India Luxury Review 2011 CII at Kearney Report

A CII - A.T. Kearney Report

India Luxury Review 2011India Luxury Review 2011India Luxury Review 2011India Luxury Review 2011India Luxury Review 2011India Luxury Review 2011India Luxury Review 2011India Luxury Review 2011

India Luxury Review 2011A CII – A.T. Kearney Report

India Luxury Review 2011A CII – A.T. Kearney Report

October 2011

Confederation of Indian Industry

The Mantosh Sondhi Centre23, Institutional AreaLodi RoadNew Delhi - 110003IndiaTel: + 91 11 24629994-7Fax: + 91 11 24626149Contact:

Amita Sarkar, Senior Director, CII ([email protected])Atreyee Talapatra, Consultant, CII ([email protected])

A.T. Kearney Limited

1st Floor, Future Capital HousePeninsula Corporate ParkGanpatrao Kadam MargLower Parel (W)Mumbai - 400 013.IndiaTel:+91-22 - 4097 0700Fax:+91-22 - 4097 0725Contact:

Neelesh Hundekari - Principal and Head - Luxury and Lifestyle Practice, India([email protected])Saurine Doshi - Managing Director, India ([email protected])Hemant Kalbag - Vice President and Partner, Head - Consumer Industries and Retail Practice, Asia ([email protected])Pameela Pattabiraman - Principal, Consumer Industries and Retail Practice, India ([email protected])Himanshu Bajaj - Principal, Consumer Industries and Retail Practice, India ([email protected])Subhendu Roy - Manager, Consumer Industries and Retail Practice, India ([email protected])

This report has been jointly produced by Confederation of Indian Industry and A.T. Kearney Limited, the con-tents of which are meant only for information purpose of the reader. Readers are advised to conduct their owninvestigation and analysis of information contained in this report, and not rely on the information contained inthis report for any purpose. Neither Confederation of Indian Industry, nor A.T. Kearney make any representationregarding the accuracy or completeness of such information and expressly disclaim any or all liabilities based onsuch information or any omission thereof. No part of this report may be reproduced or distributed without theprior written consent of Confederation of Indian Industry and A.T. Kearney Limited.

Copyright: CONFEDERATION OF INDIAN INDUSTRY 2011 and A.T. KEARNEY INC. 2011

iv

The luxury market in India is gaining increasing visibility with each passing year. While the 'buzz' generated by this sector isdisproportionately high compared to the size of the market today, it does indicate that most global luxury brands recognizethe potential of the Indian luxury market. Given the high growth rates of the Indian market compared to that in matureeconomies, it is only likely that interest in the Indian luxury market will increase in the days ahead.

It is with this backdrop, that the Confederation of Indian Industry (CII) and A. T. Kearney have been actively tracking andsupporting the growth of the luxury market in India. CII, through its National Committee on Retail and Task Force on Luxury& Lifestyle, plays an active role in creating an industry forum for players in the luxury space. A.T. Kearney, one of the world'stop management consulting firms, serves several global clients in the luxury sector and is a thought leader in this space. Lastyear, A.T. Kearney and CII had teamed up to publish a comprehensive report on the Indian luxury market - 'Luxury in India:Charming the Snakes and Scaling the Ladders'. A. T. Kearney had published another report in 2007 with the Economic Times- India Luxury Review 2007.

The 2010 report provided a detailed assessment of all key luxury categories across products, services and assets, and includ-ed a bottom-up estimate of market sizes and five year growth potential. The report also identified the key opportunities aswell as the challenges that luxury industry needs to address, to unlock the potential of the market and continue on a stronggrowth trajectory. This year's study serves as a quick refresh of the state of the luxury market in India and captures the keytrends in the luxury market over the past year.

We are grateful to all the industry leaders and consumers who spent time with us in sharing their perspectives and validatingour hypotheses. We hope that this study help take the collective understanding of the luxury industry in India a few steps for-ward.

Confederation of Indian Industry A. T. Kearney

FOREWORD

v

vi

Need for a RefreshLast year CII and A.T. Kearney had teamed up to do anexhaustive deep dive into the Indian luxury market. As ourreaders would recall, the unpredictable nature of the marketled us to use the metaphor of a game of Snakes and Laddersin our report. Every move made by luxury players couldresult in dramatic success (Ladders) or significant setbacks(Snakes); companies must be watchful every step of the way.Looking at the rapidly changing market, we decided torefresh our study - essentially looking at key top-of-the-mindopportunities (new Ladders) and risks (new Snakes) forindustry players. This report aims to accomplish this, by cap-turing key market highlights and trends from the past yearand revalidating projections for the years ahead. In addition,we have conducted in-depth assessments of two interestingsub-segments of the market - Wines & Spirits and PersonalCare.

Luxury Market in India - Reflections on the YearGone By The Indian luxury market is evolving more rapidly than mostof us had foreseen. The luxury market witnessed robustgrowth of ~20% over the past year and is estimated to havereached ~ USD 5.75 billion in 2010, in line with our 5 yearprojections. Luxury products have grown the fastest at 29%to reach a size of USD 2.05 billion, well above expectationsof 23%. Services have grown at 22% to reach USD 0.95 bil-lion and assets have grown at 13% to reach USD 2.75 billion.

Jewellery, electronics, cars and fine dining have grownbeyond expectations, while apparel, accessories, wines andspirits have continued their strong growth. Real estate andyachts have remained more or less flat due to highprices/expectations of a correction and absence of marineinfrastructure respectively. In all categories, market leadershave grown well beyond the category growth.

Skepticism is being replaced by an increasing sense of buoy-ancy and promise in the future potential of the market.Consumers are accepting and adopting global trends muchfaster than anticipated. Digital and social media have made itpossible for companies to connect with some of the oncehard-to-reach Indian consumer. On the other hand, infra-structure challenges and regulatory constraints continue toexist and are not likely to be resolved easily in the near future,creating doubts about the sustainability of this sector. Privateequity investments in Genesis Colors and Kimaya reinforcethe belief in the sector.

What has changed in the last one year: Luxury has gonebeyond Delhi, Mumbai and Bangalore to Chennai,Hyderabad and Pune, which collectively now have over 30stores in apparel, accessories, watches and personal care.Similarly North Mumbai and Gurgaon are two new distinctcatchments that have emerged. Car dealerships are the mostpenetrated with more than 50% of their dealerships outside

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EXECUTIVE SUMMARY

2.452.76

0.77

0.94

2009

2.04

2010

Products +29%

5.74

Services +22%

Assets +13%

4.81

1.58

Overall +20%

Total Luxury Market

the metros - Mumbai/Delhi/Bangalore/Chennai/Hyderabad. Trends observed have been increasing adoptionof global practices, lowering "badge" consciousness, compa-nies throwing open doors to new consumers and the grow-ing importance of digital media. However many challengesremain to be surmounted. The key challenge still remains ineffectively reaching the target consumer. Reservations onluxury purchases are clearly declining, with price parity withDubai/Singapore being very clearly attempted and commu-nicated. The need for Indianization is being realized by play-ers and some efforts are visible in apparel, watches and cars.Challenges around infrastructure still remain. There has beenlimited progress here - players need to wait and watch or gettogether, create luxury properties collectively or wait forwhat developers will offer. The regulatory structure has alsolargely remained unchanged over the past year, with therecent news about 100% FDI in single brand retail creatinghope amongst global brands. If this does happen, it will actas a growth stimulant and remove supply constraints. Talentremains a challenge.

In such an environment, companies need to make strategicchoices and smart investments, always with a cost consciousmindset. While there are several options open to luxury play-ers operating in India today, we believe there are three pathsthat luxury players could choose to take: Grow cautiously bygetting the basics right, experiment selectively to adopt a dif-ferentiated position in the market or gain first mover advan-tage in high potential sectors by bold 'market making' moves.A clear focus on the SME segment of consumers will yieldrich dividends. Domestic production of luxury goods needsto be attempted.

Players report that they are making money at the store level,

which means that the model is proven and now it is a ques-tion of adding growth capital to gain scale. A unique Indianmodel is emerging. For example, with sales productivity at60-80 Rs/sft/day, gross margins of 55-60%, rental costs of25-30% and other costs 15-20%, leaves a small profit at thestore level. This also implies that companies would benefitfrom choosing smaller store formats and being very carefulabout rent and overheads.

Overall, we are likely to see continued investment in the Indialuxury space. A few market making moves by leaders in thisspace will help exponentially increase growth. Based onindustry interviews, sentiment seems to be positive and thegeneral opinion is that India is likely to remain insulated fromthe impending global downturn. The Indian luxury seems setfor growth of ~20% in the year ahead.

Luxury Market in South East Asia - a study in con-trast An interesting contrast to the Indian market is the SouthEast Asian market (Singapore, Malaysia, Indonesia, Thailand,Philippines, Vietnam) which is culturally heterogenous, geo-graphically diverse and concentrated in a few big cities. Theluxury products market in South East Asia - focusing onapparel & accessories, personal care and jewelry - is estimat-ed to be USD 8 billion today, around 6-7 times the size of theIndian market for the same segments. The composition ofthe market is quite different from that of the India luxuryproducts market. While the Indian products market is domi-nated by jewellery, apparel and accessories form the largestsegment - over 60% - of the South East Asian market. Theconsumer base is much wider cutting across age, professionand social class boundaries. The consumer is much moreaware and luxury consumption begins at much lower income

viii

Category 2009 Market 2009-10 Growth Key Drivers(USD mn) Estimated Actual

Jewelry 730 21% 30% Increasing gold and diamond prices and low price elasticity

Electronics 160 22% 35% Increasing supply (modern trade)Stationery 9 20% 25% Increasing supply and usage as gifting itemCars 745 32% 36% New brands and better pricing due to local productionFine Dining 270 10% 40% Footprint expansion; new brandsTravel 32 15% 22% Increasing inbound tourismApparel and Accessories 205 30% 30% New entrants; footprint expansionWines and Spirits 180 22% 25% Increasing consumer awarenessWatches 50 27% 29% Increasing supply through higher distribution reachPersonal Care 230 20% 24% Introduction of new brandsHotels 440 10% 10% New hotels; footprint expansionReal Estate 1440 15% Negligible High interest rates, lower supply and expected market

correctionYachts 2 12% Negligible Inadequate infrastructure

levels at USD 10,000 per annum. Supply of luxury brands isabundant, easy payment options encourage consumption.Metrosexual, image conscious men are an important segmentand consumers do prefer brands with a distinct local origin,sensibility or customization.

Wines & Spirits - Hiccups on the High RoadThe luxury wines and spirits market which is 1.3% of thetotal wines and spirits market is about USD 220 milliongrowing at ~25%. This is interesting due to few reasons -largely male dominated, growing despite strong regulatoryand commercial barriers, and very importantly dominated bya few large players who can drive change. There are 3 maindrivers that are pushing this industry forward - increasing percapita consumption of liquor, premiumization and improvedsupply.

The Indian wines and spirits market faces four key challenges- prohibition mindset, regulatory and commercial barriers,distribution difficulties and finally the absence of goodnational liquor.

While understanding the luxury consumer continues to be acomplex task, we have been able to demystify some of thecode. We found that Small and Medium size enterprise own-ers have the least awareness to luxury wines and spirits.Traditionally wealthy families are the least price-conscious,while self employed and young professionals are the mostprice-conscious. Taste is the most critical purchase driver inall liquor categories. All liquor categories are premiumizing,with young population being the driving factor. Brand loyal-ty, although seen to some extent in all liquor categories, ishighly dominant in whiskey consumption. Growth will comefrom increased penetration into newer consumers (the SMEsegment), geographic segments (states with low penetration,Tier 2 towns), categories (champagne, liqueurs) and occa-sions (e.g. food pairing).

Companies need to use these insights to deal with the chal-lenges. Lobbying to standardize laws and regulations acrossstates and seeking inclusion in the impending GST regimewould be crucial. At the same time they need to considerinvesting in domestic production. To further develop themarket, companies should educate the low awareness con-

sumer segments and promote social drinking. Finally, compa-nies may also consider developing various channels of distri-butions like high end MBOs and organized retail channels toenhance the consumer retail experience and improve accessi-bility.

Personal Care - Fair but not yet LovelyThe luxury personal care market in India (8 % of the relevantmarket today) is estimated at ~USD 280 million in 2010 andgrowing at 22%. Typically a female consumer dominatedmarket in other countries, with a significant share of cosmet-ics and skin care, the Indian market stands out for its fra-grance domination. Traditional beauty archetypes whichemphasize fairness, eyes and hair beauty over skin and theprevalence of traditional beauty treatments are responsiblefor this slightly skewed market structure. Per capita con-sumption is one of the lowest in the world and is growing at16%.

Luxury consumers emphasize experience with the product astheir dominant purchase criteria. They are willing to experi-ment (low brand loyalty), prefers to shop in boutiques inIndia and stocks up on overseas visits due to the wider rangeand better prices. Key challenges facing the industry are lowconsumer awareness, limited supply side push andproduct/brand availability, infrastructure/retail channelavailability and talent.

Opportunities that the industry should seize are the increas-ing beauty and youth consciousness, weddings as big spendoccasions and the high penetration of beauty and skin careservices. Industry should focus on enhancing the belief inthe potential of the industry, consumer education and aware-ness and enhancing status appeal. In addition they shouldcollectively create luxury personal care zones inmalls/department stores and enhance their geographicalpenetration and invest in promotions.

Through this report, we hope to increase the collectiveunderstanding of the industry and thus contribute to theevolution of the Indian Luxury Industry. We believe there isa clear opportunity to make an impact in this market, andcreate a sizeable, profitable business quickly.

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Foreword v

Executive Summary vii

Chapter 1: Snakes and Ladders: Need for a Refresh 1

Chapter 2: Luxury Market in India — Reflections on the Year Gone By 5

Chapter 3: Luxury Market in South East Asia — A Study in Contrasts 15

Chapter 4: Sector Spotlight: Wines & Spirits — Hiccups on the High Road 19

Chapter 5: Sector Spotlight: Personal Care — Fair, but not yet Lovely 31

Appendix 39

References 45

TABLE OF CONTENTS

SNAKES AND LADDERS: NEED FORA REFRESH

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The Indian luxury industry is evolving more rapidly thanmost of us had foreseen. Skepticism is being replaced by anincreasing sense of buoyancy and promise in the futurepotential of the market. Consumers are accepting andadopting global trends much faster than anticipated. Digitaland social media have made it possible for companies toconnect with more of the hard-to-reach Indian consumer.On the other hand, infrastructure challenges and regulatoryconstraints continue to exist and are not likely to beresolved easily in the near future, creating doubts about thesustainability of this sector.

The unpredictable nature of this market led us to use themetaphor of a game of Snakes and Ladders in our reportpublished in 2010. Every move made by luxury playerscould result in dramatic success (Ladders) or significant set-backs (Snakes); companies must be watchful every step ofthe way. With this in mind, we conducted a comprehensiveassessment of the Indian luxury market last year, to providea perspective on how to avoid pitfalls (Charm the Snakes)and exploit opportunities (Climb the Ladders), to win inthis sector.

While such an exhaustive 'deep-dive' study is perhaps besttaken up once every three years, in a market that is chang-ing as rapidly as the Indian luxury sector, every year is likea new roll of dice - dealing an uncertain hand to all playersin the industry. There is thus merit in establishing an annu-al/bi-annual 'checkpoint' focused on key top-of-the-mind

opportunities (new Ladders) and risks (new Snakes) forindustry players. This report aims to accomplish this, bycapturing key market highlights and trends from the pastyear and revalidating projections for the years ahead. Inaddition, we have conducted in-depth assessments of twointeresting sub-segment of the market - Wines & Spiritsand Personal Care. We believe that deep-dive assessmentssuch as these will help us get a better understanding of theconundrum that the Indian luxury market presents.

The key questions that we set out to answer during thisstudy were:

How has the Indian luxury market grown over the pastyear?

Are we on cusp of any new opportunities to accelerategrowth?

What are the key risks to watch out for?

Insights and recommendations in this report have beendeveloped based on discussions with various industry leaderswho have shared their perspectives with us, from consumersurveys focused on the deep dive categories and from sec-ondary research.

We believe studies like this provide perspectives that are cru-cial to unraveling the enigma that continues to be Indian lux-ury market today.

SNAKES AND LADDERS: NEED FOR AREFRESH

C H A P T E R 1

LUXURY MARKET IN INDIA —REFLECTIONS ON THE YEAR GONEBY

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LUXURY MARKET IN INDIA - REFLECTIONSON THE YEAR GONE BY

The luxury market in India is interestingly poised today.Market growth over the past year was higher than expecta-tions and this strong upward trajectory is likely to continueover the year ahead. Optimism amongst luxury players seemsincreasing, driven by positive consumer sentiment.Consumers are evolving much faster than predicted, and arequickly catching up with global trends. While several chal-lenges exist, luxury players are now shifting focus from fight-ing against these constraints to innovating within their con-fines. In this environment, luxury players are moving forwardwith a mix of hope and caution. A handful of players thathave taken bold, market making moves are beginning to reapearly rewards. While there are no easy "silver bullet" solu-tions, we see a few emerging themes on how to grow andoperate profitably in the Indian luxury market.

Luxury Market in 2010: Better than ExpectationsThe luxury market in India witnessed robust growth of 20%

C H A P T E R 2

2.452.76

0.77

0.94

2009

2.04

2010

Products +29%

5.74

Services +22%

Assets +13%

4.81

1.58

Overall +20%

Total Luxury Market

Figure 1. Luxury Market Growth 2009-10 (Sizein USD Bn)

0.01

2009

1.58

0.73

Jewelry +30%

Apparel and Accessories +30%

Personal Care +24%

Wines and Spirits +25%

Electronics +35%

Watches +29%

Home Décor +25%

Stationery +25%

2010

2.04

0.96

0.27

0.28

0.22

0.21

0.070.02

0.18

0.21

0.23

0.16

0.05 0.020.01

Overall

Products

Hotels +10%

Fine Dining +40%

Travel +22%

Spa +27%

2010

0.94

0.49

0.38

0.040.03

2009

0.77

0.44

0.27

0.030.03

Overall +22%

Services

Real Estate 0%

Cars +36%

Works of Art +15%

Yachts 0%

2010

2.76

1.44

1.01

0.31

0.00

2009

2.45

1.44

0.75

0.27

0.00

Overall +13%

Assets

+29%

Source: Interviews, Secondary Research, Probe Equity Research, A.T. Kearney Analysis

Source: Interviews, Secondary Research, Probe Equity Research, A.T. KearneyAnalysisNote: Hair care has also been included this year and hence the 2009 luxury marketsize of USD 4.76 billion has become USD 4.81 billion.

Figure 2. Luxury Market Growth 2009-10 - Breakdown by Products, Services and Assets (USD Bn)

over the past year and is estimated to have reached USD 5.75billion in 2010. Luxury market growth is in line with the-forecasted 5 year growth forecast - set out in our report pub-lished last year.

Luxury products have led the way in the market, growingmuch faster than projections. Services have also performedwell, with most categories exceeding expectations. Luxuryassets like cars have continued on their strong growth path,surpassing forecasts for the fourth year in a row. However,the overall growth rate in assets was hampered by a slow-down in luxury real estate. Of particular interest to note isthe growth rates enjoyed by market leaders - high double dig-its led by a combination of same store sales and footprintexpansion.

There continues to be a steady stream of new players enter-ing the market across different segments. The luxury carsmarket, which has witnessed significant traction over the pastfour years, saw the entry of globally revered brands such asAston Martin and Ferrari. The luxury bikes market seems tobe finally kicking into the next gear, with brands like Ducatiand Harley Davidson making their presence felt in this space.The luxury products market witnessed the entry of brandslike Hermes and Paul & Shark in the apparel space, andbrands like Kiehl's and L'Occitane in personal care. The finedining market saw significant expansion by existing players aswell as the entry of new names like Hakkasan.

There were also examples of a few differentiated marketentry strategies. Instead of setting up shop in luxury malls, ashas been the trend over the past few years, Hermes has ven-

tured into market with standalone stores in iconic buildingsin Mumbai and Pune. Another interesting development wasthe number of private equity deals that have transpired in theluxury space over the past 12 months, such as L Capitalacquiring a stake in Genesis Luxury and Franklin Templetonacquiring a stake in Kimaya.

While players continue to move cautiously in the luxury mar-ket, there is an increasing sense of buoyancy and optimismamongst the industry leaders about the future potential ofthe Indian luxury market. While companies realize that Indiawill not be an easy country to play in, it is definitely on theradar of most players as a long-term growth market. Ourprojections for 2015 of an expected market size of USD14.72 billion (USD 5.38 billion products, USD 1.45 billionservices and USD 7.9 billion assets) remain unchanged.

Consumers Evolving Faster Than AnticipatedConsumers in India are evolving quite rapidly - in fact, thepace of change is much higher than that anticipated by mostluxury players. Some of highlights of emerging trendsinclude: New cities and catchments on the luxury map:

Chennai, Hyderabad and Pune are now confirmed luxu-ry destinations with several brands opening stores inthese cities (Hermes, Paul & Shark, Diesel, Canali, Tumietc). Stores in cities beyond Mumbai, Delhi, Bangalorenow account for 23% of the stores. In addition newcatchments in Mumbai (North Mumbai/Juhu) and Delhi(Gurgaon) are becoming popular destinations for luxury.This is an acknowledgement of the wealth in thesecities/catchments and the readiness of the brands to go

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Figure 3. Growth Rates by Category - Actual vs. Estimated

Category 2009 Market 2009-10 Growth Key Drivers(USD mn) Estimated Actual

Jewelry 730 21% 30% Increasing gold and diamond prices and low price elasticity

Electronics 160 22% 35% Increasing supply (modern trade)Stationery 9 20% 25% Increasing supply and usage as gifting itemCars 745 32% 36% New brands and better pricing due to local productionFine Dining 270 10% 40% Footprint expansion; new brandsTravel 32 15% 22% Increasing inbound tourismApparel and Accessories 205 30% 30% New entrants; footprint expansionWines and Spirits 180 22% 25% Increasing consumer awarenessWatches 50 27% 29% Increasing supply through higher distribution reachPersonal Care 230 20% 24% Introduction of new brandsHotels 440 10% 10% New hotels; footprint expansionReal Estate 1440 15% Negligible High interest rates, lower supply and expected market

correctionYachts 2 12% Negligible Inadequate infrastructure

Source: Probe Equity Research, A.T. Kearney Analysis, Expert Interviews

there to tap the demand. This will most certainly add tothe demand for luxury products. Car dealerships are themost penetrated with more than 50% of their dealershipsoutside the metros (Mumbai/Delhi/Bangalore/Hyderabad/Chennai) - towns where luxury car dealer-ships are present are Ahmedabad, Bhubaneshwar,Chandigarh, Coimbatore Goa, Guwahati, Jaipur, Kochi,Kolkata, Ludhiana, Pune, Raipur, Surat. These are poten-tial destinations for luxury products as well as servicesand assets.

Increasing adoption of global trends: Consumerstoday are accepting and adopting international customsand trends at a much faster pace than anticipated. Indiano longer continues to be the 'lagging' market that takestime to adapt to global changes. Consumers are well-informed and increasingly demanding about latest trends- especially in the luxury products space. In categorieslike apparel & accessories and personal care, the key cri-teria for purchase is no longer price parity with interna-tional markets (which is almost expected as a 'given' cri-teria), but the availability of the latest collections. In fact,while brands do launch their latest collections in India atthe same time as they do in other markets, consumers stillcomplain about width and depth of range. Retailershence have to walk the fine line between trying to provideas much variety and choice to provide consumers withexactly what they want (e.g. fit in apparel is becomingmuch more important) while managing the economics ofinventory and likely obsolescence, given the still smallmarket. Another interesting example is that of recenttrends in wine consumption. While India has traditional-ly been a red wine market, this summer, the consumptionof white wine went up from the typical 30% to over 50%of the market. This mirrors trends in the European mar-ket, where consumers prefer white wine in warm weath-er.

Lowering 'badge consciousness': Indians have typical-ly been highly badge conscious. Thus, selling 'famousbrands' and products with prominent logos has alwaysbeen easier than introducing new brands. While the'badge' is - and will probably continue to be an importantfactor in our market for some time to come, consumersare now increasingly willing to move beyond the verypopular brands, brands that well known in other marketsand have a clear and unique value proposition. In theapparel space for instance, there are a growing number oftakers for brands that are differentiated and have a strong'point of view'. Several new brands like Etro, Paul &Shark, Hackett and Superdry are making their mark in amarket that wanted to stick only to the likes of Armani,

Versace and Hugo Boss. Throwing open doors to new consumers: Luxury

players are slowly but surely focusing on new consumers.The traditionally wealthy who know their Guccis fromtheir Versaces, know where to buy, at what price, just asthe flush with bonus CEO does. They will come find youwhen they need something or might continue to buyoverseas. But it is the other two segments of the market- the young (the facebook generation) and SME (smalland medium enterprise owner) that are becoming impor-tant. A key trend being adopted by companies is to 'catchthem young'. Given the fast growing and upwardlymobile nature of the youth segment in India today, thisseems to be a logical move for luxury companies. Whilethe youth segment does not contribute to a significantpercentage of luxury consumption yet, by hooking theseconsumers in at an early stage, luxury players are lookingto reap benefits in the long run. The SME owner seg-ment we believe is still underleveraged. A real estateimplication of this desire to target the "new consumer" isthe firm conclusion that luxury needs to move out of itscocoon in five star hotels and experiment with crossoverformats where luxury rubs shoulders with lifestyle.Palladium in Mumbai is a great example where Burberryand Zara are right opposite each other and the consumerdoesn't seem to mind. While luxury malls like DLFEmporio offer a true luxury experience to the connois-seur, India probably needs more in-between formats thatare good enough for luxury and great for premium, whileluxury retailing in five star hotels, will most certainly stag-nate.

Growing importance of digital media: The next fewyears are likely to see a paradigm shift in the way compa-nies reach out to consumers. The internet, facebook,twitter and mobile communication are revolutionizingthe ways people interact and communicate with eachother. Early movers in the luxury space are using this asa means to reach out the once hard-to-reach yet net savvyIndian consumer. Online retailing is being suggested asthe medium of choice to target luxury consumers incities outside the metros. In India, in all industries the"last mile" is the biggest challenge. Combine that withthe "needle in a haystack" nature of the luxury consumerin this country of 1 billion+ and the problem becomesone that can seriously constrain growth. Distribution andreaching the right consumer at a reasonable cost is the bigdivide that separates the aware consumer and the eagerseller. Internet allows disintermediation like no othermedium does. The attraction is hence not difficult tounderstand. Traditional wet blankets like low internet

9

penetration do not deter the proponents, since the pene-tration amongst the target population is high. Onlineretailers on their part are working on models that wouldappeal to a broader set of consumers (e.g. myntra.com,fashionandyou.com etc) and some have attracted PEfunding as well. The products/sevices that would bemost amenable to internet retailing in the first wavewould be those where the consumer has few other con-venient options (e.g. travel, hotels), where the consumerknows exactly what they want and specifications defineeverything (e.g. a luxury watch or a perfume) or where theproduct is meant for gifting (e.g. small jewellery). Whilefor net savvy consumers in the hinterland who have nophysical access to luxury products in their own city mightdrive sales, continuing concerns about things like trials,fits etc are issues that will have to be addressed beforethis becomes a channel that can overcome the barrierthat removes the barriers of physical separation. Webelieve that while marketing using social media is proba-bly a must do for all brands, there is little evidence of suc-cessful breakthrough innovation in actual selling yet.

Challenges and Constraints to Continue In our previous report, we had listed a numbers of chal-lenges faced by players in the Indian luxury. A year later,there has been little progress made against these and bothregulatory and infrastructure constraints continue to plaguethe market. Of all the challenges that had been identified,most progress has probably been made on the consumerawareness front.

Reaching the target consumer: Awareness and per-haps more importantly - aspiration levels - have certainlygone up in the last year, driven no doubt by the increasedsupply in the market. Brands are experiencing growthupwards of 20-25% in same store sales, while new storeopening is limited only by availability of space. Newcatchments in Mumbai (North Mumbai, e.g. Juhu), Delhi(Gurgaon) and penetration into towns like Pune,Ludhiana, Chandigarh is clear indication that luxuryretailers are willing to go beyond their zone of comfort.As can be seen from the table below, the penetration ofbrands across the country is now much better than a yearago. Many CEOs that we spoke to agreed that micro-seg-mentation of the market is essential, though absence ofdata implies the need for focused effort. The hardest toreach is probably the SME segment.

Reservations about luxury purchases: The Indianconsumer continues to surprise players. Reservations areclearly declining, yet a lot still needs to be done:

a. Experimentation: The extremely experimentalnature of the consumer is coming in handy. Brandstell absolutely unique stories that brands tell abouthow the most unlikely consumers make purchases."Have money, will buy, but please treat me well'seems to be what the consumer is saying.

b. Price parity: The message about the value consciousnature of the consumer is now very clear to thebrands. Hence eliminating unnecessary frills, match-ing prices to Dubai and Singapore is now more or lessa given. Except US, the wonderland of fantastic pric-ing and the preferential pricing in home countries inEurope for brands, brands are trying to match theclose shopping alternatives such as Dubai andSingapore

c. Indianization: Too little on this front so far. Theneed actually is becoming far more obvious though.Whether it is a preference for two-tone metal watchbelts in India against the rubber belt revolution that issweeping the rest of the world or the need for gar-ments that will flatter the figure of the Indian middleaged woman, the need has never been more obvious.For example, for the Middle East markets where tra-ditional wear dominates women's wear, luxury brandshave introduced abayas. We await some significantsteps by brands in this direction. Admittedly it won'tbe easy to create customized collections for a marketwhich is still very small and designers and brandCEOs both would need a lot of convincing beforewe see, substantial Indianization.

Infrastructure limitations - no end in sight:

Availability of high quality real estate at the right pricescontinues to be the key concern for growth. With fivestar hotels losing their sheen as 'preferred' luxury destina-tions, and high streets still to emerge as a credible alter-native, players are jostling for space in premium malls.Limited new supply on the mall front, with players in thelifestyle segment vying for quality real estate as well, con-tinues to be a challenge for most luxury players. Mallactivity which had slowed down in 2009, has caused a set-back with very limited new space being available immedi-ately. No new news here, players need to either wait andwatch or get together, create luxury properties collective-ly or wait for what developers will offer.

Regulation - some hope: The regulatory structure haslargely remained unchanged over the past year. In somecases (eg: wines and spirits), new duties and age restric-tions have been introduced, which are likely to have neg-ative impact on the luxury market. FDI in multi-brandretail is not likely to be permitted any time in the near

10

future, putting a dampener on plans of many players.Reports of the proposed 100% Foreign DirectInvestment (FDI) in single brand retail have caused someexcitement in a market which has been waiting for achange in regulation for the last several years without anysuccor. Most luxury brands would want a 100% controlon their destiny if they want to consider serious invest-ment in a country. A 100% subsidiary also means greaterpsychological commitment from the brand, which leadsto greater awareness and understanding of the uniqueissues on the ground and a much greater desire to worktowards changing them, all of which will be welcomeconsequences. For most international brands, the party isstill on in China and South East Asia is a much larger andeasier market, so why would they not wait till Indiadecides to liberalize its regulations? We believe if theGovernment actually manages to push through 100%FDI in retail, many international players who have beensitting on the fence or have been less than bullish willdecide to enter, removing one of the most critical con-straints on growth - supply. Multi-brand retailing wouldbe an 'even better if' as it would allow multi-brand for-mats to enter, a necessity for getting the consumers toexperience many brands while the market matures.

Lack of Skilled Talent: There has been very littlechange on this front. High quality talent continues to belimited. With the entry of new brands and footprintexpansion by most companies, luxury players are facinghigh attrition rates resulting in increasing personnel costs.Little progress has been made around setting up an edu-cational ecosystem to provide for talent to the luxuryindustry.

Supply constraints: Perhaps due to the above factorsand partly due to alternative growth opportunities inChina and South East Asia, the market still remains sup-ply constrained. Expansion is still slow, Mumbai andDelhi still the hub of action and store footprints andproduct distribution is still low. We believe the industryshould look at luxury cars as an indication of the poten-tial. Luxury cars have continuously defied growth projec-tions even though ticket prices for cars are one of thehighest, duties on cars are undoubtedly the highest, roadsare pathetic and most of these are cars to be self-drivenin a country where the rich don't drive. To be fair, a car isperhaps unmatched as a status symbol, you can't carry itin your suitcase from abroad and "fit" is much lessimportant. However luxury car dealerships enjoy thehighest penetration amongst any luxury category andshould be an indicator of the latent demand scatteredaround the country. On the whole, however, challenges

exist and are not likely to be resolved easily in the nearfuture. In such a situation, what could happen if theglobal financial turmoil impacts India and fears of aslowdown turn serious?

Potential impact of a slow down? Maybe not muchAs business news from the West becomes more and morediscouraging and inflation and interest rates dampen theenthusiasm in the Indian market, business discussions in allindustries in India inevitably touch upon the likely impact ofa slow down. The nascent luxury industry should worryabout what a slow down could mean for them. As we dis-cussed this issue with several business leaders, while wenoticed a certain cautiousness, there was a clear feeling thatthe impact if any is likely to be muted if at all. The reasonsare perhaps not far to see. In the last recession in 2008-2009,the industry did not de-grow or stagnate, it just grew at aslower rate. While the market size potential lost was around10% during that period and international brands did defertheir entry plans, it wasn't a huge dampener on the spirit ofthe players. The feeling amongst CEOs is that domestic con-sumption in India is more insulated than we think it is.Unique characteristics such as wedding driven purchases(which are funded from inherited wealth, savings or debt -depending on who the consumer is and hence relativelyimmune), wealth driven consumption not income driven forthe millionaires and the relatively small ticket prices of atleast the product segment explains this belief. What could gowrong? Serious job losses if they happen could dampen thespirit of the young consumer and force them to conservethan spend and a severe recession might mean that thewealthy might defer purchases not because they can't afford,but they might not want to be seen spending.

Given all the new opportunities that are unfolding them-selves while challenges continue to exist, what should com-panies do? We explore potential solutions in the next section.

Uniquely 'Indian' Solutions NeededThe key challenge for players in the Indian luxury market isthat the market is small, growing fast but not exponentiallyand while growth is evident, bottomline rewards are insuffi-cient. The key question to hence think about is what could bedone to liberate the constraints on growth, so that it turnsexponential and while we wait for it to happen, how do wefind a way to make some money? Aggressive market makingmoves may be good for the growth objective and also pro-vide first mover advantage in the long term, but could berisky in the short term. Too cautious an approach and soon-er or later, the global parent might lose interest or patience

11

and decide to withdraw and reenter later. It is worthwhileremembering that for a global luxury brand, India is only oneof the many options available for growth. With China prov-ing to be not only a fast growing, but also a lucrative market,companies could choose to play a wait and watch game inIndia, while focusing on the larger Chinese market. Webelieve that the right approach would be a combinationapproach that allows companies an opportunity to growwithout losing their shirt, while preparing them for capturingexponential growth.

We believe there are three paths that luxury players couldchoose to take in India.

1. Grow Cautiously - Most players have chosen adopt await and watch route to market. Companies followingthis path have largely focused on expanding in selectcities such as Mumbai and Delhi. While this is a fairly safeploy, the downside to this strategy would be that compa-nies risk losing out to other players that take moreaggressive steps. Working within the confines of thisstrategy, there are few measures around 'getting basicsright' that companies can take to ensure that they remainpreferred players in the luxury space:a. Targeted marketing - Luxury brands need to invest

in continual brand building and marketing activitiesto stay 'top of mind' with consumers. This becomesall the more important in the luxury products space,where brands need to decide how best to channelmarketing monies - and balance between providingan outstanding store look & feel and targeted market-ing activities.

b. Superior range and availability - For companiesthat are not looking to make bold moves in the mar-ket, providing sufficient range and width of productsand services is crucial. Based on interviews that weconducted, lack of sufficient range and non-availabil-ity of latest merchandise is the single biggest reasonfor Indian consumers to continue to make purchaseoutside India. Another factor that is often overlookedby luxury players is the need to ensure high availabil-ity of products - stock-outs are simply not toleratedby luxury consumers

c. Pricing parity - Competitive pricing with interna-tional markets is now expected almost as a 'given' bymost Indian consumers. With increasing price trans-parency available to consumers, companies need toensure that pricing is not significantly higher thaninternational market

d. Ladder products - While we had spoken about lad-

der brands last year, there is also a need to have prod-ucts at lower price levels within the range. This willhelp in introducing the Indian consumer to newbrands and creating aspirations that are likely to payoff as the consumers evolve.

2. Experiment Selectively - To adopt a differentiated posi-tion in the market, companies can choose to experimentin select areas. This enables players to make strategicinvestments, with relatively low risksa. Customized product offering - Luxury players

need to develop customized product offerings andtailored solutions for the Indian market. This will nothelp overcome the concern around sufficient rangeavailability, with consumers getting access to productsavailable only in India, but will also help increasebrand loyalty. This is not a move that is new to luxu-ry players - for instance, in the apparel space, severaltop design houses like Christian Dior and AlbertaFeretti sell designer 'abayas' that retail for as much asUSD 10,000 in Saudi Arabia. While there has beensome movement in this space in the past few months,such as Hermes and Marc Jacobs designing sareesand Zegna and Canali retailing Nehru jackets, there isclearly a long way for most players to go.

b. Frugal luxury model - There is little 'luxury' thatplayers have in running a luxury business in India. Asone of the luxury CEOs said, "In India, you need torun luxury the frugal way". We couldn't agree more.Companies in India need to find a 'local' model thatworks in the context of infrastructure challenges,high rental costs, low real estate availability and lackof skilled talent. Indian consumers are used to differ-ent scales for infrastructure in the Indian environ-ment and abroad (as seen in the case of the housingmarket in Mumbai for instance) and are quiteamenable to making do with a 'frugal' luxury model.On the other hand, expectations of service areextremely high. We continue to believe that workingwith smaller store formats till such time that realestate rentals become reasonable is perhaps the onlyoption, apart from using the store as a base for serv-ing a much wider clientele by taking the store (i.e.products) to the consumer's home.

3. Market Making - To gain first mover advantage in highpotential sectors, companies could look at bold 'marketmaking' moves. While these could require higher upfrontinvestment, the benefits in the long run are likely to besignificant.

12

a. Focus on the SME consumer: Amongst all the tar-get consumer segments, we believe it is this segmentthat needs the greatest attention and offers the great-est returns on investment. This segment comprises ofowners of small and medium sized businesses, haveenough surplus cash for spending, traditional inmindset, largely unaware of luxury products andbrands, are not readers of fashion magazines, notvery internet savvy, do not have clear tastes or prefer-ences and still feel intimidated or hesitant when deal-ing with flashy, big, stiff upper lip brands. This seg-ment needs the real education and hand holding. Therest will find their way to the brands one way or theother, but this segment has to be made aware, educat-ed, attracted, hand held, treated with tender lovingcare and made to feel good and pampered while theyshop. The rewards could be dramatic - they have themoney, but don't feel they have the status and want touse the money if they could to "arrive". Their chil-dren are already spenders, having been educatedabroad or in good institutions in India. Convertingthis consumer will however mean that brands have towalk the extra mile for these consumers. The largestluxury category - jewellery- thrives precisely on thisvery segment and here we believe brands still need tolearn a lot and bring about changes in the way they goabout attracting and converting these consumers. Astiff, aloof, impatient approach will not work, ratheran enticing, service oriented, patient and empatheticapproach is the way to go.

b. Domestic production - Companies with seriousaspirations for the Indian luxury market need tostrongly consider domestic production. This will helpbring down entry prices and make luxury productsaccessible to a significantly larger percentage of thepopulation. One segment that has effectively utilizedthis concept is the luxury car market - which is begin-ning to reap significant rewards. Government poli-cies, rules and regulations are also likely to be muchless stringent with domestic production - whichwould be very helpful in segments like Wines &Spirits.

c. Internet and digital revolution - Internet and socialmedia are beginning to play a much larger role in lux-ury consumption than ever before. Companies can

use the internet to reach consumers in a targetedmanner as well as to penetrate Tier 2 markets at a lowcost, thus minimizing their risk while maximizingchances of getting that extra 10-20% of sales.

While there is no proven model for the Indian market yet,there are emerging solutions for players to operate profitablyin this space - at least at a single store level. At the corporatelevel, companies still need to build scale to set off high over-heads and break even. A high level assessment of the pro-ductivity and cost structure required for profitable singlestore operations (apparel and accessories example) is givenbelow:

Lower footfalls translating to lower sales productivity, lowergross margins due to duties and discounting,and much high-er rentals characterize the Indian model. Lower salaries is theonly succor, leaving a small store level profit. The model ishence very delicately poised and explains why some brandscould lose money even at the store level. Getting the storesize and rental right is critical for store profitability and man-aging overheads and getting the right scale is critical for thechain economics to work out favorably. The good news isthat many players report that they are making money at thestore level, and overall profitability is within sight based onscaling up plans. A model which starts to make money at thestore level is right for attracting growth capital - where infu-sion of capital will help acquire scale faster, thus improvingthe economics of the chain.

In summary, we are likely to see continued investment in theIndia luxury space. A few market making moves by leaders inthis space will help exponentially increase growth. Based onindustry interviews, sentiment seems to be positive and thegeneral opinion is that the Indian market is likely to remainreasonably insulated from the likely global downturn. TheIndian luxury market thus seems well on course for a healthygrowth of ~20% in the years ahead.

13

Figure 4. Business model for India, appareland accessories exampleP&L Item Global IndiaRevenue/Sqft/day (INR) 110 - 170 60-80Gross Margin ~70% 55-60%Rentals (% of revenue) 10-15% 25-30%Other Costs (% of revenue) 20-25% 15-20%

LUXURY MARKET IN SOUTH EASTASIA — A STUDY IN CONTRASTS

Most studies on the luxury industry in India typically com-pare the market with China, to draw upon best practices andtakeaways for local players. While China is indeed the fastestgrowing market for luxury companies globally, it is quite dif-ferent from India culturally as well as in size and scale. In thissection, we focus on a comparison of the India luxury mar-ket, specifically the luxury products' segment, with that ofSouth East Asia - comprising Singapore, Thailand, Malaysia,Philippines, Vietnam and Indonesia,. There are several rea-sons why this makes for interesting comparison. South EastAsia, like India, is both culturally heterogeneous and geo-graphically dispersed. The market is still not very deep, withluxury consumption being limited to a few large cities -another similarity to the Indian market. While the luxuryproducts market is South East Asia is much more establishedthan that in India, and there are several differences betweenthe two geographies, there are still a few key insights to takeaway from the growth of this market.

The luxury products market in South East Asia - focusing onapparel & accessories, personal care and jewelry - is estimat-ed to be USD 8 billion today, around 6-7 times the size of theIndian market for the same segments. The composition ofthe market is quite different from that of the India luxuryproducts market. While the Indian products market is domi-nated by jewellery, apparel and accessories form the largestsegment - over 60% - of the South East Asian market.

Extremely high consumer awareness levels and aspi-

rations: The South East Asian luxury consumer cutsacross age, profession and social class boundaries. UnlikeIndia, luxury consumption is not limited primarily to tra-ditionally wealthy families, businessmen or successfulprofessionals in the corporate sector. Even consumersthat earn USD 10,000 per annum are willing to spend onluxury products, unlike in India, where rupee millionaires(with incomes of USD 20,000) still hesitate to venture

17

LUXURY MARKET IN SOUTH EAST ASIA —A STUDY IN CONTRASTS

C H A P T E R 3

SEA Luxury Product Market Growth (USD Bn)

3

1

0

0

0

+15%

+14%

2015

16

2005

4

3

110

1

1

4

8

2010

01

3

2

8

0

Singapore

Malaysia

Thailand

Indonesia

Philippines

Vietnam

3

21

+7%+7%

201520102005

11

52

+16%

+16%

201520102005

3

10

+22%

+24%

201520102005

Apparel & Accessories

Personal Care

Watches & Jewellery

Thailand &Indonesia expectedto grow faster thanthe other SEAcountries

Watches & jewellery category has beenfastest growing due to the growingnumber of nouveau rich (new millionaires)& growing upper middle class householdspurchasing them

Singapore expected to grow much faster than before due to newlydeveloped Integrated Resorts which attract tourist influx to gamble at casinosand shop at new Marina Bay Sands and Resorts World Sentosa luxury malls

Figure 5. South East Asia luxury products market break-up

Source: A.T. Kearney research and analysis

into this space. In fact, in a survey conducted by A.T.Kearney, 40% of South East Asian consumers withannual incomes less than USD 20,000 were open to buy-ing luxury products. Over 70% of the consumers sur-veyed, across all income segments, were actually likely tospend more than 20% of their income on luxury items.If the propensity to buy in India were only half as much,we would see an explosive growth in the luxury market inthe country.

High luxury product availability driving growth: Akey driver of luxury growth has been increasing supplyover the past few years. Cities like Singapore and KualaLumpur are preferred destinations for luxury productsales for people from all over South East Asia. Singaporein particular, with its multitude of high-end shoppingmalls, wide range of product offerings and competitivepricing, attracts with tourists across the globe looking fora world class luxury shopping experience. Luxury shop-ping has been typically limited to malls and departmentstores, unlike Europe with its array of luxury high streets.Interestingly enough, both luxury discounters or factoryoutlets and online retailing of luxury goods - channelsthat have picked up in a big way in the more developedmarkets - are yet to take off in South East Asia.

Easy payment options: A big driver of growth in themarket has been the availability of flexible payment plans(installments), which make luxury products accessible toa wide base of consumers. With high penetration of

credit cards and most companies willing to adopting flex-ible pay options, South East Asia seems set for increasingadoption of luxury products.

Men are the new Gem: The South East Asian luxurymarket has seen the rise of a whole new consumer seg-ment - metro-sexual men. Greater media exposure andincreasing image consciousness has led to extremely highdemand for male grooming products . There is a bigpotential to tap into this market and expotentially growthe luxury segment.

Think global act local: Given the diverse nature of themarket, adapting to local tastes has been a crucial successfactor for most luxury players. Interestingly, this is espe-cially important in the apparel sector, where over 90% ofconsumers are willing to buy 'domestic' luxury brands asthey reflect local preferences and tastes. One of themoves that has worked successfully is for global brandsto partner with local brands or boutiques and tappinginto local designer talent.

While the Indian luxury market still has a long way to go tocatch up with South East Asia, there are several trends andpractices that global players looking at increasing presence inthe India could learn from. As mentioned in the previouschapter, a strong supply side push, with customized modelsfor the local market, is necessary for the next wave of growthin India.

18

SECTOR SPOTLIGHT: WINES &SPIRITS — HICCUPS ON THE HIGHROAD

We have seen in Chapter 2 that the Indian luxury market hashad robust growth despite impending global slowdown. Weshall now turn the spotlight on one exciting category - luxu-ry Wines and Spirits. This is a very interesting category -largely male dominated, growing despite strong regulatoryand commercial barriers, and dominated by a few large play-ers who can drive change. We have stuck to the definition ofluxury that we have used earlier. Luxury in wines and spiritshave includes all products with retail price above USD 75 perbottle.

Luxury wines and spirits - small but fast growingThe total alcoholic beverages market in India has grown toUSD 28 Bn in 2010. The luxury market is a small fraction ofthe total market at ~0.8%. But it is expected to grow faster

than overall alcoholic beverages market and be ~1.5% oftotal market by 2015, growing from USD 220 Mn in 2010 toUSD 670 Mn by 2015.

The luxury market has grown in line with our estimates lastyear. The market is dominated by whiskey.

It is interesting to note here that liquor consumption in everycountry follows a different pattern based on the dominantliquor. In many cases, local produce drives consumptionhabits. This explains why China has a big market for special-ty spirits, while Russia is big in vodka - both have largedomestic production in these categories respectively.Similarly, food habits drive consumption. In France, con-

21

SECTOR SPOTLIGHT: WINES & SPIRITS —HICCUPS ON THE HIGH ROAD

C H A P T E R 4

175220

670

2009 2010 2015e

+25%

Figure 6. Luxury Wines and Spirits market inIndia (USD million)

Source: A.T. Kearney Analysis

White Spirits4%

Other Spirits1%

Whiskey85%

Wines10%

Figure 7. Luxury Market Segmentation in Indiaby value (2010)


sumers drink wine with meals. Similarly Russians prefervodka. Indians do not associate liquor with food. Whiskey isthe most acceptable form of social drinking and is accompa-nied by snacks.

Another difference in the Indian market is the size byregions. South is the biggest market and East the smallest. InSouth, the regional population is highly receptive to newproducts and flavours, and hence companies prefer to launchnew products in the region. In North, most of the high-endmarket resides in cities like Delhi, Gurgaon, Chandigarh andLudhiana, and these cities are expected to continue to see

increasing demand for premium and imported brands, partic-ularly in whiskey and wine. Similarly, the West luxury marketis driven by major cities like Mumbai and Pune. Finally inEast, luxury sales is lower than those of other regions, asincome levels and awareness among the majority of con-sumers are far below those of their counterparts in otherregions.

Having looked at the market structure, let us now understandthe key drivers for growth, peep into the world of the Indianluxury consumer, identify opportunities for companies andassess challenges facing the industry.

Growth drivers - consumer and supply ledThere are three fundamental growth drivers for the luxurywines and spirits market:

1. Increasing per capita consumption: India has a lowper capita alcohol consumption, however it is growingfast. Alcohol consumption is spurred by higher dispos-able income, reduction in stigma associated with drinkingdue to western influences and increased foreign travel bythe high end consumer. Rapid increase in eating out,increasing number of women and young drinkers, puband party culture in metros are all driving consumption atthe higher end.

Even though the per capita consumption has increasedover the past few years, a comparison with other coun-tries shows that it can increase further. This will comeboth from adding new consumers as well as increasingconsumption from existing ones.

22

85%78%

38%

55%56%

Russia USAChinaFranceIndia

Whiskey Wine VodkaSpecialty

SpiritsWine

Figure 8. Dominant liquor consumption in different countries (excludes beer) in 2010

Source: Datamonitor, A.T. Kearney Analysis

South35-40%

North20-25%

East10-15%

West25-30%

Figure 9. Regional Distribution of AlcoholicBeverages Market in India (2010)

Source: Euromonitor, A.T. Kearney Analysis

2. Premiumization: The liquor dinking Indian consumer isclearly wanting to premiumize. They want to try new andmore expensive liquor - partly to experiment and partlyto demonstrate status.. With more money in their handsand exposure to trends across the world, these con-sumers are moving up to aspirational brands. While forthe previous generation in India, imported liquor e.g."scotch" was considered out of reach and no one knewwhat wines were, sky is the limit for the new consumer.Interviews with the trade reveal that upselling in pubs

and bars is relatively easy; consumers don't mind tryingout new drinks even though they may be expensive. Thisbehavior is not restricted to any particular category ofalcohol, but can be observed across whether it iswhiskeys, wines, white or specialty spirits.

3. Improved supply: Along with the increased demandfrom aspiring consumers, improved supply dynamicshave also fuelled growth. International travel and dutyfree purchases have got Indians hooked to internationalbrands which were either not available or were expensivedue to duties. Having got used to it, these same con-sumers are now shopping for the same in the country -when they can't get it duty free. Organized retail is aidingthe availability of high-end liquor. Over the past fewyears, we have seen many exclusive organized liquorstores, which have spurred availability of more brandsacross urban and semi-urban centers. Some examples areDom Perignon Bar in Delhi and exclusive liquor area inhypermarkets. Similarly, liquor companies are investing inmarketing and promotional initiatives. They have startedtargeted promotions, like tasting and appreciation ses-sions to drive consumption. This creates awarenessamong new consumers , especially in the wealthy, but lessaware segments with traditional preferences. Liquorcompanies are also actively pushing traditional retailers togrow and focus on premium consumers. While thisupscaling of the supply side is most visible in the metros,the demand for premium products extends well beyondas even these consumers trade up. Brands are also spruc-ing up their distribution network to serve these cus-tomers.

Indian consumer - luxury seeking and tough topleaseThe Indian luxury consumer is unique. We conducted a sur-vey among high-end liquor consumers to gain an under-standing of their attitudes and behaviors. Some interestinginsights emerge:

1. Awareness: Small and Medium size enterprise ownershave the least awareness to luxury wines and spirits. Theirconsumption habits are traditional and liquor being asocial taboo in their circles, they have the resources butare constrained in their consumption. They have themeans, but companies need to educate them on high-end liquor. This segment is also the least taste conscious.

2. Price consciousness: All segments except the tradition-ally wealthy families tend to be highly price conscious,self employed and young professionals are the most price

23

3.7

2.9

20102007

Figure 10. Per capita consumption (in liters) ofalcohol in India

Source: WHO, A.T. Kearney analysis

3.7

8.0

16.0

IndiaChinaRussia

Figure 11. Per capita consumption (in liters) ofalcohol across countries

Source: WHO, A.T. Kearney analysis

conscious. In the case of liquor this is directly linked topropensity to buy overseas. All segments buy fromabroad. The consumer hates to pay the very high dutiesand does not mind stocking up every time he/she travelsabroad. A peculiar, behavior observed with respect toprice consciousness is that it depends on the consump-tion occasion. Purchase for personal consumption ismost sensitive to price, but when someone else is payingfor it (e.g. paid for by the employer) or when the con-sumer is entertaining to impress he/she is willing tospend more..

While this reflects the overall luxury products market,there are subtle differences when it comes to wines andspirits. Thus, we see that small and medium size enter-prise owners are much less aware of luxury liquor thanany other category, due to traditional societal taboo ondrinking. As a contrast, when compared to apparel, wefind most badge consciousness to be exhibited by youngprofessionals, while in luxury liquor, it is exhibited by tra-ditionally wealthy families.

3. Taste: Taste is the most critical purchase driver in allliquor categories. Within categories, whiskey and vodkaconsumers are most brand conscious. Consumers likeand remember the taste of their favourite brands and goseeking them in all categories. This behavior is most pro-nounced in whiskeys with their distinctive tastes andflavours and comparatively least in vodkas where somemixer is normally used, with wines falling in between. Invodkas, variety of flavors is becoming an interesting pur-chase driver. This can be attributed to the evolving tastepatterns among younger consumers and their willingnessto experiment.

4. Brand loyalty - highest for wiskey, switching - high-

est in wines: Although seen to some extent in all liquorcategories, loyalty is highly dominant in whiskey con-sumption. Although some amount of switching doestake place in whiskey, it takes place between brands in asimilar price range. Wine consumers are at the other endof the spectrum and switch their brands regularly. This ispartly due to low awareness in the wine segment, due tothe huge variety of wines available and the way wines arebranded. In wine, the country of origin (old world/newworld), name of the grape producing region and name ofvineyard are all important and together combine to cre-ate the "brand'. One needs to be a frequent wine con-sumer to know the wine you prefer. With very little expo-sure still to wines, consumers tend to decide based on

broad parameters such as country of origin (Europeanpreferred) and price bracket (<1500, >2000, etc). As suchif price is high, consumers tend to switch between wines.

24

9%11%

9% 8%

6%8%0%

Taste

Brand image & name

Price

Convenience / Availability

Flavour varietyBrand advertisingSetting

Vodka

42%

24%

12%

2% 1%

Wine

52%

12%

18%

0% 1%

Whiskey

59%

15%

11%

0%

Figure 13. Purchase drivers for different liquorcategories

Source: A.T. Kearney consumer survey

TraditionallyCriteria Medium Wealthy Corporate Self

Size Families & Executives Employed YoungEnterprise Large Professionals Professionals

Owners IndustrialistsAwareness

Taste Consciousness

Price Consciousness

Badge Consciousness

Propensity to buy overseas


Figure 12. Luxury wines and spirits - consumer segment insights

Very High Very Low

The few consumers who are brand loyal usually stick tomore famous "go-to brands" which they havetried/heard of earlier, not necessarily because they havechosen them from many alternatives. Vodka consump-tion is split approximately equally among loyalists andswitchers. Like whiskey, vodka consumers experimentwithin price categories and the presence of various fla-vors and extensive marketing encourages switching.

Vodka consumers however, rarely trade down.

5. Consumption location - on-trade more popular

channel. This is not surprising given that fewer Indianconsumers are comfortable drinking at home. A deeperlook into consumption patterns elaborate the variousoutlets within the on trade channel which vary betweencategories. Wine is consumed more frequently at restau-rants and large events or banquets on account of its easypairing with food and image as a social sophisticateddrink. Vodka on the other hand is mostly consumed atpubs, clubs and bars on account of it being a drink whichcan be easily mixed and its more unisex image. In the offtrade channel, travel retail plays a large role for luxuryliquor purchase. Place of consumption impacts pricing aswell, five star hotels for example add huge mark-ups onliquor (which they import duty free and hence liquor is ahigh margin driver) which in turn limits consumption.

6. Pairing with Indian food still nascent: Wines are pri-marily paired with meals and is a good driver of con-sumption internationally. In India, consumers normallyhave water with their meals, while liquor is in the form ofpre-dinner cocktails. Fundamental changes in consump-tion habits is the most sustainable form of growth and

hence this aspect needs to be explored carefully. As anexample, the carbonated beverages industry has takengreat efforts to pair their drinks with food items and cre-ate bundled offerings. The pairing of alcohol with foodcan be used by companies to design their marketing andpromotional campaigns, and tasting sessions.

Opportunities for growthThe luxury wines and spirits market is expected to grow from0.8% of the total market in 2010 to 1.5% by 2015. Most ofthis growth is expected to come from increased consumptionin underpenetrated consumer segments, geographies andoccasions. Underpenetrated consumer segments: Traditionally

under penetrated consumer segments are the small andmedium enterprise owners and their families. This is aprofitable, but traditionally untapped segment.Awareness, education, facilitating experimentation,attractive pricing and convenient distribution to encour-age them to uptrade to luxury liquor will be needed to getthis consumer class to start consuming

Underpenetrated geographies: While metros will con-tinue to drive growth, penetration and focus on Tier 2cities and currently under-penetrated states (regulationpermitting) need to be focused upon.

Under penetrated categories: India is largely a whiskeymarket. Just as vodka consumption is gradually increas-ing, companies should drive consumption of other cate-gories like champagne, liquers and other spirits. This willneed to go hand in hand with change in consumptionhabits - hence difficult, but as has been proven in case ofwines (wine drinking was unknown in the country, not solong ago) and white spirits, continuous promotion will

25

33% 73%

40%

22% 7%

7%4%

Loyal

Switch regularly

Slowly trade up as per my lifestyle

Look for value for money

Vodka

47%

Wine

23%

0%

Whiskey

44%

0%

Figure 14. Brand loyalty and switching for dif-ferent liquor categories


50%

65%

80%

50%

35%

20%

On trade

Off trade

VodkaWineWhiskey

Figure 15. Place of consumption for differentliquor categories


eventually make it happen. Underpenetrated occasions: The pairing of alcohol

with food can be a very good lever to encourage con-sumption. This aspect needs serious consumer research.

Overall, there is enough headroom for growth in the luxurywines and spirits category. The luxury market is e a small partof the overall market, though the drivers and opportunitiesare similar for luxury and premium liquor are similar.Companies in this sector can drive increased consumption byincreasing the variety, experience and availability to con-sumers.

Challenges for the industryHaving looked at the growth opportunity, we now turn ourattention at three key challenges that face the industry - pro-hibition mindset, regulatory and commercial barriers andabsence of good national liquor.

1. Prohibition mindset. While most countries have somekind of prohibition laws that seek to control and curtailalcohol distribution and consumption, Indian regulationliterally creates multiple countries within one country. Avery strong pre-independence prohibition mindset stilldominates government policy and makes it very hard for

companies to sell or distribute and consumers to con-sume. On the other hand, this sector contributes signifi-cantly to the revenues of state governments, creatingenough barriers for changing any policy that could leavethe states poorer. The prohibition mindset gets manifest-ed in the controls on distribution and very high taxes(import duty and excise duties and is best exemplified inthe differences in the extent of prohibition across states.In few states like Gujarat, Nagaland and Mizoram, alco-holic drinks are simply banned. Alcohol prohibitionistsare active in other states like Kerala. As late as June 2011,Andhra Pradesh government launched a new anti-alcoholcampaign to propagate the policy of prohibition. Theregulations also greatly control the channel throughwhich the product is distributed. If a company wants toconduct a sponsorship event they cannot source directlyfrom the wholesaler but need to buy their own productfrom a retailer. This makes sponsorship events also veryexpensive. Figure 16 explains the extent of prohibition inevery state (colour codes - green - low, red - very high

2. Regulatory and commercial barriers. Liquor tax ratesin India are the highest, compared to most Asianeconomies. This increases the price of liquor in India,artificially creating barriers for in-country purchases. Thisalways drives purchase of liquor while returning from

26

Figure 16. Levels of prohibition in select Indian states

Region State Prohibition LevelsNorth Delhi Age and Duty Driven Prohibition

Punjab Age and Supply Driven ProhibitionHaryana Age Driven ProhibitionChandigarh Low prohibitionUttar Pradesh Supply Driven ProhibitionRajasthan Supply Driven ProhibitionJammu and Kashmir Supply Driven ProhibitionUttarakhand Holy cities are complete prohibition, rest is duty driven

East and North East West Bengal Supply Driven ProhibitionBihar Low Prohibition Orissa Low ProhibitionMeghalaya Age Driven ProhibitionManipur Complete ProhibitionMizoram Complete ProhibitionNagaland Complete ProhibitionAndaman and Nicobar Low prohibition

West Maharashtra Age and Supply and Duty Driven prohibitionGujarat Complete ProhibitionGoa Low ProhibitionDaman and Diu Low prohibition

South Tamil Nadu Supply Driven Prohibition Andhra Pradesh Supply and Duty Driven Prohibition Karnataka Low prohibitionKerala Supply and Duty Driven Prohibition Lakshadweep Complete Prohibition


overseas. Eg. even compared to Europe, prices are muchhigher due to tariffs - For instance a Moet Chandon bot-tle costs approximate USD 40 in France as opposed toUSD 100 in India. Similarly, liquor tax and regulationstructure in India is very skewed. Every state has a differ-ent law and import duties for alcohol are very high. Thelaw seeks to discourage consumption by imposing con-straints on the consumer and the seller in multiple forms- complete prohibition, permit requirements, high importduties, controlled distribution, high tax rates etc. Due tothe skewed tax structure, there is thriving grey market inwines and spirits. This is a problem for companies sincethey have no control over the quality, counterfeit goodsand this channel. It causes brand dilution and is a threatto sales. State governments meanwhile are unwilling tochange this structure, due to the revenue generation fromthe industry.

3. Absence of a good national liquor. This is a key rea-son why alcohol is not part of our consumption habitsand is still considered a taboo on many dinner tables.Countries with high per capita consumption have astrong national liquor. French and Italians have wines,Scots have scotch, USA has bourbons, Japan the sake,Russia and Poland have Vodka. All these are a big sourceof forex, employment and national pride and also formpart of consumption habits. This also creates a negative

image of alcohol in India.4. Distribution challenge: The multiple statewise regula-

tion means that it is impossible to create a national luxu-ry liquor chain and traditional outlets are slow to change.Talent is not easy to get due to stigma associated with theindustry. Also not all outlets are ready to sell liquor. Thereare only 60,000-65,000 outlets for liquor (dining andretail included) as opposed to FMCG goods which havea universe of 8 million outlets.

Action agenda for the industryWe have seen so far that while the market potential for winesand spirits is high, there are numerous challenges thataredaunting. We believe there are a handful of initiatives thatthe industry should focus on as the Indian consumer find itsposition in the world of luxury wines and spirits.

1. Lobbying to standardize laws and regulations:

Companies will have to combat the Prohibition Mindsethead-on by emphasizing the lifestyle and entertainmentconnotation of wines and spirits. Change in this arenawill be slow to come, given that it is a politically difficultproposition for governments to be seen as promotingalcohol. Liquor also being a major revenue stream com-plicates matters. Companies need to emphasize the needfor a reasonable duty structure to prevent the grey mar-

27

Manipur

Mizoram

Gujarat

Nagaland

Lakshadweep

Sikkim

Pondicherry

Goa

Arunachal Pradesh

Daman and Diu

Bihar

Uttar Pradesh

Madhya Pradesh

Jharkhand

Chhattisgarh

Haryana

Himachal Pradesh

Karnataka

Orissa

Assam

Meghalaya

Tripura

Delhi

Tamil Nadu

Kerala

Andhra Pradesh

Rajasthan

Punjab

Uttarakhand

Maharashtra

West Bengal

Jammu and Kashmir

Prohibition Govt. controlled Auction Open

Type of Distribution Market

Excis

e D

uty

LowRs. 10-Rs. 50per proof liter

MediumRs.50-Rs.100per proof liter

HighRs.100 and

above perproof liter

*States in bold are larger markets

Figure 17. Statewise liquor market structure in India


ket and a uniform and standardized regulation across thecountry to prevent cross state movement of liquor with-in the country. The industry should lobby for standardi-zation of the tax structure and other regulations thatgovern consumption and distribution.A good opportuni-ty to get the regulation simplified would the GST (pro-posed Goods and Service tax) that is expected to beimplemented next year. While alcohol and tobacco havebeen kept out of GST primarily due to resistance fromthe states, the industry should lobby for migration toGST, since the next round of systemic reforms will besome time away and pushing through a major regulatorychange will bring big relief. Even if the duty remains thesame as it is today a simplified business environmentwould be a quantum leap forward. Companies shouldalso clearly articulate that they are against irresponsibledrinking by taking the high moral ground and promotingcauses causes such as prevention of drunken driving. It isnot the absolute amount of tax as the variations and dif-ferent administrative mechanisms that create multiplecountries within a country.

2. Invest in Domestic Production: Possibly the best wayto overcome the all pervasive prohibition mindset is tofocus on domestic production of luxury liquor. High endliquor that can be produced locally would be able to enjoya duty free access to the Indian market. As we have seenin the case of wines, domestic production has created apositive attitude on the part of the government apartfrom creating pride amongst consumers. Creation ofemployment, foreign exchange earning potential and cre-ating an Indian luxury brand are key value propositionlevers that need to be driven. This will also allow compa-nies to develop product ranges which are possibly moresuited to the Indian palate.

3. Invest in Developing the Market

a. Educate the SME owner consumer segment: TheIndian consumer is still at the early stages of thelearning curve when it comes to high end wines andspirits. The consumer tends to consume a narrowrange of brands compared to the very large rangeavailable in most other markets and even in duty freeshops - the popular shopping destination for Indianshoppers. While education of all segments of theIndian consumers continues to be a high priority, thespecific priority is to focus on the small and mediumenterprise owner segment. This segment has the req-uisite spending ability and can be encouraged to tradeup to luxury brands or enhance the range of theirconsumption basket. Companies can educate con-sumers through focused initiatives such as tasting ses-

sions and on-trade promotion events, where the con-sumer gets to experience the product in the rightambience along with the imagery and legacy of thebrand. Champagne brunches offered by five starhotels for example have become quite popular andhave got the consumer to experience and graduallyask for champagnes.

b. Social drinking and Food Pairing: The traditionalimage of "drinking to get drunk" needs to change toa more developed country concept of "social drink-ing" in a responsible way on the one hand and pairingwith food on the other hand. Wine would go withcontinental food, sake with Japanese. The promotionof social drinking is essential because most state gov-ernments have created rigid laws in the country basedon the belief that alcohol consumption leads touncivilized behavior and is harmful to the society. Itis necessary to change this image of alcohol in mindsof consumers are show it as a sophisticated and mod-erate means of having fun - allowing consumers toenjoy new flavours and experiences. Pairing alcoholwith Indian food is potentially the largest opportuni-ty for wines. We believe companies need to do a lotmore research on Indian food habits and find oppor-tunities for connecting liquor consumption withthose.

4. Focus on developing new channels of distribution:

High end MBOs and organized retail channels are one ofthe best ways to reach the high end consumer and pro-vide an experience. This however, is still very nascent -there are very few purely high end outlets, given the dif-ficulties of obtaining licenses and the high rentals.Hotels, pubs and bars have realized the importance ofluxury liquor since it helps attract high end consumersand are a very important channel - the five star hotels getto import liquor duty free and make very high margins.Unfortunately retailers have not taken a similar favorablestance. A potential solution would be identify a few topend retailers and encourage them to move away from thelow end of the market. Differing regulations will preventemergence of a liquor retailing chain. Indian travel retail(duty free) does add significantly to revenues where theduty free revenues are counted as part of the Indian busi-ness. Buying on "arrival" has been encouraged by attrac-tive pricing in Indian duty free and opportunities to buywhen you travel out and collect when you returnschemes. This allows consumers to avoid lugging liquoron flights while still enjoying the best of internationalduty free rates.

5. Innovative Brand Building: Given the ban on advertis-

28

ing, brand building is restricted to Below The Line (BTL)marketing activities. No amount of creativity is enoughgiven the huge opportunity and the complete lack offlexibility.

In summary, while we do believe this market will continue to

grow in excess of 25%, companies are facing multiple hic-cups in their journey. Steely determination and a faith thatthe consumer will eventually force open this market shouldkeep the large players going and new ones excited aboutentry.

29

30

SECTOR SPOTLIGHT: PERSONALCARE — FAIR, BUT NOT YETLOVELY

33

Personal care market in India is estimated to be around USD3.2 bn in 2010 and includes cosmetics, skin care, fragrancesand hair care products. It is still early stages for this categoryin India with miniscule per capita spend on personal care ascompared to other developed and developing countries

Luxury Personal CareWe have defined the luxury personal care market to includeall cosmetics and skin care products priced at greater thanUSD 25, fragrances priced at more than USD 50 and haircare products priced at more than USD 10 per bottle

Luxury personal care market is estimated to be around 8% ofthe overall segment adding up to ~USD 280 million in 2010.This Indian market is fairly small compared to neighboringAsian markets like China and South East Asia.

While the segment is still very small in India, the growth ratehas been robust. It has grown at 24% in 2010 as comparedto our earlier projection of 20% and is expected to grow to~USD 700 million by 2015. This would make it 13% of thetotal personal care market.

Fragrances dominated luxury market: In India, the luxu-ry personal care segment is quite different from the overallpersonal care market. The mass and premium segments ofthe market are dominated by hair and skincare products,while makeup and fragrances form a small share. The luxurysegment, on the other hand, is dominated by fragrances,which constitute over 50% of the total luxury personal caremarket.

A key reason is that luxury consumption (except jewelleryand designer apparel) is still dominated by men in the Indianmarket, and fragrances is the only personal care category that

SECTOR SPOTLIGHT: PERSONAL CARE —FAIR, BUT NOT YET LOVELY

C H A P T E R 5

245

215

163

54

93

192

18

3

UKUSARussiaPolandBrazilChinaIndia France

Figure 18. Per capita spend (USD) on personal care across countries

Source: Euromonitor, Kline and Company, A.T. Kearney analysis

appeals to the entire male population. Additionally, fra-grances are one of the first products consumers buy as theyacquaint themselves with luxury brands. Fragrances allowconsumers to "experience" a big luxury fashion brand at afraction of what it would cost to buy a suit or a watch.Fragrances have also been much more widely available indepartment store formats, where other products of the sameluxury brands would never be found.

Make up is a small sub-segment in luxury, but growing rapid-ly at 30-35 %. Key drivers are rising disposable incomes,increase in the number of working women and consequentincreasing focus on personal grooming.

The market structure is also very different compared to other

countries including Asian neighbors.

There are multiple structural reasons for these differences like Infrastructure availability: This dominance of skin

care and make-up in other Asian countries can also beexplained by the availability of high quality retail infra-structure that allows brands to sell and consumers to'experience' the skin care products.

Varying skin requirement: While having "good skin"that is radiant and glowing is an important part of beau-ty in most other countries (all western countries, evenJapan, Korea and China), in traditional India, beautyarchetypes are typically restricted to fair "complexion",pretty eyes and long black hair.

Traditional solutions: In addition, for skincare, tradi-

34

700

280

156

2015

+20%

+22%

20102007

2,1332,000

280

ChinaSouthEast Asia

India

Figure 19. Luxury Personal Care market in India, South East Asia and China (USD Mn)


Hair Care55%

Fragrances4%

Make Up12%

Skin Care28%

(a) Total Market (b) Luxury Market

Hair Care22%

Fragrances51%

Make Up9%

Skin Care19%

Figure 20. (a) Total Market and (b) Luxury Market Segmentation in India by value (2010)

Source: Industry interviews, Euromonitor, A.T. Kearney Analysis

tional home remedies are available in abundance in Indiaand these are considered to be "good enough" even forwealthy consumer classes.

But another key element is the small base of the Indian mar-ket. As the category expands, it is expected that the structureof Indian market will also start mirroring the global markets.This will mean increased growth for skin care and make up.

The Indian Personal Care Consumer - willing toexperimentA consumer survey among high income consumers providesinteresting insights about the personal care consumers inIndia:

Experience with the product is the key decision

making criteria: Most luxury personal care users typical-ly make purchases based on previous experience. Thereappears to be a vacuum in terms of adequate productknowledge being provided at the point of purchase, lead-ing to consumers having to rely on past experience.Interestingly, price happens to be the least important fac-tor. Consumers tell us that these being small ticket itemsof frequent use, they do not mind spending a little extra,if they find products that really appeal to them.

Boutiques are the preferred channels: People prefershopping in standalone stores over other retail formatsbecause in standalone stores people are able to experi-ment and feel the products. In other formats like thedepartmental stores, the whole brand experience is signif-

icantly lower, since the luxury brands have to rub shoul-ders with premium and even mass labels..

Open to experiment: The Indian consumer is open toexperimenting with new brands and brand loyalties arestill very low. This is only to be expected for a categorylike personal care which is nascent in India. This would bea good time for luxury brands to make a push and startinculcating strong brand loyalties amongst consumers.

Stock up on overseas trips: Consumers still make a sig-

35

Fragrances51

3

26

27

9

13

20

15

19

58

2922

Brazil

36

Russia

25

China

26

India

22

Hair Care

Make up

Skin Care

Figure 21. Breakdown of Personal Care Marketby Value (2010)


Price6%

Brand Reputation30%

Salesperson6%

Past Experience58%

Figure 22. Decision making criteria for person-al care purchases

Source: Consumer Survey, A.T. Kearney analysis

I am open to experimenting,but I have some preferred brands

73%

I usually stick tomy brands

24%

I frequently experimentwith new brands

3%

Figure 23. Brand Preferences


nificant proportion of their personal care purchasesabroad. The key reason for this is that consumers feelthat the range and availability of products in India is low.

Our interviews with luxury personal care consumers alsoclearly reveal certain trends that could translate into tangiblegrowth opportunities.

Opportunities for growthGreater beauty consciousness, much earlier: Slowly, butsurely, Indian consumers are changing their tastes and pref-erences.

Fairness and hair as beauty archetypes are strong, butfocus on skin and youth is increasing

Consumers are starting young, with girls in their earlyteens beginning to use basic beauty services

Openness to using chemical based skin care products isquite high, breaking the myth of traditional, home reme-dies being the preferred skin care solution.

Men's grooming is a new trend in India; the concept ofthe metrosexual male is taking off - driven by Bollywoodand the fashion industry. This is a big trend in South EastAsia and China, though still in nascent and small in India.

Weddings: Weddings are big spending occasions in Indiaand drive growth of many luxury categories. Spends are rel-atively immune to inflation and economic cycles. Weddingsare an important driver of consumption in the professionalpersonal care services segment (bridal skin care and makeup)

as well as gifting. Compared to several other categories suchas designer apparel, jewellery, watches, penetration of per-sonal care products in this occasion is still limited.

Services penetration: Services have driven the consump-tion of the premium products The target consumers for lux-ury are accustomed to using services of high end salons. It isnow time to get the same consumer to trade up, using topend salons as routes for exposure to the brand. Tie ups withtop end salons can also be a way of directly reaching the tar-get consumer or for developing a better understanding oftheir tastes and preferences.

Challenges hurting the industry Consumer awareness: Consumer awareness for person-

al care is much lower than other categories like appareland accessories which have been around longer and havea more broader appeal in India.

Limited customization & availability: Luxury brandsin the personal care space have only now started showingsome active push in the market. Boutiques by Lancome,Clarins, Estee Lauder have had a salutary effect on brandbuilding and spreading awareness. Many other brandsoperate through a distributor which limits the amount ofinvolvement of the brand in the market. Given the smallsize, India specific innovations have been limited and inmany cases even the range available is low.

Channels and Infrastructure: The infrastructure issuesthat plague the rest of the industry challenge this indus-try even more. With limited personal care focused MBOs(multi-brand outlets), it is hard for the brand and con-sumer to find each other. In standalone boutiques, lowawareness drives low sales productivity and at highrentals makes the store viability a longer journey, necessi-tating patience. Department stores have even masstigebrands in the same adjacencies making it an unviableoption for luxury brands.

Talent shortage: No new news again. Experienced asso-ciates with high levels of product knowledge and theright attitude to encourage, coach and convert are diffi-cult to find. Problem is more acute at the store managerlevel.

Action agenda for the industryWe believe the industry could take several actions to enhancethe growth of this category:

Believe in the market: There is enough evidence to showthat it is possible to grow in the Indian luxury market certain-ly and also to start making money. Supply side innovations

36

I buy in both placesbut more overseas

32%

I only buyoverseas

15%

I buyapproximatelyequal amounts

in India andoverseas

9%

I buy in both placesbut more in India

34%

I only buyin India

11%

Figure 24. Purchase location preferences


and push have played a big role in the same. Focus and atten-tion from the majors are absolutely necessary to open up themarket.

Educate, Customize, Enhance status appeal: The Indianconsumer is willing to learn, experiment and adapt fast if sheis given the right product and experience at the right price.This is now being proven across categories. There is alsoenough evidence that the consumer spends pretty substantialsums when the "status" value proposition is clear. Playersneed to find a way to help the consumer communicate thestatus value of their purchases. Customizations are necessaryand the sooner brands do it, the sooner will they start seeingbreakthroughs.

Collectively create luxury personal care zones: Playerscould get together to create "luxury personal care zones" intop end malls to differentiate themselves from the masstigesegment as well as to create a draw where the consumer canexperience a wide variety of luxury brands.

Enhance penetration: Penetration of luxury personal care

brands is much lower than other categories. A simple firststep would be to follow the luxury apparel/accessoriesbrands as they penetrate the metros. These being small luxu-ry items, brands could be a little more aggressive and eventarget the "high footfall but cross-over" kind of malls whiledefending their positioning.

Promotions and Experience: End of season sales haveplayed a good role in getting more and more Indians to gettheir first experience of luxury. While this might not apply topersonal care, brands need to find ways and means to get theconsumer to experience the brands. Wine tasting sessionshave likewise helped. Promotions and experience sessionsneed to be targeted.

In summary, while the luxury personal care market has strongfundamentals and looks set for steady growth, there are stilla number of barriers between the consumer with the abilityto spend and successful brand performance. A strong collec-tive push by luxury players will be required to tap the poten-tial of the market.

37

38

APPENDIX

41

APPENDIX I

I. Geographical Footprint of Luxury Product Brands

Category Brand Name Total Stores Mumbai Delhi Bangalore Chennai Hyderabad OthersAccessories Alfred Dunhill 3 1 1 1 0 0 0Apparel & Accessories Blues Clothing 8 1 6 0 0 0 1 Apparel & Accessories Bottega Venetta 3 1 1 1 0 0 0Apparel Brioni 2 1 1 0 0 0 0Apparel & Accessories Burberry 5 1 2 1 0 1 0Apparel & Accessories Canali 6 1 2 1 1 1 0Apparel, Accessories Chanel 2 1 1 0 0 0 0and Personal CareApparel, Accessories Christian Dior 3 1 2 0 0 0 0and Personal CareApparel & Accessories Collective 3 1 1 1 0 0 0Apparel & Accessories Diesel 9 2 1 1 1 1 3Apparel & Accessories Ermenegildo Zegna 4 1 1 1 0 1 0Personal Care Estee Lauder 3 1 1 1 0 0 0Apparel & Accessories Etro 3 1 1 1 0 0 0Apparel & Accessories Gucci 3 1 2 0 0 0 0Apparel & Accessories Hermes 3 1 1 0 0 0 1Apparel & Accessories Hugo Boss 3 1 1 1 0 0 0Accessories Jimmy Choo 3 1 1 1 0 0 0Apparel & Accessories Just Cavali 2 0 1 0 1 0 0Apparel & Accessories Kimaya 10 2 4 1 1 0 2Personal Care Lancome 11 1 4 4 1 0 1Home Décor Lladro 11 1 1 2 2 1 4Personal Care L'Occitane 8 1 3 2 0 0 2Apparel & Accessories Louis Vuitton 4 2 1 1 0 0 0Watches Omega 5 2 1 1 1 0 0Personal Care Parcos 2 1 1 0 0 0 0Apparel & Accessories Paul and Shark 4 1 1 0 1 1 0Apparel & Accessories Paul Smith 3 0 1 1 1 0 0Apparel Salvatore Ferragamo 4 2 1 1 0 0 0Accessories Tod's 3 1 1 1 0 0 0Apparel Tom Ford 1 0 1 0 0 0 0Accessories Tumi 2 0 0 1 1 0 0Accessories Van Cleef and Arpels 1 1 0 0 0 0 0Apparel Versace 2 1 1 0 0 0 0

131 33 42 26 11 6 13

Source: Company websites

42

II. Geographical footprint of Luxury car dealerships

Category Brand Name Total Stores Mumbai Delhi Bangalore Chennai Hyderabad OthersCars Aston Martin 2 1 1 0 0 0 0Cars Audi 15 2 1 1 1 1 9Cars BMW 19 2 2 1 1 1 12Bikes Ducati 3 1 0 1 0 0 1Cars Ferrari 2 1 1 0 0 0 0Cars Jaguar/Land Rover 9 1 1 1 1 1 4Cars Mercedes 24 4 3 1 1 1 14Cars Porsche 5 1 1 0 1 1 1

79 13 10 5 5 5 41

Source: Company websites

Acknowledgements

1. Bhavesh Somaya - Diageo2. Bruno Yvon - Moet Hennessey3. Danielle D'Lima - Wine Society of India4. Darshan Mehta - Reliance Brands5. Dinesh Dayal - L'Oreal6. Gulam Zia - Knight Frank7. Ishu Datwani - Anmol Jewellers 8. Kiran Gill - Lakme Studios9. Manishi Sanwal - LVMH10. Pradip Hirani - Kimaya11. Ratish Pandey - Bose Corporation12. Rahul Balachandra - YLG13. Renu Basu - Taj Hotels Resorts and Palaces14. Sanjay Kapoor - Genesis Colors15. Shakeel Kudrolli - Aquasail16. Sharmistha Ray - Art Expert17. Stafford Braganza - Lancome 18. Suvodeep Das - Kaya Skin Clinic19. Vikram Madhok - Abercrombie and Kent20. Vinod Bamalwa - Nemichand Bamalwa and Sons Jewellers21. Viren Bhagat - Jeweller22. Yashovardhan Saboo - Ethos Swiss Watch Studios

43

APPENDIX II

A.T. Kearney TeamNeelesh Hundekari - Principal and Head - Luxury and Lifestyle Practice, India Saurine Doshi - Managing Director, India Hemant Kalbag - Vice President and Partner, Head - Consumer Industries and Retail Practice, AsiaPameela Pattabiraman - Principal, Consumer Industries and Retail Practice, India Himanshu Bajaj - Principal, Consumer Industries and Retail Practice, IndiaSubhendu Roy - Manager, Consumer Industries and Retail Practice, IndiaManoshi KamdarAvanti MalusteRitika Tawani

CII TeamAmita Sarkar, Senior Director, CIIAtreyee Talapatra, Consultant, CII

About CIIThe Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of indus-try in India, partnering industry and government alike through advisory and consultative processes.

CII is a non-government, not-for-profit, industry led and industry managed organization, playing a proactive role in India'sdevelopment process. Founded over 116 years ago, it is India's premier business association, with a direct membership of over8100 organizations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over90,000 companies from around 400 national and regional sectoral associations.

CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expand-ing business opportunities for industry through a range of specialized services and global linkages. It also provides a platformfor sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assistingindustry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the countrycarry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversitymanagement, skill development and water, to name a few.

CII has taken up the agenda of "Business for Livelihood" for the year 2011-12. This converges the fundamental themes ofspreading growth to disadvantaged sections of society, building skills for meeting emerging economic compulsions, and fos-tering a climate of good governance. In line with this, CII is placing increased focus on Affirmative Action, SkillsDevelopment and Governance during the year.

With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore,South Africa, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII servesas a reference point for Indian industry and the international business community.

About A.T. KearneyA.T. Kearney is a global team of innovative, insightful and collaborative experts who deliver creative, meaningful and, aboveall, sustainable results. We're a team of management consultants that generates powerful strategic insights to address practi-cal, real-world needs - and we see each project through to completion. By daring to challenge conventional thinking, we cre-ate customized approaches, rightly suited to our clients' challenges, which help them achieve both immediate and long-termbusiness objectives. With deep expertise across a wide range of global industries, and a proud legacy of collaboration, we prideourselves on delivering great outcomes for every one of our clients.

We believe, above all else, that by doing good, we will do well for our clients, ourselves and our community. We do this withpassion for people, ideas and the world in which we live.

44

APPENDIX III

1. Datamonitor2. Euromonitor International3. Federation of Swiss Watch Industry, World Distribution of Swiss Watch Exports, 20114. HVS, India Hotel Industry Survey, 2009-20105. IWSR, India, 20116. Merrill Lynch and Cap Gemini, World Wealth Report, 20117. Probe Equity Research, 20118. Research on India, Wines, 20109. SIAM, Automobile Sales in India, 2010-201110. WHO, World Health Statistics, 2011

45

REFERENCES

India Luxury Review 2011 CII at Kearney Report

Documents

south east

probe equity

top end salons

social class

high end mbos

alcoholic

total luxury

largely remained