India is something of an unusual emerging market in terms of the outsized significance of consumption in the makeup of gross domestic product (GDP). Indeed, consumption as a share of GDP is higher in India than it is in China, Japan and Germany, and is closer to that of the United States. Private consumption expenditure has historically been the dominant driver of economic growth, and although the share of consumption within GDP has decreased over time as other sectors have grown faster, it remains the dominant driver today. This provides a solid foundation for India's economic growth and with it compelling investment opportunities, while other more cyclical elements of growth rise and fall around it.
Youth-driven growth and diverse opportunities
Although the absolute size of India's consumption remains much smaller than that of the US and China, the contribution of India to global consumption growth has exceeded that of the US since 2010 and is on track to overtake China's in coming years, thanks to India's huge population size and rapid income growth. India officially overtook China in terms of population last year, with nearly 1.5 billion people and, importantly, India's population is both young and still expanding, with people under the age of 25 accounting for more than 40% of the total. By the end of this decade, India's population pyramid will have a significant bulge in the 25-45 age group, the key consuming demographic, which has historically coincided with consumption booms in other economies with similar demographic profiles, while China faces significant longer-term demographic challenges.
While these overall numbers are impressive, it's important to not understate the diversity of this huge cohort of consumers and recognise the variety across India's vast consumption base. Indeed, Hindustan Unilever − India's largest fast-moving consumer goods company (FMCG) − coined the phrase 'Winning In Many Indias' in order to acknowledge the reality that in India, "dialects, customs and rituals change every 100 kilometres. To look at a country as diverse as India as one homogeneous entity is a gross under-service to the vast cultural and business opportunity it presents”.
Despite being comparable to China in terms of population scale, India in aggregate is at a much earlier stage of development, with purchasing power parity-adjusted GDP per capita at only $8,000 compared with China's $21,000 and with brand penetration relatively low compared with other large economies. Modern trade remains relatively small with a market share of just 15% (and a further 5% from ecommerce), with the route to market overwhelmingly dominated by distributors supplying to family-owned traditional retailers. This provides a huge opportunity for companies to both establish brands and benefit from the improved distribution opportunities enabled by upgraded logistics networks.
Varun Beverages: capitalising on India's beverage boom and rural expansion
One such company benefiting from these trends is Varun Beverages, one of the largest franchisees of PepsiCo outside of the US, which manufactures, distributes and sells brands such as Pepsi, Seven-Up, Gatorade and Tropicana across India. The company sells nearly a billion cases of soft drinks per year, a huge increase on the 150 million sold a decade ago, recording a 20% compound growth rate in revenues over this period as well as shifting from a loss-making position to being one of the most profitable players in the global industry.
The company benefits from several structural shifts in the Indian consumer market – first, the rapid growth in consumption of carbonated beverages, which are an increasingly aspirational and fast developing segment of discretionary spending. India’s per capita consumption of carbonated drinks is just four litres, compared with the global average of 30 litres, yet this has doubled from 2009 levels. Moreover, a rising population of young consumers, Bollywood endorsements, as well as steadily warmer climate and increased out-of-home consumption, have all contributed to the strong sector tailwinds. Varun has also been successful in establishing and growing the energy drink space (now 15% of carbonated soft drink volumes) through the addition of the hugely successful Sting brand, launched in 2017. The energy drink portfolio has helped to boost Varun's low-sugar offering, which continues to evolve through the addition of juices and dairy beverages as well as healthier and zero-sugar variants of carbonated soft drinks. Varun's product mix of low and no sugar products has risen rapidly and sat at 40% last year.
Varun's capacity to expand distribution remains immense, in particular in accessing the rural market, which currently represents 30% of the company's sales but is growing rapidly. Rural electrification has been a game changer for the cold beverages sector, opening up remote areas through the deployment of visi-coolers − essentially fridges with glass doors. Electrification of rural and urban regions hit 100% in 2019/20, with availability of power rising from 12 hours per day in 2015 to 20.6 hours today (23.8 hours in urban areas). The government is currently working to achieve 24/7 access to electricity across the country. These supply-side reforms, alongside Varun's strategy to acquire bottling rights in states across India, have allowed strong market share gains and scaling up, which in turn has enhanced margins due to economies of scale. The company has doubled its distribution network from 3.8 million outlets in 2018 and doubled visi-coooler capacity from 500,000 to 1 million, and aims to accelerate expansion, adding a further 100,000 this year, with rural areas accounting for 80% of this expansion.
India's digital surge: transforming urban consumption and fuelling Zomato's growth
While rural distribution networks have been transformed by increased access to something as basic as electricity, urban consumption has developed at an even faster rate driven by the rapid development of internet penetration. Indeed, the digital transformation is transforming the Indian consumer market − with over 700 million internet users, India is the second-largest online market in the world. The proliferation of smartphones and affordable data plans has made the internet accessible to a vast population, including those in rural areas. And yet internet penetration remains in an early growth phase, with ecommerce sitting at less than half of the global average of 20%, and online ad spend at 30% of the total compared with 68% in China and 54% in the US. However, online retail platforms such as Flipkart, Amazon and Reliance's JioMart have made it easier for consumers to shop from the comfort of their own homes.
In July 2021, Zomato became the first Indian food delivery company to go public and has retained its status as the key player in the Indian food delivery market alongside rival Swiggy. Zomato's platform allows users to browse menus, read and write reviews, and order food for delivery or takeout. It has partnered with millions of restaurants, ordering a wide range of cuisines to cater to diverse tastes. In addition to its core services, Zomato has expanded into areas such as hyperpure (fresh ingredients to restaurants) and most excitingly quick commerce, through the acquisition of BlinkIt in 2022, which has demonstrated rapid growth and faster-than-anticipated progress towards profitability.
Quick commerce has huge growth potential, with mid- to high-income households most receptive to it, with a structural shift away from the slotted delivery model towards multiple daily orders for an increasing array of products that can be delivered in under 15 minutes (often in as little as three minutes). The key to such rapid fulfilment has been the construction of mini warehouses ('dark stores') at densely populated upper-income localities that are replenished daily or twice daily, with the last-mile delivery carried out on two wheels. Each dark store carries approximately 5,000 products ranging from fresh produce to larger-size items such as electronics. As supply and logistics have improved, quick commerce orders have doubled since last year.
Zomato earlier this year upgraded its medium-term growth forecast from 40% to 50% year-on-year, driven by rapid growth in its core food delivery business, where its Gold membership program has proved successful and regular increases in platform fees improve financial strength, as well as BlinkIt's rapid progress to profitability in the coming year.
Whether it be through brand penetration at the rural level or the growing convenience of groceries and goods delivered to your door in a big city, premiumisation of Indian consumption is a powerful trend as India establishes itself as one of the largest and fastest growing global consumer markets.
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