Inflation has become the biggest worry confronting India’s government, its people and its corporate environment today. The government is rolling out measures — essentially interest rate hikes — albeit without much effect. The people are tightening their belts and reworking household budgets. Companies are evolving innovative strategies and have met with some success.

Inflation and its impact on consumer spending and corporate marketing was the subject of a Nielsen India conference titled, “Consumer 360 India,” held in Delhi in November. Nielsen is a global information and measurement company. While the conference didn’t — and couldn’t — address the core problem of inflation, it did offer some solutions from a corporate strategy perspective.

The size of the problem is indeed daunting. Ruling at more than 9% since July 2009, inflation has forced the Reserve Bank of India (RBI) to raise interest rates 13 times over the past 20 months. The cumulative increase is 5.25%. The high interest rates have forced corporate India to slow down capital investment plans, which doesn’t bode well for near-term and future growth. In the just-announced second quarter (July-September) results, some companies have reported reduced profits. Others have slipped into the red.

Household spending also has been hit. But Raj Hosahalli, executive director of Nielsen India, said both consumers and companies have changed their strategies to cope with the times. “The Indian consumer has always been value conscious,” Hosahalli noted. “Companies in the FMCG [fast-moving consumer goods] sector will have to redraw marketing and pricing strategies in both rural and urban areas to sustain consumer interest.” The good news for the FMCG sector is that while non-essential expenses have been curtailed, grocery sales have not been impacted, and impulse buying categories have registered a distinct uptrend.

Hosahalli said that the priorities of low-income, middle-income and high-income consumers are distinct in combating inflation. The low-income group’s focus is ‘How do I survive?’ The middle-income group’s is ‘How do I balance?’ And the high-income group’s focus is ‘How do I sustain?’ But the budgets of all three groups have been reallocated; expenses on eating out, out-of-home entertainment and vacations have been reduced.

Innovation Is Essential

There is an opportunity for marketers to target the customers on increased consumption occasions, Hosahalli added. Another way is to innovate on package sizes and price. Samudra Bhattacharya, sales head of PepsiCo India, pointed out that PepsiCo had introduced smaller sizes in its portfolio at the “magic price point” of Rs. 10 (20 U.S. cents). These had done very well, he said. He gave other examples — Tata Gluco, a glucose-based beverage, which sells at 10 U.S. cents for 350 milliliters, and Kurkure Masala Balls, a snack food that sells at four U.S. cents for 10 grams.

Earlier, delivering the conference’s keynote address, Arun Maira, a member of the Planning Commission of India, noted that business could be the agent for change. India needs to help bridge the chasm between those who have and those who don’t. “India is a very large market with some very poor people,” he said. It is necessary for business to come up with innovative business models to cater to the very poor, he added.

Another topic of discussion was the mom-and-pop stores versus modern trade. This debate has intensified since the Union Cabinet recently cleared foreign direct investment (FDI) in retail, though it reversed its decision later. Thomas Varghese, CEO of Aditya Birla Retail, said that the kirana (small store) is king today. But he predicted that there will be problems even in the medium term, including a shortage of people willing to run such stores as customers migrate to more convenient formats.

“The growth of retail in India has had less to do with policy decisions and more with consumers and demand,” according to Nielsen India executive director Roosevelt D’Souza. “Modern trade is picking up, and consumer spending on FMCG items at modern retail stores is set to triple to nearly US$5 billion by 2015 from US$1.8 billion today.” Sales at modern trade stores have increased by 31% this year, D’Souza added.

Social Media Means Listening

Another debate at the conference centered on social media. Few have managed to tap it properly, noted Anupama Ahluwalia, chief marketing officer of Coca-Cola India. “Social media is an interesting two-way medium that we are all trying to figure out,” she said. “Yes, most brands today have a Facebook page. But how to use that page effectively is something entirely different.” Kirthiga Reddy, head of Facebook India, cited Starbucks and Huggies Nappy Care as examples of brands that have leveraged social media successfully.

“The key to tapping social media effectively is to listen to consumers instead of asking them questions, as they are already talking about your brand,” said Farshad Family, Nielsen managing director (media), India region. “You must then make them feel special.” Another challenge for marketers is offering social media applications for mobile phones. Research shows that customer behavior on mobile phones is distinct from that on the personal computer. According to a Nielsen study, by the end of 2012, more people will use mobile over the PC for social networking.

Another big discussion of the day centered on rural markets. Urban may be where the action is, but rural has the volume. It has 69% of India’s total population with 56% of the country’s income. But branded FMCG penetration is only 34%. Rural FMCG sales are now estimated at US$12 billion and are expected to reach US$100 billion by 2025.

There are several wrong notions surrounding the rural markets, conference speakers noted. “Contrary to the myth that rural Indians prefer small packs and sachets, the consumers there actually prefer the large packs, [which] offer value for money,” said Prashant Singh, vice president of Nielsen India. Additionally, companies that have worked alongside rural consumers to lend them support beyond the sale of their products have performed better. “Rural India presents a great opportunity,” added Vikram Khosla head of sales (food) at tobacco-to-FMCG major ITC.

Here, too, only innovation will deliver dividends. Launching new products in India — in the urban or rural market — is a long-term project, according to Banoja Acharya, Nielsen vice president (client services). “The truly innovative products have a longer gestation period, need significantly higher investment and usually guarantee slower, but higher, returns in the long run.”

One Size Doesn’t Fit All

However, not all categories are alike. A Nielsen analysis of 100 new launches shows that the growth curve is different across categories, said Acharya. New launches in the impulse food category have a shorter purchase cycle and typically generate higher interest among consumers. They reach their point of maxima fastest — in as little as three-four months. Loyalty plays a big part in personal care products as consumers are less willing to switch brands. They could take 24 months to peak. Household care products reach their maxima somewhere in between as these products are driven largely by benefits rather than emotion.

Based on Nielsen research, explained Acharya, there are 12 things that every new product must do to succeed. These are: offer true innovation; get noticed; land your message; communicate with focus; be relevant; be better; be credible; limit the battles; be in the right places; win the value equation; deliver on product promises; and be strong in the long run.