Retailer, December 2010

Varun Jain

Recently, 150 all new glittering Mercedes Benz cars rolled out of the company's premises to be delivered to Aurangabad Group in Aurangabad, a small town of the country. The group consists of top industrialists, businessmen and professionals. Bookings for US-made Harley-Davidson cruiser bikes, expensive luxury and sports sedans from Mercedes-Benz, BMW, Audi and Porsche have hit the roof, with some dealerships experiencing shortfall in vehicle supply.

The fact that luxury in India is growing fast is quite evident. Luxury retailers from across the globe are thronging India, where they see a lot of potential for luxury retailing. But since there are other problems like that of real estate and government policies, the growth rate has not been what the retailers would have wanted to and hence the expansion is taking a hit.

What is the potential in the Indian market?

Luxury exists in India though its numbers may not be the same as of some other markets. "China, for instance, has far more millionaires, and a middle class which is larger than India's. Luxury brands are not only bought by the wealthy people, it is bought in different ways with different products", opines Devangshu Dutta, Chief Executive, Third Eyesight. He further adds, you may not be able to afford an Armani suit but maybe you can buy a bottle of perfume. You buy into a brand.

And it's growing, maybe not as fast as the luxury retailers would have want it to be, but yes, with the economy growing in income and wealth, and the number of rich and the middle class growing, the scenario is bright. In the mature markets, growth has plateaued and the Indian middle class with minimum income of around Rs1 million per annum and who loves to get the taste of luxury, this market is the one which is highly under penetrated, will give the luxury market in India huge fillip, feels Neelesh Hundekari, Principal & Head - Luxury & Lifestyle Practice, AT Kearney India. Indian luxury market is currently estimated to be at 4.76 billion in USD and has a latent demand of 3-3.5 billion USD, which is ready to be tapped.

The industry believes that there is a huge potential for luxury retailing in India but it will take some time to mature and be ready to be exploited by the retailers. The market matures with the availability of brands and the increasing numbers of consumers buying and using luxury brands. Since luxury brands started coming to India only recently, it is expected that it will take some time before the market matures. Consumer maturity and market maturity are interrelated. "Consumers will evolve and will make markets evolve in tandem. There is always a certain lag, wherein sometimes the market is ahead of consumers and sometimes consumers are ready but market is not. My belief is that by 2020 Indian market will be a serious luxury market for all global luxury brands. The basis for saying that is by 2020 Indian economy will be as big as Chinese and Japanese economy today. China and Japan are very large and serious luxury markets and are expecting that India will follow that path," suggests Harminder Sahni, MD, Wazir Advisors.

Infrastructure not up to the mark

For the international luxury brand, real estate and infrastructure have been a major problem. For them the location of their stores and the manners in which they present themselves to their customers and their target consumers, are the most important part of their businesses. They will never compromise on that.

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"An international luxury retailer will never end up in a location where they wouldn't like their brand to be seen, especially when it comes to emerging countries like India where the general public environment is not that great", quips Pranay Sinha, MD, Star Centres. If they enter a European country, they don't have to be that concerned about it because generally the city would be clean, Sinha feels. John Hooks, Deputy Chairman, Giorgio Armani Group, whose company has three stores in the country, feels the same. According to Hooks, it is difficult to have street stores in India because of several reasons."I would like to see many more malls like DLF Emporio and Palladium coming up. We would also sometimes love to be present in the street location" informs Hooks. Armando Branchini, Executive Director, Altagamma said that Italian brands from Italy will soon announce investment plans in India, but feels that the lack of quality space in the country for luxury retailing is a concern.

Traditionally, luxury brands in India have been sold in five star hotels and stand-alone stores. However, these businesses have not been able to attract sufficient footfalls to sustain themselves. And in case of malls where luxury goods could be sold, conversions and rental costs have not worked out very favourably for all tenants. Rentals have exceeded 20-25 per cent of revenues in many cases, making the business unviable. Additionally, while several malls had offered revenue sharing options to retailers during the recession, making this an attractive value proposition for them, they have now begun reverting to fixed rentals with the market picking up again (source: CII- AT Kearney Report 2010). Luxury players today are yet to crack the real estate puzzle in India.

Can Government policy help?

Indian Government's only policy that can impact the luxury market is the customs and import duties, feels Sahni. In many luxury items, these duties are too high and either make the brand too expensive or some brands even choose not to enter the market. The Government should take a more liberal view on this and reduce duties. With lower duty rates, the Government may actually collect more duties on larger volumes of imports. For Hooks, India needs to remove barriers in trade to luxury market to become more accessible. FDI is permitted only up to 51 per cent in single brand retail and is not allowed in multi-brand retail. International players who are looking to enter India are forced to tie up with Indian partners even when they would prefer entry on their own. While some partnerships have been successful, others have not done too well as international players ended up finding partners that did not have the necessary skill sets to manage luxury businesses in India successfully. Furthermore, import duties on most luxury categories are prohibitively high, which has created barriers for international entrants and lowered profitability of luxury players.

Dutta makes a valid point as he suggests, "I don't think the Government needs to tackle at the policy level, rather it needs to tackle at the execution level because retail is something an industry which requires support at the municipal level and not at the national level. So, if a certain municipal government takes a view that retail will add something, and a good retail ambience and infrastructure will add to the local economy, they will do far more and far better and will benefit the retail business for more than any policy of the national Government".