Industry Risk Score : Apparel Retail

The growth in the Indian textiles sector is supported by rising household income levels, growing population, and increased penetration of organized retail. Consequently, the domestic apparel retail market is estimated to witness an uptick going ahead

The unorganized sector comprises more than half of the industry, indicating a huge potential for the organized sector. In fact, with rising customer brand awareness and demand for good quality products the industry is likely to witness steady growth.

The demand scenario is likely to be driven by increasing urbanization, changing customer preferences towards Ready to wear (RTW) garments, and the ever growing alternative supply channel of online retail. India's diverse demography and growing fashion consciousness are the factors which are driving the market growth particularly in the organized segment in the apparel industry. Consequently, several domestic and foreign players are competing to gain market share through improvement in their distribution channels, discounts and incentives. In fact, top players are able to develop their own niche styles, control costs, build sufficient customer base through brand loyalty and offer quality products at competitive prices.

Investment in technology is also an important aspect for the industry and will remain a key monitorable. While the dynamics of top players are shifting by rising focus on e-commerce models, small and medium players will require to adapt to changing customer preferences in order to be able to sustain growth.

India has a large working population which is supported with rising disposable income levels in metro cities. The urban metro market which primarily comprises of cities such as Delhi NCR, Mumbai, Bengaluru, Chennai has been traditionally the biggest market for apparel in the country accounting around 20- 25% to the overall apparel market.

However, with high real estate costs, rising competition among branded players coupled with saturation in metros, is driving the big brands towards the smaller cities primarily catered by unorganized local players. In fact, the rising awareness of fashion along with increasing purchasing capacity augurs well for the sector in providing a diverse market to the players.

Moreover, with the ever changing fashion trends, consumers too are increasingly looking to keep upgrading their wardrobes. Thus, increase in the number of shopping malls across India, major brands have witnessed a rise lately. Going ahead, demand is further likely to be fueled by online retail presenting an ease to customers in terms of availability of a variety of brands across various price categories with delivery position spread across the cities in India. This brings fashion to cities where there are no brick and mortar stores.

However, Indian consumers being extremely price conscious, spending on apparels is discretionary and dependent on the economic health of the country, festive season etc. The consumers constantly look out for quality products at reasonable prices which can to an extent offset demand growth.

Acuité believes that the apparel retail industry will continue to grow at a steady rate with rising demand.

Indian consumers are extremely price conscious and thus are in constant look out for quality products at reasonable prices. Subsequently, players operating in the segment too are under pressure to provide products at competitive prices. Notwithstanding, players have also managed to accrue brand loyalty among customers thereby gaining repeat purchases. However, the wave of discounts provided could hamper industry realizations.

The entry barriers are high if the player wants to set up stores pan India as it requires huge investments and managerial capabilities.

The organized sector has a large number of major players comprising both Indian and foreign retailers. Some of the Indian retailers include Pantaloons, Shoppers Stop, Arvind Mills, Future Group's FBB and Big Bazaar, Reliance Trends, Tata Trent, Raymond, Globus, Wills Lifestyle, etc. These brands have single brand retail outlets as well as large multi-brand outlets.

Some foreign brands have launched their products via joint ventures with Indian retailers like Marks & Spencer with Reliance. Further, post relaxation of foreign direct investment (FDI) norms in the retail sector, the presence of international brands like Zara, Mango, and H&M is increasing too. The advent of foreign brands has increased the competition for Indian players, albeit at a lower rate relative to the overall industry as the premium segment remains a smaller part of the entire industry. Thus, retailers in the lower and mid segment remain unaffected. Players are however under constant pressure to manage brands by improving visibility, increasing marketing and continuously innovate by offering new products.

Acuité believes that the competition risk persists in the industry as the consumption pattern of customers is majorly skewed towards products at reasonable prices leading to players confining their margins.

Most of the apparel retailers do not manufacture the clothes. Instead, they outsource the same to manufacturers requiring them adhering to the norms and specifications set by the brand.

The raw material costs constitute the major proportion of the operating costs of apparel manufacturers. The primary raw material used is either cotton or manmade fiber and its associated pricing remain a key monitorable.

For the retailers too, the risks pertaining to constantly investing in brand building by launching new styles, marketing, ensuring quality of products through strict supervision of suppliers while dealing with infrastructure constraints remain high. Store management which is an integral part to the success of retailers too remains expensive. Most retailers though operating at high gross margins, make minimal profits, at least in the nascent stage of business. Retailers require to invest in brand building to be relevant and sustain their consumer base. Efficient distribution mechanism is also essential in terms of developed supply chain and integrated IT management.

Acuité believes that the industry is exposed to input related risks thereby remaining a key monitorable.

The government has put in a regulatory framework to promote the retail industry by relaxing the FDI norms and implementing Goods and Services Tax (GST). However, retailers still find it challenging to set up brick and mortar stores owing to several required clearances.

However, recently the government has relaxed local sourcing norms for single-brand retailers with foreign direct investment (FDI) and allowed them to sell online even before setting up physical stores, in a move expected to benefit retailers.

Further, in March 2019, the government has approved a scheme to rebate State and Central embedded taxes for apparels and made-ups exports which is likely to support the textile sector.

Acuité believes that the apparel industry is likely to be benefitted from the relaxation of FDI norms. However, procedural challenges and delays related to setting up of stores continues to be an impediment.

Retailers are increasingly focusing on improving business efficiency leading to invest in information technology. Several IT tools are also available for inventory management, vendor management, supply chain management, etc. Retail business is data intensive, and it is important to analyse it to enable the management to take appropriate decisions. Increasingly, artificial intelligence (AI) and machine learning is picking up aiding the retailers to understand the consumer behaviour and recommend new demand patters.

Acuité believes that players have already adopting and implementing the technological advancements to better understand the consumption patterns.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally unfavorable)

Return on capital employed
(Marginally favorable)

Debt/ Equity
(Marginally favorable)

GCA days
(Marginally unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale