India's Growing Prosperity Opens Up A New Market For Luxury-Goods Firms

India's Growing Prosperity Opens Up A New Market For Luxury-Goods Firms

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At the end of the 19th century, India's maharajahs discovered a Parisian designer called Louis Vuitton and flooded his small factory with orders for custom-made Rolls-Royce interiors, leather picnic hampers and modish polo-club bags. But after independence, when India's princes lost much of their wealth, the orders dried up. Then in 2002 LVMH, the world's largest luxury-goods group, made a triumphant return to India, opening a boutique in Delhi and another in Mumbai in 2004. Its target was the new breed of maharajah produced by India's liberalised economy: flush, flash, and growing in number.
Other purveyors of opulence followed, from Chanel to Bulgari. In recent months a multitude of swanky brands have announced plans to set up shop in India, including Dolce & Gabbana, Hermès, Jimmy Choo and Gucci. And Indian women will soon be invited to spend over $100 on bras made by La Perla, an Italian lingerie firm. Only a tiny fraction, of course, will do so. But it is India's future prospects that have excited the luxury behemoths.
India has fewer than 100,000 dollar millionaires among its one billion-plus population, according to American Express, a financial-services firm. It predicts that this number will grow by 12.8% a year for the next three years. The longer-term ascendance of India's middle class, meanwhile, has been charted by the McKinsey Global Institute, which predicts that average incomes will have tripled by 2025, lifting nearly 300m Indians out of poverty and causing the middle class to grow more than tenfold, to 583m.
Demand for all kinds of consumer products is about to surge, in short. And although restrictions on foreign investment prevent retail giants such as Wal-Mart and Tesco from entering India directly, different rules apply to companies that sell their own products under a single brand, as luxury-goods firms tend to. Since January 2006 they have been allowed to take up to 51% in Indian joint ventures. India is also an attractive market for luxury goods because, unlike China, it does not have a flourishing counterfeit industry. Credit is becoming more easily available. And later this year Vogue, a fashion magazine, will launch an Indian edition.
Barriers to growth remain, however. High import duties make luxury goods expensive. Rich Indians tend to travel widely and may simply buy elsewhere. Finding suitable retail space is also proving a headache. So far most designer boutiques are situated in five star hotels.
But things are changing. Later this year Emporio, a new luxury-goods mall, will open in a prosperous neighbourhood in the south of Delhi.

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It is likely to be the first of many. Even so, India could remain a difficult market to crack. Last October the Luxury Marketing Council, an international organisation of 675 luxury-goods firms, opened its India chapter. Its boss, Devyani Raman, described India's luxury-goods market as “a cupboard full of beautiful clothes with a new outfit arriving every day—it could start to look messy without the right care”. This, she said, included everything from teaching shop assistants appropriate manners to instilling in the Indian public a proper understanding of the concept of luxury. “How do you educate them”, she asked, “about the difference between a designer bag that costs $400 and a much cheaper leather bag that functions perfectly well?”

New Delhi entrepreneur Natasha Chaudhri chases after expensive fashion products like a big-game hunter in pursuit of wildlife pelts. Owner of three restaurants in Bombay and Goa, two lifestyle stores in Delhi and an export business, Chaudhri, 30, has the money, if not necessarily the time, to go on shopping safari, and her closet is full of trophies: Louis Vuitton, Prada and Chanel handbags; sunglasses by Bulgari and Gucci; countless designer outfits; shoes by Sergio Rossi, Tod's and Jimmy Choo. These days, she doesn't have to go overseas to indulge. Jimmy Choo, for example, just announced plans to open its first outlet in India, much to Chaudhri's delight. "I think it is fabulous," she says, "because India has become a great luxury goods market." Upscale Indians "are super-trendy," adds Chaudhri. "We love brands."

And brands love India. Jimmy Choo and Gucci are just the latest makers of luxury goods to target India as the next hot growth market, joining Herm賬 Christian Dior, Louis Vuitton, Cartier, Piaget, Tiffany, Moschino and others. Last October, Chanel launched its brand by organizing an exhibition and haute couture extravaganza in New Delhi's tony Imperial Hotel with models flown in from Paris. That same month, Swatch Group introduced its Breguet watches (average price: $30,000) to India, which it hails as one of the world's most enticing growth markets. In January, the Indian government gave upscale retailers a further boost by allowing foreign companies to own a controlling interest of 51% in joint ventures operating "single-brand" stores. Although multinational chains like Wal-Mart and Tesco remain effectively barred from India, the move is expected to make the country more appealing to retailers like Nike and Cartier that sell their brands in exclusive outlets. "I am very, very optimistic about India," says Xavier Bertrand, India general manager for Chanel.

Not long ago, few high-end merchants had any interest in the country, put off by its pervasive poverty and an unsophisticated retailing environment populated mainly by small, independent shops. The handful of luxury brands operating in India did so quietly, selling mainly from boutiques located in five-star hotels. There was virtually no other option. India's major cities lack high streets, which elsewhere provide symbiotic clusters of posh retailers. While India is in the midst of a mall-building boom, there are very few upscale shopping centers in which companies can showcase their luxury products alongside those of similarly chic retail neighbors. India even has a shortage of major department stores. The country's leading domestic chain, Pantaloon, has fewer than 100 outlets. Given such conditions, "our marketing plan for Hangzhou or Dalian [two mid-sized Chinese cities] is bigger than for all of India put together," says Ravi Thakran, South Asia group director for LVMH, owner of 50 top-end brands such as Louis Vuitton, Fendi, Mo봠& Chandon and Givenchy.

What's changing, of course, is India's demographic makeup as the nation's booming economy mints a critical mass of newly affluent consumers. Last year, the average Indian salary surged 14% (18% for IT professionals), the highest wage growth in Asia, according to a study by Hewitt Associates, a global human-resources company. There are now about 1.6 million Indian households that spend an average of $9,000 a year on luxury goods, according to The Knowledge Company, a management-consulting firm in New Delhi. "With multi-income families and increasing international exposure through travel and the Internet, the attitude is changing from the traditional [emphasis on] savings to a spending approach," says Thakran of LVMH. "The expense basket is shifting from necessity to lifestyle products." Younger Indians from wealthier families increasingly match?and even eclipse?the purchasing power of their European and American counterparts, says Priya Sunder, director of PeakAlpha, a Bangalore-based financial-planning company that advises IT professionals on their investments. "Most of their disposable income goes towards buying luxury products, be it a Chanel lipstick, Fendi belt or Herm賠scarf."

Foreign brands that got in early have made rapid progress. Upscale watchmaker Tag Heuer, which has averaged 40% growth in India over the last three years, has plans to expand from 80 shops to 120 in 2006; and Jimmy Choo is looking to open 10 shoe stores in India by 2011. The first will launch in New Delhi at the end of 2007, under the terms of a distribution agreement with the New York-based Murjani Group, which also distributes the Tommy Hilfiger brand in India. It helps that more retailing locations are becoming available. Two luxury malls are being planned in Delhi, and hundreds of others are in various stages of construction and planning throughout his country. Chanel's Bertrand says the company is in talks about distributing its shoes in top retail chains like Shopper's Stop, Lifestyle, and Ebony.

Still, many luxury-goods retailers predict that their India business will develop relatively slowly compared with their business in other emerging markets such as China. One major barrier is India's stiff tariffs on high-end imports?the tax on imported watches, for example, is 50%. Joseph Wan, Group Chief Executive for Harvey Nichols, the London-based retailer, says India's recent economic growth and indications that New Delhi is prepared to liberalize its markets are encouraging, but adds that prime real estate in Indian cities is too expensive and that tariffs are prohibitively steep. "Harvey Nichols caters to the top 3% of the population, and that 3% are very well-traveled," says Wan. "If my Dolce & Gabbana in India has to be more expensive because of import duties, how can I do any business? You just can't." For now, other emerging markets strike him as a better bet: Harvey Nichols recently opened in Hong Kong and has also set up shop in Dubai and Turkey. "India may not be ready yet, but I can start to see that it's coming. I don't know whether it's in one, two or three years, but obviously we've been watching carefully for a long time and as soon as it's ready, we'll go there."

By then, the market may already be crowded. Just before New Year's Eve, Tag Heuer hosted an all-night party for big spenders in Goa. About 400 diamond-dripping, air-kissing Indians decked out in brands like Manolo Blahnik and Balenciaga sipped champagne and sampled canap鳠as they watched Bollywood star Shah Rukh Khan play volleyball and emcee a bikini contest. "India cannot hide behind the fact that it is a developing country anymore," says Khan. "Every Indian now wants to own products that inspire awe and envy." Can the French sell cake to people who not long ago had to scramble for bread? Given the ambitious plans luxury brands have for India, they seem to think so.
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