The luxury market in India garners huge attention and is sometimes seen as a sign of India having "arrived". The talk is about the new-found spending power of the Indian consumer, Indian luxury brands and flashy consumption culture. On the other hand, periodically one hears about another luxury brand exiting the country or a global luxury CEO talking about how China is a much better market. The truth, as always, is somewhere in the middle. India is a huge potential market for luxury, yet players face serious growth challenges and companies make money with great effort. Yet, Indian luxury brands are no longer a myth. The luxury market has grown at 23 per cent since 2006. The luxury products market (apparel, watches, jewellery, spirits, electronics) has grown at 30 per cent, reaching a market size of $2 billion. The luxury assets market-cars, homes and yachts-has grown at 25 per cent, and has a market size of $2.8 billion. In the last year, 50 luxury outlets (product stores and car showrooms) have been added to the 200 that existed, a 25 per cent growth in footprint. The market, at 1 per cent of the global luxury market, is still small; the luxury products market in China is $12-13 billion and Europe is 40 per cent of the global market.
Key growth drivers are the 150,000-plus HNIs (high net worth individuals) with a net worth of $600 billion-3.1 million households earning more than
Rs.10 lakh in the top 10 cities (Mumbai, Delhi/ncr, Bangalore, Kolkata, Pune, Chandigarh, Hyderabad, Ludhiana, Chennai and Ahmedabad), and a Gini coefficient of 39.9 per cent. Gini coefficient indicates whether income inequality within countries and rising income inequality within countries leads to a change in spending patterns, creating good business opportunities at opposite ends of the economic spectrum.
All is not well though. Import duties are high (20-150 per cent), foreign investment in luxury retail comes with strings attached-100 per cent FDI in both single and multi-brand retail requires 30 per cent of local sourcing, a clause which luxury players find difficult to comply with-and there just isn't enough quality retail real estate available. These issues have been known since the outset. Industry growth of 23 per cent, while good, is expected, given the small base. Many larger consumer industries do grow in mid-double digits. On the demand side, those who can afford it still suffer from a middle class mindset and those who do spend, don't spend enough. Price conscious Indian consumers prefer shopping overseas in the homes of luxury brands to get the best deals. The rich are also highly fragmented and not easy to reach. In addition to the traditionally wealthy who are habitual spenders and the professional elite who are careful spenders, there is a large segment of businessmen (entrepreneurs, owners of small and medium enterprises) who have the money, but lack the appreciation for fine luxury goods because of no prior exposure. This group will soon become the largest consumer segment for luxury. And they are not concentrated only in the metros. If one looks at the luxury car showrooms, (15 out of the 18 new showrooms in the last one year have been added in non-metros), one can see that there is a market waiting to be tapped beyond the metros.
Why do players still keep talking of India then, as the next luxury destination? They hope that as growth in the large markets saturates, the BRIC countries will be the next growth engines-not unlike what they would expect in most consumer categories. China has been a success story for most brands, where luxury entered in 1992 and grew at 27 per cent in its first 10 years. For example, Louis Vuitton has 35 stores in China against three in India. Also, the Indian buyer is still traditional in her preferences (as seen in jewellery and clothing), price conscious and less brand aware. Also, the market is younger (luxury re-entered India only five years ago) and China has none of the structural barriers (foreign investment and duties).
Deregulation has driven growth in several industries in India-insurance, retail, and telecom are notable examples. To get to the next level of growth, deregulation is imperative. Not just FDI and import duties, but land regulation that restricts availability of prime real estate are also a key barrier. At $1.5-$2 billion, latent demand in luxury products is equal to the current market size. Industry could grow at 35 per cent from the current 23 per cent if regulatory and real estate constraints are removed.
In the face of all of these challenges, a few business groups have emerged as consolidators of luxury brands. Out of the 40-plus luxury brands present in the country, Genesis Colors, Reliance Brands, Major Brands and DLF Brands have franchises, distribution agreements or joint ventures with almost 15-20 of them. Like most industries in India, learning from other markets is only partly useful. There is no substitute to staying invested based on a belief in the market fundamentals and ground innovation. Educating the consumer is key, customisation is imperative (sizes, designs, home delivery models) and sharp pricing a
sine qua non. Reaching new consumers while retaining the loyalty of existing ones is critical and use of media, and creating opportunities for the consumer to experience the product are key factors for success. Creating a scale that allows overheads and fixed costs to be leveraged across a wider base till such time the market gains some depth is also crucial. By doing some of this, players report that they are making money at the store level, which means that the model is proven and now it is a question of adding growth capital to gain scale. The unique Indian economic model for luxury retail is something like this: Sales productivity at 60-80 Rs/sq ft/day, gross margins of 55-60 per cent, rental costs of 25-30 per cent and other costs 15-20 per cent, leaving a small profit at the store level. This also implies that companies would benefit from choosing smaller store formats and being careful about rent and overheads.
Finally, the question that every Indian asks-why are there no home grown luxury brands? India has traditional expertise in textiles, leather, personal care (Ayurveda) and jewellery. Indian fashion designers are truly coming into their own now. For instance, Ritu Kumar, Tarun Tahiliani and Sabyasachi are setting up stores abroad and expanding. Hidesign is an example of a premium leather brand, Forest Essentials is taking Ayurvedic recipes into high-end personal care and Amrut is an Indian single malt which has received rave reviews. In addition, the royal heritage of India provides the perfect platform for high-end luxury services-hospitality, fine dining, spas. Taj, Oberoi, ITC have all created a name for themselves internationally.
Thus, while the 'buzz' generated by this industry sometimes is disproportionate compared to the size of the market, it does indicate the aspirational value of the sector and a belief in the potential of the market, both of which are difficult to ignore.
