Deep discount brands bear excise brunt

Wednesday, 27 July 2011
Deep discount brands bear excise bruntEver since a 10 per cent excise duty was imposed on branded garments, brands that offer year-long deep discounts have been facing tough times. In fact, it is they who have been hit the hardest by the new tax regime. Experts say that the 10 per cent excise duty has hampered summer sales and winter bookings are also slow. And apparel retailers offering year-long deep discounts are the ones who are facing the toughest times. Their cost structure has got distorted since the Maximum Retail Price (MRPs) of discount brands is disproportionately higher than the final sales prices. So the implication of excise duty as a percentage of actual realization is much higher for discount brands than for non-discount brands. Agrees Jay Gupta, MD, The Loot, a deep discount retail chain “Yes, the excise duty has affected our prices, bottomlines and volumes. Our costs have increased by 5 to 10 per cent and volumes have decreased by 5-10 per cent. To bridge the cost gap, we have increased prices by 5 per cent,” he says.

Deep discount brands bear excise bruntIndustry research too has confirmed that the impact is hardest on discount brands/retailers. Indeed players such as Koutons, Cantabil, TNG, TQS have been hit by a combination of factors such as imposition of excise duty, inflation and a rise in raw material prices. And dipping sales are forcing these companies to rework strategies, including lowering discounts. The Indian apparel market has witnessed a paradigm shift in consumer demand to readymade, branded apparel from traditional, tailor stitched apparel. In order to capture a larger market share, several brands adopted a steep discounting strategy, whereby they offered discounts throughout the year at 50 to 90 per cent on the printed MRP. The high MRP allowed these players to maintain their operating profit margins in the range of 13 to 18 per cent despite heavy discounts.

Moreover these brands/retailers are also facing stiff competition from private labels of large format retail stores such as Shoppers Stop, Pantaloons, Westside, Reliance Retail and Spencer’s who are aggressively promoting their own labels while offering value-for-money propositions to their customers. Given this situation, discount brands have three alternatives to maintain their cash inflows: a) increase MRP while maintaining discounts at the same levels; b) reduce discounts with the same MRP/share excise burden with customer; c) reduce MRP.

In the last few quarters, discount brands have suffered from slowing sales growth and even a decline in sales in some cases, thus squeezing their cash flows. Pressure on sales along with large and slow-moving inventory in the books may have a significant impact on the liquidity. Therefore, it is clear that there is pressure on discount brand manufacturers to maintain their growth trajectory. Koutons Retail has closed down more than 350 stores and is offering higher discounts to check losses. Cantabil is looking to launch another brand, Kaneston, to be sold at net price. Deep discount brands have some inherent limitations. There is no standard deep discount brand in India at the moment. The model remains successful as long as it creates an aspirational value with the brand.

Experts say at the moment correction in MRP seems to be the only viable approach for these brands, as the effective price increase for the customers can be limited at around 5 per cent while the cash inflows of the companies can be maintained. Discount apparel brand manufacturers may also choose not to correct their MRP fully and continue to offer low discounts in the range of 10 to 20 per cent throughout the year. Another way out for discount brands is to correct their MRPs and start following the conventional route, whereby promotions and discounts are typically limited to end-of-season sales meant to clear unsold inventory.

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