Hiring slowdown takes a toll on FMCGs

Owing to economic slowdown, the number of new jobs would fall by a whopping 3 million this fiscal, according to economist Bibek Debroy. Hiring slowdown depletes purchasing power of consumers and savages consumer confidence, say experts. And fast moving consumer goods (FMCG) companies are not pleased one bit – after all, they feel the pinch most.

With GDP growth estimates coming down sharply of late, there is a huge risk to new jobs. Debroy says when gross domestic product or GDP grows at 7%, the economy would create 10.5 million new jobs in a year. But, if the GDP growth rate slips to around 5%, as is happening in India this fiscal, there would be only 7.5 million new jobs.

Hiring freeze, job losses and absolute, not real, growth in salaries (that does not match inflation and hence lowers the purchasing power) have all set alarm bells ringing at FMCG companies.

A survey by recruitment firm Manpower revealed that India’s employment scenario is the weakest in the last three years. And industry body Ficci states that the waiting period to find a job has increased from 2-3 months to 9-10 months. Many job-seekers are settling for junior roles.

 Despite attempts to shift focus to rural markets, FMCG companies can’t wish away the fact that urban markets account for much of their sales. And when hiring slows, sales, too, slow. Worse, signs are not encouraging.

 “Indian consumers have become progressively more pessimistic about future prospects over the last two years, following negative real wage inflation and a plunge in hiring. We see risks to overall consumption from: a) further job losses; b) delayed hiring in IT and financial services; and c) prolonged job search period post redundancies,” says Nitin Mathur and Jitin Samtani of Espirito Santo Securities. The brokerage house has turned bearish on the sector overall, leaving no buys in the FMCG space.

That’s probably because those who have jobs see that salaries have remained more or less flat even as  prices rise, making them seek ways to optimise their spends.

That could lead to downtrading, a scourge that the FMCG sector has been dreading for the last two quarters. There hasn’t been any downtrading yet, analysts say, but hasten to add it is a matter of time before discretionary spend gets impacted.

Amitabh Mall, partner and director at the Boston Consulting Group, says that when the job market does not look very bright, consumers tend to become tight-fisted: they either buy fewer quantities or defer some purchases, or go in for cheaper options.

Any downtrading would spawn price cuts and higher spends on ads and promotions, thus shrinking the bottomline. As if to fill the cup of FMCG woes, certain stocks’ current high valuations are causing concern (they are trading at up to 30 times their 2013-14 earnings). When earnings figures are revised downward eventually, FMCG stocks would plunge, says Naveen Kulkarni, analyst at MF Global, a brokerage.

“High input cost, devaluation of the rupee and the changing consumer behaviour have also taken the wind out of the consumer space,” says Gaurav Sharma, associate vice-president, Tecnova India, a management consulting firm.

Urban market troubles will affect FMCG companies’ efforts to increase their rural presence, Sharma says.

If September 14-15 reforms hold, consumer confidence may get a boost, but it will be some time before foreign investments trickle in and new jobs are created. If the reforms lead to political instability and policy logjam, pain for FMCG companies will only intensify.

Mathur and Samtani of Espirito fear the imminent slowdown in the consumer sector may even result in the “king of the defensive sector” losing its crown.