Luxury Car Industry Analysis 2010

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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


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


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


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October 2011

Confederation of Indian Industry The Mantosh Sondhi Centre23, Institutional AreaLodi RoadNew Delhi - 110003India

Tel: + 91 11 24629994-7

Fax: + 91 11 24626149Contact:

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

A.T. Kearney Limited1st Floor, Future Capital HousePeninsula Corporate Park Ganpatrao Kadam Marg Lower Parel (W)

Mumbai - 400 013.India

Tel:+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

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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 worldstop 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 as well as the challenges that the luxury industry needs to address, to unlock the potential of the market and continue on a strong growth trajectory. This years study serves as a quick refresh of the state of the luxury market in India and captures the key trends 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 validating our hypotheses. We hope that this study helps take the collective understanding of the luxury industry in India a few stepsforward.

Confederation of Indian Industry A.T. Kearney

FOREWORD

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Need for a Refresh

Last year CII and A.T. Kearney had teamed up to do anexhaustive deep dive into the Indian luxury market. As ourreaders will recall, the unpredictable nature of the market led

us to use the metaphor of a game of Snakes and Ladders inour report. Every move made by luxury players could resultin 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-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 interesting sub-segments of the market - Wines & Spirits and PersonalCare.

Luxury Market in India - Reflections on the Year

Gone By

The Indian luxury market is evolving more rapidly than mostof us had foreseen. The luxury market witnessed robust

growth 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.

Jewelry, electronics, cars and fine dining have grown beyondexpectations, while apparel, accessories, wines and spiritshave continued their strong growth. Real estate and yachts

have remained more or less flat due to high prices/expecta-tions of a correction and absence of marine infrastructurerespectively. In all categories, market leaders have grown wellbeyond 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 once

hard-to-reach Indian consumers. 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


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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

players and some efforts are visible in apparel, watches andcars. Challenges around infrastructure still remain. There hasbeen limited progress here - players need to wait and watchor get together, create luxury properties collectively or waitfor what developers will offer. The regulatory structure hasalso largely remained unchanged over the past year, with therecent news about 100% FDI in single brand retail creating hope 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 by getting 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 of 25-30% 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 overhead.

Overall, we are likely to see continued investment in the India

luxury 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 Southeast 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 Southeast 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 of the market is quite different from that of the India luxury products market. While the Indian products market is domi-nated by jewelry, apparel and accessories form the largestsegment - over 60% - of the Southeast 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

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

Jewelry 730 21% 30% Increasing gold and diamond prices and low priceelasticity

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 production

Fine Dining 270 10% 40% Footprint expansion; new brandsTravel 32 15% 22% Increasing inbound tourism

Apparel 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


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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 prefer brands with a distinct local origin, sen-sibility or customization.

Wines & Spirits - Hiccups on the High Road

The 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 - themarket is largely male dominated, growing despite strong regulatory and commercial barriers, and very importantly dominated by a few large players who can drive change.

There are 3 main drivers that are pushing this industry forward - increasing per capita consumption of liquor, premiu-mization and improved supply.

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

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 of 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 regime

would 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 Lovely

The 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), prefer to shop in boutiques in Indiaand stock up on overseas visits due to the wider range andbetter prices. Key challenges facing the industry are low con-sumer awareness, limited supply side push andproduct/brand availability, infrastructure/retail channel

availability 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 companiesshould collectively create luxury personal care zones inmalls/department stores and enhance their geographical

penetration 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 sizable, 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 Southeast 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


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SNAKES AND LADDERS: NEED FORA REFRESH


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3

The Indian luxury industry is evolving more rapidly thanmost of us had foreseen. Skepticism is being replaced by an

increasing 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 regulatory constraints 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 of the 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-mind

opportunities (new Ladders) and risks (new Snakes) forindustry players. This report aims to accomplish this, by

capturing 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-segments 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 the cusp of any new opportunities to acceler-ate growth?

What are the key risks to watch out for?

Insights and recommendations in this report have beendeveloped based on discussions with various industry leaders

who have shared their perspectives with us, from consumer

surveys 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


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LUXURY MARKET IN INDIA REFLECTIONS ON THE YEAR GONE

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7

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 expected,

and this strong upward trajectory is likely to continue overthe year ahead. Optimism amongst luxury players seems tobe increasing, 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 forward

with a mix of hope and caution. A handful of players thathave taken bold, market making moves are beginning to reap

early rewards. While there are no easy silver bullet solutions, we see a few emerging themes on how to grow and operateprofitably in the Indian luxury market.

Luxury Market in 2010: Better Than Expectations

The luxury market in India witnessed robust growth of 20%

C H A P T E R 2

2.45 2.76

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

0.73Jewelry +30%

Apparel and Accessories +30%

Personal Care +24%

Wines and Spirits +25%

Electronics +35%Watches +29%Home Dcor +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

0.160.05 0.02

0.01

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 A rt +15%

Yachts 0%

2010

2.76

1.44

1.01

0.310.00

2009

2.45

1.44

0.75

0.270.00

Overall +13%

Assets+29%

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

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

Note: 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)


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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, growing much faster than projections. Services have also performed

well, with most categories exceeding expectations. Luxury assets 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 as

Aston 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 Kiehls and LOccitane in personal care. The fine

dining market saw significant expansion by existing players as well 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 of the Indian luxury market. While companies realize that India

will 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 Anticipated

Consumers in India are evolving quite rapidly - in fact, thepace of change is much faster 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, Tumi

etc). Stores in cities beyond Mumbai, Delhi, andBangalore now account for 23% of the stores. In addi-tion new catchments in Mumbai (North Mumbai/Juhu)and Delhi (Gurgaon) are becoming popular destinationsfor luxury. This is an acknowledgement of the wealth inthese cities/catchments and the readiness of the brands

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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 priceelasticity

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 tourism

Apparel 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


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to go there to tap the demand. This will most certainly add to the demand for luxury products. Car dealershipsare the most penetrated with more than 50% of theirdealerships outside the metros(Mumbai/Delhi/Bangalore/ Hyderabad/Chennai) -towns where luxury car dealerships are present are

Ahmedabad, Bhubaneshwar, Chandigarh, CoimbatoreGoa, Guwahati, Jaipur, Kochi, Kolkata, Ludhiana, Pune,Raipur, and Surat. These are potential destinations forluxury products as well as services and 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. Retailers haveto walk the fine line between trying to provide the variety and choice necessary to provide consumers with exactly

what they want (e.g., fit in apparel is becoming muchmore important) while managing the economics of inventory 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 thebadge is - and will probably continue to be an impor-tant factor in our market, consumers are now increasing-ly willing to move beyond the very popular brands,brands that are well known in other markets and have aclear and unique value proposition. In the apparel space,for instance, there are a growing number of takers forbrands 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 a marketthat 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 you

when they need something or might continue to buy overseas. 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 upwardly mobile 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 these

consumers in at an early stage, luxury players are looking to 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 of a location

where Burberry and Zara are opposite each other and theconsumer doesnt seem to mind. While luxury malls like

DLF Emporio offer a true luxury experience to the con-noisseur, India probably needs more in-between formatsthat are good enough for luxury and great for premium,

while luxury retailing in five star hotels will most certain-ly stagnate.Growing importance of digital media: The next few years are likely to see a paradigm shift in the way compa-nies reach out to consumers. The internet, Facebook,

Twitter and mobile communication are revolutionizing the ways people interact and communicate with each

other. Early movers in the luxury space are using this as ameans to reach the once hard-to-reach yet net savvy Indian consumer. Online retailing is being suggested asthe medium of choice to target luxury consumers in citiesoutside the metros. In India, in all industries the last mileis the biggest challenge. Combine that with the needle ina haystack nature of the luxury consumer in this country of 1 billion+ and the problem becomes one that can seri-ously constrain growth. Distribution and reaching theright consumer at a reasonable cost is the big divide thatseparates the aware consumer and the eager seller.Internet allows disintermediation like no other mediumdoes. The attraction is hence not difficult to understand.

Traditional wet blankets like low internet penetration do

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not deter the proponents, since the penetration amongstthe target population is high. Online retailers for their partare working on models that would appeal to a broader setof consumers (e.g., myntra.com, fashionandyou.com, etc.)and some have attracted PE funding as well. The prod-ucts/sevices that would be most amenable to internetretailing in the first wave would be those where the con-sumer has few other convenient options (e.g., travel,hotels), where the consumer knows exactly what they

want and specifications define everything (e.g., a luxury watch or a perfume) or where the product is meant forgifting (e.g., small jewelry). While for net savvy consumersin the hinterland who have no physical access to luxury products in their own city might drive sales, continuing concerns about things like trials, fits, etc., are issues that

will have to be addressed before this becomes a channel

that can overcome the barrier that removes the barriers of physical separation. We believe that while marketing using social media is probably a must do for all brands, there islittle evidence of successful breakthrough innovation inactual selling yet.

Challenges and Constraints to Continue

In our previous report, we had listed a number of challengesfaced by players in the Indian luxury market. A year later,there has been little progress made against these and both

regulatory 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 certainly gone 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 store

opening is limited only by availability of space. New catchments in Mumbai (North Mumbai, e.g., Juhu), Delhi(Gurgaon) and penetration into towns like Pune,Ludhiana, Chandigarh are clear indicators that luxury retailers are willing to go beyond their zone of comfort.

As can be seen from the table, the penetration of brandsacross the country is now much better than a year ago.Many CEOs that we spoke to agreed that micro-segmen-tation of the market is essential, though absence of dataimplies the need for focused effort. The hardest to reachis 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 about how the mostunlikely consumers make purchases. Have money,

will buy, but please treat me well seems to be whatthe consumer is saying.

b. Price parity: The message about the value consciousnature of the consumer is now very clear to thebrands. Eliminating unnecessary frills and matching prices to Dubai and Singapore is now more or less agiven. Except in the United States, the wonderland of fantastic pricing, and the preferential pricing in homecountries in Europe for brands, brands are trying tomatch the close shopping alternatives such as Dubaiand Singapore

c. Indianization: Whether it is a preference for two-

tone metal watch belts in India over the rubber beltrevolution that is sweeping the rest of the world orthe need for garments that will flatter the figure of the Indian middle aged woman, the need has neverbeen more obvious. For example, for the Middle Eastmarkets where traditional wear dominates womens

wear, luxury brands have introduced abayas. We awaitsome significant steps by brands in this direction.

Admittedly, it wont be easy to create customized col-lections for a market which is still very small, and

designers and brand CEOs both would need a lotof convincing before we see substantialIndianization.

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 desti-nations, 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 the

lifestyle 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 asetback with very limited new space available immediate-ly. Players need to either wait and watch or get together,create luxury properties collectively or wait for whatdevelopers 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 nearfuture, putting a damper on the plans of many players.

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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 any relief. Most luxury brands would want 100% control of their destiny if they want to consider serious investmentin a country. A 100% subsidiary also means greater psy-chological commitment from the brand, which leads togreater awareness and understanding of the unique issueson the ground and a much greater desire to work towardschanging them, all of which would be welcome conse-quences. For most international brands, the party is stillon in China and Southeast Asia is a much larger and eas-ier market, so why would they not wait till India decidesto liberalize its regulations? We believe if the governmentactually manages to push through 100% FDI in retail,

many international players who have been sitting on thefence or have been less than bullish will decide to enter,removing one of the most critical constraints on growth- supply. Multi-brand retailing would be an even better ifas it would allow multi-brand formats to enter, a necessi-ty for getting the consumers to experience 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 footprint

expansion by most companies, luxury players are facing high attrition rates resulting in increasing personnel costs.Little progress has been made in setting up aneducational ecosystem to provide for talent to the luxury industry.Supply constraints: Perhaps due to the above factorsand partly due to alternative growth opportunities inChina and Southeast Asia, the market still remains supply constrained. Expansion is still slow, Mumbai and Delhiare still the hub of action and store footprints, and prod-

uct distribution is still low. We believe the industry shouldlook at luxury cars as an indication of potential. Luxury cars have continuously defied growth projections eventhough ticket prices for cars are one of the highest, dutieson cars are undoubtedly the highest, roads are patheticand most of these are cars to be self-driven in a country

where the rich dont drive. To be fair, a car is perhapsunmatched as a status symbol, you cant carry it in yoursuitcase from abroad and fit is much less important.However luxury car dealerships enjoy the highest pene-tration amongst any luxury category and should be anindicator of the latent demand scattered around thecountry. On the whole, however, challenges exist and arenot likely to be resolved easily in the near future. In such

a situation, what could happen if the global financialturmoil impacts India and fears of a slowdown turnserious?

Potential impact of a slowdown? Maybe not much

As 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 of a slowdown. The nascent luxury industry should worry about

what a slowdown could mean for them. As we discussed thisissue with several business leaders, while we noticed a certaincautiousness, there was a clear feeling that the impact if any is likely to be muted. In the last recession in 2008-2009, theindustry did not de-grow or stagnate, it just grew at a slowerrate. While the market size potential lost was around 10%

during that period and international brands did defer theirentry plans, it wasnt a huge damper on the spirit of the play-ers. The feeling amongst CEOs is that domestic consump-tion in India is more insulated than we think it is. Uniquecharacteristics such as wedding driven purchases (which arefunded from inherited wealth, savings or debt depending on

who the consumer is and hence relatively immune), wealthdriven consumption for millionaires and the relatively smallticket prices of at least the product segment explain thisbelief. What could go wrong? Serious job losses if they hap-

pen could dampen the spirit of the young consumer andforce them to conserve rather than spend and a severe reces-sion might mean that the wealthy might defer purchases notbecause they cant afford them, but they might not want tobe seen spending.

Given all the new opportunities that are unfoldingthemselves while challenges continue to exist, what shouldcompanies do? We explore potential solutions in the nextsection.

Uniquely Indian Solutions Needed

The key challenge for players in the Indian luxury market isthat the market is small, growing fast but not exponentially and while growth is evident, bottomline rewards are insuffi-cient. The key question to think about is what could be doneto the constraints on growth, and while we wait for it to hap-pen, how do we find a way to make some money?

Aggressive market making moves may be good for thegrowth objective and also provide first mover advantage inthe long term, but could be risky in the short term. Too cau-tious an approach and sooner or later, the global parentmight lose interest or patience and decide to withdraw andre-enter later. It is worthwhile remembering that for a global

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luxury brand, India is only one of the many options availablefor growth. With China proving to be not only a fast grow-ing, but also a lucrative market, companies could choose toplay a wait and watch game in India, while focusing on thelarger Chinese market. We believe that the right approach

would be a combination approach that allows companies anopportunity to grow without losing their shirts, while prepar-ing them for capturing exponential growth.

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

1. Grow Cautiously - Most players have chosen to adopt a wait and watch route to market. Companies following this path have largely focused on expanding in selectcities such as Mumbai and Delhi. While this is a fairly safe

ploy, 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 a 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 providing an outstanding store look and feel and targeted mar-keting 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 reason

for Indian consumers to continue to make purchasesoutside 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 by most Indian consumers. With increasing price trans-parency available to consumers, companies need toensure that pricing is not significantly higher than theinternational 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 will

help in introducing the Indian consumer to new brands and creating aspirations that are likely to pay off 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 risks.a. Customized product offering - Luxury players

need to develop customized product offerings andtailored solutions for the Indian market. This will notonly 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, several

top 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 in run-ning a luxury business in India. As one of the luxury CEOs said, In India, you need to run luxury the fru-

gal way. We couldnt agree more. Companies in Indianeed to find a local model that works in the contextof infrastructure challenges, high rental costs, low real estate availability and lack of skilled talent. Indianconsumers are used to different scales for infrastruc-ture in the Indian environment and abroad (as seen inthe case of the housing market in Mumbai forinstance) and are quite amenable to making do with afrugal luxury model. On the other hand, expecta-tions of service are extremely high. We continue to

believe that working with smaller store formats tillsuch time that real estate rentals become reasonable isperhaps the only option, apart from using the store asa base for serving a much wider clientele by taking thestore (i.e., products) to the consumers 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.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-

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est returns on investment. This segment comprisesowners of small and medium sized businesses, whohave enough surplus cash for spending, are tradition-al in mindset, largely unaware of luxury products andbrands, are not readers of fashion magazines, not

very 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 loving care and made to feel good and pampered while they shop. The rewards could be dramatic - they have themoney, but dont feel they have the status and want touse the money if they could to arrive. Their children

are already spenders, having been educated abroad orin good institutions in India. Converting this con-sumer will however mean that brands have to walk the extra mile for these consumers. The largest luxu-ry category - jewelry- thrives precisely on this very segment and here we believe brands still need to learna 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 empathetic

approach is the way to go.b. Domestic production - Companies with serious

aspirations 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 much

less stringent with domestic production - which would 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 canuse the internet to reach consumers in a targetedmanner as well as to penetrate Tier 2 markets at a low

cost, thus minimizing their risk while maximizing chances 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 profitably in 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 is

hence 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 improving

the economics of the chain.

In summary, we are likely to see continued investment in theIndian luxury space. A few market making moves by leadersin this space will help exponentially increase growth. Basedon industry interviews, sentiment seems to be positive andthe general opinion is that the Indian market is likely toremain reasonably insulated from the likely global downturn.

The Indian luxury market thus seems well on course for ahealthy growth of ~20% in the years ahead.

13

Figure 4. Business model for India, appareland accessories example

P&L Item Global IndiaRevenue/Sq ft/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%


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LUXURY MARKET IN SOUTHEASTASIA A STUDY IN CONTRASTS


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Most studies on the luxury industry in India typically com-pare the market with China, to draw upon best practices and

takeaways 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 of Southeast Asia - comprising Singapore, Thailand, Malaysia,Philippines, Vietnam and Indonesia,. There are several rea-sons why this makes for interesting comparison. Southeast

Asia, like India, is both culturally heterogeneous and geo-graphically dispersed. The market is still not very deep, with

luxury consumption being limited to a few large cities -another similarity to the Indian market. While the luxury products market is Southeast 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 Southeast Asia - focusing onapparel and accessories, personal care and jewelry - is esti-

mated to be USD 8 billion today, around 6-7 times the sizeof the Indian market for the same segments. The composi-tion of the market is quite different from that of the Indianluxury products market. While the Indian products market isdominated by jewelry, apparel and accessories form thelargest segment - over 60% - of the Southeast Asian market.

Extremely high consumer awareness levels and aspi-rations: The Southeast Asian luxury consumer cutsacross age, profession and social class boundaries. Unlike

in India, luxury consumption is not limited primarily totraditionally wealthy families, businessmen or successfulprofessionals in the corporate sector. Even consumers

who 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 SOUTHEAST 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

11

4

8

2010

01

3

2

8

0

Singapore

Malaysia

Thailand

Indonesia

Philippines

Vietnam

32

1

+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 riche (new millionaires)and growing upper middle class householdspurchasing them

Singapore expected to grow much faster than before due to newly

developed Integrated Resorts which attract tourist influx to gamble at casinosand shop at new Marina Bay Sands and Resorts WorldSentosa luxury malls

Figure 5. Southeast Asia luxury products market break-up

Source: A.T. Kearney research and analysis


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into this space. In fact, in a survey conducted by A.T.Kearney, 40% of Southeast Asian consumers with annu-al incomes less than USD 20,000 were open to buying luxury products. Over 70% of the consumers surveyed,across all income segments, were actually likely to spendmore than 20% of their income on luxury items. If thepropensity to buy in India were only half as much, we

would see an explosive growth in the luxury market in thecountry.High luxury product availability driving growth: Akey driver of luxury growth has been increasing supply over the past few years. Cities like Singapore and KualaLumpur are preferred destinations for luxury productsales for people from all over Southeast Asia. Singaporein particular, with its multitude of high-end shopping malls, wide range of product offerings and competitive

pricing, 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 factory outlets and online retailing of luxury goods - channelsthat have picked up in a big way in the more developedmarkets - are yet to take off in Southeast 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, Southeast Asia seems set for increasing adoption of luxury products.Men are the new gem: The Southeast Asian luxury market has seen the rise of a whole new consumer seg-ment - metrosexual men. Greater media exposure andincreasing image consciousness have led to extremely high demand for male grooming products. There is a big potential to tap into this market and exponentially grow the luxury segment.

Think globally, act locally: Given the diverse nature of the market, adapting to local tastes has been a crucial suc-cess factor for most luxury players. Interestingly, this isespecially important in the apparel sector, where over90% of consumers are willing to buy domestic luxury brands as they reflect local preferences and tastes. One of

the moves that has worked successfully is for globalbrands to partner with local brands or boutiques andtapping into local designer talent.

While the Indian luxury market still has a long way to go tocatch up with Southeast 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 growth

in India.

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SECTOR SPOTLIGHT: WINES &SPIRITS HICCUPS ON THE HIGH

ROAD


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We have seen in Chapter 2 that the Indian luxury market hashad robust growth despite impending global slowdown. We

shall now turn the spotlight on one exciting category - luxu-ry wines and spirits. This is a very interesting category - large-ly male dominated, growing despite strong regulatory andcommercial barriers, and dominated by a few large players

who can drive change. We have stuck to the definition of lux-ury that we have used earlier. Luxury wines and spiritsinclude all products with a retail price above USD 75 perbottle.

Luxury wines and spirits - small but fast growing

The total alcoholic beverages market in India has grown toUSD 28 Bn in 2010. The luxury market is a small fraction of the total market at ~0.8%. But it is expected to grow faster

than overall alcoholic beverages market and be ~1.5% of total market by 2015, growing from USD 220 Mn in 2010 to

USD 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 every country 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 embraces 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)



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sumers drink wine with meals. Similarly Russians prefer vodka. 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 by region. The South is the biggest market and the East the smallest. Inthe South, the regional population is highly receptive to new products and flavours, and hence companies prefer to launch

new products in the region. In the North, most of the high-end market resides in cities like Delhi, Gurgaon, Chandigarhand Ludhiana, and these cities are expected to continue to

see increasing demand for premium and imported brands,particularly in whiskey and wine. Similarly, the West luxury market is driven by major cities like Mumbai and Pune.Finally in the East, luxury sales are lower than those of otherregions, as income levels and awareness among the majority of consumers are far below those of their counterparts inother regions.

Having looked at the market structure, let us now understand

the key drivers for growth, look into the world of the Indianluxury consumer, identify opportunities for companies andassess challenges facing the industry.

Growth drivers - consumer and supply led

There are three fundamental growth drivers for the luxury wines and spirits market:

1. Increasing per capita consumption: India has a low per capita alcohol consumption, however it is growing

fast. Alcohol consumption is spurred by higher dispos-able income, reduction in stigma associated with drinking due to western influences and increased foreign travel by the 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 increasing consumption 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


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2. Premiumization: The liquor dinking Indian consumer isclearly wanting to premiumize. They want to try new andmore expensive liquor - partly to experiment and partly to 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 knew

what wines were, the sky is the limit for the new con-sumer. Interviews with the trade reveal that upselling in

pubs and bars is relatively easy; consumers dont mindtrying out new drinks even though they may be expen-sive. This behavior is not restricted to any particular cat-egory of alcohol, but can be observed whether it is

whiskeys, wines, white or specialty spirits.

3. Improved supply: Along with the increased demandfrom aspiring consumers, improved supply dynamicshave also fueled growth. International travel and duty free purchases have got Indians hooked on internationalbrands which were either not available or were expensivedue to duties. These consumers are now shopping for thesame in the country - when they cant get it duty free.Organized retail is aiding the availability of high-endliquor. Over the past few years, we have seen many exclu-sive organized liquor stores, which have spurred availabil-

ity of more brands across urban and semi-urban centers.Some examples are Dom Perignon Bar in Delhi andexclusive liquor areas in hypermarkets. Similarly, liquorcompanies are investing in marketing and promotionalinitiatives. They have started targeted promotions, liketasting and appreciation sessions to drive consumption.

This creates awareness among new consumers, especially in the wealthy, but less aware segments with traditionalpreferences. Liquor companies are also actively pushing traditional retailers to grow and focus on premium con-

sumers. While this upscaling of the supply side is most visible in the metros, the demand for premium productsextends well beyond as even these consumers trade up.Brands are also sprucing up their distribution network toserve these customers.

Indian consumer - luxury seeking and tough to

please

The Indian luxury consumer is unique. We conducted a survey among high-end liquor consumers to gain an under-

standing of their attitudes and behaviors. Some interesting insights emerge:

1. Awareness: Small and medium size enterprise ownershave the least awareness of luxury wines and spirits.

Their consumption habits are traditional and liquor being a social taboo in their circles, they have the resources butare constrained in their consumption. They have themeans, but companies need to educate them abouthigh-end liquor. This segment is also the least taste con-scious.

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) of alcohol in India

Source: WHO, A.T. Kearney analysis

3.7

8.0

16.0

IndiaChinaRussia

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

Source: WHO, A.T. Kearney analysis


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conscious. In the case of liquor this is directly linked to

propensity 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 paying for 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 young professionals, 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 with regard to whiskeys with their distinctivetastes and flavours and comparatively least in vodkas

where some mixer is normally used, with wines falling inbetween. In vodkas, variety of flavors is becoming aninteresting purchase driver. This can be attributed to theevolving taste patterns among younger consumers andtheir willingness to experiment.

4. Brand loyalty - highest for whiskey, lowest for wines:

Although seen to some extent in all liquor categories, loy-alty is highly dominant in whiskey consumption.

Although some amount of switching does take place in whiskey, it takes place between brands in a similar pricerange. Wine consumers are at the other end of the spec-trum and switch their brands regularly. This is partly dueto low awareness in the wine segment, due to the huge

variety of wines available and the way wines are branded.In wine, the country of origin (old world/new world),name of the grape producing region and name of vine-

yard are all important and together combine to create thebrand. One needs to be a frequent wine consumer toknow the wine you prefer. With very little exposure stillto wines, consumers tend to decide based on broad

parameters such as country of origin (European pre-ferred) and price bracket (2000, etc). As such if 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 liquor categories

Source: A.T. Kearney consumer survey

TraditionallyCriteria Medium Wealthy Corporate Self

Size Families & Executives Employed YoungEnterprise Large Professionals Professionals

Owners Industrialists

Awareness

Taste Consciousness

Price Consciousness

Badge Consciousness

Propensity to buy overseas


Figure 12. Luxury wines and spirits - consumer segment insights

Very High Very Low


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The few consumers who are brand loyal usually stick tomore famous go-to brands which they have tried orheard of, not necessarily because they have chosen themfrom many alternatives. Vodka consumption is splitapproximately equally among loyalists and switchers. Like

whiskey, vodka consumers experiment within price cate-gories and the presence of various flavors and extensivemarketing encourages switching. Vodka consumers how-ever, rarely trade down.

5. Consumption location - on-trade more popularchannel. This is not surprising given that fewer Indianconsumers are comfortable drinking at home. A deeperlook into consumption patterns reveals the outlets with-in the on trade channel which vary between categories.

Wine is consumed more frequently at restaurants andlarge events or banquets on account of its easy pairing

with food and image as a social sophisticated drink. Vodka on the other hand is mostly consumed at pubs,

clubs and bars on account of it being a drink which canbe easily mixed and its more unisex image. In the off trade channel, travel retail plays a large role for luxury liquor purchase. Place of consumption impacts pricing as

well, 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 this is a good driver of con-sumption internationally. In India, consumers normally have water with their meals, while liquor is in the form of pre-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 growth

The luxury wines and spirits market is expected to grow from

0.8% of the total market in 2010 to 1.5% by 2015. Most of this growth is expected to come from increased consumptionin underpenetrated consumer segments, geographies andoccasions.

Underpenetrated consumer segments: Traditionally underpenetrated consumer segments are the small andmedium enterprise owners and their families. This is aprofitable, but traditionally untapped segment.

Awareness, education, facil itating experimentation,attractive pricing and convenient distribution to encour-

age uptrade to luxury liquor will get this consumer classto start consuming Underpenetrated geographies: While metros will con-tinue to drive growth, penetration and focus on Tier 2cities and currently underpenetrated states (regulationpermitting) need to be focused upon.Underpenetrated categories: India is largely a whiskey market. Just as vodka consumption is gradually increas-ing, companies should drive consumption of other cate-gories like champagne, liquoers and other spirits. This

will need to go hand in hand with change in consumptionhabits - hence difficult, but as has been proven in the caseof wines (wine drinking was unknown in the country, notso long ago) and white spirits, continuous promotion will

25

33% 73%

40%

22% 7%7%4%

Loyal

Switch regularly

Slowly trade up as per my lifestyleLook 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



39/60

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 luxury wines and spirits category. The luxury market is 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 by increasing the variety, experience and availability to con-sumers.

Challenges for the industry

Having looked at the growth opportunity, we now turn ourattention to 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. A

very 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, creating enough barriers for changing any policy that could leavethe states poorer. The prohibition mindset is manifestedin the controls on distribution and very high taxes and isbest exemplified in the differences in the extent of pro-hibition across states. In few states like Gujarat, Nagalandand Mizoram, alcoholic drinks are simply banned.

Alcohol prohibitionists are active in other states likeKerala. As late as June 2011, Andhra Pradesh govern-ment launched a new anti-alcohol campaign to propagatethe policy of prohibition. The regulations also greatly control the channels through which the product is dis-tributed. If a company wants to conduct a sponsorshipevent they cannot source directly from the wholesaler but

need to buy their own product from a retailer. This makessponsorship events very expensive. Figure 16 explains theextent of prohibition in every state (color 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 statesRegion 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 Prohibition

Andaman and Nicobar Low prohibitionWest Maharashtra Age and Supply and Duty Driven prohibition

Gujarat 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 ProhibitionLakshadweep Complete Prohibition



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overseas. For example, even compared to Europe, pricesare much higher due to tariffs - a Moet Chandon bottle

costs approximately USD 40 in France as opposed toUSD 100 in India. Similarly, the 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 a thriving gray marketin wines and spirits. This is a problem for companies

since they have no control over the quality, counterfeitgoods and this channel. It causes brand dilution and is athreat to sales. State governments meanwhile are unwill-ing to change this structure, due to the revenue genera-tion from the 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, The United States has bourbons,

Japan sake, Russia and Poland have vodka. All of theseare a source of forex, employment and national pride andalso form part of consumption habits. This also creates a

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

tion regulations make it impossible to create a nationalluxury liquor chain and traditional outlets are slow tochange. Talent is not easy to get due to stigma associat-ed with the industry. Also not all outlets are ready to sellliquor. There are only 60,000-65,000 outlets for liquor(dining and retail included) as opposed to FMCG goods

which have a universe of 8 million outlets.

Action agenda for the industry

We have seen so far that while the market potential for wines

and spirits is high, there are numerous daunting challenges. We believe there are a handful of initiatives that the industry should focus on as the Indian consumer finds a position inthe 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 arena

will be slow to come, given that it is a politically difficultproposition for governments to be seen as promoting alcohol. Liquor as a major revenue stream complicatesmatters. Companies need to emphasize the need for areasonable duty structure to prevent the gray market and

27

Manipur

Mizoram

Gujarat

Nagaland

Lakshadweep

SikkimPondicherry

Goa

Arunachal PradeshDaman and Diu

Bihar Uttar Pradesh

Madhya PradeshJharkhand

ChhattisgarhHaryana

Himachal Pradesh

KarnatakaOrissa

AssamMeghalaya

Tripura

Delhi

Tamil NaduKeralaAndhra Pradesh

Rajasthan

PunjabUttarakhand

Maharashtra

West BengalJammu and Kashmir

Prohibition Govt. controlled Auction Open

Type of Distribution Market

E x c

i s e

D u

t y

LowRs. 10-Rs. 50

per proof liter

MediumRs.50-Rs.100

per proof liter

High

Rs.100 andabove per proof liter

*States in bold are larger markets

Figure 17. Statewise liquor market structure in India



41/60

a uniform and standardized regulation across the country to prevent cross state movement of liquor within thecountry. The industry should lobby for standardization of the tax structure and other regulations that govern con-sumption and distribution. A good opportunity to get theregulation simplified would be the GST (proposedGoods and Service tax) that is expected to be implement-ed next year. While alcohol and tobacco have been keptout of GST primarily due to resistance from the states,the industry should lobby for migration to GST, since thenext round of systemic reforms will be some time away and pushing through a major regulatory change will bring relief. Even if the duty remains the same as it is today asimplified business environment would be a quantumleap forward. Companies should also clearly articulatethat they are against irresponsible drinking by taking the

high moral ground and promoting causes such as preven-tion of drunken driving. It is not so much the absoluteamount of tax as the variations and different administra-tive mechanisms that create multiple countries within acountry.

2. Invest in Domestic Production: Possibly the best way to overcome the pervasive prohibition mindset is tofocus on domestic production of luxury liquor. High endliquor that can be produced locally would enjoy a duty free access to the Indian market. As we have seen in the

case of wines, domestic production has created a positiveattitude on the part of the government apart from creat-ing pride amongst consumers. Creation of employment,foreign exchange earning potential and creating an Indianluxury brand are key value proposition levers that need tobe driven. This will also allow companies to developproduct ranges which are possibly more suited to theIndian palate.

3. Invest in Developing the Marketa. Educate the SME owner consumer segment: The

Indian consumer is still at the early stages of thelearning curve when it comes to high end wines andspirits. The consumer tends to consume a narrow range of brands compared to the very large rangeavailable in most other markets and even in duty freeshops - the popular destination for Indian shoppers.

While education of all segments of the Indian con-sumers continues to be a high priority, the specificpriority is to focus on the small and medium enter-prise owner segment. This segment has the requisitespending ability and can be encouraged to trade up toluxury brands or enhance the range of their con-sumption basket. Companies can educate consumersthrough focused initiatives such as tasting sessions

and on-trade promotion events, where the consumergets to experience the product in the right ambiencealong with the imagery and legacy of the brand.Champagne brunches offered by five star hotels forexample have become quite popular and have allowedthe consumer to experience and gradually ask forchampagnes.

b. Social drinking and food pairing: The traditionalimage of drinking to get drunk needs to change to amore developed country concept of social drinkingin a responsible way on the one hand and pairing withfood on the other hand. Wine would go with conti-nental food, sake with Japanese. The promotion of social drinking is essential because most state govern-ments have created rigid laws in the country based onthe belief that alcohol consumption leads to uncivi-

lized behavior and is harmful to the society. It is nec-essary to change this image of alcohol in minds of consumers by framing it as a sophisticated and mod-erate means of having fun - allowing consumers toenjoy new flavors and experiences. Pairing alcohol

with 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 of the 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 of luxury liquor since it helps attract high end consumers,and they are a very important channel - the five starhotels get to import liquor duty free and make very high

margins. Unfortunately retailers have not taken a similarfavorable stance. A potential solution would be identify afew top end retailers and encourage them to move away from the low end of the market. Differing regulations

will prevent the emergence of a liquor retailing chain.Indian travel retail (duty free) does add significantly torevenues where the duty free revenues are counted aspart of the Indian business. Buying on arrival has beenencouraged by attractive pricing in Indian duty free andopportunities to buy when you travel out and collect

when you return schemes. This allows consumers toavoid lugging liquor on flights while still enjoying the bestof international duty free rates.

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

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ing, brand building is restricted to Below The Line (BTL)marketing activities. No amount of

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