For manufacturers, brands and retailers of non-food consumer products, it is going to be tough times ahead.
Despite the expected sharp slowdown of India’s economy in March, it may have still clocked a GDP of about $3,000 billion for the year ending March 31, 2020. Private consumption accounts for about 58% of GDP (therefore expected to be about $1,700 billion). Of this, about 48% (or $825 billion) is consumer spending on merchandise, and the remaining $875 billion is spent on a range of services (and small savings). Some of the biggest privately-owned companies in India—and then some that are managed through cooperatives such as the GCMMF (Gujarat Cooperative Milk Marketing Federation) and the KVIC (Khadi and Village Industries Commission)—operate in consumer products businesses, and enjoy a much higher market capitalisation than companies that are operating in other sectors of the economy.
In recent years, consumer focused businesses have also caught the attention of venture capital and private equity in a much bigger way. The retail sector through which the 250 million Indian households buy this merchandise is the country’s largest employer(after those who are engaged in agriculture), accounting for over 45-50 million jobs directly. With food and grocery, textiles and apparel, jewellery, and consumer electronics and durables being the four largest segments of consumer spending in India, the fate of the country’s farmers and then millions of workers in the MSME sector that manufactures myriad consumer goods is directly linked to the private consumption of these 250 million households, connected through nearly 20 million independent retail outlets and several tens of thousands of retail outlets operated by large, organised retailers and through the still-small but extremely important e-tail channel.
Under a more optimistic scenario, India’s GDP may grow between 2.5% and 3% in FY2021, and then perhaps by 4.5% in FY2022. This rapid deceleration of the economy, already on a downward trajectory before the Covid-19 hit it, will have a significant impact on what India will consume over the next 6-8 quarters. This change in consumption patterns and in consumer behaviour will be more because of substantially diminished purchasing power in the hands of the consumer, and not so much because of being under lockdown for3-4 weeks (or a bit more).
About $550 billion out of the $825 billion of consumer spending on merchandise is accounted for by food and grocery. This spending is likely to see the least impact either in terms of volume consumed across different sub-segments under this category or on the retail channels that largely sell food and grocery items. The most visible impact post-Covid-19 in this category will be some more headwinds on ‘lifestyle’ foods—for example, health foods with relatively more exotic ingredients, premium snack foods, and premium alcohol and beer, etc.
At about $65 billion, textiles and apparel is the next big category(although much smaller than food and grocery) for consumer spending on merchandise. This category is expected to see the maximum (adverse) effect post-Covid-19. Just about every textile and clothing manufacturer(including those who have a large presence in exports) are likely to be carrying very high stock of raw material and semi-finished/finished goods.
With textiles and apparel stores completely shut down, they would also be carrying stock that runs the risk of becoming slow-moving as the season changes from winters to summers. The consumer sentiment is likely to be quite depressed for several months after the removal of the lockdown, and it is quite likely that spending on clothing (and accessories) would not be a priority for most consumers in various income strata.
To clear unsold stocks, the manufacturers and retailers would have no choice left but to try and clear that same through heavy discounting. To add to the woes of Indian textiles and apparel manufacturers, Indian mid-price and premium brands, and organised/large independent fashion retailers there is a strong possibility of very cheap clothing finding its way into India from Bangladesh (with whom India has a Free Trade Agreement).
Hence, a very large segment of Indian consumers will meet their clothing needs through heavily discounted merchandise, creating a lot of stress of India’s non-food organised retailers and many brands, too, where the brand-pull may not be sufficient to retain or attract cash-strapped consumers. Therefore, this important product segment may see tough and tougher times probably well into 2022. There would be a substantial adverse impact on the jewellery segment (about $60-65 billion), but its prospects should improve from September 2020 onwards as the wedding market picks up (with a backlog of weddings being deferred now).
The consumer electronics and durables segment (about $50 billion) will probably see the least long-lasting impact (though some summer-season specific categories such as air-conditioners may face significant loss in sales if the lockdown is prolonged much beyond April 15). These categories are likely to be among the first ones to see demand coming back steadily from September/October 2020 onwards.
The impact on other categories such as home and living, footwear, etc, is likely to be more byway of consumers looking for more value-priced options, while their consumption by volume may not see much decline when seen over the entire April 2020 to March 2021 period. Hence, for manufacturers, brands and retailers of non-food consumer products, it is expectedly going to be tough times ahead. However, other than those in the textiles and apparel segment, there is still reason to believe that their headwinds may begin to ease by September this year and, therefore, they just need to last out the current storm while consciously introducing more value-priced options in their product mix.