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September 27, 2014
Alys
Francis, Nikkei Asian Review
New
Delhi, 27 September 2014
A few months ago, a group of wealthy industrialists and other
businessmen gathered in a plush Mumbai hotel suite to pore over
a selection of John Lobb handmade welted shoes that cost up to
$12,000 a pair.
It may just be a temporary “pop-up” store, but Thomas Collette, John Lobb’s commercial director for India, was excited. He said that a local agent for the bespoke shoemaker would start taking orders by appointment only. “This is a big step for us and a big step as well for the country,” he said.
Although international luxury brands have opened flagship stores all over developing Asia, they have hardly touched the Indian market. This may be about to change.
After all, many people in the population of 1.3 billion are steadily getting wealthier. According to the Associated Chambers of Commerce and Industry of India, luxury spending will reach $14 billion a year by 2016 compared with $8.5 billion in 2013.
But foreign luxury brands have had a tough time in the country, partly due to restrictions on investment.
Many major brands, such as Prada and Versace, only entered after 2006 when the government began to allow foreign investors in single-brand retail operations. Prior to that, foreign companies were only allowed to operate wholesale “cash-and-carry” outlets.
While companies welcomed the chance to open in India — albeit
with the requirement that a local partner owned at least 49% of
the business — they struggled with the lack of suitable retail
space and trained staff, bad supply chains, and a raft of customs
taxes and duties, as well as a long wait to turn a profit because
there was only a nascent market for their goods.
Since 2006, Prada and Gucci have been among the 50-odd brands that have either left India, restructured or quit soured partnerships, according to a 2012 report by retail consultant Third Eyesight.
In 2012, India started allowing full foreign ownership of single-brand retailers but included restrictions such as the need to source at least 30% of products from local small and midsize enterprises. That is virtually impossible for most luxury labels since their brand integrity often rests on the craftsmanship of products made in their home country. Unsurprisingly, the new rules did not trigger an influx of foreign brands.
Jones Lang LaSalle, the real estate company, in August ranked New Delhi and Mumbai near the bottom of its list of 30 major Asia-Pacific cities in terms of the presence of top luxury brands.
Indians optimistic
Some foreign brands, like John Lobb, have decided that franchise and distribution deals are a better way to establish their presence in a difficult market.
John Lobb’s local partner is Regalia Luxury, which spent a year wooing the Hermes-owned brand before securing a deal to sell John Lobb’s “By Request” line of shoes that are custom-made for each client.
Regalia Luxury is one of a number of Indian companies eyeing the rising number of style-conscious local shoppers who are hungry for Western luxury brands but are wary of entering the market on their own.
“From a longer-term perspective, there’s immense opportunity if you do it the right way,” said Regalia Luxury founder Pratik Dalmia, who clinched a franchise for bespoke Italian suitmaker Kiton in 2013 and expects to sign up two more brands by year-end.
But he admits that the market boom has yet to start and that operators will have to “run a tight ship” for the next couple of years.
Indian companies that represent foreign luxury brands need to have a long-term view and keep a close eye on what the younger generation likes — these are the customers with the most potential, since they are more exposed to overseas fashion trends.
“India is all about the customer of tomorrow,” said Darshan Mehta, CEO of Reliance Brands, a subsidiary of Reliance Industries that was set up in 2007 to bring foreign luxury fashion to India.
Mehta often sits in a cafe at DLF Emporio, New Delhi’s first luxury mall which opened in 2008, and watches shoppers. He said many people shop at Zara but they walk into Gucci and Zegna just to have a look. “That is what makes markets like India so promising: the aspirational consumer,” he said.
Unlike China, where a lot of luxury retailers are now at a consolidation stage after years of rapid expansion, brands are still struggling to find space in India for their first shops.
Even in Mumbai, the Emporio is the “only true luxury mall,” according to Mehta.
It may take some time before India’s luxury market takes off, but the market has been boosted by a stream of well-off Indian professionals and students returning after working and studying abroad, including many bankers who left Wall Street and London after the global financial crisis.
Luxury players are also expecting a boost from the introduction of a Goods and Services Tax, which was promised by India’s new government and would get rid of complex multi-level taxes that are hampering the sector.
Reliance Brands, which also represents Reiss and BCBG Max Azria, expects to add three more brands to the company’s stable of 16 foreign brands by year-end.
A few pioneers are even setting up boutiques in smaller cities. Bangalore firm Fervour, which has licenses to sell Nina Ricci and Christian Lacroix, is planning to expand to Chennai and Hyderabad.
But most don’t see these cities as viable markets just yet.
“There is no sustained luxury market outside of Bombay and Delhi,” Mehta said. He expects luxury demand outside the two main cities to take another three years to reach critical mass.
Sanjay Kapoor, the founder of distributor Genesis Luxury, said India’s luxury market is not yet at the point where China was 10 years ago, even if the potential for growth is immense.
Kapoor founded Genesis Luxury in 2008 to sell foreign luxury brands in India and has deals with Jimmy Choo and Armani, among others.
“As awareness and retail space spread, demand will accelerate in smaller cities in the interior of India,” Kapoor predicted.
Tight ships
Amid the shortage of high-quality retail space, one option is to use the “shop in shop” model.
R&B International rents small spaces in other retailers’ stores to sell Australian luxury label Easton Pearson. The manufacturing firm supplied embroidery to the brand for years before nabbing a distribution agreement in India in June.
Dalmia also said he is in no hurry to open flagship stores for John Lobb and Kiton before 2016.
Instead he is targeting ultra-rich customers who want the pampering that comes with exclusive, by-appointment-only services. Clients are shown samples of Kiton’s made-to-measure suits and John Lobb shoes, and then measured by a trained team at a place and time that suits them, often at home in the late evening.
Collette said he’s been pleasantly surprised by how well the brand has been received in India. While the brand has wholly-owned stores in Japan and the U.S., Collette said it would have been impossible for it to enter India alone.
(Published in Nikkei Asian Review.)
Tarang Gautam Saxena
February 14, 2014
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.
Devangshu Dutta
October 12, 2013
Much has been written about the various relationship break-downs that have happened in the Indian retail sector in recent years. The biggest, most recent high profile ones are between Bharti and Wal-Mart and the three-way conflict playing out at McDonald’s. Other visible ones include Aigner, Armani, Jimmy Choo, and Etam, while Woolworth’s faded away more quietly because, rather than being present as a retail brand, it was mainly involved in back-end operations with the Tata Group.
I think it’s important to frame the larger context for these relationship upsets. Most international companies, non-Indian observers as well as many Indian professionals are quick to blame the investment regulations as being too restrictive, and being the main reason for non-viability of participation of international brands in the Indian consumer sector.
However, India with its retail FDI regulations is not the only environment where companies form partnerships, nor is it the only one where partnerships break up. Regulations are only one part of the story, although they may play a very large role in specific instances. In most cases, FDI regulations are like the mother-in-law in a fraying marriage: a quick, convenient scapegoat on which to pin blame.
Many of the reasons for breaking up of partnerships can be found in the reasons for which they were set up the first place. The main thing to keep in mind is that the break-down is inevitably due to the changes that have happened between the conception of the partnership to the time of the split. The changes can fall into the following categories, and in most cases the reasons behind the break are a combination of these:
According to Third Eyesight’s estimates, more than 300 international brands are currently operating in the Indian retail sector across product categories, if we just count those that have branded stores, shop-in-shop or a distinct brand presence in some form, not the ones that merely have availability through agents or distributors.
Of these, about 20 per cent operate alone, while other others work with Indian partners, either in a joint-venture or through a licensing or franchise arrangement. The relationships that have broken up in the last decade are only about 5 per cent of the total brands that have come in, and in many cases the international brand has stayed in the market by finding a new partner.
So there’s life after death, after all. And my advice to those who’re feeling particularly defensive or pessimistic because of a few corporate break-ups: take time for a song break. Fleetwood Mac (“Don’t Stop”, “Go your own way”) or Bob Dylan (“Don’t Think Twice, It’s All Right”) are good choices!
Devangshu Dutta
August 19, 2013
If you’re planning to develop a mall, here’s a short-list of key issues you must address:
Fail-proof the business plan by focussing on the customer: Focus on the development of retail brands and not solely on quick returns on investment. The primary responsibility should be that of catering to the consumer catchment and driving footfalls for the retail occupants. The other requirements follow from this simple premise. Also, a tenant-unfriendly revenue model that overloads the tenant with a high rent (whether fixed or as a percentage of sales) leads to a churn in tenants, and in combination with other factors, keeps the best tenants out of the mall making it unattractive to customer as well.
Do a thorough recce of the catchment: Ask questions like “can the catchment support the development in terms of consumer footfall and spending?”, “Is there a connect between the needs of the immediate catchment and the occupants of the mall?”, “Are there too many malls in the catchment area?”
Offer a good occupant mix: You cannot have mall occupants who have little relevance for the target consumer. Also, the retailers must complement each other in a healthy way rather than cannibalise customers and sales from each other.
Ensure good access: Accessibility and connectivity to get the traffic smoothly in and out of the mall is a must; ensure there is adequate parking space.
Avoid undersizing: A small-sized is a straight handicap because it will lack variety, and you run the risk of getting dwarfed by the next big mall that throws its hat into the ring. [However, the specific size can vary depending on the state of development of your own catchment.]
Focus on design: This involves making the mall brands ‘visible’, ensuring appropriate ‘zoning’ in terms of entertainment, multiplexes, kids’ areas, food courts etc. This will result in better customer flow management. Bad design and poor customer flow management within the mall leaves large parts of mall “invisible” to visiting consumers, or improper zoning that confuses customers and breaks up the traffic.
Finally, remember, it’s not so much about the “square feet”, as about the feet that will occupy it! Focus on the consumers that you want visiting the mall and why they should return again and again.
Devangshu Dutta
February 24, 2013
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.”
