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A favourable policy and taxation regime is what the branded footwear sector needs to get up and get running again
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India's domestic footwear retail market estimated at Rs 72,000 crore in FY20 is projected to grow at a CAGR of ~8 per cent to reach Rs 1,05,000 crore by FY25. This is good news for the footwear and leather industry that has been down in the dumps for some time. But it bodes well from another perspective as well: all segments are needed to start running full throttle to haul the economy across the $5-trillion line. Of course, by the agreed probable deadline. After all, the domestic footwear and leather industry employs more than 2 million people, with the potential to create another million and a half jobs purely based on demand supply parameters. Says Sanjay Leekha, Chairman, Council for Leather Exports: “The sector has the potential to reach a total turnover of $30 billion in next five years, with a domestic turnover of $20 billion and export turnover of $10 billion and generate additional employment for 15 lakhs more people.”
For sure, there is revival and recovery in the market as evident from the healthy financial numbers posted by most large players. The footwear sector, apart from being a big employer, also generates significant foreign exchange for the country. India is world’s second-largest producer churning out more than 2 billion pairs of leather and non-leather footwear in almost equal proportions. India is also the third largest footwear consuming country after China and the US with consumption of nearly 1.7 pairs, against the global average of 3-pairs.But it wasn’t all hunky-dory for the sector until a year ago. Pandemic-induced lockdowns, labour shortage, cash flow challenges, stuck orders and high cost of raw materials, were all choking this otherwise thriving sector. Most of 2020 and 2021 saw the footwear manufacturing industry on the brink of closure. Several hundred small and medium manufacturing units across hubs like Agra, Kanpur, Delhi, Karnal, Ludhiana, Sonepat, Faridabad, Ranipet, and Ambur were faced with shutdowns and job losses due to lockdowns, stuck payments, 40-60 per cent jump in raw material costs, and other local factors. As a result of the turmoil, the footwear retail market in India contracted nearly 33 per cent. In number terms, the overall size of the footwear market shrunk to Rs 48,000 crore in FY21, from Rs 72,000 crore in FY20.
Thanks to the vaccine induced recovery though, the segment is projected to close FY22 at Rs 64,800 crore (numbers are still being computed). Better still, in the next two quarters, the numbers are expected to touch the pre-pandemic levels, say experts. “The footwear industry is expected to return to pre-Covid levels in the second half of FY 23,” says Anand Ramanathan, Partner, Deloitte India. But before the industry gets there the sector has to tackle a few more challenges and obstacles for which the industry is demanding certain measures from the central government.
Turnaround Tales Led By Bata
As per the ministry of micro, small and medium enterprises (MSME), India is the second largest producer of footwear after China, accounting for over 13 per cent of global footwear production of 16 billion pairs. Men’s footwear currently dominates this market with approximately 48 per cent share.
However, growth in women’s footwear segment will outpace the growth in men’s to account for an almost equal share by value in FY25 against the current share of 41 per cent, a Technopack analysis says. While the casual segment is the largest accounting for almost 67 per cent of the total market in FY20, sports and athleisure is one of the fastest-growing segments that will drive the growth, the research adds. Indeed, the organised and branded footwear segment is on the path to recovery. “The organised segment, which accounts for nearly 30 per cent share, is growing at 15 per cent CAGR while the online segment accounting for nearly 4 per cent is growing at 25-30 per cent,” says Ramanathan. Major branded footwear giants like Bata India, Relaxo Footwear, Woodlands and others have shown recovery in business especially post-September 2021. Take, for example, the recently declared financial results of Bata India, the largest footwear retailer in India. For the fiscal ended March 2022, Bata India’s revenue from operations stood at Rs 2,387.71 crore, around 40 per cent higher than Rs 1,708.48 crore in the year ago period. From reporting a net loss of Rs 89.31 crore in FY21, Bata India’s consolidated net profit bounced back in the green. It reported its net profit at Rs 102.99 crore.
“In the last two quarters, we witnessed significant recovery in demand in the backdrop of improvement in consumer sentiments and deeper understanding of the pandemic, availability of vaccines and faster easing of restrictions. We kept expanding our reach through new franchise stores and multiband outlets,” Bata India MD and CEO Gunjan Shah said. Bata has opened 22 new franchise stores taking the total number over 300, expanded availability via distribution channels that continued to scale up to over 1,000 towns. “We have
enhanced our portfolio in the casual and fashion footwear section across categories. Sneakers led the growth recovery in the quarter, while formal and fashion also recovered significantly,” Shah said. “Bata India has had a robust performance and is on a sound trajectory. Given its focus on newer collection, expansion through all channels and omni-channel in particular, Bata India is well poised for the future,” said Bata India Chairman Ashwani Windlass.
Another major player in the business, Relaxo Footwears also reported a 12 per cent higher revenue at Rs 2,653 crore for FY22 (on the back of sharp price increase) even though it posted a 20.19 per cent dip in its net profit at Rs 232.68 crore. It had reported a net profit of Rs 291.56 crore in FY21.
|We Will Add 25 Exclusive Stores|
|Harkirat Singh, MD, Woodland talks to Ashish Sinha about the ups and downs. Excerpts:|
On Covid impact
Pre-Covid, we were consistently following our growth pattern of 15 per cent y-o-y growth. This shook due to the sudden closure of all our stores for a few months. Our pre-pandemic revenue of over Rs 1,200 crore got reduced to around Rs 650 crore in the first year. In year two, we clawed back to revenue of Rs 900 crore.
We are expecting to cross our benchmark of Rs 1,200 crore and grow further if things remain under control. We are definitely on the road to recovery.
On expansion plans
We are planning to add around 25 exclusive stores this year primarily in the Tier1 cities. We are also planning to expand our network of current 4000 MBOs (Multi Brand Outlets). We believe that the offline market will always be our strongest point and we cannot stop expanding there.
On offline versus online sales
Offline outlets have always been a major contributor to sales. Post-covid, we witnessed a sharp increase in the online sales as well. Today e-commerce contributes over 30 per cent of our total sales (earlier 12-15 per cent).
Analysts say the decline in profit was due to multiple issues including substantial hike in the price of raw material, and higher GST (for footwear priced under Rs 1,000) that are posing a challenge to the entire footwear industry. Exports crossed the Rs 100-crore mark and are picking up with opening of market and its contribution is more than 4 per cent of revenue of FY22, says Sushil Batra, CFO, Relaxo Footwears. Footwear and apparel brand Woodland also expects to grow over 20 per cent and claw back to the pre-pandemic levels with a top line of more than Rs 1,200 crore this fiscal, mainly driven by ‘revenge-buying’, says Harkirat Singh, Woodland’s promoter and managing director. Woodland closed FY22 with Rs 1,000 crore in revenue and plans to clock more than Rs 1,200 crore this year or claw back to the pre-pandemic sales this fiscal. The Delhi-based company, which began manufacturing special purpose leather boots for extreme weather conditions (targeted primarily at the defence sector) in Canada in the late 1980s, entered the country 25 years ago and is the market leader in the category, selling over 5 million pairs annually. The company sells its footwear mostly in premium athleisure range for outdoors, accessories including apparel and deos and men’s personal wears through Woodland, and super premium Wood labels through 500 exclusive stores and over 5,000 multibrand retailers. Almost 50 per cent of the sales come from these exclusive stores, 20-25 per cent from exports primarily to the UAE and other MENA markets, South Africa, Russia and Canada’ and the rest from other retailers.
Boon or Bane
Are the higher prices of raw materials a bane or boon for the footwear industry? Naveen Kulkarni, Chief Investment Officer, Axis Securities says it may be a ‘blessing in disguise’. “Higher raw material prices are a blessing in disguise for the organised players because the weaker unorganised players are expected to lose market share due to raw material inflation. The pandemic has already made such players weaker on account of which organised players such as Bata and Relaxo are likely to gain market share,” says Kulkarni. Moreover, Kulkarni expects FY23 to be a ‘normal year’, free from Covid. “An expected revival in rural areas led by a projected normal monsoon, expected increase in rural wages and higher crop realisation are the factors that may ramp up the demand for low-end footwear and benefit players like Relaxo,” Kulkarni adds. None the less, high input costs are impacting the footwear sector for sure.
Explains Ramanathan of Deloitte India: “One major challenge faced by the industry is the increase in raw material costs, mainly polyvinyl chloride (PVC) and ethylene vinyl acetate (EVA)). This is impacting the margins and leading to reduced rental concessions. This implies lesser headroom for reduction in fixed cost.” The industry is also urging the government to extend the Production Linked Incentive (PLI) Scheme to the sector. A further rationalisation of GST slabs and a possible inclusion in the PLI scheme may just act as catalyst thereby speeding up the overall sectoral growth story. We will keep you posted about developments in these areas, so watch this space.
|Well Poised For Future|
|The new Bata CEO Gunjan Shah talks to Ashish Sinha about recovery, growth and expansion plans for Bata. Excerpts:|
We witnessed significant recovery in demand in the last two quarters because of improvement in consumer sentiments, availability of vaccines and faster easing of restrictions. The year 2021 can be seen in two halves. The first half was badly impacted because of the second wave. However, in the second half, we saw a pretty decent bounce back, which also reflected in our results.
On Covid impact on supply chain
Operations were impacted adversely. However, we were very resilient. As soon as things came back to normalcy, the supply chain team bounced back equally aggressively.
A large part of the expansion is being driven through tier 3-4 cities. People want branded products and what better than Bata that offers value for money. Towns like Tiruchirappalli or Rai Bareilly are growing markets for us. The aim is to provide access to Bata products all across India.
On one GST rate
A few months ago, as one of the major steps, the government moved the less than thousand rupee footwear from 5 per cent to 12 per cent slab. We believe it is a revenue neutral move if they introduce 18 per cent or 12 per cent GST on footwear, as it will make it a 'one flat rate'. This makes for much better compliance, and enables companies like us to be better compliant andorganised for the future.
On growth via ecommerce
Yes, it has gone up from less than 5 per cent during pre-Covid times, to now in 10-15 per cent band. The sale on our own e-store is also growing where it shows the entire page of Bata and its 7,000 footwear styles.
(This article was published in the print issue of BW Businessworld Dated 18 June 2022)