COVID-UNDRUM 20- The Consumer Story

02nd April 2020

Covidundrum-20 - The Consumer Story

I call the current situation a Covidundrum as Covid 19 has made it very confusing and difficult situation for us, not only as individuals & families but as a nation and a global citizen. We live in uncertain times and one thing that we all know is that if something can happen once then it can happen again. Covidundrum-20 is a wake-up call for the entire world to realign themselves such that they have their dependencies minimised. While organisations look at Enterprise Risk Management (ERM) to manage their risks, its time the governments manage the countries through a Comprehensive Risk Mitigation and Continuity Plan (CRMCP) in place to address such pandemics including lock down situations.

The ongoing Covid-19 pandemic has led to a lot of changes already. For example, Health and Safety Infrastructure has become our biggest priority, Business Continuity Planning (BCP) which was mostly laughed away has taken a centre stage and Work from Home (WFH) which was a rarity in prevalent work culture is becoming a way of life.

All changes that happen in eco system usually have a gestation period before they mature to become a norm from being an option. However, there are certain events which accentuate these changes. Just like Demonetisation made digital wallets a part of our everyday life. Some things have taken a giant leap because of this pandemic. Online learning which has been there for long has now got a huge push and guess what, the push is coming from the primary eco-system players themselves – Schools, Parents & Students. Collaborative working tools which were typically used mostly by senior management have found their way to all levels now. All these changes are behavioural changes. Having seen these behavioural changes, there is a lot which is going to change soon as behavioural economics will come into force. With an impression on human psychology through this pandemic the economics has changed for ever. The rules of engagement will change, the variables impacting purchase behaviour will change and more importantly the economies will move to a reboot mode pretty soon.

The economies are going through a recessionary phase already, I hope this phase is rather short and passes by quickly. But do we see something which has changed around us? Globally or at least in countries that significantly influence the global economic trade, people are having big concern with the pandemic and the role that China has played in this. There has always been an anti-Chinese trade lobby, but it was never so powerful, indestructible and univocal as it is today. The reason for it being unabating is that the pandemic has impacted the common man across the globe. When was it last that there was a common cause bonding the global citizens? With the build-up of this common cause, the friction for Chinese trade which was earlier intermittent is fast switching to one which is steady and continuous. A recessionary phase typically leads to a huge impact on the daily lives of a common man. As recession creeps in, typically the unemployment rate increases, the income levels tend to reduce, and people convert to cautious spenders.

You might be wondering how this impacts the consumer story for us. Let me try and explain that.

As we have moved more towards a digital world, we have grown into high demonstration netizen. Meaning we are aspirational and want to have products which people in developed nations use. This

? has meant that we have been the ones who have been driving the consumption story. Look at the demand for mobiles, electronic products etc., but this is just the demand side of it.

How is this demand getting paid, is it from savings or is it from credit availed? Look at the credit bureau data and very clearly the while growth of most loans have slowed down, only the consumer & personal loans are the ones which have buck the trend. What this means is that this is mostly debt led.

Lets look at the supply side of it. As we saw the demand is debt led so most of the times the demand is fulfilled by products meeting a threshold criterion and providing good value for money. Clearly here while the higher income group fulfils the demand by taking the best in category products, others are catered to mostly by “Made in China” products. With the trade becoming more global because of E-Commerce, just have a look at what we would have ordered online over last 18-24 months. How much of these goods were “Made in China”? My estimate is that more than 35-40% of these products would have originated from China. Each one of us was supposedly doing rational buying as these products were priced less even though quality of some of these products was pure Chinese!

First Change – Normal goods / Inferior Goods & Now Chinese Goods

The traditional economics treats goods as Normal goods or Inferior goods. The normal goods are those ones whose demand increases when the income of the consumer increases while inferior goods are those whose demand reduces when the income of the consumer increases. Owing to the deep impact that the pandemic has on people’s mind, there is already an addition of a new good called Chinese good which for some of the consumers will have no linkage to income. What this means is that Chinese products may cease to be an option for these individuals when they make their buying decision. I say some as not all individuals ever think alike. However, given that this is happening globally this some could be huge and hence driving this new change in a big way.

What does it mean to our consumer story? It implies there is a hidden opportunity which exists now for those who were addressing the same market but doing a catch-up game with Chinese goods manufacturing. This demand has two critical elements to it which are important to understand, firstly it will not be a temporary spike and secondly as the gap created will be huge so multiple capacities need to be created.

Second Change – Incomes have already reduced

The pandemic has dented the airlines and logistics companies across the globe thereby making the global supply chains costly. What does it translate to? Obviously, a transfer of these increased costs to end consumers, thereby leading to a price hike. What it also means is that in a way there is reduction in the disposable income as consumer would end up using a larger pie of the current income for the same product. Remember the Income effect. Because of the higher prices the buying power of income will come down. So irrespective of there is a salary cut or not, the quantity of total purchase (All products) will take a hit.

What does it mean to our consumer story? It means one simple thing, if we can get product substitutes to be produced locally at competitive cost structures, with still a pretty robust domestic supply chain (because of Railways) we can ensure that the Income effect can be minimised. Now the products that take a hit because of income effect could be any and this means that there will be a substitution required for these products.

Third Change – Identify segments for Substitution

The Substitution effect will happen in form of typically lower priced products, but the growth and growth of Chinese made products have meant that there are very less of these lower priced products, hence the consumer in short run may not have options however identification and setting up of the industries in these filler segments will not only ensure absorption of demand but provide boost in reversing the recessionary forces. Important thing here is that we need to be cognizant of the fact that this kind of thing will happen across the globe and so we need to go with our strength and leverage them completely.

An important question that comes to my mind, while I look at the consumer story is that will this lead to a slowdown on consumer demand and hence the credit? I think the same will just be an aberration for a short period only. The reason I say this is that this pandemic has showed us where the priorities need to be for us to be ready for any such future issues. Health sector improvisation itself will be a huge sector which can productively employ lot of our population as it not only doctors that are required there. Food processing is another sector which is required to grow further to ensure steady supplies of food in case of emergency. With China becoming a ‘unfathomable’ word due to pandemic we will see a lot of businesses reviving and coming out stronger once their supply chains are realigned because demand continues to be there. More importantly we need to understand that while consumption demand has traditionally been led by Urban population the businesses revival will ensure that the same becomes broad based.

As we tide over the Covidundrum, I am sure the consumer story will continue to hold good. The economy will move towards better internalization of the situation and government will lead the way once again in restoring normalcy.

Stay Home & Stay Safe.

Manish Chaudhari