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Nov, 01 2007

Luxury brands, the new market

Luxury retail is catching the eye of Indian investors who see it as one of the profitable investment opportunities. What is the best possible route for bringing luxury products into India? How can franchising contribute in this regard? A study on the subj

After discounts on premium products and designer wear, India is all set to witness a luxury boom. In the years to come, India will see more number of luxury retailers entering the Indian market to tap a market worth $ 1 billion (approximately Rs 40 billion).
According to a study conducted by PriceWaterHouseCoopers, traditionally the Indian consumer has always been perceived as a price-conscious one but now the mindsets of consumers and retailers are slowly evolving.
Earlier, consumers had to shop abroad for luxury products but now after realising the spending power of the Indian consumer, luxury brands are leaving no stone unturned to explore the opportunity to operate in India. It not only offers Indian shoppers to shop in the comfort of their home but also gives international brands increased business with the added number of consumers.
The increased acceptance to foreign luxury brands and the urge to splurge has given boost to the increased demand for luxury products in India.
Talking about the increased interest of Indians towards luxury, Nalini Gupta, CEO, Genesis Colors says, “Luxury businesses and brands have been making their presence felt for quite some time now and they are here to stay.” She further adds, “With more and more Indians travelling abroad and globalisation making the world a smaller place, people are finally getting at their doorstep brands for which they shopped when abroad.”
To this increased interest of Indian shoppers in luxury brands and of Indian investors for bringing them to India, Suresh D Bhatia, Country Head, Major Brands, says, “Luxury retail is slowly taking a huge leap forward into the Indian market, but luxury is not a new word for Indians. Indian consumers have been patronising it since the days of the Maharajas.”
Brands like Cartier, Louis Vuitton and Baccarat had loyal clientele among the Indian royalty, dating back into the 60s. Louis Vuitton, like in other markets, was the first to enter in India and in Delhi in 2003, followed by Mumbai. Various brands like Bally, Hugo Boss, Bvlgari, Salvatore Ferragamo, Aigner, Fratelli Rossetti amongst others entered India.

Market share for luxury
According to a study conducted by PriceWaterHouseCoopers, Foreign retailers are keenly evaluating the Indian market and identifying partners to forge an alliance within areas currently permitted by regulations.
Indian companies like Major Brands forayed into the luxury retail sector through the launch of Bally. Bally is a Switzerland based leader in leather footwear, handbags and accessories for men and women.
Companies like Murjani Group have already cut the ice by bringing in a lot of luxury brands like Gucci, Jimmy Choo, La Perla, Tommy Hilfiger and Tumi.
Brandhouse Retail, a subsidiary of S Kumars Nationwide Ltd is acting towards the growth of luxury brands in India. It has already brought into India various luxury brands like, Dunhill and Escada. The new entrant in this line from Brandhouse is Stephen Brothers.

Entry routes existing
For any foreign brand which plans to enter the Indian market there are three routes available:
• Forming a Joint Venture
• Signing a franchise agreement
• Setting up a subsidiary
The current FDI policy does not allow more than 51 per cent foreign direct investment in certain categories. This makes it necessary on the part of foreign retailers to seek a local partner.
Every international firm that wants to foray into a new market tries to find a new partner that has the right knowledge and capability to take the brand further. Franchising is a business model wherein an international firm can tie-up with a local partner and transfer the right to develop the market.
Talking about the best possible route available for bringing luxury brands in India, Bhatia says, “In the current Indian context with only either licensing or franchising routes available, franchising is the better option with a small window to market. Although the duties are a deterrent, the consumer does understand that there will be a premium attached for the products available at his or her doorstep with a global returns policy in place. With 51 per cent FDI allowed in single brand retailing, it could be the next step for progression.”
Though a number of routes are available for luxury brands to enter the Indian market, many of prefer the franchise route.

Franchise route
At present, many luxury brands are present in India through the franchise route. Brands like Chanel, Ferragamo, Valentino are present in India through the franchise route.
Speaking about the benefits of bringing a luxury brand in India via the franchise route Tarun Joshi, CEO, Brandhouse Retail says, “Franchising has a very major role to play in this regard. Partnering with a local franchisee gives the company a lot of benefits as he has in-depth knowledge of the market and the capabilities.”
Further emphasising on Indian companies` keen interest on brining luxury brands via franchise route, Joshi says, “Why Indian investors are interested in bringing luxury products is for the simple reason of making more profits.”
He further adds, “Luxury is going to boom in the near future. Franchising is also developing and will play a major role in this regard. Brandhouse has taken the franchise of Dunhill and Escada.” Confident about the success a luxury brand can achieve via franchising Joshi says, “Luxury is the future of India.”
Talking about the business model adopted by Major Brands to bring in luxury brands Bhatia says, “In order to optimise the product offering, we have adopted the franchising model to bring in the luxury leather and bags brand, Bally.”
According to a spokesperson at PWC, FDI restrictions in retailing have not deterred prominent international players from entering India and franchising, has thus far been the preferred entry route. Even with 51 per cent FDI introduced in single brand retail, many companies prefer franchising as an entry route to test the market till further control is allowed. Franchising operations are becoming more popular in geographically vast and culturally diverse nations such as India. The size and spread of the Indian market coupled with local variances of consumer preferences implies that expansion through local franchisees enables entrants to understand market realities.

Franchising as asset
Mature markets for luxury are Europe, US, Japan, France, Germany and Paris where luxury retail is already prominent. Countries like India and China are still in the nascent stage of luxury retail and have been catching the eye of luxury retailers.
Taking franchise of a luxury brand is an investment opportunity of an emerging market. The first mover who acts as a catalyst in bringing the luxury brand gains the advantage. With Luxury catching the eyes of Indian investors the opportunity in luxury retail seems bigger.
Companies like Genesis Colors which already hold some of India`s premium designer labels, has brought Aigner, a German luxury brand for clothes and accessories and Canali, an Italian Menswear luxury brand in India through the franchise route. The company is presently thinking of bringing another luxury brand in India named Sergio Rossi.
The demand amongst consumers is high for luxury brands but is it worth investing in luxury brands. If luxury is worth, the investment option is a question for an investor.
Talking about the keen interests of Indian firms for luxury brands, Bhatia says, “It is a catch-22 situation. The returns are good over a longer gestation period, but pose many hurdles in the short run. For instance the import duties are a deterrent but there is a niche market for luxury products in India.”
Talking about the future, Gupta says, “If these brands have made it big and successful in other countries, why should India be far behind.”
In answer, Bhatia says, “If the retailer has a long term vision for luxury brands the Indian market is poised to grow exponentially for luxury. With an ever increasing `Dollar Millionaires` in India, the demand for luxury products and brands is on an upswing.”
Looking at the brighter side of the picture, Major Brands are ready for a few more tie-ups. It is in the process of launching a Canadian brand; Aldo Accessories as well as a cosmetics brand Inglot at Select CityWalk Mall, Saket, New Delhi. According to Bhatia the company is in the final stage of talks with other International brands too.

Experts have estimated the growth of luxury retail at the rate of 15-17 per cent a year. Says Joshi, “Luxury will be the biggest boom in the coming years.”
Looking at this view, luxury seems to hold a long-term perspective, though the gestation period is long it is worth the pain. Luxury brands are willing to enter the Indian shores estimating the current growth of the Indian economy. To be successful the brands are looking at models specific to the Indian market. With other options like single brand foreign direct investment and wholesale models, franchising seems to be the right choice looking at the specifications of the Indian market.

Factors driving luxury retail
• Increased awareness amongst Indian consumers
• Increased purchasing power
• Changing taste of Indian consumers
• Easier acceptance of luxury

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