Monday, July 24, 2006

The long tail of India

Chris Anderson's Long Tail post about "scaling down is better" is quite apt, in my opinion, for the country I live in. In essence, what Anderson says is that the real difference Google (and long tail companies) makes is that they give their smallest customers the same flexibility as their biggest.

Anyone today can set up a Google Adsense account and get access to advertising on their own web site, making it possible for millions of otherwise ignored customers to get paid advertising on their site. Anderson mentions that this is the long tail - a hitherto uneconomic market tapped by simply providing a service that would otherwise be reserved for the "high end" customer.

India is a growing economy and suddenly, we've seen hordes of "high end" consumer products come into the mainstream. I'm not just talking Gucci or Armani - I'm talking about a gazillion products that are built to sell only to the super rich. Cars priced above Rs. 10 lakhs; Restaurants that cost you a fortune to eat; Software companies that only sell "ERP" solutions; Wealth management only for those with incomes over Rs. 25 lakh p.a.

My complaint isn't that these products are available. It's that these are the ONLY (or seemingly so) products out there in some fields. For instance, most wealth management products from banks are conjured as "portfolio management systems" - a service that advises one to invest in certain financial products or markets based on one's goals - and these are limited to "High Net Worth Individuals" (HNIs), or essentially those with incomes greater than Rs. 25 lakh. Now the great majority of wealth management is required at the lower end i.e. with those that have much lower incomes, say Rs. 5 lakh p.a. These people need financial planning because their saving of even Rs. 5,000 per month today can result in a significant income stream for them tomorrow.

Further, High end products in cars make little sense in India, where the annual passenger vehicle market itself is a total of 1.1 million. No, sit down and understand that. Of the purported "middle class" of India of 300 million people, less than 0.4% buy a new car every year. (Compare this with the U.S. total population of around 300 million and 16.9 million cars sold a year) Further, the number of people that buy cars greater than Rs. 10 lakhs is probably less than 10% of all new car buyers - that's a total market of 114,000. This is shared by Honda (Civic, Accord), Toyota (Corolla, Camry), Mercedes (all variants), Skoda Octavia, Ford (Mondeo, Endeavour) (etc.) and only higher priced players like Audi , Bentley and BMW. And new cars are releasing every month in this segment!

Software companies too are not going for the layman - most products built for the Indian market involve ERP (Enterprise resource planning) priced at Rs. 100,000 or more. There is only one India wide accounting software for small companies, which is frankly a piece of cr**. But when no one is investing, the one eyed man is King! And there are very few software for filling in personal income tax, share and mutual fund portfolio management, traffic analysis, internal security and such. And there is huge potential for services in these domains too - but it's "too small" a ticket size. Long tail!

Services too are the domain of the rich. Housekeeping and messenger services are overpriced to make up for addons like buttoned up suits, printouts and such. Coffee shops provide a "hang out" for the urban elite, and ignore the deluge of masses that want one "to go, and fast". The U.S. retail model comes here, but with U.S. prices - that puts the mass market chains like McDonalds and Subway on a higher pedestal and out of reach of the very base they were created to serve.

I could go on forever. Books, Videos, Libraries and so on. Yet, the mentality of investing hasn't really sunk in. Everyone wants to go online; books online, videos online and so on. India doesn't need online investments, like I had mentioned earlier.

India has 50 million internet users (*), though the number that are ready to use a credit card number on a web page is, frankly, peanuts. Business can't be ONLY online - having an online arm is good, but we must go beyond the online world and engage in really leveraging long tail principles - using offline resellers or franchisees.

(* I find that number difficult to believe. From Computer Industry Almanac, the total number of PCs in use in India are 16.98 million. So, if we don't count people who visit cyber-cafes we'll end up with a far lower "addressable" population - people who would actually make business happen on the internet)

You might think: But that's not true! Look at the number of investors using online trading, or the number of cell phones + connections being sold, etc. But that's because of the long tail, because there are offline links to these products! Online brokerages allows for "sub brokers" - people with computer terminals who can link to the main broker and resell brokerage services.

Cell phone services too engage an offline intermediary for sales and bill collection - and Reliance Infocomm was probably the first to realise the extent of the Indian market (frankly, if they hadn't come in we simply wouldn't have seen the growth of that industry like it has now).

What we need is more services to get on the road. Products for the 300 million middle class, not for the 2 million overpampered upper class. And ideas that will allow for a much broader reach through a reseller or franchise concept.

What kind of businesses?

  • Fast food: In big cities there's still a demand for fast, healthy takeaway food. Not "burgers". Think of packaged curd rice in the south (picked, sour, etc.) freshly packaged and sold for lunch. Think of a roti cut into small round pieces and packaged in with dal/chana in Delhi. The idea is that it should take less than 5 minutes to serve, and could easily be taken away. In smaller towns, work on the "clean" model - most restaurants there simply don't have clean or visible kitchens.
  • Motels: With good highways coming up, people want affordable, clean and safe places to stay. Not five star hotels, but motels - the Kamat group is doing a great job in the south, but the field can accomodate FAR more.
  • Wealth management: Banks and FIs can easily provide this, with a strategy similar to broking. Provide online terminals to resellers in small towns, let resellers enter information and get advice - and then allow product sales to flow indirectly.
  • Books and CDs/DVDs: In smaller towns, this can be provided through an online link. The problem here is that stocking books or CDs is usually a big expense - allow a shop to order such CDs online, and send the shop only the cover of the book/CD. The idea is that the customer won't see a product immediately - they'll get it a day or two after they order, and they pay when they get a product. As sales increase, stock important products or make more trips!
  • Microfinance: Give a guy a hundred rupees in the morning. He'll give you back Rs. 110 in the evening. Yes, that's how the retail agriculture traders operate in the villages, with money borrowed from loan sharks. And most borrowers, remarkably, are honest. If you have the right infrastructure, you can get in there and offer loans at a far lower interest - yes, there is a fear of loss, but is that any greater than that in the city?
  • Magazines: There are simply not enough magazines for the middle class; and not enough variety in the ones available. "Home improvement" may not be a big thing in India right now, but there is a definite potential for "how to", "great deals" and coupon booklets in India. I am exploring such markets myself so I won't elaborate, but the market here is huge, for what is a very low burn rate at Indian publishing costs.
What do you all think? Is this true? Or will India grow so fast that the really HIGH income people will be the market we should all care about?

1 comment:

Concerned Citizen said...

The market of tomorrow is the growing middle class which is becoming more and more discerning by the day. Call it growth of aspirations or income levels, these are the people who will decide the future of the economy tomorrow. This is a volume mass that no business can afford to stay blind to for long. Be it the Small Investor in the trading space or the small quantity buyer of daily grocery, the proletariat is awake than ever before.

It's only about time that businesses pay them their due.