Festive season may not add fizz to retailers’ profits

Mumbai/New Delhi: Shivik Gupta, a marketing professional at a media company, has put plans to buy a sports utility vehicle (SUV) on hold because he is concerned that rising fuel prices and inflation will dent his budget.

Gupta has also decided to cut spending on things like home decor and furnishings. As for consumer durables such as electronics and appliances, he won’t spend any money on them “unless and until there are lucrative schemes in the market”.

While Gupta waits for marketers to unveil promotional offers that may tempt him to open his wallet, there’s another lot of consumers who won’t be swayed by advertising in the festive season that runs through to the end of the year. They have already decided not to buy anything that isn’t absolutely essential. Retailers have lowered their expectations.

A dismal employment outlook and stubbornly high inflation have caused consumer sentiment to decline further, pulling down spending on discretionary items such as durables, vehicles and homes, said a new report by BluFin Advisors Pvt. Ltd, a financial information company.

BluFin’s consumer confidence index (CCI) fell 2.9 points in September to 36.7, the biggest month-on-month decline since October 2011, reflecting the hit consumer sentiment has taken because of slowing economic growth. High borrowing costs have also deterred purchases.

The 100-point index tracks consumer spending plans on basic necessities, discretionary products such as durables, cars and motorbikes as well as homes. Consumers have significantly cut back on plans for discretionary spending while expenditure on basic necessities has been increasing, primarily because of rising prices, said Blufin.

“In my mind, I’m particular about quality so I don’t go berserk shopping around the festive season,” said a teacher at a school in Gurgaon who believes she has evolved into a “sensible shopper” now and does not get tempted to buy even at sales. She did not want to be named.

The reluctance to buy is being reflected in poor sales despite the onset of the festive season, which began with Onam in the South and the 10-day Ganesh Chaturti festival in the West.

“Personally, September was a slow month. All brands went on an aggressive end-of-season sale (spree) which lasted longer,” said Timmy Sarna, managing director of DLF Brands, whose portfolio includes Mothercare, DKNY and Mango.

“Consumer demand is still sluggish in the market, we are still experiencing an inflationary situation, and the job market overall has not picked up. We should have expected a 20% increase in sales during this festive season, but we are keeping our expectations at a 10-12% increase over last year”, said Jacob John, brand head for Louis Philippe of Madura Fashion and Lifestyle, a division of Aditya Birla Nuvo Ltd.

The travel market, too, is bearing the brunt of the downbeat consumer sentiment. Travellers are opting for shorter trips to nearby destinations, according to Madhav Pai, chief operating officer, Leisure Travel (Outbound), Thomas Cook (India) Ltd.

“Customers have now begun weighing all options available in the market, while some may opt to put their plans on the back burner, our trend data indicates that most price sensitive travellers prefer a shift to short haul value destinations like the Far East and India,” said Pai.

Mohit Bahl, a partner at KPMG India, expects growth in organized retail sales over the next year to match the past year’s level, noting that retail spending and consumption are directly linked to economic expansion.

“Organized retail grew at a compounded annual rate of 20% between 2006 and 2011. In the last one year, organized retail has grown at a slower rate of 12-15% due to overall slowness in the economy,” Bahl said.

There are definite headwind to retail growth this year, said Rafique Malik, managing director of Metro Shoes Ltd, who said that at the low-end, consumers are not buying on account of high inflation and increasing prices, while the top-end consumers are deferring their purchases because of the gloomy economic environment.

Factors such as the rupee’s depreciation against the dollar, which makes imports more expensive, has also probably influenced consumers to delay purchases, said L.K Gupta, vice-president (marketing), LG Electronics India Pvt. Ltd.

The consumer durables company had raised prices across categories like washing machines, refrigerators and televisions by an average 15%, driven by rising input costs, in the last 18 months.

To revive sales and consumer spending, retailers are increasing advertising and promotional budgets.

“We are increasing our advertising spends this festive as compared with the last year and hope this will revive consumer sentiment and make them spend,” said Ashish Dixit, president, Madura Fashion and Lifestyle, a division of Aditya Birla Nuvo which operates brands such as Van Heusen, Allen Solly and Louis Philippe.

Some retailers are hoping that the recent clutch of policy announcements by the government allowing foreign direct investment (FDI) in multi-brand retail and easing rules for FDI in single-brand retail, which have cheered the stock market, would have some effect in bolstering consumer confidence.

“While it may be true that consumer sentiment has ebbed till some weeks back, good signs of economic stability indicate a resurrection in consumer sentiment. The stock markets have also been on a good trajectory, which indicates a stable economic outlook,” said George Menezes, chief operating officer at Godrej Appliances, an arm of Godrej Industries Ltd.

A bleak employment scenario may dash those hopes. Blufin, for one, remains pessimistic.

“The overall employment sentiment has become more pessimistic, and that is a worrying sign,” said Rashid Bilimoria, chief executive officer, BluFin. “Consumer sentiment is set to decline further due to the recent diesel price increase, which wasn’t taken into consideration for the August survey.”