Inside India’s High Growth Luxury Market
India’s luxury goods market has been growing by more than US$255 million a year in absolute terms, on a par with the United Arab Emirates and considerably stronger than Singapore and Australia.
All luxury categories witnessed a big rise in demand with double-digit growth across the whole of the 2008-2013 review period. This was fuelled mainly by a mushrooming urban middle class with a penchant for Western brands.
Growth expectations among the world’s biggest luxury goods manufacturers are highly optimistic. This is a country, after all, where as many as one million young adults are entering the job market every month and it offers a potentially unrivalled demographic dividend.
There are, however, growing signs that the wheels are slowing on India’s hitherto unstoppable luxury goods growth surge. The combined effects of a cooling economy, rising prices and lacklustre job creation are causing middle-income consumers in particular to tighten their belts.
In practice, this means urban middle-class consumers are trading down to economy products and is the latest example of unpredictability in first-tier emerging luxury markets.
Nevertheless, accounting for 17.5% of the world’s total population in 2013 and a member of the BRICs, India remains a key market for investors and ranks among the world’s most important consumer markets. The victory of the Bharatiya Janata party (BJP) in the May 2014 elections will have a pervasive impact on India’s business environment.
Antila, the world’s most expensive residential complex, South Mumbai, India
Although its retailing industry is likely to remain difficult for foreign entrants, yet there is hope that corruption and political stability may be improved. The party has also pledged to prioritise economic growth, which can only be good news for the long-term outlook of India’s luxury goods market.
While China has been spearheading the BRICs growth surge and whetting the emerging market appetite of the world’s leading luxury goods companies, India is by far the fastest-growing market and is predicted to grow by an additional 86% in constant value terms between 2013 and 2018, to reach a value of US$3.5 billion.
India’s impressive growth story in luxury goods sales has been the result of a number of factors. Firstly, the traditional Indian custom of personal adornment has led to strong demand for luxury accessories, luxury jewellery and timepieces, and designer clothing and footwear.
Secondly, and much in line with the characteristics of top-income earners elsewhere in the emerging economies, luxury goods are perceived as an investment, which has helped to drive luxury spending, especially at a time of slowing economic growth, high inflation, weak stock market performance and currency fluctuations.
Therefore, holding on to such tangible assets as luxury jewellery and timepieces has been a good hedge against inflation and currency risk.
Economic optimism returns following on from election results
India saw a weak start to the year, but optimism has returned following on from election results that gave Narendra Modi a strong mandate and, as a minimum, take political uncertainty out of the equation. As a result, investment is likely to pick up in the second half of the year and business confidence is improving domestically. Real GDP grew at an average rate of 8.3% per year in 2004-2010.
Economic gains were broadly based, with both agriculture and industry performing strongly. However, growth began to ease in 2011. The slowdown continued in 2012 and 2013 as a result of problems in the world economy and domestic supply constraints. Public and private investment also declined. The economy’s performance was not sufficient to create enough salaried jobs for the country’s expanding workforce.
Despite the optimistic outlook in the luxury goods industry, serious challenges remain on a broader scale and turning the economy around will be no small task for the government. Inflation remains stubbornly high and is a key challenge for the new government, with wholesale prices surging in June on the back of food price rises.
The fiscal deficit remains a key concern, but, in July’s budget, the government pledged a fiscal deficit target of 4.1% of GDP in 2014 – an ambitious goal – but a sign of the government’s commitment to tackling one of the economy’s key weaknesses.
The Oberoi Udaivilas, Udaipur
Income inequality is still high and poverty is widespread in India
While income inequality is still high and poverty is widespread in India, Euromonitor International forecasts a solid middle-class expansion in the country through to 2030 as a result of India’s improved long-term economic outlook.
Over 2014-2030 the number of households with an annual disposable income below US$10,000 (in 2013 prices) will fall, while the number of households earning US$10,000-25,000 will rise significantly, creating a solid base for the country’s luxury goods markets.
Although India is still a low-income country, especially when compared with other BRIC peers, the country’s consumer market is vast, with growth prospects and opportunities driven by a youthful demographic and burgeoning middle class.
Much like in other key emerging markets, Indians in their 30s and early 40s are the highest income earners in the country and are forecast to remain so in the period through to 2030, driving consumer expenditure growth as well as shaping patterns of discretionary spending and demand for luxury products.
Close to 70% of people in the top income bracket in India are in their 30s and 40s – significantly younger than high-income populations in advanced economies as well as some emerging markets.
These professional and emerging business leaders – many of whom have not necessarily been born wealthy and are keen to use luxury as a marker of success – represent the new money that is driving luxury spending in the market.
Recognising this long-term trend will help luxury businesses succeed by targeting the right consumers with the right luxury products, at the right price levels.
Consumer spending on discretionary items (including luxury goods) has steadily increased from 54.9% of total consumer expenditure in 2008 to 57.2% in 2013, despite overall low income and high savings levels. Over the same review period consumer expenditure on miscellaneous goods and services recorded the fastest growth of 50.1% in real terms.
The growing number of young professionals with rising disposable incomes has driven the robust growth in these consumer-spending categories, while the aspiration to enjoy better lifestyles has also created increased demand for financial services in the consumer credit and private banking sectors. This has indirectly fuelled demand for luxury goods, premium services and high-end hotels.
Growth in India’s high-income population is relatively weak when compared to the overall growth in luxury goods sales. In 2013, India’s high-income population grew by 3% and yet sales of luxury goods grew by 15% – the fastest growth between all emerging and developing countries, and double the growth witnessed in China over the same period.
In fact, India is not even among the top 10 emerging markets with the fastest-growing high-income population and it is not necessarily a “luxury-friendly” country compared to other emerging markets like Indonesia, due to high custom duties on imported luxury goods.
So, the fact that it has the fastest-growing luxury market in the context of low-income growth and modest expansion in high earners makes it an interesting market to watch, although it should be noted that such growth is from a low base.
India is one of the world’s most desirable markets for luxury goods
The number of high net worth individuals (HNWIs, defined as those having more than $1 million in liquid assets) in India grew significantly between 2007 and 2011. According to the 2012 World Wealth Report by CapGemini and Merrill Lynch, the number of high net worth individuals in India reached 125,500 by the end of 2011. This was the fifth highest number of HNWIs in the Asia Pacific region after Japan, China, Australia and South Korea.
These figures are impressive when considered against the backdrop of the global financial crisis. A member of the BRIC club alongside Brazil, China and Russia, India’s output in purchasing power parity terms is expected to surpass many of the world’s current developed powers in the next decade, which, teamed with the increase in HNWIs, provides a huge opportunity for global luxury brand manufacturers to concentrate on India and target wealthy Indian consumers.
An increase in the number of top-income earners will continue to spur luxury spending in India, given the importance of the richest households in private consumption. In India, the richest 10.0% of households made up 22.7% of total consumer expenditure in 2011.
In 2011 and 2012 the central government of India finalised policies that will allow 100% foreign direct investment in single-brand retailing and 51% in multi-brand retailing. This has created an opportunity for international luxury brands to concentrate on the Indian market. Global brands such as Prada and many more have already made plans to invest in India and open a couple of stores in the short term.
The already present global brands such as Louis Vuitton are also expanding their stores by investing more money and some companies are changing their joint venture partnerships to increase their presence. For example, Armani has changed its partner from DLF to Genesis Luxury.
In theory, India is one of the world’s most desirable markets for luxury goods manufacturers and investors alike. As one of the four BRIC markets, along with Brazil, Russia and China, it offers a vast population of 1.2 billion in 2013, rapid urbanisation and rising disposable income levels.
Yet not only are India’s foreign direct investment inflows far below their full potential, they were also nearly halved between 2008 and 2013 from US$47.1 billion to US$25.5 billion.
Euromonitor International has identified a number of issues, including poor infrastructure, pervasive corruption, red tape in business procedures and skills shortages, which is making it increasingly challenging for luxury brands and retailers to operate effectively in the country. Wide-reaching reforms are needed to address its problems and boost luxury investment.
Increasing infrastructure and operational costs will remain a concern for luxury goods players
It remains to be seen if the BJP will conduct the reforms needed to improve India’s business environment, which will have a long-term effect on its luxury goods landscape. India’s FDI intensity dwindled to 1.3% of its total GDP in 2012, down from 3.6% in 2008. This could well increase, as the BJP has said it will encourage foreign investment inflows, providing they will create employment and generate economic growth.
Yet this investment is unlikely to be permitted to come from foreign luxury goods retailers: the BJP stated in its manifesto that it was opposed to lifting India’s ban on foreign investment in multi-brand retail, which is part of the reason its FDI intensity rate is currently so poor.
Euromonitor International forecasts that India will achieve the fastest real growth in luxury goods sales of all emerging markets between 2014 and 2018. Total luxury goods retail value in India is expected to grow by 63% (ahead of China on 59%) during the period. Increasing disposable incomes and rises in the number of high net worth individuals will provide an opportunity for luxury goods players in India.
Taj Lake Palace, Udaipur
However, operators will continue to face limitations in terms of a shortage of luxury infrastructure and well trained retail personnel. Increasing education levels in India are not expected to help luxury goods retailers and maintaining quality staffing will remain an issue.
Increasing infrastructure and operational costs will remain a concern for the luxury goods players over the forecast period, particularly given the depreciation of the rupee.
Furthermore, the removal of restrictions, enabling more luxury players to enter India through 100% single-brand and 51% multi-brand retailing will restrict the space on offer in luxury shopping centres. As a result, luxury players will shift more into prime shopping streets in major cities during the forecast period.
In the face of rising costs, luxury players may seek to find alternative means of distribution, including targeting Internet retailing as a key distribution channel during the forecast period. Operators will also see the grouping of brands to form multi-brand outlets.
For example, Genesis Luxury Fashion Pvt Ltd will expand its multi-brand luxury outlet Luxxe Box and many more players will follow the same trend. Companies will shift to the prime shopping streets of major cities and increase their presence in third party outlets such as 7 For All Mankind (VF Corp), which has exclusive branded outlets and is present in luxury multi-brand outlet The Collective.
While India’s overall per household expenditure is low compared to its BRIC counterparts there are large variations in household spending levels and consumption patterns, with richer regions such as Delhi, Goa and Mizoram having significantly greater capacity for luxury spending.
Marketers of luxury goods will need to implement multiple business strategies, tailoring to each region and target group, in order to successfully harness the tremendous potential of the Indian luxury goods market.