Companies optimistic despite consumption slowdown: It’s not all turbulence for luxury goods market

NEW DELHI: What’s the state of India’s luxury goods market? Not so good in the immediate term, but better beyond, although the answer depends also on whom you are asking. There are definite signs of a chill in sales this festive season, in line with the slowdown in India’s consumption engine. But there are brands and segments that continue to do well. Indians continue to buy luxury during travels overseas, and gilded digital stores are taking off in a big way, too.

It’s around 9 pm on a Thursday night. Diwali is just three weeks away. At the DLF Emporio mall in Vasant Kunj, New Delhi, home to top international luxury brands such as Louis Vuitton, Burberry, Jimmy Choo and Gucci, the air is scented and thick with anticipation. A luxury shopping festival is underway to prod buyers on this festive season. Stores are decked up, the latest wares are smartly displayed and charming shop attendants, trained to compliment your shoe, are spiffy and ready.

But customers aren’t walking in. Except a few window-shoppers, there’s hardly anyone in sight carrying a shopping bag. Store managers say in informal conversations that things are muted compared with last year.

At the Palladium mall in Mumbai, the destination for such elite brands in India’s commercial capital, the story was no different on Friday night.

The luxury goods sector, which witnesses a big chunk of its annual sales during the festive season, is watching the unfolding scenario closely. Having been at the receiving end of various policy changes in recent years, it was hoping this year would finally see strong sales.

“We are not seeing a negative sentiment. Some of our brands are doing exceedingly well and some are seeing tepid sales. But we will get to know a much clearer picture in the next couple of weeks, closer to Diwali,” said Dinaz Madhukar, executive vice president at DLF’s luxury retail and hospitality vertical, which runs upscale malls such as Delhi’s Chanakya and Emporio.

Gayatri Ruia, director of Phoneix Mills that runs Palladium, also has a similar outlook. “We are expecting a growth of anywhere between 5-6% this year. Consumers are still spending on luxury goods,” she says.

Because luxury is small, secretive and vaguely defined, authoritative industry figures are hard to come by. Statista estimates India’s luxury goods segment to be worth $8 billion and forecasts 6.6% CAGR growth during 2019-23.

It’s a minnow compared with the US market, worth $62 billion in annual sales, and China, worth $41 billion.

Market research firm Euromonitor provides rosier estimates. It forecasts that the luxury segment in India will grow at 18.1% during 2019-23. It counts luxury eyewear, jewellery, leather goods, time pieces, writing instruments and consumer electronics for its estimates.

Due to the massive expansion in India’s economy in the post-liberalisation decades, India was seen to be emerging as a major market for luxury goods. But compared with China, for luxury brands, India is yet to live up to its potential.

Perceptible Slowdown
In other luxury segments such as watches and air charters, executives say there’s a perceptible slowdown.

Harminder Sahni, founder, Wazir Advisors says, "We somehow have this misplaced notion that the government can help in everything. But luxury brands and retailers haven’t done much to grow their customer base and that is why the slow down hit them badly. Also the lack of quality retail infrastructure doesn’t allow expansion and the cost of rentals is killing it," he says.

And rentals are skyrocketing. PropEquity, an online real estate data and analytics platform has estimated that rentals in luxury malls are very high. “In the mall space in India, the consolidation has already happened and only a handful of the successful malls have survived (in bigger cities). Of this entire lot, luxury malls make up just 5%. Hence, rentals hardly ever fluctuate here, even in leaner sale periods," explains Samir Jasuja, the company's founder.

A luxury mall charges anywhere upwards of Rs 4- 5 lakhs a month for a 1000 sq. ft. super area or 500 sq. ft. carpet area as rental. At hotels boutiques, it is double of that.

According to the Federation of the Swiss Watch Industry, a leading trade association, Swiss watch exports to India between January and August this year fell to 96.3 million Swiss Franc, or CHF (approximately Rs 685 crore), from 98.7 million CHF during the same period last year.

Yasho Saboo, founder and chairman of Ethos Watch Boutiques, which retails brands such as Ulysse Nardin, Chopard, Longines, Jaeger-Le-Coultre and Rolex in India, says after a very robust growth in 2018, there is a slowdown which is especially being felt after April 2019. “I think it is partly due to macro-economic conditions and soft consumer sentiment, as well as cyclical and global factors,” Saboo says.

Air charters are also witnessing a slump. “Corporate clients are shying away from chartering jets for travel. I think it’s got more to do with the prevailing economic sentiment. Companies have turned conscious about how much to spend and on what,” says Rajeev Wadhwa, chairman of Baron Luxury Lifestyles, a company that charters business jets, choppers and yachts.

Air charters attract a GST of 18%, compared with 5% for commercial airliners.

Taxes are a dampener in other luxury segments as well. Saboo of Ethos says that while the reduction from 28% to the current level of 18% GST has made the Indian tax regime comparable with many other countries, at around the same time the basic import duty was increased from 10% to 20%, so there was no net benefit. “The combined effect of this and GST is quite high.”

In 2016, the government mandated that purchases above Rs2 lakh need a PAN card. This and increased scrutiny by the taxman has made people wary. Many prefer to make luxury purchases overseas. "Post demonetisation, people were choosing the must-haves over the nice-to-haves. But we have digested the effects of GST and demonetisation now," says Anil Talreja, partner, Deloitte.

That and the rise of online channels also make arriving at an accurate picture of luxury consumption a difficult task. TataCliq, Elitify, Darveys and Ajio gold are popular online channels for luxury.

Nakul Bajaj, founder of Darveys.com, says business has been strong. “There has been an 18% growth in our business and it is accelerated by customers who were earlier buying full price from flagship stores,” says Bajaj.

Going Strong
Some luxury brands have demonstrated growth. Reliance Brands, which operates the largest number of luxury brands in the country, reported an operating profit of Rs378 crore in FY19, up from Rs336 crore the previous fiscal. Aditya Birla Fashion & Retail’s The Collective, a retail chain that houses a number of international brands such as Versace, Armani, Alexander McQueen and Ted Baker, will expand through two more stores in the next 8-9 months in Pune, and one more store in Delhi.

“Our businesses have done well and we have witnessed double-digit, like-to-like growth this year. We have expanded our network with brands like Ralph Lauren and Ted Baker this year. We track competition and they are taking a bit of a hit. Generally, walk-ins have been lower in malls like the Emporio and Palladium but we have a loyal base of customers,” says Amit Pande, its brand head and head of international brands at the company.

Pratik Dalmia, chairman of ASSOCHAM's National Council on Luxury and Lifestyle, and founder of Regalia Luxury, which retails watch brand Bovet in India besides Italian menswear label Isaia and British shoemaker John Lobb says indulgence in luxury products and services is quite dependent on sentiments."We hope with the onset of the festive and wedding season there will be a revival."

Luxury companies are now betting big on the ‘high earners, not rich yet’ (HENRY) consumers with significant discretionary income and a strong chance of being wealthy in the future, Deloitte said in its 'Global Powers of Luxury Goods 2019’ report.

(With inputs from Shailesh Menon in Mumbai).