India once again heralds the promise of growth, and opportunity for businesses — Indian and international alike. Developments in the global markets and a reasonable decline in commodity prices are aiding this despite emerging signs of some gloom in Europe. With the recent push by the government to restart the investment cycle, and also funnel foreign direct investments, the real question occupying more mind space in boardrooms today is this: where to play as rapid shifts in India’s geographic and economic landscape take place? For example, the number of census towns increased from 5,161 in 2001 to 7,935 in 2011, while Bihar and Madhya Pradesh, erstwhile BIMARU States, are increasingly being seen as the economic miracles of the decade.
This question is increasingly forming the bedrock of strategy for all companies — irrespective of their target market being the affluent-consuming classes or the neo-middle classes. Clearly, there is no unanimous answer to this question as it is guided by the overall aspirations and resources of companies. But there is one proven approach to succeed in developing and developed markets. Companies that have managed to spot and serve granular growth opportunities have won, with Indian ones being no exception. Analysis of the performance of a few leading Indian companies shows that players who adopt a granular growth strategy typically grow at 1.5 to 3 times the industry average. For example, the focus on high-growth regions and segments helped an automotive company outperform its competitors, with the choice of segments and markets accounting for over half of its 30 per cent year-on-year growth from 2011 to 2014.
The conceptTo develop a granular growth strategy, companies should consider focussing on metropolitan clusters. Metropolitan clusters are groups of districts located around the metropolitan district that have high economic and income potential, and are contiguous such that each cluster represents a serviceable market with similar psychographics. Based on this approach, India can be dissected into 49 mini-markets — about 183 districts — or metropolitan clusters that accounted for 70 per cent of India’s GDP in 2012 and were home to 250 of India’s 450 Class-I cities according to the 2011 Census.
By 2025, they are likely to contribute 77 per cent of India’s incremental GDP between 2012 and 2025; 73 per cent of its income pool; and 72 per cent of its 89 million consuming class households — households with an average annual income of Rs.4,85,000. No other combination of as many districts provides access to such a disproportionate share of the pie.
The economic might of the cluster-based approach to establish a pan-India footprint is further underscored by the dispersion of clusters; 29 of the 49 clusters are located in performing States like Chhattisgarh or low-performing States, e.g. Bihar, Uttar Pradesh whose GDP per capita is either between 0.7 to 1.2 times that of India’s or lower than 0.7 times that of India’s respectively.
AdvantagesInterestingly enough, of these 183 districts that constitute the 49 clusters, 70 are semi-urban and 57 are ones with transition economies — less than 60 per cent and 35 per cent urbanised respectively — making them locus of development and growth. Why?
First, they have a lower competitive intensity when compared to districts that are more than 60 per cent urbanised. Second, the quality of life in these clusters, measured across key urban services — access to drinking water, sanitation, electricity, and cooking gas within the household — is similar to India’s or higher with the exception of Bareilly. Third, a relatively skilled workforce equips them to evolve into active centres of production and consumption. And fourth, their proximity to metropolitan cities provides them with the connectivity required for mobility of goods, and labour. For example, the Solapur cluster — which in addition to Solapur city and district, encompasses the adjoining high potential districts of Sangli and Satara — is actively growing on the back of tourism; a thriving wind energy sector; and the manufacturing of textiles. Finally, investments in these districts could help accelerate the outcomes envisioned from the government’s ‘Make in India’ programme.
PrioritisationThe next step to granularity is to prioritise these 49 clusters to ensure that the allocations they receive — from companies and governments — are commensurate with their economic and income potential. To do this, we dissected these clusters across the dimensions of growth rate and per capita income, and the results are telling; 21 of the 49 ‘high growth-high affluence’ clusters score above others and India on both metrics. They are dispersed across various groups of States from ‘high performing’ to ‘low performing’ ones, account for 77 per cent of India’s airline capacity, 59 per cent of port capacity and 29 per cent of the number of railway junctions in the country. By 2025, they are likely to account for 47 per cent of India’s income pool and 44 per cent of consuming class households. As expected, many of these 21 clusters are led by metropolises like Delhi, Mumbai, Hyderabad, Chennai and Bengaluru. But the unexpected metropolis-led clusters in this coveted group of 21 include — Rajkot, Jabalpur, Bhopal, Madurai, Patna, Jamshedpur, Tiruchirappalli, Adilabad, and Indore.
But even this cohort of 21 clusters is not homogenous — local market attributes, driven by social and cultural attitudes, vary significantly across consumers. For example, an analysis of the expenditure data provided by the National Sample Survey around 2011-12 suggests that the expenditure on transportation in the Indore cluster is about less than half of that in the Delhi cluster. Auto companies would benefit from making note of this. Indore is an important cluster for e-retailers — a relatively lower number of households own computers indicating that the online market is yet to take off, and early investments are likely to yield a higher pay off.
Our experience shows that marketers who have followed such a detailed granular cluster-based approach have emerged as winners. A leading cement manufacturer followed a similar granular approach to allocate resources to attractive markets, resulting in a five per cent increase in value share. So, are you going to follow a cluster–based approach to win?
(Jaidit Brar is a partner based in McKinsey’s New Delhi office; Sunali Rohra is an expert co-leading McKinsey’s work on urbanisation in India and based in Mumbai, and Shishir Gupta is a knowledge expert with MGI Economics Research based in New Delhi.)
