FDI Spillover: Luxury brand-wagon to roll into India

Wednesday, 08 February 2012
First the CII-AT Kearney report predicted that booming Indian luxury market growing at 20 per cent per annum would become $14.7 billion by 2015, up from $5.8 billion as of now. Then followed the government’s decision to allow 100 per cent FDI  in single-brand retail and a host of luxury international brands taking a wait and watch approach so far have suddenly perked up. They are putting together their plans to venture into India.

Considering other big names like Zara, Canali and Louis Vuitton are already in India others such as Tiffany & Co, Christian Louboutin, Abercrombie, Arcadia, Hennes and Mauritz, Prada and GAP are planning to launch their stores in the country. Other global retailers such as Swedish furniture major Ikea, the UK’s Arcadia group and American coffee brand Starbucks are reported to be firming up their India plans. With the number of high net worth individuals increasing and aspiration levels of the young consumer rising, the potential is big. And Indian brands and fashion conscious consumers, who could by their favourite brands only on their trips abroad, are all perked up.

India has three million affluent households, defined as those with more than $100,000, or more than 50 lakh, of investable surplus, according to a global affluence study by research firm TNS. All said and done, though Indian consumer is looking forward to the luxury brand line-up, the question is, whether these brands are really ready for the Indian market.

Though the government has allowed 100 FDI in single brand retail, the clause of 30 per cent sourcing from the small-scale sector may emerge to be the spoiler. Luxury brands are finding this clause restrictive because they feel that the mandatory restriction will become a trade barrier since it is very difficult for any brand to change their global manufacturing processes for India. As Neelesh Hundekari, Principal, AT Kearney opines, “The scale of the Indian market is small at the moment for it to make sense of the luxury brands to start manufacturing in India, only for India.” Other hindrances could be finding quality raw materials and skilled labour.

Another critical issue faced by these brands is the service staff at their India showrooms/stores. Many luxury brands are distributed through local dealers in India, which results into consumers not always receiving the same high-quality brand experience they get abroad since the salespeople are not adequately groomed to serve the luxury customer.

According to experts, for foreign brands to succeed in this market, they must first understand Indian taste and create merchandise suitable for Indian audiences instead of stocking old stocks at higher prices. For instance, the Indian market for luxury clothing is driven by the Indian wedding estimated to be more than $1 billion. If western brands study this segment, and understand that the preferences of people belonging to different states following different cultures are not similar, then they can tap into the desire for India-inspired wedding clothing and jewellery.

On a positive note, the development of India’s digital infrastructure would definitely act as a booster to luxury segment. The Internet penetration and speed that was too slow for brands to create successful online platforms is rapidly changing. Luxury brands can take advantage of this phenomenon to raise awareness and educate consumers about their history, collections and their heritage.

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