Traditional industries benefit from San Francisco’s dot-com boom

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The growth of the digital economy in San Francisco has been phenomenal, with the number of jobs in the city increasing by 205% since 1994 – but not to the detriment of the old ways of life.

A new corporate migration study reports that, contrary to popular belief, dot-com companies are not displacing San Francisco’s traditional industries.

The study, performed for the San Francisco Partnership by management consulting firm A.T. Kearney, reports that traditional industries – defined as providers of goods and non-high-value-added services – have actually benefited from the digital boom and are growing at a very healthy rate. In fact, the 6% compound annual growth rate (CAGR) of traditional-industry revenues in San Francisco has outpaced that of US manufacturing strongholds such as Chicago (4.8%) and Baltimore (2.9%), two cities that have not experienced a digital boom.

“We conducted the study to gain a better understanding of why San Francisco’s economy is doing so well, with an eye toward identifying the factors that will help maintain a strong economy over the long term,” said Maximilian Schroeck, vice president at Kearney.

“This study raises some questions for San Francisco leaders about the city’s changing industrial profile,” said Jon Jenni, director of economic development for the San Francisco Partnership. “While the digital industry has seen explosive growth, traditional industry also has grown, and the relative shares of the different industry sectors remain largely the same.”

The study says that company turnover is high, but revenues are strong. The number of firms in San Francisco has been almost constant from 1995-1999, increasing only 3% from 29,600 to 30,400. However, turnover has been high, 41%, indicating an ongoing renewal of companies.

Business revenues in San Francisco grew by 29% during this period, suggesting higher average revenue per company. Retail and professional services firms mostly left the city between 1995 and 1999: 3,372 retailers and 1,571 professional services firms either moved or went out of business. However, these firms were more than replaced by similar types of companies entering the city with 3,380 retailers and 1,575 professional services firms.

Space-intensive businesses are leaving San Francisco. A city bound by water on three sides, San Francisco is limited in its ability to expand. There is a migration out of San Francisco by manufacturing and wholesale companies, which declined by 5% from 1995-1999.

“There is a long-standing misconception about the viability of wholesale and manufacturing companies for San Francisco,” said Jenni. “Manufacturing, which employs just 6%of our workforce, has been in decline for decades. We should welcome the new knowledge-based industries, which for the past several years have been providing good-paying jobs for all skill levels for San Francisco and the US economy as a whole.”

The cost of living is increasing. While rents have increased 78% since 1995 and the percentage of residents who can afford to buy a median-priced home has dropped to 9%, the lowest in California, the increase in compensation has only been approximately 11% for both the knowledge-based and traditional industries.

The San Francisco Partnership is a public-private partnership that offers a range of business attraction and retention services on a pro-bono basis. Its primary goal is to increase jobs in San Francisco.

A.T. Kearney is one of the world’s largest management consulting firms. With a global presence that includes 59 offices in 35 countries, spanning major and emerging markets, Kearney provides strategic, operational, organizational and information technology consulting and executive search services to the world’s leading companies. A.T. Kearney is a subsidiary of EDS.

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