Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, head of Asian Equity Strategy, coming to you this week from Bangalore in India.
Speaker: My special guest is fellow equity strategist Amit Satchdeva in Mumbai, and today's podcast is all about the Indian consumer.
Speaker: We're going to look at how Indians are spending their money with a focus on key sectors of the economy, including the dot coms, delivery services, and of course, the auto market.
Speaker: From the land of the original Banyan tree, after which this very podcast is named, let's get the conversation started.
Speaker: Let's start with a few customary facts and figures and set the context for today's discussion.
Speaker: According to the United Nations, India has or is about to overtake mainland China as the most populous nation on the planet.
Speaker: One area that's growing particularly fast is the Indian middle class, which is expected to get 70% bigger between 2021 and 2030.
Speaker: That in turn should help lift spending, general spending in India by more than 7% every year on a compound basis throughout the rest of this decade.
Speaker: Time to bring in our resident expert, Amit Sajdeva.
Speaker: He's our Indian consumer and retail analyst, also my fellow strategist, and I'd like to welcome him to the podcast.
Speaker: Thank you, Harold.
Speaker: Thank you for having me here.
Speaker: Good.
Speaker: So, Amit, let's just start in general terms.
Speaker: What is the Indian consumer doing these days?
Speaker: So, Harold, India consumer market headline growths have been very impressive last year.
Speaker: For example, apparel may have grown 40 to 50 percent and consumer staples may have grown between 10 and 15 percent.
Speaker: But essentially, this growth has been led by price increases and not the volume increases.
Speaker: So in some sense, the growth has been essentially inflation led.
Speaker: And that has resulted in rural demand being particularly weak.
Speaker: lower income consumer has been hit hard and is basically consuming less, while the top end consumer, high income consumer, I think unimpacted and has done pretty well.
Speaker: You know, if you look at hotels booking or travel, this seems to be doing extremely well.
Speaker: So it's a case of quite divergent consumer trends, if I may say.
Speaker: So the top end is still traveling around, but the low end, yeah, they're really struggling.
Speaker: You always talk about the diversity, not just low and high end, but also the geographical diversity of the Indian consumer, Amit.
Speaker: Can you give me an example of that?
Speaker: So Harold, two-thirds of the population live in rural India and one-third in urban India.
Speaker: Now, rural, we have 600,000 villages, some as low as 40 people living in the village.
Speaker: So it's very difficult to reach.
Speaker: So it is a quite complex market from a consumer income cohort to a geographical cohort as well.
Speaker: Good.
Speaker: Can you explain to me, Amit, a little bit how that works in practice for a company?
Speaker: So, for example, in North India, South India, the consumer will be different from, say, somebody in Mumbai.
Speaker: Can you give me an example of this?
Speaker: So I think the way to think about this is that larger cities such as Mumbai would have very high per capita income.
Speaker: So consumer is very different.
Speaker: South India is very developed.
Speaker: Well, north and if you go up way up north, north is behind south, if I may say, in consumer evolution, for example.
Speaker: So certain companies, so let's say you're a paint company, the product you sell across different parts of India would be extremely different.
Speaker: Is that correct?
Speaker: That would be very different.
Speaker: The mix will be very different.
Speaker: If you go to a more economically challenged area, lower end of water-based paints would be the main product that gets sold.
Speaker: And if you are in cities such as Mumbai or Delhi, it would be emulsions, which is water-based paints, which has a premium finish that goes on the wall.
Speaker: Okay, you also mentioned that two thirds of all consumers are in rural areas.
Speaker: So outside of the cities, it must be very difficult to reach them.
Speaker: I mean, I came from the airport here in Bangalore last night, took me an hour to get into the city, was actually relatively okay, but still getting around is not always easy.
Speaker: Distribution is really difficult, right?
Speaker: And some companies have fairly unique solutions to distribute their products across India.
Speaker: Is that correct?
Speaker: That's very correct, Harold.
Speaker: And it's a very sharp observation you make because India not only is diverse, but also economically difficult to serve those consumers.
Speaker: So, for example, many large consumer companies have innovated how to distribute their products to such challenging circumstances or areas.
Speaker: They have assembled an army of
Speaker: women entrepreneurs who are rural women and employed them as basically their own local distributors, small, very, very small scale distributors who buy their product and sell to their fellow village people, riding on a bicycle and carrying a bag of goods with them.
Speaker: So that's the way many companies are innovating to reach the marginal consumer.
Speaker: The cost to serve is very high, but they still can't be ignored because they are future consumer.
Speaker: And that must be sort of tapped into.
Speaker: Okay, so but this is a kind of a traditional way of looking at it.
Speaker: I understand that some e-commerce platforms are really growing fast in India.
Speaker: They must be able to distribute, right?
Speaker: So can you tell us a little bit what happens with the dot-com companies in India?
Speaker: So e-commerce is a large opportunity, Harold.
Speaker: We would be close to $70 billion e-commerce opportunity.
Speaker: And hence, e-commerce is one of the emerging channels to distribute products.
Speaker: Case in point is beauty and personal care.
Speaker: Beauty channel in India is not developed at all.
Speaker: And hence, the e-commerce growth in beauty and personal care has been quite rapid.
Speaker: And it was, I guess, too expensive to put it literally, as you mentioned earlier, on somebody's bike and get him there because the cost of doing that was maybe too high for that particular product category.
Speaker: But if you then do it slightly differently, distribution, and you have higher price points, then the cost of distribution is something you can accept.
Speaker: And therefore, it's easy to distribute this product.
Speaker: Is that fair to say, Amit?
Speaker: Yeah, it actually aggregates the demand.
Speaker: Even if there are 10 very premium consumers sitting in a small town,
Speaker: You could aggregate demand of 10 towns nearby and then serve those 100 consumers.
Speaker: For 10 consumers, it's very difficult to open a shop there.
Speaker: But e-commerce can serve that aggregate demand and tap those consumers and serve their needs.
Speaker: And hence, some categories are finding it uniquely beneficial to develop those categories on e-commerce platforms.
Speaker: Well, thanks, Amit.
Speaker: We're taking a very quick break here.
Speaker: And when we come back, we're going to talk about one particular consumer market, and that's the auto industry and electric vehicles.
Speaker: Amit, I arrived in Bangalore, I am driving around the city, I do see some electric vehicles, but to be honest, not so many.
Speaker: I've seen a few Korean and Chinese and Japanese brands, but I don't see too many electric vehicles.
Speaker: In China, actually, you see quite a few of them.
Speaker: Why is that the case?
Speaker: Why is the adoption rate of electric vehicles so low in India?
Speaker: I think that's a great question.
Speaker: The key reason is I think the affordability and the cost of electric vehicles is very high relative to normal traditional fossil fuel-based internal combustion engine.
Speaker: And that needs to be compensated by distance traveled.
Speaker: And still, economic case for a very affordable EV is less.
Speaker: And hence, we see less adoption in the passenger vehicle, which is less than 1%.
Speaker: Have there been subsidies divided?
Speaker: Has the government, for example, provided some subsidies?
Speaker: The government provides a subsidy, but still it's not enough to make it very compelling case to own EVs.
Speaker: And that is perhaps held back the growth of passenger vehicles.
Speaker: but at the same time if you see two wheelers they seem to have taken off a little bit more because it's sort of more affordable than the passenger vehicle so that's the kind of dichotomy we see uh what's the experience in china harold if i may ask you well in china i think the subsidies have been substantial and the government has made a lot of investments in making sure that there is quite a few charging stations across the nation
Speaker: So in China, if you buy an EV, you're not so much worried that you think I can't charge it somewhere along the road.
Speaker: And therefore, my radius, which I can reach with that particular car is quite small.
Speaker: That's not the case in China.
Speaker: So subsidies have helped demand, but also they've put the infrastructure in place.
Speaker: And I guess that's the difference.
Speaker: More broadly speaking, Amit, while I'm just listening to you, what I think is a key difference here comes between India and China is the kind of development stages that India and China went through.
Speaker: China was really a country that had a lot of manufacturing bases built up in the early 2000s and people flocked to the factories.
Speaker: got a job there and that's where consumer demand started to develop.
Speaker: So demand was fairly concentrated in cities such as Beijing, Shanghai, Ningbo, Shenzhen, etc.
Speaker: In India, that's not the case.
Speaker: India never had that boost and this boom in manufacturing.
Speaker: So the consumer remained much more rural and therefore getting to those consumers has always been extremely difficult.
Speaker: I mean, the roads are not always very helpful and as you said,
Speaker: that it's also very costly to get to those particular consumers.
Speaker: Sometimes you have to literally ask people to put them on a bicycle and get to the villages.
Speaker: That seems to be changing now with the internet names, but it makes the Indian consumer market completely different from the Chinese.
Speaker: And you can see this in the companies.
Speaker: The average Chinese company is dealing with a lot of competition in India.
Speaker: That's much less so.
Speaker: And Indian consumer companies belong to the most profitable companies on the planet.
Speaker: Yeah, in some sense, there's an opportunity and challenges too, and which results in competitive advantages, which have existed for many years for some of the companies which have larger scale, and they can profit from their large positions.
Speaker: Exactly.
Speaker: The ones that have figured out how to distribute are extremely profitable.
Speaker: And that's the opportunity that they've been able to grasp, you could say.
Speaker: So, Amit, just to round it off, what are some of the very latest trends in the Indian consumer space?
Speaker: So Harold, one thing that I've observed, which is very, very relevant, is consumer, although is very value seeking, or at least look for discounts and fair pricing, but also still is very demanding.
Speaker: Case in point, very low priced fashionable clothes are in vogue now.
Speaker: So companies that are able to provide high fashion content in apparel at very low prices
Speaker: and give them the experience of some great shopping, they are doing exceptionally well.
Speaker: So this is sort of gives you a summary of India consumer experience that demanding, value seeking and also always evolving in taste and preferences.
Speaker: Amit, that is really for the lower end, but what about the upper end of the consumer spectrum?
Speaker: Are they looking for bargains as well or is this much less so the case?
Speaker: My sense is that bargain seeking is pervasive across price points.
Speaker: You know, I would say that even premium consumers wants great value for the premium goods.
Speaker: If somebody is able to provide that, there is also a case where, you know, things can get unlocked very quickly as well.
Speaker: across the whole of the Indian consumer space.
Speaker: Thanks a lot, Amit, for that.
Speaker: It's very inspiring.
Speaker: Can I add one more small bit of tidbit here, Harold?
Speaker: Is that bargain hunting is pervasive, but what happens is when you discount too much, brands get fatigued.
Speaker: Some companies are quite wary of discounting their products because they've been labeled as probably cheaper goods.
Speaker: So some companies would do very limited discounting.
Speaker: So it's value seeking behavior, but I think different companies can resort to different way to play it.
Speaker: So just to put this all together, the Indian consumer space is just incredibly diverse and complex.
Speaker: You have rural versus urban.
Speaker: You got north versus south.
Speaker: You got high-end consumers that look for discounts, but where the brands struggle to figure out how they deal with this.
Speaker: And you have at a low end people that definitely are looking for value and companies that can capitalize on that can do extremely well.
Speaker: And then, of course, you have the issue of distribution, getting these products into the thousands and thousands of villages
Speaker: that are dotted across the landscape here in India.
Speaker: And that is an absolute big challenge.
Speaker: And the companies that are able to solve all these problems very well can be incredibly profitable enterprises.
Speaker: And some of the most profitable listed companies on the world and in the planet are Indian consumer names.
Speaker: I'd like to thank Amit for dialing in from Mumbai.
Speaker: It was a really fascinating discussion, Amit.
Speaker: Thanks for being on the Banyan Tree podcast.
Speaker: Thank you, Harold, for having me.
Speaker: It was a great pleasure.
Speaker: And that brings us to the end of this special edition of Under the Banyan Tree, recorded in Bangalore and Mumbai.
Speaker: We hope you've enjoyed learning more about spending in India as well as what's driving it.
Speaker: My regular co-host, Fred Newman, will be taking the reins on a podcast back in Hong Kong next week and will be back recording together soon.
Speaker: Take care for now and we'll talk to you next time.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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