Friday, September 19, 2008

Retailing of Luxury Goods

(Article written for RetailBiz)
Let’s start off with a story, a flash back, in the far end of the 19th century India’s Maharajas discovered a Parisian designer called Louis Vuitton and flooded his small factory with orders for custom made Rolls Royce interiors and leather picnic hampers however post independence when India’s princes lost most of their wealth, the orders dried up. Coming back to recent times, almost 100 years later, Geeta, an IT executive, spends a large amount of her high seven figure annual salary on a range of Louis Vuitton hand bags and Channel cosmetics.
What we are referring over here is that the concept of Luxury is nothing new to the mindset of the Indian consumer. Geeta’s spending on luxury products is not just a one off case. More and more of today’s new generation love shopping and do not mind spending big bucks on luxury items. These are consumers who are not affluent in the traditional sense of originating from wealthy families as the Maharaja’s of yore, but are successful in their chosen profession and bearing the fruits of their hard work have a large disposable income in their hands.
This has led to the evolution of a new generation of luxury consumers, who we would term as the “because I’m worth it generation”. Hence people like Geeta are no longer at a financial distance from luxury and are trading up to meet their current aspirations.
In this article, we would try to explore the current status of the luxury goods market, the key drivers for growth and some of the challenges and the future outlook for retailing of luxury goods.

Luxury Brand
Indians associate luxury with perceptions of not just ‘quality’ and ‘performance’ but with ‘comfort’, ‘beauty’, ‘pleasure’ and ‘style’. Luxury goods in fact evoke strong emotional reactions like feeling ‘I am perfect’ or ‘I am walking on air’.
Today in India, luxury is no longer just about buying western-influenced values and lifestyles. It therefore becomes imperative that the luxury retailers should understand the relevance of the brand not only in global but in local context as well. These brands should construct an identity that amalgamates western influences with local insight.
When compared to an retailing in general, luxury goods' marketing is a different ball game as the type of customers involved fall in a different class altogether. These customers are influenced more by glamour and style and want to stand out in a crowd. They do not bat eyelid when they buy a Vuitton bag costing Rs 50,000 or a Mont Blanc diamond-encrusted pen for Rs 50 lakh, Ermenegildo Zegna's top-of the-line, custom-tailored suit costing Rs 6 lakh or a mid-range Louis Vuitton briefcase priced Rs 1.27 lakh.
As these figures suggest, luxury brands are prestige products characterized by high-involvement decision-making that is strongly related to the person's self-concept. Sensory gratification and social approval are the primary factors in selecting a prestige product. Cutting prices or giving discounts can be detrimental in case of luxury brands. A higher price implies a higher level of quality and also suggests a certain degree of prestige. Similarly, distribution should be restricted. Status-sensitive consumers may reject a particular product if the feeling of exclusivity goes away.

India – the next hub for luxury goods
Turning its back on Nehruvian socialism and Gandhian asceticism India has become a luxury destination ever since Louis Vuitton Moet Hennessey (LVMH), among the biggest luxury players in the global market started the trend in 2002 with the entry of their watches and jewellery line.
A Technopak study puts China's top end luxury market contributing to an estimated 12% of global sales. The report also predicts that China will also account for 30% of luxury goods sold globally by 2014. India, on the other hand, accounts for less than 2% of total market spends on luxury products. Experts however believe that the country has a huge potential in coming years as it develops and stabilizes its retail market further.
With the total number of consumers for luxury goods in India exceeding the adult population of several countries, the Indian luxury retail market is estimated to leap-frog from around US$ 3.5 billion currently to US$ 30 billion by 2015, according to a survey done by AT Kearney. India's luxury market, estimated to be the 12th largest in the world, has been growing at the rate of 25 per cent per annum. Already Indians splurge US$ 2.9 billion on luxury assets, spend another US$ 953 million on luxury services and top it by buying luxury goods worth US$ 377 million. Consequently, a number of foreign brands including French Connection, Sanrio of Hello Kitty fame, Jimmy Choo, La Pearla and Calvin Klein among others are looking forward or have already infused foreign direct investment through the single-brand retail window.
India with the fastest growing high net worth individuals (HNWI) in the Asia-Pacific region, is being perceived now as the next hub of luxury goods consumption. India led the world in HNWI population growth at 22.7 percent, driven by market capitalization growth of 118 percent and real GDP growth of 7.9 percent. Although India’s real GDP growth decelerated from 9.4 percent in 2006, current levels are considered more stable and sustainable.
It is however the emergence of ‘mass affluence’ combined with aspirational mindsets and lifestyles that are helping stimulate consumer demand. The rapid growth of the Indian middle class means that a larger number of consumers are able to afford luxury goods than ever before. McKinsey forecasts that the Indian middle class will increase from approximately 5% to 41% of the population and hence might propel India to become the world’s fifth largest consumer market by 2025.
According to technopak study, in India there are 420 million people under the age of 25, 22 million people who join the ranks of the middle classes every year and 67 million who have an average annual income of $25,000. These young shoppers, who aspire to acquire a lifestyle that is international and the best that the market offers is what is going to take this segment to the next level of growth.
The Changing Consumer DynamicsGovernment has recognized the fact that India’s traditional heritage and inherent strength in craft, design and creativity, especially in textiles and gems industry could be leveraged to corporatize and organize an indigenous lifestyle industry. The government therefore has shown full support to luxury and fashion goods industry to share and integrate the skills of Indian artisans and craftsmen with international expertise to make India a global hub for manufacturing luxury goods.
It is expected that the government will slowly move on to allow 100% FDI in single brand retailing from 51% now. We may also expect government to allow FDI even in multi brand retailing in the future. However, the foreign players should have the respect for corporate social responsibility and government norms to develop a long term and mutually beneficial relationship with the government.

As luxury labels descend on India to seize the potential, and the rich Indian responds with wide eyes, the big question mark that dangles is counterfeits. Counterfeiting can severely undermine the brand value of luxury goods, for which everything is in a name.
High import duties(35%) and restrictive FDI rules are some of the other factors that is holding back premium brands from entering and expanding their businesses.
But the biggest challenge for the luxury goods makers is the paucity of quality space. Most luxury brands are currently housed within five-star hotels which is making them comparatively inaccessible. 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. Partnering with real estate companies and acting as their anchor tenants might solve some of the problem.

Managing luxury brands is as much an art as a science. The challenge is to create a demand for something which is non essential. After all, it looks crazy to spend Rs 50,000 on a handbag or Rs1,27,000 on a briefcase. Creativity plays a key role in creating such a premium image. Many luxury brands achieve legitimacy and fashion authority as a result of the creative talent of their design teams who respect the brand heritage and yet continuously reinvent it.
With a rapidly expanding population of high net worth individuals, India could emerge as the next hub for luxury goods consumption. When all is said and done, the experience of the stores themselves may be the real key to the luxury industry's success.
We think the growth of luxury retailing in India is going to be very exciting, colorful, and vibrant. India will reshape the luxury industry itself in many ways. For now, the question isn't whether India can support such a huge rise in luxury retailing - a strong interest in foreign brands and a growing middle class of about 300 million almost guarantee that it will be a leading luxury market in the future - but whether the country is running out of retail space.

No comments: