CONSUMER SPENDING TO REBOUND IN 2021: FITCH

Consumption is forecast to contract by 12.6% in 2020

After a COVID-19 pandemic-led contraction in consumer spending in 2020, household spending will return to growth in 2021, expanding by as much as 6.6%, Fitch Solutions said on Monday.

Health, wellness and nutrition products & services will occupy a larger share of the consumer’s wallet in the new year. This is because cautiousness would continue to rule 2021, even as the Covid vaccine’s rollout plan raises hopes.

Consumer spending in India is forecast to have contracted by 12.6% in 2020.

“While growth will return to positive in 2021, we do note the recovery will be slower than most countries, as a result of the significant contraction over 2020,” it said. “Unemployment will remain heightened, while the effectiveness of government support measures is questionable.”

Fitch Solutions forecast a return to pre-COVID-19 levels only over the second half of 2021 and 2022.

In nominal terms, total household spending will only be 1.2% higher than what it was in 2019 (?123 lakh crore in 2021, compared to ?121.6 lakh crore in 2019), indicating the extent of the impact that the pandemic has had on consumer spending.

Fitch Solutions said the main categories will return to growth in 2021.

However, the economic impact of 2020 had created a significant base effect.

Food and non-alcoholic drinks were prioritised in household budgets in 2020 and so growth in spending on these items will be slightly lower than in 2020.

It is estimated that, before the pandemic, households on average spent less than 1% on health and wellness. This changed last year as the consumer started to mark health and wellness products & services as a ‘must-have’ on his list. The percentage of spend on this segment is certainly going to increase in 2021 as well, said industry experts, and this would include the amount a household sets aside towards health insurance.

The consumer would continue to spend on household products, grocery and the essentials as usual — this occupies about a third of his wallet (see graphic). In addition, education expenses would be a priority for households. Alongside, internet connectivity required to work remotely would see a higher portion of spends.

Subramanyeswar S, group chief strategy officer at MullenLowe Lintas Group, said, “The last three months have been particularly good, with consumers opening their purse strings during the long Indian festive season. What’s aided this is also the surge in online purchases, which became super convenient — to buy from anywhere and through any platform/mode. A large number of them were in fact first-time buyers who found the experience thrilling. Pent-up demand too helped in a generally feel-good spirit that happens during the festive period. However, consumers would be watchful about their spending in future. They would continue to spend on essential items, and would spend more on health and wellness related products & services, mobile & DTH services, online education, apparel, home renovations and food orderings. I expect that the share of the consumer’s wallet in each of these would go up.”

Home renovations, which suffered a setback during 2020, will surge. Nilesh Gupta, managing partner at Vijay Sales, said there has been a structural shift in the thought process of the consumer who is now willing to upgrade on the value of a durable, appliance or electronic item.

“Everybody stayed at home and has saved money that would otherwise have been spent on travel. The consumer’s attention is now on home enhancements. In 2020, consumers were fine with buying products for functional purposes. But they were highly conscious about the price. Today, they don’t mind spending on a larger capacity refrigerator or washing machine. This is one shift in mindset which is here to stay for the sector,” said Gupta.

A laptop too has become a necessity. “This year, given the pandemic, if a household either borrowed a laptop or settled for a cheaper one or a tab, they are likely to invest in a better model in the new year. One would see laptops following the cycle of a mobile phone, which gets replaced every two years,” said Gupta.

An urban household on an average would spend Rs 1.5 lakh in a year on a product in the combined sector of consumer durable/appliance/mobile phone. With children also studying online — an exercise that is expected to continue in the new year in some form — the sector’s share of the consumer’s wallet is expected to increase in 2021, said Gupta.

What’s also going to catch the attention of consumers are apparel. This segment could account for about 10% of a consumer’s spend on an average. This contribution had come down drastically in 2020 as window-shopping came to a halt.

Sanjeev Mohanty, MD (South Asia, Middle East & North Africa) at Levi Strauss & Co, predicts consumers could seek more premium and high quality brands and products as the pent-up demand to dress well has been bottled up for a year now. Pressures on food preparations at home would likely continue in 2021 as well, which means there would be more eating out or food orders being placed for home delivery. Dalip Sehgal, CEO of Nexus Malls, said people are expected to spend heavily on entertainment and dining out. However, certain things like grocery and fast fashion will continue to be ordered online.

“To me, the year 2021 is going to be a story of two halves. The first six months, people would still be working from home, schools and colleges will still take some time to reopen and therefore there would be a steady consumption pattern. During these six months, people will continue to spend on electronics, health and fitness, beauty and luxury,” said Sehgal.

With the psyche of an Indian household being one of saving, experts said consumers could make more solid investments such as in gold and real estate. Investments form 10-20% of a consumer’s wallet and this would remain unchanged, albeit with a certain rejig of the portfolio.