COVID-19 credit negative for India's retail in short term

08 Apr '20

3 min read

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The COVID-19 outbreak is credit negative for India’s retail industry in the short-term amid shutdown of malls and closure of non-essential stores across most states, according to ICRA, which recently said revenues and profits of the industry will be adversely impacted in the short-term as consumers are forced to defer their discretionary spends.

Further, with the anticipated adverse impact on economy and consequent uncertainty around employment prospects, it is likely to result in lower purchasing power.

Additionally, consumer sentiments are likely to remain weak in an adverse economic environment. Consequently, recovery in discretionary spending is expected to be gradual once the COVID-19 threat is allayed and ICRA expects the credit profile of retailers dependent on discretionary spending to moderate in the next 12 months.

This impact is however expected to be mitigated in the long-term driven by healthy demand outlook for the industry supported by favourable demographics, rising disposable income and low penetration of organized retail.

“Lifestyle and fashion retailers (primarily those having higher contribution of apparels, consumer durables, jewellery, accessories and footwear, among others) will be impacted the most because of these restrictions and overall curtailment on the movement of people, resulting in demand pressures over the short-term. However, the food and grocery retailers have witnessed a sudden spurt in demand as consumers have started panic buying around uncertainties of stock-outs and closure of these stores as well,” said Sakshi Suneja, assistant vice president, ICRA, in a statement.

In addition to demand, the Indian retailers are also facing supply chain issues as transportation and movement of non-essential goods is also restricted. Even after malls are allowed to start operations, the discretionary spends are expected to remain muted over the near term as consumers, as a means of caution, are likely to stay away from crowded places, ICRA said.

The rating agency, however, expects the sales for lifestyle retailers to pick-up following normalisation of the situation led by rise in demand by consumers who postponed purchases during the outbreak.

However, the impact on the value fashion segment would be more pronounced. Amid the government-mandated office shutdowns in some states and possible work stoppages in other regions (in case of a prolonged outbreak), the disposable income of consumers, primarily the labour force is likely to reduce, compounding the pressure and elongating the slowdown.

The possibility of business rationalising their employee costs also cannot be ruled out, especially if the coronavirus outbreak persists for long. This in turn will weaken the purchasing power of the consumers in the short-term. The value fashion segment is already reeling under pressure in fiscal 2019-20 given the overall slowdown in consumer spending.

The present scenario, however, provides a favourable opportunity for e-commerce food and grocery players. The outbreak has led to a sharp surge in online grocery retailing as consumers are wary of stepping out of their homes. These platforms are witnessing increased demand not only from the existing consumers, but also from new consumers.

Fibre2Fashion News Desk (DS)

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