If the weeks preceding the launch of Goods and Services Tax (GST) saw a flood of discounts, there are predictions of sales falling off the cliff in July as traders are expected to take a breather — ranging from some days to several weeks, depending on the category of products — to soak in the nuances of the new tax regime before stocking up, including aspects such as tax set-offs, effective rates and invoicing.
This “pre-GST bump” in retail sales, followed by sharp slackening of sales, has also been witnessed in countries such as Australia and Singapore where the indirect tax regime has been implemented earlier. Alongside a markdown in inventories by consumer goods and auto dealers, pharmaceuticals too have reported a slowdown in stocking, with this trend being more pronounced in the case of small and medium players.
In the pharmaceutical sector, the slowdown in stocking is already indicative from the lower-than-usual inventory with distributors. According to All Indian Origin Chemists & Distributors (AIOCD), as of June 28, pharmaceutical distributors have reported drug inventories for only 17 days. On June 21, these distributors had inventory of 22 days.
“The updated status of inventory days as of June 28… is a dip of 5 days in the last one week. This means primary sales from company to distributor is negligible. Overall inventory days (including in-transit stock) at month-end are generally 40 days, which has dipped to 17 days. This means a 23-day sales loss over May and June in primary sales (assuming no billing in the last two days — June 29, 30). Due to this inventory lowering, primary sales would have dipped by approximately 50 per cent or more for most pharma companies for the month of June,” the AIOCD stated.
In order to allay consumer concerns regarding drug shortage, the AIOCD clarified that “apart from 17 days of stockist inventory, there is two weeks of retail inventory — so possibility of drug shortages are nil and all brands of medicine are available in adequate quantities for consumption”.
In some cases, druggists have even de-stocked their goods on account of loss in margins on their existing inventories. “The manufacturing companies have said that products purchased before GST might not be taken back after the GST rollout. Hence, a few vendors are apprehensive of a loss due to inventory and have de-stocked. Vendors like us who are confident of sales have nothing to worry about… We have rather stocked up inventory in the last two-three weeks. We generally keep 30 days of inventory across the country. We have bought it up to 40 days to ensure that customers do not feel the brunt. We anticipate that a few products might be missing from the market, we do not want our end-users to suffer. So we have stocked up,” Dhaval Shah, co-founder of online pharmacy PharmEasy, told The Indian Express.
However, this trend was different for larger pharmaceutical players and smaller ones. Prashant Tandon, founder of online pharmacy 1mg, stated that large distributors and vendors were overstocking while the small vendors were reducing their stocks. “The reason is that in our sector, the large vendors work directly with pharma (companies) and already have IT systems and processes in place, so they were preparing for GST in advance and in an organised manner. Pharma is underwriting their losses during the transition, so they are in a good position. Further, they anticipate market shortages since smaller vendors might not be able to comply and are reducing stocks,” Tandon said.
In the automobile sector, too, some dealers have tried to extinguish their stocks, citing lack of clarity about the levies that will be applicable on cars from July 1, and the set-offs they are expected to get. “We have tried to extinguish the June stocks, and have only about 28-30 cars left in our inventory. We will wait for some clarification on what would be the levies under GST, and how will the taxes we pay be set-off,” said a manager at Bagga Link, one of Maruti Suzuki’s biggest dealers in Delhi-NCR.
Another issue faced by automobile dealers is that of auto components. Gulshan Ahuja, secretary general of Federation of Automobile Dealers Associations, said that dealers would not get any input tax credit on parts that are stocked with them for over a year. He said many of the dealers would have to wait for at least five-six days to get an idea about these issues.
Retailers selling goods such as electronic appliances and apparel, which were the main participants in stock-clearance sales during May and June, could particularly be slow in re-stocking their inventories considering that the demand that would normally arise in July was met in the earlier months through discounts.
“This (slowdown in re-stocking) may vary across product segments — products where there have been large discounts, especially consumer durables, sales could be a little slow in the month of July and as a result the re-stocking also can be somewhat slow in these segments. In most other product categories, the re-stocking would be done rapidly,” said Subrata Ray, senior group vice-president, ICRA.
The potentially lower sales in July could be an additional burden on an already weaker month in terms of sales. “The first two weeks are going to be slow. Other than selling the goods, which is the main job of the retailers, they are going to spend time on doing the back-end part of it. All the players in the supply chain, from small vendor to dealer to wholesaler, are going to be busy in the first two weeks. After two weeks, things could get normal, if not fully settled,” said Satish Meena, senior forecast analyst, Forrester Research.
“July is not a big month in terms of sales for retailers on account of monsoon and the fact that major sales happen around Diwali. There are some categories that pick up, such as those who are travelling buy some goods, or school supplies. In summers, some sales might be there of home appliances but what has happened in the past two months is only because of stock-clearance sales, so people who planned to buy later have gone ahead and bought it because of discounts,” Meena said.
According to Arvind Singhal, chairman and managing director of consulting firm Technopak, the initial few days would be the phase when players would choose to wait and watch. “Retailers, of course, have to stock up. Even the manufacturers have to get their deliveries going, they are not stopping production as such. So the transition period will essentially be four-five days before you start to see shipments taking place once again. In some cases, there could be some marginal disruption,” he said.