Space crunch, taxes hurting India's luxury market: study

The massive pressure on land in overpopulated India is hampering the growth of luxury brands in India, as there is a dearth of quality space and high street or super premium malls, according to a new study.

There is a strong need for creating modernised and dedicated luxury retail areas in protected vicinities such as airports, according to the Assocham-KPMG joint study.

"Setting up stores in high streets affects luxury retailers' profitability due to skyrocketing rental costs. Moreover, high streets are very cluttered, crowded and are unsuitable due to the absence of exclusive ambience that luxury retail demands," according to the study titled Challenges highlighted by luxury retailers in India, jointly conducted by the Associated Chambers of Commerce & Industry of India and KPMG.

The Indian luxury market grew at a healthy rate of 30 per cent to reach $8.5 billion in 2013 and is likely to continue growing at a healthy pace of about 20 per cent, and reach $14 billion by 2016 owing to rising number of wealthy people, growing middle class, affluent young consumers and other related factors.

India currently has just 1-2 per cent share in the global luxury market, but it is the fifth-most attractive market for international retailers.

Yet, a fragmented and diversified consumer base is another significant challenge being faced by luxury retailers as high net worth individuals are not easy to reach, noted the study.

Luxury brands need to strategically design their growth plans to tap demand across three categories of HNIs - the inheritors (traditionally wealthy) who are habitual spenders; the professional elite who are discerning spenders; and a large segment of business giants (entrepreneurs, owners of small and medium enterprises) who have the money but lack appreciation for fine luxury goods.

"There is a need for luxury brands to focus on expansion in the type and nature of products being offered and increasingly adopt innovative marketing plans to tap rapidly evolving consumer behavioral trends," said D S Rawat, secretary general of Assocham, while releasing findings of the study.

''Luxury retailers need to plan out-of-the-box marketing strategies and come up with products that are tailor-made to suit the whims and fancies of varied Indian customers," said Rawat.

"Luxury is no longer a 'status symbol' but is now a lifestyle and the global brands need to fast evolve and learn ways to adapt within the local environment so that they can get accustomed to nuances of the market by understanding the cultural identity of Indian consumers," he added.

Lack of policy support is another prominent challenge being faced by luxury brands in India, noted the study. "Despite strong demand momentum, Indian luxury market has not been viewed as policies and regulations friendly for the luxury retailers," the report said.

"Import duties (20-150 per cent) are relatively higher and this is considered as a key apprehension factor among the international players, who may resist them to frame aggressive growth plans for India."

The supposed liberalisation of foreign direct investment (FDI) in retail contains clauses requiring 30-per cent of local sourcing, and this places a further constraint for international luxury brands, the study adds.

"Duties are manifold, ranging from customs, countervailing duty (CVD), special additional tax, to education cess, adding to the overall cost," said Rawat.

Besides, luxury retail is also affected by the system of 'maximum retail price' as it applies to customs duties and to cascading 'after customs' taxes, thereby heavily penalizing foreign brands and pushing up their overall entrance costs by up to 40 per cent.

Lack of trained staff is another facing Indian luxury retail industry which requires greater discretion and knowledge on the part of a salesperson, further highlighted the ASSOCHAM-KPMG study.

"Shortage of skilled labour for the industry is a major cause of concern as it is difficult to make the local workforce understand the heritage and legacy of the brand along with the specific finishes involved in the manufacturing process," said Rawat.

In the absence of these skills, brands have no option but to manufacture in their country of origin.

Lack of skilled workers can also be attributed to the sales function where presentation and interpersonal skills form an integral element for the business. Growing prevalence of counterfeit luxury goods and a grey market are also hampering the growth of the industry, noted the study.

Most of these products belong to segments such as apparel, perfumes and accessories, which are usually lower ticket items and can be easily placed in grey channels.

"Luxury players in India continue to face supply side issues such as legal loopholes pertaining to intellectual property rights, inadequate means to monitor various emerging channels, and a growing number of online portals, among other factors," the study added.

A collective, industry wide effort is likely to have a far-reaching impact in dealing with the issue - as seen in other industries such as films and music. Awareness and collaboration also needs to be built with authorities, who have experienced major revenue losses due to loss of taxes and duties, on how to deal with counterfeits, further suggested the study to counter the growing menace of counterfeit luxury products.

"Corrective measures need to be taken to banish the growth of grey luxury goods' market in India which results in sizeable revenue losses for firms," said Rawat, and added that a strong legal structure combined with effective framework of intellectual property protection would help prevent dilution of brand image and reduced consumer trust.

"Measures in form of effective intellectual property enforcement, plugging loopholes in the legal and judicial structure and higher conviction rates can help curb the growth of fake luxury products," Rawat said.