The apparel industry has been hit hard by fresh curbs and lockdowns imposed by the state and district level authorities. The degree of impact, however, is varied within the subsections of the industry.
Larger brands are affected in terms of rising debt levels and reduced free cash flows. However, the players in this category are likely to rise faster once COVID-19 impact is subsided.
Smaller players, on expected lines, are the worst impacted. A large proportion of smaller players are closing down their businesses, plagued by an uncertain outlook, stretched working capital, and liquidity positions.
Dealing with Pandemic
Discussing the recent trends among the larger apparel retailers, Tushar Ved, Vice President of Major Brands said that many weaker brands are likely to shut shops. It will help the larger and organized players to capture a larger market share going ahead.
The retailers have also opted for extensive cost-cutting measures to tackle the situation. They are also negotiating rental structures with landlords and mall operators and have initiated discussions accordingly.
He also emphasized the need of clearing inventory and planning for the autumn/winter season in advance. Clearing inventory will help in managing the cash flow and reduce the working capital requirements.
Smaller Players Facing the Burn
Chief mentor of the Clothing Manufacturing Association of India (CMAI), Rahul Mehta informed that smaller players are once again on the back foot as the second COVID-19 wave has wiped out the entire recovery. CMAI largely represents smaller retailers in the apparel industry.
He indicated that a large proportion of smaller players are closing down their businesses due to the uncertain outlook and stretched working capital/liquidity.
Increased raw material prices have impacted the small players badly. It has increased the procurement prices of winter’21 collections. On the other hand, store closures have impacted their sales. The liquidity position is also squeezed due to the stretched credit cycle for smaller players.
Revenue Sharing Model Not Working for Mall Operators
Malls were the first to close down under the impact of COVID-19, impacting the business of tenants and the operators. These changed circumstances had forced them to renegotiate the rental model with tenants. The majority of malls under the renewed negotiations have shifted to a revenue sharing model.
However, mall owners are looking to shift back to the fixed rental model as soon as possible. As per Vrushank Mehta, CIO, R Retail Ventures, Grade B/C malls are 80–90% leveraged. Revenue sharing would be inadequate to pay even six months’ worth of EMI installments. In this situation, these malls could be forced to convert into either office or residential spaces.
He further sees Grade-A malls directly benefiting from this trend. A large number of visitors are likely to shift to them with service and experience levels going down in grade B/C malls.