State of the Economy and MSMEs

“How do you feel about the economy?” is a question often discussed in public forums, private conversations and the media. The question acquires more weight in light of the volatility and uncertainty which are surrounded with and many of us are still grappling with the events of the past three years – the pandemic, spectacular run and crash of the stock markets, high inflationary environment, Russian-Ukraine war, job losses, the arrival of ChatGPT, and the list is endless.

These events have had their share of impact on not just the Indian economy, but the global economy as well. This was the theme of the discussion that I attended a few weeks back. It was toplined by leading industry and market experts (Rakesh Biyani, Vikas Khemani and Saurabh Mukherjea*) who provided an in-depth commentary on the underlying factors that define the state of the economy and how one can navigate through the uncertain environment in which we are.

Below is my summary capturing the key insights and learnings.

If we look at the state of the global economy we recognise the fact that India is one of the few economies, globally that is acting as a beacon of high economic activity, with Global CXOs being extremely bullish on India. If we look at the GST collections over the past year, we are witnessing consistent growth and in the recent past, the collections have been historic. But the perception differs on the ground, especially when you talk with small businesses or MSMEs. To understand the disconnect, we need to zoom out and understand the macro picture.???

India, a Story of Integration

Over the past few years, the world has witnessed a higher inflationary environment and the India story is no different. If we look at GST, higher GST collections can also be alluded to the high inflation that we are dealing with, as it is the tax on value. The impact of inflation has been visible across the board, be it the rising cost of capital, housing, cost of consumer durable and others which have contributed to the dampening of demand with customers deferring purchases. This can be defined as transitionary in nature. As we see monetary policies having the desired impact albeit at a slow pace, we are bound to transition into a more stable inflationary environment.

When we look at the macroeconomic story of India, we are following a similar playbook of a modern economy that has now become a force to reckon with. If you pick up any modern economy, integration and consolidation are drivers of rapid economic growth. The country has witnessed multi-faceted growth across industries owing to a slew of reforms and policies that have enabled the growth of the economy.

But the growth is uneven due to the size and diversity of our economic landscape. Remember, that the economic cycles don’t play out in the same way for all businesses/sectors – some witnessing accelerated growth while others are slowing down – aka K-shaped economy.? Along with it, we have also witnessed the rise of large conglomerates with diverse interests consolidating gains as economic development proceeds.

As the sectors get more and more organized, it will keep benefitting the larger businesses. As they become more organized, they will discover more efficiency translating into better value propositions which will appeal to a larger group of customers. This doesn’t mean that there is no role for MSMEs or small businesses.

New India - New Playbook of Success

The MSMEs or small businesses are the ones that contribute to a substantial part of the overall GDP of India and are also responsible for job-creation efforts. To know how the MSMEs/small businesses can benefit, we first need to understand the kind of MSMEs which exist in India. They can broadly be segmented into two kinds.?

One that focuses on creating a niche moat, with its expertise and capabilities, is well capitalised. While the other thrived on tax arbitrage, are often undercapitalised, and lack of expertise/better capabilities. The first kind of MSME has seen a higher share of disproportionate growth in recent years, as they focused on better output quality, creating value-added products along with demonstrating reliability and agility, all translating into a healthier balance sheet.

Below are a few examples of businesses that have been able to scale-up in a crowded space.

1 | Theobroma and Jumboking Vada Pav?

These two brands are examples of small businesses that are part of an industry which is extremely competitive and commoditised in nature. On one hand, Theobroma morphed into a brand to reckon with from its early days as a small store in Colaba Causeway to a premium bakery and patisserie brand with multi-city operations.? On the other hand, Jumboking Vada Pava became the nation’s top seller of vada pav with the growth supercharged by a solid franchisee network with a widened set of offerings – core and ancillary products.

Both these businesses were plagued with a saturated industry that witnessed a wave of business closures owing to changing business environment, the next generation not interested in taking on the mantle, the old way of doing business, fragmented and unorganized and many more. Given these constraints, the entrepreneurs took on the challenge of rethinking their business model from a fresh perspective and focusing on creating value. This not only helped them differentiate from the competition but elevated their positioning which appealed to a much more diverse set of customers who had the ability to pay a premium.??

2 | Style Union

They have created a brand new chain of fashion stores that are built on impulse buying. In less than a year they were able to open 43 stores with an average size of 8000 sq.ft focusing just on the Southern India markets. The success of these stores is driven by investments in technology impacting customer experience along with focusing on tight inventory and supply chain management.?

Their business is built on the customer’s buying journey which includes understanding the buying triggers, customer preferences, pain points and faster sales conversion. This means every time a customer walks in, he/she is going to experience a fresh stock which triggers the impulse to buy.?

For this faster impulse to work, they required customers with higher disposable incomes and hence they picked up fast-growing markets down south rather than focusing on the Western India markets which are saturated with a lot of businesses competing for the same market share.?

They deployed a strategy which is contrary to how the fashion industry operates. We are living in a world that is deluged with discounts and promotions and it is believed that a customer will not buy if that's not the case. Interestingly, their store offers no discounts, no promotions, and even no end-of-sale offers - it's a fixed price throughout the year. This has not been a hindrance for them, as the value proposition is solid and is targeting the right set of customers.?

What's next?

The ‘New India’ mindset is rapidly growing and there are enough opportunities for people who are ready to work hard and create a niche for themselves. There are enough examples of businesses around us which have scaled up the economic ladder by sheer tenacity and focus, turning into multi-billion dollar businesses.

Here are the 4 key takeaways when it comes to defining the playbook of success in ‘New India’.

1 | Understanding the micros of business

There is a need to cut through the noise and focus on the signals. What this means is that businesses need to relook at their business strategies and not worry too much about the macro events which are playing out. The goal is to understand what will it take for a business to become sustainable in an emerging economic landscape (regulatory environment, consumer mindset and technology evolution).?

Secondly, it is critical to understand the biggest advantage a small business has over a large business is the control of the overheads and the agility to respond to the changing dynamics on the ground. These are multiplied by the promoter’s energy and motivation to succeed in the face of adversity.

Lastly, larger metros and cities are saturating and it has become unsustainable for businesses to scale up as the rentals have gone up, space availability is a constraint and the overall environment is changing. There is a need for businesses to step out of their comfort zone and venture out into new territories and locations which provide ample opportunity for business growth.

2 | Understanding changing consumer mindset??

Consumer mindset and preferences are undergoing a radical shift owing to the rise of digital, with technology enabling all facets of a consumer’s life. This is leading to stress on customer loyalty as they become more demanding owing to the exposure, they have in an omnichannel environment.

Secondly, the pockets of economic influence are rapidly undergoing a shift from a few centres closer to metro cities to a much wider spread into tier 2 and 3 cities. This has created a completely new set of customer segments who have moved up the economic ladder and are aspirational in nature. The cities and towns which they inhibit are witnessing tremendous value creation for all sorts of businesses.???

These changes are forcing businesses to go back to the drawing board and redesign their playbook of doing business in the digital age and redefine product strategy with a focus on products and experiences to stay relevant in the coming years.

3 | Technology Adoption

In the past decade, access to technology has been democratized and the cost of technology adoption has shifted from a high upfront cost to pay based on the usage. This has created a level playing field for everyone and has opened up avenues to adopt technology solutions across their value chain and improve the efficiency of doing business.?

A lot of leading technology names have created business verticals which specifically cater to the needs of small businesses by enabling solutions spanning point of sale, inventory management, bookkeeping, logistics, marketing and communication. The onboarding is super quick and the solutions are usually affordable in nature and can be scaled up based on the usage.

There are many success stories of small businesses which have leveraged technology to rethink their distribution strategies and have experienced massive success along the way.?

Government-led technology infrastructures such as UPI and now ONDC have enabled businesses across the board to operate in the digital economy by reducing the friction in technology adoption.??

4 | The need for formalisation

There is a certain way in which small businesses operate – business and management are the same. One cannot expect to grow the business if there is no basic financial discipline in place. This approach becomes a bottleneck in scaling up the business, raising funds, attracting good talent, etc. It is imperative to formalize the business operation, which includes defining a salary that the promoter can draw on a periodic basis, bringing a more professional management team, defining a succession plan, and much more. What this does is that it brings a certain sense of discipline and shift in perspective and lays the foundation for scaling the business.

Secondly, it also helps in the financial health of the business. As we know that capital in business is like fuel for a vehicle and an undercapitalized business has very low chances of survival in the long run. Availability of credit was a challenge in the past, but things have changed for the better in today’s time. Easy availability of finance irrespective of the size of the business is the norm with multiple avenues for raising funds spanning banks, NBFCs, fintech, venture capital, private capital, etc.

The key requirements are the formalisation of the business, who is the management team and how is the business model aligned from a scalability point of view. We have to understand that betting on a business is fraught with risk and the above requirements are means of mitigating the future risks for any investor or a strategic partner.

To sum up, as we transition into a more organized and fundamental-driven economic growth journey, structural repairs (GST, etc.) will keep happening along the way. The key is to keep the focus and be confident about the future of the Indian economy.

Hope you found the aggregation of learnings useful. Would love to hear your thoughts and perspectives as well.

Until next time!

~ Sajid?

(Sajid is a Strategy Consultant who works at the intersection of human behaviour, business design and innovation strategy. He blogs at sknotes and tweets @sajidkhetani.)

* Panellists profile:

• Rakesh Biyani is an experienced retailer with a demonstrated history of working in the retail industry.?
• Vikas Khemani is the founder of Carnelian Asset Management Pvt. Ltd.?
• Saurabh Mukherjea is the founder and Chief Investment Officer of Marcelius Investment Managers
• Moderated by Aly Jagmagia who is the founder of Seicho Capital