Walking into a mall in an Indian metro on a weekend is like entering into a scene from a dystopian film. There’s overpowering odour of sanitising liquid, multiple temperature checks by security staff, little or no food available, shuttered entertainment zones and about 30% of shops the stores closed.

Until mid-March, India was possibly the best place in the world to be in the fashion business. While fast fashion was retreating in the West, it was gaining ground here. Over the past decade, leaner supply chains, faster time to market, extended credit terms from factories, technology-powered omni-commerce and a young talent pool have been the gasoline for the industry. Celebrity endorsements, social media influencers and China imports have driven market growth.

But in less than two quarters, the playing field is being re-leveled, pushing both heavyweights and startups into the ground. Wrapped up in this collective delusion of an ever-expanding market and a burgeoning middle class, no one really saw the Covid-19 pandemic coming – until it had one foot and a hip inside the door. Coronavirus has knocked the wind out of the sales. Sales revenue, I mean, not discounts. The fashion retail business is beset with fragility.

The trouble manifests in leveraged balance sheets heavy with bank debt, the perishability of the merchandise because of quick-changing trends and the quixotic nature of consumers, who want upscale-looking product at accessible prices. In July, sales in high street stores for fashion had declined by 50%-55% vis-a-vis the same period last year. In India’s malls, sales were at 20%-30% of the previous year’s levels. Department stores like Central, Lifestyle and Shoppers Stop saw sales plummet in similar fashion.

Hoping for BaU

When the first lockdown was ordered in March, we thought it was a sniffle and would vanish in the next few weeks. But as the lockdowns got extended, conversations between retailers centred around how soon the vaccine was expected so we could start seeing BaU, or business as usual.

Fashion retailers have three large expenses. Salaries, which are between 7%-12% of revenue, lease rentals that hover from 8%-15%, and debt, which varies so much that it’s best not guesstimated. A lot of the debt is well deserved, as Indian fashion brands continue to show double digit growth the last three years and have earned that leverage. On elective expenses, you could turn off the marketing tap and you could stop discounting, but liquidity is what keeps the retailer in the fight.

Discounting is a weapon that boosts liquidity. However, with customer sentiment low, the gunpowder is no longer dry for it to be used. Moratoriums offered on loans took care of part of the liquidity, but suddenly revenues had come to nought. Projected profit and loss accounts took a heavy beating with the lockdown coming in March when retailers closed accounts.

A worker sprays disinfectant in a mall in Mumbai. Credit: Francis Mascarenhas/Reuters

Eighty percent of organised fashion retail in India operates on lease, from stores that are either in malls or on high streets. High street landlords are usually uninvolved in the business and the relationship is transactional, but malls convince retailers that they are partners in progress. However, when the lockdown was imposed, the high street landlords were far more amenable to reducing rents or operating on a revenue-share models than the malls – which suddenly started invoking agreement clauses.

Many agreements have incongruously worded force majeure clauses that neither mention pandemics nor government actions of closure, leaving no wiggle room for retailers. Punitive lock-in clauses for the tenure of the agreement and large rental deposits make it hard for fashion tenants to walk out.

As you read this piece, a Mexican standoff continues between retailers and malls, with little chance of resolution. The mall business model is as delicate as a retailer’s: if a mall is occupied at only 75% capacity by tenants, then its viability goes south. With theatres and food courts shut in most cases, footfall drivers are missing in the malls.

On the other hand, the high streets continue to do modest business, bringing about an inflexion point in customer preferences. Adding to this, smaller cities have shown a smaller drop in sales as they seem insulated to the macroeconomy for now. Tumkur, Hubbali, Cuttack, Gulbarga, Bhimavaram, Rajkot, Durgapur, Jamshedpur, Allahabad and Gwalior are among the places that have held steady.

Fraying relations

For most national fashion brands, about 20% of sales come from the large multibrand retail stores and franchisees. These distribution channels have minimum guarantees (meaning that brands have to pay the stores a quarterly minimum margin, regardless of sales revenue), margins and related fixed costs like transport, logistics and staff salaries. The retailer-brand relations are also fraying at the edges, as terms get renegotiated with the multibrand department stores.

Lockdown rules by the Centre and states have been ambiguous and convoluted, causing more confusion. Shopping hours, shopping days, containment areas, sanitisation standards, staffing policies, permission procedures varied by state, region, district and street. Representations to governments for normalising a routine have met with limited success. Also, what’s the point in allowing stores to open if all means of public transport are still closed, and staff have no way of reaching a store?

On the demand side, consumer sentiment is weak. If you’re not keen to get out, wilfully or voluntarily, then you have no interest in buying new clothes or accessories. Weddings, trips to movie theatres, PTA meetings at school and restaurants are drivers of consumption in fashion. These have all come to a halt.

A scene in a Mumbai mall. Credit: Indranil Mukherjee/AFP

Indian fashion retailers are an innovative, hardy bunch. Many have pivoted to spruce up websites with the latest technology and snazzy interfaces, deepened their engagements with e-commerce marketplaces, brought in virtual shoppers over WhatsApp Video, elevated their digital marketing managers and thrown every bait to keep or better their marketshare. Sadly, other than delivery services for Amazon, Myntra and e-commerce players, brick and mortar retailers were not permitted to service customers through direct to home or e-commerce by government,and hence did not gain this advantage of fulfilling orders directly through their own websites, losing consequent revenue opportunities.

With low revenue, retailers have had to cut salaries or furlough employees. Many fashion retailers helped their staff get jobs at online grocery retailers, at e-commerce warehouses and even hyperlocal delivery services. Almost every large brand has shut stores and is renegotiating with creditors (mostly raw material or finished goods suppliers), who are also stressed with no inflows or orders for the next season. Some have shut their factories permanently, as workers have gone back to their villages. Thus, the entire chain suffers.

This is not unique to India. The US is seeing bankruptcy procedures with Neiman Marcus, J Crew, JC Penney as well. But soon, India is going to see a very large takeover of one of the largest retail conglomerates. This buyout is the canary in the coal mine, and some more quick mergers and acquisitions will follow, once the pandemic is over.

At troubled times, the government seems to be the only hope. Retailers Association of India and Clothing Manufacturers Association of India, two respected bodies, have now got involved and are helping retailers navigate these times with government, local administrations and malls.

But retailers haven’t been successful in lobbying the government for over three decades. Governments have seen organised retail on the same plane as traders’ bodies and consequently, retail has not seen any benefits from the well-packaged fiscal stimulus packages that were announced with fanfare on television.

If banks do not extend the moratorium on loans announced in March beyond August 31, a bloodbath could ensue.

As you read this, the malls and retailers continue to exchange calls, emails and legal notices with each other. The jury is still out on whether there will be a win-win.

Jaydeep Shetty has been a fashion professional for 25 years and currently serves as CEO of Soch Apparels Pvt Ltd, a leading ethnic wear retailer. The views expressed here are his own.