Identifying Addressable Markets & Target Customers

Arvind Singhal

1st March 2014

Structure Of The Session …

1. Select global business trends and India’s preparedness

2. Select Indian consumer trends

3. Identifying addressable markets & target customers

4. Q&A

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1. Select Global Business Trends And India’s Preparedness

Segment 1:

Three Major Disruptive Change Drivers …

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1. Demographic Unbalancing & Rebalancing

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Demographic Unbalancing & Rebalancing

• Relatively homogeneous demographics across the planet for most of existence of humanity and until, perhaps, till mid 19th century

• Differential progress in different parts of the world (education, industrialization, economic growth, women’s empowerment and entry into formal workforce, access to good healthcare, etc.) in the last 200 years started to create demographical imbalances (different birth rates, different life expectancies, and different social and lifestyle behavioral patterns)

• As a result, today different countries across the world show highly different demographic profile

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World Population And Aging Profile

1800 1900 1950 1971 1991 2001 2011 2021 2030 2050

Population (in million)

900 1600 2400 3700 5100 6000 7000 8000 8800 9700

Increase (in million)

700 800 1300 1400 900 1000 1000 800 900

Age Profile (proportion % of population)

0-14 35 38 30 28 25 22 22 20

15-44 55 52 60 60 60 58 56 55

45-59

60+ 10 10 10 12 15 20 22 25

Source : UN Development Study 2013; French Institute of Demographic Studies,2013

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India’s Population And Age Profile

1857 1900 1947 1971 1991 2001 2011

Population (in million)

282* 295* 345 547 843 1027 1220

Increase (in million)

13 50 202 296 184 193

Age Profile (proportion % of population)

0-14 38 42 38 36 30

15-34 34 30 32 34 36

35-59 22 21 22 22 25

60+ 8 7 8 8 9

* Population of undivided India

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Demographic Shifts …

1,100

1,300

482 350

127

830

1,184

1,334

505

312

126

1040

1,400 1,450

480 390

108

1995

-

500

1,000

1,500

2,000

2,500

India China EU USA Japan Africa

2000 2010 2050

25.3 Median Age ‘10

Tota

l Po

pu

lati

on

(m

illio

n)

34.1 36.7 44.2 40.0 21.2

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A Complex Future …

• Over the coming decades, the world will get older: the median age of the world’s population will rise from 29 today to 38 in 2050

• Some countries may shrink: Italy may lose 3m people (5% of its population today), Russia 24m (17%) and Japan may lose 18m (15%) by 2050

• Age dependency ratios will rise sharply in many places, including China

• Profound implications on global and regional production and consumption centers, employment, industries, and companies

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2. Onset Of Digital Age

8000 BC 3500 BC 400 AD 1600 1900 2010 2015…….

ICE AGE COPPER AGE IRON AGE MODERN

BRONZE AGE MEDIEVAL EARLY DIGITAL

DIGITAL

STONE AGE

…2.5M BC

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Onset Of Digital Age …

2. Onset Of Digital Age

• Rapid digitalization of the world and of India

• Concurrent emergence of several transformational technologies

• Multiple implications

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India : Rapidly Rising Penetration Of Smart Devices

2005 By Dec 2013 2015 (E) 2020 (E)

People with Internet Access 25 160 300 800

Mobile Phone Subscriptions* (unique users)

150 ~600 700 850

Smart Phone Users 1 90 250 600

Laptops & Tablet Users 1 25 50 150 (?)

• By end of 2015, as many as 45%-50% of all urban households (about 120 million) could have internet access through smart phones / tablets / laptops

• Primary mode for dissemination of information, attitudes and views, shopping, and entertainment could be through these smart devices

Penetration (millions)

Two Humungous Indian Initiatives …

• Universal ID Card initiative: • To enroll 600+ million by end of 2014 and perhaps 900+

million by 2017 (?) with biometric and other data fields in the data base

• “Bharat Broadband” initiative:

• Connecting top 250,000 villages (out of about 6,00,000)

with fiber optic network by March 2016 and thereby providing internet connectivity to nearly 60% (about 425 million inhabitants) of India’s rural population (about 750 million)

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Universal, Near Real Time Access To Information And Ideas …

• TV / Internet / Social Media

• Newsfeeds

• Google – world’s knowledge resource center!

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Viral, Global Broadcast Of Opinion Of Individuals …

• Consumers

• Citizens (nameless, and hitherto, voiceless)

• Activists

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Unprecedented Wave Of Open Sourcing…

• Open sourcing of: • Education (Massive Open Online Courses – MOOCs)

• Knowledge

• Ideas

• Trends

• Capabilities and capacities (e.g. Odesk, Elance, Airbnb,

etc.)

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Many Emerging Transformational Technologies ..

• 3-D printing (manufacturing)

• Nanotechnology

• Engineered materials

• Bio-medical engineering / life sciences

• Big Data

• Haptics, Virtual Reality, others

• Mass “peer-to-peer” networking

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3. Shifts In Global Economic Power Balance …

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World GDP – A Historical Perspective 21

India China Western Europe Rest of the World USA

• Figures for 1600, 1820, 1950 derived from work of Angus Maddison, an economist who worked on historical projections of GDPs of countries through ages

• Figures for 2012 are derived from World Bank. • Definition of western Europe include EU + UK

~330 ~700 ~5,330 ~70,000 ~250,000

World’s GDP Estimates (US$ billion)

22%

29% 20%

0.18%

29%

1600

16%

33% 23%

2%

26%

1820

4% 5%

26%

31%

34%

1950

3%

10%

27%

23%

37%

2012

14%

23%

15% 15%

33%

2050

Differential Global Economic Growth Rates

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GDP (US$ tn) 1990 2000 2010 2012 2020

USA 7.4 12.5 14.4 15 20.8

China 0.4 1.5 5.9 7.3 15.3

Japan 3.8 6.0 5.4 5.8 7.4

Germany 2.1 2.4 3.2 3.5 4.9

UK 1.2 1.8 2.2 2.4 3.2

Brazil 0.6 0.7 2.1 2.5 3.5

India 0.4 0.6 1.7 1.8 3.7

Russia 0.6 0.3 1.4 1.9 3.0

Implications For India …

• In the global context, India will still be an attractive oasis of relatively high growth (at 5.5-6% CAGR) over the next 10 years

• Private consumption will continue to drive India’s growth; by 2025, at a decadal GDP growth averaging 6% CAGR, India’s merchandise spending at US$ 1.5 Trillion (in 2012 dollars) would be among the top-5 in the world

• Intensified competition in India not only from Indian companies but global competitors too

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Socio - Political Challenges Across The Globe …

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Key Challenges …

• Specter of sustained inflation both in developed and developing economies

• Growth without jobs or without enough jobs

• Increasing frequency of “black swan” events and increasing intensity of universal impact

• Increasing deficit in political statesmanship – the flawed premise of “entitlement” versus “equal opportunity” for all citizens

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Specter Of Sustained Inflation …

• Demand – Supply mismatch induced

• Systemic changes in select hitherto low-cost supplier countries

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Growth Without Enough Jobs …

• Some of the new disruptive technologies have the potential to displace more jobs than what they create directly and indirectly e.g. • E-commerce • 3-D manufacturing • MOOCs • Etc.

• Education no longer a guarantee of jobs and upwards mobility

• Creation of new classes of “haves” and “have-nots”?

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Deficit In Political Statesmanship (?) …

• Caliber of G-7 / G-20 leadership?

• Erosion of UN’s authority?

• Increasing domestic (short term) politics induced expediency?

• Misinterpretation of “democracy” – rise in promises of “entitlements” to everyone rather than creating conditions that offer “equal” opportunity for everyone and let the most-able do better than less-able ones

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Segment 2:

Emerging Business Challenges (The World & In India) …

3 Major Changes & Challenges …

• Among many changes (and challenges) brought by the change drivers just highlighted, 3 of the most impactful ones could be: • Transformation of complete industries beyond recognition

• Steady rise in unemployment and underemployment –

both in the developed countries as well as the developing ones; rise in social and political instability

• Big may no longer be beautiful (or as beautiful)

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1. Transformation Of Sectors & Industries ...

• Fundamental transformation likely in several sectors and industries, such as: • Education • Healthcare • Distribution & retail of consumer goods and services • Entertainment • Energy production and distribution • Defense • Others

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2. Rising Tide Of Unemployment …

• Divergence of views on this subject, but I believe that the entire world will see steady increase in unemployment and underemployment

• Some studies peg the net job losses by 2030 at as much as 2 billion!

• Next wave of job losses likely to hit more white collar, middle

class workers • Rise in inequity, leading to increase in social disruption and

unrest

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3. Big May No Longer Be As Beautiful …

• The bigger companies will face bigger challenge in adapting to these changes

• Larger manufacturing capacities may end up compromising flexibility in adjusting to competition and in changes in consumer trends and demands

• Steady attrition in competitive advantage of large companies that is currently founded on proprietary technology, know-how, product development capabilities, branding, and marketing

• Disadvantages / diminishing economies of scale

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However, New Opportunities Too …

• Open-sourcing of almost every form of “intellectual” capabilities

• Crowdsourcing (funding, jobs, manufacturing capacities)

• “Creator to Consumer” – ultra lean value chains

• Mass customization: reaching out to millions of consumers, one-consumer-at-a-time

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Inferences …

• Globally, India will still be an attractive oasis of relatively high growth (at 5.5-6%) over the next 10 years

• Private consumption will continue to drive India’s growth; by 2023, at a decadal GDP growth averaging 6% CAGR, India’s merchandise spending at US$ 865 Billion (in 2013 dollars) would be among the top-7 countries in the world

• Intensified competition in India not only from Indian companies but global competitors too

• The most successful businesses will be those who can come up with innovative solutions built to solve or built to overcome India’s 12 major deficits and other challenges

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Segment 3:

India’s Deficits

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Preamble …

Just as an individual’s health cannot be gauged just by 3 parameters e.g.

temperature, pulse rate, and blood pressure, the nation’s health cannot also

be measured just by 3 (economic / financial) parameters i.e. GDP growth rate,

BSE / NSE indices, and fiscal deficit.

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Issue Dimensions

1. Education Quantity, quality, mismatch between national needs and programs /curricula

2. Healthcare Quantity, affordability, accessibility, accountability, geographic distribution

3. Water Household, agricultural, industrial

4. Food The entire food basket (rather than just food grains)

5. Energy Industry, household (including cooking), public utilities

6. Space Non-industrial and non-agriculture (i.e. housing, education, hospitals, retail, etc.)

7. Housing Quality and affordability

8. Sanitation Toilets and human waste disposal

9. Waste management Household and industrial waste management

10. National transportation Roadways, railways, airways, and waterways

11. Intra-city transport MRTS and others

12. Jobs, internal security Mismatch in expectations, rising aspirations & tensions, rising security needs

India’s Growth Challenging Deficits

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2. Select Indian Consumer Trends

Convenience (access, time, ease of decision making, ease of transaction) will create consumer behavior shifts and new opportunities

1: Increasing Time Poverty

Number of days in year spent by an urban Indian couple on various activities. shopping account for ~6 days in a year primarily led by quality of urbanization and

participation of women in the workforce

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2: Display Of More Brand-Heterogeneity

Category

Food & Grocery

Apparel

Footwear

Jewellery

Furniture & Furnishings

Personal Care

A more brand-heterogeneous consumer :

1. Displaying ownership of multiple types of brands 2. Comfortable with both “Indian” and “international”

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3: Revisiting The ‘Value’ Equation

• Last decade’s

economic boom lead to high discretionary spending

• Consumers looked at ‘value’ beyond price

2000 - 2010 2011 - 2020

• However, in the current environment of slowing economic growth and high uncertainty, consumers will:

1. Shift from ‘value plus’ to ‘trade downs’ 2. Look at more affordability across various

income levels and different price segments 3. Power of brands coming under pressure

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Many signs of internet usage taking off

95 mn + face book users today (second highest in the world, the figure stood

at 8mn in 2010)

20 mn prefer to read news online (6% of the total newspaper circulation and

75% of total smartphone user base)

250,000 IRCTC daily transactions (online railway reservations) 60 mn access internet via. mobile

94% automotive customers research for products online before purchase

~12mn Indians filed income tax returns online in 2013

4: More Technology Enabled And Smart Connected (Continued)…

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• No real legacy relating to consumption

• New needs and new aspirations, new norms

• Confident, higher propensity to spend ..

• Adopt technology faster

• Major impact on retailing and consumption of many categories and products ( e.g. salons and gyms, cafes and QSRs, vacations, kitchen and other home décor etc.)

5: New Needs And Aspirations, Almost No Legacy ….

29%, 346 Mn

36%, 435 Mn

27%, 324 Mn

8%, 102 Mn

0-14 15-34 35-59 60+

25%, 338 Mn

35%, 463 Mn

29%, 386 Mn

10%, 138 Mn

0-14 15-34 35-59 60+

Age-wise Population – 2012

Age-wise Population – 2020

Median Age 26 years

Median Age 29 years

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6: Need Based Vs. Aspiration Based Spending

• Need based merchandise and services: • Food & Grocery • Most categories of FMCG • Prepared food / food services • Textiles and apparel (Indian brands) • Footwear (Indian brands) • Consumer durables and appliances (white goods) • Consumer electronics (select categories e.g. TV, Laptops, Cameras) • Kitchen (large) appliances e.g. microwaves, ovens • Mobile telephones (?)

• Impact:

• Diminishing branding power, weakened pricing power • Increased volumes in most categories but lower increase in value

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6: Need Based Vs. Aspiration Based Spending

• Aspiration based merchandise and services: • Home décor • Global brands in apparel and footwear • Bathroom & Kitchens (cookware, small appliances) • Jewelry • Accessories (handbags, eyewear, pens, high end watches others) • Grooming • Well-being • Education (schooling, colleges & university) • Coaching & learning • Leisure & recreation • Socializing & other lifestyle

• Impact:

• Superior pricing power, more amenable to sustained “branding”

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7: Changes In Information Collection Sources & Decision Influencers

• More complex mix of mediums for information collection and decision making e.g. • Print • Electronic • Outdoor • Social media • Internet • Mobile • Workplace • Point-of-sale

• Likely increase of subliminal impact on decision making of issues relating to ethics, environment, social responsibility

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3. Identifying Addressable Markets & Customer Segments

Addressable Markets & Customer Segments …

• Unprecedented new opportunities for entrepreneurs on account of global and Indian changes, on account of India’s deficits in just about every sphere of activity, and on account of rapid changes in Indian consumers’ aspirations and lifestyle

• To start with, choose a sector that is of personal interest and passion rather than just follow the herd or get attracted by the flavor of the season

• Spend some time desk researching the sector (landscape, products / services being offered in the sector, competitive environment, regulatory environment, demand / supply dynamics, key success factors, emerging needs or unmet needs etc.)

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Addressable Markets & Customer Segments …

• Once an unmet need has been identified, and the overall sectoral landscape seems to be positive, get down to actual primary research by meeting as many people as possible in the manufacturing, distributing, and marketing side and as many people as possible who may be potential customers

• Revisit initial hypothesis to re-establish prima-facie unmet or emerging demand for the product / service in mind, and to come up with an innovative solution to meet that demand

• Think of achieving breakthroughs in at least one facet of whatever

business segment that you choose e.g. product design, technology, engineering / production, distribution, and marketing : a me-too approach or being just as good as any one else is not likely to succeed

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Addressable Markets & Customer Segments …

• For a start-up, as long as the sector chosen is fairly large, a more detailed market sizing study is not essential. However, it is critical to be able to segment the market (several possible ways of segmenting e.g. application, positioning (e.g. premium / mass / value), demographic, etc. etc.

• Once confident about the “USP” (and low price cannot simply be the USP), get down to preparing a more detailed business plan that covers product mix, proposed capacities, pricing mix, technology and cost of acquiring the same, resources such as land, building, and equipment, human resource needs, revenue projections, all the significant line items of expense, and preliminary profitability estimates

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Addressable Markets & Customer Segments …

• Once closer to coming out with the actual product / service, revisit a select group of potential customers to take their feedback on the current market trends, competitive trends, and their unmet / inadequately met needs

• Once in business, make it your business to understand your customers’ business (if in the B2B space) or the end consumers’ / customers’ needs and financial capabilities. This is perhaps the best way to continue to remain relevant and then to spot new market opportunities and business sub-segments

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Comments ?

Questions ?

Thank You !

Good Luck …

For further dialogue, please contact: Arvind Singhal Chairman Technopak Advisors (India) T : (+91) 124 454 1111 E : arvind.singhal@technopak.com Web : www.technopak.com