Those who enjoy marketing more than any other management discipline will find 2007 an exciting year. According to a recent headline in one of the leading business dailies, major FMCG companies are trying to assert their pricing power and raising prices of various products straddling many categories by 5 per cent to 20 per cent.
The official justification for doing so is that inflation has led to increases in the cost of various inputs though the reality could be a belief that with the upsurge in incomes, consumer demand is higher and that could support these price hikes.
As a marketer, I would not be so bullish about the price insensitivity of the average Indian consumer. Let me start by putting in perspective the environment in which the Indian consumer product businesses are currently operating and the impending impact of changes in this environment. These changes can be broadly segmented in four dimensions.
The first dimension is to do with changing demographics wherein the fact that the majority of India is below 25 years old implies that most of the current and near-future new customers are going to be first-time consumers for most goods and services.
There would be no "history" or "legacy" of a similar consumption in their households since their parents may not have ever been consumers of such products or services. This holds true for goods such as automobiles and telecommunication products and services such as beauty salons or cafes. Aspirations and desires of such new consumers are evolving and will undergo frequent changes in the coming years.
The second dimension is to do with the economic environment in which many of these new consumers are living now or will be living shortly and changes in their lifestyle. With the emergence of many new, largely service industry-oriented employment opportunities in urban India, and with rapid increase in such opportunities as new service sectors such as retail, the typical middle-class India will move from single-income household to multi-income household.
This will certainly imply a marked increase in disposable income per household but at the same time, will also bring in a significant change in the lifestyles of such households. Many more categories of consumption shall enter into such consumers' calculations, and, as a result, there will be a tussle across categories for the share of such households' spending.
Aspirational / lifestyle-based consumption needs are likely to come up strong relative to more basic "survival" needs and hence, I would be very surprised if consumers will get any joy in spending more for "upgraded" variants of shampoo, soap, detergents, biscuits, honey, atta, pickles, ketchup, and toothpaste when they concurrently desire to upgrade their cell phones more frequently, plan more vacations, eat out more frequently, and entertain at home more often, implying more expenditure on alcoholic beverages and snack foods, just to list a few lifestyle-oriented expenditure categories.
The third dimension is that everyone is very bullish on India and hence almost all producers and marketers of consumer goods and services are investing heavily in increasing capacity. The impact may yet not be visible as the current capacity is chased by rising demand. However, this may not be the situation even 12 months later.
The fourth dimension is perhaps the most interesting one, and probably the most overlooked one by many branded goods marketers. Modern retail trade is now picking up rapid momentum.
In the last 12 months alone, as per Technopak estimates, additional "capacity" in additional retail shelf space worth at least Rs 15,000 crore (Rs 150 billion) in annualised revenue terms has been created.
By the end of 2007, another Rs 30,000-35,000 crore (Rs 300-350 billion) worth of (annualised) shelf space would have been created. Interestingly, this capacity will be created not only by current players such as the Future Group, Shoppers Stop, Subhiksha, Trinethra, and others, but also by newer and new players such as Reliance, the AV Birla Group, Wal-Mart, ITC, Godrej and others.
Most of these retail players yet do not have the critical mass to introduce their own brands/labels and hence are stocking up or will be stocking up tens of millions of running feet of new shelf space with branded merchandise from current players.
Hence, it is my belief that the increase in demand being seen by FMCG and other consumer goods companies could be largely accounted for by this filling up of the newly laid modern trade pipeline and not largely by increased consumption.
While this pipeline's spread will dramatically increase in the coming years, beyond 2007 the stocking up could be through retailers' own private brands, which will then start putting tremendous pressure on the national and regional branded goods marketers.
There are no easy generic answers to this challenge for marketers other than my unsolicited advice that most of these companies should look at 2008 and beyond, and then go back to introspecting on the very basics of their business.
Till they reinvent their USP and further hone their marketing strategies, they should not risk annoying their consumers and play into the hands of the emerging large modern retailers by creating more price-performance gaps between themselves and the retailers.'