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Impact of Demonetization on Retail

Impact of Demonetization on Retail

On 8th November, 2016, government announced the demonetization move in a surprising fashion invalidating the existing currency denominations of Rs.500 and Rs.1000. The decision came as a surprise for the general public as more than 80% of the currencies in circulation comprised of these two faces. It caused some inconvenience for the general public in the initial few days and weeks but with the introduction of new currency denomination of Rs. 2000 and efforts of RBI and the banking system, the hardships were subsided to a great extent and now things have started to look normal. However, in case of business and industry, the impact of demonetization may linger for a little longer.

Demonetization directly affects purchases (by customers) which is why it always has a strong impact in the retail performance (sales) of a company. Although, the Q4 results are yet to be out but from the prevailing circumstances it can be induced that demonetization may have caused a temporary slug in the performance of the companies.

In order to assess the impact of demonetization on retail, let us take a stock of the retail performances of three key industries (Automobile, Textile and Apparel & FMCG) in the recent months and analyse the trends that followed.

Automobile

Vehicle category Sales Performance during January 2017

Passenger vehicle Up 14.40%
Commercial vehicles Flat
Two-wheelers Down 7.39%
Motorcycles Down 6%
Scooters Down 14.5%
(Source: http://www.autocarpro.in/analysis-sales/india-sales-analysis-january-2017-23650)

The carryover of the impact of demonetization from 2016 was eminent in the retail performance of the automobile industry in the first month of 2017. Apart from passenger vehicles, all other categories of vehicles continue to show dismal performance. The passenger vehicle segment rebounded in January 2017 after a poor performance in December 2016 in which it registered a negative growth of 1.36%. It is expected that the impact of demonetization will begin to fade in other vehicle segments as well in the coming months.

Textile and Apparel

The textile industry contributes to about 4% to India’s economy. In the unorganized textile sector (especially in the rural areas), the local markets heavily rely on cash. The sector leans back on the domestic market for revenue generation. It is a labour intensive industry employing lakhs of workers to whom daily, weekly or monthly wages are also paid mostly in cash. The scrapping of two major currencies and restrictions on withdrawals from bank has significantly impacted the sales of these small town retailers.

Demonetization struck the apparel market during the wedding season. The retailers had planned & stocked themselves considering the huge sales that they clock during this season. Demonetization impacted these retailers severely as “Cash” contributes 70% of their daily collection in most of the Tier 2 & Tier 3 cities. This effect continued till the end of Dec 2016. The apparel market started reviving from Jan 2017 & to our surprise by Jan 2017 end, the flow of cash in the market regained its position.

FMCG

The impact of demonetization was intense in the FMCG sector. According to a Nielsen report, the FMCG sales have come down by 1-1.15% or Rs.3,840 crores in November 2016 (as compared to October 2016). The inventory levels maintained by retailers and stockists have come down because of cash and supply constraints and retailers’ purchases came down by 6.4% in November 2016.

The fall in sales was more visible in the urban areas. In the rural markets, sales were almost flat owing to the popularity of sachets, smaller transactions and credit from retail stores. Experts believe that the slowdown will last longer in the impulse category (biscuits, snacks etc) than in the essential category (atta, cooking oil etc). Some categories of retailers (like pharmacies) could find a little room for breathe as old currencies were accepted in these stores for an extended period of time.

Cash is back

While customers did face some currency crunch in the initial few weeks post demonetization but as things start falling back to normalcy, the usage of cash for making purchases has again started to trend up. Several retailers agree that during the period of currency crunch, there was an increase in the use of debit cards and mobile wallets for making purchases. But as the cash shortage started to subside, customers fell back to their old habits. However, it cannot be denied that the government’s push for use of digital payment did found a major boost.

Even on the part of most of the merchants and traders, cash is still a preferred payment option for business transactions on account of several factors like operating knowledge of digital payment platforms, digital security concerns, and complementary willingness on the part of the customers to use digital payment solutions and so on. It is very likely that digital payment was seen only as a temporary solution to avoid disturbance to the flow of business during the demonetization phase and not yet as a tool for long term use.

Demonetization may have brought a temporary slug in the retail sector but its impact has already started to subside. The process of remonetisation is already at its full throttle and withdrawal limits are not forever.

The demonetization move is aimed at broader economic good. The timing of this move, contrary to the beliefs of many, was impeccable. The retail sector could have been much worse hit had this decision been taken before Puja or Diwali, the prime festive season in India when the general public does the most of the high value shopping.

To know more about “Impact of Demonetization on Retail” get in touch with our Retail Experts on [email protected]


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Author Bio

Varun Shah

Chief Finance Officer

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