In an unprecedented blow to the travel and tourism sector, the COVID-19 pandemic has cut international tourist arrivals in the first quarter of 2020 to a fraction of what they were a year ago. Data points to a double-digit decrease of 22% in Q1 2020, with arrivals in March down by 57%. This translates into a loss of 67 million international arrivals and about USD 80 billion in receipts. Estimates for the year have been downgraded several times since the outbreak because of the high level of uncertainty.
The luggage industry is directly affected by the travel and tourism industry. According to Euromonitor International, the luggage market in India was valued at Rs 8,495 crore in 2019 and is estimated to degrow to Rs 7,305 crore in 2020, due to the impact of the Covid-19 pandemic. This big hit has blurred the outlook for the luggage companies in 2020.
The luggage industry is dominated by the unorganized sector as they hold approximately 60-65% market share. The industry has a trait of having a small market due to the fact that luggage is a durable good, one which is not frequently used. The sales in this industry are directly related to travel and tourism, school and office going individuals and wedding travel.
The Unorganized Sector: Dominance on a Wane
The unorganized sector has always stayed ahead of the organized sector. The dominance of unorganized players in the backpacks market is in line with luggage (<67% share). However, the handbags market is even more fragmented with unorganized players having a higher share of approximately 90-92%. The trend seems to be changing since the implementation of GST since they have been caught up in the tax net and lost pricing power. Moreover, an increased sentiment towards purchasing the branded merchandise is observed as it has been associated with lifetime replacement warranties. The organized sector is also gaining consumers thanks to their ability to innovate and launch new variations.
The organized sector: Sales Battered but Impressive Cost Control
The organized luggage industry is oligopolistic and is dominated by VIP Industries, Samsonite and Safari, which form nearly 90% of the organised luggage industry. VIP Industries is the market leader with about 55% of the market share, therefore, I would be using it as a proxy to understand the organized sector.
VIP has been focussing on cost rationalization since the beginning of the pandemic which has been achieved through a reduction of manpower, negligible advertisement expenses and shutting down 100 retail stores that were marginally weaker. The management stresses that the issue that the company is facing is not on the supply side but that of demand. The travel sector has been the worst hit from the pandemic and being a travel-oriented product the demand for the company’s products has dried up drastically. Moreover, the company has started shifting production from China to Bangladesh and India. Bangladesh, being a low-cost economy enables low working costs and increases the gross margins.
However, ensuring liquidity is the most important in this situation. VIP has been able to do it pretty well. The company has plans to borrow Rs 300cr to tide through the current tough times and is looking to leverage its manufacturing capability to enter into the PPE category and is starting to make face masks. As Covid-19 has accelerated the movement towards e-commerce, which is VIP’s fastest-growing channel, it is aiming at increasing investment and gaining market leadership within the e-commerce channel.
The revenue from operations declined approximately 93% YoY to close toRs40cr in the June quarter of FY21, with the company posting a loss of Rs 51 cr. The first quarter of FY21 was a washout quarter with no further improvement expected in Q2FY21. Although demand in July was better than June, however, it is nowhere near pre-COVID levels as the travel industry continues to be the most affected one. Some improvement is expected in Q3FY21 supported by the festive period and marriage season. However, for FY21 demand scenario appears to be bleak.
Changing trends in the Industry:
One can observe that the industry is going to undergo certain structural changes. Once normalcy resumes people will take short breaks (2-3 days) in cars rather than a domestic flight. One can see international tourism coming down significantly and leisure travel bouncing back earlier than business travel because of increased work from home trends. Although marriages, (which are an important part of the luggage industry) would be postponed, one can expect delayed revenue, but not a total loss of revenue from them. Backpacks would also gain traction as the schools and offices start opening up. However, as India enters a recession, the organized sector would find it even more difficult to gain market share from the unorganized sector due to overall price pressure.
Such unprecedented situations force the companies to reassess their business model and revisit their cost and profitability. It is in times like these that companies maximize their productivity and venture into new markets that provide them with substantial growth opportunities. Same is the case with the luggage industry in India. The outlook is blurry as one cannot expect recovery till the air, rail and road travel industry bounce back. However, full recovery in these sectors seems tough at least until 2022.
Ashu Jain is a second-year student at Ashoka University pursuing a major in Economics and Finance.