The misconception that is Diwali

Written by Sharad Raghavan | Updated: Oct 25 2011, 08:47am hrs
Is the correlation between the festive season (Dussehra, Dhanteras, Diwali) and higher sales and purchases valid

Even though the popular conception is that the festive season represents a surge in sales for the retail, auto and realty sectors, the reality is that while the number do surge in this period (October-December), theyre not much higher than those for the fourth quarter (January-March). In fact, in the case of auto, the fourth quarter sees more sales than the third. Typically, according to a study by Citigroup, the October-December quarter accounts for around 25-30% of most consumer business sales. Considering that this period includes December (which recently has seen a surge in sales due to Western festivals like Christmas), this number isnt as high as one would expect.

So, how is this Diwali likely to turn out for the auto sector

As can be seen in the figure, auto sales do surge during the festive season, on the back of the belief that purchases in the period are auspicious. The vendors, on their part, try to make it attractive to buy a car in this period, by offering cash discounts or free accessories. This trend, though, is largely restricted to passenger vehicles (cars and two-wheelers). Commercial vehicles sales, being business-oriented, are typically not affected by consumer sentiment or festivals. However, this year, the sentiment is less cheerful than it usually is, what with high interest rates, high and rising fuel prices and high inflation. An interesting trend that can be seen, as pointed out by the Citigroup study, is that the increasing divergence between petrol and diesel prices is resulting in more people opting for diesel cars, which, in turn, has resulted in higher discounts for petrol cars this season.

This year, as in most years, auto sales will surge in the festival quarter, but will be topped by the fourth quarter for a variety of reasons. A major consideration while buying a car in India is the resale value, which is significantly affected by the model year of the car. Thus, most people would rather buy a car in January 2012, than October-December 2011, since theyll get a better price for it when they sell it. Another major determinant is the depreciation tax/benefits, in the case of corporate or institutional sales. Most companies choose to buy cars, etc. in the fourth quarter so as to avail of the depreciation/ tax benefits at the end of the fiscal year.

So, according to the Citigroup study, car sales will take the worst hit this festive season, on the back of already sluggish annual sales growth (a year-to-date decline of 1.4% year-on-year) and adverse macro conditions.

How does the festive season affect the retail sector

The Citigroup study, taking into account the numbers for a mix of retail, paint and FMCG companies, says that over the past 5-6 years, the festive quarter on average accounted for 25-30% of annual sales, only marginally higher than the contributions of the other quarters. Still, it is this season that sees the biggest promotional campaigns and discounts by retailers. According to news reports, this season generally accounts for 40-45% of companies annual advertising expenditure, and, according to the Citigroup study, it seems companies have increased this proportion to 50-60% this year.

The same macro factors that are likely to dampen auto sales will have an effect in retail, as well. High inflation and high interest rates are hardly conducive for a shopping spree.

And whats the outlook for realty

As with auto and retail, the realty sector sees a surge in discretionary spending, sales, discounts and promotions in the Diwali season. Last year, for example, 25-31% of total home sales were clocked in the October-December quarter, according to the Citigroup report . However, with the macro conditions as they are, this year is likely to see a dampening to this effect. The report goes on to say that this year, and especially the festive season, has seen a low number of launches mostly due to high inventory levels. Most of the developers the report surveyed said that this festive season was business as usual, with no special launches or pricing discounts on offer. Banks are trying to make it more attractive to buy a house during this season, like reducing interest rates by 25-50 bps on home loans and offering zero processing fees, but their effect is likely to be limited.

Are there any other commercial trends in this festive season

If conditions are looking dim for you to buy a car or a house, or if shopping seems a waste, maybe you could settle for movie tickets. Diwali is prime time for movie launches, with the period August-October accounting for almost 30% of Bollywood releases in a year. This year, October itself will see 13 new movie launches, one of which is the much-hyped Shah Rukh Khan-starrer Ra.One, promotions for which started around January this year.

And last, whats the picture on the crackers industry

Rising input and labour costs are likely to raise cracker prices by 25-30%, according to a study by Assocham. This rise in price, coupled with heightened environmental awareness, will result in an expected drop of 35-40% in sales for the R1,200 crore cracker industry, the report said.