INTRODUCTION TO CHANGING CONSUMPTION PATTERN AFTER 1991

The economic liberalization way back in the 1990s had opened up the market in India and
set the ball rolling, leading to a number of foreign brands entering the country and creating
more choices for consumers. However, the then rural market was not looked as a profit-
making center because of low income, lack of proper distribution channel, low awareness
and stronghold of unorganized players. The GDP in 1991 was US$266 billion and per capita
income was US$ 300. Against this backdrop, there has been an improvement in the living of
standard of the rural population since last two and half decades. In FY18, the annual
consumption growth in rural India stood at 9.7% while the urban consumption grew by
8.6%. Rural Indian households are now spending more on consumer goods like durables,
health and personal care, food and beverages and services etc. than a few years ago. The
economy now set to be driven by rural demand due to rising income levels, changing
lifestyle, habits, taste, increasing literacy level and increasing expectations of rural
consumers. The consumption habits of the rural consumer are also gradually mirroring
those of their urban counterparts; still, the composition of the Indian rural market is
different from the urban market on a number of aspects such as the physical environment,
marketing environment, the consumer profile, etc. Today almost all leading FMCG brands
are available in rural parts of India and rural consumers are using them regularly. It is
estimated that the rural FMCG market would grow to US$ 220 billion by 2025 from just US$
23.6 billion in FY18. The Indian FMCG sector has grown from US$ 31.6 billion in 2011 to US$
52.4 billion in 2017 growing at a CAGR of 8.8%. The sector is further expected to post
explosive growth of more than 20% plus CAGR to cross US$ 100 billion by 2020. FMCG’s
urban segment, which contributes 55 percent of the revenues, is expected to post a steady
revenue growth at 8% CAGR in near term while the rural segment is expected to grow at
mid-to-high teens on back of good monsoon, GST implementation, improving infrastructure,
distribution channels and reach of manufacturing and FMCG companies. Thus, the rural
segment is expected to grow at double pace compared to the urban segment.

When compared to global consumption, the outlook for India's consumer market looks
promising. The demographics are certainly favorable. India has a population of 1.3 billion
and half of those people are under the age of 25. Incomes are ticking up; the per capita
income has been growing at a consistent rate of 8% over the last 11 years. India's per capita
income is still very low compared to developed countries, but it grew by close to 8.6% to Rs
1,12,835 in the financial year 2018 compared to the previous year. Total consumption
spends in India would rise three-fold to Rs 4 lakh crore by 2025 as per BCG, growing at more
than double the global rate over the coming years. As Indian incomes rise, the shape of the
country's income pyramid is also changing dramatically. A large portion of the population is
moving from desperate poverty to sustainable life. India's middle class is expected to
increase by multiple times from 5 crores in 2007 to 58.3 crore people by 2025 and over 2.3
crore Indians (more than the population of Australia today) will be amongst the country's
wealthiest citizens. Consumption expenditure is already rising at 14% annually with
emerging cities, value for money orientation, better education and increasing participation
of women in the workforce and would drive exponential growth in the economy.
Furthermore, the new India is slowly shifting towards the nuclearisation of families due to
job prospects, the standard of living and urbanization increasing the consumption spending
by 20-30% more than that of joint families. About 34% of India's population is now
urbanized (3% increase since the 2011 Census) and would reach 36% by CY20 compared to
51.3% urban population of China in 2011. This presents a tremendous opportunity for
companies to capture markets in the sectors that are bound to see explosive consumption
growth.

Rising income and increase in awareness will fuel expenditure on health, education,
communication, transport and entertainment. Thus, household, personal care, health care,
food and beverages sectors are expected to receive a significant boost in the coming years.
Urbanization and increasing value/brand consciousness among consumers augment for the
rapid growth of organized retail. Automobiles would grow on account of low penetration
and the increasing demand for energy would benefit power manufacturers. The consumer
durables/light electrical industry is expected to reach Rs 3 lakh crore (US$ 46.54 billion) by
2020. To add to the growth of the sectors mentioned, financial services growth would be
the catalyst. Taking all these into account, an investor should look at the FMCG/
consumption sector as an opportunity to create his wealth by positioning himself in right
stocks with reasonably good growth prospects and backed by visionary management.

RECENT CHANGES AND ITS IMPACT ON CONSUMPTION PATTERNS IN INDIA

1. The digitization of economic and social life in Asia generally and India specifically
promises to bring great changes to consumption patterns. We’ve seen this dramatically in
China in recent years—We might expect similar changes to come to India’s rural areas as
national e-commerce networks develop.

2. A number of Indians still don’t own a smartphone, but adoption is increasing rapidly,
which should nudge further use of digital payments by consumers. Given continued
increases in wages and decreasing cost of smartphones, I’d guess most Indians will own a
smartphone within the next 5-10 years. At the same time, we’ll see increasing merchant
acceptance of digital payments, for example through QR codes and the UPI system, neither
of which require an expensive point-of-sale terminal. This should give a continued boost to
the development of digital commerce, which can open up the entire economy to a lot of
innovation and efficiency gains.

3. The recent implementation of a national Goods and Services Tax (GST) is typically thought
of as a supply-side, structural reform, but it will impact long-term consumption as well.
Rationalizing local and state taxes into a standardized national system should decrease
fragmentation of domestic supply chains and encourage the development of more national
markets (while also raising revenue). The GST, by its nature, will impact consumption
patterns. Generally speaking, the consumption tax levied on goods by the GST should be
lower than the previous effective rate amalgamated from state and local taxes. In addition,
if the intended supply-side effects take hold and provide efficiencies to domestic
manufacturing and supply chains, that should reduce costs of final goods and services and
boost consumption.

4. India’s modern economic development has been notable for the sustained contribution of
consumption. In the long run, consumption is supported by strong employment and wage
growth and the consumer confidence that flows from these fundamentals. Moving forward,
the economy will need to provide jobs for its young, growing workforce to sustain this
impressive run of consumption-led growth.

THE IMRB RESEARCH ON CONSUMPTION PATTERNS

-RURAL AND URBAN CONSUMPTION-UPCOMING OPPORTUNITY

Millennials in rural India could influence $220 billion worth of annual spending, with over
$177 billion of this in discretionary expenditure, as migration to urban areas and the
internet fuel their aspirations, according to researcher Kantar IMRB and Dialogue Factory.

India is home to the world’s largest population of millennials—typically defined as those

aged 18-35. At 450 million, these millennials are influencing the way Indians eat, shop,
commute and buy, much like their global counterparts.

However, a bulk of these millennials lives in India’s hinterland—home to 300 million rural
millennials, or 36% of the rural population.

Rural millennials are increasingly shaping the bottom of the pyramid with increased rural-to-
urban migration, particularly among the aspirational and ambitious millennials. Rural India,
home to more than 66% of the country’s population, represent an important consumer base
for large companies. They draw anywhere between 30% and 40% of their revenue from
selling to rural households—albeit products at lower price points. And as India’s millennial
population has emerged as a sizeable demographic, marketers across the board are
relooking at how they can serve them better.

The urban Indian millennial, for instance, is well exposed to global trends and continues to
seek similar experiences closer home. For rural Indians, higher aspirations and growing
access to the world are driving their purchases. Search for better employment, spending on
better education for their children, ownership of land, and government jobs continue to be
the driving values among these households.

Monetary concerns rule and education is a key route to changing their status. This also
reflects in higher instances of migration among rural millennials, who are moving to bigger
cities in search of better job opportunities. While 73% of Gen Z (those aged below 15) live in
rural India, only 67% of millennials continue to stay there. If we look at the distribution of
Millennials vs Gen Z, we find a distinct pattern pointing to migration of millennials from
rural India perhaps in search of employment. Clearly, the desire to improve their economic
status is a key driver for rural millennials regardless of personal costs such as staying away
from their children. This is true for both male and female milliennials.

-FOOD ITEMS

This section of the IMRB report attempts to unravel and understand the changing food &
grocery consumption behaviour on the basis of key consumer insights and understand the
emerging trends that will shape the future and profitability of food retail in India.

Food is the most primal of human needs and, especially in the Indian culture, food forms the
core of our lifestyles with nearly 12 million kirana stores which in many ways are the
backbone of the rural economy.

Quite obviously, food is the largest retail consumption category in India, accounting for 33
per cent of the overall consumption expenditure. It is also the largest opportunity area,
especially in times when market dynamics are changing dramatically and consumer
behaviour is no longer generic.

In today’s market, anything is possible – a grocery store where you don’t have to stand in a
check out queue, where you don’t need to fish for your wallet to pay and where all that you
want gets automatically delivered to your shopping basket, rather than tediously looking
through racks and racks of SKUs at the store! Technology is changing shopping behaviour
across categories in India.

The old paradigms are changing every day and already the definition of ‘going’ shopping has
assumed several meanings in an urban shopper’s life. The first big change is the fading
boundary between the brick and mortar and digital world. The shopper is moving seamlessly
between the physical and digital world, and the mobile is fast becoming the central
processing unit of her life! She is buying more and more food online – grocery buying on the
internet has grown by 14% over last year. Over all F&G e-tailing is the fastest growing
category in India.

However, while e-commerce is growing, brick and mortar continues to be the mainstay of
food retailing in India. And clearly, brick and mortar is here to stay. The powerful sensory
experiences of visiting a physical store has a great impact on the purchase behaviour – the
smell of bread, the sight of fresh fruits and vegetables, the excitement of unplanned
discovery, and the comfort of human interaction cannot be undermined.

However, this does not imply that all is well – brick and mortar F&G stores of the future
need to be clearly positioned, be relevant and differentiated from other retail channels. The
consumer’s enthusiasm to visit the store is directly proportional to their expectations being
met – the shopping experience, store design, service, variety and uniqueness of the product.
We are almost moving to “me-tailing” as the newest format of customised, bespoke
shopping experiences of the future customers in urban india.

In the hitherto small category of modern format stores, convenience seems to be the
biggest driver of visitation – the fact that all categories and brands are available under one
roof. It is apparent that “location convenience”, “customised services” and “easy goods
return/exchange facilities” drive a customer towards kirana stores while “product choice”,
“efficient store-management” and “value-enhancing services” attract customers towards
modern retailers.

Many consumers, in fact, equate grocery shopping to be an enjoyable activity that enhances
their sense of self and creates positive feelings.

Some older consumers look forward to their monthly/ weekly grocery shopping trip to the
kirana store as an important social activity, rather than just another chore. Technology can
create convenience, but may not substitute a real shopping experience.

Kiranas, in fact, have emerged the biggest winners in the race towards Modern Retail. While
international and national biggies experimented with their store formats, Kiranas quietly
and swiftly redeemed themselves by forging stronger engagements with consumers. So
much so that today the retail giants in India are tying up with local kiranas or
neighbourhood stores to boost their operations.

Women, mothers particularly, continue to be ánnapurnas’, shouldering the onus of nutrition

for Indian families. The only shift in their behaviour is the near perfect juggle between time
consuming home-made food and the quick and convenient ready to eat/ packaged food. It is
also an ongoing tussle between health and convenience. And while she goes food shopping,
the factors influencing her food & grocery shopping are: budget, promotional strategy,
festival offers, discounts, availability, billing speed and ambience.

Some of the trends are predictable and in line with the conventional wisdom, like, for
example, we know that in absolute terms, the amount spent on food increases with a rise in
income, etc. However, there are other trends that indicate paradigm shifts in the consumer
buying behaviour, like, for example, the change in the food palate of the Indian consumer,
and the passionate adoption of ‘foreign’foods in daily life.

A few key trends are discussed below: A new breed of bold & experimentative consumers has
emerged

– Indian consumers are becoming more and more indulgent with food (and vegetables), and
they are experimenting with new and foreign cuisines; they are seeking variety and are open
to international brands. They profess to enjoy foreign food and are ready to pay more for
premium or organic food items. This is a huge shift from the last decade.

– As a result, new foods like quinoa, different kinds of brands, etc, are now available at
regular supermarkets and large kiranas today and they have an increasing shopper base.
– Consumption of new and exotic food items, salad dressings, syrups, etc., have gone up
dramatically over the last year.

Indian consumers are now conscious of the effect their busy lifestyle has on their health.

They equate fast food with junk and are showing a marked preference towards branded
packaged food, fruit juices, health drinks, low fat, organic food, etc. Packaged fruit juice
consumption as a category has grown 15% over the last year.

In order to maintain a healthy diet, consumers are limiting the intake of high calorie and
high cholesterol food items.

They are more likely to indulge in new food items, which they think can also address their
health concerns.

Convenience is now the new driver of consumption:

Rapid urbanisation, demanding lifestyles have increased time-starved consumers

exponentially and the segment that values convenience has grown – consumers are more
likely to seek for convenience in their consumption or shopping for food items, over other
considerations.

This has led to a rising incidence of consumption of food items like ready-to-eat foods,
processed foods and packaged foods like frozen paneer, vegetables, etc. The consumption
of packaged pasta alone has gone up by 28% over last year!

Even for eating out, there is a conspicuous growth of consumers visiting shopping malls for
eating out at Food Courts than stand-alone high street restaurants/ joints.

The cocktail of old and new

– Food products dominate the lifestyle occasions in Indian life and the combined ‘food’
category accounts for 29% share of the festival wallet.

– Packaged sweets, Juices, Fruits etc. are the most preferred gifting items; chocolates is
becoming a new ‘mithai’ though contributed mainly by the north and east.

Old learnings shaping new models

The digital natives are representing the new consumption base in India; online shopping is a
deeply embedded behaviour in these new customers, a fact which will define how food
retailing will take shape in the coming years. It will be critical to include digital touch points
along the entire path to purchase.

From mom and pop kiranas to super markets, hypermarkets to online grocers, Indian food
shopping has slowly arrived full circle with a learning that home delivery is the only
constant.
Home delivery of groceries and other daily staples like milk was a well-established tradition
in Indian families and even though food shopping has become complex, involving several
channels, a new model has emerged where consumers can visit the retailer’s website, use
an app and pick up the phone to order at home.

Gender Roles

Family grocery shopping has been the accepted domain of women for the longest time;
however, modern, social and demographic shifts have challenged traditional gender roles
within the family unit. Indian men are now engaged in grocery shopping more freely and
frequently

There has been a 4x increase in male shoppers (Y-o-Y ) compared to 3x growth in women.

69% of the online F&G shoppers in India are in the age group of 25-34 years, and more than
half of them are men.

To conclude, the Indian Food Consumer is hungry and the appetite is growing voraciously.
Growing disposable incomes, exposure and ambition is breeding even more consumption.
The global recession seems to have had little impact on the urban Indian shopper’s
consumption habits and her food shopping and consumption behaviour has only evolved.

The emergence of new channels and the combined growth of all of them in tandem is a
testament to how hungry the consumer is. What this really means is that convenience is
king. And the consumer has to be at the centre of the food business strategy, which should
allow her to decide when, where, and how to shop. The consumer should be able to order
anytime, anywhere, and from any device. Consumers should have the privilege to get their
purchases in the store, at a separate delivery location, or through home delivery; they
should have the freedom to decide their own shopping and delivery or pick-up windows to
fit their packed schedules; and to be able to return items seamlessly.

The shopping behaviour of the future will be defined by many micro moments leading to the
zero moment of truth. Winning at the zero moment will be the new measure for success in
Food Retail.