U.S. Export to India: Consumer Culture
India is rapidly becoming a consumer on a global scale. Can its national identity survive the transition?by Richard Woodbridge
Last summer the world’s largest retailer, Walmart Stores Inc., made its grand entry into the Indian market. In a joint venture with Indian telecom giant Bharti Enterprises Ltd., Walmart opened the doors to its first Indian retail supply store in the northern state of Punjab. Although Walmart has been sourcing products from India for years, this launch reflected a growing paradigm shift within one of the world's fastest growing economies. India is becoming a global consumer.
As the economic crisis tightened its grip on many Western economies, India’s $1.2 trillion gross domestic product was growing strong at 7.9 percent in the quarter ending December 2009, and averaging approximately a 9 percent annual growth rate over the prior year. Walmart’s entry into India’s $427 billion retail market has paved the way for other retail giants including the U.K.'s Tesco, and most recently, a proposed entry from France's largest retailer, Carrefour. According to a recent Business Monitor International report, it is estimated that India’s retail sales will grow to $755 billion by 2014. Although the majority of products are currently sourced within the country, Walmart’s foreign private label suppliers are eager to gain entry into the burgeoning Indian market.
One of the most striking features of India’s incredible diversity is its stark economic disparity, which makes the country’s transition to a consumer culture extremely complex. In 2008, India was home to four of the world’s 10 richest people while over two-thirds of its population survived on less than $2 per day. As many sectors were showing signs of weakening, the fast moving consumer goods (FMCG) industry in India was experiencing nearly 15 percent growth in the financial year ending March 2009. Surprisingly, this was mostly driven by sustained economic activity in the country’s diverse, and typically poor, rural markets.
There are approximately 820 million people spread across 630,000 villages in rural India. This segment, which represents 71 percent of India’s population, is playing a key role in the country’s economic growth. Even though the majority of families in this segment live below the poverty line and more than 52 percent of their income is spent on food items, demand is higher than ever for aspirational products. The rural market is not only demanding FMCGs, it is also a large consumer of durable goods such as TVs, mobile phones and two-wheelers. Today, companies all over the world are scrambling to find innovative ways to access the purchasing power of this enormous market.
It was Hindustan Unilever Limited (HUL), formerly Hindustan Lever Limited, that made the most famous foray into India’s rural market with an innovative sales technique back in the 1980s. It recognized that although poor families desired health and beauty products, they didn’t have the steady incomes required to afford large purchases. So instead of trying to sell bulk containers of shampoos to customers, HUL introduced the small one-rupee sachet, the equivalent of approximately 2 cents U.S. This technique was wildly successful, making small, low-priced, branded personal items the norm in just about every shop in India. More recently in 2007 Dove introduced a new three-rupee shampoo sachet in India that now makes up a major portion of their hair care sales.
As rural households increasingly enter the formal economy, many families are experiencing wealth for the first time. Public-private partnerships have pushed electrification and roads into much of the interior, increasing productivity and relieving supply chain woes to potential customers and suppliers. Financial inclusion through microloans and innovative mobile banking technologies has given this sector greater access to capital. Many farmers are switching to cash crops and modern, efficient irrigation techniques, resulting in increased yields, revenues and available jobs in rural communities. All of these changes bode well for retail.
A Rocky Road
While India’s growing consumer market is enticing more foreign players, there are still harsh realities that need to be considered before multinationals take the plunge. Last fall, a government policy change left thousands of expats with business visas only two weeks to either attain a work visa or leave the country. This unexpected event caused severe disruptions to the management of many multinational corporations. Along with unforeseen policy shifts, other uncertainties such as corruption, regulatory issues and price sensitivity can be daunting for companies inexperienced with the nuances of the Indian market.
Walmart’s entry was stymied by the fact that India does not allow foreign direct investments for multi-branded retailers. The rule prohibited the retail giant from selling directly to retail customers. This was largely a move by the government to protect the millions of neighborhood and village mom-and-pop-style stores, commonly known as kirana shops. However, the regulation did allow for the creation of wholesale stores that cater to retail store owners and large institutions. There is now increasing pressure on lawmakers to ease restrictions for international retailers as was done in the telecommunications and other industries.
In response to increased demand for high-quality, low-cost items and growing competition, neighborhood kirana shops are changing the way they do business as well. In some areas, small stores are teaming up to make bulk purchases and passing the savings to their customers. Many stores go one step further, providing credit for purchases and even offering neighborhood delivery.
Photo by Richard Woodbridge
For all the challenges the Indian market presents, there also exist opportunities, and indeed entrepreneurship is gaining momentum across India. Visit any major Indian bookstore and you will see a large section devoted solely to business management and entrepreneurship. Even in the poor rural communities, microloans and self-help groups are opening the doors to fruitful new ventures.
“Entrepreneurship is happening at the grassroots level in India with micro, small and medium enterprises,” said Dr. Jayshree Suresh, dean of the Sri Ramaswamy Memorial (SRM) University School of Management, one of the largest private management schools in India, and author of the book “Entrepreneurial Development.” “Technology and venture capital are allowing for a whole new group of entrepreneurs.”
For a long time, there was a lack of entrepreneurial encouragement in India. Due to cultural, social and economic pressures, it was hard for many to justify giving up a stable salary and job to start a new venture. Although societal pressures are relaxing, failure is still a major fear that is hindering India's entrepreneurial potential. Once you have failed, you are branded as a failure. “It is very hard to get back into the corporate sector after a failure that stigma is still there,” said Suresh. However, this too will likely change over time as more MBAs enter the market and the rewards associated with entrepreneurship are recognized. “For new Indian business students, entrepreneurship is becoming a career option.” And while there is no better business bureau, there are many support organizations, such as the Confederation of Indian Industry that offer resources for individuals interested in launching new enterprises.
According to a report by the McKinsey Global Institute, Indian incomes are expected to triple by 2025, growing the country’s middle class population to 583 million people, nearly 10 times its current size. As the rural market opens up and government pressure is kept on the economy to maintain an 8 to 9 percent growth rate, needs for new products and services are surfacing almost daily. For example, India currently has a massive energy deficit of 13 percent (16 percent during peak hours). This will grow as demand on energy increases. Although new coal burning plants are being installed, cities and towns still suffer from inconsistent and undependable electricity supplies. New energy-efficient products and decentralized power generation projects can help rural and urban regions meet this demand and increase productivity.
Changes in lifestyles are fueling a growing need for new medicines and diagnostic technology. There are over 50 million people in India living with diabetes, making India home to the world's largest diabetic population. Current estimates show nearly 11 percent of the urban population and 3 percent of the rural population have this disease. These rates are expected to grow rapidly as diagnosis improves, diets change and more people accept a sedentary lifestyle.
Even changes in India’s demographics present new opportunities. Currently, India’s rapid urbanization is creating a large demand for safe, reliable materials for new building construction. Just as India was able to make quantum leaps in its telecommunications industry, virtually bypassing the land line in exchange for the mobile phone, it is poised to cut to the forefront of the clean technology and green building consumer space.
The rural market presents several opportunities not only in energy generation, but also improved water management and irrigation technology, agricultural processing and cold storage warehousing, as well as fertilizers and farming equipment. As this population segment becomes both a strong consumer and producer, needs arise for improved supply chain logistics to get products and services to and from India's interior. Innovative insurance, retail, medical and financial services that can cater to the rural sector have a chance of being lucrative.
With the allure of over a billion pocketbooks, many companies are ready to charge right in. However, in order to be successful in this market, multinationals must proceed with open eyes and a degree of flexibility, regardless of the product or service they plan to offer. “Foreign companies need to modify their business models to cater to the Indian conditions,” said Suresh. “There are slightly different ways of doing business here.” For example, Levi's stores now offer installment payments for their clothing, allowing the customer to walk away with a new pair of jeans and pay for them in four parts over time. A trust of the consumer and a thorough understanding of India’s vibrant cultural, economic and political landscape are imperative before attempting to tap into this growing market.
As the economy grows and there is more disposable income, India is becoming a consumer on an international scale. Although this is a sign of progress for many, debates are currently raging about whether India's approach to consumerism is good for the country in the long run. In a land where millions of families are caught up in a rapid transition between agrarian and post-industrial economies, there is a real fear that India is losing its identity. While this transition presents great opportunities for entrepreneurs and foreign multinationals, India will need to do some soul searching to decide whether it wants to become a consumer culture. Is India willing to follow the West, or will it create a new path that is uniquely its own? Only time will tell…
Richard Woodbridge (’09) is a product development professional with a background in anthropology and ten years of experience in market research and design consulting. He currently researches and designs rural energy solutions at the Centre for Development Finance affiliated with the Institute for Financial Management and Research in Chennai, India.