In our second article this week focused on India, we investigate the barriers impeding the growth of India’s international luxury goods market, which go beyond the recently lifted restrictions on foreign direct investment.
MUMBAI, India — “By the end of 2015, emerging markets should account for more than 50 percent of luxury sales,” Antoine Colonna, a luxury analyst at the asset manager Carmignac Gestion in Paris, told The Wall Street Journal in the spring of 2011. “This isn’t evolution. It’s revolution,” she continued.
But in India, the revolution has yet to take hold. Despite having the world’s second-fastest growing major economy and a rapidly expanding population of high net worth individuals, the country’s market for international luxury goods, worth around $1.3 billion, remains surprisingly small. In fact, while China currently accounts for an estimated 10 percent of the global luxury market, India makes up a mere 1 to 2 percent.
So why has India’s market for international luxury goods failed to take off?
FOREIGN DIRECT INVESTMENT REGULATIONS
Recently, enormous attention has been focused on India’s foreign direct investment (FDI) laws, which for years capped foreign ownership of India-based retail operations at 51 percent. In a landmark decision earlier this month, India formally lifted restrictions on foreign investment in its single-brand retail sector, allowing global fashion brands like Louis Vuitton, Gucci and Burberry to acquire 100 percent ownership of their India operations and trade without local partners.
“This was the last frontier to open. It will make India a preferred market,” Tikka Shatrujit Singh, chief representative in Asia for French luxury conglomerate LVMH, told BoF. But the decision comes with a caveat: foreign companies are required to source 30 percent of their production from small and medium-sized enterprises (SMEs) in India. “We’re delighted with the decision, but the 30 percent caveat about working with small industries has to be carefully looked into, since there are concerns over child labour and quality factory production,” added Singh.
“Sourcing from Indian SMEs will restrict investments since it’s difficult for brands to match their quality standards and positioning,” said Abhay Gupta, executive director at Blues Clothing Company, a firm that represents Versace, Corneliani, Cadini and John Smedley in India. “Besides, most brands cannot alter their DNA and signature specialisation of ‘made in country of origin.’”
“A bureaucrat’s delight, a business person’s nightmare,” commented Darshan Mehta, president and CEO of Reliance Brands, a subsidiary of Indian conglomerate Reliance Industries, which represents international brands Ermenegildo Zegna, Diesel, Paul & Shark and Kenneth Cole in India. “India’s cottage industries are not equipped to even produce H&M quality goods, forget catering to luxury brands.”
But new sourcing requirements aside, FDI reform only addresses one of the many challenges that international fashion brands face in India.
HIGH IMPORT DUTIES
For one, high import tariffs mean that luxury products can cost between 20 and 30 percent more in Mumbai and Delhi than in London or Paris. “The government has assured us that at an appropriate time, the duty structure will be adjusted to realistic levels,” said Singh. But for now, the problem persists. “We have only seen year-on-year growth, but the reason that the business suffers, even if slightly, is on account of high import duties,” said Bertrand Michaud, president of Hermès India. In fact, affluent Indians, who are extremely price-conscious even when shopping for luxury goods, buy more than 50 percent of their international luxury goods abroad.
Brands also face significant difficulties finding suitable retail space and understanding and catering to Indian tastes and sensibilities, challenges that can make partnerships with savvy local allies highly advantageous.
NO RUSH TO END LOCAL PARTNERSHIPS
Indeed, despite recent changes to FDI law, few brands are in a hurry to snap their ties with their Indian partners. “The FDI announcement doesn’t affect Hermès at all,” said Michaud. “Our partners in India, Ashok and Neelam Khanna, have been friends of the brand family for 50 years. They are in sync with our aesthetics and the Indian market.”
“The relaxation in FDI norms is a progressive move in the economic reforms process; it opens up the economy further to competition from global players, resulting in better processes, improved supply chains, better pricing and of course, more jobs,” said Sanjay Kapoor, managing director of Genesis Luxury Fashion, which holds Indian franchising and distribution rights for Burberry, Paul Smith, Bottega Veneta, Canali, Jimmy Choo and Etro. “But on their own, brands may not have enough understanding of the Indian market, its nuances and customer demographics; all critical to the luxury retail business,” he added.
A SCARCITY OF SUITABLE RETAIL SPACE
In particular, the challenge of finding suitable retail space in a country without equivalents to London’s Bond Street or New York’s Fifth Avenue makes local knowledge highly valuable. “One of my jobs is to continue an ongoing dialogue with real estate developers,” said Singh. “Purchasing property is extremely expensive and quality rental space in India comes at a premium.” Ambiance, cleanliness and security can be significant concerns, as well. As a result, luxury retailers have historically favoured opening stores in five-star hotels and upscale malls. But in cities like Mumbai, for example, brands face a shortage of premium mall space and selecting the right retail location is no simple task for those unfamiliar with the local landscape.
Hermès was the first international luxury brand operating in India to open a stand-alone boutique with an open storefront to the street in South Mumbai’s Fort District in 2011. The brand’s two other outlets in Delhi and Pune are both housed in hotels.
“Retail is about detail,” said Mehta. “Galleria gets 10 footfalls a day! Tod’s had to shut down,” he continued, referring to retail space at South Mumbai’s Hilton hotel. “The next best bet is malls. Palladium in Mumbai is doing well,” he added, mentioning a luxury mall in Mumbai’s Lower Parel neighbourhood that houses international brands like Burberry and Zara (which in India is positioned as a premium label).
CULTURAL COMPLEXITY & LOCAL LUXURY COMPETITORS
International brands operating in India also face a market with cultural complexity and culturally-attuned, local luxury goods. “Indian consumers are price-sensitive when buying Western high fashion. They won’t spend easily on that one lakh-plus rupee ($2,000) eveningwear dress. But they’d splurge on Indian couture-based wedding wear in a jiffy,” said Sanchita Ajjampur, a design consultant to international fashion brands including Lanvin, Gucci, Marni and Etro, underscoring the enormous cultural and economic importance of India’s wedding market and the local designers who cater to it. Indeed, a wedding outfit by Indian designer Sabyasachi, for example, can come at couture prices, which leaves less “share of wallet” for international brands. “This probably explains the decision to launch the Hermès India sari collection,” she continued.
“I am not here to get tourists. I want Indians. I want Hermès to be in the hands of Indians,” said Christian Blanckaert, senior executive vice-president of Hermès, at the launch of the brand’s first India store at New Delhi’s Oberoi hotel back in 2008. But achieving this is no simple task. To attract local clientele, Hermès has experimented with a number of India-inspired product lines, including a recently launched line of saris, based on the company’s famous scarves.
Other international fashion brands have also offered Indianised products, tailored to local tastes, like Bottega Veneta’s Knot India clutch, Jimmy Choo’s Chandra clutch and Canali’s Nawab line, all designed to cater to the country’s large wedding market. But while most India experts emphasise the importance of a tailored offering, localising product isn’t a guarantee of commercial success. “India-inspired collections add PR value to the brand, but they don’t always translate into serious sales,” said Mehta.
“Every brand has a different approach; global but tinged with local ideas,” said Singh. Indeed, knowing exactly when and how much to localise is a delicate act and each brand has a different formula that must be fine-tuned to its specific positioning and target customer. “When we tied up with Diesel, my friends asked me, ‘Are you launching desi (local) Diesel or the real Diesel?’” Mehta continued. “Luxury brands have a Western quotient attached to them. That’s what adds the aspirational value for Indians.”
Indeed, despite recent FDI reform, the on-going challenges of cultural complexity, scarcity of suitable retail space and high import duties mean the “Indian problem” is far from solved. But for brands with staying power, India presents a compelling long-term opportunity. According to Swiss wealth manager Julius Baer, the number of high net worth individuals in India with assets of over $1 million is expected to reach 403,000 by 2015. Furthermore, according to the United Nations, India is set to enjoy favourable demographic momentum for another three decades and will add over 241 million people to its working-age population by 2030 (far more than Brazil or China) boosting the country’s economic growth prospects in the coming years.
“Doing business in India doesn’t have a wham-bam-thank-you-ma’am formula,” said Gupta. “It’s a slow process but it’s one that will eventually pay long-term dividends.”
Shweta Shiware is a freelance journalist based in London and Mumbai.