“Indian Consumption Pie”: “Food to stay No.1” item on Family-shopping List | by: Abheek Singhi | Livemint

“Food will remain the Largest Spend Category” even in 2020 with spending of Rs.40 trillion, followed very closely by “Housing & Consumer Durable” with spending of Rs.35 trillion..!!

Most Indians, even those with incomes of $3,000 (around Rs.1.8 lakh) per-annum OR Lower, consume basic products such as cooking oil, bathing soap, washing powder, and tea. But, as they get richer, they start to purchase durable goods, with the typical hierarchy being TV and cooking gas as the top focus..

Ten years ago, Rakesh Sahu, who runs a small restaurant on the outskirts of Lucknow, ate cheap rice, avoiding fruits because of the cost involved. Now, he buys branded refined oil, basmati rice, and eats all the fruits and vegetables he wants because he can afford the extra spending…

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“I don’t think twice before buying good food for my family today”, says Sahu, whose income has increased more than five times in the past 10 years from Rs.90,000 per year to Rs.5 lakh now…!!

He used to get clothes stitched for the family for special occasions earlier. These days, he buys ready-made garments —though he does not spend extra for brand names..

The amount Sahu spends on consumer goods and what he chooses to spend his money on fit into a pattern that has accompanied rising incomes in India. The aggregate consumer expenditure is likely to increase from Rs.45 trillion in 2010 to nearly Rs.150 trillion by 2020—an over-threefold jump in a decade..

Sahu, for instance, does care about brands in the durables space. His television set is an LG, which he bought after watching a programme on a neighbour’s LG. He has moved his son from a government school to the City Montessori School—an English-medium private school. “I want my son to have the best education possible”.

Where once he had no money for “Leisure or Entertainment” (discretionary spending), Sahu now takes his wife out for an occasional movie and even the spot of jewellery shopping…

We analysed consumer spending across different categories and how it is expected to change with rises in income levels and over time. Today, the No.1 item on the family shopping list is food, accounting for nearly one-third of the total consumer spending. Second on consumers’ spending list is housing and household appliances, closely followed by transport and communication..

Interestingly, the spending across different income segments is quite different and has changed with time…!!

To monitor this transition, we use a tool we call consumption curves. This helps us establish how consumers change their spending habits as they earn more. Different types of products have differently shaped curves—and this demonstrates that consumer demand for different products and categories changes at varying rates..

For items such as #Household goods, the consumption curve is an upward line, indicating a steady rise in spending as incomes rise. Other #ConsumerCategories, that rise steadily, if less steeply than Household Goods, are Transport and Communication, as well as #Education..

Expenditure on “Health”, another Major Category, only really starts to rise as people enter the upper-middle OR affluent classes, with only the tail-end of the Consumption curve bending upwards. By contrast, the #ConsumptionCurve, for Food..follows a gentler trajectory, and “actually flattens out as people get richer”… You can only spend so much and consume only so many calories…!!

Exhibit 1: shows the consumption curves for broad categories across different countries for the three different types of curves for Household-goods, #Health-care and Food. We find that the consumer off-take pattern changes with increase in income—even within the same broad category.

Exhibit 2: show the three patterns observed in India. The first type of increase is “inflection point”—observed in the mass #FMCG (fast moving consumer goods),categories such as Tooth-paste—which also have low-cost substitutes such as Tooth-powder..

In this situation, category consumption changes dramatically as the consumer enters the middle class and then remains largely flat…!!

The second pattern is “continuous growth”, which holds true for most durable goods and more premium FMCGs. Here, the consumption increases steadily with increases in income. The third pattern is “stable with income”, observed in highly penetrated FMCG categories such as biscuits and vanaspati..

In this case, the level of penetration is not significantly different across income segments…

Our research indicates that as people enter the #Middle-class, they switch their focus to Consumer-goods that enhance their quality of life Far-beyond subsistence..

Most Indians, even those with incomes of $3,000 (around Rs.1.8 lakh) per annum OR lower, consume basic products such as cooking oil, bathing soap, washing powder, and tea. But, as they get richer, they start to purchase durable goods, with the typical hierarchy being TV and cooking gas as the top focus..

Beyond this, they prioritize goods and services relating to the family, especially children…

We have calculated that 37% of the middle class household’s expenditure is devoted to children, mainly their food and education…One young couple we met in Mumbai, earning about Rs.15,000 per month and living in a one-room chawl, spends nearly Rs.1,000 per month on the school fees for their only daughter. “We want the very best we can afford for her,” they explained…!!

We have estimated how the shape of consumption is likely to change for India in the future, based on the consumption curves from 2010 to 2020…Food will remain the largest spend category even in 2020 with spending of Rs.40 trillion, followed very closely by housing and consumer durable with spending of Rs.35 trillion.

The fastest growing categories are related to “Education, Entertainment & Leisure”, increasing more than FOUR Times in the 10-year period…!!

It seems clear that Both the Size & Shape of Consumption is going to undergo dramatic changes going forward…!!

Why “Acquisitions (M&A)”,make sense in Consumer & Retail” | by: Ryan Caldbeck | Forbes

When I evaluate companies in the Consumer & Retail space, one of the most important questions I try to answer is “ Who will acquire this business in 5-7 years? ”…

Of the two most common exits for private companies—IPOs & Acquisitions—the latter outcome is far more common among consumer and retail businesses. This is an important distinction between tech and the consumer space that every investor should understand, whether you’re investing through an online investing platform or investing offline.

Consider the Mergers and Acquisition (M&A) market last year. The total value of consumer-retail deals actually exceeded the value of internet and software M&A, combined, in 2013. In 2013, the consumer and retail market was about$91 billion according to PwC. The internet and software industries had a total of $55 billion in M&A for 2013.

The point here is not that the total exit market is larger—it is only to highlight that the M&A market in 2013 was larger for consumer and retail than it was for internet and software. So why are deals so appealing in consumer and retail ? Strategic acquisitions tend to be a source of innovation for consumer and retail. 

Consumer goods and services companies frequently use acquisitions to keep pace with emerging preferences in the marketplace, says Accenture .

As Accenture wrote in a report on M&A trends, “ Many large Beverage companies have acquired smaller sports and energy drinks makers to respond to consumers’ increasing appetite for these drinks, and because these large companies did not have such products in their R&D pipelines.”

Pick a major strategic in the consumer and retail space (any major public consumer or retail company). Now think of the number of brands they have added to their portfolio over the past decade. How many did they buy versus build ??

In the Consumer Packaged Goods (CPG) industry, the most valuable asset is the brand. For a larger consumer goods and services company, it is not particularly difficult to replicate a product’s formula, find a manufacturing facility, and begin producing a knock-off of a sports drink or energy bar. And yet, at the end of that assembly line what you get will not be Red Bull or Clif Bar. That’s because the missing ingredient is the brand. When Danone buys Happy Family baby food, or Del Monte buys Natural Balance Pet Foods, for example: they are investing in an innovative and developed brand that they simply cannot create from scratch.

Contrast this with technology deals. For tech companies, the valuable asset early on is the team designing and building the product. Young, small tech companies can be attractive M&A targets. But as those businesses grow, their value lies in their scale, and the more likely path is an IPO.

A compelling tech company’s more typical route to becoming billion-dollar company is through an IPO. And private investors put their money into young tech companies with hopes of being in early on the next Facebook or Google. A consumer packaged goods company, however, can grow from a $5 million business to $200 million, and at that point be an attractive takeout target. Obviously, it doesn’t happen every time, and early stage investing is high risk in any asset class, but I’ve seen this scenario time and again in my years in this sector.

Acquirers get more than innovative products, too.  The returns that strategics achieve in the consumer space tend to be higher than returns on tech deals, according to Towers Watson. Some research, for example, shows tech acquirers had overall negative returns on deals in 2011 and 2012, while acquirers in the consumer space had positive returns in both years on those transactions, including returns of around 10% in consumer products and services.

Last year was a good year for M&A across industries, and PwC expects that to continue in 2014…aPwC points out, corporate cash balances remain at all-time high levels and the funds available for investment and low debt financing costs in private equity should support continued M&A in the sector.

This bodes well for growth companies in the Consumer & Retail space. It also bodes well for investors..