Indian apparel retailing is going through a paradigm shift in terms of manufacturing, selling, and consumer demands. In terms manufacturing a notable shift has taken place from traditional tailored to modern custom made apparels. In terms of selling, retailers adopt several innovative strategies, and offer deep discounts attempting to capture a wider market. In terms of consumer demands, shoppers today are well aware of the quality and pricing of the products, as well as the competing ones, and demand a balance between both. To retain their market share, apparel retailers are providing discounts throughout the year.
'Discount' was once a term related to festival seasons. In today's cut-throat market situation retailers go up to offering 50% - 90% discounts on the MRP. Despite such high discount rates, apparel retailers are able to acquire considerable profit margins due to the high MRP of apparels. This situation was favorable until the declaration of the Union Budget for 2011-12 wherein readymade garments were under an optional excise duty 1 regime. The current budget has declared a mandatory excise duty of 10% on branded garments with an abatement of 55%.
Apparel brands that were operating under discounts would be most affected as it has is likely to distort their cost structure. These discount brands have an MRP that is disproportionately higher than the final sales price. Therefore, levy of 10% duty on these brands will take toll on the profit margins of these retailers more, comparatively over the non-discounted brands.
Apparel manufacturers and retailers have to hike garment prices to tackle the excise duty. Branded apparel segment had a price hike to 12-20%. But customers are refusing to take the increase in prices due to imposed excise duty. This has forced some manufacturers to cut down some of their production. Retailers have extended their discount offers. Still the recent months saw sales dipping by approximately 20%, which has forced the manufacturers to restrict their production.
Generally apparel retailers have a gross margin of 30-35%. Earlier they use to sell 60% of their merchandise on full price, and the remaining 40% at a discount ranging from 20-25%. With the current trend, the matrix has reversed with them selling a major portion on discount.
Festival seasons start picking up 20-45 days in advance of the approaching festival. With festivals approaching in late October and September, brands are cautious about hiking prices as this would adversely affect the consumer sentiments. Sales during November and December account to almost 40% of the total apparel sales of the year.
Alternatives:
Indian shoppers prefer more deals and are even willing to probe around, seeking best bargains trying to offset a squeeze on their income. A Neilson consumer market survey conducted in eight major metros of India states that 39% of the consumers checked for better deals compared to the 30% during the previous year. Economic times reports Dipita Chakraborty, executive director for Retail and Shopper Practice as Nielsen saying, "There is a greater deal seeking nature in consumers due to two primary reasons - inflation as well as accessibility that make consumers aware of the various deals being offered by retailers ".
Discount apparel retailers have three options to consider at this situation:
* Increase the MRP and maintain the discounts at the same level. The rate of excise duty payable and customer's buying price would be the highest under this option.
* Reduce the MRP. Retailers need to bring their MRP close to the actual selling price.
* Keep the same MRP, and reduce or do off with the discounts. Under this circumstance, the customers will have to pay an additional 9-45% more charges for the garments which they were earlier purchasing on discounts.
Indian apparel retailers are going through a difficult phase owing to the mandatory excise duty, and poor consumer sentiments.
References:
1) moneycontrol.com
2) timesofindia.indiatimes.com
3) Business-standard.com
4) economictimes.indiatimes.com
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