How top global luxury brands are negotiating the minefield that is India
India has always been a difficult place for premier brands plagued by constant policy interventions.
And yet, fans must have it, even if they have to wait many months to get their hands on one ever since Bollywood divas Kareena Kapoor and Deepika Padukone were seen “flaunting their athleisure airport look.” The brand’s store, its flagship in India, is moving addresses right now from a boutique five-star hotel to DLF’s glitzy new The Chanakya in the capital.
Meanwhile in Emporio, also owned by the DLF, the hubbub has intensified. After Polo, Manhattan’s swishiest hipster Ralph Lauren is due to launch his flagship store this year end. Alexander Mcqueen – eponymous label of the late iconoclast East Ender who ruffled the haughty Parisian haute couture – too is believed to be opening soon in partnership with Radha Kapoor’s Doit Creations. And in case you didn’t notice, LV has added another floor for menswear after its successful pop up in the beginning of the year.
Anjali Gaekwar, India country manager at Christian Louboutin, we are told, has just returned from a successful trunk show in Hyderabad, where the brand’s designer redlacquered soles are as much a rage as the latest Erdem jacquard cape. And in Mumbai’s Palladium, Canali’s deep blue nawab suits are flying off the racks this Diwali, even before the wedding season fully kicks in.
“We are having the best run of our lives after five years of struggle,” says Cecilia Morelli Parikh, a former buyer at Bergdorf Goodman turned co-founder of Mumbai-based luxury store Le Mill that retails several trendy global fashion houses like Saint Laurent, Celine and Balmain. “Last month, our topline grew 4X year-on-year.” This month though it is likely to be a different story for most.
If sentiment drives shopping, it faced yet another setback. Just when the whole industry was adapting to a new normal — coming off a long period of trough after disruptions like demonetisation and doubling of duties — the welter of negative macro headwinds and news flows is bound to impact any positive vibes or buoyancy creeping back in the market.
“Buying luxury is an emotional experience. When the mood is sombre, how can sales volumes rise?” asks the local country head of a marquee global fashion house. “The spending decision of a large portion of our top clients does get influenced by the stock market fluctuations. It’s not that they have become poorer overnight but before splurging on Rs 2.5 lakh accessory, they may pause or instead of buying four, pick two. Even Indian billionaires are value conscious.”
That is why India is such a tough market to crack. It’s not just about the bureaucratic intransigence or high taxes or repeated policy shifts, global luxury and fashion brands have to constantly deal with some of the unique challenges of the market dynamics. “Most of us, are not so season centric like Europe, and our approach to luxury is different,” argues Malini Banerjee, fashion director at Elle Magazine.
“For most Indians, the ‘it’ bag or dress is a matter of novelty and not return on investments like it is for gold, jewellery or even real estate. So during Diwali, a majority of us would rather spend on these three than binge on accessories and clothes. We are conditioned differently.”
Getting a “good deal” still drives the generation that are between the millennials and the traditional super rich, and industry players admit they are the ones driving growth. But for them, a Rs 25,000-30,000 price difference between retailers in London and Dubai – the traditional Indian splurging hot spots —and New Delhi’s malls is an air ticket to Dubai or a small accessory from a masstige brand.
“The psychology of the Indian spender is very different. They will shop luxury in India largely for their wedding trousseau for the comfort, ease and timing, but shopping for retail therapy is still a part of the overseas jaunt. It’s very much part of the travel agenda and even in for the Instagram the badge value of Bond Street is far higher than any zip code here,” explains a New Delhi-based country head of a European fashion house who did not wish to be identified.
But even then, everybody wants to be here, sign enduring collaborations and partnerships to enjoy any upswing that may happen in future. “Brands still see India as a potential market which is why we are all here. Some have been here for even 15 years,” says Gaekwar. “Some have bled, some had their go-to market strategy wrong. But luxury shopping is still happening even if the average shopping basket has shrunk.”
Stability is essential for any battle-scarred brand to prepare a business case. “There is no way you can anticipate anything in India. You just have to adapt yourself and take the business as it is,” feels Olivier Bernheim, global president, Raymond Weil, a luxury watch company. Even as his brand clocked tremendous growth for the last 3-4 months, Bernheim adds, the market “has been very challenging.”
THE SIN GOODS
The go-go years of 2006-08 gave way to heightened regulatory scanner since early 2016 with interventions like PAN cards for high value transactions of over Rs 2 lakh or caps on cash purchase or even doubling of customs duty to up to 25 per cent depending on categories thereby spooking several shoppers. There was even an additional 1 per cent tax on luxury spending that was levied but eventually scrapped a year later in 2017. GST, though a booner in the long run, has had its share of teething problems before stabilising between slabs of 5-18 per cent after the initial of 28 per cent.
“Indian high net worth individuals are wary of the taxman and are sceptical about sharing too many details with agencies while making purchases unlike say, the Chinese,” says a Bangalore-based jewellery designer with a high NRI clientele who also preferred to remain anonymous. “The whole world got to know about the invasion of the Chinese luxury shopper buying out entire Gucci or a Versace store in Europe or US only after they sought a tax refund at the airport. “Getting Indian records is impossible. Our relatives overseas still hoard on our behalf and we pick them up during our travels,” she adds.
The overall market contraction has translated to cut downs in sales teams on the shop floors or staffers foregoing incentives after hanging on to their jobs. A top Indian executive of a European luxury brand even had her salary frozen for three years. She finally left the company chaired by a French businessman, to set up her own business because the company wouldn’t clear her dues.
It has been reflecting on company P&L’s as well. For a few, profits had slipped into red in the 2017 business cycle, while others made smaller profits. Genesis Luxury reported a loss of Rs 2.8 crore in financial year 2017 against a profit of Rs 11 crore compared to its previous fiscal.
Earlier this year, Nikhil Mehra CEO, Genesis Colors also resigned after Mukesh Ambani’s Reliance moved in and took control of the company. Between Genesis Luxury and arm Genesis Colors, the fashion house now manages top brands like Canali, Coach, Armani Exchange, Burberry, Jimmy Choo and home grown Satya Paul.
“The business is flat and in some cases and there has been a 30 per cent de-growth in some brands.. It will take 2-3 years to regroup,” says Ronak Sheth, owner, Eternity Lifestyles, an eyewear company that represents brands like Cartier, Maybach, Gucci among others.
THE POLICY & THE PARANOIA
Less than nine months after the PAN card rule was introduced, in November 2016, Narendra Modi-led government demonetised banknotes. That evening, many flocked to jewellery stores and ritzy malls to convert their soon-to-be worthless cash into gold, bags and vouchers. Anecdotal evidence suggests many high-end retail outlets especially in the national capital region stayed open late that day; some even post midnight, that led to a sudden spike in sales for select categories like luxury jewellery and watches in the month of November. But even those who managed to weather the initial storm because of quick interventions like selling gift vouchers were caught off guard.
Till then,Louis Vuitton had seen a bump up in its profit after tax of over Rs 8 crore as compared to the Rs 5 crore in 2016 for Louis Vuitton India Retail, according to Registrar of Companies data. Similarly, Hermes India Retail’s profit went up to Rs 13 crore in 2017 over its Rs 8 crore in 2016, added its ROC data. “But soon it was paranoia all over,” recalls an industry executive. “Like a guillotine to the neck, it disrupted the business model,” says Dinaz Madhukar, executive vice-president of DLF luxury retail and hospitality vertical. “The policy changes came too quickly and the scale was huge. Consumers didn’t know what to expect and there was that anxiety about whether they should spend or not.”
Today, GST implementation for the most part helped lower the cost of certain items but not high value luxury products like watches, luxury clothes and shoes.
This luxury segment now attracts a 20 per cent basic customs duty and a 2 per cent social welfare surcharge accompanied by GST on the final sale, higher than what it was a year ago. Since most luxury good are mostly imported and are not very fast moving, the luxury segment suffered a double whammy of demonetisation and GST, believes Sachin Menon, partner, national head, indirect tax, KPMG. “Digital compliance under GST led to more transparency, reduced the cash transactions and so led to a slowdown in demand.”
Overall, the tax incidence remained more or less the same post GST. Earlier imports attracted an additional countervailing duty of 12 per cent and Special Additional duty of 4 per cent in addition to the basic duty.
Analysts studying this space started to notice that the impact of the PAN card rule or the cap on cash purchases since April 2017 to Rs 2 lakh dealt the harshest blow to the sector, even greater on the luxury goods market than the initial shock of demonetisation.
Across categories, there was an evident dip including jewellery which was down 8 per cent for that year. “The implementation of the PAN card rule, till today, has had a larger impact on buying as compared to demonetisation,” says Pradeep Srinivasan, research analyst, beauty and fashion at Euromonitor International.
LEARNING THEIR LESSONS
From poorly thought-out retail return policies to patronising the local shopper, many labels have suffered due to their arrogance. “Luxury sales in India are determined by the brands ability to understand the complexities of the Indian market, their agility to innovate and tweak strategies to provide affluent consumers unique and bespoke brand experiences,” says Gayatri Ruia, director business development at Palladium.
A lot of brands like Genesis Luxury also went ahead with bulk deals with their foreign partners to get 40-50 per cent cheaper rates and boost margins. But these agreements weren’t watertight and soon the high street retailers were saddled with outdated old stock after sudden policy shocks. On top of this, hefty mall rentals and profit sharing agreements were tipping companies over too.
The good news, though is that some top end luxury businesses did begin to see a gradual uptick before the recent shakedown. Wealthy Single Urbanites (WSUs) who are tech savvy and prefer non-cash transactions have been on the rise and in the future, a sizable chunk of the consumer base would come from this generation. “But it will be a slow path to recovery though,” warns Karan Ahluwalia, president and country head, media and entertainment, luxury and sports at Yes Bank.
For the last three months, sales have been trudging upwards. Bags are back on waitlists, Gucci sneakers are the rage and collaborations like H&M-Moschino are back on the ramp and the rack. More importantly, bridge-to-luxury brands have actually grown at 8-12 per cent at the Select Citywalk Mall in Delhi, that houses brands like Burberry, Bobbi Brown, Armani Exchange but has also added Onitsuka Tiger to its shopping bag.
“We are trying and stick to bridge brands like Chanel (cosmetics), which are relatively affordable,” says Arjun Sharma, chairman of the Select Group.
But for veterans like J Suresh, chief executive officer of Arvind Brands, the market will remain niche. “I don’t see that there is scope for many luxury stores to come up. The demand is likely to contain itself to cities like Delhi and Mumbai for the next 10 years,” he says adding that Arvind Brands — that has brought GAP, Ed Hardy, Nautica, Sephora to India — is unlikely to enter the niche luxury segment.
Hong Kong based luxury consultant Radha Chadha is far more categorical and says, “In the last decade or so, India has not lived up to the dreams that Western luxury brands had for it. They had hoped India would become the next China, but that didn’t happen for a variety of reasons.”
What perhaps could be a trigger to reverse that trend is the concept of geo-pricing, even at the cost of margins, that is slowly becoming a movement around the world. “Prices have to be at par with the European high streets. We do that,” quips La Mill’s Parikh.
This will catalyse the Indian shopper to once again open her purse strings and shop locally and bring back the bonanza.