Luxury in a slowdown
Sanjiv Bhattacharya March 19, 2009For the luxury industry in India, 2008 began on a crest of optimism, like the head of a flute of Krug—luxury brands were charging in, a vast new luxe mall was set to open and there was reportedly no more marina room in Mumbai for all the new yachts. India truly looked like it was following in China’s footsteps.
But then came the global financial collapse, followed by the terror attacks in Mumbai. The champagne bubbles went flat. And 2009 began with a hangover, the luxury industry reaching for the aspirin and wondering: What went wrong? And, in the midst of this slowdown, what now?
Certainly, when the terrorists struck, India’s nascent luxe industry was probably the least mourned of their victims. And yet it was wounded in several ways. Luxury hotels were attacked, stores were shot at and customers were terrorised. In terms of positioning, terror and luxury were suddenly inseparable— the world watched shaken guests being lowered outside the Louis Vuitton storefront, it noted the cruel irony of Ajmal Amir Kasab’s fake Versace top. And all this was happening in a slowing economy. There seemed little cause for optimism in the luxury industry. And yet, despite everything, it appears to be bouncing back.
For instance—part of the fallout of 26/ 11 was the cancellation of the International Herald Tribune Luxury Conference, scheduled for a week later. Several giants of global luxury were due to attend— among them Christian Blanckaert, VP, Hermes, and Francois Pinault, boss of PPR (luxury behemoth which owns Gucci). Well they’re still coming—the conference takes place on March 26 in Delhi, four months since the attacks. Luxury one, terrorists nil. There are similar green shoots of recovery poking through the gloom of the morning newspapers, which increasingly reflect a kind of economic bipolarity. Alongside headlines like “Sensex Hits All-time Low” is news about the launch of a new Rs 4 crore Rolls Royce.
Could it be that luxury in India is actually in good health, despite everything? “Our base is so small that we’ve hardly been affected,” says Sanjay Kapoor, CEO, Genesis Luxury, which has brought Aigner, Kenzo and Paul Smith, among others, into India. “You have to remember, the luxury market has been estimated as low as Rs 500 crore. So, we’re, maybe, 10 per cent down on our targets.”
Another positive sign is that the Sensex is not a foolproof barometer of luxe spending in India. “The heavens are not falling,” says Arvind Singhal, Chairman, Technopak, a retail consultancy. “Tier I towns are more affected by the Sensex, but the top eight metros account for less than 8 per cent of retail spending. Tier II towns like Chandigarh, Surat and Ludhiana haven’t been as badly hit and these people also visit the stores in Delhi, Mumbai and Bangalore. They make up the difference.” Furthermore, the numbers look promising.
“Power brands like Louis Vuitton and Dior are still performing, even though lesser-known brands like Canali or Dunhill are finding it tougher,” says Singhal. And the opportunity remains as strong as ever. He estimates that there are roughly 2.1 million households spending Rs 4 lakh annually on luxury/ premium goods and services—that’s a market potential of Rs 84,000 crore. They don’t necessarily want Cartier watches—“they have other priorities like housing, travel, high-end cars and home entertainment systems,” he says. But priorities will change as prosperity deepens. “The affluent base is expected to increase 14 per cent annually for the next five years.”
It sounds highly contrarian—that the luxury market should be solid in a slowdown. Surely, luxury is the first to feel the pinch? It feels wrong to splash out Rs 3 lakh on a suit when the future is uncertain and jobs are being lost. It’s not the cost, but the timing. Anand Mahindra, Vice Chairman, Mahindra & Mahindra (M&M) has mentioned anecdotally that he balked at buying a suit for this very reason. But this will pass, says Singhal. The fundamentals remain strong. And for a luxury retailer, 2009 is, in fact, a much better time to enter the market. In 2008, the market was overheated—whipped up by media hype and wild projections about an imminent explosion. So everyone charged in, and prices skyrocketed. Especially real estate.
“There were so few suitable locations and an oversupply of bidders,” says Darshan Mehta, CEO, Reliance Brands. “DLF Emporio in Delhi was charging a monthly lease of Rs 1,000/ sq. ft, which translated to about $280 per year. So, you’d need to sell $1,200/ sq. ft to break even. And just for comparison, that’s the same as Fifth Avenue in New York or New Bond Street, London. It didn’t make sense. You’d be praying for tailwind.”
Staff costs were similarly bloated—luxury being a fledgling industry, the same handful of staff were being hotly pursued, so salary demands grew. Furthermore, customs duties remained high. And the hype remained relentless. So, poor choices followed. In the urge to be first, companies struck franchise deals with global brands in which they bore all the start-up investment. They submitted to landlords who demanded expensive lock-in periods at inflated rents. Interests were not aligned, neither between the franchisee and the mall owner, nor between the franchisee and the brand.
One of the groups to suffer these consequences was the Murjani Group, franchisee for Gucci throughout India. Anticipating a boom, Mohan Murjani actually turned down a JV option with Gucci. “We expected to make at least half of what Gucci stores were making in Dubai and Singapore,” he says. It didn’t happen. “You get caught in this terrible situation. Your sales are low but your rents are high, and because everything is imported, you have to purchase merchandise at least six months in advance. So, you’re committed not only to the current season but also for following seasons. And unlike other markets, there are no outlets in India for end-ofseason stock. So, you can imagine—the inventory just keeps piling up.” Now, Murjani is attempting to restructure his Gucci deal. But today, the situation is much improved. The slowdown may have muted the media hype, but conditions have improved in real terms.
Mehta is bullish. “Customs duties are down by 25 per cent on leather goods,” he says. “Staff salaries are manageable—these days, people are happy just to hold onto their jobs. And there has been a major correction in real estate—it’s down 50 per cent from January 2008. So now, malls don’t simply lease to the highest bidder, they’re open to revenue-sharing models.
It’s a great time to get into luxury retail.” Select Citywalk in Saket, for instance, is a predominantly revenuesharing model. Emporio, on the other hand, remains a straight lease enterprise, says a DLF spokesperson. So, it appears that luxury industry is driving with the brakes on—even as the customer grows thrifty, retailers are bullish, launching new products and opening new stores. “The downturn will pass and the customer will return within a year or two,” says Mehta. “But the real estate advantages will last longer. It’s a great time to get into luxury retail.” But, who is the luxury customer in India? Actual data is scarce.
Anecdotal estimates abound about the new rich, the uneducated entrepreneurs and the foreign educated professionals in top companies. But a broad picture emerges, one with as many similarities with China as differences. And China remains the dream for luxury in India—since announcing its Open Policy in 1978, 13 years before the opening of the Indian markets, it now stands to be the biggest luxury market in the world by 2015. According to Radha Chadha, author of The Cult of the Luxury Brand: Inside Asia’s Love Affair with Luxury, luxury in Asia has typically followed a five-stage arc. “The first step is ‘subjugation’ where the country is under colonial or authoritarian rule. This creates a hunger for luxury,” she says. “Stage II is the ‘the start of money’ when the economy starts racing and a segment of society starts buying cell phones and washing machines.
Then you enter a stage of ‘showing off’ when luxury starts to take off— that’s where China is at. India’s just barely entering this phase now. And the next stage is ‘fitting in’ where the brands are so widespread that it’s about keeping up with the Joneses. Say, Singapore.” The final stage, which she terms “Way of Life”, is epitomised by Japan, in which a generation has grown up with luxe brands so they have become mainstream.
The similiarities between India and China, luxury-wise, are many. Both have small pockets of immense wealth, cultures that emphasise social status, and a latent climate of corruption. (“Luxury goods make great presents,” says Chadha). And both markets are fuelled by new money, which typically serves to display wealth rather than taste. Conspicuous consumption is the goal. “Europeans call it crass,” says Chadha, “but in China, if you’ve got it, flaunt it.” Hence the trend of Chinese customers leaving the price tag on their clothes.
That ostentation is also a primary motivation in India is illustrated by the luxury car market. “In a maturing market, it’s easier to persuade people to spend on hard goods than soft goods,” says Ashish Chordia, one of the early luxury pioneers in India. Now selling Porsche, Audi and Ducatti, Chordia also established ‘Thanks’ in Mumbai in 2004, the first multi-brand luxury store in India. “Only 20 per cent of Porsche customers are Dolce & Gabbana customers. Why? Because shirts don’t have show value—only you know if it’s worth it. But drive a Porsche into a lobby and you get noticed.” As a result, luxury cars have been performing surprisingly well. Porsche sold 160 cars last year and Chordia projects sales of 200 in 2009. Similarly, Peter Kronschnabel, CEO, BMW India, expects growth in 2009. “In 2008, the luxury car market was 7,500 cars,” he says. “And in 2009, I expect 9,500. Already, our numbers for January and February are up on last year. The luxury segment in India is artificially low because the brands are not available. But the pull is coming from the market. China does 200,000 luxury cars per year. BMW sold over 60,000 in China alone last year!”
That said, India is no facsimile of China. Our market is unique in many ways—much more colourful, less beholden to the four season fashion calendar, and also famously proud of home-grown fashions, particularly when it comes to women’s wear. While elsewhere in Asia—Thailand or Hong Kong, for example—the customer switched wholesale to western fashions, in India, the luxury spend is focussed around wedding season where Indian designers reign. Don’t be surprised if Armani starts making sherwanis.
The Emporio Mall in Vasant Kunj, Delhi, is as good a metaphor as can be found for luxury in India. With 111 Indian designers and 74 international brands, it has all the grandeur and swoop of a landmark hotel. But its opening in August was fraught with problems and delays and it still looks acutely out of place—a grandiose, twinkling structure, set in a relative wasteland on the way to Delhi airport, as though a mothership from Planet Luxury got lost and landed in India by accident. And it’s not exactly heaving with customers. There are days at Emporio, when all you can hear are your own footsteps echoing clip-clop on the polished marble—that and muzak. It’s a bleak duet.
But if Emporio is seen a symbol of ambition rather than achievement, then bear in mind that these are early days yet. The inflated prices and hyperbolic projections of 2008 have given way to a more prudent outlook. And despite this slowdown luxury continues to expand its reach. So even if luxury is driving with the brakes on, in 2009, it may have just switched up a gear.