Luxury Resurfaces in India, Cutting a Wider Swathe

India has been no stranger to branded luxury. The shopping lists of Indian royalty are still remembered long after princely titles have been reduced to mere courtesy. In 1926, for instance, the Maharaja of Patiala gave iconic jewelry house Cartier its largest commission to date — the remodeling of his crown jewels, which included the 234.69 carat De Beers diamond. The result was the Patiala necklace weighing 962.25 carats with 2,930 diamonds. In 1928, the Maharaja of Jammu & Kashmir placed 30 orders in six months for trunks from luggage-maker Louis Vuitton, including one for a shoe maintenance kit. In the 1930s, 20% of Rolls Royce’s global sales were from India.

These might be stray indulgences, but they highlight the extreme contrast that followed. For close to 50 years after Independence from the British, anything remotely opulent was frowned upon as India flirted with socialism. But in the past decade, the onset of liberalization and capitalism has enabled India’s new maharajas — industrialists, entrepreneurs, professionals and the rural rich — to blatantly covet all things luxurious. “Those who have made money in the past 15 to 20 years are the real big spenders in this segment,” says Vispi Patel, group director, Louis Vuitton Moet Hennessey (LVMH) India. “The new, young, upper middle class who will spend rather than save will be new-generation, first-time customers for luxury products. They will fuel growth.”

In 2012, millionaires in Asia outnumbered their counterparts in North America for the first time, according to the World Wealth Report 2012 released by consultancy Capgemini and RBC Wealth Management. The Asia-Pacific region has 3.37 million high net worth individuals (HNIs), compared to 3.35 million in North America. Asia surpassed Europe in 2010. India recorded a marginal decline, but that was largely because of notional losses in the exchange rate and a stock market slump. (The markets have recovered since, and the rupee has stabilized.)

The new feature of the growth in the number of HNIs and the spread of luxury wares is that they are no longer restricted to the metros. It is difficult to get a handle on the number of rich in rural areas. Agricultural income is tax-free in India, and there are no reliable records of rich farmers. There is anecdotal evidence, however, that small-town luxury spending is shooting up. While the economic slowdown has impacted automobile sales, the luxury car segment has managed to retain its momentum, growing at a compound annual growth rate (CAGR) of 30% to 40% from 2008 to 2012. Mercedes Benz India marketing director Debashis Mitra told India Knowledge@Wharton recently: “Two to three years ago, Delhi and Mumbai accounted for nearly 70% of our sales. Today, this percentage has declined to 50%; the rest is accounted for by Tier-2 towns.”

Innovative Marketing

At a luxury conference last month, organized by business daily Mint, Joydeep Bhattacharya, head, and Sandeep Lodha, principal, of Bain & Company’s consumer products and retail practice in India, presented a report, titled “Small Ain’t Beautiful — Point of View on India Luxury Market.” According to the report, India’s traditional luxury market — which includes personal luxury goods such as watches, jewelry, apparel, accessories, fragrances and cosmetics as well as non-personal items such hotels, cars, boats, yachts, furniture and fine dining — is valued at about US$6 billion and growing at 15% to 20% a year. Of this, the personal luxury goods segment is valued at US$1.5 billion.

The primary driver for such growth has been a 200% increase in the number of HNIs (with more than US$1 million in onshore liquid assets) since 2006. The total number of HNIs is expected to reach 132,000 in 2013. The report also estimates there will be 1.1 million households with an annual disposable income over US$100,000 in 2013, a 60% increase since 2006.

Consequently, luxury brands are responding by increasing awareness with innovative marketing campaigns and events. For instance, Judith Leiber decided to tap into India’s burgeoning bourgeois even in Tier-2 cities with an exclusive trunk show in Indore. The luxury handbag brand, which typically sells about 300 bags in India a year, sold 30 pieces ranging from US$500 to over US$6,000 in one event.

It’s not just one-off trunk shows, explains the Bain report. Luxury retail is moving out of five-star hotels into “hybrid” malls, with a mix of luxury and non-luxury stores with customized service. Says Atul Ruia, managing director of Phoenix Mills, the company that owns the upscale Palladium and mid-market High Street Phoenix malls in Mumbai: “Hybrid malls have been a huge driver of luxury goods’ sales, because the customer who shops at Zara here also shops at Burberry. All the brands realize that five-star hotels are not the way to go. The kind of numbers we have seen at Palladium in Mumbai or DLF Emporio in New Delhi are phenomenal because they reach a much wider audience. The numbers are surprising the luxury companies themselves.”

Another factor that has driven awareness and consumption has been the influx of high-end fashion magazines in India. While Elle and L’Officiel have existed for over a decade, the launch of international fashion bible Vogue in 2007, followed by Harper’s Bazaar, has raised the fashion and lifestyle aspirations among middle-class India. Even Robb Report, the definitive American ultra luxury magazine for the uber wealthy, featuring cigars, cars, yachts and other toys for the rich and famous, has found its footing in India.

Jamal Shaikh, editorial director, Robb Report India, says: “I think luxury magazines have exposed what was traditionally considered obnoxious spending to a people that believed that being frugal was the only way to live. Where Robb Report is concerned, our responsibility is not just putting out luxury, but curating and developing taste.” 

The Visibility Factor

Bain’s report suggests that a unique Indian interplay of supply and demand factors has determined the current penetration levels and growth of certain categories within the overall luxury segment. Luxury cars, with their high brand visibility, mature market and developed distribution and advertising, is the fastest growing category. Apparel, accessories, perfumes and cosmetics — categories most popular in other parts of the world — remain at the lower end of the penetration spectrum.

The report attributes this disparity to “new money” — individuals who find it easier to “show off” with a branded car as opposed to bags and accessories. This is even truer of small towns. A psychological shift in the mindset of the Indian consumer, brought on by greater wealth, has also contributed to the increase of luxury retail. Bain expects that the upper middle-class Indian consumer will be more “status-driven” with a greater aspiration for “visible” luxury — where the brand is obvious.

LVMH’s Patel counters this assertion. “While it is true that cars do show easier than a watch or handbag, portability is the greatest reason for the differing CAGR among these segments. Both are status symbols, but it is easy for a consumer to purchase a handbag or a perfume when traveling abroad; nobody will buy a Mercedes S Class. This disparity is seen in other markets as well, be it Singapore, Malaysia or Dubai. Patel emphasizes that in India, supply creates demand and not the other way around. “India is an investing market. If you set up a particular store or brand, even one that is relatively unknown, if you choose the right location, stock it adequately and promote it sufficiently, there will always be demand. Indians are keen to acquire, are inquisitive as a race and are open to trying new things.”

The long breakeven period is perhaps one of the reasons the actual size and penetration of India’s luxury market remains small. The U.S. luxury market for personal luxury goods is estimated at US$75 billion as opposed to India’s US$1.5 billion. The more relevant comparison, to other BRIC nations, also suggests a considerable lag. Brazil’s personal luxury goods market is at US$4 billion with 130 stores while China has surged ahead at US$20 billion with 1,100 stores. (India has around 60 stores.) Unlike India, both countries also exhibit an awareness and appeal for luxury goods that goes beyond HNIs. The Indian way, albeit changing, largely follows a typical austere investment pattern — house first, then jewelry, followed by car and, last, other luxury products. That makes Indian branded jewelry the highest-selling luxury goods segment in the country.

The Luxury Gap

Bain’s report offers several explanations for this “Luxury Gap.” First, India has fewer HNIs than Brazil and China. Second, luxury companies have made limited retail distribution investments in India. After suffering heavy losses in the first round of investment in 2000, luxury vendors are reluctant to put in more money, as returns are higher in other emerging markets. High growth might be difficult to achieve given the limited supply-side investment early on. China, for instance, had 270 stores in 2003, when luxury companies had only first started investing in India.

Patel compares LVMH’s experience in China and India: “For LVMH, the first Vuitton store opened in China only in 1992, 13 years after China introduced progressive reforms. Between 1992 and 2000 our main retail business in China was through our perfume and cosmetics business in department stores. The acceleration has happened only in the past eight to 10 years largely because in that time China has gone from being a poor country to a middle-class economy with greater purchasing power. In India, growth has followed a similar pattern. India will see its own acceleration as well.”

Additionally, Bain’s report claims that in the six brands with the largest presence in India, there has been a marked slowdown in the number of stores opened. While 2010 saw 22 stores open doors, 2011-2013 is expected to have only eight. Even marketing investment in India remains low at less than 5% of sales as opposed to 15% of sales in other parts of the world. Patel offers his view: “The brands that have deep pockets are investing in India, but all luxury companies don’t have the means to do that. Through our wine & spirits, watch & jewelry and fashion & leather businesses, we have been investing in India for over 10 years.” But he concedes the return on investment is sometimes higher in other emerging economies, which is a deterrent to foreign investment.

Regulatory factors have also been a significant deterrent in spurring growth of the luxury sector. High import duties mean that goods are 30% to 40% costlier than home country prices. 100% FDI is still to play out in practice as limits on sourcing restrictions still cap investment. And, like all other industries, luxury suffers the typical hazards of doing business in India — mediocre infrastructure, challenges of operating with local partners, high rents and lack of talent. “But there will be improvement in each of these aspects with the onset of hybrid luxury malls that are currently under development,” says Patel.

Bain puts the growth potential at 20% to 30% in the short term. Patel and Ruia agree. “An inflexion point will take five to seven years,” says Patel. “But it will definitely come.”

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