Off-season sales hurt branded goods

Off-season sales, when shopping malls and high streets buzz with tempting offers of up to 70 per cent discounts on your favourite brand of shirts, jeans or even home textiles, are getting longer by the day. And this is eroding the margins of branded labels.

Leading consultancy firm Mckinsey has observed that almost 40 per cent of the branded apparel sales come from discounting. Market experts say that ideally the ratio between off-season sale and full price merchandise should be 20:80 respectively. But the current trend in the market suggests that the ratio is 50:50.

Rahul Mehta, president, Clothing Manufacturers Association of India, said, "Companies have started taking into consideration the larger share of discount sales in the production cycle. Excessive discounting has no specific advantage to any brand." This season, Raymond has announced discounts simultaneously across all brands in exclusive stores as well as multi-brand outlets. Industry insiders said that though a certain amount of periodic sale is required to liquidate merchandise, the increasing competition is prompting customers to shift their shopping patterns. Nikhil Chaturvedi, director, Provogue said, " It is important to liquidate the merchandise as stagnant shelf spaces will not attract the repeat customers. The problem lies when brands go on year-round sale and customers do not tend to make full price purchases."

The problem is hitting companies such as Madura Garments hard. The operating profits of the largest branded apparel player dipped by 7 per cent at Rs 19.8 crore for the third quarter ended December 2007. The company also posted a 28 per cent fall in operating profit for the second quarter over the corresponding period of the previous year. It attributed the dent in bottom line to higher discounts offered to meet market dynamics and high lease rentals for opening new stores.

Mehta gives an example of Double Bull shirts that would be sold only during the sale period. "The exercise also erodes the brand value as customers associate the brand with sales. Secondly merchandise may also suffer as manufacturers might compromise on the quality."

Ireena Vittal, head retail practices, Mckinsey, said, " Excessive short-term promotion can spoil long-term market behaviour." She asserted that it is important for brands to communicate price proposition and ensure price discipline in the market as promotions are teaching customers to become bargain hunters.

Endorsing the view that heavy discounts will affect long term profitability B S Nagesh, managing director, Shoppers Stop, said, " The retailers need to work with brand managers as there is sale for almost six months of the year, affecting foot falls during the rest of the period."

According to reliable sources, this discount season has been particularly dull for branded apparel players due to weak consumer sentiments.

"Most of the brands are seeing poor response for sale due to the stock market crash, increased spending towards other lifestyle products while severe winter has led to sudden spurt in demand for woolen clothes," says a source.

While margins are getting affected, some analysts feel that India is moving towards global trends of discount retailing. Recently, established branded players like Provogue and Arvind Brands too launched their own discount retailing formats. Sources indicated that margins are also shrinking as companies have to supply the old stock to the discount retailers at lower margins.