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India – A Growth Trajectory for Global Fashion Brands

February 14th, 2014 by Tarang Gautam Saxena

2013 has been a mixed year for retail in the Indian market with multiple factors working in favour of and against the business prospects.

Economic growth had slowed to 5% for 2012-13 (as per advance estimates by The Central Statistics Office, Government of India), down from 9.3% in 2011. The ray of hope is that the growth rate is expected to rebound to 6.8% in 2013-14. Spiralling inflation, with prices of some basic vegetables shooting up almost eight to ten times, distracted the consumers from discretionary spending. The year hardly saw irrational expansions by retail businesses as they primarily focused on bottom line performance.

While the Government of India liberalised Foreign Direct Investment (FDI) policy in retail in September 2012, international investors have been slow to respond and sizeable foreign investments have been announced only recently at the end of 2013.

The political environment also took unexpected turn with the success of Aam Aadmi Party (AAP) at the Delhi Assembly Elections held towards the end of the year. This may augur in a new era of politics driven by performance and results but in the short term it could restrict market access for international multi-brand retailers, as the AAP has declared their opposition to investment from foreign multi-brand retailers.

So is India still a strategic market for international fashion brands to look at?

FDI Policy – Clarifications and Impact

India’s Foreign Direct Investment (FDI) policy has come a long way with foreign investments now being allowed in multiple sectors including retail, telecom, aviation, defence and so on. The Indian government is now exploring the possibility of allowing FDI in sectors such as railways and construction.

The year 2006 was a significant year for international brands in fashion and lifestyle space as the Government of India allowed up to 51 per cent foreign direct investment in the newly-defined category of “Single Brand retail”. In September 2012 the Indian Government liberalised the retail FDI policy to allow foreign investment up to 100 per cent in single brand operations and up to 51 per cent in multi-brand retail albeit with certain conditions related to the ownership of the brand, mandatory domestic sourcing norms for both single-brand and multi-brand retailers and additionally certain investment parameters for the backend operations of the multi-brand retail business. The idea was to attract foreign investment in retail trading a part of which could flow into improving the supply chain while providing Indian businesses access to global designs, technologies and management practices.

Large Investments in the Pipeline

The investments flowed in slowly initially. Some of these have looked at converting existing operations, such as Decathlon Sports which was present in India through a 100% owned subsidiary in cash and carry business. The brand is converting its cash and carry business in India to fully-owned single brand retailing business.

But there have been some significant moves as well. A record breaking FDI proposal in single brand retail is the Swedish furniture brand IKEA’s, that had to apply three times since December 2012 before its’ proposed investment of €1.5 billion (Rs. 101 billion) received the nod from the Government. However, the proposal is reportedly still in the works, as Ikea looks to structure the business to comply with the laws of the land. And as the year came to a close the Government cleared Swedish clothing brand Hennes and Mauritz’s (H&M) US$ 115 million (Rs.7.2 billion) investment proposal. According to news reports the brand had already begun blocking real estate with the goal of launching its stores in India at the soonest.

While the initial response to the relaxation of FDI policy spelt positive inflow for single brand retail, there was no new investment forthcoming in multi-brand retail. The existing foreign multi-brand retailers present in India through the cash and carry format showed a marked lack of interest in switching to a retail business model. On the other hand Walmart, the only foreign multi-brand retailer having access to a network of retail stores through its wholesale joint venture Indian partner, Bharti Enterprises Ltd., ended its five year long relationship and has restricted itself to the wholesale business. Though the company cited that it was disheartened by complicated regulations, it was also caught up in its own corruption investigation as well as allegations that it had violated foreign investment norms. The sole bright spot was the world’s fourth largest global retailer Tesco proposing and getting approval for a US$ 115 million investment into the multi-brand retail business of its partner, the Tata Group. At the time of writing the precise scope of this investment remains unclear.

If you want the full paper please send us an email with your full name, company name and designation to services[at]thirdeyesight[dot]in.

Posted in Apparel, e-commerce, Footwear, India, Lifestyle & Fashion, Luxury, Marketing, Retail, Soft Goods, Strategy, Uncategorized | 1 Comment »

The Franchise “Space Programme”

December 5th, 2013 by Devangshu Dutta

(Published in ETRetail.com on 6 December 2013)

Franchising isn’t rocket science, but advanced space programmes offer at least one parallel which we can learn from – the staging of objectives and planning accordingly.

A franchise development programme can be staged like a space launch, each successive stage being designed and defined for a specific function or role, and sequentially building the needed velocity and direction to successfully create a franchise operation. The stages may be equated to Launch, Booster, Orbiter and Landing stages, and cover the following aspects:

  1. Launch: assessment of the franchiser’s own readiness to launch and manage a franchise network in the target geography
  2. Booster: having the franchise pack ready to target the appropriate geographies and franchisee profile
  3. Orbiter: franchisee recruitment
  4. Landing: operationalising the franchise location

Stage 1: Launch

The first and perhaps the most important stage in launching a franchise programme is to check whether the organisation is really ready to create a franchise network. Sure, inept franchisees can cause damage to the brand, but it is important to first look at the responsibilities that a brand has to making the franchise network a success. Too many brands see franchising as a quick-fix for expansion, as a low-cost source for capital and manpower at the expense of franchisee-investors. It is vital for the franchiser to demonstrate that it has a successful and profitable business model, as well as the ability to provide support to a network of multiple operating locations in diverse geographies. For this, it has to have put in place management resources (people with the appropriate skills, business processes, financial and information systems) as well as budgets to provide the support the franchisee needs to succeed. The failure of many franchise concepts, in fact, lies in weakness within the franchiser’s organisation rather than outside.

Stage 2: Booster

Once the organisation and the brand are assessed to be “franchise-ready”, there is still work to be put into two sets of documents: one related to the brand and the second related to the operations processes and systems. A comprehensive marketing reference manual needs to be in place to be able to convey the “pulling” power that the brand will provide to the franchisee, clearly articulate the tangible and intangible aspects that comprise the brand, and also specify the guidelines for usage of brand materials in various marketing environments. The operations manual aims to document standard operating procedures that provide consistency across the franchise network and are aimed at reducing variability in customer experience and performance. It must be noted that both sets of documents must be seen as evolving with growth of the business and with changes in the external environment – the Marketing Manual is likely to be more stable, while the Operations Manual necessary needs to be as dynamic as the internal and external environment.

Stage 3: Orbiter

Now the brand is ready to reach out to potential franchisees. How wide a brand reaches, across how many potential franchisees, with what sort of terms, all depend on the vision of the brand, its business plan and the practices prevalent in the market. However, in all cases, it is essential to adopt a “parent” framework that defines the essential and desirable characteristics that a franchisee should possess, the relationship structure that needs to be consistent across markets (if that is the case), and any commercial terms about which the franchiser wishes to be rigid. This would allow clearer direction and focussed efforts on the part of the franchiser, and filter out proposals that do not fit the franchiser’s requirements. Franchisees can be connected through a variety of means: some will find you through other franchisees, or through your website or other marketing materials; others you might reach out to yourselves through marketing outreach programmes, trade shows, or through business partners. During all of this it is useful, perhaps essential, to create a single point of responsibility at a senior level in the organisation to be able to maintain both consistency and flexibility during the franchise recruitment and negotiation process, through to the stage where a franchisee is signed-on.

Stage 4: Landing

Congratulations – the destination is in sight. The search might have been hard, the negotiations harder still, but you now – officially – have a partner who has agreed to put in their money and their efforts behind launching YOUR brand in THEIR market, and to even pay you for the period that they would be running the business under your name. That’s a big commitment on the franchisee’s part. The commitment with which the franchiser handles this stage is important, because this is where the foundation will be laid for the success – or failure – of the franchisee’s business. Other than a general orientation that you need to start you franchisee off with, the Marketing Manual and the Operational Manual are essential tools during the training process for the franchisee’s team. Depending on the complexity of the business and the infrastructure available with the franchiser, the franchisee’s team may be first trained at the franchiser’s location, followed by pre-launch training at the franchisee’s own location, and that may be augmented by active operational support for a certain period provided by the franchiser’s staff at the franchisee’s site. The duration and the amount of support are best determined by the nature of the business and the relative maturity of both parties in the relationship. For instance, someone picking up a food service franchise without any prior experience in the industry is certainly likely to need more training and support than a franchisee who is already successfully running other food service locations.

Will going through these steps guarantee that the franchise location or the franchise network succeeds? Perhaps not. But at the very least the framework will provide much more direction and clarity to your business, and will improve the chances of its success. And it’s a whole lot better than flapping around unpredictably during the heat of negotiations with high-energy franchisees in high-potential markets.

Posted in Apparel, Branding, Consumer, Entrepreneurship, Food & Grocery, Footwear, India, Leadership, Lifestyle & Fashion, Marketing, Real Estate, Retail, Soft Goods, Strategy, Supply Chain, Textiles, Uncategorized | No Comments »

India’s Luxury Love Affair: It’s Complicated!

February 24th, 2013 by Devangshu Dutta

Luxury is an ill-defined concept. There is no specific line or limit of price, quality or availability that separates the luxurious from all that is not.

However, like other similarly intangible attributes such as power or grace, we all immediately recognise luxury when we experience it.

In fact, experience — vague as that may sound — is key to differentiating luxury, more than the tangible product being consumed. It’s not just the person’s own direct sensory experience, but also the prestige and status granted by others around her or him that creates the luxury experience.

Surely, with such intangible notions of experience, power and prestige, luxury brands should be among the most influential in the market. They should be pioneers that set the tone for change in improving retail management practices, upping customer service standards, driving quantum leaps in quality.

But is it so? The response from the rest of the retail sector may not quite be “meh”, but I suspect that it would not be far off.

There are strong reasons why luxury brands would have a lower influence as benchmarks in India and why, in fact, they may draw in more influence from the market themselves.

Market presence and location

As an example, in physical presence, luxury brands seem to demonstrate a delayed response to changes in the market, both in terms of market entry and location selection.

Prior to the entry of global brands, luxury products and services in India were naturally defined by niche, largely owner-managed businesses. Business scale was curtailed by internal limitations, and due to the small size, its market reach was also limited. While there were some designer brands that would occasionally get copied by mid-priced retailers, by and large luxury brands lived in their own separate bubble, with little or no influence on the heaving mass of the market.

In contrast, in the Western economies, from where many of today’s luxury brands originate, they are looked up to for inspiration. So, it is natural to expect Western luxury brands to lead the charge into the newly emerging modern retail economy of India. However, according to Third Eyesight’s research of international fashion and accessory brands in India, in the last 25 years it is mid-priced and premium brands that have opened the market. It is only in the last 10 years, well after the economic and retail growth was underway, that luxury brands stepped up their presence.

Sure, during the so-called “retail boom” from 2004, luxury brands went up to one-quarter of all international fashion and accessory brands present in the market. Then, when practically the whole world was in a recessionary mood, and mid-priced and premium brands took a call to defer their India launch plans, luxury brands pushed ahead. In 2009, luxury fashion brand launches accounted for two-third of all foreign fashion brands launched in India. Maybe the brand principals felt that this market could take on the burden of slowing growth elsewhere, or perhaps it was their Indian counterparts who were the source of optimism. Either way, the optimism took a hit in 2010 and 2011 when it was luxury brands that became cautious.

In terms of store openings and location selection too, luxury brands seem to have waited for the overall market to upgrade itself, and have then latched on to that growth. Previously luxury brand stores, such as there were, largely restricted their presence to five-star hotel shopping arcades, while a few took up non-descript sites as they were confident of being destinations in their own right or clustered together to create a precious few bohemian locations in surroundings that were far from luxurious. As modern shopping centres emerged in recent years, these presented an environment where rich consumers — especially the ‘new’ rich — could flock to buy globally benchmarked lifestyle statements. While these were mainly targeted at mid-market to premium brands, some of them are now even attracting designer brands such as Canali at Mumbai’s Palladium mall rubbing shoulders with Zara. These new luxury stores in mid-market or premium locations are performing better than the original “luxury” sites.

Thus, in terms of expressing confidence in the market, luxury brands seem to be following market trends rather than leading them. And far from being the anchors to create demand, they seem to be following where the demand goes.

Design and product development

The most important impact that luxury brands could have on the market is by influencing product design. This fashion trickle-down is supposed to work in two ways: one, through “inspiring” knock-offs by cheaper brands; two, making luxury customers act as opinion leaders and trend-setters for other consumers.

However, various factors dilute the luxury brands’ product and design influence in India: the preponderance of domestic (“ethnic”) style and colour, especially in womenswear, the existing domestic variety in products, the flood of premium (non-luxury) international brands and a customer base that is oblivious to the difference between the premium and luxury segments. In spite of their small size, Indian luxury and designer brands possibly have a larger direct impact, not to mention the massive Bollywood machine that drives mainstream fashion trends on a day-to-day basis. The international luxury giants are conspicuous by their small influence.

In fact, increasingly the influence is flowing the other way. A few luxury brands have attempted to create India-specific items to give the customer what they might want. Some of these may be indulging in superficial pandering such as putting an Indian image on a global product, but others have created Indian products that genuinely reflect what the brand stands for. While some use India as a production sweatshop to minimise the cost of high-skills jobs, others are now beginning to use Indian crafts to design products that are relevant to other global markets. A few examples, without passing judgement on which category they fit into, include: Lladro’s Spirit of India collection, the Hermès sari, the Jimmy Choo “Chandra” clutch bag, Louis Vuitton’s Diwali collection and Canali’s nawab jacket.

Slow, but not yet steady

Another issue with India is the sheer numbers, or the lack thereof!

China’s GDP is about four times the size of India’s but its luxury market size is estimated to be six times that of India. There are 1.7 million households in China that meet the high net-worth criteria, as compared to 125,000 in India. What’s more, according to industry estimates, only about 30 per cent of luxury consumers in China are actually wealthy, while the overwhelming majority are people with mid-market incomes who are given to conspicuous consumption, whether buying luxury goods for themselves or as gifts.

Indian consumers also have a penchant for buying overseas rather than shopping from the same brands’ stores in India. This is not just due to higher costs and import duties in India, but because of wider and more current selections of merchandise in stores overseas. Indians’ luxury shopping destinations include the usual suspects: London, New York, Paris, Milan, Singapore and Dubai. This has meant that while luxury brands recognise Indians as a large, emerging base of customers, for most brands India itself remains an operating market for the future.

Having said that, when compared to any other sector of business, luxury brands in India probably get the most media coverage for every rupee of sales earned. Although they are a small fraction of the sales, luxury brands rule in terms of column centimetres or telecast seconds. The coverage is not restricted to consumer-oriented media such as lifestyle magazines or mainstream newspapers, individual luxury brands are also extensively covered in business media.

One may argue that such is the nature of luxury: this disproportionate visibility and share of mind happen because luxury is not just aspirational, but inspirational. However, that inspiration and influence is yet to become apparent in the business at large. Until we see significantly larger numbers of upper-middle-income customers in India, luxury brands will find it difficult to expand their reach beyond the small base of ultra-rich consumers. The aspiration and price gap is just too wide for the Indian middle class, and there are very few who will emulate their Chinese counterparts and save up a year’s salary for a single luxury item.

And so…

One thing is beyond doubt: the luxury sector in India is undergoing significant change. We could even say it is in active ferment. There has never been so much interest among so many people, or so many brands so widely promoted, as now.

The question is still open on whether it is a good ferment such as the one that produces wine from raw grape juice and fine cheese from plain curds, or the unguided rot that results in a putrid, smelly mess unfit for consumption.

My bet is on the first possibility. In the short term, the luxury business appears to be a mess, littered with fractured partnerships and bleeding financial statements. But the brew needs time to mature. Gradually, as the luxury segment matures along with the rest of the market, we will see the influence trickling down into other segments. But remember, the finest brews do not only impart their flavour to the cask, but imbibe the cask’s characteristics into themselves. So it is with luxury and the Indian market. The message that we have given many other international businesses seems to hold doubly true for the global purveyors of influence, the luxury brands: “As much as you think you would change India, India will change you.”

Posted in Apparel, Branding, Consumer, Entrepreneurship, Food & Grocery, Footwear, India, Leadership, Lifestyle & Fashion, Luxury, Market Research, Marketing, Product Development and Design, Retail, Soft Goods, Strategy, Supply Chain, Textiles, Uncategorized | No Comments »

International Shoes & Accessories Brands in India – The March Ahead in 2012

May 1st, 2012 by Tarang Gautam Saxena

India’s economic growth may seem to have taken a dip last year with India’s GDP growth falling to 6.9% for 2011-12 from 8.4% the previous year. But that has not translated into a slower entry of international brands entering the market. There already exist over 200 international fashion brands in India with more than a quarter of these operating predominantly in the footwear and accessories category. Bata may be an exception, having been present in India for over eighty years, but since the 1980s international brands have been trickling in, and the numbers really picked up in the 2000s.

Since 2006, the number of international shoes and accessories brands entering the market has increased 4-fold. The year 2012 has already ushered in international brands such as Claire’s (jewellery), Christian Louboutin (shoes) and Kelme (sports shoes and apparel) within the first three months, while more brands are there on the anvil. While India is expected to grow at 7.6% this year, the pace of growth of international brands may just as well surpass this relatively slow growth rate.

Business Environment & Choice of Operating Structure at Entry

The choice of entry strategy is a key decision for brands entering new markets. This decision hinges on internal and external business factors including the degree of control that a brand wants to exercise on the brand, the product and the supply chain, the market potential, the internal capabilities and strategies of the international brand in their home market or other overseas markets and the government policy pertaining to foreign investment in that particular market.

In the late 1980s and 1990s the Indian retail market was largely unorganized with few national Indian brands and an under developed modern retail network. Import duties were high and there were many investment barriers for foreign brands. The early players entering the market in the shoes and accessories segment were primarily sports footwear and equipment brands targeting the Indian men.  Bata was perhaps a lone brand that offered footwear for the entire family.

The international brands that entered the Indian market at that time largely opted to license the brand to an Indian partner that allowed the international brands to gain quick access to the Indian market with a minimal investment. Brands such as Lotto, Hush Puppies and Puma chose to license the brand to a partner based in India. The Indian partner invested in sourcing or manufacturing, merchandising, branding, marketing, distribution, and even retail while the international brand received royalties and other fees for lending its brand to the market. However, this left the brands with very little control on their growth path in the market. A few formed joint ventures (Reebok, Adidas) or entered into licensing and distribution tie-ups (Nike, Umbro) with Indian partners to leverage the partners’ manufacturing or distribution strengths.

Over time, certain brands decided to move their existing entities (licensed, franchised or joint venture) into wholly owned subsidiaries. These brands may have invested a disproportionate amount of management time and effort initially but the investment has paid off well. Reebok is today the largest international sports goods brand in India with a reported turnover of Rs 600 crores last year, followed by Adidas, Puma and Nike.

The 2000s saw a rising interest of women’s footwear and accessories brands in the Indian market as the market further evolved. Many of these players operated in the luxury segment appealing to a limited few. There was a distinct shift in the choice of entry strategy and franchising emerged as the preferred entry route for the brands stepping afoot in the Indian market testing the waters. The successive lowering of import duties for fashion products resulted in imports being a less expensive sourcing option and the realty boom brought investors in retail real estate that were ideal franchisees for the international brands.

At the same time the count of sports footwear and accessories brands also continued to grow. This product category was primarily distributed through agents, regional distributors and through a combination of exclusive branded outlets, multi-branded outlets and large department chains at the retail end. By 2003, franchising became the preferred launch vehicle for an increasing number of international companies, including Accessorize, Aldo, New Balance and Nine West, while only a few chose to enter through licensing.

In 2006 the Government of India reopened retail to foreign investment (allowing up to 51 per cent foreign direct investment in “Single Brand” retail). Later the Indian government also announced the possibility of gradually increasing the FDI limit in single brand retail from 51% to 100%. The possibility of having part or an eventual complete ownership encouraged brands, seeking a more controlled business in India, to use joint venture as the launch vehicle. International footwear and accessories brands such as Clarks, Fendi, Kipling, Pavers England either entered India by forming joint ventures or shifted their existing structures to joint ventures.

Thus the last decade saw the international brands largely using the franchising route or forming joint ventures to create a presence in the Indian market. While franchising became the choice for risk-averse brands, those that were convinced about the longer-term value of India took the more committed ownership route.

While the government has recently allowed 100% foreign direct investment in single brand retail, it has placed the rider that 30% of the sourcing would happen from small and medium enterprises in India. The lack of clarity as to what this actually means, as well as the need to set up an adequate sourcing presence in India has meant that most brands have not pushed their Indian presence into a 100 per cent ownership structure.

Of course, for a few brands India may be the key source for their entire range and given our government’s manufacturing policy they may already have an existing small and medium enterprise vendor base. These brands may go for complete ownership if India is a strategic and important enough market and sourcing base in their global portfolio.

One such international company is Pavers England, a premium leather footwear brand from UK, which has recently approached the Indian government to allow the retailer 100% foreign direct investment in single brand retail. The group has been present in India since 2008 through a joint venture and currently sells the brands, Pavers England and Staccato in India.

At the moment, 35% of the international brands are present through an ownership business model, either through a wholly owned subsidiary or a joint venture with majority stake which reflects the growth of confidence level of international brands in the Indian market.

Changeovers, Exits & Re-launches

The road to success in the Indian market has not been an entirely smooth ride even for the large brands that are successful globally. Brands that have invested in understanding the psyche of the Indian consumer, adopted flexibility in market approach and displayed persistence, have been paid off handsomely and some of these have even exceeded domestic brands in size and reach. Some others have had to reconcile to being niche operators.

Some brands have shifted their strategy and changed their operating structures and even partners in response to the dynamic market conditions and the increasing importance of India’s contribution in their global business. Some brands that may not have achieved success in their initial stint and have exited the market, only to return with renewed strategy, energy and rigour and more suitable business models and or partners. There are plenty of examples of international brands that have changed over their operating structure, partners, exited the market and yet re-launched again.

Puma, for instance, had first entered the Indian market through a licensing arrangement with Carona in the early 90s to sell sports footwear, but the agreement was revoked in 1998. The brand entered the market again in 2002, this time with a licensing / distribution tie up with Planet Sports. The company positioned itself as a lifestyle brand this time with a wider product range. While the Indian partner was responsible for sourcing of apparel and accessories, distribution and retail, Puma ensured that the quality of footwear being sourced from India was upto mark and also ensured brand consistency throughout all marketing, product and retail efforts. To the international company, India occupied an important position in Puma’s global as well as Asian business. With an aim to strengthen the brand’s position further in the country through greater control over its India operations, Puma set up a wholly owned subsidiary in 2006 subsequent to the end of its licensing tie-up.

Another early entrant, Lotto Italia, re-entered the market in 2005 through a license deal after a gap of ten years. More recently, in an effort to move to the higher growth trajectory, the brand has changed its partner last year and the brand is looking for aggressive growth by planning to grow its network of exclusive stores across India from 50 at the moment to 200 in the next three years. The brand is also undertaking various marketing activities to gain high visibility and connect with the consumers. Recently, the brand has been reported to be working on launching cricket equipment in India in the next six months, which will be a pilot run for the global launch of the product as well.

The renowned Italian brand Gucci was brought into India through a franchise agreement with Murjani Retail in 2006. However, the global economic crisis and its resultant impact on the Indian market, led a shift in the Indian partner’s focus from luxury to premium brands. The franchise agreement with Murjani Retail was terminated and replaced with a new franchisee, Luxury Goods Retail, in 2009. Simultaneously, the international brand Gucci, converted this new franchise agreement into a majority owned joint venture for more control over the Indian operations.

Clarks, a British footwear brand, first entered India in 2005 through a distribution agreement with an India partner and also set up a few exclusive stores across India. It withdrew from the market due to below-par performance. However, after researching and understanding the Indian consumer further it re-entered the market 2011 through a joint venture with Future Group. Now Clarks is offering differentiated products across segments (men, women and kids) with lower price points and is focusing on high brand visibility through exclusive branded stores to break through the clutter. India is an important sourcing base for this company and it is also drawing synergy for its global product range from the products being developed as per the tastes and preferences of Indian consumers. From the new partner the brand hopes to leverage their experience in real estate and their understanding of the Indian consumer.

The Italian fashion brand Miss Sixty exited the market and their partnership with Reliance Brands in 2007. The brand re-launched shoes and accessories in 2009 through another franchise agreement and currently the brand has three stores across Delhi, Mumbai and Chennai.

The German lifestyle brand, Aigner that entered India in 2004 is perhaps a lone brand that has not yet re-entered the market since its exit in 2010, but it will be no surprise if it returns to India again at an appropriate time.

The strategies of international brands have changed due to various factors. Many of the changes in strategy and structure have been due to the actual performance in the market falling well short of expectations and projections. Perhaps, the changes in partnership could have been moderated had the companies been more careful in questioning the criteria and motivations for choosing partners. (This is discussed further in detail in our earlier articles, relating to the International Fashion Brands in India). In choosing their partners, the international brands need to carefully identify what role they wish to play in the market, and what capability and capacity they need operationally to create the success that can truly root a brand into the rich Indian soil.

International Brands: Here to Stay

India is at the early stage of consumer growth and is emerging to be a strategic market to many international brands with a promising market potential. The market conditions are much better and the barriers to entry much lower for the international brands as compared to even the last decade. The overall confidence of the international brands in the potential of the Indian market is highly positive.

So far, the shoes and accessories market has been led by international sports and outdoors brands. Though there are already over a dozen international brands present in this category, we can expect to see more entering this category. The recently announced joint venture between Wolverine and Tata International to strengthen the presence of CAT and Merrell brands in the Indian market and to possibly introduce other brands from the portfolio shows that this segment is far from saturation.

Indian women are emerging as another important segment, drawing more footwear and accessories brands into the market and expansion of the existing brands through stand alone stores for women. There is still open ground available in the premium and value segment of women’s accessories for the growth of both international and national brands.

Over the last decade, the pace of growth of a brand has accelerated; the time needed for a brand to scale up has shortened.  The modern retail network has expanded and there are an increasing number of distribution channels today, even as existing players such as Bata and new ones such as Reliance Footprint offer growing platforms for international accessory brands to plug into.

The online channel is further emerging as an important route to reaching the consumers especially in the tier II and III cities where demand exists but there is low accessibility due to inadequate distribution network. Vans Shoes, an international footwear brand from USA, has tied with online portal myntra.com to widen its consumer reach having entered India last year through a joint venture with Arvind Brands. The online channel also offers the possibility of “pilot runs” and test marketing for brands at the early stage.

Going further, not only do we see more brands customizing their product range for Indian tastes, but India also becoming the testing ground and an inspirational source for global product range.

International brands clearly are here to stay. The more successful brands will be the ones that take pragmatic view of what is achievable and make course-corrections to their India business model as often as required.

Posted in Branding, Footwear, India, Lifestyle & Fashion, Marketing, Product Development and Design, Retail, Soft Goods, Strategy, Uncategorized | No Comments »

Luxu-Re: Back to the Roots

February 27th, 2012 by Devangshu Dutta

Luxury is dichotomous, conflicted and conflict-creating by its very nature. “Luxuria” is Latin for “Lust”, the first in the list of the Seven Deadly Sins. The British poet Edith Sitwell is quoted as saying, “Good taste is the worst vice ever invented.” Luxuries are not a basic fundamental need to start with, yet to seek them out is innate in our nature.

For the most part, the term luxury has been and continues to be applied to tangible goods whether found naturally, hunted or manufactured, rather than to intangible services. Yet, it is the intangible that differentiates what is luxurious from what is not.

Certainly, the definition of luxury changes with time. There was a time, in today’s advanced markets, when hot water baths were a luxury and available frequently to only a few people. Indian pepper was once more expensive than gold. In fact, a significant part of European exploration of the world during the last millennium was driven by the craze for spices from “the Indies” before morphing into empire-building. Today, most modern Europeans would call neither a hot bath nor spices as a luxury, and many would gladly delegate to someone else their share of global travel.

If we want to understand the shifts in the luxury market and how the emerging markets of luxury such as India and China might evolve in future, we must understand the two most fundamental drivers of price premium: the social esteem achieved and the possessor’s own experience of the product or service.

When viewed together in the Experience-Esteem Price Premium Model (see graphic), we see the relationship of price premium and these two factors zig-zagging in an N-shape for immature or rapidly evolving markets (“New”), whereas in more mature markets the premium would follow more of an S-curve (“Stable”). The term “market” here refers to not just geography but consumer segments, including segments defined by need/use rather than by demographics such as income or age.

In rapidly evolving markets there is a significant premium available on products and services that are conspicuously expensive, whose price (or at least the apparent price level) is known in the buyer’s social circle. It’s a positive feedback loop: high social recognition keeps the price up, which in turn improves the social esteem of the buyer. Expensive cars and gadgets, designer brand apparel and accessories, holidays that would be the envy of others, Big Fat Indian Weddings (for and by Indians) all fit into this category. Beyond social recognition, however, the buyer’s own experience and satisfaction also plays a role in driving the price premium: the better the buyer’s own experience is for a given amount of social recognition, the higher the price premium is likely to be. This gives rise to the familiar pyramid for the luxury market, where the highest price is available for products and services that deliver both high social status and a superlative personal experience.

In “New” or evolving markets, more of the premium is attributable to social status; the buyer’s thought process is: “if you’ve spent a million Rupees or Yuan on something and no one knows about it, it’s not that valuable”. In more evolved or “Stable” markets, on the other hand, where tastes have had longer to evolve, personal experience becomes important in driving premium for at least some products: for example, high-fidelity unbranded speakers bought by music aficionados or a vacation in an unknown destination fit the bill. The satisfaction, and the premium, is driven more from the personal high-quality experience, not from receiving recognition or respect from someone else.

Developing taste needs time both at the personal level and for the society. On the other hand, status difference is a factor in all societies, at any given time. The pull between conspicuous and inconspicuous consumption at the higher price end plays out between indulgence and luxury versus opulence. Opulence may or may not enhance the buyer’s experience, but its main function is to make a status-statement, including instances such as millions being spent on “public” spaces to enhance a political leader’s own standing.

The thing with status is this: If others see you as worse off than them it is their problem; if you think you’re worse off than others, it is yours. By and large, the luxury industry, as it has evolved over the last 30-40 years, feeds on this status insecurity that is multiplied and amplified by media.

Luxury used to mean something that was expensive because it was highly desirable but also scarce. Today ubiquity seems to be the driving force of luxury not scarcity. As economic growth has created nouveau riche worldwide, brands (especially logo-bearing ones) have emerged to deliver instant gratification and legitimacy. Distinct, recognisably expensive brands are the accepted currency in the world of cachet. In the final price, the share of marketing spend is often higher than the cost of the core product. In a consumer society that is more conscious of the status that the product offers rather than its utility, it is the recognition and identification that matters most.

This has led to the trickle-down effect with luxury brands becoming increasingly more accessible, not just in terms of physical availability but also in terms of price units through bridge, diffusion and prêt lines, and licensing. A particular consumer may not be able to buy a Chanel dress or Dior gown, but she can surely scrounge enough to buy a perfume that promises at least a whiff of celebrity status!

The vintage of the product or service is an important component of the status or recognition premium, especially when the buyer has newly come into money. This is why the market is dominated by European luxury brands that can claim ancestry of at least a few decades, if not centuries, while there are barely any brands of note from other geographies. This is not conclusive evidence of European tastes being better or more acceptable, just the economic cycles through which societies around the world have been.

So where does India stand for luxury marketers? The Indian operations of most brands that have been launched in the last few years are bleeding, and seem unsustainable. And yet, it is tempting to compare the emerging golden bird of India to the golden dragon of China.

In our work with brands and marketers from around the world, we have to constantly remind people that not all emerging markets are the same. The explosion of luxury and premium brands in China during the last decade or so has been aided by sudden economic growth that came after a long cultural and economic vacuum. When the new money wanted links with the old and when uniform grey-blue suits needed to give way to something more expressive, well-established western premium and luxury brands provided the most convenient bridge. As China evolves further and consumer become more discerning, I believe we will see the emergence of Chinese and smaller new international brands that differentiate themselves on the core product, rather than relying on a long foreign history.

India’s case is slightly different. Discernment may be a new experience to some Indians who have come into money recently, for whom brands can be a valuable guide and “secure” purchase. Globally well-known premium and luxury brands or products that are endorsed by “people in the know” (including works of art) are the first to benefit from this spending.

However, discernment and taste are not new to India and, more importantly, differentiation and self-expression never disappeared even during the darkest years of “socialistic” economics. Therefore, India will see a layered approach to the luxury market and grow in a more fragmented manner, with slower expansion of individual brands. There would be multiple tiers of growth for international as well as Indian luxury products. For international brands customisation and Indianisation will be important, as is already visible in bespoke products by Louis Vuitton and Indian products by brands such as Canali (jackets) and Lladro. And there is a real prospect of luxury Indian brands emerging to respectable size, if they can stay the course and travel the distance.

As the market matures spending by Indian consumers on indulgences will also grow, driven by the need to satisfy themselves rather than for the status they could gain. In fact, another market to watch out for is India itself is a source of indulgences for foreigners – luxurious Indian experiences in which price is not the object but the experience – Big Fat Indian Weddings, ayurvedic treatments and meditation holidays for non-Indians are a case in point.

While on indulgences, in closing, I refer back to the ExEs Price Premium Model. For a limited number of people the price premium curve follows a clockwise-D, starting from Indulgences. For them invisible or inconspicuous products whose only function is to enhance the owner’s or buyer’s own experience are the most prized. In many cases, the fewer people that know about it, the better and more premium it would be.

In fact, perhaps invisibility could be the greatest indulgence of all in a world of hyper-information, self-promotion and instant celebrity. Increasingly we will find that anonymity and invisibility will be treated as luxuries, and service providers will charge a huge premium for taking you down below the radar, making you invisible. We don’t really need to wait to see that emerge. That world of luxurious anonymity is already here, and its most valuable service providers are banks in offshore tax havens!

(Edit: This article appeared in a special issue of the Strategist on March 26, 2012.)

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