Who stole my middle class?

10 years since Series A of Flipkart

• Middle class turned out to be very small
• White collar salaries now lag behind drivers, maids
• Discounts continue, but growth has plateaued
• Over 20 unicorns, but none profitable yet

Next 10 years for consumer Startups

• Oyo is bigger than OTAs, Decathlon bigger than Nike
• Supply side, full stack models theme for next decade
• Software eating the world is not a high margin business
• Startups like Byju's, Dream 11 have real software margins

A very widely quoted Mckinsey study in 2007 said India will go on to have a 583 million strong middle class. They defined the middle class as Seekers, who earn between 200 thousand to 500 thousand rupees a year and Strivers, those who earn between 500 thousand to one million rupees a year. This study formed the basis of the business plans and thesis of most consumer businesses built in the decade of 2010s.

Pitchdecks thus loaded brought a lot of money into consumer businesses in India, to replicate online consumer models successful in US/ China, starting with Lee Fixel’s investment in Flipkart in 2010. The middle class went missing. Its 2020 and we are still searching for it as VCs.

Rama Bijapurkar in a path breaking study showed us that what we call the middle class is actually the upper middle class, top 20% of the population, and this is the only market that looks similar in consumption to the middle class of developed countries. If you were a fund or entrepreneur operating out of the posh areas of Bombay or Delhi, you would find this very difficult to accept and yet you would, almost grudgingly.

 As the decade ends, we take a look at not one but two classes of ‘Seekers’ in India and how the large outcomes of venture capital in the next decade will look different from the ones attempted in this decade. First let’s talk about the new class of Seekers that is getting created. They are the maids, drivers, beauticians and the delivery boys. If you thought like my mom, you would wonder that these people earn more than the entry level Infosys IT professional with his expensive engineering degrees.

The answer can be found in the dedicated pursuit of English Medium education by the poor living in the cities. The Catholic education institutions in the country have 52 Million students as per their website, and their low-price points are a boon for the kids of the maids and drivers.

 Given this huge supply of English medium trained young people who want to move upwards in life, we will have a shortage of maids and drivers but a huge pool to take up low level white collar jobs, say in IT and BPO. This will mean we will have a huge lower middle class- the Seekers, but market forces will not allow creation of a sizeable developed-country-middle class. Big IT salaries today start at Rs 350K per annum, a number that has gone up barely 2 times in the last 20 years. Compare this with the salary of a driver, which has gone up at least 6 times in the same period, to Rs 18-20K pm. So has the salary of a full time maid in Bangalore. And the Uber driver earns over Rs 25-30K pm. So all of these people have more money in-hand than the entry level Big IT employee.

In 2010, one of the first food tech cos estimated delivery boy salary at Rs 6k pm and forecast it to increase in line with inflation. It is ironical that this gross underestimation of income increase has actually not worked in favour of startups. We have one parity with developed countries: blue collar jobs in cities are paying more than entry level white collar jobs, and manpower is a big challenge to solve for most startups or businesses.

While incomes are not very high, westernized education, proliferation of social media and internet coupled with aspirational outlook means that people are seeking brands. No consulting co could have predicted the huge onslaught of mobile broadband on our lives. For a generation that has borrowed money and spent years to study, there is enough social pressure and to maintain a fa?ade.

 Will there be a rise in discretionary spend as salaries increase through their career? The three systemic taxes on these young people are High Education fees, High interest rates and Usurious real estate. It will be a while before this segment of populations will stop voting for low onion prices.

 The one tax that does not matter for them is Income tax- their salaries will have to rise multi-fold over their careers for the income-tax slabs to meaningfully kick in, and at that point they will graduate to the real middle class. Their discretionary consumption will still be limited as the taxes above will continue through their lifetime- say in form of kids’ education. This reality has dawned on the new generation and changes are already visible.

 MBA is not the default degree to earn better and the Seekers know this- except for places that Peter Thiel calls Studio 54 Night Clubs with their exclusivity and long waiting lines.

 Educated Seekers are staying back in smaller cities with their parents and figuring out local jobs and businesses. Cities like Surat, Indore, Jaipur etc are brimming with young people enjoying a much better lifestyle than their city brethren. So even in small towns there are eateries, discos and fashion stores.

 Reskilling the Seekers and putting them into high-tech fields is a very big opportunity and Income Share Agreement (ISA) driven colleges will be the next Ivy League. The first batch of one ISA based coding-school recently outperformed even the IITs in its placement record, and interestingly found a few IITians applying for its next batch.

 In the US, first the middle class came, then the brands came, and then internet & ecommerce happened, each taking a few decades. In India, investors invested in an ecommerce landgrab frenzy first, in anticipation of the middle class and the internet, and now startups are building for the middle class that formed differently.

 Aping the US in aggregation of existing brands hasn’t worked for malls either. India has barely 40 thriving malls today, with most cities having only one or two thriving. Nobody got it wrong more than the real estate industry- it assumed that all of this middle class will live in luxury apartments. This industry is still unwinding and causing havoc on the banking industry.

 Maids will become unaffordable and food is a great opportunity, but the delivery boy earns more than the white-collar worker the food apps target. Stop the subsidies and the business shifts to the local eatery. 

 A decade of ‘market creation’ by consumer startups hasn’t been enough; growth has plateaued but discounts continue. These companies rode a tiger as investors sought growth at any cost but now investors are prioritizing unit economics in a post-Wework world. VCs in India will now have to match the global mood to local reality. The Bay area VC mantra of founders solving for problems they face themselves is definitely not true for India- most founders start with income levels much above the masses.

 Snapdeal realized at some point that it does not cater to a western-style middle class, its customers can’t afford fancy brands and its average order values will remain low. It has a better chance now compared to its peers who still imagine a western-style middle class emerging just because they are ‘educating’ so much with discounts. Paytm and Cred are two great examples of great market-insights. Paytm started with the recharge market- the masses are obsessive about how to save on their phone recharges. Cred focuses on the market that obsesses on their credit card points and knows that it’s focusing on just tiny fraction of the population.

 Lenskart, which started as a mall of many things and many brands, realized soon that the real need is for fresh brands at right price points. Lenskart may not be as big, but may certainly outlast most of its demand aggregation peers. There may even be room for a brand at lower price points as well. Players in equally large categories like Lingerie, Furniture etc haven’t been able to do a Lenskart on their markets. Oyo started as an Airbnb clone but shifted to a full-stack approach that involved creating supply. Its valued higher than MMT, the largest aggregator. 

Will Student housing and Co-living and Co-working spaces create larger market caps than online brokerages? Will full stack financial services businesses create more value than aggregators? Looks like. Are there consumer businesses beyond ‘Software eating the world’? Real world with a software layer is still a low margin business, as in Uber. Is India finally large enough for virtual-only businesses?. Companies like Byjus, Dream 11 and others have shown that there are large markets for high gross margin businesses. The entire SaaS industry of US will be replicated in India in this decade as a younger and savvier generation takes over businesses.

 The best execution for the India Seekers market has come from the Smartphone makers and perhaps the two wheeler manufacturers. Xiaomi, with its fabulous model of very low margin and high value offerings, is best suited to expand its offerings beyond smartphones. As Indian households reduce dependence on maids and experience 24*7 electricity, home appliances at the right price will be a great market. Patanjali has shown how to blend right value with cultural fit. Decathlon overtakes Adidas, Nike in sports gear retailing. With revenues north of Rs 1250 cr last year, Decathlon has also become India's second-largest single-brand retailer after Xiaomi.

The unicorns of the next decade will look beyond landgrab and create their own fertile lands.

This article appeared in a shorter version at : https://tech.economictimes.indiatimes.com/catalysts/getting-it-right-in-the-2020s/3954