The novel strain of the virus has gripped almost every business. However, the maximum impact can be seen on fashion retail due to prolonged store closures. Amongst all the affected sectors, fashion industry is most likely to be the last one to revive as that is at the lowest rung of priority for customers at present.
Retail brands have also witnessed a shrinkage in consumption due to the closure of shopping malls and stores which has affected both the revenue and inventory of the businesses. It has given us opportunities to add new product categories and to reinvent, for example, work from home(WFM) that retailers can look at.
Following are few futuristic trends ( based on a report share by neilson and ICICI securities) expected to rule fashion retail in the time to come.
Greater adaptability and acceptability of e-commerce as a channel: E-commerce was predominantly used as a key liquidation channel for most brands. Going ahead, this channel is likely to gain traction for even new season/ fresh collections as consumers still want to avoid crowds. Accordingly, companies may invest further to strengthen their online capabilities. Currently, online constitutes13-15% of overall sales for big retailers including TCNCBR and ARVINDFA while same is <5% for TRENT and ABFRL.
Value-fashion retail may gain momentum: Given slower economic growth ( job losses, salary cuts) and muted consumer sentiment/ confidence. Consumer may defer purchase of relatively high-priced products/ categories till improvement in overall sentiment resulting in overall downtrading.
Greater emphases on work from Home( WFH) may to increased foofalls on weekdays resulting in overall better store productivity. Many retailers are already working in same links, For example, online retailer Koovs has launched called #AboveKeyboardDressing campign targetted to work from home professionals. The brand forsee tremendous potential in this category.
Companies may make WFH fashionable: Companies may introduce WFH wear as a new category which provides all day clothing for remote working, conference calls / virtual meetings. This may help to reduce huge unsold inventories.
Focus on tight cost-control: Companies are likely to significantly slash discretionary expenses including advertising, marketing , travel, repair etc. These expenses usually account 3-4% of sales for apparel retail and 6-8%for brands companies. Companies may renegotiate rent expences(10-15% of sales) to make it variable and linked to sales. Employee expenses and other operating expenses ( 15-18% of sales) , which are relatively fixed in nature, could see tighter control.
Cash conversation and industry consolidation: New product launches/ categories may be deferred. Even new store additions may be recalibrated. Companies with stronger balance sheet may seek opportunity to gain market share. Unlisted entities/ start-ups may find it difficult to get funds.
Unappreciated short- term challenges
Short-term revenue loss pressure due to lost summer season: In order to liquidate the inventory as well as to incentivise consumers to enter malls/ stores, companies may resort to higher discounting and higher number of EOSS days. Speaking on same, Sorav Arora, Head - Retail & Training, Blackberrys, said” With the current visibility, the previous season (SS20) ended in a very short span. This has built huge inventory at all point of sales. It is predicted that the market will see early EOSS to free up working capital. EOSS won’t be an exceptional occurrence, as India still would not have come out of the situation. But we all feel that the festive season will be normal and we would see some customer sentiment coming back. Pricing of the products will also play an important role in bringing the customers back.
Balance Sheet to Strentch: Short term rise in inventory may result in higher working capital requirements/ increase in leverage owing to lower sales. TRENT, KEKC, TCNS are net cash companies while ‘net debt to EBITDA ( FY21E) and ABFRL and ARVINDFA may stretch to 4x and 6x respectively.
No doubt, covid has thrown unprecedented challenges, but like it has been said every cloud has silver lining. This situation will also be over soon and a new era of retail is ushering and whosoever can reinvent themselves as per new norms will survive.