GST panic sparks early Diwali for consumers, but fire sales at retailers

The implementation date of July 1 for goods and services tax (GST) regime has advanced the festive shopping for consumer goods and lifestyle products, but retailers are not a happy lot.

While they are witnessing record jump in sales, heavy discounts across distribution channels to clear pre-GST stocks is forcing them to hugely compromise on margins and profitability.

Speaking with DNA Money, Ramesh Tainwala, chief executive officer, Samsonite International S.A., said the sales growth at 40% in June 2017 has been highest ever in the company's history for the month.

"Our focus is more on encouraging dealers and distributors to finish the pre-GST inventory. Losing sales is a bigger burden than losing input credit and that's what we are trying to tell our channel partners," said Tainwala on the stock clearance frenzy in the market.

Interestingly, the travel luggage company is also sacrificing a portion of its margins to further incentivise retailers to dispose of the stock.

"We are giving retailers an additional 5% margin on all the pre-GST stock," said Anushree Tainwala, executive director - marketing, Samsonite South Asia Pvt Ltd.

The market scenario in the consumer durables/electronics industry isn't any different. While companies manufacturing the products are tight-lipped on their approach to deal with the pre-GST stock, retail chain operators aren't taking any chances.

Nilesh Gupta, managing partner, Vijay Sales, said the biggest concern in the market currently is about how to deal with the stock with traders/retailers as well as the transit stock.

"We are already 50% down in terms of store inventory as compared to what we used to have on an average (in the stores). By July 1 we are hoping that this (inventory level) will come down to 30%," said Gupta.

On heavy discounting as a strategy being adopted by the trade to sell off pre-GST stocks, Gupta said the (discounting) range is almost equivalent to their own cost (of buying the products from the manufacturers). "We are also taking a huge hit on our margins for (pre-GST) sales registered in June. So this month, the topline is looking very good but the bottomline isn't," said Gupta.

The post-GST market scenario is not looking very good either, as electronics retailers were earlier (in the pre-GST regime) paying 13.5% on profit as value-added tax (VAT) in Maharashtra. "Now it will be 28% GST, which is a significant loss in profitability. While I will be able to claim input tax credit that's not enough to balance the additional tax outgo," said Gupta, adding that traders will have to take a hit on their margins which will have to be borne by the consumers over a period.

Electronics retailers claim they do not enjoy huge margins to be able to absorb the increase in tax payout. Accordingly, prices of consumer durable/electronic products will increase by 3% to 4% post implementation of GST.

Mobile phones as a category, however, will not result in any hit on margins as at 12% GST, there is a 1.5% decline from 13.5% VAT earlier. However, on all other products, approximately 2% to 2.5% will be the margin hit that retailers will take post-GST.

"We are talking with the (consumer electronics/ durables) brands on how ways to deal with this situation. They are yet to come back with a solution as right now everyone is occupied with their own set of preparations for becoming GST-compliant," said Gupta.

As for the possibility of festive season sales getting impacted due to the current shopping frenzy in the market, Tainwala said that sales will be volatile in the coming months.

"People have advanced their purchases for sure across industries. So while companies have booked higher sales earlier my sense is that festive season sales may not be equally good this year. There will certainly be some moderation of sales going forward as compared to what's been booked already. Someone who's bought a refrigerator in June due to attractive pricing will not buy another one during the festive season. So that impact will definitely happen. But personally I think businesses will be fine even in that scenario," said Tainwala.