From the Human Resources stand point, modern retail was expected to create a large number of new jobs
It is still a very far cry from “recession". India is nowhere close to the situation in countries like Japan, US and Europe
This is the first part of Technopak‘s analysis of the Impact on Slowdown in different industries. In the next issue, learn more on what employers, employees and job seekers can do to alleviate the pain and prepare themselves for better times.
Slow down in consumption in the Indian market has been talked about for some time, but has really been felt since Lehman Brothers collapsed in the second half of the year 2008. While it has definitely affected the performance of a large numbers of companies across sectors, the current economic scenario is both an opportunity and a significant challenge for them. While there are corrections happening in the operating costs for most of the companies, there is slackening consumer demand at the same time. Also, this is the time for them to move away from a pure growth focus to a necessary focus on getting various elements of operations right – supply chain management, efficient operations, IT back bone, staff training, etc.
In this article we have tried to capture the outlook of various consumer facing industries for the next few years.
Outlook for Consumer and Service Industries in India
Recent GDP growth data from the Government shows Quarter 3 (ending December 2008) growth at 5.3%, much below government projections of 7.1% for the quarter. This presents a downward sliding trend, when compared with 7.9% and 7.6% in the first two quarters of fiscal 2008-09, and was sharply lower than the 8.9% growth achieved in the same period last year. For the nine months to end-December 2008, GDP expanded by 6.9%.
While this data is not helping sentiment in the country, it is still a very far cry from “recession”, a word being used fairly loosely and frequently in India in the recent months. Also, India is nowhere close to the situation in countries like Japan (expected to contract by 10%+ in 2008), US and Europe (expected to see their economies contract by between 2 to 5% in 2009, and now seeing unemployment levels in the high single digits!).
This overall macro-economic scenario has specific and different impacts on various consumer and service industries / sectors in India. The table below provides an overview of current (2008) and projected (2013) industry size and employment data for seven such industries / sectors. These seven industries make up about 51% of India’s GDP and employ almost 62% of its non-farm employment.
As can be seen from this table, these seven sectors are projected to grow by almost US$ 250 billion in the next five years (average CAGR of 9%) and create 35 million new jobs (average CAGR of 7%). Clearly, these will be amongst the largest job-creators in India, with opportunities across male and female, highly educated and less educated, and urban as well as rural. However, short term concerns are quite high. Let us look at these industries individually in some more detail.
Retail in India is a US$ 375 billion industry and has been growing at 10-11% over last 5 years. Of this, modern retail (which has a 5-6% share and is 15 years old in the country) was growing at 35-40% YoY and traditional retail at 8-9%. Along with the ~6.5% GDP growth for 2008-09, if we add inflation of 4-5%, consumer spending at retail in India will grow by 10-12%. This translates into ~US$ 40 billion, and is a figure that many countries would really be envious of! Traditional retail is expected to continue seeing growth in line with GDP growth (6-7% in real terms), while modern retail may slow to around 22-26% levels in the short term. Consistent growth segments are formats focused on “necessities” while those focused on “discretionary products” will see a slowdown, in line with consumer sentiments.
From the Human Resources stand point, modern retail was expected to create a very large number of new jobs. Since modern retailers are currently facing issues of overall weak macros and consumer sentiment, rapid front end expansion but insufficient supply chain investment, incorrect business models (in some cases), disproportionate real estate prices (though, these have / are correcting rapidly), slow down of international entrants, and some recent very public “controversies”, this job creation is expected to be weak in the short term (2009).
Of the top 10 performers on the BSE Sensex in calendar 2008, 5 were FMCG companies. So, “necessities” focused consumer product companies did well, while those at the “discretionary and lifestyle” end of the market saw average growth, as consumers tend to downgrade in difficult times. This trend applies to the international firms (P&G, Colgate, HUL, Nestle, etc.) as well as Indian ones (Dabur, Marico, Rasna, etc.).
Given the above scenario, the FMCG sector re-emerged (after a number of years) as amongst the most sought after at B-school placements. With the expected countrywide GST implementation in 2010 (replacing central and state VAT), resulting reduction in overall taxation on consumer products, and given their high price elasticity, consumer products are expected to continue with their growth levels. Also, we will see more innovative products being launched by FMCG companies targeting middle-upper class segment of consumers, leveraging the efficient and cost effective distribution platform provided by the modern retail. This augurs very well for current employees as well as for new job creation. There will also be jobs created in the SME segment, as they will play a major role as private label manufacturers for modern retail in the years to come.
The domestic apparel, textiles and home textiles market in India is estimated at US$ 30 billion, and grew by 5-6% in 2008. Including the export sector, the size of the industry is US$ 52 billion. The export sector faced a relatively tougher year last year, given a weak retail environment in US, Europe and Japan.
Apparel, accessories and footwear were amongst the first categories to see emergence of modern retail in India with the likes of Shoppers Stop, Lifestyle, Pantaloon, Adidas, Reebok, Nike, etc. Given current consumer sentiment, job creation in the domestic apparel market is expected to be, at best, in line with overall GDP growth. On the export side, the 80:20 rule (80% of business coming from 20% of companies) is likely to get further skewed to a 85:15 or even 90:10. This is because price pressures will continue in the international markets and economies of scale will play a significant role. Companies that supply to Wal-Mart, IKEA, etc. from India reported healthy growth last year. However, job creation was largely at a shop-floor / labour level, as opposed to middle / senior management, signaling continued pressure.
Here is the first real silver lining amongst the 7 industries analyzed in this paper. About US$ 40 billion per annum is spent on healthcare in India (4% of GDP). The healthcare market is growing at 15% YoY and is expected to double to US$ 80 billion by 2013. However, only 6% of delivery is organized and less than 10% of India’s population is covered by any form of healthcare cover or benefit.
A growing and ageing population, rising income, growing urbanization, increasing burden of chronic disease, increasing accessibility to health insurance, and medical value travel are some key reasons fuelling growth. We see the imminent entry of large corporate players in this sector, which will lead to new jobs for medical professionals (doctors, nurses, paramedics), and also numerous job opportunities for healthcare administrators, managers, corporate staff, project managers, etc.
Hotels and restaurants is a US$ 23 billion sector in India. Global slowdown / recession and the 26/11 Mumbai attacks (and so lesser foreign tourist arrivals), coupled with a slower domestic environment are likely to have a contracting impact on hospitality (especially hotels) in 2009. Given the real estate intensiveness of hotel projects (land makes up over 30% of most project costs) and the current lack of equity and debt financing for such ventures, numerous projects in the pipeline are being delayed.
The medium term outlook is of course perfectly fine, especially given that India has just 115,000 hotel rooms while over 270,000 are required (and an estimated 85,000 rooms are in the pipeline). This large demand-supply mismatch has also catapulted hotel rates in India to disproportionate levels (5 star rooms at over US$ 300 a night in the metros were the norm till a few months back), beating prices in New York, London, Tokyo and Paris. This is now correcting, and we hope hotels can develop sustainable business models at more reasonable room rates. We expect hospitality to grow to US$ 38 billion by 2013, and job creation to be proportionate.
This sector represents the second silver lining. As is well known, Indian agriculture contributes 17% to GDP and provides 60% of employment. The Indian food industry stands at US$ 200 billion (2006-07), with food processing making up for a 43% share (US$ 85 billion). Share of food processing is slated to increase from 43% to 50% by 2015, and combined with sectoral growth, this is expected to be a US$ 140 billion industry by 2015.
Job creation is expected across the board – in operations, distribution and management. Most companies (other than the likes of Nestle, ITC Foods, Ruchi Soya, Suguna Chicken, etc.) are relatively small and are non-MNCs, and in the past have been unable to attract talent the way IT / ITES, MNCs, etc. have. Given the growth contrasts, this may be well set to change, at least partly.
This sector brings up the third real silver lining in the current macro-economic environment. The current private education market of US$ 40 billion is expected to grow to US$ 70 billion in the next 5 years, and US$ 115 billion in the next 10 years. This comprises 3 segments – schooling, higher education and vocational education. In higher education, given current growth in demand for seats and increasing supply, a shortfall of almost 5 million seats is expected by 2015! There is a pressing need for world’s best-in-the-class institutes focused not only on engineering, medicine, management but also law, industrial design, architecture, healthcare administration, food (culinary) and hospitality.
The “Jobs Recession”
As explained earlier in this article, India’s GDP is not undergoing a recession but a slowdown. However, there is certainly a deep recession as far as jobs for the higher educated is concerned. Ironically, this may be the first time in India’s history when it is more difficult for the professional graduates to find employment or appropriate employment, compared to the less educated millions. Those who are currently struggling to find a decent job include engineers, management graduates, IT sector trained professionals, fashion designers, merchandisers and other retail sector professionals, pilots and other aviation industry staff, and other professionals. The problem is even more acute for those in the middle and senior management functions who have lost their jobs in the last few months.
To compound the misery further for these job seekers, even if the overall business sentiment improves in India during this year sometime, it is very unlikely that prospective employers will go back to aggressive hiring of professional staff anytime during the next 12 - 18 months. In most of the 90’s and early 2000’s, developed countries such as the USA and in the EU shed hundreds of thousands of middle-management jobs. Even in the boom times of the last 5 years, many of those jobs were never really filled up. The job creation actually happened in different sectors e.g. real estate and housing, financial services, travel and hospitality, retail, and healthcare just to list a few. These job seekers will also be facing the adverse fallout of the otherwise much heralded demographic divide of India. In the next 12 months, India will add more than 3 million graduates to the pool of employable. Of these, there will be more than 10,000 engineers from just the top 25 colleges alone (including the IITs), more than 5,000 MBAs from the top 25 Business Schools, more than 500 textile, apparel and accessories designers from the top-10 fashion institutes, more than 2,000 retail sector professionals (corporate staff level) from miscellaneous sub-streams of specialization, and more than 2,500 aviation sector professionals (cockpit and cabin staff level), etc. And finally, a trickle has already begun of the professionals of Indian origin returning to India as job opportunities dry up in USA and other developed economies.