India’s Unique Consumption Story: Who Will Benefit?
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A small piece of news on India caught my eye some days back. It had nothing to do with the will-it-won’t-it FDI saga or the nation’s political turmoil. Nor was there a hint about its slashed growth rates. Instead, the news highlighted how a particular section of the society is increasingly spending more – a section not many companies would pay attention to.
According to a Crisil (Standard & Poor’s Indian arm) research report, for the first time in 25 years, rural consumption in India was way above urban spending in the last two years. If the urbanites spent an additional $54 billion during the period, rural India’s incremental spending came in at around $68 billion. Clearly, the landscape of the Indian rural market is changing, which got me thinking – with a mind-blowing 70% of the nation’s population living in rural areas, doesn’t it signal tremendous opportunities for companies that sell stuff rural people would opt for? Since I’ve lived in India, I kind-of-know what they would be, and I can instantly think of three companies that can tap this huge potential.
Trusted, and how!
Personal care, nutrition, and hygiene products are bound to be priority buys for a person who has always lived on a tight budget but can afford to spend a little more now. So my fist vote goes to Unilever (NYSE: UL).
Why the second-largest consumer packaged-goods company instead of industry leader Procter & Gamble (NYSE: PG)? That’s because Unilever is a much bigger story in India than P&G for quite a few reasons. To start with, Unilever enjoys an older association with India, operating since 1931 through its subsidiary Hindustan Unilever (HUL), which has also emerged as one of its biggest and most important subsidiaries. Procter and Gamble India came into existence much later in 1964. ProcP&G emerged as a tough competitor, but isn’t as big a threat now that it gave away crucial market share when it decided to retrench from the emerging markets and shift focus to the U.S. markets in a bid to improve margins. While Unilever derives more than 50% of sales from developing markets, P&G’s share is around 35%. Unilever already had its finger on India’s pulse, and P&G’s move proved to be a godsend. Riding on high demand from emerging markets, Unilever’s last-quarter numbers outpaced that of peers.
Unilever’s product range is much wider, and HUL is one of the most trusted and well-loved brands in India today. I got an idea of how deep HUL brands are set on Indian minds when I realized how people in several villages I went to thought ‘Lux’ and ‘soap’ are synonymous, and called any and every soap bar ‘Lux’! Unilever’s successful experimentation with sachets and small packs at extremely affordable rates together with door-to-door selling initiatives have probably taken it this far.
India has been a critical growth driver for Unilever over the past decade, and things might just get sunnier with increasing rural consumption. The company apparently is keen to make India its ‘export hub’ for agricultural products like essential vegetables, which reminds me of the next company that could gain big from India’s rural growth story -- agriculture equipment king, Deere (NYSE: DE).
Reaping the greens
With nearly 65% of India’s population dependent on agriculture, it’s not tough to guess why Deere makes it to this list. The company has more than 400 dealerships in the country, and opened its fifth plant early this year. It has a strong foothold, enjoying as much as 18% share in some important Indian agricultural markets.
Deere’s share in the Indian tractor market has grown to around 10% from 6% over the past five years. So opportunities are huge. Demand for Deere’s mechanised and advanced equipment, particularly higher-horsepower tractors, is already on the rise as purchasing power of farmers improves. Analysts are expecting the Indian tractor market to grow at a rate of 12% every year, supported by a rise in agriculture production as the sector contributes nearly 16% to India’s GDP.
This company can be a big beneficiary of India’s rising rural consumption, and seems to be on track with an additional investment of $100 million for new plants and capacity additions in the next few years. Deere has earlier won awards for exports excellence in the nation, and I can only hope for more.
Sip, sip, slurp!
Now get ready to be surprised, for the third name on my list is beverage king Coca-Cola (NYSE: KO). Yes, Americans might be getting health-conscious, but Indians have a huge craze for fizzy drinks. Believe me, I’ve lost count of the number of people I came across in India who got excited when they held a soft drink bottle in hand, and how many said they grabbed one every time there was little ‘extra’ money in their pockets. It’s a huge-potential market, which explains Coke’s ambitious $5 billion investment in the nation. Rival PepsiCo (NYSE: PEP) hasn’t come out with any such plans after spending roughly $1 billion in India in the past few years. The two dominate the market, but Coke’s share of carbonated soft drinks sales was much higher at 60% last year compared to PepsiCo’s 37%.
One area PepsiCo can bank on is its snacks range, which Coke doesn’t offer. Competition’s tough, but drinks like Thumsup and Sprite score well over some of PepsiCo’s brands in terms of sales. Coke’s investments prove how keen it is on gaining market share in India. In Coke’s last quarter, India was the only emerging market that clocked a double-digit growth of 20%, and I won’t be surprised if it keeps growing.
Here’s an interesting piece of information not many know about – Coca-Cola is not just about beverages, but has a much deeper attachment with India’s rural areas. It has played a key role in promoting and supporting sustainable agriculture through awareness and close associations with leading organizations and companies to promote rainwater harvesting, drip irrigation and other techniques. I can only assume Coke’s relation with rural India will only get stronger over the years.
Leading global consultant McKinsey projects 3 billion additional consumers to hit the middle class segment globally by 2030. I’m sure India will feature high on the list -- the result of increasing rural incomes. And I don’t think either of the companies discussed will miss the growth story.
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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo, The Coca-Cola Company, The Procter & Gamble Company, and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.