Posted in Marketing & Strategy Articles, Total Reads: 1050
, Published on 04 April 2015
Luxury goods are known to deliver exceptional experience and the superior experience of them is delivered at the product level and the experience level. Luxury is a self-expression and an emotion which at experiential level caters to the consumer’s desires of hedonism and materialism. The functional and utilitarian characteristics are satisfied at the product level which includes attributes like craftsmanship, technology and innovation, materials, unique designs, precision, high quality and extraordinary product capabilities.
Luxury brands offer premium products and services and are spiked by a sense of connoisseurship. The luxury goods focus on quality, craftsmanship, innovation, provenance, scarcity and a compelling story to deliver the experience which is associated with the sense of belongingness from a certain niche group of people. Performance, paucity, pedigree, persona, personality, pricing, placements are a number of attributes which are used by luxury brands to design the product experience for the consumers.
The Indian luxury market is 1-2% of the global luxury market but is growing with the rate of 17% (EconomicTimes). Indian luxury market is expected to reach $14.73 billion by 2015 from $8.21 billion in 2013, according to a joint study conducted by Assocham and Yes Bank (thehindubusinessline). Luxury market in India is slow moving and challenging but promising enough in order to attract attention of major foreign luxury brands. The area of interest is that luxury now is not restricted to only the rich and the famous but new pockets of regional growth have led to the rise in the number of first time luxury buyers from small cities and towns. The slowdown in 2013 did impact the market but the market is expected to revive and grow at the rate of 17% to reach the $10 billion mark by 2014 (EconomicTimes). The year 2013 is characterized by global recovery and in the same year the increase in the wealth of world’s richest by 17% is reported. In Forbes India billionaires list of year 2013 there are 55 billionaires listed from India which is a marked improvement as compared to the 9 billionaires present in the list in year 2004. The 55 billionaires from India accounted for a total net worth of USD 194 Billion. The luxury market in India has been able to attract players like Damiani and Royce over the last few years and many others are planning to enter the Indian luxury market because of the promises it holds. Also, players like Geox group and Villeroy and Boch are planning to re-enter the market after exiting previously because of the renewed interest looking at the present scenario.
As already mentioned that the new emerging pocket of wealth which is attracting the luxury players to the country is on the rise and it has led to rise in the number of first time buyers of the luxury especially from smaller towns. The newly emerging customer segment for the luxury goods are not of the kind of traditional buyers but for the new category of luxury buyers the luxury is about exclusivity and at the same time about value too. These customers are termed as closet customers who have no exposure to global brands but in accordance with their annual earnings they cannot be termed as middle class any longer. According to a report “The changing face of luxury in India”, prepared by IMRD international, the definition of closet customers is the growing population of cost conscious customers and they seek value even if buying a luxury product (The changing face of luxury in India). The growth is in the segment of high net worth individuals who are earning more that Rs 10 lakh per year and they are 150000+ in numbers. The closet consumers broadly consists of new generation entrepreneurs, farmers who have sold their lands to the builders, senior corporate executives, the generation working in BPO who are living with their families but have money to splurge et cetera. But these customers want value for their money too. These customers are well travelled and well informed. They are tech savvy and do research before buying anything and evaluate what they are spending on.
The luxury players like BMW and AUDI, have started actively targeting the emerging Tier II and Tier III cities. For Mercedes, 30 % of its sales is generated from outlets outside the Tier I cities of Mumbai and Delhi. BMW has 13 of its total of 15 dealership outlets in Tier II and Tier III cities. For luxury players these cities represent untapped but great business markets.
Though India is fastest growing economy but it still occupies only 1-2% of the global luxury market. 30% of the top 500 luxury brands are present in India while in china 70% of the brands are present (India Real Time). Also, India has fast growing population of billionaires but for the luxury players to penetrate the market is getting increasingly difficult and it has forced some of the players to reconceive their strategies. Few of the major problems that are the cause of concern for the players entering in India are lack of suitable infrastructure, high import duties and rental costs, shortage of luxury talent and parallel growing market of counterfeits. The lack of suitable space in this context refers to the lack of space where self-indulgent experience can be provided which is desirable for luxury shopping. The unavailability restricts the luxury players to only luxury hotels and a few luxury malls but which comes with high rental costs and therefore limits the profitability of the retailers which acts as a deterrent. Also, the high streets in India are very cluttered and crowded, lacking the ambience demanded by luxury retail. The players then have to set up a small outlet in some luxury hotel with high rental cost and not enough space to stock up the variety. Also, the import duties are as high as 30 % which is enough to reduce the profit margin of the players to a great extent. The 100% FDI comes with a clause that 30% of the sourcing needs to be done from local area which provides a little discomfort to the foreign players in terms of whether the local partner will be able to keep up with the quality and other standards of the luxury player. Even if despite of all this the players enter into the country the high cost is passed on to the consumers who refused to pay the high price as they are well travelled and can get the same thing or rather more variety abroad at competitive prices. In the end the brands are forced to bear the cost themselves which makes difficult the long term sustainability of the brand in the country.
The shortage of luxury talent is yet another concern for the players planning entry into the country. Luxury talent is the term which refers to the talent that is required to serve the elite customers. According to an article published in Luxury Society, a luxury chronical website based in Paris, India will require about 1.76 million people by 2022 to handle luxury brands and services. That means a chronic shortage is foreseeable as the requirement is more that 5% of the total retail human resource requirement, according to National skill development cooperation (luxurysociety.com).
In the scenario mentioned about as the problems are increasing for the brands so is the market of counterfeits. The market of counterfeits in the country is expected to reach Rs 5600 cr by 2015 i.e. 5% of the total luxury goods market, according to an article published in Indiatimes in January 2014 (articles.economictimes.indiatimes.com). The market for fake luxury is growing parallel and at double the rate to the market of luxury goods. The concept of counterfeits destroys the exclusivity factor which is associated with luxury and is a necessary part of the whole experience. This causes enormous loss to the profitability of the luxury players.
In a nutshell, the Indian market represents huge opportunity for the foreign luxury players but because of some loopholes here and there the market is proving to be a tough nut to crack. But looking at the long term scenario the players are positive about the struggle proving to be worth the effort.
This article has been authored by Gunjan Sharma from IIM Udaipur
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