Last Modified: Mon, Sep 05 2016. 12 45 PM IST
Price discounts on online platforms and frequent sales drives are unsettling Aditya Birla Fashion and Retail Ltd’s (AB Fashion) premium brands business and driving a strategy rethink.
Sales at Madura Fashion and Lifestyle, which has premium brands, fell 3% in April-June, the second consecutive quarterly drop. As the company refrained from deep discounting to protect brand value, throughput volumes fell, impacting the unit’s operating profit.
Sales at Pantaloons, which operates in the value segment, grew 31%, helping the company register a respectable revenue growth of 8%. With the division seeing good traction, analysts expect it to continue to drive growth at AB Fashion and Retail.
But it will be lopsided growth—not least because Madura is more profitable than Pantaloons.
A significant part of AB Fashion and Retail’s capital is invested in Madura (roughly half of stand-alone assets are in Madura). The division generates more than half of AB Fashion’s revenues and weak performance is weighing on the overall performance.
The company is recalibrating the Madura business.
It is reducing fixed costs, increasing the season cycles and is driving digital transformation through the omni channel programme (shoppers can check unavailable inventory at stores and order online).
The measures and inventory drawdown process are estimated to take another quarter to begin showing results, which means Q2 could also be weak.
Aided by the wedding and festive season, the company expects Madura’s performance to recover from October or in the second half of the fiscal year.
But the street is sceptical. The stock fell sharply after the Q1 results and is yet to recover.
That is due to weak pricing power. Discounts have become sales drivers. Online platforms continue to offer high discounts and retail stores are being forced to follow suit. Further, with the consolidation in e-commerce firms (such as the Myntra-Jabong combination), analysts fear the market will continue to see pricing pressures.
To be sure, the problem is not typical to AB Fashion.
The whole apparel and retail industry is facing pressure on prices and realizations.
“It looks like now that it is a new normal that there will be discounting, there will be schemes and you have to live with those and then really still ensure that you can make money out of it,” Shoppers Stop Ltd told analysts last month.
But companies are getting around this. Branded apparel divisions of both Arvind Ltd and Raymond Ltd registered good sales growth in the June quarter. It is a different matter that these companies are yet to attain decent profitability.
But AB Fashion’s Madura is yet to even reach this stage. Of course, as pointed out earlier, the company is working on it.
Proof that the company is mastering the online strategy without sacrificing too much on profitability will bring relief to investors.