The INR 2.5 Sugarcane Juice and Consumer Spending

This afternoon when I was walking by JP Road, Andheri (west) I saw a crowded shop. My curiosity led me to that place which I saw was a sugarcane juice shop where it was written in bold all across the shop - “Full Glass Rs. 2.5” I happily drank a glass of sugarcane juice. While I was walking back to my college, I had an interesting thought. I remember drinking a glass of sugarcane juice for 5 bucks 16 years ago. My memories went back to those balmy days in Delhi when I used to go to a nearby park, play cricket and gulp a glass of sugarcane juice in a shop near the park.

Suddenly I asked myself when inflation averaged more than 5% for the past decade or so, the price of sugarcane juice should have increased from Rs 5 in the year 1992 to somewhere close to Rs 10 ( in the shops of same kind of course!). But I remember drinking sugarcane juice for 5 bucks for a long time and now it’s 2.5 bucks! What is causing this anomalous reduction in price?

We see a lot of products whose prices come down because the products are associated with some technology and it is common wisdom that enhancements in technology can reduce the costs and hence the prices. But the sugarcane juice vendor doesn’t seem to be blessed with any technology and he uses the same old machine driven by an electric motor. In fact the real estate prices have escalated greatly and that too running a shop in a place like Andheri West should in fact increase the overheads and hence the price. But we are seeing the reverse.

There are two reasons I can think off. The first is that the transportation and logistics has improved big time as compared to a decade ago. This means cost of sugarcane supplied to a shop does not increase much from that a decade ago. The second and most important reason is that there is an increase in consumer spending across all strata of Indian society. This leads to a lot of people drinking sugarcane juice as compared to a decade ago and hence the number of glasses of sugarcane juice sold per day increases which considerably reduce the overhead costs (land, electricity etc) per glass of sugarcane juice. Hence increase in consumption is one of the most important factors that have reduced the price of many items.

Increase in consumption spurs the GDP growth which leads to better economies of scale. This leads to reduction in price. But this price reduction can’t happen on a continuous basis. Let us analyse why. We saw in the sugarcane juice case that the costs could be minimised by increasing the efficiency of the game. The shops have increased the number of glasses it could sell per day. It can sell more as people buy more. But it can’t produce more than its capacity. To technically put across, all these years the sugarcane shop has been moving towards achieving a higher ‘utilisation rate’ or ‘utilisation capacity’ or in other words increasing its efficiency to cut costs. Prices will fall till utilisation of resources is maximised.

World’s top notch Management Guru CK Prahalad believes that for achieving sustainable growth, corporations should look at ‘Inclusive Business Models’ (co-creation!). The fact of the matter is that, as explained above increase in consumption should lead to increase in GDP which should again lead to increase in prosperity and consumption in a merry go around way, but the bottomline is that for this cycle to be sustainable the consumption should be ‘Inclusive Consumption’. By ‘Inclusive Consumption’ I mean the whole India including those at the bottom of the pyramid earning and spending more. A recent McKinsey report suggests that India will be the 5th largest consumer market by 2025. All these signal very interesting times to come!