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The perishable inventory problem - Fashion and Beverages

While sectors like Auto and Real estate have been seeing mounting inventory levels for a while now, the lockdown amidst summer months has extended the problem to the broader industry. In today's piece, we discuss two sectors that could be particularly affected by the issue due to the issue and how they could deal with it.


Beverages - A sad, sad summer


The soft beverages business is sold via two primary channels - On-trade, the retail stores from where you can buy your beverages, and Off-trade - The restaurants, bars, and pubs from where you would buy this with the food/drinks you're having. The Off-trade segment from where the industry makes close to 55% of its sales by value will see an unprecedented drop in demand due to the lockdown. The on-trade channel will face some pressure as well as people spend less time outdoors.


Most of the beverage players make more than 40% of their sales in the summer months and the average shelf life of the bottle is close to three months. In such a scenario, not only do these firms miss out on the sales in their peak summer months, but could also be in a position where they have to write off inventory. In a capital intensive industry, the impact of this could be greatly magnified.


Fashion - The season's collection in lockdown season

The fashion industry that has seasonal ranges faces a similar problem. While sales have come to a grinding halt due to the current lockdown, a recovery post opening isn't on the cards as people become more conservative with how they spend their money. India's leading agency on cloth manufacturing estimates a hit of greater than 1 lakh crores due to the lockdown alone.


When shops open, clothes are likely to see deep discounting as companies with a more seasonal inventory look to get it out. But with both monetary fear, leading people away from discretionary consumption, as well as concerns around health, moving people away from the "touch and feel" heavy industry could make that tough irrespective of the discounting. Online brands with a combination of sanitization and deep discounting could have slightly better luck.


The path ahead - Credit and consolidation


So where do we go from here? In the absence of a government relief package, which there is little fiscal space for at this point, all industries with a similar sales pattern will take a significant hit in FY21, entering FY22 with significant stress on its balance sheet.


While this is bad news for the sector, the larger players with access to good lines of credit at reasonable rates will most probably tide through, a little bruised but alive to fight another day. It is the smaller players, of which there are many in the beverage space that would find it difficult to get themselves out of the issue. Over the medium term, therefore, this should be a positive for the larger players in the industry, as they either get to acquire some of the smaller players at near liquidation rates and operate with significantly lower competitive intensity as the smaller players die out.

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.

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