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The Good, Bad and Ugly of How the Lockdown Will Affect India’s Retail Sector in FY’21

While 'essential retail' will weather the storm, the woes of other retail sectors include over Rs 2 lakh crore in lost sales, which puts nearly 2.6 million jobs at risk.

One metric that stands out as glaringly different in the economic comparison between India and China is the share of “private consumption” in the overall GDP of each country.

For India, this share of private consumption stands at 58% of the country’s GDP versus that of China’s, which is at 34%.

In layman’s terms, this means that the internal demand to consume merchandise and services is far more crucial for India’s GDP growth than it is for China’s. China can ramp up its factors for the creation of capital goods and exports to offset muted domestic demand, whereas India has to ensure consumer sentiment to spend on merchandise and services to remain in good spirits at all times for a positive economic outcome.

Of this 58% share of private consumption in India’s GDP, 48% is contributed by merchandise retail (grocery, jewellery, fashion, electronics, home improvement etc.) and 52% is contributed by services (education, healthcare, wellness, tourism, eating out etc.).

Even though the lockdown started in the last month of FY 20, India’s GDP for FY19-20 should exceed $3000 billion (Rs 210 lakh crore). This would mean private consumption basket of India to close around Rs 121 lakh crore – comprising ‘merchandise retail’ to close at Rs 58.45 lakh crore and services to clock Rs 63 lakh crore for the year gone by.

But the start of FY’21, could not have been worse for this private consumption cycle and it is important to appreciate the structure of Indian retail to relate to this challenge.

Nearly 90% of India’s merchandise is sold through 17 million shops comprising everything between a shanty and a paan shop to a kirana and stationery shop employing an estimated 30 million people.

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On the count of retail density (measured as number of shops per 1000 people), India’s retail density stands at 13 compared to that of the US at 3-4 to give a sense of the outsized role that traditional retailing plays in India. The balance 12% of India’s retail is channelled through what analysts call ‘modern retail’ which comprises brick stores of supermarket chains, exclusive brands outlets etc and e-tailing. On this count in absolute terms, traditional retailing should contribute Rs 51.52 lakh crore of retail sales and ‘modern retail’ should account for the rest Rs 7 lakh crore in FY’20. While the ensuing lockdown has brought to standstill the sales cycle of this retailing structure, the impact of closure of the retail sector due to the lockdown will be different for different types of retail.

India’s merchandise retail has an outsized share of food and general (staples, groceries, FMCG, pharmacy etc.) retail that stands at 70% of the total merchandise retail basket, implying Rs 40.95 lakh crore of estimated sales in FY 20. From a household perspective, this is “essential retail” that is crucial for the day to day functioning of any household.

With or without lockdown, the primary consumption demand for essential goods will continue in FY 21 with minor blips in supply chain provided India transitions to a phased relaxation from May 20 onwards. In FY 21, essential retail is therefore expected to grow by nearly 10% to end at Rs 44.8 lakh crore by the end of FY 21. The operations of kirana stores, supermarkets, grocery e-retailers and pharmacy stores continues during the lock-down period. Therefore, the stock market remains bullish on retailers focussed on essential retail and FMCG-focussed consumer products companies.

But, in this assessment, we do need to keep in mind that merely 5% of essential retail is channelled through modern retail (as against the overall retail average of 12%) and it is the traditional retail of standalone shops that do the heavylifting of last mile sales and availability.

While for the whole of FY 21 the assessment is optimistic, we have to recognise that at the individual kirana store level, it is possible that the store owner in towns and villages is unable to operate his store due to local restrictions on supply and employment, adverse nature of credit cycle in the pre-lockdown period and lack of spare cash to inject new working capital among other issues and we have no way to verify this conjecture either ways.

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The not-so-good part of the lockdown impact on the Indian retailing sector is to do with the non-essential retail or discretionary retail and that makes up the balance 30% of the merchandise retail basket (Apparel, Footwear, Accessories, Jewellery, Consumer Electronics, Home Improvement etc.). There are two types of discretionary retail groups and the impact of the lockdown in the forthcoming year will be severe for one group and bad for the other. For the lifestyle and fashion group (Apparel, Footwear, Accessories), the economic impact of the lockdown is projected to be severe. From the current base of Rs 5,32,00 crore size, this retail group is projected to contract to Rs 4,76,00 crore in FY 21 again assuming the business cycle in some form starts by the start of May’20.

Fashion and lifestyle retailing works on a tight fashion cycle that involves the entire value chain involving fabric/material suppliers, workshops & artisans that manufacture the merchandise and retailers who sell the merchandise over a period of 3-4 months. Successful inventory rotation every quarter through new designs, products and styles makes way for the new cycle to play out in the next quarter.

For this form of retailing that works on a quarter to quarter inventory rotation basis, the lockdown is not merely a sales loss of one month but a disruption of this cycle that will drag on for the entire year. The merchandise under the locked stores of fashion retailers may not be all relevant for the forthcoming months. They will, therefore, face pressure to liquidate current stock on one hand and to ensure confidence building with their suppliers on the other. Vendors involving craftsmen and small/large manufacturing units may face payment delays and late start to the sourcing cycle. Consumer demand for such a discretionary expenditure is linked to drivers like wedding, gifting and impulse purchases beyond replacement demand. Therefore, post the lockdown many small fashion retailers may stare at business closure and loss of earnings for an extended period.

The other category of discretionary retail group (Consumer Electronics, Jewellery, Home Improvement etc.) has a relatively lower sensitivity to fashion cycles (a phone, a jar of paint or a jewellery design does not change every quarter). But, this category of retail will also witness a 9% of retail contraction in FY 21 from the current base of Rs 10.42 lakh crore in FY’20 primarily because of consumer demand drivers that will either remain muted throughout FY 21. Gifting, weddings, impulse purchase and aspirational upgrades are all consumer sentiments that drive consumption for this retail group. Barring a few outlier consumer sentiments like investment in gold that may propel people to pay a visit to a jewellery store or a necessary replacement of a mobile phone most consumers sentiments are largely tied up with job/employment security and wage growth and that aren’t optimistic in the coming year.

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Put together, overall discretionary merchandise retail sectors will contract in FY 21 from FY 20 by Rs 1.75 lakh crore and this contraction may put 1.6 million jobs at risk. If ‘food services’ (eating out), a sector that is estimated to close at Rs 4,25,650 crore in FY 20 and employ 8.2 million people, is included, this picture becomes sombre. Barring home deliveries, the food services sector by and large remains shut during the lock-down involving everything from dhabas to restaurants chains. This is also the sector, whose sales directly depend on businesses and establishments back in operations, tourism and positive consumer sentiments towards eating out and all of these remain suspended. In FY 21, the sector is estimated to contract by 17% in value terms and may lose 13% of jobs totalling one million jobs.

Between discretionary merchandise retail and food services, the retail sector stares at significant challenges of lost sales totalling Rs 2.44 lakh crore and 2.6 million jobs (in direct employment alone that can be attributed to retail operations) being put at risk in FY 21. One silver lining is that the lockdown has happened during the sector’s lean period. 60% of retail sector’s sales in a normal year is skewed in the five months period of October to February. Given the way the COVID-19 crisis is unfolding in other parts of the world, there is no other way than this lockdown to fight the pandemic.

But given the retail sector’s outsize role in India’s economy, post the lockdown period, the immediate task will be to mitigate the economic threat on this sector. One key action point for the sector to mitigate the retail sector’s pain is to revive the consumer sentiments well in time before the start of the second half of FY 21 and that can bring the consumers back to the retail stores with a positive frame of mind.

Ankur Bisen is the senior vice president, Technopak Advisors, a consumer and retail advisory firm and author of the book Wasted. He can be reached at @AnkurBisen1 on Twitter. The source for all data and figures quoted in the article comes from Technopak’s Analysis & Research.