Lukewarm Consumption Looks For Festive Season Boost

While demand in India is back at levels seen just before the second wave of the Covid-19 pandemic, the upcoming festive season could pivot it back to pre-pandemic levels, albeit in an optimistic scenario.

The seven-day moving average for mobility to places of retail and recreation is about 25% below the baseline as of July 22—close to levels last seen in March before the onset of the second wave.

Google shares mobility trends on a daily basis and changes for each day are compared to a baseline value for that day of the week from Jan. 3–Feb. 6, 2020. A seven-day moving average was used to smoothen out mobility trends and account for day-to-day volatility.

Formal retail across parts of the country still remains under curbs, according to Kumar Rajagopalan, chief executive officer of Retailers Association of India. At about 70% of the pre-pandemic level, consumption is nowhere close to normal for the formal sector, he said.

Yet, pent-up demand and robust sales of consumer durables across the board, even after the Covid-19 second wave, was a pleasant surprise after markets reopened, according to Nilesh Gupta, director at the Mumbai-headquartered electronics retail chain Vijay Sales. Sales are at about 80% compared with the year before, he said.

Godrej Interio also saw sales rise 2.5 times in the first four months of the fiscal over the year prior to reach 86-90% of the pre-pandemic levels.

The demand went back back to the pre-second wave levels as soon as customers got an opportunity to shop despite odd opening hours and restricted timings because of local lockdowns, Subodh Mehta, senior vice-president at Godrej Interio said. Recovery was much more quicker than the first wave where unlock was slow and their reaction was more balanced, he said.

Consumer sentiment, according to Mehta, is almost at odds with the magnitude of the second wave.

Another surprise is that price hikes to offset rising commodities costs by manufacturers has not affected demand, Gupta said. At Vijay Sales, since about 70% of business takes place through EMIs, even a change of 10% translates only into a 1% hike in EMI.

Hopes Of A Festive Push

Consumption can be expected to show some traction beginning next quarter led by the onset of the festive season, as it finds support in the recent hike in dearness allowance, a normal monsoon for the full season and a gradual revival in consumer sentiment amid progress on vaccinations, said Yuvika Singhal, economist at QuantEco research.

Manufacturers and retailers agree. Clear signs of demand and pent-up consumption indicate that the onset of the festive season will help boost consumption further, said Rajagopalan. Further easing of restrictions for retail and a better sentiment, too, are expected to support demand, Mehta said.

Festivals are an anchor for consumption and often accompanied with a lot of other things that help improve it, Mehta said. Like employees receiving a bonus, people taking possession of new homes as it's considered an auspicious time.

"This time, with fewer cases than the last year and vaccinations in progress, pent-up demand and festive spending, there is a good chance to touch pre-pandemic festive sales in the absence of a third wave," Mehta said.

Inventory building is on in anticipation of this boost. There are two scenarios Godrej Interio is working with--a third wave and the absence of it. "Still, as far as inventory is concerned, we have gone for the optimistic scenario."

Not everyone is that optimistic. The expectation from the festive season is to be able to clock sales at about 10-15% below the pre-pandemic levels, said Gupta. Stores in cities like Mumbai continue to operate under Covid-19 compliant guidelines with shorter working hours and fewer working days, said Gupta. "Everyone is now taking each day as it comes."

Rajagopalan agreed that what counts as a good festive season is now vastly different from expectations in a pre-pandemic world. Any retailer would be happy to match levels seen during festivals before Covid-19, he said.

And these expectations are conditional--that the third wave will be muted and India meets its vaccination target, Rajagopalan said.

Band, Baaja, Baraat (And Spending)

An year and a half of living with the pandemic has meant a pause for the big fat Indian wedding. There were a lot of "mahurats" in May and June when the second wave hit, said Sanna Vohra, chief executive officer of the Wedding Brigade—an online wedding platform. Many of those weddings either took place on a very small scale or have been pushed.

"In November and December, if cases remain where they are, we will see a big recovery and pent up demand from earlier this year and from last year," she said. A lot of people are also waiting before they make a decision depending on the third wave and vaccination pace, she said. Still, Vohra expects it to remain below pre-pandemic levels.

The wedding economy extends well beyond the wedding itself. A married couple often spends on setting up a new home, for instance, said Mehta.

What Comes After?

Even with the pick-up in demand in the festive season, long-term consumption trends remain uncertain.

In the current quarter, there appears no strong impetus for growth, said Singhal. After a burst of recovery in the first two weeks of June (as the second wave of infections ebbed), QuantEco's proprietary index indicates pace of improvement in economic activity to have sobered down in subsequent weeks well into July.

The index recorded a marginal contraction for the first time in 10 weeks for the week ended July 25, underscoring expectations of economic activity levelling off here on, Singhal said.

"With a part of pent-up demand already exhausted last year, and forced savings during the first wave having been replaced with precautionary savings in the second, a full-scale recovery in consumption will remain dependent on achieving a critical mass of vaccinations,” she said.

“Our estimates suggest the possibility of vaccinating nearly 60% of the population with a single shot by year-end," according to Singhal. An elevated inflation may also have bearing on consumer demand, she said.