Apparel retail to grow by 8-10% ahead of festive season

Ahead of the festive and wedding season, the organised apparel retail sector is expected to see an 8-10% revenue growth, according to a Crisil Ratings analysis. The growth in apparel retail operating under the brick-and-mortar format will also be driven by higher demand stemming from a normal monsoon, easing inflation, and increasing preference for fast fashion.

“The likely increase in demand for premium clothing during the upcoming festive and wedding seasons will contribute to overall revenue growth of 8-10% this fiscal,” says Anuj Sethi, Senior Director, CRISIL Ratings

A 2022 Statista survey revealed that 58% of urban Indians planned to shop during Diwali, making it the most popular seasonal event. This was followed by 39% of respondents who intended to shop during major online sales.

“The mass market segment accounts for ~60% of total sales now, compared with ~56% before the pandemic, due to the rising popularity of fast fashion, which is expected to be the primary revenue driver this fiscal,” Sethi adds.

In apparel retail, the mass market is the largest segment, followed by premium and luxury. Fast fashion, a key part of the mass market, quickly delivers the latest trends with shorter lead times. As consumer spending in major cities shifts towards travel and luxury goods, apparel retailers are cautious about expanding stores in these areas, focusing instead on growth in tier 2 and 3 cities, which are increasingly embracing organised retail.

Another survey by the Retailers Association of India (RAI) reported a modest 2% growth in the retail sector for August 2024, with apparel sales rising by the same margin. In comparison, the previous year's Retail Business Survey by RAI showed a 6% increase in apparel sales during the October-November festive season.

With the festive season approaching, hopes are high for stronger apparel sales, both in retail and online. Apparel remains a key category for upcoming e-commerce festive sales starting later this month. In 2022, apparel and footwear accounted for 17% of e-commerce retail sales, making it the third-largest category.

While apparel retail sales are anticipated to improve this festive season, revenue growth is expected to slow this fiscal year compared to the 11-12% compound annual growth rate from 2018 to 2023. As a result, retailers are prioritising efficiency in existing locations, managing costs, and reducing reliance on external debt rather than opening new stores.

“Besides, the need to offer higher discounts and incur marketing spends to attract customers will limit the overall improvement in operating margin to 7.2-7.4% against ~7.0% in fiscal 2024,” says Anil More, Associate Director, CRISIL Ratings.

Store area addition is expected to decrease to ~2.2 million square feet, down from ~3.6 million last fiscal, with smaller store sizes. Revenue density will likely remain flat at ~Rs 11,900 per square foot due to slow same-store sales growth, limiting profitability. However, stable input costs and better inventory management will help prevent significant write-offs, unlike last year when cost fluctuations affected margins.

Retailers are streamlining operations, focusing on supply chain efficiency, and adapting to trends like fast fashion. Cash flow stability and limited debt reliance will keep key financial metrics, such as interest coverage and debt-to-EBITDA ratios, steady at ~6.2 times and 1.7 times. Changes in commodity prices, inflation, and consumer spending behaviour, especially in fast fashion, will be key factors to watch.