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US retail shake-up adds to woes of textile exporters

LiveMint logoLiveMint 05-09-2017 R. Sree Ram

Home textile exporters, whose profitability is already weighed down by a firm rupee and higher raw material prices (see chart), are staring at another potential headwind—the implications of the ongoing transformation in the US retail industry.

Home textile retailers in the US, the biggest customers of Indian exporters, are facing a heightened threat from e-commerce. Companies unable to withstand the transformation are even filing for bankruptcy. According to Nirmal Bang Institutional Equities, more than 300 retailers have filed for bankruptcy so far this year, a significant rise from the previous year. As a consequence some Indian exporters have already reduced supplies to the troubled retailers. Contract renegotiations are getting trickier as retailers beset with tough market conditions are said to be resisting price hikes.

Established retailers are realigning and restructuring their business models. But they do have ramifications for suppliers. “The (Welspun India Ltd) management stated that US retailers have been cutting down inventory by moving to weekly orders instead of monthly consignments, thereby passing on the working capital costs to suppliers,” Nirmal Bang said in a note.

In another report, Emkay Global Financial Services Ltd said that retailers under increased threat from e-commerce are asking for price cuts.

To be sure, companies are yet to receive price cut requests. But frequency of promotions and requests for them are rising, which obviously involves costs. “The home textiles industry is at a point where retailers are trying to discover the right model in a combination of online, offline and omni-channel. There are frequent promotions at retail and the same is significantly increasing. Hence, industry is seeing build-up in pressure,” Emkay Global said in the note.

True, the industry anyway goes through such changes every once in a while. The challenge lies in its implications.

One of them is the impact on costs. Retailers are aiming for significant cost savings from their supply chain, not just one-time but as a continuing exercise. “We know that we’ve got a multi-year journey around the supply chain transformation, which will help that working capital continue to come through the business,” Target Corp., a large retailer in the US which has already reduced inventories, told analysts last month,.

The second factor is the competition from e-commerce firms, which some fear can put pressure on prices. We have seen a variation of this play out in the Indian apparel sector where online discounts drove pricing trends in the retail stores and impacted realizations of manufacturers.

Of course retailers and exporters are investing in online channels, and are adjusting to the changes in the market. Further, given India’s strengths in access to raw materials and market share gains in US textile imports, the transformation will not unsettle exporters’ business in a major way in the near term.

But if e-commerce firms (say Amazon) in their penchant to gain market share keep up the competition and pressure on prices, then they can exert pressure on the profitability of Indian exporters in the medium to long term. “It all depends on how the retailers and exporters handle the changes. If they can make a dent in the online market or gain a foothold in the Amazon marketplace by themselves, then we may not see much of an impact,” says an analyst with a domestic broking firm.

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