Li Mei Foong
Nov 17, 2014

Luxury in India growing amidst thorns

SECTOR STUDY: Despite the nation’s size and tempting wealth, top-end brands aren’t necessarily having an easy time in India. Careful strategy is needed to thrive there.

Testing times: Tariffs, slow growth make India a tough luxury market
Testing times: Tariffs, slow growth make India a tough luxury market

It seems that other than the window displays of their retail stores, little else has changed in the Indian luxury goods market for the past few years.

While India’s luxury consumption boom is surging neck on neck with United Arab Emirates and surpassing Singapore, there are increasing signs that the wheels are slowing, according to a recent analysis by Fflur Roberts, head of luxury goods at Euromonitor International.

Deloitte, in its report Global Powers of Luxury Goods 2014, also observes that the market in India is on a lower growth trajectory since its peak in 2012.

Among the stumbling blocks, writes Roberts, are the shortage of luxury retail space and skilled talents, as well as the high custom duties imposed on imported products – factors that were already highlighted in the India Luxury Review study back in 2011 by the Confederation of Indian Industry and A.T. Kearney.

“The key barriers to growth have not been eliminated,” Neelesh Hundekari, partner of A.T. Kearney, tells Campaign Asia-Pacific recently. He is one of the researchers behind the India Luxury Review 2011 study.

On the flipside, Sanjay Kapoor, managing director of the luxury conglomerate Genesis Luxury, disagrees that luxury consumption is losing momentum in any way. He believes that Euromonitor based its report on sentiments prior to the May 2014 elections in India, which saw the victory of Bharatiya Janata party (BJP).

“Post 2014 general elections, the mood is fairly upbeat as the new Government and Prime Minister are pro-development and FDI… The Prime Minister has himself gone abroad and pitched for investment in India by global companies. That is a very positive sign for investment in India, and even luxury brands are watching this trend with renewed interest,” says Sanjay.

Neelesh, however, does not share Sanjay’s optimism about the post-election prospects of the luxury goods industry, as luxury retail is a small sector and is not the government’s priority now.

Roberts put forth similar opinions in her analysis. She points out that foreign direct investment is unlikely to come from luxury goods retailers as BJP’s manifesto promised to maintain India’s ban on foreign investment in multi-brand retail.

It is not all bad news though. The industry waits in bated breath as the new government mulls scrapping one of luxury players’ biggest banes – the 30 percent domestic sourcing clause.

Brands have long lobbied for the government to drop the clause, which makes it compulsory for single-brand retailers to source at least 30 per cent of the value of the goods sold in India from local small and medium enterprises. Such restrictions have discouraged many luxury brands from entering the Indian market, as the existing industry players are already complaining that they are having trouble upholding their standard of quality with local sourcing.

Meanwhile, the industry realises that to thrive, they can no longer afford being snobs – throwing its doors open for new consumers is the key for survival.

Among Neelesh’s observation is that luxury car retailers are offering test drives to anyone who asks about their models, even if that person may not seem like a typical luxury consumer. As they experience the product, consumers are eased into the idea that one pays premium price for the quality, designs or panache that luxury items offer.

 “[Brands] are going out of their way to reach out to consumers who have the money but [are not familiar] with luxury products such as SME owners. It is acknowledged by every [industry player] that SME owners are the segment with the highest potential, and all luxury products now target that segment,” says Neelesh.

What many brands are neglecting to do, however, is “micro-segmenting the market”, according to Neelesh. Within the SME owners segment alone, brands need to further divide them by region, ethnicities and so on to specifically target each group’s needs and fancies.

Another of Neelesh’s advice for brands is to keep the retail stores small, so as to minimise rental and overhead costs.

“Until the market grows in an explosive manner, [brands] have to be really sharp and smart in the way it spends money,” cautions Neelesh.

The “explosion growth”, according to him, will not happen without the rationalisation of custom duties imposed on foreign goods. The duties have been jacking up the prices of luxury items, thus driving value-conscious Indian consumers to do their luxury shopping overseas instead.

“The rationalisation of duties [will encourage] Indians to shop in India instead. This will then drive many brands to spend on marketing and advertising,” says Neelesh.

Until then, it pays for brands to be frugal when selling to the rich in India.


EXPERT OPINION To survive, luxury players in India must be cost-conscious

Neelesh Hundekari, partner, AT Kearney India

The Indian luxury market presents an interesting conundrum to players. On the one hand there are a large number of high-net-worth individuals. On the other hand, constrained availability of premium retail space, high rental costs, low sales productivity, a fragmented consumer base, high import duties and constraints on FDI make profitability a challenge.

The most attractive consumer segment is the owners of SMEs, who have the money to spend and who use luxury consumption to enhance their social status. These consumers lack the awareness of brands and their value proposition, but are happy to be educated and to experiment. The second most attractive segment is salaried executives earning between US$25,000 and $200,000 per annum. These are new consumers who travel overseas and are active on social media. All segments tend to be very value-conscious and are unwilling to pay a premium over prices in other international shopping destinations like the US, Europe or Dubai. Given this, luxury players in India are consciously trying to create a commercially viable ‘Indian model’.

Elements of this model include: micro-segmenting the market to identify new segments; smaller store sizes in premium (not necessarily luxury) malls; investing in consumer education; and low-cost marketing practices.

While some of these will certainly help in keeping businesses viable, continuous growth of the market can happen only if import duties are reduced and FDI is completely liberalised.


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