Indian apparel retailers seem to be stuck between a rock and a hard place. On one hand, falling cotton prices is inducing them to reduce product prices to woo back customers while on the other hand, they are fearing the government’s decision to retain 10 per cent excise duty on branded apparel would force them to hold on to the hike. And the dilemma over how to gain consumer confidence to clear piling inventories and also to maintain the cash-flows continues in the new year…
The buzz is that excited by the ‘buoyancy’ in tax collection from branded clothing, with collections of more than Rs 2,000 crores in this fiscal, the finance ministry may not reconsider its decision of levying 10 per cent excise duty on branded clothing. Indeed, the textiles ministry has recommended that the levy of excise duty on branded garments be withdrawn and exemption restored or alternatively levied at the rate of 1 per cent with abatement and CENVAT credit. However, sources say the FM is unlikely to relent. And this has alarmed apparel retailers since it would once again mean, retaining the high product prices and turning down consumers. After the announcement in last year’s budget, most brands increased product prices between 15 to 20 per cent to pass on the burden of excise to consumers, which led to lower demand in a year of economic turbulence.
Mohan Sadhwani, Executive Director, Clothing Manufacturers Association of India (CMAI) says the industry is expected to have a cumulative loss of around Rs 4,000 crores, which includes sales going down and discounts going up, plus the extra inventory carrying cost to retailers and manufacturers. The industry reported its worst sales performance in the festival months of September and November, he added. There are 25 large branded players and lakhs of small and medium clothing manufacturers, all of whom are covered under excise. India’s organised apparel market is worth Rs 40,000 crores annually and was growing at 15 per cent till 2010. Sadhwani informs clothes worth Rs 1,400 crores are lying unsold with retailers and manufacturers. And companies are now desperate to get rid of high-cost inventory. The ratio of fresh sales and discount sales is 70:30. Experts says this year, the share of discount will rise to 40 per cent. Brands using discounts as a marketing tool (including factory outlets) have been very badly affected. They are now being forced to pay excise on MRP which is much higher than the actual selling price. Caught between higher inventories and deeper discounts, the average margins of 7-8 per cent have now evaporated.
On a positive note, fall in raw material costs was the only good news for retail last year and this may lead to brands reducing the product prices by as much as 10 to 20 per cent from March this year. In fact, big names like Reliance Retail, Spencer’s Retail and others are said to be relooking at their product prices before their spring/summer collection hits the shop floors. After correction in prices, retailers are hoping to bring back the customers. According to J Suresh, MD and CEO, Arvind Lifestyle Brands and Arvind Retail, the quantum of drop will be at least 10 per cent next fiscal.
However, premium brands may not be able to reduce prices due to currency depreciation. In fact, they are expecting prices to go up by almost 20 per cent, which means, the price correction will only happen in the value segment while premium and luxury brands will continue to cost more.