A value fashion retail brand such as V-Mart, which is largely present in tier 2-3 towns, has most of its stores on high street and has lower rental overheads by virtue of being present in smaller markets where real estate costs are less expensive, is likely to be less impacted by COVID-19 rather than the premium apparel brands which are mostly present in the metros and tier-1 cities.
A recent report by CRISIL Ratings expects the revenue of the Rs 1.7 lakh crore organised apparel retail sector to dip by 30-35 per cent this fiscal because of temporary store closures, restricted mobility and low-income visibility for consumers.
The report says that while operating profitability is expected to be impacted by 200 basis points (bps), the absolute fall in operating profits will be much sharper, necessitating additional funding, mainly debt, by firms to make up for cash flow shortfalls. This will affect credit metrics. The analysis, based on a sample of 60 CRISIL-rated apparel retailers (representing a third of sector's revenue) considers staggered easing of the lockdown, and majority of stores reopening in June, though demand is expected to recover to pre-lockdown levels only during the October-December festive season. Pent up demand, as well as the behaviour of consumers post lifting of lockdown, will have a bearing on the pace of recovery.
The worst affected would be departmental stores (such as Lifestyle or Shoppers Stop) which could see a decline in revenue that could be as steep as 40 per cent, says the Crisil report. Half of these departmental stores are located in malls and in tier 1 cities where the rental costs are extremely high. The real estate cost in a high street like Linking Road in Mumbai can be as steep as Rs 500-600 per sq.ft. and the large format fashion retailers need nothing less than 50,000 sq.ft. for their stores. As opposed to this, the impact on value fashion retailers will be lower at 30 per cent, since they have a higher presence in tier 2-3 cities, with over half of the stores located in these geographies, the CRISIL report further noted.
While leading apparel retailers such as BIBA or House Of Anita Dongre started the first phase of Unlock 1.0 by announcing that they would not resort to discounting, Gautam Shahi, Director, CRISIL Ratings, says, "To increase footfalls, retailers may have to offer discounts while also incurring higher costs to ensure adherence to social distancing. On the other hand, we also expect retailers to convert a portion of fixed lease rentals to variable, in addition to pruning employee cost, and other discretionary spends. Considering these aspects, operating profitability will moderate by up to 200 bps this fiscal, from ~7-8% in fiscal 2020."
Converting lease rentals from fixed to variable is critical as the margin impact will be severe otherwise. Lease rentals and employee costs typically constitute 20% of the overall revenues of the apparel retailers and large proportion of these costs is fixed in nature.
Also read: 41% Indians to curtail shopping budgets in new post-COVID normal