Soaring living costs, exacerbated by high food inflation, and stagnant wages are undermining the purchasing power of the traditional middle class living in cities, eroding the consumer base of top-tier companies such as Nestle India Ltd., Hindustan Unilever Ltd., and even Bajaj Auto Ltd.
In recent post-earnings commentaries, heads of these companies have rued the slowing consumption of essentials such as food and shampoo to cars and bikes. Middle-class families, according to them, are just not spending enough, and urban markets are in prolonged stress. This is in sharp contrast to rural markets, which are gradually recovering while affluent consumers continue to splurge.
"There used to be a middle segment, the middle class, where most of us used to operate, but now that seems to be shrinking," said Suresh Narayanan, chairman and managing director of Nestle India Ltd.
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He pointed out that megacities and metros were the latest "pressure points," dragging down overall growth. The "shrinking of middle class" is leading to reduced spending over the last two to three quarters, in stark contrast to previous years when slow quarters typically rebounded quickly.
Narayanan picked food inflation as the "biggest concern" at the moment.
Economists believe that the root cause of the current consumption slowdown is middle-income squeeze rather than an outright decline of the middle class. They argue that though social welfare programs help the poor and the wealthy remain insulated from inflation, it is the middle-income households that are left to fend for themselves, troubled further by the sluggish job market and lower disposable incomes.
"The middle class, or the salaried individuals, is significantly affected due to high inflation," says Madan Sabnavis, Chief Economist, Bank of Baroda. "We can keep saying that inflation is going to trend towards 4%, but that is a conceptual issue meant for policymakers. At an individual level, it is being observed that people are paying a higher price for everything.”
Sunil D'Souza, managing director of Tata Consumer Products, concurs. "We see a consumer spending issue, especially in urban areas. And my hypothesis is probably food inflation is higher than what we think it is, and the impact is far higher. And therefore, there is a tightening of belts."
The traditional consumer goods companies are losing out in the battle of wallet share for some time now, according to K Ramakrishnan, managing director of Kantar India's South Asia Worldpanel Division, which tracks household staple and essential consumption. FMCG consumption has plateaued at around 117 kilograms per household for the past three years.
"The stressed middle-class consumers are allocating their spending to other areas such as mobile services and streaming," Ramakrishnan explained. "As they accommodate rising data costs, they are cutting back in other areas, like choosing a less expensive soap for bathing."
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On the other hand, Bajaj Auto has trimmed the growth outlook for two-wheeler sales in India to a modest 3-5%, down from its earlier range of 8-9%. In September, sales of two-wheelers took a hit, falling 10% month-on-month and 8.5% year-on-year on account of weak consumer sentiment.
"The industry was thinking that we should be in the zone of 5% to 8%, but we'd probably be closer to 5% than 8%," said Rakesh Sharma, executive director, Bajaj Auto Ltd.
The passenger vehicle segment is in deeper trouble, with sales plunging 10% over the previous month and a striking 18.8% when compared to last year. A sluggish economy has left dealers sitting on alarmingly high inventory levels—around 7.9 lakh vehicles worth Rs 79,000 crore, according to FADA data, with inventory stretching to 80-85 days.
Consumer spending in sectors like smartphones has also remained weak in the September quarter. For instance, smartphone volumes fell 3% year-over-year during the first phase of the festive season between September 26 to October 7, according to Counterpoint Research. However, premium models priced over Rs 30,000 increased by 7% year-over-year, and those priced over Rs.45,000 grew by 12%, driven by Apple and Samsung.
Teresa John, economist at Nirmal Bang Institutional Equities, says it is the middle-income squeeze rather than a shrinking of the middle class.
"Traditional middle-class jobs face stagnating wages, and the wage gap between general workers and coveted middle-class jobs is shrinking or nonexistent. The prospect of educated unemployment is also very real, which continues to impact consumption," she said.
Be that as it may, the squeeze may not go away in a hurry.
"Food prices, particularly, are very high, and historically, once they increase, only a portion of these price hikes tends to subside. So, unless there is more money in the hands of people, the trend is unlikely to reverse," said Sabnavis.
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