Apparel sale slump after imposition of excise duty on branded garments


June 28, 2011

Pradeep Pandey & Pramugdha Mamgain, The Economic Times
Mumbai/New Delhi, June 28, 2011

Apparel sales in the country have slumped about 20% since March, forcing many brands to start end-of-season discount sales two weeks earlier than usual.

Companies blamed high apparel prices-increased due to the mandatory 10% excise duty on branded garments introduced in the Union budget and soaring cotton prices-for the fall in demand.

"The present trend indicates that the industry will hardly be able to sustain a growth of 10-15% as margins are under tremendous pressure," said Rahul Mehta, president of Clothing Manufacturers Association of India ( CMAI).

Most manufacturers and retailers have reported a 10-20% increase in their inventory levels, the association said in a report submitted to the textile ministry last week, and sought removal of the tax to cut prices and boost demand.

Or, the excise duty be cut to 1%, said the association, which represents 200 garment makers and 60 retailers including Arvind Brands, Aditya Birla, Madura Garments and Pantaloon Retail.

The organised apparel industry, which booked sales of around 40,000 crore last year, is hit by shrinking profit margins because the rise in cost of production-raw material, labour and borrowing costs-have outweighed increase in prices.

The rise in raw material prices was passed on to consumers in tranches earlier, but now it has become difficult to carry forward, Mehta said.Any more increase in prices will impact demand. Already, many consumers, hit by rising food and fuel prices, have already started buying lower-priced brands than their usual favourites.

Reliance Trends Chief Executive Arun Sirdeshmukh said consumers are downtrading to more comfortable price points within national brands. "As a result, volumes of private brands have grown even though prices have increased for that segment too," he said.

"But the real impact on sales will be known in the festive season as cotton price increase will start reflecting then," Sirdeshmukh added.

Retailers are wary about business growth in the coming months. Some have cut their winter garments bookings. "We may see sluggish demand for high-priced garments in the coming months," Pantaloon Retail CEO Kailash Bhatia said.

Although cotton prices have corrected, the component of raw material cost will be high in the stock that will be sold during autumn and winter. So prices will be up for those products, Bhatia said.

Meanwhile, rising inventory costs have forced many brands to advance summer season-ending clearance discount sales two weeks ahead of the normal July first week schedule.

Brands that have already started season discount sales include Reebok, Adidas and Mango.

Organised retail sector’s inventory cost in the last three months stood at around 2,500 crore, while total sales were around 10,000 crore, industry insiders estimated. Arvind Brands-which manages the country’s largest denim manufacturer Arvind Mills’ brands such as Arrow, Lee and Flying Machine-has reported sluggish sales in June. "We need to wait and watch whether this continues in July and August," said J Suresh, MD and CEO of Arvind Lifestyle Brands and Arvind Retail.

He said the company’s sales have grown in the first quarter ended June.

Devangshu Dutta, chief executive of retail and consumer products consultancy firm Third Eyesight, said demand from lower-income group will fall the most because this section will spend most of its income on food, which is getting costlier with continuing inflation. "It is still positive for the middle class and above salaried consumers as increments have grown along with inflation and confidence remain high," he said.