Hit by the slowing sales, apparel and textile retailers are doling out as much as 80 per cent discount on their merchandise to clear inventories and meet the working capital requirements.
Though end-of-season sale is common in the first week of February, what is interesting this time around is the quantum and timing of the offers. Retailers are giving away 20-25 per cent additional discounts, compared to the last year. Also, they began giving discounts at least three weeks before the ususal timing.
The reason: Fall in sales. According to industry estimates, October to December sales, which constitute nearly 40 per cent of the total apparel sales in a year, has fallen over 25 per cent, compared to the last year.
"Stock is moving slowly and inventory pile-up is high. There will be more merchandise on sale and discounts are sharper this time around. They have to liquidate before the next season,'' said Purnendu Kumar of Technopak Advisors, a business consultancy.
Indian retailers are passing through tough times as same store growth of retailers, which compares sales of stores that have been in the business for a year or more, has dipped reflecting the economic slowdown and poor consumer sentiments.
Ratings firm Fitch expects same store growth in FY09 to be lower than FY08 due to slower GDP growth. The ratings firm said retailers may be forced to give discounts and promotional offers to maintain volumes, which will drive down margins further.
Normally, apparel retailers carry a gross margin of 30 to 35 per cent and would sell 60 per cent of their inventories on full price and the rest of the merchandise at 20-25 per cent discount.
"But now the matrix has reversed with them selling the major portion on discount, which is expected to bring down their margins by 10-15 per cent," said an analyst tracking the sector.
"Third quarter was bad for retailers. If they have an extended offer period, their EBIDTA margins will dip further. It will only prop up their top lines and same store growth,'' said an analyst. But retailers are hopeful of better margins through the offers and promotions.
"When we launch offers, we calculate how much sales we will make and what will be the hit on our margins. When we launch an offer, we normally tie up with retailers or have inventory to clear. Obviously, we do not sell at a loss,'' said Sandip Tarkas, president, customer strategy, Future Group.
Retailers such as kidswear maker Liliput is giving a 70 per cent discount to clear their inventory due to scaling down of their expansion after the liquidity crunch.
It planned to open 275 stores by the end of current financial year but could open only 200 stores.
"We have to clear the inventory we had purchased for the other 75 stores. That's why we are giving such a high discount," said, Kamal Gupta, vice-president, retail, Lilliput Kidswear.
In some cases, retailers had to sell the products below the purchase price to clear their inventory. Vishal Retail, a New Delhi-based retailer, has an inventory of Rs 813 crore (Rs 8.13 billion) and sells its winter collection at even below purchase-price.