The rise of the Indian small town

In a year where consumer confidence generally took a beating with the European crises, high interest rates, inflation and political uncertainty, the Indian FMCG market managed to clock a respectable growth rate of 15 per cent in 2011 over the previous year in value terms.

This charge is led by the tier II and tier III towns, according to a study conducted by Nielsen.

The metros have carried India for the last decade, and now it's the smaller towns that have taken on the demand baton.

Source: Nielsen, India

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Over a three year period (from 2009 to 2011), middle India (towns with a population of 1-10 lakh) leads the pack in value growth.

They are demanding a similar lifestyle and products as their counterparts in metros. In fact, the study points out the demand for products like pre-post wash, hair conditioners, mobile phones and high-end TVs is on the rise.

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Who is most demanding of them all?

The million dollar question Indian marketers are forever wrestling with is -- in a land of over 8000 towns and 6,00,000 villages, where is demand the strongest?

The performance in 2011 (Q4 over Q1), shows that the smaller Indian towns with a population of less than 1 lakh people, led an impressive growth story: 19 per cent in value terms versus 15 per cent in rural India and 12 per cent in the metros.

While the distribution grew marginally faster in rural:  4 per cent in villages compared to 3 per cent in these smaller towns.

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Along with distribution, there was also a significant rise in sales.

Growth in sales per point of distribution in 2011 stood at 16 per cent versus 11 per cent for the metros. 

Thus, the demand pull today is undoubtedly strongest in the smallest of Indian towns.

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What's on their wish list?

The small-town demand opportunity runs deep and wide. From an FMCG perspective, within the same year, 42 out of 83 categories in middle India grew at least 10 per cent or more in same-store sales.

In smaller towns this was even more broad-based with 53 out of 83 categories clocking at least a 10 per cent growth in same-store sales.

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It is interesting to note that many specialty and evolved categories like pre-post wash, hair conditioners, air fresheners, prickly heat powder and cheese stack up on the top of the list.

There is a great influence of metros and mini-metros on smaller towns. They want to look, feel and behave just as any urban customer.

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The evolving demand appetite

Further, mobile penetration across smaller towns and metros was largely comparab#8804 small-town India was willing to spend more on their handsets.

According to the study, when asked what the price of the most expensive mobile handset in the household was, middle India spent about one-third more than mini metros like Pune.

This demonstrates the improving 'quality' of demand going beyond FMCG.

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Another interesting consumer insight surfaced in the world of durables upgrade where despite similar levels of TV penetration, it was understood that the middle India consumer was more inclined to upgrade to a TV every two years than their counterparts from a mini metro like Pune.

While four out of every five small town consumers were looking to upgrade their TV set in the next two years, the figures were much lower for Pune at 61 per cent.

This finding demonstrates the changing demand appetite for small town India even in sectors beyond FMCG and their ability to match the demand profile in metros.

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As distribution inroads are made into these smaller Indian towns and as brands find ways to connect with the small-town Indian, the industry will continue to see a stronger proportion of value growth being led by consumer pull.

In the metros, given that distribution opportunities are largely maximised, most of the value gains must now come from same-store sales increases.

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In 2011, less than 5 per cent of value sales growth in the metros came on account of distribution gains.

Thus, the deeper we delve into the growing small-town opportunity; it becomes more obvious that these towns are quickly making the transition from a push to a pull-based consumer economy.

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A brewing market

Small town India contributes to 38 per cent of the Indian FMCG market today; their growth contribution is even larger.

Today, the question Indian marketers need to ask themselves is whether or not their marketing efforts and spends are keeping up with where the real demand is?