On a shoestring: COVID-19 & Indian footwear industry

• India has prided itself as being the world’s second largest footwear producer. The sector plays a major role in generating employment in the country, with about 400 jobs being created for every 1,000 pairs produced and sold in the country.
• However, the onset of COVID-19 pandemic has sent the industry off track. This is owing to a string of demand factors such as weak consumer sentiment, closure of shops, depleting consumer incomes, and consequently, drop in revenues.
• On the other hand, owing to the restrictions on imports, there was difficulty in obtaining raw materials. Further, the flight of labour is another factor that will affect the production.
• The solution to overcoming these challenges lies in reassessing the current modes of production, supply and consumption.

For quite some time now, India has established itself as the world’s second largest footwear producer and consumer, after China. The sector accounts for 9% of the global annual production of 22 billion pairs and contributes significantly to the Indian economy. Leather footwear exports account for 49.23% of the total leather exports by India; with an annual production of 2,257 million pairs. The product mix is led by gents (55%), followed by ladies (35%) and children (10%).

However, the COVID-19 contagion has led a string of demand and supply related challenges, which have dented the sector’s performance, primarily due to significantly subdued consumption. However, as COVID-19 proliferated across continents, key markets like US, UK, France & Italy became the global epicenters of this pandemic. To check the spread of this disease, these countries imposed nationwide lockdowns, which rendered a lot of shops being closed and significantly lowered the demand for shoes.

Ramesh Juneja, Regional Chairman, Council of Leather Exports, informs:

“Importers from US, UK, France, Italy, Spain and Germany have either cancelled orders or put them on hold. Some of them are also delaying payments. The loss is around US$ 1.5 billion and we do not know when we will be able to recover it.”

The sales of footwear are down in the domestic market too. Ratings agency ICRA estimates a revenue loss of 10-15% owing to the closure of retail outlets and restriction of delivery of non-essential items in certain areas. For example, sales of iconic British footwear brand Clarks have been badly affected in India because of the COVID-19 outbreak. It is interesting to note that close to 55-60% of Clarks products are produced in India by players like Farida Group and TIL.

India, too, like rest of the world, imposed a country-wide lockdown, which brought a halt to footwear sales in the country. After recording an 8% growth in January and February, the sales of Bata India Ltd plunged in March, leading to a 9% decline in the overall March quarter revenue to ₹620 crore. Relaxo Footwears’ sales also fell by 2.62% to Rs 643.80 crore.

As unemployment rose during this period and the pandemic led to shrinking of disposable incomes in the hands of consumers, the demand for discretionary products nosedived too. Moreover, this period also facilitated a shift towards remote working. As per reports, even as malls in the country have opened, shoppers are staying away from them. Footfalls in stores selling non-essential items were down to 40%-50% of business-as-usual levels.

Treading on slippery ground

On the supply side too, the industry is struggling, particularly due to its heavy dependence on China for importing raw materials (about 30-40%). These include several components such as laces, shoe lining, buckles, ornaments, insoles, outsoles, cellulose board, shank board, foam and packing materials. The outbreak of the virus in China, the initial epicenter of this virus, meant the drying of supply chain. Ambud Sharma, Founder & CEO, Escaro Royale, explains:

“China is also a major supplier of raw materials and components. The shutting of factories and production in China has wreaked havoc in the supply chain, leading to a sharp increase in the prices of various items.”

In order to clear unsold stocks, there might be a marginal decline in the average selling price (ASP) due to the expected discounts owing to the companies’ inclination to convert the limited footfalls to shore up their cash flows while liquidating the inventory. Consequently, the capex outgo for the year FY 2021, both in terms of addition to the manufacturing capacity of plants as well as addition to the retail store network, is likely to be moderated.

The sector is also impacted by the flight of labour and the break in production activities during the lockdown. The condition of raw hides lying in these factories has meant a further hit on business, as this is expected to impact production of leather shoes in the coming months.

Gearing up for the future

As markets revive post-COVID, Indian players need to look at reinventing themselves to overcome legacy challenges and boost their international standing, starting with the import dependence. Reducing this dependence will not only add to the turnover of domestic enterprises including MSMEs, but is also likely to translate to benefits through forward and backward linkages, better economies of scale along with cost competitiveness and importantly, enhancing the scope of employment in our country, according to Ambud Sharma.

Arvind Soneja, Honorary General Secretary, Indian Footwear Components Manufacturer’s Association, adds:

“As the footwear component industry is the backbone of footwear manufacturing in India, it should be the key focus area. The import dependency can be minimised by promoting domestic industry. ”

Despite being the second largest producer, India is ranked 8th in exports of footwear with outer soles of rubber, plastics, leather or composition leather… (HS Code 6403). Moreover, India’s exports are overdependent on the European region with UK (17.1%), Germany (13.2%), France (7.4%), Italy (5.7%) and Spain (4.1%) being among its top 10 markets.

This factor keeps it exposed to significant risk. Moreover, the predominant target audience for Indian footwear is the lower and middle income populations in target markets. There is a need to upgrade and serve more upmarket audiences. To enable this, a culture of research and innovation must be fostered with aggressive branding so that the country can lead the curve in product design, quality and engineering.

Going forward, industry players project that since people are more likely to spend more time at home, footwear consumption patterns will be subject to transformation, as more people will look for comfort instead of fashion. Therefore, the industry is looking to increase focus on non-leather footwear exports such as machine-washable shoes. A case in point is the premium footwear brand, Escaro Royale, which is resorting to leather made of peas and mushrooms in the absence of raw material supplies from Italy, Argentina and Brazil.

Despite being a global leader in numbers, the industry is characterised by the low level of modernisation, horizontal growth in tanneries, less productivity and lower share of the organised sector. A report by CLRI in 2019 emphasised on the importance of adopting Industry 4.0 or intelligent manufacturing technologies for the footwear industry.

This will significantly help players improve competitiveness, enhance value creation and minimize risks through shorter operations cycle times, quick delivery times, faster time to market of new products and services, improved quality, and product/service customization. On top of all this, understanding and quickly responding to rapidly changing and unpredictable demands of international customers will become even more important in the post-COVID scenario. Industry 4.0 will help catalyse India’s progress towards this goal.