Why consumer-centric businesses will continue to do well?

Economics

customer-centric-company customer-centric-company

There is a certain charm in consumer-centric businesses. They are easily understandable businesses. For a potential investor in stock markets, the first investment in a consumer-centric company can be a good start as she can connect with its services. For instance, one can buy Hindustan Unilever (HUL) { Click here to download our app} just because she can see its well-known products such as Horlicks, Dove, or Lifebuoy being lapped up by consumers. Besides, the advantage of regular dividends is a clear favorable factor that makes consumer-centric businesses attractive investments. 

No wonder this theme is being closely monitored by big global investors. A key driver for this is the increasing shift in China from a consumer economy to investment and export-driven economy. Back home, we have another consumer-facing business that is being closely considered by markets: The initial public offering (IPO) of Zomato.

Investors’ preference for consumer-centric business is not just sentiment-driven. The theme of consumption has created a lot of wealth. The Nifty India Consumption Index delivered 15.55% returns over the nine years ending 12 July 2021 compared to 14.19% and 15.18% returns given by the Nifty 50 index and the Nifty 500 index respectively.

In the context of these facts, it is important to understand why consumer-centric businesses may do well: 

Young and urban

  • India is one of the fastest-growing economies. It is estimated to grow to the size of USD 5 trillion by 2028. The median age of India’s population is 28 years and more than 40 percent of Indians will live in urban areas by 2030. Low median age and rising urbanization will ensure increasing spending which will boost consumption.

Nascent consumption

  • We have a long way to go as regards consumption. For example, insurance still accounts for 0.4% of India’s GDP. Only 7% and 13% of households have air conditioners and two-wheelers respectively. Though fast-moving consumer goods such as detergents, toothpaste, and shampoo may have reached almost all households, discretionary consumption continues to be at a nascent stage.

Technology

  • Consumption can increase considerably as technology improves further and becomes more accessible to more people. For instance, the rollout of 4G services boosted sales for e-commerce companies. Also many preferred to buy goods and services through applications on phones - be it buying a railway ticket, booking a movie show, or ordering food using the Zomato app.

Premiumisation

  • People upgrade as they earn more. There is a tendency to buy premium products. Today, smartphones are a basic requirement. So is traveling in an air-conditioned cab. People have realized brands ensure services at reasonable prices. Hence, they are willing to pay for premium services. Brands bring pricing power and ensure a relatively higher return on investment to investors.

Consolidation

  • As consumers prefer brands and premium offerings, strong players may become stronger and weaker hands are likely to perish. Consequently, organized players will gain more market share from unorganized players. Rising compliance costs, implementation of the GST, and increased use of technology in fulfilling consumer needs may result in consolidation.
  • This will help large corporations in gaining market share. For example, the implementation of the Real Estate Regulatory Authority (RERA) Act made many non-serious developers exit the realty business. This helped larger and serious entities. They earned more business and better margins.

Besides the aforementioned reasons, there are segment-specific factors that are likely to drive consumption in India. This means the consumption theme will continue to be remunerative. Does this mean the talking point in markets—Zomato IPO—will also create wealth for investors? Click here to find out. 

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