The Hindu Business Line : Luxury, interrupted

There is a huge appetite for luxury products in India but high duties, FDI rules and lack of quality retail space are holding back premium brands from entering and expanding their businesses.

Luxury retail: Waiting to boom

Bindu D. Menon

Luxury is the new necessity and the unabashed display of wealth is no longer considered dirty. The mantra is: If you have it, flaunt it. Aspirational shoppers are giving a fillip to luxury retailing in India. And if statistics are anything to go by,India will soon emerge as the biggest consumer for luxury goods globally. Not surprising that over 200 international luxury brands are making a beeline for the sub-continent. The 2007 Asia Pacific Wealth Report, released by Merrill Lynch and CapGemini, says India has recorded the world’s second fastest growth in the number of high net-worth individuals (HNIs) at 20.5 per cent, making it a lucrative luxury market. The likes of Armani, Versace, Cartier, Marks & Spencer, Salvatore Ferragamo, Canali, Mont Blanc, Lladro and Tommy Hilfiger have made inroads into India.

“There is immense appetite for luxury brands in India. The market is exploding. We are currently in the second phase of expansion and will have 23 points of sale by the end of this fiscal,” Shailesh Chaturvedi, CEO, Tommy Hilfiger, said. And what space are the luxury retailers entering? It is a whole gamut of segments like footwear, apparel, eyewear, watches, jewellery, phones, perfumes, yachts and even jets. Says Mark Lee, CEO, Gucci, “India will emerge as one of our key markets. However, today it is still in a state of fantasy.” Currently, Gucci has two stores here and plans two more this year. However, he added that infrastructure remains a constraint. Unlike China, where Gucci opens one store every six weeks, the company is far more cautious here.

Commerce and Industry Minister Kamal Nath recently observed that “luxury is not a product but an emotion and it has both aspirers and admirers. India will engage the world.” In the last three months alone, over $400 million investment has been made in India. “This shows that the world is bullish about India and its consumers,” he said. Currently, 100 per cent foreign direct investment is allowed in wholesale trade, but only 51 per cent in single brand outlets. So while DLF has entered into a joint venture with Armani, Marks & Spencer has inked an agreement with Reliance. The others who are in the pipeline include Cartier.

With the joint venture proposing wholesale trading, Armani could introduce a range of products and not restrict itself to a select few. This apart, in all likelihood, Armani could also be permitted to buy goods from its parent company and then distribute to retail shops and multi-brand outlets, a retail analyst said.

The luxury retail market, which is currently in a nascent stage, is estimated at Rs 2,000 crore and expected to grow at 20-30 per cent in the next five years. But the biggest challenge for the luxury goods makers is the paucity of quality space. “On an average, the space requirement for luxury brands is higher (2,000-3,000 sq. ft.) and only a handful of places fit the bill,” said Rajneesh Mahajan, Director (Retail), Cushman & Wakefield India. Mahajan pointed out that most luxury brands are currently housed within five-star hotels. “With leading developers planning a slew of hotel ventures, the demand-supply situation may ease,” he said.

A CB Richard Ellis report pegs India at 44th position in the list of places for international retailers looking to expand, while China is way ahead at nine. Industry observers point out that there would always remain a huge differential in rental for luxury spaces compared to regular retail space, as superior finishes come at higher price tag.

Leonardo Ferragamo, Chairman, Altagamma, the association of Italian luxury goods manufacturers, said, “Partnering with real estate companies and acting as their anchor tenants will solve some of the problems.” Luxury retail mall Emporio by DLF in New Delhi is slated to be launched in the middle of this year. “We are clinching good rentals. This will be the first-of-its-kind luxury mall and will have leading global brands,” a DLF spokesperson said. Italian luxury menswear and accessories brand Canali is mulling the possibility of sourcing high-quality fabric from India even as it is planning to launch eight mono-brand stores by 2010. “The panorama of luxury in India is changing and we want to be a part of it. Luxury is also about providing the right ambience. If we don’t get the right atmosphere, we may slow down our expansions,” Paolo Canali, Sales and Marketing Director, Canali, said.

Mark Ashman, CEO of Marks & Spencer Reliance India Pvt Ltd said: “There is already a strong demand for great-quality, good-value Marks & Spencer products in India. Partnering with Reliance Retail will enable us to accelerate our growth in this dynamic economy. We intend to open bigger stores, selling a wider range of products at lower prices, including a growing number of products sourced from local suppliers.”

But what attracts retail brands to India? Says Vittorio Missoni, Chairman of Missoni and Vice-Chairman of Camera Nazionale della Moda Italiana, an association of luxury brand manufacturers, “There is potential in India because of its craftsmanship and art. The colours and styles of India are a perfect international fit”. On the needs of the luxury industry, several major retailers BrandLine spoke to noted that India was not a fair market, as it is over-regulated. China has 20 per cent capital duty, while the Indian duty structure on luxury goods is between 45 and 65 per cent. “Taxes should be imposed on profits only and the rest left to market economics,” retailers note. With the top luxury brands enjoying operating margins of 60-70 per cent, it’s not hard to see why many marketers view counterfeit products as the biggest threat to the luxury brands.

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