Future of retail sector in 2009

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Shoppers are closing their wallets worried by job losses, sinking stock markets and prospects of a prolonged recession. There should be a major contraction in consumer spending that will be aggravated by banks being overcautious in lending. Banks in India would tighten their rules on the credit card limits and its issuance, resulting in less money being made available for spending.

I expect the sales to slide down steadily in the current year that will put pressure on profits and in many cases will undermine the capacity of retailers to pay debts that may result in the weak retailers going bust. Many companies may end the year in difficult financial straits. Retailers will need to close stores that are in loss, those who do not, are in for difficult times.

With deep discounts coming into play in the current year, we would see consumers spending on items that are in deep discounts. Consumers will not spend time in stores if they do not find good deals. Main goal of retailers should be to mark down the merchandise, on lower profit margins and work through the inventory buildup. Look out for discounts in the range of 50-70 per cent on footwear, 40 per cent on sportswear, discounts may also be seen on branded goods. Price slashing needs to be done carefully by companies and must be done so that the consumers get the feeling that they are paying the true value for the product being bought. Discount retailers should get a boost as the consumers are cash strapped.

While price slashing would help, alone it will not be able to rescue a bleak 2009 as sales will take a plunge across categories as consumer spending shrinks. I expect a fall in retail sales anywhere between 5-8 per cent. We should see the biggest impact in electronics and appliances followed by women’s apparel. While consumers will visit the shopping areas, the purchases should decline considerably. 2009 may go down as perhaps the worst sales year for retailers.

Luxury Goods shall also start taking a hit and I expect their sales to drop by around 20 per cent if we include jewellery in luxury, a fall up to 30 per cent in sales is expected. If the government can ensure inflation adjusted consumer spending going up or at least being stable, there is some hope. It is about restoring confidence. Across the globe the sales have gone down, on-line sales have gone down as well. Swiss watch sales fell by 18 per cent compared to last year in the month of November. A fall was sure to come but I feel the fall has been quite steep. It was felt that luxury sector would be somewhat screened from the downturn but that is not the case and we have more pain coming in the luxury sector.

Banks too would be under pressure especially those into retail as they would see rise of bad loans in segments of credit cards and personal loans. Mid of 2009 will be good for buying stocks of pharma companies, clinical research and commodity companies. And for those who are feeling glad about inflation coming down then, there is nothing to cheer about inflation coming down – it is a sign of deflation.

Siddharth Shankar is an economist and financial expert. views expressed are personal. View profile.

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