Why are global consumer goods companies such as IKEA headed to India? It’s the country’s burgeoning middle class that holds out the promise of rapidly growing consumption.
The domestic consumption is set to treble to $4 trillion by 2025 as rising affluence levels drive changes in consumer behavior and spending patterns that have big implications for companies, according to a report by Boston Consulting Group released last year. About 40 per cent of the population would be living in urban areas by 2025, and city dwellers would account for over 60 per cent of consumption, it said.
India’s middle class is rising when it’s shrinking in European and North-American countries. The report points out stagnation of the middle class in leading economies. This stagnation is either due to households falling below the middle-class threshold or others escaping and becoming rich. In the developed countries of North America and Europe, the middle class is large but stagnating in numbers. In fact, it is squeezed between the two ends, growing even slower than overall population growth.
Here are some of the big global companies that India’s growing middle-class has attracted:
The world’s largest furniture and home products company recently invested in India by opening its maiden store in Hyderabad. IKEA is clearly targeting top layers of India’s middle class that is increasingly travelling to the west and has exposure to the western brands. The IKEA store is testimony to the fact that India’s middle class is maturing with the emergence of a segment that is willing to spend money on international brands. IKEA plans to open dozens of more stores in India in the coming few years because it sees a large opportunity in India’s rising middle class.
The American over-the-top media services provider Netflix launched its India operations in January 2016 and has been able to capture significant market share here, with a focus on the top 10-20 million internet consumers. According to Netflix’s chief content officer Ted Sarandos, India is the fastest investment it has ever made and the largest investment it has made to date in local original programming. With stupendous growth in internet users in the country, Netflix hopes to hit a jackpot in India. “The next 100 million is from India. We are at 120 million across the world,” Reed Hastings, the chairman of the online streaming company, said recently. “It’s the most phenomenal example anywhere in the world of low Internet costs, expansion of 4G. We didn’t see that coming and we just got lucky on that one,” he said.
Harley-Davidson sells 16 models in India ranging from Street 750 with starting price of Rs 525,000 to CVO LIMITED tagged at Rs 4.9 million. But now it is planning to reach out to the rising middle class. The Iconic US superbike maker is planning to enter into a 250-500cc range which is usually considered a choice of middle class in India. Harley Davidson is planning to give tough competition to Royal Enfield. It may even offer an upgrade option to thousands os of Royal Enfield owners. It also plans to add lighter, smaller and more accessible products through 2022 in its electric motorcycles portfolio. It will kick-start with the launch of its first electric motorcycle, LiveWire in 2019. Harley-Davidson believes that consumer spending on discretionary and premium products is reaching critical mass in India and neighbouring countries. The company expects India’s 250-500cc motorcycle segment to grow at more than 25% annually through 2021, which present a big potential growth opportunity. “If you look at the demographic in India, it is much younger than the US. We are seeing an emerging middle-class who are looking for lifestyle-oriented products. And our products are not only motorcycles, it’s a complete range of lifestyle brand,” Peter MacKenzie, MD, told ET in March.
With large parts of India’s population coming online due to cheap smartphones and low data prices, the e-commerce market is expected to boom. Recently, when American multinational retail biggie Walmart bought a 77% stake in India’s largest online retailer Flipkart, it bet on hordes of India’s new middle class buying stuff online. What made Walmart bet so heavily on a company that is not even close to profitability and more importantly, why would it want to cough up $ 16 billion for a 77% stake? The answer lies in the future of e-commerce it sees in India. The rise in India’s middle class and penetration of internet in the hinterland offer a vast e-commerce opportunity in near future. “We have been operating in India since 2009 and have been very impressed with the progress. One of the things we are most excited about is ecommerce in India, which we expect to grow four times that of average retail. Flipkart is already capturing a large portion of this growth and well positioned to lead the market in the future,” CEO Doug McMillon said.
In June 2013, online retailer Amazon launched its first website ( www.amazon.in) in India. In five years, it has managed to build a dominant position organically with a 30% e-commerce market share compared to Flipkart group (including Myntra & Jabong), that has a nearly 40% market share, according to a recent Citi report. Amazon India has ploughed in billions of dollars in its Indian business, expecting to lead in the market that is set to explode with growth of the middle class and internet. In May this year, just when Flipkart was being acquired by Walmart, Amazon India received a fresh infusion of Rs 2,600 crore from its parent company for its marketplace business, one of the largest by the Seattle firm in its India business. This brought Amazon’s total investment in Amazon Seller Services, its main marketplace business in India, to more than Rs 20,000 crore. According to a recent ET report, Amazon is teaming up with Goldman Sachs and homegrown private equity fund Samara Capital to form a consortium for the acquisition of Aditya Birla Group’s food and grocery supermarket chain at an enterprise valuation of Rs 4,500-5,000 crore. The reason behind Amazon;s aggressive investment in India is the bright future it sees in India’s e-commerce market, a business fuelled by a rising middle class.