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Soaring high end, falling low end: India’s consumption story splits in two after pandemic

India’s consumption story is a baffling tale of contrasts. Luxury apartments, fancy cars and top-end consumer goods are flying off the shelves. Malls and restaurants are full while hotel rooms are pricier than ever amid surging demand.

Meanwhile, FMCG companies are looking on enviously, unable to sell as much of biscuits, soaps, shampoos and perfumes as they would like. Economists trace the dichotomy to the pandemic, exacerbated by the subsequent developments that sharpened the contrast.

“For some at the top of the income pyramid—both individuals and companies—the incomes did not get impacted,” says Sachidanand Shukla, group chief economist, L&T.

Those not impacted by the pandemic ploughed their extra savings into the stock market and while indices did plunge at the start of the Covid wave, they reaped rich rewards subsequently. The wealth effect of the booming stock markets could be driving top-end consumption. The borrowing binge—housing, personal and consumer loans—could also be fuelling demand as younger consumers shed the conservatism of the past.

“With increased access to credit, consumers starting their careers in the corporate sector are not going for vehicles priced below `10 lakh, which is upping sales at the more premium end of the market,” says Madan Sabnavis, chief economist at Bank of Baroda.

The lower end of the income spectrum, more impacted by the pandemic, did not see a swift recovery amid high inflation. A patchy monsoon has also slowed rural recovery. “Government spending also digressed from its long-term pattern, where revenue expenditure used to be higher. Now capital expenditure is higher, impacting income,” says Shukla. “It will probably take 18 months of economic momentum to (regain) a semblance of normalcy in the consumption pattern. There has to be over 6% growth in real terms or 10% in nominal terms for four-six quarters in addition to a normal monsoon.”

FMCG: Moving faster in cities, selling slower in villages

Rural India, which accounts for nearly 40% of the overall market of fast moving consumer goods (FMCG), has seen a noticeable drop in demand for a year due to inflation and erratic monsoons. It is the demand in cities that is leading the overall growth as urban incomes are more resilient and have better wage inflation. Rural FMCG sales expansion was about 6% in July-September 2023, y-o-y, while the urban sales volume grew by 8%. This is in sharp contrast to what had happened before the pandemic, when villages were growing at twice the rate of cities.

The consumption pattern for groceries and household products shows a sharp divergence, segmentally. There is a greater demand for pricier, more discretionary products like cosmetics in urban markets where the per capita FMCG consumption is 1.5-2 times the national average.

However, the same categories are under stress in rural areas where consumers are either downtrading to cheaper products or shifting to local brands. There is a huge demand, mostly in rural areas, for products of small and regional companies, especially in categories such as detergents, soaps, snacks and tea where the raw material costs have fallen. This is reflected in a slower pace of growth for many large, listed companies such as HUL and Britannia, especially at the mass end and in rural markets.

Says Rohit Jawa, MD, Hindustan Unilever: “We are seeing a resurgence of small and regional players in select categories and price points. Many of them had vacated the market at the peak of inflation. But the No. 1 consumer trend is upgradation and premiumisation. It is more pronounced in urban areas, but if you take a longer arc of time, it is also true of rural areas.”

The overall FMCG demand, however, is on the rise, although at a slow pace, and entirely driven by volume. The overall volume growth for July-September 2023, y-o-y, was 7.2%. Companies said a fall in inflation due to the base effect and a recent decline in unemployment figures, among other factors, could lead to demand recovering in the hinterland.

Smartphones: Ringing two ways

The smartphone market is ringing two ways. While the overall market has been on a decline since CY2022, the premium segment of smartphones priced above `30,000 has been growing. In the first half of FY2024 (April September), the `30,000-plus price band has grown by 65% in volume, y-oy, while phones costing `10,000-30,000 fell by 15% in the same period.

Chandu Reddy, director, Sangeetha Mobiles, a leading cellphone retail chain that has over 800 stores in south India, says consumers —even those with less disposable incomes— now prefer premium smartphones since they expect these to last longer.

“Consumers are replacing or upgrading their handsets 6-12 months later than they did in pre-Covid days. So, they prefer to buy premium handsets,” he says.

The rise of schemes to finance such purchases is fuelling the trend. EMI purchases now account for almost 55% of transactions in his stores compared with about 34% in 2019. The overall smartphone market shrank by 10% in CY2022 in India, according to market researcher International Data Corporation (IDC) India. In the first half of this fiscal year, the overall market declined by 1% y-o-y.

According to industry executives, consumers are delaying or shying away from purchases due to high inflation and the lingering impact of Covid-19 on earnings and savings. There is also a slowdown in the transition from feature phones to smartphones. IDC India research manager Upasana Joshi says it was a modest start to the festive quarter with multiple launches, especially of affordable 5G phones.

“The fourth quarter is expected to decline owing to a post-festival dip in shipments and high inventory levels that are expected to remain till the beginning of January 2024. IDC estimates a slow start to 2024 owing to rising prices, macroeconomic uncertainties and consumers holding on to devices for a longer period, says Joshi.

Smartphones

Travel: Everyone’s on the move

Travel across segments seems to be growing, say industry insiders. It is bucking the contrasting consumption trend in many other sectors. While demand in some travel segments seems muted compared with the pre-pandemic period, that is mostly due to capacity constraints and supply not being able to match the uptick in demand.

“All kinds of segments are travelling,” says Rajesh Magow, group CEO of MakeMyTrip. “In the domestic flight market, it appears that flyers are close to the pre-pandemic numbers, and that they haven’t grown much, but that’s due to capacity constraints of Go First and other supply issues. Fares are up precisely for this reason of demand exceeding supply.” About 12.54 crore people flew in domestic airlines in January-October this year. In comparison, the number of flyers in the pre-Covid period of January-October 2019 were 11.82 crore.

Meanwhile, Indian Railways ferried 363.6 crore passengers from April 1 to October 10 this year, up from 324.2 crore in the same period last year. Even a surge in the cost of air and land travel by 12- 35% has not caused a dent in demand, says Madhavan Menon, executive chairman, Thomas Cook (India) Limited.

The upbeat demand, especially at the premium end, is reflected in the performance of listed hotel chains. In the first half of FY2024, Indian Hotels Company reported a net profit of `415 crore, up by 34%, y-o-y. Menon says the pandemic has created a mind set of YOLO (you only live once) and fuelled the desire for new experiences and bucket list-led travel.

Travel: Everyone’s on the move

Home truths: Big becomes bigger

Over 500,000 homes are expected to be sold in top cities in India in CY2023, the highest in a decade, as demand for property rises. However, while the share of luxury homes in overall sales is growing, the share of budget and midincome housing has been falling post-Covid. In Q3 2021, affordable housing’s share in overall sales was 26%, mid-segment’s was 50% and luxury and premium housing’s was 22%, according to CBRE.

In Q3 2023, the share of affordable housing dipped to 16% and that of mid-segment declined to 46%. Meanwhile the share of premium and luxury houses went up to 35%, as the well-off went for bigger and better homes. (Affordable housing costs less than `50 lakh; mid-segment homes cost `50 lakh-1.5 crore; while premium and luxury houses cost above `1.5 crore and `4 crore, respectively.)

According to data analytics firm PropEquity, developers in top seven cities — Delhi-NCR, Mumbai, Pune, Bengaluru, Kolkata, Hyderabad and Chennai—sold 4,64,849 units in 2022. In the first nine months of 2023, 3,72,961 units were sold. With big launches planned by DLF, TARC, County Group and Godrej in December, the sales for 2023 are expected to cross 5 lakh. The luxury housing segment registered sales of about 9,200 units between January and September 2023, compared with 4,700 in the same period in 2022.

“There is a growing demand for luxury and high-end properties—it is a trend that emerged during the pandemic and has continued since,” says Aakash Ohri, joint MD, DLF. Agrees Amar Sarin, MD and CEO, TARC: “There has been an increased demand for bigger homes, and developers are responding to that demand.” Delhi-NCR, Mumbai and Hyderabad have emerged as the top three markets, accounting for nearly 90% of luxury housing sales in the top seven cities.

Home truths: Big Becomes Bigger

Consumer durables: Premium is in, entry level is out

Consumer electronics manufacturers swear by the binary nature of consumption they have been seeing for the past two years. Sales of the premium segment have been growing in categories like televisions, refrigerators, air conditioners and washing machines. Meanwhile, demand for entry-level and mass-segment products is either declining, or flat or, at best, registering a marginal growth rate.

Sales of premium televisions having screen size of 55 inches and above grew by 18% in the first six months of FY2024, y-o-y, while the overall smart television market declined by 5% in the same period, as per industry tracker Counterpoint Research.

In washing machines, sales of premium, frontloading models grew by 20% in April-September, y-o-y, while the overall segment grew by only 2%, as per industry estimates. Industry executives say this trend is noticeable in semi-urban and rural markets, where only premium products are selling.

The manufacturers have noticed two trends: only consumers enjoying a certain level of income and disposable money are buying, and they are upgrading to better, more expensive products. The share of EMI purchases is also going up.

Says Satish NS, president, Haier India: “At the low end, consumer income is hurt and savings have been wiped out due to Covid. Markets with a higher share of upper middle class consumers and a healthy penetration of consumer finance are growing—like Andhra Pradesh, Karnataka and Gujarat. However, the Hindi heartland that includes Madhya Pradesh, Uttar Pradesh and Rajasthan is badly impacted.”

The slowdown in the sales of entry and mass-segment products is pulling down the overall category growth rate as they still contribute 70-80% to overall category sales. This is despite the growing share of premium products to overall sales.

As per GfK data, the share of televisions having 65 inches and above in total TV sales has gone up from 9% in 2021 to 12% in 2022 to 14% till August 2023. The share of smartphones with 256 GB or more storage in total sales has grown from 6% to 11% to 18% in the same period.

Blue Star MD B Thiagarajan had told analysts recently, “Category after category, whether it is FMCG, or garments, or consumer durables, or automobiles, India’s biggest market is in the affordable segment.” And that’s been hit.

Premium is In, Entry Level is Out

Auto: Only top wheels in the fast lane

The sales of premium vehicles across categories have been on the rise post-pandemic. While the demand for entry-level motorcycles and small cars has remained weak due to the pressure on disposable incomes of buyers at the lower end of the market, the rising aspirations of young, urban buyers and easy access to financing solutions are boosting the demand for premium vehicles. Sales of cars costing upward of `10 lakh have risen by 27.8% to 957,183 units in the first half of FY2024, y-o-y.

Meanwhile, demand for cars costing less than `10 lakh has dropped by 6% to 1.12 million units in the same period. Madan Sabnavis, chief economist, Bank of Baroda, says, “Buyers migrating from two-wheelers to four-wheelers are not only seeing stress in disposable income, but they are also being impacted by the hike in interest rates in the past one year. At the same time, with increased access to credit, consumers starting their careers in the corporate sector are not going for vehicles priced below `10 lakh, which is upping sales at the more premium end of the market.”

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Ravi Bhatia, president of auto consultancy firm Jato Dynamics, says the post-Covid economic recovery has been K-shaped, with the rich getting richer and the poor becoming poorer. The average price in the passenger vehicle (PV) industry has gone up by `103,551 in H1FY2024, y-o-y. While prices of entry-level and midsize hatchbacks have gone up by 60% and 69%, respectively, in the past five years, those of entry-level SUVs went up by only 21%.

This has hit prospective buyers of vehicles in the `4-7 lakh segment who are highly price sensitive. While SUVs are nearly half of all PVs sold in the Indian market, the share of hatchbacks has slipped to about 30% in H1FY24 from 35.1% H1FY23. In two-wheeler sales, share of premium motorcycles (upward of 150 cc) in total sales has been growing—from 17.8% in April-October 2023 to 19.6% in April October 2024 — although entrylevel bikes (75-110 cc) still form 49% of total two-wheelers sold in India.

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