Exuberance and Despair

Devangshu Dutta

February 13, 2009

In the last few months, I’ve interacted with retailers and their suppliers from a number of countries in North America, Europe and Asia and, except for a handful, the conversations have not been happy.

In November-December companies in France, Belgium, Germany and the United Kingdom were dealing with a season where there was as much red on the P&L statements as in the Christmas shop windows. In January 2009, the National Retail Federation’s annual convention in New York had participation that was somewhat thinner than in past years, but the gloom in the atmosphere was thick enough to slow everyone down.

On the other side, the factory of the world, China, had been battered by a Year of the Rat that brought increasing costs, erratic power supplies, slowdown in orders, safety concerns and product recalls. All of this culminated in reports of factory closures and migrant workers at railway stations on their way home for the Chinese New Year holiday carrying not just clothing, but all their possessions including fridges and TVs. The resultant unemployment figures expected currently range from 20 million to 40 million people.

The Indian retail sector, of course, has had its share of pain. In an idle conversation on a sunny December afternoon, a real estate broker in Ludhiana had a pithy description for one of the retail chains: “Unhone apne haath khade kar diye hain. Bakee logon ne abhi tak toh haath neeche rakhe huey hain – unke bhi upar ho jayenge.” (“They have thrown their hands up in despair. The rest still have their “hands down” – but they’ll also give up eventually.”)

On the one hand you have the gloom-seekers. In the eyes of some of these people, the retail boom is over. In the eyes of others, the retail boom was all hype anyway, a big bubble of artificial expectations.

On the other hand, you have other people asking some uncomfortable questions: here’s a country that apparently has the largest population of under-25s, where millions of new jobs have been created and incomes have been growing. How can retail businesses be showing a decline in their top-lines?

I don’t think anyone has all the answers, but I can offer at least one speculation, borrowing from the title of a book that came out some years ago, named “Irrational Exuberance”. Robert Shiller’s first edition was related to the dot-com stock bubble, and his 2005 edition added an analysis on housing bubble that was developing at the time. He had, in turn, borrowed the term from the US Federal Reserve chairman Alan Greenspan who in December 1996 had said in a speech: “…how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?”

We now seem to be in such an unexpected (but was it really unexpected?) and prolonged contraction. Of course, consumers are feeling more cautious about spending, even if their actual income has not been affected (just as it wasn’t affected when they were feeling suddenly wealthy 12-18 months ago). Obviously, stores that should not have been opened will now get closed, or excessively large stores will be reduced in size. Companies that are over-stretched may collapse completely.

But I would label the mood prevailing now “irrational despair” as far as a consumer market such as India is concerned. From a position of over-optimism, the pendulum seems to be swinging to the other extreme of utmost misery, dejection and complete pessimism, and I think that is a swing too far.

I think it’s worth reminding ourselves of the factors that make India a market for sustained consumer growth. The country looks likely to have a large under-25 profile well into the next several decades. These young people will grow older and get into jobs. They will get married and therefore expand the number of consuming households. If the policy-makers don’t really mess up, real incomes should go up. Infrastructure projects should largely remain on track, regardless of the political party or parties in power, facilitating industry, trade and wealth distribution.

So the time is right for business plans that have sound fundamental assumptions – or as the cement ad says: “andar sey solid” (solid from within).

I’d like to repeat issues that I have highlighted earlier as top priority for retailers and consumer products companies in India. These are as follows:

  1. Realistic demand estimation: Let’s work with realistic sales expectations, and not expect all consumption to multiply like cellphones have in the last few years.
  2. Productivity Analysis: As a retailer (especially in food and grocery), margins are thin. Except for marquee locations there is no excuse for continuous losses. Store productivity depends on merchandise availability, staff capabilities and store operations, customer traffic and a host of other factors, and you need to know what’s working and what isn’t.
  3. Moderated growth: Many retailers in India have had tremendous growth in scale without growth in sophistication in processes or people. Some have been driven by motivation to capture market share, others driven by their investors who want an exit, and a few might have been driven by ego. I’m not asking anyone to grow slower that they want to, or slower than they should. However, I would say: do look at Intel. A manufacturing company that makes its own products obsolete in an industry where rapid change has been the norm for the last 40 years. Intel alternates changes in its production and supply chain processes, and products – it doesn’t change everything at once.
  4. People: A leader of the industry pointed out a few months ago that there is no shortage of people in India. But the race to the top of the heap (or as it seems now, the bottom of the loss-making pile) has created artificial scarcity of talent. One benefit of the downturn is that artificially inflated compensations for people jumping on the “retail boom bandwagon” will disappear (at least for now). If we can use the experience of people who have been in modern retail trade in India for decades, and train others who are fresh but committed, it will provide a more solid and lasting impact for businesses.

A number of companies worldwide that we know as market leaders and businesses to be emulated found their feet in the depths of the Great Depression of the 1930s. That should give some hope to entrepreneurs and professionals.

However, does that mean that only bad companies or unprofessional managements will fail in the current downturn? Certainly not. Does it also mean that all good companies or competent entrepreneurs will succeed? Again, the answer is, no.

Some bad companies will manage to ride through this trough, while some really deserving people will run out of cash, ideas and opportunities. Life and “natural selection” processes are not fair.

But, by and large, if we can get our heads down and focus on getting the right people together, making money to get through and having something left over to invest in the future of the business, we would have more chances of succeeding than by over-stretching, or by swinging to the other extreme and being totally defensive.

I won’t even attempt to predict how long the current downturn will last. The Great Depression lasted a whole decade, was “walled” by the Second World War, and the first blooms of real recovery only appeared in the early-1950s, or about twenty years from the first downturn. Other recessions have been shorter. In 2000, after the dot-com bust car bumper stickers in the US quoted a political satirist, saying, “I want to be irrationally exuberant again.” Within a few short years, many people were showing those very signs.

We can be pretty sure that such a time will come again. But I’m also quite sure that durable companies are unlikely to be built on bursts of such exuberance.

Shopping Centres – Boon or Bane

Devangshu Dutta

March 13, 2008

Many people I know treat shopping centres or malls as a new phenomenon, a progressive development of recent times or a modern blot on the traditional cityscape (depending on your point of view).

However, Grand Bazaar (Istanbul, Turkey) is the earliest known mall, with the original structures built in 1464, with additions and embellishments later.

In India, if one were to include open arcades, Chandni Chowk in Delhi is reported to have opened around 1650, with its speciality shopping streets. (Of course, more traditional bazaars have been around many thousands of years around the world.)

But even if one were to get more “traditional” about the definition of a mall, possibly India’s first mall was founded in the hottest city in the country then, Kolkata (New Market) in 1874.

In more recent history, Delhi’s municipal pride, the air-conditioned underground Palika Bazar was a novelty in the mid-1980s, while Bangalore’s Brigade Road saw several early pioneers with their shopping arcades in the late 1980s.

Then came the mall-mania beginning with Ansal Plaza in Delhi and Crossroads in Mumbai. Everyone started looking at malls as the new goldmine, being pushed ahead by a “retail boom”.

The early stage of any such gold rush usually has several experiments missing their mark, which is what has happened with the hundreds of mall-experiments that have been launched in the last 7-8 years.

Some of the significant and common issues are starting to be addressed, but many others remain.

Catchment-Based Planning is Needed

The top-most issue in my mind is “oversupply”. While this may sound absurd to many people, given the low figures quoted for modern retail, I am referring to the over-concentration of malls in a small geography. If 8-10 malls open 4-5 million sq. ft. of shopping in a catchment that can only support 1 million sq. ft., everyone knows that some of the malls will fail. But everyone also believes that their mall will succeed (otherwise, they would obviously not have invested in the mall).

What happens to the malls that fail? Depending on the design of the building, many of them can be repurposed into office space – another area where a lot of investment is still needed. So in the end, actually, most people win, one way or the other. Yet, there will be some losers. Does anyone “plan” on being one?

The second key issue in my mind has been that mall developers have been thinking as “property developers” rather than retail space managers. The successful shopping centre operators worldwide (now also in India), are actually as concerned about what and who is occupying that space as a retailer would be. They are concerned about the composition of the catchment, the shopping patterns, the volume of sales, the shopping experience. Therefore, the tenant mixes as well as adjacencies are factored into the earliest stages of planning the shopping centres.

In fact, if I were to identify the most critical operational problem for many of the malls, it is the lack of relevance to catchment and, therefore, the low conversion of footfall into sales for the tenants other than the food-courts. Customer flow planning within the mall is another factor that can make a tremendous impact on the success and failure of the tenant stores.

Once you start looking at these factors during the planning of a mall, another obvious aspect that jumps out is “differentiation”. Currently, there is little to choose from between malls (other than possibly the anchor store). However, with more clarity in terms of the target audience, the potential strategies for differentiation also become clearer. The visitors also become segmented accordingly, and there is a natural benefit to the tenants occupying the mall.

If, as a mall operator, you want to be in business for long, and also develop other properties in the future, the success of your tenants is probably the most critical driving factor for your business.

Integration into the Urbanscape

When we gauge malls from the perspective of integrating within the urban landscape, there are obviously some glaring errors being made. Instead of aesthetic design that reflects the heritage and culture of the location and its surroundings, or some other inspirational source for the architect, most malls that have come up are concrete and glass boxes.

Beyond the looks, some of the malls are a victim of their own success. They attract more crowds during the peak than they have planned for. Not only does the parking prove to be inadequate, there is no holding capacity for cars entering or exiting the mall. The result is a traffic nightmare – not just for general public, but even for the visitors to the mall. Someone who has spent 45 minutes stuck in a jam waiting to get into the parking of a mall will certainly not be in the best frame of mind to buy merchandise at the stores occupying the mall.

Some of the problems lie outside the mall-developer’s control – for instance land costs are a major driver of the cost of the project (and, therefore, the lease costs to the tenants), and land is a commodity which is independent. Real estate is available within the cities as brown-field sites (former industrial locations), but the regulations are convoluted and the strings are in the hands of too many different departments of the government (city, state and central). This needs joint creative thinking on the part of developers, the government and the public, if our cities are to develop in a more sane fashion than they have in the past.

Similarly, land deals are still not clean enough for foreign investors to be comfortable participating in many developments. This obviously is holding back a tremendous source of capital and domain expertise that could contribute to the growth of this sector.

Many other operational issues exist – manpower, systems, health & safety – some of them can be managed or controlled by the mall developers, and it is a question of time (and of their gaining experience). Other issues are more in the domain of the government, and need a visionary push to make “urban renewal” a true mission.

New Life for the Cities

In my opinion, one of the most interesting areas which would be in the joint interest of almost all parties (that I can think of) is the possibility of revitalizing the high streets and community markets, and reinventing them as the true centres of shopping.

Many of our markets are rotting (a strong word, but let me say it anyway). The individual stores are owned by individual owners who are not all equally capable of maintaining the same look and feel throughout. The infrastructure in and around the markets are owned or managed by several different agencies. To make matters worse, there is often no cohesiveness and no synergy in the interests of most of the members of the market association. None of these individually have the power or the mandate to recreate the shopping centre. But what if they could get together and take the help of a re-developer?

If an example is needed, New Delhi’s Connaught Place provides the example of one stage of redevelopment. Connaught Place had lost its pre-eminent position as a shopping centre, due to the spread of Delhi’s population and the new local markets that had come up. Further disruption was caused by the construction by Delhi Metro. But DMRC has reconstructed an “improved” centre, and the Metro connectivity has made the customers come back into CP, as it is affectionately known in Delhi.

There are clearly many such opportunities around India’s cities. These need to be looked at as a commercial opportunity for all concerned (revenue for the redeveloper, better sales for the store owners / tenants, more tax revenue for the government from additional sales and consumption). But it is also a broader social opportunity to breathe a new life into our cities, and to make them proud beacons of a growing India.

It would be a mission that would truly prove the worth of shopping centre developers, urban planners, regulators and the retailers themselves.
Any takers?

Brand Immortality and Reincarnation

Devangshu Dutta

January 18, 2008

The entertainment business suggests that nostalgia is a very powerful driver of profit.

It is quite clear that retro is “in”. The movie business worldwide is full of sequels, prequels, re-releases and remakes. The music business is ringing up the cash registers with remixes and jukebox compilations.  Star Wars and Sholay still have a fan following. ABBA has leaped across three decades, Hindi film songs from 30-60 years ago have been given a skin-uplift by American hip-hop artists, while Pink Floyd is hot with Indian teens along with Akon and Rihanna.

As copyright restrictions are removed from the works of authors long-gone, the market gets flooded with several reprints of their most popular writings. Of course, we know that classic literature survives not just a few years but even thousands of years. Examples include the still widely-read 2,500-year-old Indian epic Ramayana by Valmiki, the Greek philosophers’ works that continue to be popular after two millennia and the Norse legends that have been told and re-told for over a thousand years.  Spiritual and religious leaders’ writings are also recycled into the guaranteed market of their followers and possible converts for a long time after their passing away.

On the other hand, the basic premise of today’s fashion and lifestyle businesses is that silhouettes, colours and design-cues will become (or be made) obsolete within a few weeks or a few months, and will be replaced with new ones.   This principle is true not just of clothing and footwear, but is applied to home furnishings, furniture, white goods, electronics, mobile phones and even cars.  In fact, the fashion business (as it exists) would find it impossible to survive if customers around the world chose only classics which could be used for as long as the product lasted in usable form.

What Fashionability Means for Brands

Other than individual styles or products falling out of favour, as fashions move and as the market changes, it is evident that some brands also become less acceptable, are seen as “outdated” and may also die out as they lose their customer base.

Of course, that some brands become classics is quite apparent, especially in the luxury segment where brands such as Bulgari have survived several generations of consumers, and continue to thrive.

However, the past is of relevance to the fashion sector because, other than planned or forced obsolescence, the fashion business has also long worked on another principle – that trends are cyclical.

Skirts go up and down, ties change their width, and the colour palette moves through evolution across the years.  A style formula that was popular in the summer of a year in the 1970s might be just right in another summer in the first decade of the 21st century.

So, the question that comes up is whether the same logic that is applicable to individual products, styles and trends, could also be applied to brands.

The answer to whether apparently weak, dead or dying brands could be brought back to life is provided by brands such as Burberry’s, Lee Cooper and Hush Puppies.  Sometimes innovative consumers create the opportunity – as with Hush Puppies in the 1980s – while in other cases (such as Burberry’s, Volkswagen’s Beetle, or Harley Davidson), vision, concerted effort and resources can make the brand attractive again.

The question then is not whether brands can be relaunched – they can. The more important question for brand owners is: should a brand be relaunched. And using the logic of the fashion business, rather than being left to linger and then dying a painful death, could brands be consciously phased-out and later brought back into the market as the trends change?

The Brand Portfolio – Diversifying Opportunities and Risks

These questions are particularly important for large companies, or in times when market growth rates are slow, or when the market is fragmented. Organic growth can be difficult in all these scenarios, and companies begin to look at developing “portfolios” by acquiring other businesses and brands, or by launching multiple brands of their own.

The car industry worldwide has lived with brand portfolio management for long. Even as companies have merged with and acquired each other, the various marques have been retained and sometimes even dead ones have been revived.  The companies generally focus the brands in their portfolio on distinct customer segments and needs (such as Ford’s ownership of “Ford”, “Volvo” and “Jaguar”, or General Motors with its multiple brands), and then further play with models and product variants within those.  When things go right portfolio strategies can be quite profitable, but the mistakes are especially expensive. Sensible and sensitive management of the portfolio is absolutely critical.

In the fashion and lifestyle sector, the players who already follow a portfolio strategy are as diverse as the luxury group LVMH, mainstream fashion groups like Liz Claiborne (with brands in its portfolio including Liz Claiborne, Mexx, Juicy Couture, Lucky Brand Jeans) and LimitedBrands (Limited, Victoria’s Secret, La Senza etc.), retailers such as Marks & Spencer (with its original St. Michael’s brand having given way to “Your M&S”, and also Per Una) and Chico’s (Chico’s, White House | Black Market, and Soma Intimates) who wish to capture new customer segments or re-capture lost customers.  Some of these companies have launched new brands, some have relaunched their own brands, and some have even acquired competing brands.

The issue is also relevant to the Indian market, whether we consider Reliance’s revival of Vimal, the new brand ambassador for Mayur Suitings, or the PE-funded take over of Weekender.  As the market begins evolving into significantly large differentiated segments, branding opportunities grow, and so will activity related to existing or old brands being resurrected and refreshed. An additional twist is provided by Indian corporate groups such as Reliance, Future (Pantaloons) and Arvind that are looking to partner international and Indian brands, or grow private labels to gain additional sales and margin.

The issue also concerns those companies whose management is attached to one or more brands owned by them which may not have been performing well in the recent past, but due to historical or sentimental reasons the management may not like to close down or sell them.

It is equally critical for potential buyers who would like to take over and turn brands around into sustainable profits. This is a real possibility in this era of private-equity funds and leveraged buyouts, where a company or a financial investor might find it cheaper and more profitable to take over an existing brand and turn it around, rather than building a new brand.  This is already happening in the Indian market. More interestingly, Indian companies have also already acquired businesses in the USA and Europe, and the potential revival or relaunch of brands is certainly relevant for these companies as well.

When to Recycle and Reuse

Relaunch or acquisition of an existing active or dormant brand can be an attractive option when building a portfolio, or when a company is getting into a new market.

For the company, acquiring an existing brand is often a lower cost way to reach the customers, and also faster to roll-out the business. The company may assess that the brand already has an existing share of positive customer awareness that is active or dormant, and that the effort and resources (including money) needed to build a business from that awareness will be much less than that to create a new brand.

The risk of failure may also be lower for a relaunched brand than for a new brand.

This is because the softer aspects, the hidden psychological and emotional hooks, are already pre-designed. This provides a ready platform from which to re-launch and grow the brand.

From the customer’s point of view, there is the confidence from previous experience and usage, and possibly also nostalgia and comfort of the ‘known’.

‘Age’ or vintage is respectable and trustworthy. This is especially powerful during volatile times or in rapidly changing environments when there is uncertainty about what lies in the future, and makes an existing brand a powerful vehicle for sustaining and growing the business.

On the Downside

However, when handling brands it is also wise to keep in mind the cautionary note that mutual funds issue: “past performance is no indicator of the future”.

In re-launching active or dormant brands, there is also a downside risk.  While the brand may have been strong and relevant in its last avatar, it may be totally out of place in the current market scenario.  The competitive landscape would have shifted, consumers would have changed – new consumers entering the market, old consumers evolving or moving out – and the economic scenario itself may now be unfriendly to the brand.

Also, the “awareness” or “share of mind” may only be a perception in the mind of the person who is looking to re-launch the brand, and the consumer may actually not care about the brand at all.  There are instances where the management of the company has been so caught up in their own perception of the brand that they have not bothered to carry out first-hand research with the target segment to check whether there is actually an unaided recall, or at worst, aided-recall of the brand. They are imagining potential strengths, when the brand has none.

It is also possible that, during its last stint in the market, the brand may have gathered negative connotations – consumers may remember it for poor products or wrong pricing, the trade may remember it for late deliveries, vendors may remember it for delayed payments…the list goes on. In such a scenario, it may be a relaunch may be a disaster.

So how does one know whether to resurrect a brand, or to reincarnate it in another form, and when to just let it die?  The answers to that lie in answering the question: what is a brand? And then, what is this brand?

A Critical Question: What is a Brand?

Even in these enlightened marketing times, many people believe that the brand is the name. They believe that once you advertise a name widely and loudly enough, a brand can be created. Nothing could be further from the truth.  High-decibel advertising only informs customers of the name, it cannot create a brand.

If we put ourselves in the customer’s shoes, a brand is an image, comprising of a bundle of promises on the company’s part and expectations on the customer’s part, which have been met.  When promises are delivered, when expectations are met, the brand develops an attribute that it is defined by.

The promise may be of edgy design (think Apple), and the customer expects that – when the brand delivers on the promise and meets the expectation the brand image gets re-affirmed and strengthened. However, these attributes are not always necessarily all “positive” in the traditional sense. For instance, a company’s promise may be to be low-cost and low-service (think Ikea, or “low-cost airlines”), and the customer may expect that and be happy with that when the company delivers on that promise.  The promise may be products with a conscience (think The Body Shop), which may strike a chord with the consumer.

What that brand actually stands for can only be created experientially. Creating this image, creation of the brand, is a complex and step-by-step process that takes place over time and over many transactions. Repetition of the same kind of experience strengthens the brand.

The brand touches everything that defines the customer’s experience – the product design and packaging, the retail store it is sold in, the service it is sold with, the after-sales interaction – all have a role to play in the creation of the brand.

For instance, to some it may sound silly that market research or how supply chain practices can help define a brand, but that is exactly how the state of affairs is for Zara.  Changeovers and new fashions being quickly available are what that brand is about, and it would be impossible for Zara to deliver on that promise without leading edge supply chains, or a wide variety of trend research.

Similarly, it may sound clichéd that your salesperson defines the brand to the consumer, but even with the best products, extensive advertising, and swanky stores, for service-oriented retailers everything would fall apart if the salesperson is not up to the mark. This is indeed a sad reality faced by so many of the so-called premium and luxury brands.

Of course, brand images can be changed or updated, but the new image also needs to be reinforced through repeated action, a process just like the first time the brand was created.

Reviving a Brand: the New-Old Seesaw

Given that a brand is created over multiple interactions and repetitive delivery of certain attributes, it is only natural that the older the brand, the more potential advantage it would have over a new brand.  Just the sheer time it would have spent in the market would give an old brand an edge.

An old brand can appear to be proven, experienced and secure, while a new brand could be seen as untested, raw and risky.  An old brand may have had a positive relationship with the consumer, but may have been dormant due to strategic or operational reasons.  In this case, reviving the brand is clearly a good idea.  There is already an existing awareness of an older brand, which can act as a ready platform for launching the same or a new set of products or services.  Often, there may be a connection with the consumer’s past positive experience of the brand.

On the other hand, a new brand may appear to be fresh, more up-to-date and relevant, and vigorous, compared to an old one that may be seen as outdated and tired.  Certainly, if nostalgia had been all that brands needed to thrive, then old brands would never die and it would be difficult to create new brands.

Clearly, there is no single answer to whether it is a good idea to re-launch an existing or old brand.   If you are considering whether it would be a good idea to revive an old brand, or to acquire and turn an existing brand around, ask yourself this:

  • Is there evidence of enough customer awareness and support for the brand?
  • Are there positive connotations for the brand that can be built upon in the current market context?
  • Is there an opportunity to refresh the brand, so that it does not appear outdated, while retaining its core promise and authenticity?
  • Does the company have the resources and inclination to be a “caretaker” or “steward” of the relationship that has been created in the past between the brand and its customers?

If the answer is “No” to any of these questions, then one needs to think again.  However, if the answers are all “Yes”, then a resuscitation is just what the doctor might have ordered.

Time to Take Off the Blinkers

Devangshu Dutta

May 18, 2006

When I am at the receiving end of expectations, business plans and such like, of companies that are looking to ride the current retail boom in India, one thing stands out, and scares me the most: the opening slides, paragraphs or pages that are devoted to the “opportunity presented by India’s booming middle class and its rising income”.

In the previous part to this column (“The Case of the Missing Millions“, 27 April 2006), we concluded that for most international companies looking at India, the potential target market was in the region of 18-19 million people, or over 3 million households. When international companies look at the “middle class” they may be looking at annual household incomes adjusted for PPP in the region of US$ 40,000 (Rs. 5 Lakhs, in absolute terms, not adjusted for PPP), and this population number is what appears on the radar.

Clearly, this less than a tenth of the figures around which many new businesses are being launched in the hottest retail market globally (as global comparative studies are stating). 200 million, 300 million – take your pick – they’re all in the mythical range!

So is it time to put out a missing persons alert for the hundreds of millions of so-called “middle class consumers”, on whose back the current retail boom is to be built?

Hang on – the trick is in changing the frame of reference. Let’s first define what the characteristics of the middle class should be.

In my opinion a good starting point is a simple one – look for a segment that is on the middle of the income scale.

Most marketers and their reference guides live in a high-income urban India paradigm (read, Mumbai, Delhi, Bangalore). Passing out of even a second-tier business school today, starting salaries can easily be over Rs. 20,000 a month. When you get into the middle-management segment, metropolitan salaries in the private sector can easily be Rs. 35,000 – 50,000 a month. This may not sound like much money when you live life from the Delhi-Mumbai-Bangalore paradigm, but trust me, it is still a very large sum of money as you go further down the list of cities and towns in India. In those towns and in semi-urban and rural India, the rupee goes a much longer way.

However, the income scale can be defined subjectively by different people.

So, to this evaluation I would add one other important attribute – this middle segment should be a substantial proportion of the total population. Clearly, a population that is only 2 to 3 per cent of the total is still very much at the narrow tip of the pyramid. We definitely need to move further down the income scale to find the real middle class.

The next annual household income range defined by NCAER is Rs. 2 Lakhs to Rs. 5 Lakhs. Now it starts to get interesting. In this income segment we are talking about approximately 9 million households or a little under 50 million people. An income of Rs. 2 Lakhs (US$ 4,500 in absolute terms) is equivalent to a little over US$ 16,000 by PPP, which is well below middle-class standards in developed economies. However, in India an income of Rs. 16,700 per month brings a number of aspirational and discretionary purchases within reach. This size of population is about the same, or larger, than many countries in Europe and will grow to 70-80 million by the end of the decade.

However, as far as my criterion of significant proportion is concerned, this still doesn’t cut it – we’re still only in the range of 6 per cent of the total population. We need to move further down the income scale, to the Rs. 90,000-200,000 annual household income range.

Bingo!

NCAER identifies this segment as having over 41 million households – that is over 225 million people – about 22 per cent of the total population. Large towns (population of over 500,000) have about 30 per cent of this population, while rural India has about half of this income group.

Earning between Rs. 7,500 a month to over Rs. 16,000 a month, this is the population that, in my opinion, is the real growth engine for the great Indian retail dream. This population has discretionary income, and yet it spends with discretion, if you will pardon the pun. It is a population that is only just beginning to be touched by cashless spending, a population that is beginning to appreciate the comforts and conveniences of modern retail, and its power as a driver of markets. It is possibly more firmly rooted in Indian traditions than aspiring to move to western standards. It is a population that is probably discovering the benefits of investing as much as it is the joys of spending thus reducing the free cash available.

Many brands are ending up planning for the 150-200 million real middle class population, while offering products and prices that are more appropriate for the ersatz “middle-class” of 15-20 million.

Consumer markets are structured around obsolescence, replacement and repeat purchases. If your product fits well within the price-value equation for repeat purchases, you have a winner. If you don’t, then what you get is a bunch of occasional purchases from most of your consumers, with long replacement cycles (or even, no repurchase).

The end result is the sales plateau that is the characteristic of so many brands in India.

If you want to volumes, prepare a product and price offer that makes sense to the real Indian middle class. The small shampoo packs make sense, the “chhota recharge” on the mobile phones makes sense. Does your product?

The missing millions aren’t really missing – they’re just invisible through our Delhi-Mumbai-Bangalore upper income blinkers. It’s time to take off the blinkers.

The Case of the Missing Millions

Devangshu Dutta

April 27, 2006

In my previous column (“Deal Ya No Deal“, 9 March, 2006), I raised a point about unrealistic volume expectations on the part of many marketers launching new products and brands in India.

In some part these are due to the marketer believing his or her own hype. However, a more insidious influence on the expectations are the unrealistic assumptions – a big factor being the incorrect assumption about the size of the market.

Back in the early days of economic liberalisation, during 1993-94, I remember figures being thrown about that talked about the 200-300 million middle class. Multinational and Indian consulting firms, in the slick presentations on behalf of Indian clients pitching partnerships to foreign companies, fed the legend. (Hey, let’s face it, for a while I, too, was part of that game!)

Well, for the last two to three years, those times have been upon us again. The difference is that, instead of hiring consultants, Indian companies have smartened their act, hired a few (or a few dozen) young MBA’s, who are making the exact same pitch to potential international partners again.

As a fall-out in my own small little corner of the world, I have been severely troubled by several international clients and associates whose first question is: “Just how big is India as a market?” and I must say that not many of them like the answers I have given them.

Foreign companies’ first attraction to India is the billion-plus population. Brands from countries which have domestic markets of 50-300 million salivate at the prospect of 1.2 billion Indians starving for their particular make of biscuit or coffee or the latest backless cropped blouse. The thinking goes, “If we can capture even 2% of the market to start with…

Let’s stop dreaming and tell the truth for a change. And I promise you, the truth is still very palatable – you just need to shift your perspective a bit.

The simple fact is that, if we were to evaluate incomes, spending and consumption the way they are evaluated in the developed markets, even allowing for purchasing power parity, the Indian “Middle Class” is possibly less than 20 million individuals.

“What?! But that’s less than 2 per cent of the Indian population,” has been the anguished reaction of many international marketers that I have spoken to in the past year or so. Followed by, “Where are you pulling out these figures from?”

The answer to the first question is: “that’s correct”. And the answer to the second question is: the sample survey carried out by the National Council for Applied Economic Research (NCAER) over the past few years focussed on household income.

Let’s consider the figures that NCAER has been coming up with. In its figures for 2001, NCAER estimated that approximately 2.5 million households earned above Rs. 500,000. The reason I see the Rs. 500,000 figure as important is because, in absolute terms in the Indian, context it is a good benchmark – about Rs. 40,000 per month – by which to categorise the middle class. Also, in relative terms, adjusting for PPP (say a factor of 3.5), this is an annual income of about US$ 40,000.

After allowing for mandatory household and other expenses, these (or higher) income levels do leave a good margin for discretionary spending. This population has much greater access to the stimuli and information that international marketers rely on to build a brand presence across borders. Other sources of brand and product influence include overseas travel (or relatives travelling in from overseas).

NCAER has dubbed the class earning between Rs. 500,000 and Rs. 1,000,000 as “the Strivers”, and that I believe is the most apt definition of the middle-classes across the world.

Currently, the estimate for this population would be over 3 million households, or about 18-19 million individuals. That then, my friends, is the size of the middle class, to be targeted by international companies and premium Indian brands.

Ouch! that was the sound of thousands of dreams shattering and hundreds of business plans going into waste-bins!

Come, come, let’s pick the pieces up and look at them afresh.

Firstly, a population of 19 million is no small market by itself. Many of the international brands’ home markets are about the same size – Australia’s population is a little over 20 million. Italy’s total population is estimated at about 58 million and UK’s slightly above 60 million, and so on. The problem is that when you start with a reference point of 1-billion, a figure in the vicinity of 20 million looks very uninteresting. So, the first solution is to shift one’s initial perspective on the Indian market.

Secondly, a significant part of this target population in India is concentrated in a few large cities in the country. This makes it easier to target this consumer group, rather than dispersing the budget and management effort across a very large number of locations. The reality is that most national brands can achieve a bulk of their sales from the top 8-12 cities in the country, and there is no reason why the story should be any different for international brands looking to create a new presence in the market.

Third, and very important, I would challenge you to show me another similar population anywhere else in the world (other than China), which is growing at the rate of 11-12% a year i.e. doubling every 6-7 years. This is certainly not because the upper income classes are producing babies at a more prolific rate – it is the rise in real incomes and the wider distribution of wealth through greater business opportunities for businesspeople and increases in salaries for the employed.

So, as an international brand, or as a premium Indian brand, by the end of this decade you’re looking at a potential market of 30-40 million consumers.

Now, that number is a respectable market anywhere in the world. What’s more, on the back of the growing market, if you launch your products now, you’re looking at very healthy business growth rates over the next few years.

“But where is the mythical 200-300 million middle class?” was the third painful question raised by our clients and associates, “Do they really exist and how do we reach them?”

But that, my friends, is the next column.