this period.
As India is embarking on the journey, it will have three pronged changes in the consumption
Economic transformation
Social transformation
Digital transformation
Economic transformation:
Changing shapes of these triangles (below) tells you the story of economic transformation. How every decade, lower income households are migrating upwards. As this migration accelerates with economic growth, it will accelerate consumption, and each class will consume More, New and Better.
Source: WEF, PRICE projections based on ICE 360 surveys (2014, 2016, 2018), Bain, Future of consumption in Fast-Growth Consumer Market: INDIA, F-Forecast
One of the obvious trends is Premiumization is - If you compare the store placement of Vijay Sales 20 years ago and now, you will get glimpse of what’s likely to happen in future. In the last 3 years, there has been considerable growth in the sale of premium vehicles. SUV sales have grown at 2.5x whereas hatchbacks and sedans have declined. Every second car sold is an SUV. As the per capita increases, people want better quality and branded products which drives the higher growth in premium products. This can be witnessed by the growth in luxury watch imports from Switzerland which have increased by 45% over the last 2-3 yrs. Also, we have seen the highest RAC sales at 4 million units and most of them came from first-time buyers who have upgraded from fans. Coming to alco-bevs, Prestige and Above category for United Spirits has seen a CAGR growth of 12% over the last 4 years whereas the popular category has declined by 20%. With higher disposable income people prefer to drink better than drink more.
Social transformation
This another important transformation is underway to influence India’s consumption. Nuclear family, working women and Rapid urbanization are three major social transformation happening in India. India’s focus on Women led development is leading to a greater number of working women. Women participation in labor force has increased from 23.3% in 2018 to 37% in 2023. Along with this economic migration, another migration is inevitable is urbanization. More than 60% of India will reside in Urban centers by 2047 from current 36%. As a result, India is rapidly moving from joint family system to nuclear family which creates whole set of new consumption patterns.
Digital Transformation
Whole world is witnessing rapid digital transformation, but India is leapfrogging this at a very different pace. Internet penetration has increased the addressable market multifold and tier II, III and IV cities have now become new hotspot of consumption. India has more than 820 million active internet users at present. Over half of them — 442 million — now come from rural parts of the country. With the rapid internet penetration and e-commerce, a consumers living in Jhumry Taliaya have access to the same fashion and products as someone in Mumbai. Earlier new trends and fashion used to take years to reach small towns, now it is at the same time, which has transformed the consumption landscape in a significant way. As a result, trends and cycles are shorter and the need for adaptability is higher than even before.
This technological transformation has also created opportunities for start-up and new companies who can now capture/address these trends in agile way and at the same time disrupt companies with legacy mindset. Brands building has taken on a whole new dimension. The consumer is experimental and happy to try new products and brands.
We must keep in mind; India’s consumption is significantly underpenetrated. The chart below gives a glimpse of what’s in store. We have a long way to go on this ladder.
Source: Carnelian Research, PRICE, MoSPI, National Accounts, Juniper DRHP
Now let’s see what major things are to watch out for.
The key beneficiaries of these can be seen in the following segments of consumption –
Consumer Durables – Household penetration of consumer durables in India remains much lower than that of many developed and developing nations. Only 17% of households in India own a room air conditioner (RAC), compared with above 90% in China, Japan and the US. For Washing machine penetration in India is 21%, as against the global average of more than 50%. Similarly, for refrigerators penetration in India is just 35% compared to 90% plus in China.
China’s discretionary spending saw accelerated growth. RAC sales grew at a CAGR of 15.5% from 12 million units to approx. 90 million units. Washing machines sales grew 2x from ~20 million units to 40 million units. When apple entered China in 2008, post that they sold 58 million units in 2015, ~25% of global sales in a span of just 7 years.
Similarly, the USA experienced 3.2x growth in RAC sales from 1980 to 2000 when its per capita crossed USD 2,500. Washing machine sales grew by 2x.
Country wise product penetration
Source: - CRISIL Research
Retail – Retail is the third largest sector in the Indian economy, with more than 12% contribution to GDP growing at CAGR of 13% +. With rising per capita income, one sector which benefits the most is retail.
Source: News articles, Trading Economics
A retail boom was witnessed in USA between 1980-2000 when Walmart expanded from 125 stores to a whopping 3,456 stores, growth of 28x. RT-mart in Taiwan grew 10x during this period and their most popular retail clothing store Hang Ten expanded from 10 stores to over 150 stores. The clothing landscape evolved significantly in Indonesia as well driven by the growth of both international fast fashion brands and local designers. H&M, Zara, Uniqlo all increased their store count by 9-10x and the local designers like The Executive, Cotton Ink, HijUp grew 3-5x during this time. 7-Eleven stores expanded aggressively by 5x in Taiwan from 100 stores to 500 in just a decade.
Travel & Tourism (Experiences) : Travel, tourism and hospitality get disproportionately benefitted by rising per capita income. People upgrade their frequency and quality of travel spends. India is seeing initial signs of creation of its travel eco-system. It doubled its number of airports from 74 to 148 in the last decade and aims to add another 71 newer airports in just the next 5 years. Domestic air passengers in India are expected to surge to 300 million annually in 2030 from 153 million currently.
India has only 0.4 hotel rooms per million population as compared to 9 for USA and 14.3 for China.
QSR – As more and more youngsters are joining the workforce and with higher disposable income, eating out and wanting to taste different cuisines is gaining prevalence. Indians are eating out approximately 6 times a month compared to USA’s 4-5 times a week and multiple times a week for China. Subway in USA grew 70x from 200 outlets to over 14000 in just 20 years and Starbucks which was a major success story grew 318x in just 13 years.
Number of Starbucks increased by 19x, and number of McDonald’s have increased by 7x during this period (2006-15) in China when they saw their per capita income go beyond USD 2,500.
McDonald's entered Taiwan in 1984 with 1 store and expanded to 230 stores in just 15 yrs a whopping 44% CAGR growth. A similar pattern was observed in Indonesia where McDonald’s expanded 5x in just 10 years to 500 stores and Starbucks grew at a staggering 30% CAGR from 2008 to 2018.
Source: News articles, Trading Economics
Healthcare – India’s spend on healthcare at 3.5% of GDP is amongst the lowest in the world and out of the pocket spend at ~60% is amongst the highest in the world as government spend just 1.2% of the GDP. One of the reasons for high out of the pocket spend is low penetration of healthcare insurance in India. As per the national health policy, public investment in health is envisioned at 2.5% of the GDP. There is a very strong correlation between Per capita income, average age of the nation, insurance penetration and spending on healthcare. US spends 17% of GDP on healthcare, which is at one extreme however, Europe spends 10-12% of the GDP on the healthcare and China spends 7% of GDP.
Luxury- As India creates huge wealth, number of billionaires are going up significantly, with billionaire count up 3x in last 10 yrs to 334. This new class will have a whole new paradigm to consumption. In India, luxury is hardly any segment today, but it will be the fastest growing. India is an aspirational society and like most countries, luxury will take off. Luxury car sales have grown at a CAGR of 30% in the last three years, luxury watch imports from Switzerland have increased by 45%, and the share of luxury home sales has tripled in the last five years.
Our conviction is as India gets rich, “each person” and “each family” will consume MORE, NEW and BETTER. This transformative phase will create opportunities which are Bigger, Newer and Better. While many existing companies will become 10-50x in this period, new business models will come which didn’t exist before, new products categories will come which didn’t exist before, new brands will come which didn’t exist before and many more. One will have to be open to evaluate opportunities from this lens.
We will be like always keep looking for interesting opportunities for our investors which fits in with our framework of superior risk reward.
Comments