Following a 51% YoY (year-over-year) revenue growth in the fiscal year 2023, the fashion retail industry is anticipated to experience a slowdown in the current fiscal year due to inflationary pressures, according to ICRA
Bengaluru: Demand pressures and inflationary headwinds are expected to moderate the revenue growth of Indian fashion retail entities to 10% in the fiscal year (FY) 2024, according to an analysis by credit rating agency ICRA. The analysis covered 11 listed retail entities and highlighted the challenges faced by the sector, including the impact on demand in the value-fashion segment.
Following a 51% YoY (year-over-year) revenue growth in FY23, the fashion retail industry is anticipated to experience a slowdown in the current fiscal year due to inflationary pressures.
“The fashion retail sector has been facing demand slowdown due to inflationary pressures, especially post the last festive season,” said Sakshi Suneja, vice president at ICRA. “The slowdown has been more pronounced in the value fashion segment, where the average sales per sq. ft. still remain lower than pre-pandemic levels and has been witnessing a QoQ (quarter over quarter) decline since Q3 FY2023,” Suneja added.
Retailers’ operating profit margins (OPMs) are also expected to decline by 100 basis points to around 5.7%, due to the demand softening and continued high advertisement and promotion expenditure expected during the year.
Most large retailers acquired/launched brands in newer categories, especially in the ethnic wear segment and have been undertaking substantial investments to ramp up these brands. Retailers have not indicated any reduction in ad spends in the coming quarters as they are hopeful of demand recovery in the second half of FY2024.
“Post the pandemic, retailers have also recalibrated their focus towards expansion via offline channels. Sales through the online channels, which were earlier expected to grow at a faster pace, have now slowed down,” said Suneja.
“Given the low level of penetration of organised segments within the apparel retail and the loss-making nature of online operations necessitating substantial investments, physical store expansion is the preferred growth route for retailers, especially in Tier-II and III cities. Online sales accounted for only ~8% of the overall revenues of entities and are likely to increase to 10-12% by FY2025/26,” she added.
In FY2022 and FY2023, retailers added nearly 5.2 million sq. ft. of space and total capex outlay on store additions of entities increased YoY by 60% (partly aided by a low base) to Rs. 1,460 crore in FY2023, despite a slowdown in the value fashion segment.
No major pruning of capex has been announced by retailers so far, given the expected demand revival and favourable long-term demand prospects of the Indian retail industry. Capex outlay towards store additions is thus expected to increase further by 10% in FY2024 to Rs. 1,600 crore, the report added.