Prognosis on Consumer Spending
Economic Times - October 27, 2008
We are spooking ourselves into a slowdown that is even slower than is warranted by the reality of how much our consumers' disposable income and their mood has actually been hit. Gloom and doom feeds on itself, and then it makes companies even more pessimistic in their marketing conduct as they shift from coaxing consumers to buy (as they usually do in the normal course of their business) to conserving their own cash and not taking chances on sales growth generating expenditure.
The last several quarters saw unprecedented rise in input costs, but companies decided to absorb much of it and opt for margin pressure rather than pass it on to the consumer and risk decreasing consumer demand. Their bet was on a steady future increase in consumer income and desire to consume, hence top line growth would more than offset the margin drop, and profits growth would be safe. They also strove to improve margins through efficiencies. Now it seems to be the reverse logic that is operating - companies have bull and bear behaviour with respect to consumers too too! The bet seems to be that consumers have no money to spend, so let's focus on value growths, pass on price increases to consumers, focus on the value end of the market and cut marketing expenditure. But before totally moving to this line of action, companies should pause and examine who their consumers are, how badly they are affected and in what way (real income hits? Credit availability and price? Uncertainty driven 'wait and watch' mood?). The picture may be far from bleak, in fact there may be opportunities to shore up market share or customer loyalty.
Gloom and doom based on abstract debates like whether we have a de-coupled economy or on an exaggerated notion of how aam janta are linked to the stock market needs to be replaced by a more consumer centred analysis of consumer demand. The stock market effects actually are far exaggerated - the number of households it directly or indirectly affects is around 20 million (admittedly 100 million people). The bad 'good' news is that most Indians don't have pensions and hence don't have the life crippling story of their old age savings being wiped out. Of course that does not mean having a pension fund is undesirable. But it means that we don't have that problem just now. There is no reason for us to assume that stockbroker and share bazaar players committing suicide is more dangerous for our economy than the farmer suicides due to indebtedness that we just saw.
Let's look at the state of consumer demand through the lens of 'real people' not abstract macro constructs. The fact is that Consumer India is a hydra headed monster, and comprises many demand segments or "mini Indias". Each of these is not as badly hit by the US recession - indeed some 85 million farmers and their families are quite de- linked, and have a good monsoon and crop and recent loan write offs. Nor did they gain much as world food prices skyrocketed nor do they lose as they come down. Hit by the US recession are 1.6 million people and their families in IT/ ITES sectors, traditionally good spenders, now with shaky jobs and low confidence, taking some of the pubs and landlords that they patronize down with them. But then again, some of the captive units of large global financial institutions are increasing hiring and planning to offshore more, so the news may be better than we think. There will be temporary uncertainty for as much as six months leading to new hiring not happening but this is not life threatening for consumer demand from this segment. People working in auto ancillaries, apparel, export driven pharmaceuticals and such sectors like airlines will see decreases in income, maybe not layoffs, so there is mixed news here. But the profiles of people who work in each of these sectors is quite different, as is the nature of employer and employment benefits, and the net effect on different consumption goods sectors will be different - so it is little bits of slowdown in lots of sectors. But still not life threatening for any one sector.
This is probably the first time when the rich are hurting more than the poor - but they have the resilience to ride through the present decrease if their net worth and their incomes, in some cases. The rich are hurting on account of being the most over leveraged (remember, when you are poor no one is giving you such a lot of money relative to your earning power), and on account of having money in the stock market, and children studying overseas etc. The top 8 to 10 million households by income (40 million people) fall into this category, and the luxury brands and retailers who, in any case, were not making money in India yet, will have to postpone that date for a while longer. Second homes, newest model cars, very expensive overseas holidays will have to wait. But on the subject of holidays, middle India is traveling regardless, if not by plane, by train. And to offset the 40 million people who are going to spend a lot less on high ticket items, there are 5 to 7 million government, quasi government employees who are laughing all the way to the bank. They will spend at some point in time - maybe not now when it is confusing to see what is going on, but they have the real money now. The last time they got so much, the consumer durables industry did very well. Now, maybe it will be housing?
Let's come to housing. Someone said the other day that if Unitech and DLF crash, then the entire housing market will be finished. But some banks and / or money market funds may be close to finished, and some consumers may lose their money but how can consumer demand for housing be finished? With real estate prices coming down, and with cheaper raw material costs and several builders, it would be reasonable to assume a resurgence in this market, if interest rates get better.
If we manage to contain the interest rates and flow of credit for mass market borrowers, the high value durables and car markets will come back. Leisure, entertainment, eating out will slowdown at the high end but actually speed up at the low end.
Finally, let us note that the top 20% of India accounts for about 43% of consumer spending, the bottom 60% for about 36% of consumer spending. So the mass may be safer than the class at the moment. And the news on overall consumer demand is better than we think it is.