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India is on the brink of a revolution that will see incomes almost triple, the formation of a 583m strong middle class as 291m people move out of poverty and the development of the world’s fifth largest consumer market by 2025.
Consumerism will largely be an urban affair, with 62 per cent of consumption in urban areas and the balance in rural India. A simultaneous shift from the informal economy, characterised by individual traders, to the more efficient formal economy of organised business will further boost demand.
However, it is important to recognise that three quarters of the new market does not exist today; about $1,200bn a year in future annual purchases will largely come from new middle class consumers, who will make up 40 per cent of the population.
So what does this mean for businesses? How can companies make the most of this opportunity?
In the face of this demand growth, market positions will change dramatically. Competition will be rife as market leaders fight to hold their positions and new entrants strive to exploit the discontinuities behind the growth. But both incumbents and new entrants could have a share of the pie if they create products that meet the demands of the growing consumer class.
Undoubtedly, India’s incumbents, largely domestic brands and companies, have the benefit of existing relationships with customers, an understanding of consumer needs and recognised brands. More importantly, in a vast land with limited infrastructure, they have established distribution and service channels.
But they must be prepared to tackle two important challenges. First, keeping pace with changing tastes, aspirations and brand loyalties as incomes rise and lifestyles evolve. Second, competition from many new entrants: multinationals, established Indian companies looking to expand and entrepreneurs. To combat this onslaught effectively, existing players will need to refresh and strengthen their offerings continually, defend their brands and scale up rapidly.
On the other hand, the challenge for new entrants will be to spot the gaps and opportunities that arise as India’s income and class structure change, including the emergence of a niche luxury market. Companies looking to exploit this discontinuity should also be able to pre-empt what new needs will be unique to Indian tastes and the environment as this class of consumers grows.
Middle class families will spend between $4,709 and $10,880 a year, a very modest sum in real terms but, in terms of purchasing power parity, this equates to $25,315-$58,498. New entrants will need to design innovative means to keep costs low while delivering an aspirational middle-class lifestyle.
Both incumbents and new players will also have to deal with well-recognised hurdles such as India’s crumbling infrastructure and bureaucracy at the lower levels in the government.
The volume of eager buyers will be enormous and so will be the opportunity to create brands as India is only 5 per cent “branded” compared with a developed market such as the US.
Companies that can develop new business models, design products with carefully targeted functionality and create brands that appeal to India’s new upward mobility are likely to emerge as winners.
The author leads McKinsey & Company’s India practice as a director in its Mumbai office