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Here’s why the garment industry is upbeat despite demonetization

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One of the boldest moves taken by the Government of India in the history of Indian economy was the pulling out of circulation, high value currency notes – Rs 1,000 and Rs 500 – with effect from November 8, 2016 midnight. While the policy has received mixed reactions from all sectors of retail, one segment which was affected badly – but bounced back with aplomb – was the garment business across value chains.

Here's why the garment industry is upbeat despite demonetization
Though apparel retailers are expecting the dismal sales environment to continue till February 2017, they are hopeful that in the long run, the organized sector will benefit from the note ban

Experts unanimously feel that the decision will benefit the organized segment in the industry though many unorganized players and firms, working unethically, will face pressure to comply.

and Its After Effects

Demonetization had a tremendous impact on disposable incomes and hence consumer spending waned, resulting in a dip in the domestic demand for apparels and other end-products of the textile industry in the immediate term. The resulting inventory accumulation has caused deferring of purchase from apparel manufacturers (focused on domestic market) in the near term, besides resulting in stretched payments. This further effected he cash flow of the textile industry and is likely to drive a constraint in the demand for the entire value-chain.

Managing Director, and President, CMAI, says, “Most brands and retail outlets reported a 40 to 60 per cent drop in sales from the previous weeks. But after November 20, businesses started picking up. In the first week of December, the drop has come to -5 per cent. Most of the brands and retailers introduced various promotional schemes or attractive discounts to counter this demonetization effect. With this the immediate sales have picked up and things have quite stabilized now. However, neither the retailers nor brands can sustain this for a very long period. We definitely believe that the apparel sales will be impacted for the next three to six months by at least 10-20 per cent.”

International brands that form a large mix of the domestic apparel business in India are also feeling the heat. Commercial Director, , says, “The impact is at both ends — production and consumers. In production, as large part of the industry is still unorganized and lot of activities are subcontracted which are getting impacted due to cash crunch. It has also compelled consumers to pull the plug on spending. The way of doing business, largely cash dependent, has impacted the inflow of products. This in turn has delayed the Spring/Summer 2017 deliveries.”

Director, , believes that plastic money and other modes of payment has still kept fashion retail alive and things will be back to normal very soon.

“The Indian garment business relies on a lot of cash transactions and the demonetization has brought in a conservative spending sentiment, for which there might be a slight dip in the sales over the next one or two quarters. However, the impact should normalize in the long term and this move would be beneficial for the organized retail sector. The impact is felt more by the small traders and the unorganized retailing segment who rely more on cash trading and sales. Some sectors like jewellery and the luxury segment have been impacted more than mid-premium and mass segments and will no doubt take a longer period to revive. However, the use of plastic money and transactions through online payments will continue to increase consumer spend in the retail market,” he said.

Demonetization has definitely triggered a rapid growth in card transaction, as Chief Operating Officer, , says: “For the first few days, there was an impact on sales. If I speak on my brand’s perspective, it went out pretty well for us. Our debit and credit card transactions have increased a lot. I really do not see that our business has dropped dramatically. But the percentage of sales drop for an organized player like us in comparison to an unorganized one very different. However the situation is bound to improve very soon.”

A lot of organized players stood in support of the note ban since they felt that an overhaul of the complete cash economy was required before the GST comes into force.

Director, Klix, Ankur Gadia says, “Demonetization was required; its a systematic approach by the Government. The honourable Prime Minister has also brought in GST which will be applicable soon. Once this happens, people who have organized business and do transactions on invoices, will definitely benefit from this step. The panic among every one of us is a short time affair and will definitely normalize within a few days. The business in the apparel sector has been hit by 30-35 per cent at the retail counter. This is obvious when demonetization has taken place, people will first spend on food and other utilities and then think about spending on garment. If we look at the ethnic sector, it has been hit badly as the news has come during the wedding season.”

The garment industry in India is versatile and has diverse players and will quickly absorb the move, Managing Director, Vitamins, Mansukh Nishar one of the leading players in the kidswear segment feels.

He says, “It’s a short term problem. The drawing limit for withdrawal has hit the retail segment hard. Shops without credit card machines are suffering. India was used to almost 90 per cent cash for buying essentials, including clothes. I feel that the effects of demonetization will continue for another three months, indirectly effecting the upcoming summer 2017 season due to slow movement across retail channels. I also feel this move will motivate many unorganized players to shift to the organized sector.”

Dip in Footfalls and Sales Chart

From the long term perspective, demonetization of Rs 500 and Rs 1,000 notes is definitely a positive move by the Government, feel most apparel retailers.

Director, Phoenix Marketcity, Pune, says, “The impact on the retail sector will be short termed due to sudden cash crunch and general public sentiments. Post the announcement, we have witnessed a decline of around 5 per cent in the footfall and close to 7-8 per cent impact on overall sales. However in the last few days, we have seen things getting back to normalcy with circulation of newer currency notes in the system. Also from the overall retail industry perspective, the impact will be less on the organized sector as compared to the unorganized retailing segment, as the former offers more payment options to consumers like e-wallet, cards and other digital payment modes. We anticipate the Indian retail industry to be robust and growth-oriented in the long run.”

Turtle initially registered a major dip around 30-40 per cent. But Jhunjhunwala takes on an optimistic approach and says, “With the winter season and marriage season in full swing, we see an increment in sales in our outlets. Our target consumer base is more comfortable in making payments via plastic money and e-wallets.”

Benetton, one of the most popular international brands in the country discloses the consumer behavioural shift witnessed among their consumers. Soni defines it as saying, “There are low walk-ins as the purchases are being restricted to bare necessity, there is a certain amount of consciousness on spending therefore the consumers are not buying additional units.”

Head Marketing, Pepe Jeans, adds, “The day after the announcement was made, a 49 per cent sales dip was reported. To reduce this number, we introduced an initiative wherein we offered an extra 5 per cent off on use of credit cards. This strategy helped us to narrow the dip to 25 per cent currently. We are anticipating the dismal sale environment to continue until February-March. In the long run, the move of demonetization coupled with GST will result in positive growth of the brand.”

Long Term Future of This Step

Mehta talks on some key insights on demonetization and its future for the garment industry as he says, “When we reduce the cash supply in the industry and the market, we have to understand the fact that ours is cash oriented economy. Apparel industry also largely is dictated by the cash transactions. So even in organized modern retail 40-50 per cent of the transactions were in cash and the balance was through electronic transactions like credit or debit cards. There was a certain element of discretionary spend in the garment industry which is likely to get impacted.”

Soni shares a complete understanding saying that the demonetization will have a short term impact and in the medium to long term, there could be positive impacts basis the following assumptions:

Lower interest on borrowing and lending due to additional/surplus funds being available with the banks:
1. Would increase the disposable income for large part of the population.
2. It would desist people from blocking funds in banks either in savings or fixed deposit accounts.

Relief in income tax, without impacting the overall collection to the kitty: This move could bring more people under the ambit of income tax and with enough liquidity in the system, the government might give relief by way of increasing the slabs for income tax, thereby providing higher disposable income to the people.

This along with GST would lead to ease of business and thereby lead to growth and higher GDP.

Higher investment by the government would lead to growth of the economy: As there would be enough liquidity in the system, the government would encourage both public and private partnership and spending in infrastructure and development which would lead to growth of the economy.

Conclusion

It so seems that although the demonetization policy did have an immediate impact in the garment industry and its value chains, it’s fairly clear that the impact will be short termed, at least for the organized sector, only triggered due to sudden cash crunch and general public sentiments. But, the impact has largely hit the small scale manufacturers who were producing for the majority of the population.

The organized ones are only hit with current season in flow and confusion about the upcoming season and its sales. Also, among the organized market itself, a few sectors like jewellery and the luxury segment have been impacted more than the mid-premium and mass segments and will no doubt take a longer period to revive.

The ethnic segment has also been hit badly as the news came just at the helm of the wedding season. Overall, the garment industry in India is versatile and has diverse players and will quickly absorb the move.