Not luxurious at all

Despite the potential, there are major challenges for the growth of the luxury market

The luxury market in India attracts significant media and popular attention and is mostly believed to be on an upswing. 
Simultaneously, almost as often, one hears about luxury brands exiting the country or how China is a better bet for them. The truth is somewhere in the middle. 

The potential of India's luxury market is evident in its growth. The market has grown at 20 per cent since 2012 and luxury products have grown at 20 per cent to a size of $4 billion. Assets are growing at 22 per cent and are on course to reach a size of $10 billion. Categories such as jewellery, watches, and cars have been at the forefront among the luxury products and have grown faster than others.

The growth drivers for the Indian luxury market are obvious: Over 250,000 high networth individuals (HNIs) here with a net worth of $1.3 trillion and increased discretionary spend by ultra-rich. Having said that, accounting for just 1 per cent of the global luxury market, the one in India is still small. The luxury products market in China is worth $30 billion and Europe commands a 33 per cent share of the overall figure. 

But there are concerns for future growth prospects too. Import duties are high at 20-150 per cent, foreign investment in luxury retail comes with strings attached  and there just isn't enough high quality retail real-estate available. Even if the industry has grown at 20 per cent, it’s on a small base. On the demand side, those who can afford still have that middle-class mindset where they mostly spend during holidays in foreign destinations. And not to forget, the rich in India are also highly fragmented geographically with 50-55 percent HNIs based in metros. The rest are hence, difficult to reach. The traditionally wealthy people and the professional elites are careful spenders, and then there is a large segment of businessmen who spend only on a few types of luxury goods/brands because they were not exposed to them earlier. 

But why do we then keep talking of India as the next luxury destination? China has been a success story for most brands, where luxury entered in 1992 and grew at 27 per cent in its first 10 years. What India lacks in the numbers, it makes up in the potential. The Indian market is undoubtedly very different from China. The Indian buyer is traditional and prefers to spend on assets and jewellery and continues to be extremely price conscious. Also, the market is much younger as luxury brands re-entered India only five years ago and struggles with structural barriers such as regulations around foreign investment and duties and the lack of appropriate real estate. 

The luxury industry could grow at 35 per cent from the current 20 per cent if the regulatory and real-estate constraints are relaxed. The recent FDI deregulation announcements are welcome changes and could encourage international brands to explore India more aggressively. Keeping in view the potential, a few business groups have emerged as consolidators of luxury brands. 

To put the ideas into numbers, it is safe to say that the Indian economic model for luxury retail will be close to this: sales productivity at rRs 300-400 per square feet per day, gross margin of 55-60 per cent, rental costs of 25-30 per cent and other costs ranging between 15 and 20 per cent, thus leaving a small profit at the store level. This also implies that companies will benefit from choosing smaller store formats and being prudent about rent and overheads. 

Running a luxury business in India is surely not luxurious.