luxury in india - charming the snakes and scaling the ladders
TRANSCRIPT
Luxury in India: Charming the Snakes
and Scaling the Ladders
A CII – A.T. Kearney Report
Luxury in India: Charming the Snakes
and Scaling the Ladders
A CII – A.T. Kearney Report
October 2010
Confederation of Indian Industry
The Mantosh Sondhi Centre
23, Institutional Area
Lodi Road
New Delhi – 110003
India
Tel: + 91 11 24629994-7
Fax: + 91 11 24626149
Contact:
Amita Sarkar, Senior Director ([email protected])
Jaya Gupta, Deputy Director ([email protected])
A.T. Kearney Limited
1st Floor, Future Capital House
Peninsula Corporate Park
Ganpatrao Kadam Marg
Lower Parel (W)
Mumbai 400 013.
India
Tel:+91-22 - 4097 0700
Fax:+91-22 - 4097 0725
Contact:
Neelesh Hundekari, Principal ([email protected]);
Hemant Kalbag, Vice-President ([email protected]);
Pameela Pattabiraman, Manager ([email protected])
Subhendu Roy, Manager ([email protected])
This report has been jointly produced by Confederation of Indian Industry and A.T.
Kearney Limited, the contents of which are meant only for information purpose of the
reader. Readers are advised to conduct their own investigation and analysis of any infor-
mation contained in this report, and not rely on the information contained in this report
for any purpose. Neither Confederation of Indian Industry, nor A.T. Kearney make any
representation regarding the accuracy or completeness of such information and express-
ly disclaim any or all liabilities based on such information or any omission thereof.
No part of this report may be reproduced or distributed without the prior written con-
sent of Confederation of Indian Industry and A.T. Kearney Limited.
Copyright: CONFEDERATION OF INDIAN INDUSTRY. 2010, and
A.T. KEARNEY, INC. 2010
iv
The Luxury industry in India is no longer a new comer. Like many other industries in India, it is of great interest to both
international and Indian players. International brands see India as an emerging luxury market which could become a sig-
nificant part of their portfolio tomorrow. Indian companies also see the growth at the top end of the market as an oppor-
tunity to introduce premium offerings. This enthusiasm was reflected in the first moves of several iconic international
brands in the last 5-7 years. Indian companies have also seen the opportunity and a handful of players are now very active
in the space. Apart from luxury products such as watches, apparel, accessories, large Indian five star hotel chains, fine din-
ing and spas, apart from luxurious houses, the latest luxury cars and yachts have expanded the definition of luxury.
The Confederation of Indian Industry (CII) and A. T. Kearney have been active players in the luxury space. CII through its
National Committee on Retail has played an active role in trying to create an industry forum for players in the luxury indus-
try. CII brought the industry together to help organize the industry and create a forum for dealing with issues of common
interest. A. T. Kearney, apart from serving clients in the luxury industry has also contributed to providing a robust fact base
and perspectives on realizing the potential of the industry through their first study in 2007 (The Economic Times - A. T.
Kearney India Luxury Review 2007).
Just when the industry was showing signs of coming of age in 2007, from the third quarter of 2008, the global recession
dampened the hopes of the industry. The industry suffered internationally, and that acted as a brake on the emotional eupho-
ria for a good 9-12months in India as well. Several players used that time to consolidate their position, right size their busi-
ness, restructure real estate deals and become fitter. A few others suffered. Now with positive signs in the Indian economy,
optimism about the industry is on the rise, as demonstrated by heightened market activity and consumer spending. However,
key issues such as a relatively new market, duties, access to quality real estate etc continue to pose a challenge to exponential
profitable growth. A few key questions keep bothering CEOs in the sector:
How to make the luxury business a successful proposition in India?
How big is the market really? When will the market be fully ripe?
What operating models work and do they need to be customized for India?
Given this backdrop, CII and A. T. Kearney decided to team up and take stock of the industry and address key questions that
current players, potential entrants and other stakeholders have about the industry. Our desire was to study and understand the
major changes in the industry in the last 3-4 years and the implications of these for the future of the industry..
With this end in mind, over the last three months, we conducted an exhaustive and comprehensive research of the industry.
The A.T. Kearney team collated and analysed large amounts of data, interviewed several industry leaders and luxury con-
sumers to develop all round insights on the industry.
The report establishes the growth trajectory for the industry over the last three years, takes stock of the opportunities and the
potential as well as the continuing challenges that it faces and estimates the likely potential over the next 5 years and recom-
mends actions for industry players to undertake. We believe that this report will serve as an important step in the industry’s
FOREWORD
v
journey of growth. It clearly confirms that the hope in the potential of the Indian luxury industry is not misplaced, that there
is still a huge latent demand in the market and that India will be an important market and player on the global luxury plat-
form. While the hope in the potential remains undaunted even after the recession, infrastructural and regulatory issues con-
tinue to impede the development. Like in all other sectors, though we are confident that the Indian industry will discover a
uniquely Indian way of converting them into opportunities.
We are grateful to all the industry leaders and consumers who spent time with us in sharing their perspectives and validating
our hypotheses.
We hope this study will act as a milestone in the evolution of the Indian luxury industry and will take the collective under-
standing of the industry a few steps forward.
Confederation of Indian Industry A. T. Kearney
vi
Over the last two decades, post liberalization in the 90s, the
new maharajahs of business have created some serious
wealth in India. This new found prosperity has attracted lux-
ury brands that were looking for new engines for growth to
make up for slow growth in their traditional markets.
While most industries are now coasting along smoothly, the
small and emerging luxury industry players have not stopped
reflecting on the past to ask some fundamental questions
about the market. This report attempts to answer these ques-
tions through a wide and deep coverage of all segments of
the luxury market in India. To get the most credible answers,
we adopted a robust methodology with a large element of
primary interviews and extensive data collection. We collated
data from a variety of sources to size the market and under-
stand the growth rates over the last few years.
Indian Luxury Consumer
While Indian consumers talk about exclusivity, uniqueness
and appeal to personal taste, the majority of the market is
still far away from this and brand/logo/badge value drive
luxury purchases very clearly. That said, traditional attributes
such as high quality, heritage, longevity, the “stories” associ-
ated with brands are beginning to emerge as drivers of pur-
chase. The mindset is still that of an “aspirer” not that of a
“connoisseur”.
The Indian luxury consumer is young - 30-45 years old.
While the average Indian luxury customer values High
Quality, Exclusivity and Social Appeal as key drivers of luxu-
ry purchase, they are also very Price Conscious and often
straddled with a “middle-class mindset”. The segments are
composed primarily of:
Medium size enterprise owners: This is the largest seg-
ment in terms of number - these are typically the medium
enterprise owners - industrialists and traders who run busi-
nesses with revenues upwards of 50 cr. Their wealth is their
passport to the elite segment of the society and conspicuous
consumption is their way of announcing it to the society. The
children are the bigger spenders, having been educated
abroad and hence familiar with brands and the luxury way of
living.
Traditionally wealthy families/large industrialists: This
group comprises two sub-segments - the first is the tradition-
ally wealthy families - who have been consuming luxury for
several decades and go for the finer things in life. The other
sub segment comprises the promoters of some very large
businesses which have come up in the last two decades and
have created a disproportionate amount of wealth very
quickly.
Corporate executives: Senior executives of corporate India
who are paid in excess of INR 1 crore (USD 225,000) and
bankers who earn big bonuses epitomize this category. These
executives are well traveled and are aware of brands. Most of
this segment consists of people who are in their mid-late for-
ties and represent some of the brightest minds in the coun-
try. Many of them though have come from middle class
backgrounds and hence have a conservative approach on
conspicuous spending.
Other segments include self employed professionals, young
professionals, expatriates, politicians and bureaucrats.
A correlation between the size of the luxury market, the
GDP/capita, number of HNIs and HNI wealth over the
years 2004-2009 shows that in terms of importance the num-
ber of high net worth individuals is the most important driv-
er. Interviews with leading luxury brands in India point to the
fact that family wealth is a stronger determinant of spending
than household income. The masstige phenomenon can also
be observed very clearly in India. Luxury products in India are
appealing to, and purchased by, middle-class consumers that
do not fit the typical profile of an elite consumer segment.
vii
EXECUTIVE SUMMARY
The distribution of the rupee millionaires is a good indicator
of the luxury consumer distribution in the country. While
Delhi and Mumbai continue to be the mainstay markets for
luxury consumption, there are several other cities with a large
base of potential luxury consumers. We believe in the next 5-
7 years, at least 5-7 new towns will get added on the luxury
map of India. We also believe that the potential in Delhi and
Mumbai has not been fully exploited and that there exists a
few more micro markets within these cities that need to be
tapped.
Luxury Market 2007-2009
Our endeavor in this study has been to provide robust data
on the size and growth of the Indian luxury market for stake-
holders to consider, debate and if it makes sense to base their
decisions upon. For sizing the market, Product, Price and
(where possible brand also) filters are applied to isolate the
luxury from the non-luxury in all segments. We err on the
side of conservatism i.e. only pure luxury is included.
Based on a category wise build-up, the size of the Indian lux-
ury industry in 2009 is estimated at USD 4.76 billion (at retail
prices). This includes all luxury products, luxury services and
luxury assets sold in India. The total luxury market has
grown at a CAGR of 13% between 2007-09, with luxury
products growing at 22%, services degrowing at 5% and
assets growing at 18%.
The most visible segment of the luxury industry is the luxu-
ry products segment. This includes the most visible fashion
luxury segments such as apparel, accessories, personal care,
watches and jewellery as well wines, spirits and high-end elec-
tronics. This market has been estimated to be USD 1.5 bil-
lion in 2009. Most luxury product categories have witnessed
over 15% growth over the past 2 years - performance of cat-
egories like Electronics, Wines and Spirits, Apparel and
Jewellery has been exceptionally strong.
The Indian luxury services market was severely hit by the
recession over the past 2 years. Nonetheless, the India
Luxury Services industry is considered to be one of the best
in the world. Consumer interviews revealed that consumers
prefer Indian hotel chains like the Taj, Oberoi or ITC even
when International chains like the Hyatt, Hilton or Four
Seasons have entered the country.
The current Indian luxury assets market is estimated at USD
2.45 billion. The growth of the Luxury Assets market is driv-
en mainly by the phenomenal growth of the Real Estate and
Automobile sectors.
Latent Demand and Future Potential
The Indian luxury market is still very small compared to
global standards. While India has one of the highest GDPs
in the world, its luxury consumption, in absolute terms, is still
very small. We believe that there exists a large latent demand
in India, constrained by both demand side and supply side
factors.
On the demand side, there are several potential consumers in
India who either do not buy luxury at all or do not buy
enough of it from the local market. As we had mentioned,
Rupee millionaires with incomes between INR 10-30 lakhs
do not really spend on luxury. On the other side, supply of
most luxury products in India is present is mostly present
Mumbai, Delhi or Bangalore. However, wealth creation in
the country is now no longer limited to these cities. It is tak-
ing place at a rapid rate in Tier I and Tier II cities like
Ahmedabad, Pune and Hyderabad.
The current market size for luxury products in the country is
around USD 1.5 billion. A regression based on India’s GDP
per capita and Number of HNIs, indicates that the size of
the Indian luxury products market should have been around
USD 3-3.5 billion. This implies that there is a latent demand
of almost USD 1.5-2 billion. As percentage of the current
market size, India’s latent demand is estimated at 120-150%
while for China it is estimated at only 10-15%.
We have estimated the expected growth in the luxury goods
market using a number of methods. Regression of the mar-
viii
Luxury market in India
Source: A.T. Kearney research and analysis
ket size for luxury products against the number of HNIs
results in a growth estimate of 18%. Based on numerous
interviews with luxury company CEOs, executives and
industry experts as well as secondary research, a bottom-up
build up of category wise growth rates leads to an average of
21%. Given this and considering the huge latent demand, we
believe that India’s overall Luxury Market will grow 21% to
become almost 3 times its current size by 2015.
Luxury Industry Challenges
Fundamentally there are four key challenges that any luxury
player faces in India.
1. Difficulty in reaching the target consumer: The scat-
tered nature of the target population and absence of
critical mass in India is a big concern for the industry.
While luxury magazines have increased in maturity and
volumes, they still reach only a small fraction of the
existing consumers and a much smaller fraction of new
consumers. Cost of reach is high, results uncertain and
word of mouth continues to be best method to create a
“buzz”.
2. Consumer reservations about luxury purchases:
India is faced with a low luxury penetration, with most
of the rupee millionaires with income between INR 10-
30 lakh segment having the capacity but not the propen-
sity to spend on luxury goods and services.
Furthermore, there are reservations against buying less-
er known brands as well as shopping in India.
3. Infrastructure and regulatory constraints:
Companies have to struggle with lack of credible real
estate options, underdeveloped back end infrastructure
like warehouses and logistics as well as regulatory restric-
tions on FDI and high import duties.
4. Lack of talent: Absence of skilled manpower has hin-
dered luxury players from being able to provide the
same customer service experience as that in internation-
al locations.
However, there are several ideas that could be used to
address these challenges.
To convert potential customers, who have the financial
wherewithal, to luxury consumers, players should look at
micro-segmentation of the population to identify specific
“high potential” professions. Once identified, focused com-
munication would be needed to reach out to them and con-
vince them of the offering. Players also need to look at effec-
tive media vehicles to reach their target consumers.
Consumer perceptions and reservations about shopping for
luxury goods in India can be addressed by breaking the myth,
getting high recall brands and bringing in “ladder brands”.
To address the infrastructure and regulatory challenges, play-
ers can use smaller retail formats to increase store densities
far above the global benchmarks in order to drive higher
sales productivity. A multi-brand environment would also
help players attract a critical mass of consumers and also
lower the burden on each brand in terms of operating costs.
Other options include mini high streets, collaborative efforts
with competition for both retail and supply chain and airport
retailing. Indian companies can capitalize on the regulatory
ix
Country comparison based on GDP and # of
HNIs
Source: Altagamma, A.T. Kearney research and analysis, Merrill Lynch Capgemini
world wealth reports
Projected growth of luxury market in India
Source: A.T. Kearney research and analysis
restrictions imposed by the Indian government to enhance
their presence in the market.
The resource crunch needs to be addressed through the cre-
ation of a parallel education ecosystem - similar to what has
happened in the IT, ITES, airlines and fashion industry.
Critical Success Factors
There is no instant formula for success in the Indian luxury
market. Everything about our country is different - the con-
sumer, the challenges and also opportunities for luxury
players. The Indian consumer is in a state of flux - evolving
rapidly, but perhaps along a path that is inherently different
from that taken by other developing economies. Several
luxury players have managed to seize opportunities in the
market early.
We believe that the critical factors for success in this market
include exploring formats that enable players to attract foot-
falls; getting the pricing right to encourage Indians to pur-
chase locally; providing a world class experience e.g. ambi-
ence and service; bringing in iconic brands as Indians still
buy luxury products for brand value and not to make a fash-
ion statement; getting the cost structure right by ensuring the
cost base is justified by the sales realized; getting access to
local expertise to get the best real estate deals; experimenting
with new formats such as a luxury discounter (liquidation
channel) that can help open the market by getting consumers
exposed to last year’s collections at attractive prices and help
them move up the ladder. While we believe there is a clear
opportunity to make an impact in this market, a systematic,
smart and careful approach is what will differentiate the win-
ners from the losers in the long run.
x
Foreword v
Executive Summary vii
Chapter 1. Luxury market – need for a fresh look 1
Chapter 2: Indian luxury consumer – rapidly maturing and looking for more 5
Chapter 3: Luxury market 2007-2009 – products leading the way 15
Chapter 4: Latent demand and future potential – only the tip of the iceberg so far 27
Chapter 5: Luxury industry challenges – obstacles or opportunities in disguise? 33
Chapter 6: Conclusion – luxury market gearing up, but a few bumps still ahead 41
Appendix 45
References 51
TABLE OF CONTENTS