The DeMo Effect: One Year and Counting

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While the jury is still out on the good, bad and the ugly sides of demonetisation, we can all agree that digital economy has had its biggest push ever in the country after this disruptive policy was launched a year back. Let's see how this has impacted some key sectors.

High Earning Not Rich Yet aka HENRY is a new economic category that has emerged in post-demonetised India. They comprise people who are typically very aspirational, well-read and who also want to find something that will suit their personality, not necessarily for a boast value. They fall in the age bracket of 25-35 and earn in the range of 15 lac+ per annum, and they have opened an entirely new channel for luxury retailers after digitisation and online retail sales saw an upswing in the aftermath of demonetisation.

While the traditionally rich, despite being steady spenders, stick mostly to tried and tested brands, these new bunch tend to take risks and try things out which offers a whole new range of possibilities for luxury retailers.

Swagat Sarangi, co-founder of premium invite-only app Smytten, says, "The luxury market in India caters to two kinds of customers - the traditionally rich and the nouveau rich, or old money and new money. And HENRY belongs to the latter category.

"The old economy has affinity towards certain brands while the new gen is all about 'let me first figure out what works for me'. They will want to find what fragrance really works on their body composition rather than simply opting for a Nina Ricci or Chanel No. 5, which have a huge following. There is a massive change in the way shoppers are 'buying' luxury products. For us, 90% of the core audience is HENRY, in the age group 25-35, mostly female in the income bracket of Rs 15 lac annually or more. They have a fair share of disposable income at hand."

Online shopping has been gaining traction in India, even before demonetization, with desi players like Flipkart and Snapdeal fighting it out with the global giant Amazon. But what demonetization did for online outlets was to open the floodgates of offers from digital payment channels who partnered with service providers to ensure that shoppers keep shopping. And brand positioning and marketing focus became increasingly tilted to HENRY because of their tech savvy nature and affinity to the online experience, which has democratized the luxury market.

"Luxury brands have realised that they can reinforce their brand positioning, especially after demonetisation, by welcoming this new stream of young players, who come with a fair share of disposable income, good social media presence and the power to help push their business through referrals," says the top executive of a major company that sells international luxury products in India (on the condition of anonymity).

Swagat says, "Young crowd with a decent amount of disposable income has access to information, they know what they want and are now figuring out new avenues to fulfill their aspirations."

Luxury retailers are also seeing a paradigm shift in sales demographics with Tier II and III cities catching up with Tier I cities in terms of high end luxury sales. With the lack of luxury shopping spaces in small cities, online shopping makes more sense to the HENRY category in these places, despite apprehensions about fraud on the Internet.

"The trust issue is still there because of the marketplace model most of the e-commerce industry operates on. As the luxury retail is limited to the metros, Tier II and III cities rely on the convenience of online shopping for premium and luxury products, which then, by default, plays a huge role in the growth of the luxury markets in smaller towns and cities," says Swagat.

"In early 2016, almost 90% of our purchases came from Tier I, which is typically top metros. Now, almost 35% of our sales comes from Tier II towns like Nagpur, Aurangabad, Jalandhar, Ludhiana and the north-east, which is coming up as a very big market, especially in premium beauty & makeup sector. In the south, Coimbatore, Mangalore and Mysore have caught up quite significantly," he adds.

Online retailers have also seen a trend of Tier II sometimes exceeding Tier I in average basket value. Swagat says, "Our hypothesis is that tier II doesn't have a showroom to drop by and buy a BVLGARI rose gold fragrance for example. So, they think of buying it online even if it is on a very high price range because for them it might make sense as they might be buying one luxury perfume in a year."

Things weren't that rosy for the retailers when demonetization hit the country. It took more than a month for business to stabilise.

"Demonetisation was introduced on November 8, 2016, and that was a terrible month for us. Even though much of our shipment was not in cash on delivery mode, we still got hit by the whole sentiment of money not being available in the system. It was really bad until mid December and then we started seeing holiday shopping with Christmas, New Year etc, and with end of the season sale, the business started kicking in again."

But websites had to continue with incentives to keep shoppers interested until things began to pick up.

"In the luxury segment, not many brands want to offer deep discounts to keep the brand positioning intact and we do not introduce discounts without the permission of the brands. Still we did have to offer around 10% added incentive to the consumers than regular times. But things got back on track and in February, there was a spike with Valentine's Day, and since then business has been good. And with wedding season going on now (November onwards), we are seeing a spike in business which was completely muted in the same period last year due to demonetisation.

If you look at the Indian luxury market, reports show it has been growing by 25% YOY and it is already an $18bn industry. But again, in India, luxury space is very narrowly defined. It is primarily about luxury cars, spirits, wine and jewelry but if you go down, there is a huge market that is opening in the premium space.

Swagat adds, "Premium segment has seen a massive growth as compared to luxury space, driven by the aspirational HENRY class. Our estimate is, there are about 10mn households earning more than Rs10 lac income annually and who would have a decent amount of disposable income to splurge on these things and these numbers will go up to 20mn households by 2020.

A combination of physical luxury stores, social media presence and collaborations in the digital space (without compromising on the exclusivity component) will drive the luxury sector to the cusp of market dominance.

Property and Real Estate: Reality of Realty

The sector that saw a deep impact post demonetization was real estate. A sector that mostly operated on hard cash, was jolted to its core with the currency crunch and push for digitization. But companies who played by the book found the impact to be a mild seismic activity than an earth-shattering quake.

Nibhrant Shah, CEO & Founder of Isprava, a luxury realtor, says, "We don't think digitization has had much of an impact on the luxury real estate segment post demonetization. It indeed was a sentimental hit for the first couple of months but, that was all it was. We believe, demonetization would have only hit the fly by night operators who were not ethical in their approach. Trusted players kept following the same process and the HNIs (high net worth individuals) and UHNIs (ultra high net worth individuals) of the world were still able to afford the luxury they wanted."

Real estate was among the worst hit sectors after demonetization. Raj Khosla, Founder and Managing Director of financial services marketplace mymoneymantra says despite the short-term 'bearish' hit, the effect of demonetization on real estate will be positive in the long run. "Real estate got back on track after a few months but only partially, as in actual users were acquiring but the investor is still missing. Price buoyancy is determined primarily by investors. So, the effect will be positive in the long run."

Reports on market analysis pointed out that 7% of real estate customers shifted from buying to renting. This trend seems to have emerged as there were talks about an overhaul in property laws. As a positive effect the sector has seen a certain level of consolidation and a rise in purchases by upmarket clients who made the best of the situation at hand.

"For a brief two months period right after demonetization, we did experience a sentiment hit in the market, but having said that this was only short lived for Isprava, mostly because of our transparent purchase process and seamless experience. So, when the world thought that the luxury industry, especially the real estate sector would perish, we on the contrary, saw an upward trend, increasing sales in the holiday home market.

"We believe this has happened because the industry has become more consumer centric and only the large players have survived. The process and the new set of laws that now define the real estate industry, have separated the wheat from the chaff. The result is what I like to call Real Estate 2.0"

The real estate sector is now developing every day. Builders have gone beyond the old-school brick and motor perception and companies are now looking to disrupt the way real estate functions. By bringing technological developments in client relationships, client servicing, operational and building processes, the typical fly by night operators will leave the arena and only trusted players will survive.

Shah adds, "Over the years we have also seen a psychological shift in the mind set of people when it comes to the luxury segment in India. Families are now more open to buying and investing in various luxury products and services. The future of the real sector looks bright due to this developmental shift in India."

Investment and Savings: More Money to be Made

While it is difficult to estimate how demonetisation has affected the savings habit of people, it can be said that after demonetisation, people have started to invest a lot more. The simple reason for this is that they had more surplus money in their bank accounts and easy access to investment options like fixed deposits and mutual funds. Money that earlier used to be held in cash found its way into bank accounts. The financial industry also created awareness about investment options and how that extra money lying idle in the bank could be used to earn higher returns.

"Enquiries about SIPs (Systematic Investment Plan) vastly enhanced post demonetization. Also, there was a splendid acceleration in insurance policies, especially those products which combine investment and risk cover", says Khosla.

"The mutual fund industry has reported record breaking inflows over the last year and a part of this is because of demonetisation. The stock market bull run has also aided and drawn people towards investing in mutual funds. It is safe to assume that people getting into this habit of investing would also have led to them saving a lot more than they did before. How much an individual or family saves would depend on their income and expenses, but increased investments post demonetisation point towards a higher rate of saving as well," adds Archit Gupta, Founder and CEO, ClearTax.

The general outcome from a cursory view into these segments show that economic activity keeps taking new shape amid changing circumstances. The true impact of demonetization will be revealed in the years to come. But with strong fundamentals on our side, the Indian economy is still a juggernaut.

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