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Impact of Covid19 on Seasonal Discretionary

Summer is a month that brings in excitement not only for children but also for a lot of industries that are driven by season. Sale of Products like Fans, Air coolers, Air Conditioners, Refrigerators, Beverages and services like hospitality and tour operators witness spikes in Summers

In this post, we shall see how the BlackSwan event of the century, COVID 19 can impact the seasonal consumer durables and also how each of its stakeholders – Suppliers, companies, and distributors can get impacted.

Seasonality of these products

To understand the effect of seasons on products, let us look at their sales - Air cooler is the most seasonal product as, close to 85% of the annual sales of this item happens in months of March to June. Next in line are products like Refrigerators and Air Conditioners for which 50-60 % of annual sales happen in the summer season. Then comes other appliances like Fans with 40% of the annual sales happening in the summer months of March to June. These figures show how significant is the peak season for the sale of these products.

The Supply Side Disruption with COVID 19

When we look at appliances like air-conditioners or refrigerators, 75 % of the cost of the appliance goes into raw materials or components like compressors, motors, evaporators, etc. Many of the companies source these components from China (Approx. 60% of components and 40% of fully built products are imported from China). When China got impacted by Covid19 and was locked down, these companies faced a supply-side disruption and had to search for alternatives. Then the Indian component manufacturers came to their rescue, albeit at a higher cost. Some components had to be paid in excess of 40% than the usual price. This resulted in the price of these appliances going up by at least 4%.

The Demand Disruption

Just around the same time the lockdown was lifted in China, India enforced a lockdown sending shockwaves to these companies. Now the demand side of these products has been impacted. Most of the Modern trade for a good half of March and April have shut shop due to zero footfalls owing to Lockdown. The situation is so bad that some analysts are predicting that the entire Aircooler stock sale for this year will have to be written off and 40% and 35% of annual sales of Air Conditioners and Refrigerators respectively have to be written off. This might force the sellers to wait for 1 full year to sell this inventory or do a distress sale at dirt cheap prices incurring losses.

The Impact on Companies, Suppliers, and Distributors

Due to demand disruption, each of these companies will sit on a huge inventory of unsold appliances resulting in an aging inventory and increased working capital. This will strain the operating profits of the companies. Owing to a weak summer, their credit ratings are likely to be downgraded which will result in higher financing costs for the coming years. This forces the company to take tough decisions like shutting the plants, longer credit cycles to suppliers to improve bottom-line. Some companies which are worst hit might also retort to job cuts for cost-cutting.

On the other hand, the Suppliers will have shrunk order books which is already visible as most of the appliance manufacturers have shut down their plants foreseeing a weaker demand and aging inventory. This will result in lower capacity utilization and increased fixed costs.

The weaker demand will impact the inventory turnover of Distributors resulting in weak business. But since the lockdown is announced in the mid of March, the distributor’s orders wouldn't have been fulfilled which lets them withdraw their orders save them from the inventory piling up.

With most of these items falling in the seasonal discretionary bucket, a tapering down of Covid post June is unlikely to have a major impact, and we might have to wait the better part of a year to see a recovery.

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The post is written by our EZPP partner Vamsi Gorthi with relevant edits and changes by our editorial team. Vamsi is a JBIMS graduate currently working with Ernst & Young.


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