'Vastra Shastra' In Times Of Covid: Can The Fashion Retail Sector Make A Comeback This Festive Season?

The fashion retail industry is betting on festive season to boost sales as it tries to recover from the pandemic. The industry was among the worst-hit during the Covid pandemic due to localised lockdowns and supply-chain shock witnessed world over.

The discretionary nature of consumer spending on fashion products further adds to the pressures of the sector.

However, with no sign of the third wave and the rapid pace of vaccination, states have been opening up at a rapid pace. Malls, multiplexes, shopping centres, and other leisure spots that had been mostly been closed, have now opened up.

As consumer sentiment improves, discretionary spending level might increase, helping alleviate the sector’s troubles.

The markets seem to have already accounted for a rise in demand. Some stocks like Aditya Birla Fashion & Retail Limited, V2 retail, and Trent Limited have already seen their stock prices rising above the pre-pandemic level with ABFRL and Trent nearing their all-time highs.

Long Journey Ahead

But the sector still has a long way to go in order to reach its pre-pandemic levels. For instance, Shoppers Stop has seen its revenues for financial year 2021 (FY21) fall below its FY11 revenues.

Several other companies like ABFRL, Trent, V2 Retail and several other listed fashion retailers have seen their revenues almost halve over the past year. Apart from Trent and ABFRL, none of the companies have reported profits since the fourth quarter of FY20.

However, according to channel check by ICRA, some of the companies are returning back to 70-85 per cent of pre-Covid levels business.

The sector is capital-intensive and requires companies to spend on inventory, human capital, leases, advertising and other areas to attract customers.

The sector is also vulnerable to rapid fashion trend changes that can lead to large, unsold piles of inventory.

These chains had also been expanding at a rapid pace before the pandemic. Consequently, many of these companies are now stuck with debt, causing the ratings agencies to downgrade or attribute a negative outlook to several of these companies.

“The ratings strengths are, however, constrained by highly leveraged capital structure with weak coverage metrics and return indicators along with presence in the highly competitive branded retail industry which is vulnerable to changes in fashion trends/consumer preferences and economic cycles,” said a credit report by ICRA.

Increasing Competition

The industry also faces competition from other retail chains as well as multiple new online retailers in the space. Today, the sector is in the midst of a war as three large players (Amazon, Reliance and Walmart) attempt to battle it out in both the digital and physical spaces.

For instance, despite being a late entrant, Reliance’s Ajio has grown by leaps and bounds. Reliance Retail has continued opening stores amid the pandemic and continues operating its older stores.

Amazon too has been looking to shift its strategy and enter the physical retailing space in several geographies. It had also entered into a deal with Future, one of India’s largest retail groups.

However, the deal went awry and the matter is currently sub-judice. Consumers have also become habituated to ordering online due to convenience and safety.

Such consumer habit changes could make the journey for fashion retail stores quite difficult.

Several retail chains already operate on single-digit margins, which make them vulnerable to losses in case of intense competitions. All credit rating agencies have highlighted the intense competition aspect as a grave risk to the current players in the fashion sector.

The United States saw several retailers go bankrupt during the pandemic period. J. C. Penney, Ascena Retail, Neiman Marcus and others joined the list of bankrupt US retailers.

According to reports, around 60 per cent of the retail companies that filed for bankruptcy had listed assets at $100 million, making the severity of the pandemic evident.

Fortunately, no large Indian retailer had to file for bankruptcy during the period.

The sector has been raising funds to survive the pandemic. Last year Reliance Retail raised almost Rs 47,000 crore from several investors. Similarly, ABFRL raised Rs 1,000 crore through a rights issue and Rs 1,500 crore from Flipkart.

Arvind Fashion raised Rs 440 crore, while Shopper’s Stop had announced plans to raise Rs 300 crore to shore up its finances.

Hope for the sector

In contrast to fashion retail chains that are struggling, other retail chains like D-Mart have managed to remain profitable despite Covid. These stores could remain open as they supplied essential commodities, which allowed them to sustain their revenue levels with relative ease.

As the sector tries to survive, it might even see some consolidation in the space. Further, expenses are going up with the rising prices of commodities.

Rentals that had been renegotiated due to the lockdowns might return to original levels as the sector recovers. Several retailers have begun spending more on their online channels and pushed innovative marketing methods to attract customers.

Rating firm ICRA expects these companies to begin spending on new stores in the current financial year, which could rekindle growth. Yet, it expects the sector to return to pre-pandemic levels only during the next festive season.