This story belongs to the Fortune India Magazine February 2025 issue.
ADVERTISEMENT
IT’S SIX-O’-CLOCK on a December evening and the residents of the quaint town of Jaunpur in eastern Uttar Pradesh are all set to call it a day. A chillier evening makes people stay indoors, with the only exception of The Jalan’s Megastore on T.B. Hospital Road. As the evening sets in, street food stalls on the premises of the 60,000-sq.-ft. store (which at first glance reminds one of Kishore Biyani’s Big Bazaar in its earliest avatar) come alive. Interestingly, the street fare is not about delicacies such as kachori or imarti the town is known for, but, surprisingly, Mumbai street food, from vada pav and misal to dabeli and ragda pattice! The Mumbai feeling at the entrance gives the first brush of being among the ‘aspirational small-town Indian consumer’. The vibe grows stronger as one sees shoppers arriving in nothing lower than an entry-level SUV or a powerful engine bike.
At Sonepur Mela (Asia’s largest cattle fair) on the outskirts of Patna, the trends are similar. At the Everest Masala stall, consumers are ditching the usual garam masala or chat masala for the smoky hot pizza seasoning. Similarly, the adjoining Ghadi Detergent stall has more takers for its washing machine variant than the normal detergent.
In Chandigarh, the general manager at the Tata Berkeley showroom talks about a surge in sales during the festival season, driven by the company’s leadership in the EV market. The ₹2-lakh discount on Tata Safari and EVs, combined with the administration’s ₹1.5-lakh EV subsidy and registration fee waiver, have significantly boosted numbers. At the city’s Croma store in Elante Mall, festival season (Diwali to New Year) footfall has been far higher than last year. Down south, in Chennai’s Saligramam, the owner of a consumer durables store says his sales are going up. Not only are consumers premiumising, the price of premium products has rationalised with consumer durable manufacturing shifting base to India. Sony, for instance, used to only assemble in India earlier, but post pandemic it has started manufacturing in the country, helping reduce prices.
Jaunpur, Patna, Chandigarh or Chennai don’t paint a picture of a consumption slowdown as opposed to myriad macroeconomic reports. So, where’s the missing link? According to the Reserve Bank of India (RBI), consumer confidence has declined by 7 percentage points to 94.0 in November 2024. A recent Kantar report says FMCG growth decelerated to 4.3% between August and October 2024, compared with 6.4% a year ago. Urban markets saw a sharper decline as volume growth dropped to 4.5% from nearly 7%. Quarterly data of leading consumer companies also reflect a slowdown in consumption. Hindustan Unilever, in its Q3 FY25 results, reported an underlying sales growth of 2% and a flat underlying volume growth. Nestle India has also been reporting a dip in volume growth for the past few quarters.
Suresh Narayanan, chairman and MD, Nestle India says the economy is seeing a K-shaped recovery post Covid, wherein the premium end of the market has grown at the expense of the middle- and lower end. “Food inflation has been significantly high and has impacted household budgets. Secondly, real wages as published in various surveys have either been stagnant or have grown marginally. The premium end of the market is growing quite well, but the belly of the market, mid-stream and popularly priced products, seem to be languishing in terms of relative growth. This has manifested itself in overall volume decline as well. Commodity-led inflation has compelled companies to take up prices, so volume growth has suffered. As a result of this, overall organic growth has also languished in the last couple of quarters.”
But then, the government has waved a magic wand with Budget 2025. In her Budget speech, finance minister Nirmala Sitharaman announced a complete tax waiver for those earning up to ₹12 lakh per annum. And with 80% of Indians below the ₹10-lakh salary bracket, the move is expected to revive the country’s lacklustre consumption trends. “The income tax concession is significant as the amount foregone can be spent or saved. Assuming 70% is spent. it is a good boost for consumption,” says Madan Sabnavis, chief economist, Bank of Baroda.
“By focusing on the 10 broad areas aimed at GYAN (Garib, Yuva, Annadata, and Nari Shakti) Budget 2025 paves the way for the well-being of end-users, leaving more cash in hand, thereby helping drive consumption,” adds Manish Sharma, chairman, Panasonic Life Solutions, India and South Asia.
The K-shaped Syndrome
The slump in demand and eventual slowdown in growth has hit sectors, including the likes of automobiles and consumer durables. K-shaped growth is visible in the cars and bikes segment as well. Contrary to expectations of the presence of entry level cars in markets such as Jaunpur or Bodh Gaya near Patna, most showrooms have premium cars and bikes on display. And while ₹1-lakh refrigerators are flying off the shelves in these markets, there aren’t too many takers for an entry level refrigerator or washing machine. “Car prices have gone up due to regulations whereas household incomes are at the same level. There is a problem of affordability. After Covid-19, we are seeing a K-shaped recovery. People who have money are getting richer faster, but the bottom of the pyramid is under pressure,” says Partho Banerjee, senior executive officer, marketing & sales, Maruti Suzuki India.
According to Anil Verma, CEO, Godrej & Boyce (G&B), the consumption slump is more pronounced in metros, as opposed to Tier II-III cities. “In metropolitan areas, factors such as slower wage growth and higher living costs have led to a reduction in discretionary spending. Economic uncertainty and inflation have further dampened consumer confidence in metros, leading to more restrained purchasing behaviour. On the other hand, Tier II-III cities are experiencing better consumption trends, driven by credit-led growth. Financial inclusion initiatives such as the Pradhan Mantri Jan Dhan Yojana have improved access to credit in these regions, empowering consumers to make purchases they might have otherwise avoided.”
“The growth of premium products and high-ticket items in smaller towns is 5-7 percentage points higher than urban areas due to the availability of finance,” he adds.
So, what could be the reason for this K-shaped growth? Economists attribute it to the uneven spends of the government and the brakes applied by the Reserve Bank of India (RBI) on fresh money creation. “The RBI has been fairly stingy in letting money supply go up. With the Central and state governments upping expenditure, fiscal deficit has been rising as well. Therefore, the RBI felt it should put a brake on reserve money creation, or else it will lead to high inflation. In the past year, the RBI has also come up with norms such as curtailing NBFC loans and increased repo rates. This has impacted consumption,” explains Sachidananda Shukla, chief economist, L&T.
“Nominal GDP growth has been coming down because they have been able to put curbs on inflation. In the last 20-30 years, inflation has averaged around 6.6%, but post the Monetary Policy Committee formulation, we have brought it down closer to 5%. The 1.5% shrinkage is also a cause for lower income,” says Shukla. The liquidity crisis has led to low growth in wages too. “In the last 4-5 quarters it (wage hike) has been coming down. It’s now low- to mid-single digits.”
The reason the rich are becoming richer is because they have saved enough during the pandemic and despite the tightening of the macro-economic environment, have resources to spend. However, economists and analysts point out demand saturation even at the upper end. “There is ownership fatigue at the top of the pyramid post Covid. Couple of years of intense buying and owning has happened and now the rich consumer is saying he/she has enough apparels, cars and watches and doesn’t want more. When the premium segment gives way you expect the middle of the pyramid to catch up. But the middle is hurt because of inflation and lack of employment prospects,” explains Angshuman Bhattacharya, national leader, retail and consumer, EY.
Sabnavis agrees. “When you talk about the so-called affluent, there has not been a slowdown in demand. It’s more a case of saturation,” he says.
According to a Retailers Association of India report, categories such as apparel, footwear, beauty and quick-service restaurants grew in mid-single digits in 2024, against a 15% growth in the preceding year. Apparels did well during Diwali, but have been slow ever since. Sales of consumer durables have also remained stagnant. “Volume growth in urban consumer goods has dropped from 10.1% in Q1 to 2.8% in Q2 FY25. The decline can be attributed to multiple interconnected factors, primarily stemming from economic challenges facing the urban middle class. High inflation, especially food inflation, has eroded purchasing power, compelling urban consumers to cut back on discretionary spending,” points out Verma of G&B.
In fact, Bhattacharya of EY talks about lifestyle inflation, even at the lower end of the pyramid. Unlike yesteryears, lower-end consumers are hugely aspirational nowadays. “An electrician or a driver may have a daughter who would surely aspire for at least a ₹15K smartphone. Beyond food and regular inflation, there is aspiration-driven inflation, too. So, on one hand nothing great is happening in terms of income and employment, and on the other, there is this whole lifestyle expenditure which is increasing the cost of living.”
Apart from the macroeconomic challenges, ad hoc factors such as the general elections have also played a role in the consumption slowdown. “During election years governments cut down on spends. Elections have just got over so government spends will pick up. Floods in many parts of the country have created havoc too,” explains Kamaldeep Singh, CEO and board member, DealShare.
Soaring food inflation
The bottom of the pyramid is also hit by food inflation (as high as 9-10%), affecting consumption across sectors. With food prices spiralling, the average consumer is cutting corners when it comes to buying a refrigerator or a TV panel. “It is worrying,” says L&T’s Shukla. “In the last few years, we have started to see unseasonal trends such as heat wave and excessive rains. We are getting into a difficult territory where the impact of weather is beginning to show on food inflation numbers. If heat wave hits in February or March your wheat or rice crop will obviously be affected.”
Sabnavis doesn’t expect respite from food inflation in the near future. Apart from climate vagaries which are here to stay, he blames it on the MSP (minimum support price) system. “MSP pushes benchmark prices off the market. If we say there will be good production of wheat this year, prices will not come down. Gone are the days when high production led to lower prices for products which have a MSP. There is going to be a 4-5% increase in input cost because of a 4-8% increase in MSP. For conventional food products such as cereals and pulses there is going to be an inherent tendency for prices to move up as input costs go up.”
As far as spiralling rates of fruits and vegetables are concerned, Sabnavis believes prices are volatile because of demand-supply mismatch. “Unless there is backend contract farming (which many companies have developed) controlling costs would be difficult.”
Local FMCG Satraps find an edge
Consumers are shying away from large national brands. But he/she hasn’t stopped consuming. In fact, the aspirational Indian buyer is more than willing to consume as well as premiumise. But the big story here is that consumers of Tier II-III India are not premiumising with national brands, it is the regional brands which are rising to the occasion by offering premium products at a value price. At Jalan’s Megastore in Jaunpur, a consumer may refrain from buying a 5 kg washing machine variant of Ariel for ₹1,400, but nothing stops her from buying the Ujjala variant, priced competitively at ₹850. What’s more, at ₹850, with Ujjala, she also gets an additional 1 kg of detergent.
The aspirational middle-class consumer in Tier II-III India also has an appetite for oats and muesli. Here, too, she opts for a 1 kg pack of a lesser-known Zerobeli against the good-old Kellogg’s. The former is barely ₹2 cheaper than the market leader, but the perception is that it’s crunchier and fresher than Kellogg’s. Be it biscuits, noodles or even mosquito repellents, there are local, premium alternatives giving tough competition to national peers. For instance, the premium offerings of Chandigarh’s Bansal Bakery are doing exceptionally well. Mohit Bansal, who operates seven bakeries in the city, attributes it to focus on healthier choices and in-house production. “We manufacture cookies, namkeens and snacks in-house, offering customers a chance to taste before buying,” he says. Products such as butter kaju pista and American almond cookies made with desi ghee and premium dry fruits are his signature offerings and fly off the shelves within hours of manufacturing.
Delhi-based FMCG brand Cremica, with a stronghold in north India, is expecting a close to 15% growth this fiscal (unlike the likes of Britannia or Nestle which have reported single-digit growth). Chairman and MD Akshay Bector says there’s a noticeable shift in consumer behaviour. “Retail consumption has stretched compared to two years ago. While Chandigarh, like other cities, saw a temporary spike in consumption during Covid, customers are now resuming normal patterns, including the eating-out market.” Cremica owns brands in biscuits and cookies, sauces and ketchup, ready-to-eat and frozen foods categories, among others. Bector says Cremica’s growth would be driven by an uptick in small-pack consumption. “Consumers are now more quality-conscious, which has positively impacted our sales.”
Similarly, for Amritsar-based premium basmati rice company DRRK Foods (Crown brand), sales have remained stable despite high inflation. “Our sales, particularly for consumer packs, are consistent because rice is an essential food item. However, there are noticeable changes in our product mix as customers seek value amid rising costs,” Joint MD Vikram Marwaha explains.
Former HUL distributor, Tirupathi Trading (headquartered in Jaipur), launched its own detergent brand Yaare, at a substantially lower price (₹100 for a 3kg pack compared to ₹250 for a similar size pack of Wheel). COO Mohit Kundalia emphasises on how volume growth for FMCG majors has shifted in favour of not just regional brands, but also direct-to-consumer (DTC) ones such as Mamaearth and Dot & Key. Today, if a consumer wants to buy a premium moisturiser or face wash, she would rather opt for a DTC brand such Minimalist or Juicy Chemistry, which offers her products with natural, active ingredients (suited to her skin type) rather than a Dove or Vaseline. “Not only are DTC brands offering more choices, logistics companies such as Shiprocket and Delhivery have also started delivering across pin codes,” says Kundalia.
Local brands have a better understanding of consumer preferences, opines Sunil Agarwal, co-founder and chairman, RSH Global (which owns Joy Personal Care). “Large companies are not ‘regional’ in their approach. For instance, uptan (a kind of facial) works very well in North India, but turmeric appeals to South Indians. If regional brands come up with these options, consumers patronise them. National brands are finding it difficult to adapt to regional nuances.”
Sabnavis says even though local brands are victims of inflation, they have an advantage as their operating costs are lower. “Also, they don’t need plush offices with high rentals and salaries. Big firms need products that reach the masses.”
Marico MD & CEO Saugata Gupta also agrees that local brands have carved out a space for themselves across markets. “A lot of us are locked into price points. We think we will reduce grammage and keep the price point, but it doesn’t always work. At the bottom of pyramid, especially in rural areas, the outlay is fixed. If they have decided they are going to buy a bar of soap every fortnight, they stick to it. The moment I do grammage change, what I call shrinkflation, transactions don’t necessarily increase.”
According to Bhagirath Jalan, CEO of Varanasi-headquartered Jalan’s Retail (which has seven stores across Varanasi, Prayagraj, Azamgarh and Jaunpur), the biggest draw for local brands is competitive pricing and high margins. Jalan retails a mosquito vapouriser brand, Rapido, which he says has grabbed a 10% market share from GoodKnight within two years of launch.
In fact, the Rapido story is one of premiumisation. Launched by Varanasi-based entrepreneur Sachin Bhat, Rapido comes with a promise of using only natural ingredient (neem). It is also priced lower (₹69) than Goodknight (₹99). Similarly, Vivek Jaiswal, founder, Mother’s Choice, which sells packaged whole spices, is inching towards overtaking market leader Catch in Varanasi and adjoining towns. Jaiswal’s promise also centres around freshness. “Most whole spices brands contain preservatives. Mine is preservative-free,” he claims.
The proliferation of local brands, however, is largely limited to FMCG. In automobiles or consumer durables, the impact of macroeconomic challenges is visible. Consumer durables- and auto-retailers in Chandigarh and Varanasi, for instance, talk about an uptick in premium offerings, while mass-market products have remained stagnant. “Our growth this year has largely come from the sale of premium consumer durables. Sales of mid-range TV panels or window air-conditioners have stagnated due to liquidity crunch. Most mid-level consumers opt for finance schemes and since their CIBIL scores are low, they are not able to obtain finance,” points out Tushar Agarwal, owner of Varanasi-based Neelkanth Electronics.
The apparent rise in spending power among the affluent in Tier II-III markets is also due to improved access to credit and financing, rather than a broad-based increase in disposable income, says G&B’s Verma. “Consumers in these areas are upgrading to premium products using easy loans and EMI options. The shift reflects a more sophisticated approach to consumption, where financial tools, not increased wealth, enable upgrades.”
Chasing premiumisation
HUL recently acquired an over 90% stake in DTC personal care brand, Minimalist. The company has not just been ramping up its DTC portfolio through acquisitions, it is also regularly launching DTC variants of existing brands such as Dove and Lakme. The writing on the wall is clear: Big conglomerates need an aggressive premiumisation strategy for their next level of growth.
“Firms need to recalibrate some of their brands and offerings to make the affordable segment more profitable. They need to accelerate the journey of premiumisation because there is clearly an opportunity there,” agrees Narayanan.
Emami, says, vice-chairman and MD, Harsha Vardhan Agarwal, has always focused on entering categories (Navratna Hair Oil, Fair & Handsome, Himani Sona Chandi), which are not quite the strongholds of the biggies. The company started acquiring stakes in DTC start-ups such as The Man Company much before others entered the fray. “We need to keep giving consumers value for money. We operate in niche categories where competition is less.”
According to Panasonic’s Sharma, while the shift to premium is obvious, the need of the hour is to democratise it. “If you look at the last 20-25 years of products that have been sold, the capacity of consumers to change and upgrade is extremely high. Also, the cost of ownership of products getting sold in recent years is much lower as energy efficiency is far better and consumers are willing to pay a premium for it. Technology is playing a huge role in democratising premium.”
Furniture brand Wakefit, which started off as a mass-market solution provider, has recalibrated its strategy to premium. “We had zero premium products two years ago, but as we saw people talk about premiumisation as a secular trend, we experimented in a small way with mattresses. We came up with a range of Wakefit Plus mattresses, which had superior materials. The uptake went up at retail stores, as people were touching and feeling the products and were willing to up their budget by another ₹5000-10,000. That gave us confidence to come up with a premium range of sofas,” says co-founder Chaitanya Ramalingegowda.
While India Inc.’s head honchos attribute the consumption slowdown to macroeconomic factors, Jalan says it is due to the absence of wedding muhurats during the summer months. “People in Tier II-III cities are not bothered about the macroeconomy. Our business is directly related to weddings. April is the harvest month, so people have money and they splurge on weddings. We didn’t grow in Q1 2023 and Q1 2024 as there was not a single wedding muhurat. Our sales recovered in October-November due to weddings. We had set a 25% growth target at the beginning of the fiscal, and we grew by 30% in the last two months itself.”
Hindustan Unilever CEO and MD Rohit Jawa recognises the shift in consumption patterns — the average Indian consumer’s appetite to premiumise. “Whether it is real wage growth or inflation we can’t control the macro. The government is already doing the right things. What we can do is do what’s right for our consumers. What we believe we can do in this market condition is to make our brands unmissable, grow competitively and keep investing in the future by doing the right things in a strategic disciplined way,” Jawa said in the company’s recent Q3FY24 earnings call.
The Indian consumer’s appetite to consume is far from over. It’s only growing. While large firms need to pull up their socks, policymakers, too, need to incentivise consumption. That journey has already begun with the Budget.
(With inputs from Manoj Sharma, Urvashi Mishra and Karan Dhar)
Fortune India is now on WhatsApp! Get the latest updates from the world of business and economy delivered straight to your phone. Subscribe now.