Private consumption accounts for about 58 per cent of India’s GDP, which is likely to grow to around $3,000 billion by the end of FY20. Of this, about 48 per cent is spent on merchandise shopping while the remaining $875 billion is spent on a range of services. Traditional mom & pop stores form the largest share of sales. India currently has 17 million independent retailers which are likely to grow to 20 million by 2025.
Food and grocery to remain unaffected
Among these, food and grocery retailers will hold the largest share. These retailers currently account for about $550 billion of the $825 billion consumer spending on merchandise. Even in future, this spending is likely to be least affected, either in terms of volume consumed across different sub-segments, or on retail channels selling food and grocery.
Unsold inventories to eat into textile and apparel retailers’ profits
The next big category, in consumer expenditure is textile and apparel which accounts for about $65 billion of spending on merchandise. This category is likely to suffer the most from the pandemic as manufacturers are likely to be saddled with unsold inventory. Consumers are unlikely to spend on clothing and accessories even after the nationwide lockdown ends on May 4, 2020.
Easy going for consumer electronics and home furnishings
The consumer electronics and durables segment — worth about $50 billion, will be least impacted. It is also likely to be the first sector to bounce back during the upcoming festival season between September-October 2020. Sellers of home furnishings and other lifestyle products will also have a relatively easy FY21 as consumption by volume will not decline drastically during the entire April 2020-March 2021 period.
Finances of all big retailers are likely to be stressed in FY21 and FY22. However, traditional and independent retailers are likely to be least affected as they own their stores, have few employees and can quickly recalibrate their inventories to align with consumer demand or preference.
Brick & mortar stores face fixed costs, zero sales
Most affected by the pandemic will be organized brick-and-mortar retailers as they had to either shut down or hardly got footfalls due to restrictions on the movement of people. These retailers have high fixed costs by way of rentals and common area maintenance charges. They also have to pay salaries at retail front end, head-office staff, and utilities.
In the next six-eight quarters, monthly sales of most organized retailers will be reduced though they will still have to incur the same (or nearly the same) monthly fixed costs. They may also have to face margin erosion when they are compelled to liquidate some of their inventory through aggressive discounts.
The situation is likely to be similar for e-commerce players too. As consumer sentiment is likely to be depressed for months to come, their monthly gross margin intake will be severely affected though their fixed costs are likely to remain nearly the same.
FDI to boost future retail growth
Therefore, the government should allow 100 per cent foreign direct investment in all retail formats and all channels. Its policies should not hinder the growth of the sector even as it works to raise capital and merge/sell businesses within India or anywhere else.