Retailers in a Fix as Discounts Fail to Draw Buyers

Lifestyle Retail Faces Weak Consumer Demand Despite Winter Sales Discounts

Source and Citation: News article published by ET Bureau on January 18, 2024

Analysis of Consumer Trends in Lifestyle Retail

The lifestyle retail industry, encompassing clothing, footwear, and fashion accessories, has experienced a decline in consumer demand since the beginning of 2023. To clear unsold stocks, major brands such as Shoppers Stop, Max, Lifestyle, etc., resorted to offering substantial discounts, reaching up to 65% during the winter sales period in December and January.

Typically, promotional offers of this nature attract buyers, but this year has seen a tepid response. This suggests prolonged consumer stress, possibly stemming from high inflation impacting disposable incomes. Despite advancing winter sales, growth has remained in low single digits, indicating minimal signs of recovery as households reduce non-essential spending.

The value fashion segment, focused on the budget category, has been particularly affected, with the industry anticipating demand headwinds to persist into the March quarter. Hopes are now pinned on the summer season for potential revival.

Retailers in a Fix as Discounts Fail to Draw Buyers

Impact on Retail Investors

For investors in retail stocks, the persisting slackness in demand for apparel implies sustained margin pressures in near-term earnings. Inventory markdowns aimed at offloading products could impact profitability as consumption appetite remains weak.

Stocks such as Trent, Shoppers Stop, etc., may experience volatility in the coming months based on monthly sales data trends. Investors are advised to avoid fresh exposure to the space and consider trimming positions if holding a significant allocation, anticipating an extended business struggle until macro growth visibility improves.

However, large organized players with strong balance sheets, a mix of private labels, and omni-channel presence are better positioned to gain market share. Investors may consider re-entering top picks like Tata Group’s Trent at higher margins of safety upon visible demand recovery in the next fiscal.

Impact on Industries

The extended slowdown in demand for apparel and lifestyle retail has repercussions across various granular categories. Industries related to apparel manufacturing, textile companies, and fashion designers may continue facing order cuts or payment delays from stressed retailers in B2B channels.

Counter trends, such as share gains for affordable fast fashion brands, value retailers, and premium/luxury players targeting resilient high-income consumers, are visible. Online retailers may also fare better as deal-chasing buyers migrate to mobile apps while reducing physical store spending.

Long Term Benefits & Negatives

Taking a longer-term view, the current demand moderation provides an entry opportunity for investors in fundamentally strong retail companies with proven execution and financial discipline credentials. As macro growth recovers by mid-2024, organized retailers stand to gain a disproportionate share.

India’s vast middle-class expansion potential, low penetration of modern retail, and a rising working population, along with increasing female workforce participation, present a case for exponential organized apparel growth over the next decade. Investors should identify retail players with strong survival abilities to reap rewards later, but they must also consider risks from alterations in consumer preferences due to social media trends or fast fashion’s volatile dynamics.

Short Term Benefits & Negatives

In the near term, over the next 2-3 quarters, headwinds persist for the apparel retail industry due to wage growth lagging behind inflation, hampering demand from middle-income groups for non-essential categories. Rural distress remains a concern, dependent on normal monsoons.

Easing commodity pressures by mid-2023 may provide some cushion alongside a boost in government capex spending on infrastructure projects, generating tertiary demand benefits. However, most companies are likely to report sluggish sales growth until the Diwali festival season as consumers remain cautious.

For investors, this implies further stock price volatility cannot be ruled out in the next 6-12 months, depending on monthly consumption data trends. Healthy companies with a robust e-commerce and private labels mix may fare better, supporting selective buying opportunities during market corrections.

Companies Impacted by Weak Demand in Fashion Retail

Indian Companies Potentially Losing:

  1. Listed Apparel and Lifestyle Retailers:

    • Shoppers Stop, Reliance Trends, Lifestyle, Pantaloons, VMART, Max, and Westside are all mentioned as facing weak demand despite heavy discounts.
    • Their sales growth figures (flat to low single-digit) and reliance on end-of-season sales to clear inventory raise concerns about profitability.
    • Lower consumer spending on apparel could negatively impact their stock prices and investor sentiment.
  2. Mass Value Segment Brands:

    • Manish Kapoor (Pepe Jeans) highlights the stress in the mass value segment, indicating potential struggles for brands like Spykar, Mufti, and Wrangler.
    • Their dependence on price-sensitive customers and limited ability to offer high discounts might further constrain growth.
  3. Department Stores:

    • Devarajan Iyer (Lifestyle International) expects muted growth in the January-March quarter for department stores.
    • This could negatively impact companies like Shoppers Stop and Lifestyle.

Indian Companies with Potential Upsides:

  1. Premium and Luxury Brands:

    • Consumers may prioritize discretionary spending like travel over everyday purchases, potentially benefiting luxury brands like Aditya Birla Fashion and Retail (ABFRL).
    • Their higher price points and focus on non-seasonal collections could offer some insulation from the slowdown.
  2. Activewear and Athleisure Brands:

    • Growing focus on health and fitness might continue to drive demand for activewear brands like Decathlon and Fastrack.
    • Their practical appeal and potential overlap with leisure spending could provide some resilience.
  3. E-commerce Platforms:

    • Consumers seeking deals and convenience might turn to online platforms like Amazon India and Flipkart for apparel purchases.
    • Their upcoming Republic Day sales could benefit from the weak performance of physical stores.

Global Companies Likely Unaffected:

  • Global Apparel Giants:

    • The slowdown is primarily an Indian phenomenon driven by local economic factors.
    • Companies like Nike, Adidas, and H&M will likely see their performance influenced by broader global trends and regional markets.
  • Luxury Fashion Houses:

    • The Indian luxury market may be experiencing specific temporary challenges, but global luxury giants like LVMH and Kering are likely to see continued demand from other regions.

Please note: This analysis is based on the available information and is subject to change based on future developments. It is not intended as financial advice, and you should always consult with a professional before making any investment decisions.

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