Laveesh Bhandari’s Talk at

The Next 101 Markets Good morning, we are living in by far the most exciting times in the history of this land. Indian economy society and people are changing in character, preferences and aspirations at a rate never before experienced or even imagined. What was common wisdom in the past no longer works; international experiences no longer work either internationally or in India.

The Next 101 Markets In such times what do individuals, companies and entrepreneurs do? Well, they start to think for themselves, listen to the world, hear out the experts, but in the end – their views and advice is as good as the paanwalla down the street. I speak here not in my capacity as an economist, trying to figure out how this crazy animal we call the economy is going to behave. But as someone who is trying hard to measure and follow the rapid changes that are occurring around us.

The Next 101 Markets They used to tell us India lives in the villages ; but our grandparents generation found out pretty quickly – planning or no planning, independence or no independence, it was impossible to make money trying to service India’s vast hinterlands. In fact barring a few items like tea leaves and cotton textiles, there was little that organized manufacturing or services could get to the villages at a cost low enough for the farmer to benefit from.

The Next 101 Markets But then came the reforms , with investment and introduction of new technologies , with improved infrastructure , it was possible to service latent demand across India. Some of us – such as those producing motorcycles or in telecom, even managed what was thought to be impossible – made money selling to rural India without government help or subsidies. That revolution continues and will continue for some time to come.

The Next 101 Markets But despite the magnificent attractiveness of the ‘ rural bottom of the Indian pyramid ’ only a very few can service at a low enough cost to rural India and its 750 million people. For the bulk of manufacturing and services, it is urban India that remains most attractive . The reason is not so much the numbers of the affluent – there are many rural affluent - but the concentration of demand in urban areas.

The Next 101 Markets It is this concentrated demand in the top cities that we are trying to get a grip on. The top 10 odd cities contain about 20% of India’s urban population as per Indicus estimates. The top hundred cities barely account for 60% of India’s urban population, the rest being spread over hundreds of large and small towns, some of which are not very different from over-grown villages.

The Next 101 Markets So how are the next 100 markets different from the large 8-10 metros and million plus cities? The answer is, of course, very different. The reason has to do with the character of India’s cities. Before I expand on that let me first brief you on how cities have evolved. (for those of you not interested in history, just bear for a couple of minutes).

The Next 101 Markets Almost all major Indian cities are close to large water bodies and located on a trade route. Delhi, Mumbai, Kolkata, Indore, Pune, Jodhpur, Coimbatore, Trivandrum etc. etc. all were some type of trading centres. If we go back in history we find that each of these cities specialized in one of two types of economic activities in their initial phase of growth – whether they were manufactured items, agri commodities, or even services. They were quite specialized at some point. But as a city grew larger and larger, gradually more and more activities got added to the cities’ portfolio .

The Next 101 Markets In other words, as a city grew larger and larger, it became less and less specialized . Conversely some cities grew smaller and smaller, and they became more and more specialized. This is of course a generalization, and there are many idiosyncracies built-in each city. But it helps us a lot in trying to figure how smaller cities are different. The largest Metros are the least specialized ; conversely they have the most heterogenous consumers. And so they are by far the easiest to service because they have enough numbers of all types of consumers .

The Next 101 Markets The probability of not finding enough demand is therefore lowest in the larger cities. And for this very reason these cities are the first point of entry for most marketers. This makes them highly competitive markets. In other words, the demand is there, but so is the competition. Then there are the capital cities , there are 35 of these cities in India – and they all have critical things in common. They have the best infrastructure of all cities in that state. And they have a large number of well paid and educated middle classes whom we commonly refer to as babus .

The Next 101 Markets This is a lethal combination. Quality infrastructure reduces wasteful expenditure and increases the demand for high quality and premium goods – government jobs pay much more than private ones (except at the very top) so demand for durables also tends to be higher in this set. Moreover, the area occupied by a babu’s household is about 1.3 times the size of any other household with comparable income – this also affects its purchase decisions. It is no accident that Chandigarh stands out among all cities in Punjab and Haryana. But there are significant differences among the 35 capital cities – they range from Mumbai to Agartala and Shillong to Trivandrum. That is because other activities differ.

The Next 101 Markets There are the industrial production centres . These range from Meerut to Kanpur to Tirupur to Asansol and so on. These centres are characterized by a very larger lower middle class . But within these centres as well, there are differences. The bulk of Meerut’s industry is small scale, consequently there are a large number of SSI entrepreneurs. Thus there is also a significant higher income group. In the case of Asansol however that is missing.

The Next 101 Markets Entrepreneurs can make great consumers . The reason – they rarely distinguish between income for the business and income for home. Since funds are fungible for the entrepreneur he will be less affected by income constraints. Durables purchases, auto ownership, tourism expenditure – all show a far higher propensity among entrepreneurs than salary earners having similar incomes.

The Next 101 Markets But all entrepreneurs are not fortunate. About half of all Indian households depend on a chief wage earner who is self employed. And almost all of these 50% (about 47-48%) are in the unorganized sector . There is a problem with unorganized businesses. They have no formal account books, keep no paperwork, and have few explicit contracts. They pay no taxes. This set of entrepreneurs includes your sabjiwala for instance. But there are many large businesses that remain in the unorganized sector – construction contractors, forging units, many bidi making units, and so on. These entrepreneurs will never get cheap credit from financial institutions and typically get credit from the market at rates that range from 30 to 100% annualized. They rarely borrow to consume at these rates.

The Next 101 Markets The unorganized sector is the enemy of consumer goods and services that depend on credit. For not only does the owner not get credit, but the employees of these units also cannot avail of commercial bank credit of any type. For how can you get credit, if there is no credible record of your employment ? And the unorganized sector is relatively more important. Cities such as Aligarh, Moradabad, Surat, etc. have a very large share of employment that is low income and in the unorganized domain. Then there are the towns that continue to have a large share of population dependent upon agriculture ; these are typically smaller towns, but some among them are quite large. These towns tend to have a very important characteristic – high seasonality in purchases and high price and cost fluctuations that correlate to the agriculture season. Gurgaon , used to be such a town till the early 1980s. Nanded in Maharshtra, Belgaum in Karnataka and Guntur in Andhra are other examples of such cities.

The Next 101 Markets I will now move from consumer economics to consumer demographics. Is the demography different in smaller cities. The answer, here as well, it depends upon the economic structure. Some cities have been growing very rapidly in the last few years – Delhi, Pune, Surat are some examples. To feed and benefit from that growth, in-migration into these cities is occurring at a very rapid pace. Now typically most migrants tend to be in the 18-25 age group. Consequently Delhi, Pune and Surat happen to be among the youngest cities in India. They have a high share of unmarried working people, and married nuclear couples. As is true of all migrants, here as well, migrants work harder and consequently earn more, but save more as well. The migrant’s expenditure behaviour is much more oriented towards value for money than the non-migrant – something many of us notice when we visit our migrant cousins in the US.

The Next 101 Markets There is another great churn that is occurring – today about two thirds of India’s population, that is, 66% is below 35 years of age. Many of us mistakenly believe that the youth therefore define consumer markets. That’s surprisingly not the case. Among the middle classes and the affluent, the age structure is more like that of developed countries; it is only among the lower middle and poor that we have a pyramidical age distribution. In other words, those that have higher incomes and wealth tend to be older. They tend to have larger sized households and a different set of aspirations characterize their consumption habits. Moreover, the affluent in the smaller cities tend to be even more older than those in larger cities. The point I am trying to make is, there are deep and entrenched patterns that drive consumption behaviour. And these patterns are determined to a very large extent by the economy of the city. And most important, unlike in the larger cities, the smaller cities are much more specialized and therefore have distinctive consumption behaviour.

The Consumer Spectrum

Consumer Segmentation

Alpha numeric codes A1 A2 A3 A4 A5 B1 B2 B3 C1 C2 C3 C4 C5 C6 D1 D2 E1 E2 E3 E4 E5 E6 E7 E8 F1 F2 F3 G1 G2 G3 G4 G5 H1 Alpha code denotes skill and earnings potential of the chief wage earners, A denotes the highest level and H the lowest Numeric code denotes the life stage of the chief wage earners and his/ her needs, 1 is the entry level usually singles See next slide for the complete segment grid Segments

Consumer Spectrum SEC Group Household Head/ Chief- Wage Earner Single with family Married without child in joint family Single Alone Married without child Alone Married with Young children in joint family Married with Young children in nuclear family Married with grown up children in joint/nucle ar family Married with married child Retired (singles/co uples living alone) empty nest SEC E Unskilled Worker H1 SEC D Primary Educated Skilled worker G1 G2 G3 G4 G5 SEC C School Educated Skilled worker F1 F2 F3 SEC B School Educated Business man E1 E2 E3 E4 E5 E6 E8 SEC B Graduate/PG Skilled worker D1 D2 E7 SEC A Graduate/PG Professional C1 C2 C3 C4 C5 C6 SEC A Graduate Executives/ Managers B1 B2 B3 SEC A Graduate/PG Businessman A1 A2 A3 A4 A5

Thank You

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