Excise duty fall out: waning brand loyalty

Thursday, 24 March 2011

The Union Budget’s proposal of a mandatory excise duty on branded readymade garments has put retailers in a tizzy. From the garment manufacturer such as Arvind Mills, to independent brands such as Provogue as well as large retail outlets such as Shoppers Stop, Trent and Pantaloon Retail everyone is concerned. Those companies who have a small budget for advertising and promotional activities as well as low bargaining ability, will create a weak brand recall among consumers, who may move on to cheaper products.

Some retail outlets have already implemented a 15-20 per cent increase in their products to deal with the rising price inflation. It is likely that they will pass on the excise duty, which will be levied on 60 per cent of MRP of products to their consumers, making their garments prices shoot up by around 27 per cent. Experts feel this could impact volumes thereby reducing 1-2 per cent in net profit of retail companies. However, this will depend from company to company, depending on the size and business turnover. For example, a brand like Provogue input cost proportion at 65 per cent is much higher than the 35-36 per cent for Zodiac and Kewal Kiran for example.

Also, companies with higher input costs but a stronger brand recall such as Page Industries, which sells the Jockey brand of innerwears, will have a better ability to pass on the higher cost burden effectively. Profits of such companies, therefore, will not be impacted much. Increased documentation could be another repercussion of the Budget proposal. However, with textile associations, garment manufacturers and retail outlets all coming together as a unit rallying against this hike, it remains to be seen whether the excise duty hike for branded readymade garments will hold ground in the long run.

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