Bricks & mortar retail is expected to do well. But 2018 may be the year of reckoning for many e-tail players
After a rather roller-coaster ride in 2017, India’s private consumption is expected to see more steady growth in consumer spending, across categories, in 2018. The overall merchandise private consumption is expected to increase by about 12% in nominal terms with a real GDP growth of about 7%.
Before elaborating on the prospects for consumer demand in 2018, we must look at how 2017 panned out. It was a year of many extraordinary events for India’s $750-billion-plus merchandise retail sector. It began under the shadow of November 8, 2016, when the country was taken by complete shock, thanks to demonetisation of high-value currency notes. In the ensuing weeks, the entire population was left with practically no currency until the new notes found their way, via banking channels, to citizens. Expectedly, DeMo had a disastrous impact on consumer-spending that continued well into the first quarter of calendar year 2017.
Even as the Indian economy got remonetised by the time the second quarter began, GST’s roll-out date of July 1, 2017, led to most businesses becoming occupied with of migrating to the GST regime, creating a huge dip in overall economic activity in June 2017, and in July/August, even though the transition was made with surprising ease. Nevertheless, the retail sector was adversely hit—first, because of a forced liquidation of pre-GST inventory (consumers benefited from the fire-sale by various retailers and brands) and, then, because of some disruptions in supply-chains leading to some challenges in re-stocking. However, despite DeMo and GST roll-out, 2017 ended with a positive note for consumer spending, with most consumer product categories showing a relatively healthy nominal growth of 8-15% over 2016.
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The other notable event of 2017 was the strong upward re-rating of entire physical retail sector by private investors and on the Indian bourses, largely because of the stellar public debut and even more spectacular subsequent performance (on the bourses) of a relatively lesser known (until then) Indian retailer, D’Mart (Avenue Supermarkets). It is currently valued at over $11 billion, making India’s physical retail sector a hot sector once again.
The year 2018 will be the penultimate year for the current term of the NDA government at the Centre, and it can be safely surmised that the year will see increasing public spending, especially targeted towards farmers and rural India. With steady improvement in GDP growth, and high probability of a stronger fiscal stimulus targeted directly to consumers (voters) through higher spending as well as some tweaking of direct and indirect taxation rates, the new year should be a good one for overall consumer demand. And if the monsoon turns out to be a good one, 2018 may well be one of the best years for consumer spending since 2011.
Specific high-growth consumer spending categories for 2018 will include two- and four-wheelers, mobile phones, jewellery, apparel, and footwear. Within FMCG, the products anchored on health & wellness, natural, and “Indian heritage” platforms are likely to outperform the broader segment. Consumer durables’ demand is likely to remain subdued unless the category sees a downward revision in the currently applicable GST rate of 28%.
As far as retail channels are concerned, 2018 could well be the year of reckoning for India’s pure-play online retailers—2017 saw many shut shop and many more in deep stress. While the three current market leaders (Flipkart, Amazon, and Paytm) are very well capitalised and should therefore see strong growth without too many hiccups, the prognosis does not look very good for other online market-places, or for that matter, many single/limited product category players. With investors getting more cautious about the near-term prospects of pure-play online retailers (other than the top-three and a few others), and at the same time, getting more excited about the bricks-and-mortar retail businesses, the new year could see a stronger, more profitable growth of the old-fashioned physical retail businesses.
And finally, as far as consumer behavioural trends are concerned, 2018 could see the biggest growth of brands and retailers that are positioned at value/mass end of spectrum. The growth prospects for luxury/bridge-to-luxury brands are also looking better compared to 2017. The biggest challenge would be for those brands and those retailers that are positioned somewhere in the middle. They would be seen as too expensive for the masses, while not aspirational enough for the affluent. This consumer trend, by the way, is not limited to India alone. Indeed, even many developed countries such as the US and the UK are seeing similar pressures being exerted by consumers on brands and retailers that have traditionally taken a middle path when it comes to their positioning.