• Thu. Dec 7th, 2023

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Behind the puzzling consumer shift towards premium segments

And then, he had enough money to buy his first car. For years, he waited for a vehicle with “good build quality”, five-star safety rating and one loaded with new technology. “I didn’t think of a hatchback because people think those are our papa-dada ke zamaane ki car,” Kapoor said.

Moving up

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Moving up

He opted for the top-end variant of Mahindra’s XUV300—a compact sports utility vehicle (SUV)—for 13 lakh.

When incomes rise, people buy cars. They also book houses.

Down south, in Bengaluru, KV Subhas, a 41-year-old data consultant with an American technology company, received an 18% salary hike in early 2021. He and his wife Hema began a house hunt right away. They lived in a one-bedroom flat along with their five-year-old son Aditya. But life under the pandemic’s shadows and lockdowns felt cramped, with Aditya’s online classes interfering just too much with the couple’s work-from-home schedule. They needed a more spacious apartment.

In January this year, the family moved into a 1,325 sq ft, two-and-a-half bedroom flat, in a gated community. The price tag: 67 lakh.

“Covid was the big trigger. My wife, who is a graphic designer, now permanently works from home. I am still working from home on most days. We realized we needed a two-bedroom place. It helped that I got the increment and the builder gave an easy payment scheme offer,” Subhas said.

Whether it is aspiration or a real need, there seems to be a shift towards more premium products and services in the Indian economy. We can’t say it’s totally unexpected. Corporations, for many years, have been underlining the potential of the big Indian middle class. What is probably surprising is the timing, bang in the middle of a perfect storm. India, and the global economy, battled the covid-19 pandemic for two years. And now, countries face sky-high inflation and supply-chain nightmares because of the Ukraine war.

Beyond cars and real estate, the trend towards premiumization cuts across phones and electronic devices, fast-moving consumer goods (FMCG), and even alcohol.

In fact, in real estate, even the luxury segment—properties that cost more than 1.5 crore—appears to be a hot proposition. Across India’s top seven cities, the supply in the luxury segment has rocketed 230% in the first quarter of 2022 compared to the same period in 2020, data from Anarock Research, showed. Luxury sales’ share of the overall housing market increased from 7% in the March quarter of 2019 to 12% in 2022.

As per CyberMedia Research, one in every eight smartphones shipped in 2021 was a premium one ( 25,000 and above); the premium smartphone category grew 58% in the first quarter of 2022, indicating strong consumer appetite to switch and upgrade.

In FMCG, companies such as Hindustan Unilever Ltd (HUL), India’s largest packaged consumer goods company, have been expanding its premium products portfolio. In 2021-22, the company’s premium portfolio grew at twice the pace as the rest of its portfolio. That’s quite a change considering that HUL has for years driven household consumption in India selling mass-market brands such as Sunsilk, Vim cleaning bars and Lux soaps.

In its annual report, Mumbai-based Marico Ltd., another FMCG major, outlined three pillars of growth for its domestic business: premiumization of hair nourishment; “turbocharged” growth in foods; scale-up of premium personal care plus digital-first brands. The company’s premium personal care range grew in high double digits in the last fiscal.

Uneven, unequal

You would be mistaken to think the whole of India is buying pricey shampoos and holidaying in resorts with breath-taking views of the Himalayas. While a section of India’s vast 1.3 billion people have upgraded to consuming more fancy stuff, a vast majority has pulled back on consumption because of inflation.

Rural markets reported a 5.3% decline in sales volume in the March quarter, the steepest in the past nine months, while urban volumes dipped by 3.2%, market researcher Nielsen IQ said in its March quarter update on the packaged consumer goods sector.

A spokesperson for HUL said that the company is witnessing two trends. “There is a section of consumers whose household budgets have been hit by widespread inflation across the consumption basket. They are becoming more value conscious and preferring trusted brands that offer better price-value equations,” the spokesperson said. And then, there are the discerning consumers who, despite high inflation, are looking for products with higher-order benefits.

India, in short, is seeing a K-shaped recovery, where growth isn’t uniform across either sectors or sections of the population.

“The ongoing inflation is likely to impact the middle class and rural consumers. Our data shows that consumer sentiment has started dipping over the last two months. We may have had a setback of 1-1.5 years due to the ongoing challenges. The recovery will be uneven and K-shaped,” Amit Adarkar, CEO of market research firm Ipsos India, said.

“Clearly, the rich have not been affected by the pandemic and hence big-ticket purchases on homes, auto and mobile continue,” Madan Sabnavis, chief economist at Bank of Baroda, observed. “The middle class and the lower income class are affected the most and this also reflects growing inequality. Companies don’t see the same demand at the lower end. At the higher end, no budgets come in the way.”

Way back in May 2019, economist Rathin Roy had argued that the economic growth was being driven by the top 100 million consumers. This appears to be true even in 2022.

The drivers

Sahiba Sindhu, a 35-year-old makeup artist from Gurugram, is on a sabbatical. Nevertheless, she routinely tries out expensive shampoos, skincare products and other personal care items. Sindhu is clearly driven by a personal desire to move beyond the ordinary.

Some products, Sindhu said, have proven benefits and she wouldn’t mind paying a significant premium. For instance, a bottle of Kérastase shampoo, sold by Loreal India. It costs upwards of 2,500. She may buy more expensive washing detergents, too—they have better fragrance, she said.

Sindhu is part of the top 100-million cohort driving demand for premium products and services. Aspirations apart, there are other reasons that explain the propensity to spend more.

Amit Adarkar of Ipsos India links some of this buying behaviour to the pandemic. “People had fewer outlets for their disposable income due to restrictions. So, they ended up revenge-spending. Some may have developed a ‘live for today’ approach to spending,” he said.

Part of the disposable income may have flowed into the alcohol sector.

“Demand for premium brands has been relatively less impacted by the covid-induced industry slowdown. Where spending on commuting, social activities or holidays had reduced, consumers had more disposable incomes which they could use to have a quality experience at home. Therefore, premium brands have shown much more resilience in the recent past,” said Amar Sinha, chief operating officer of liquor manufacturer Radico Khaitan Ltd.

The growth of premium brands has continued uninterrupted beyond the pandemic. “Unlike other discretionary consumer products, in the case of Indian-made foreign liquor (IMFL), once a consumer upgrades to a premium product, it is very difficult to downgrade,” reasoned Sinha.

In 2021-22, “prestige and above” category brands grew twice the rate of regular categories in terms of volume growth, he informed. In the alcohol industry, “prestige” implies a brand with premium positioning.

Meanwhile, a small percentage of the population may have benefited from a sharp revival in the real estate sector, stock markets (in 2021), startup activity as well as the rebound in the formal job market.

This week, the Monster Employment Index, which analyses online job posting activity conducted by job platform Monster India, stated that the employment market registered 9% growth in May 2022 versus the same period last year.

Even during the pandemic, the “income sentiment” differed depending on where you worked.

Analytics company CRISIL researched employee costs at large companies (revenues of more than 500 crore) and small ones (less than 500 crore) as a proxy for income sentiment. The hypothesis: the affluent category of buyers is from large companies, while the small and MSME ecosystem would contribute to the lower-end buying segment.

“We saw that there is a 20%-25% increase in the employee costs in 2020-21 at large companies compared to 2018-19. In the small and MSME ecosystem, this increase was only 0-10%. This shows that there was a stark difference in employee costs which are a function of both salary hikes as well as new employee additions,” said Pushan Sharma, director at CRISIL.

This sentiment determined buying choices, including that of cars.

“The trend we’re seeing in terms of premiumization is not solely due to entry-level car buyers choosing more expensive cars, but also a function of the positive income sentiment of the affluent buyers,” Sharma said.

Forced premiumization

Meanwhile, the entire “entry-level” car segment itself is getting reconstituted and redefined.

Five-six years ago, mass market cars such as the Swift or Brio would be priced at about 5.5 lakh. Anything above was considered premium. Now, companies such as CRISIL are classifying cars in the 10 lakh and above category, which represented 28% of 2021-22 passenger vehicle sales, as premium.

Prices of vehicles have gone up by 15-20% in the last year alone, as automakers passed on the costs of implementing new BS-VI emissions standards, introduced additional specifications, and bought costlier raw materials and precious metals. Consumers like Prateek Kapoor have also started preferring cars with more features. For instance, automatic ones, which are more expensive.

In short, many consumers have little choice but to buy pricier cars.

The average selling price for Maruti Suzuki cars was around 620,000 in 2019-20; this has inched up to about 690,000 now, said Shashank Srivastava, executive director at the company. “Our portfolio is also going up in line with the market. If you look at the new Baleno, Ertiga and the new XL6, we have loaded it with features and with technology,” he added.

The magnitude of this increase has been felt most sharply in the lower-priced models, which has made a new car out of reach for a lot of first-time buyers, who typically seek to buy an entry-level model.

“Income levels will go up eventually. So, if it grows faster than the rate of price hikes, the affordability will increase,” Srivastava hoped.

(Alisha Sachdev, Madhurima Nandy, Suneera Tandon, Varuni Khosla, and Gulveen Aulakh contributed to this story.)

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