India has become of greater interest to investors over the past year. This is unsurprising, given that the country was the world’s second-fastest-growing economy last year and is expected to be the global frontrunner this and next year. Much of this growth can be attributed to India’s consumer industry, which currently accounts for around 60 percent of the country’s economy and is on track to reach approximately $2 trillion in 2032.
However, the expansion of India’s consumer market will neither be uniform across categories nor equally boost all companies. Categories that have evolved amid the increasing organisation of distribution channels in the country and companies that are able to leverage such channels will benefit the most.
This is clear, as sales via organised channels have been growing four times faster than sales via unorganised channels, and are forecasted to continue outpacing the latter over the coming years. They are also projected to rise from around 5 percent of the market in 2017 to approximately 18 percent of the market by 2025.
Rewards of Digital Push
The rapid digitalisation of India is fuelling these developments, thanks to investments by the government and financial institutions over the years. Significantly, the quantum of payments made digitally in 2022 was five times higher than it was in 2017. With over 90 percent of India’s population now having Aadhaar cards and a similar proportion of those in the country above the age of 15 now having bank accounts, the uptrend is expected to persist.
Moreover, India has around 600 million smartphone users, as well as the world’s fifth-cheapest mobile data price rate and one of its highest per capita consumption of mobile data; and the number of those connected to the internet via smartphones is forecasted to reach 1 billion by 2026.
Accordingly, companies are increasingly engaging consumers online, such that netizens in small towns now have as much exposure to brands and are aspiring towards similar lifestyles as those in metropolises. While inflationary concerns may create speed bumps for mass-market consumers over the next few quarters, the secular tailwinds propelling India’s growth story are set to prevail.
The Long-Term Winners
What do all these mean for investors who seek further exposure to India’s consumer industry and for companies that aim to emerge as long-term winners in the flourishing market?
Investors will undoubtedly have to be discerning and disciplined. Around $100 billion have been ploughed into the country’s consumer market over the past eight years, disbursed across approximately 4,000 deals. These have almost entirely gone towards startups, and not all of them will generate outstanding returns, or even healthy gains.
The ones that are more likely to reap rewards are those which operate in categories that are underpinned by immutable consumer trends, supported by enduring demand drivers, as well as differentiated through quality offerings and defensible competitive advantages.
Companies, many of which are seemingly spoiled for choice when seeking investors, will have to be more selective.
Striking Effective Partnerships
Visionary founders with their eyes on the prize over a long-term horizon should look for investors who can create sustainable value, not just the most deep-pocketed ones who may help them quickly reach unicorn or decacorn statuses. Investors with deep consumer insights, proven category expertise, and extensive operating capabilities are better positioned to help drive revenue and earnings growth.
An area of focus for many companies currently is their distribution strategy, with some direct-to-consumer brands now contemplating omnichannel models. However, the optimal mix of online and offline sales will vary across businesses, and digital-first companies should not hastily open brick-and-mortar stores just to have a physical footprint, without thoroughly considering capital expenditure payback periods and the sustainability of channel margins. In some cases, remaining entirely online for the time being may prove wise.
The best outcomes tend to stem from effective partnerships between investors and the companies they back. The two need to work closely together to build strong brands and compelling narratives that resonate with consumers and facilitate high repurchase rates, while maintaining prudent customer acquisition costs and healthy unit economics across all their channels.
Anjana Sasidharan is Partner and Head for India of consumer-focused investment firm L Catterton. Views are personal, and do not represent the stand of this publication.
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