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Inventories pile up at retail stores despite heavy discounts

Inventories pile up at retail stores despite heavy discounts
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First Published: Wed, Feb 11 2009. 11 10 PM IST
Updated: Wed, Feb 11 2009. 11 10 PM IST
New Delhi: Unsold merchandise is piling up at retail outlets and warehouses as consumers faced with an economic downturn hesitate to spend, squeezing the already wafer-thin margins of retailers further and limiting their capacity to repay debt.
Heavy discounts that ranged up to 70% in an extended sale season failed to convince shoppers to open their wallets, leaving retailers holding inventory that was supposed to supply stores they have either shut down or decided not to open.
“I don’t think sales have picked up despite the discounts,” said Hemant Patel, an analyst at Enam Securities Pvt. Ltd. “Consumer footfalls were not coming despite the sales.”
The economy is forecast by the government to grow 7.1% in the fiscal year ending 31 March—the slowest pace in six years. The slowdown, after four years of growth that averaged 8.9%, has caused firms to stall expansion plans, put hiring on hold and reduce staff, denting consumer confidence.
The country’s largest listed retailer, Pantaloon Retail (India) Ltd, said so-called same-store sales were down in December for the first time in years. Same-store sales typically denote sales by outlets that have been open for at least a year.
Pantaloon managing director Kishore Biyani attributed the December contraction to slack sales of furniture, electronics, mobile phones and some other merchandise.
Pantaloon’s The Great Indian Shopping Festival was spread over almost a month in December and January. Pantaloon followed up with its annual discount season at the Big Bazaar hypermarket chain, but analysts say January sales were lacklustre because of subdued consumer response and competition from other retailers that marked down prices similarly.
Figures released by Pantaloon showed same-store sales in January were up for the so-called value and lifestyle segments, by 4% and 12%, respectively. Home segment sales were down 4%.
A New Delhi-based analyst, who asked not to be named, said Pantaloon has about Rs1,700 crore of inventory. “As per the past track record, it’s marginally on the upper side,” this analyst said.
”Our inventory is best in terms of industry standards and we have standard stocks,” Biyani said.
Shoppers’ Stop Ltd, Tata group’s Trent Ltd and other retailers also offered hefty discounts on select merchandise. Even Reliance Retail Ltd, for the first time since its inception about two years ago, organized the first concerted sale across different store formats.
“This year even discounts could not boost sales,” said Ritesh Doshi, an analyst at First Global Securities Ltd.
“They are not able to clear their inventory,” he said. “Once they (merchandise) become obsolete, they have to write (it) off and (that) is affecting their margins.”
A person close to the situation said Reliance Retail fell well short of its target of opening 1,500 outlets by September and was able to open only about 850 stores until early this year. As a result, the chain was left holding unsold goods that had been ordered for hundreds of additional stores whose opening may have only caused more losses, this person said.
“We deny any such situation,” a Reliance Retail spokesperson said in an email reply to Mint.
Girish Solanki, a research analyst at Mumbai-based Angel Broking, says Bombay Stock Exchange-listed Vishal Retail Ltd has a “pretty high level” of inventory that could last as long as seven months. “There is a big problem there,” said Solanki, who attributed the inventory pile-up to stalled expansion plans in the face of a funding squeeze.
Manmohan Agarwal, chief executive for corporate affairs at Vishal Retail, said the economic slowdown had caused the retailer to curtail its expansion. Agarwal said the company had Rs800 crore worth of inventory at the end of December. “Our sales for the Republic Day campaign were good,” he said, but declined to give the current value of inventory.
According to analyst Ankur Periwal of Religare Securities Ltd, Vishal has about Rs480 crore in “stuck up” inventory. Vishal may have to get rid of the inventory at below cost price, he said.
The mountain of unsold goods and extended discounts would further squeeze the already low margins of retail chains and restrict their ability to repay debt, analysts say. Doshi of First Global expects margins at Pantaloon to narrow to 2.3 percentage points for the year ending June, from about 2.6 percentage points a year ago.
Meanwhile, Indian exporters hit by the global meltdown, which has led many international buyers to cancel orders, are dumping their products in the local market, according to Solanki at Angel Broking. “That is also putting pressure on the existing inventory,” he said.
Jharna Mazumdar in Mumbai contributed to the story.
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First Published: Wed, Feb 11 2009. 11 10 PM IST