The REAL potential of India’s luxury market (updated)

Imperial Hotel New Delhi, Vintage Rolls Royce

A study released today by Kotak Wealth and Crisil Research reveals that India has 62.000 ultra high net worth households, with an average net worth of 12 million euros. In five years, the number of such households would more than triple to 219.000, each household with a net woth of about 16 million euros.

A recent Merrill Lynch Capgemini Wealth management report estimated the number of individuals with a net of 700.000 euros at 126.700. The report sais the five-fold rise in the net worth and the increasing propensity to spend would have a long term impact on the luxury market in India. The potential market size of the Indian luxury jewellery segment is 3,6 billion euros, while the market for the luxury car segment in India is estimated at 2,4 billion euros.

The reports also indicate that the full realization of the potential would only be possible once luxury brands develop more retail locations and more customized products to respond to the specifics of the Indian luxury market.

But how can international luxury brands expand when there are no suitable luxury retail locations ? The existing hotel shopping galleries and malls fall short of providing a proper luxury customer experience and wealthy Indians do travel a lot internationally and are very well accustomed the Western style retail.

For instance, wealthy consumers would need to take a one day ”tour” of luxury shopping in New Delhi. Let’s asume they stay in the centre, in the diplomatic area. It would take them 40 minutes (off peak) to reach Emporio Mall where they would find Gucci, Fendi, Dior, Ferragamo etc, then, another 20 minutes to reach the Trindent Hotel Gallery where they can find Guess, Tod’s etc and from there 45 minutes to go back in the centre to the shopping gallery at the Oberoi where they would find Hermes, Chopard etc. and the final 20 minute drive would be to The Imperial Hotel, where the only CHANEL boutique is. Mention should be made that, for instance, Hermes can only be found at the Oberoi and Vuitton can only be found at the Emporio Mall.

Another ”challenge” facing local consumers, or better to say frustration, is the limited availability from the collections of each brand. For example, the Vuitton store does not have any apparel, and neither does Fendi, Ferragamo or Chanel. For most stores, especially those operated in franchising by a local partner, the selection of goods is rather limited. And do not forget the price difference.

Another important point that should be address is that, despite the wealth of these individuals, the buying power of the upper middle class (managers in multinational companies) remains lower than in any other major markets such as China or Brazil. That is why, not all brands should aim at openings tens of stores in India as they wouldn’t be profitable. And according to a study of CPP Luxury Industry Consultancy, more than 60% of the ultra rich make their purchases of luxury goods on shopping trips abroad, especially in Dubai, followed by London and Hong Kong. Hence, the price sensitivity of these consumers who find the same goods at 20% higher prices, in India (due to taxes) but in shopping centres which lack a proper customer experience.

The much hailed local legislation on DFI (direct foreign investment) which prevents foreign companies owning more than 51% of a local company  is blamed by many international luxury brands for the sluggish development of the market. Let’s say, the legislation would become more lax and a foreign company can own 100%. Shall we see overnight 10 Gucci stores or 15 Vuitton stores in New Delhi ? Most probably not ! And the answer lies in the fact that wealthy individuals are very much spread in medium size cities, which makes it a big logistical and investment challenge for luxury brands. It has to be highlighted that due to the development of the airline industry, there are now direct international flights from medium sized city, therefore, Indians do no longer have to pass by Delhi or Mumbai. They can then do their shopping abroad. And with a country the size of India, this can be, indeed, a major challenge? Would the solution be to open corners or shop in shops in luxury shopping galleries in these cities ? Definitely ! But which galleries ?!?

Regarding the huge potential of the jewellery segment of the Indian luxury market, I beg to difer with the reports above mentioned. Unless the major international luxury jewellery brands fail to produce Indian inspired or Indian themed products, the growth of the market would not be that significant. It is widely known and agreed that India has probably one of the most developed local jewellery market, being a large gold and diamond producer, with a huge industry and one with centuries of traditions and craftsmanship. That is why, assuming, Indian consumer would buy and wear a piece of jewellery just because it belongs to a major international brand, would not come as an automatic thought, especially considering the wealth of locally crafted jewellery of the highest standards.

The value of the luxury retail market is also quite low in comparison with for instance with China and Brazil. In 2010, the total turnover of mono-brand (stand alone) stores in India was between US$ 3 and 4 billion. And foreign direct investment inflows between April 2000 and January 2011 stood, in mono-brand retailing stood at US$ 128,3 million according to the Department of Industrial Policy.

Ironically, in a country famous for its natural essential oils and natural ingredients, India is lagging behind in the luxury cosmetics segment. The most luxurious ”natural” brands which are widely present are The Body Shop and L’Occitane and they have gained a luxury positioning by overpricing their products, let alone their products are far from being natural or even organic. None of the major international organic cosmetics brands is present on the market.

But the luxury industry isn’t only about cars, fashion and jewellery. The services industry, such as SPA is hugely underdevelopped in large metropolis cities such as New Delhi or Mumbai. Over 95% of all SPAs are those within hotels. The potential is to develop day SPAs for the high income middle class, especially middle and top management in multinational companies.

As for Mumbai, India’s business capital and the largest city in the world with over 22 million inhabitans is far behind the capital city of New Delhi in terms of development of the luxury retail market. Unlike New Delhi which has a shopping Mall dedicated to luxury brands (DLF Emporio), the majority of the international luxury brands present in Mumbai are situated within hotel shopping galleries, with the exception of Burberry, Emporio Armani, Etro and Hugo Boss which are situated within the Palladium Mall, otherwise medium level. One would find quite odd to see a rather small BURBERRY store facing a large ZARA one inside the ”premium” wing of the Mall. Most stores are split between the galleries at Taj Majal, Oberoi, Trident, Grand Hyatt. With the heightened security measure, customers have to go through the hassle of a security check, in the case of some hotels, such as the Taj Mahal, parking would be a real issue, as the entrance is made on a lateral improvised path. Much like in New Delhi, all stores seem more like museums, the galleries themselves being looking quite run down and tired. Gucci, Bottega Veneta, Jimmy Choo and Versace have the best representation in Mumbai, with stores within the Trident hotel, yet in a separate stand alone building at the main entrance of the hotel.

The worst represented stores in Mumbai are Etro, in a hidden shady corner of the Palladium Mall, right near the exit towards the mass market Phoenix stores and Brioni, which has a very small shop at the Oberoi, which not only looks outdated with, but also in customer service (bazar bargaining) and merchandising.

The only sector which is better represented in Mumbai than in New Delhi is the luxury watches. All the major international luxury watch brands are gathered in a stand alone building known as the Time Avenue. Customer Service is impeccable and the local dealers strive to have the latest products in their selections. There are two certified service centres which cater to all the watch brands. The only inconvenient, it we may call it this way, is that prices of luxury watches are 20% to 25% more expensive than in Europe, compared to 10%-15% higher prices for fashion and accessories. There are two major multibrand players, ”Collective” at the Palladium Mall, on two floors and a brand mix which includes Calvin Klein, Hackett, Polo Ralph Lauren, D&G etc and ”Thanks” which is situated in a stand alone building in the Worli area. ”Thanks” sells mainly older / outlet merchandise (unfortunately, at new collection prices) and the brand mix includes: D&G, Versace, Trussardi etc.

In August this year, French luxury maison HERMES is opening its flagship in Mumbai, in a bold move, having opted for a street location, in a stand alone building. This would be Hermes’ third store in India, the first two operating in New Delhi (within Oberoi Hotel) and Pune (within Ista business Hotel). The Hermes building is opposite the Asiate Museum in the Fort area and is surrounded by banks and some governmental offices. The fact that the building is on a corner it will benefit from great visibility especially for car traffic (there are hardly any pedestrians). The store is split on 4 floors, the top one being used as a gallery. The Hermes flagship will include all product lines except carpets. While I do understand the need for Hermes, which has been enjoying a very special connection with India, to open a proper flagship, with the aim of making a statement. However, the upcoming openings such as Louis Vuitton (already at Taj Mahal and Taj Lands End hotels) will be at Palladium. Other major international luxury brands such as Prada and Ralph Lauren are reportedly interested in the market and have even considered locations at the upcoming Shangri La Hotel, due to open mid 2012.

The only luxury sector in India which is set for a stellar development is the luxury cars. The fact that customers rely on after sale service locally and additional taxation if imported from another country, makes India the eldorado for luxury cars. The sector has actually seen a 100% growth in sales for certain Western luxury brands, especially German brands. Driving a local made Ambassador car is not only passee, but it does no longer fulfill the show off factor, which in India’s luxury market, is most evident when it comes to cars. Wealthy Indians love to splash out and buy flashy colours, SUV’s and many limited edition models. The wealth of information and marketing on luxury cars is immense, therefore making consumers really savvy about the latest model or the latest customization opportunities.

From a marketing point of view, international luxury brands should pay particular attention to the many local social and lifestyle events, especially for ladies, who do not have cricket, polo or other sports as a hobby. Generating events with Western culture such as theatre, opera, ballet or even more modern, where Indians would be inspired to wear international luxury branded products rather than traditional clothing, is a must ! …

Oliver Petcu