By Soumitra Sharma
A slow yet steady development is occurring in the Indian consumer space. Young professionals can be frequently seen buying Prada sunglasses at Shoppers Stop, BMW and Mercedes are fighting a fierce battle to capture market share in the super-premium segment, while sales of Tata Nano have dropped. Increasingly, wine bottles are appearing on Indian dining tables, and it’s hard to find a place in the spa outlets at major Indian airports. Irritated relatives carrying high-end perfumes and handbags from Dubai and Bangkok are being replaced by growing footfalls in super-luxury malls in Delhi, Mumbai and Bangalore.
Indian luxury is arriving, and for good. According to the “India Luxury Review 2011” report by the Confederation of Indian Industry and A.T. Kearney (http://www.atkearney.in/images/india/pdf/India-Luxury-Review-2011-CII-AT-Kearney-Report.pdf), the Indian luxury market reached $5.75 billion in size in 2010, a growth of close to 20% over 2009. Categories such as jewelry, electronics and cars have shown excellent growth. The luxury market is expected to reach a size of $14.72 billion by 2015,the report says, a compound annual growth rate of about 21%, indicating that the Indian luxury story is only getting started. Activity by financial investors in recent months only reaffirms this, with the Indian luxury market witnessing private equity deals such as L. Capital acquiring a stake in Genesis Luxury Fashion (http://articles.economictimes.indiatimes.com/2011-08-01/news/29838628_1_luxury-brands-genesis-luxury-fashion-pe-fund-plans) and Franklin Templeton buying a stake in Kimaya Fashions (( link - http://articles.economictimes.indiatimes.com/2011-07-27/news/29820645_1_kimaya-fashions-fashion-hub-top-fashion-designers)).
For technology venture investors, a clear thesis, albeit in stealth right now, is engrained in the above trends. The Indian luxury market is ripe to go digital, and there is a real luxury e-commerce opportunity emerging, which is synchronous with offline retail. The thesis is backed by very real economic, social and business factors:
Offline luxury retail stores are still uneconomical - Luxury brands such as Ferragamo have publicly indicated1 that high real estate prices combined with low footfalls make brick-and-mortar stores unprofitable for a long period of time, particularly outside the Delhi-Mumbai-Bangalore corridor. Consider that for luxury apparel and accessories retail stores, the revenue per square foot per day in India is 60 rupees to 80 rupees ($1.19-$1.59), compared with 110 rupees to 170 rupees globally, according to the CII-A.T. Kearney report. Further, rental cost as percentage of revenue for such stores is about 25-30% in India, compared with 10-15% globally. These statistics suggest that luxury stores in India will tend to remain unprofitable for a while. This is where the power of the Internet comes in. By selling online, luxury brands can dis-intermediate the physical part of value chain and drastically improve bottom-lines. To maintain the “touch-and-feel” experience, they could still keep flagship retail stores in select locations, but e-commerce is the optimal way to scale at favorable unit economics.
(To be continued)
Soumitra Sharma is part of the Investments Team at IDG Ventures India, a venture capital fund focused on investing in Indian technology and technology-enabled businesses. The views expressed in this article are his own. Mr. Sharma can be reached at soumitra_sharma@idgvcindia.com, and you can also follow him on Twitter @soumitra_sharma.
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