India Luxury Review 2011

A CII - A.T. Kearney Report

India Luxury Review 2011

A CII A.T. Kearney Report

India Luxury Review 2011

A CII A.T. Kearney Report

October 2011 Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area Lodi Road New Delhi - 110003 India Tel: + 91 11 24629994-7 Fax: + 91 11 24626149 Contact: Amita Sarkar, Senior Director, CII (amita.sarkar@cii.in) Atreyee Talapatra, Consultant, CII (atreyee.talapatra@cii.in) A.T. Kearney Limited 1st Floor, Future Capital House Peninsula Corporate Park Ganpatrao Kadam Marg Lower Parel (W) Mumbai - 400 013. India Tel:+91-22 - 4097 0700 Fax:+91-22 - 4097 0725 Contact: Neelesh Hundekari - Principal and Head - Luxury and Lifestyle Practice, India (neelesh.hundekari@atkearney.com) Saurine Doshi - Managing Director, India (saurine.doshi@atkearney.com) Hemant Kalbag - Vice President and Partner, Head - Consumer Industries and Retail Practice, Asia (hemant.kalbag@atkearney.com) Pameela Pattabiraman - Principal, Consumer Industries and Retail Practice, India (pameela.pattabiraman@atkearney.com) Himanshu Bajaj - Principal, Consumer Industries and Retail Practice, India (himanshu.bajaj@atkearney.com) Subhendu Roy - Manager, Consumer Industries and Retail Practice, India (subhendu.roy@atkearney.com) This report has been jointly produced by Confederation of Indian Industry and A.T. Kearney Limited, the contents of which are meant only for information purpose of the reader. Readers are advised to conduct their own investigation and analysis of information contained in this report, and not rely on the information contained in this report for any purpose. Neither Confederation of Indian Industry, nor A.T. Kearney make any representation regarding the accuracy or completeness of such information and expressly disclaim any or all liabilities based on such information or any omission thereof. No part of this report may be reproduced or distributed without the prior 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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FOREWORD
The luxury market in India is gaining increasing visibility with each passing year. While the 'buzz' generated by this sector is disproportionately high compared to the size of the market today, it does indicate that most global luxury brands recognize the potential of the Indian luxury market. Given the high growth rates of the Indian market compared to that in mature economies, 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 and supporting the growth of the luxury market in India. CII, through its National Committee on Retail and Task Force on Luxury & Lifestyle, plays an active role in creating an industry forum for players in the luxury space. A.T. Kearney, one of the world's top management consulting firms, serves several global clients in the luxury sector and is a thought leader in this space. Last year, 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 included 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 luxury industry needs to address, to unlock the potential of the market and continue on a strong growth trajectory. This year's 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 help take the collective understanding of the luxury industry in India a few steps forward.

Confederation of Indian Industry

A. T. Kearney

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EXECUTIVE SUMMARY
Need for a Refresh Luxury Market in India - Reflections on the Year Gone By

Last year CII and A.T. Kearney had teamed up to do an exhaustive deep dive into the Indian luxury market. As our readers would recall, the unpredictable nature of the market led us to use the metaphor of a game of Snakes and Ladders in our report. Every move made by luxury players could result in dramatic success (Ladders) or significant setbacks (Snakes); companies must be watchful every step of the way. Looking at the rapidly changing market, we decided to refresh our study - essentially looking at key top-of-the-mind opportunities (new Ladders) and risks (new Snakes) for industry players. This report aims to accomplish this, by capturing key market highlights and trends from the past year and 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 Personal Care.

The Indian luxury market is evolving more rapidly than most of us had foreseen. The luxury market witnessed robust growth of ~20% over the past year and is estimated to have reached ~ USD 5.75 billion in 2010, in line with our 5 year projections. Luxury products have grown the fastest at 29% to reach a size of USD 2.05 billion, well above expectations of 23%. Services have grown at 22% to reach USD 0.95 billion and assets have grown at 13% to reach USD 2.75 billion. Jewellery, electronics, cars and fine dining have grown beyond expectations, while apparel, accessories, wines and spirits have continued their strong growth. Real estate and yachts have remained more or less flat due to high prices/expectations of a correction and absence of marine infrastructure respectively. In all categories, market leaders have grown well beyond the category growth. Skepticism is being replaced by an increasing sense of buoyancy and promise in the future potential of the market. Consumers are accepting and adopting global trends much faster than anticipated. Digital and social media have made it possible for companies to connect with some of the once hard-to-reach Indian consumer. On the other hand, infrastructure challenges and regulatory constraints continue to exist and are not likely to be resolved easily in the near future, creating doubts about the sustainability of this sector. Private equity investments in Genesis Colors and Kimaya reinforce the belief in the sector. What has changed in the last one year: Luxury has gone beyond Delhi, Mumbai and Bangalore to Chennai, Hyderabad and Pune, which collectively now have over 30 stores in apparel, accessories, watches and personal care. Similarly North Mumbai and Gurgaon are two new distinct catchments that have emerged. Car dealerships are the most penetrated with more than 50% of their dealerships outside

Total Luxury Market

5.74 Overall +20%

4.81 2.04 1.58 +22% Products +29%

0.94 0.77

Services

2.45

2.76

Assets

+13%

2009

2010

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Category Jewelry Electronics Stationery Cars Fine Dining Travel Apparel and Accessories Wines and Spirits Watches Personal Care Hotels Real Estate Yachts

2009 Market 2009-10 Growth (USD mn) Estimated Actual 730 21% 30% 160 9 745 270 32 205 180 50 230 440 1440 2 22% 20% 32% 10% 15% 30% 22% 27% 20% 10% 15% 12% 35% 25% 36% 40% 22% 30% 25% 29% 24% 10% Negligible Negligible

Key Drivers Increasing gold and diamond prices and low price elasticity Increasing supply (modern trade) Increasing supply and usage as gifting item New brands and better pricing due to local production Footprint expansion; new brands Increasing inbound tourism New entrants; footprint expansion Increasing consumer awareness Increasing supply through higher distribution reach Introduction of new brands New hotels; footprint expansion High interest rates, lower supply and expected market correction Inadequate infrastructure

the metros - Mumbai/Delhi/Bangalore/Chennai/ Hyderabad. Trends observed have been increasing adoption of global practices, lowering "badge" consciousness, companies throwing open doors to new consumers and the growing importance of digital media. However many challenges remain to be surmounted. The key challenge still remains in effectively reaching the target consumer. Reservations on luxury purchases are clearly declining, with price parity with Dubai/Singapore being very clearly attempted and communicated. The need for Indianization is being realized by players and some efforts are visible in apparel, watches and cars. Challenges around infrastructure still remain. There has been limited progress here - players need to wait and watch or get together, create luxury properties collectively or wait for what developers will offer. The regulatory structure has also largely remained unchanged over the past year, with the recent news about 100% FDI in single brand retail creating hope amongst global brands. If this does happen, it will act as a growth stimulant and remove supply constraints. Talent remains a challenge. In such an environment, companies need to make strategic choices and smart investments, always with a cost conscious mindset. While there are several options open to luxury players operating in India today, we believe there are three paths that luxury players could choose to take: Grow cautiously by getting the basics right, experiment selectively to adopt a differentiated position in the market or gain first mover advantage in high potential sectors by bold 'market making' moves. A clear focus on the SME segment of consumers will yield rich dividends. Domestic production of luxury goods needs to 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 question of adding growth capital to gain scale. A unique Indian model is emerging. For example, with sales productivity at 60-80 Rs/sft/day, gross margins of 55-60%, rental costs of 25-30% and other costs 15-20%, leaves a small profit at the store level. This also implies that companies would benefit from choosing smaller store formats and being very careful about rent and overheads. Overall, we are likely to see continued investment in the India luxury space. A few market making moves by leaders in this space will help exponentially increase growth. Based on industry interviews, sentiment seems to be positive and the general opinion is that India is likely to remain insulated from the impending global downturn. The Indian luxury seems set for growth of ~20% in the year ahead.
Luxury Market in South East Asia - a study in contrast

An interesting contrast to the Indian market is the South East Asian market (Singapore, Malaysia, Indonesia, Thailand, Philippines, Vietnam) which is culturally heterogenous, geographically diverse and concentrated in a few big cities. The luxury products market in South East Asia - focusing on apparel & accessories, personal care and jewelry - is estimated to be USD 8 billion today, around 6-7 times the size of the Indian 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 dominated by jewellery, apparel and accessories form the largest segment - over 60% - of the South East Asian market. The consumer base is much wider cutting across age, profession and social class boundaries. The consumer is much more aware and luxury consumption begins at much lower income

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levels at USD 10,000 per annum. Supply of luxury brands is abundant, easy payment options encourage consumption. Metrosexual, image conscious men are an important segment and consumers do prefer brands with a distinct local origin, sensibility or customization.
Wines & Spirits - Hiccups on the High Road

sumer segments and promote social drinking. Finally, companies may also consider developing various channels of distributions like high end MBOs and organized retail channels to enhance the consumer retail experience and improve accessibility.
Personal Care - Fair but not yet Lovely

The luxury wines and spirits market which is 1.3% of the total wines and spirits market is about USD 220 million growing at ~25%. This is interesting due to few reasons 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, premiumization and improved supply. The Indian wines and spirits market faces four key challenges - prohibition mindset, regulatory and commercial barriers, distribution difficulties and finally the absence of good national liquor. While understanding the luxury consumer continues to be a complex task, we have been able to demystify some of the code. We found that Small and Medium size enterprise owners have the least awareness to luxury wines and spirits. Traditionally wealthy families are the least price-conscious, while self employed and young professionals are the most price-conscious. Taste is the most critical purchase driver in all liquor categories. All liquor categories are premiumizing, with young population being the driving factor. Brand loyalty, although seen to some extent in all liquor categories, is highly dominant in whiskey consumption. Growth will come from increased penetration into newer consumers (the SME segment), geographic segments (states with low penetration, Tier 2 towns), categories (champagne, liqueurs) and occasions (e.g. food pairing). Companies need to use these insights to deal with the challenges. Lobbying to standardize laws and regulations across states and seeking inclusion in the impending GST regime would be crucial. At the same time they need to consider investing in domestic production. To further develop the market, companies should educate the low awareness con-

The luxury personal care market in India (8 % of the relevant market today) is estimated at ~USD 280 million in 2010 and growing at 22%. Typically a female consumer dominated market in other countries, with a significant share of cosmetics and skin care, the Indian market stands out for its fragrance domination. Traditional beauty archetypes which emphasize fairness, eyes and hair beauty over skin and the prevalence of traditional beauty treatments are responsible for this slightly skewed market structure. Per capita consumption is one of the lowest in the world and is growing at 16%. Luxury consumers emphasize experience with the product as their dominant purchase criteria. They are willing to experiment (low brand loyalty), prefers to shop in boutiques in India and stocks up on overseas visits due to the wider range and better prices. Key challenges facing the industry are low consumer awareness, limited supply side push and product/brand availability, infrastructure/retail channel availability and talent. Opportunities that the industry should seize are the increasing beauty and youth consciousness, weddings as big spend occasions and the high penetration of beauty and skin care services. Industry should focus on enhancing the belief in the potential of the industry, consumer education and awareness and enhancing status appeal. In addition they should collectively create luxury personal care zones in malls/department stores and enhance their geographical penetration and invest in promotions. Through this report, we hope to increase the collective understanding of the industry and thus contribute to the evolution of the Indian Luxury Industry. We believe there is a clear opportunity to make an impact in this market, and create a sizeable, profitable business quickly.

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TABLE OF CONTENTS

Foreword Executive Summary Chapter 1: Snakes and Ladders: Need for a Refresh Chapter 2: Luxury Market in India Reflections on the Year Gone By Chapter 3: Luxury Market in South East Asia A Study in Contrasts Chapter 4: Sector Spotlight: Wines & Spirits Hiccups on the High Road Chapter 5: Sector Spotlight: Personal Care Fair, but not yet Lovely Appendix References

v vii 1 5 15 19 31 39 45

SNAKES AND LADDERS: NEED FOR A REFRESH

CHAPTER 1

SNAKES AND LADDERS: NEED FOR A REFRESH

The Indian luxury industry is evolving more rapidly than most of us had foreseen. Skepticism is being replaced by an increasing sense of buoyancy and promise in the future potential of the market. Consumers are accepting and adopting global trends much faster than anticipated. Digital and social media have made it possible for companies to connect 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 be resolved easily in the near future, creating doubts about the sustainability of this sector. The unpredictable nature of this market led us to use the metaphor of a game of Snakes and Ladders in our report published in 2010. Every move made by luxury players could result in dramatic success (Ladders) or significant setbacks (Snakes); companies must be watchful every step of the way. With this in mind, we conducted a comprehensive assessment of the Indian luxury market last year, to provide a perspective on how to avoid pitfalls (Charm the Snakes) and exploit opportunities (Climb the Ladders), to win in this sector. While such an exhaustive 'deep-dive' study is perhaps best taken up once every three years, in a market that is changing as rapidly as the Indian luxury sector, every year is like a new roll of dice - dealing an uncertain hand to all players in the industry. There is thus merit in establishing an annual/bi-annual 'checkpoint' focused on key top-of-the-mind

opportunities (new Ladders) and risks (new Snakes) for industry players. This report aims to accomplish this, by capturing key market highlights and trends from the past year and revalidating projections for the years ahead. In addition, we have conducted in-depth assessments of two interesting sub-segment of the market - Wines & Spirits and Personal Care. We believe that deep-dive assessments such as these will help us get a better understanding of the conundrum that the Indian luxury market presents. The key questions that we set out to answer during this study were:

How has the Indian luxury market grown over the past year? Are we on cusp of any new opportunities to accelerate growth? What are the key risks to watch out for?

Insights and recommendations in this report have been developed 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 secondary research. We believe studies like this provide perspectives that are crucial to unraveling the enigma that continues to be Indian luxury market today.

LUXURY MARKET IN INDIA REFLECTIONS ON THE YEAR GONE BY

CHAPTER 2

LUXURY MARKET IN INDIA - REFLECTIONS ON THE YEAR GONE BY

Figure 1. Luxury Market Growth 2009-10 (Size in USD Bn) Total Luxury Market
5.74 Overall +20%

The luxury market in India is interestingly poised today. Market growth over the past year was higher than expectations and this strong upward trajectory is likely to continue over the year ahead. Optimism amongst luxury players seems increasing, driven by positive consumer sentiment. Consumers are evolving much faster than predicted, and are quickly catching up with global trends. While several challenges exist, luxury players are now shifting focus from fighting against these constraints to innovating within their confines. In this environment, luxury players are moving forward with a mix of hope and caution. A handful of players that have 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 operate profitably in the Indian luxury market.
Luxury Market in 2010: Better than Expectations

4.81 2.04 1.58 +22% Products +29%

0.94 0.77

Services

2.45

2.76

Assets

+13%

2009

2010

The luxury market in India witnessed robust growth of 20%

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 market size 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)
Products
Overall +29%
Overall +22% +27% +22%

Services
+25% +25% +29% +35% +25%

Assets
2.76 0.00 0.31
Overall Yachts Works of Art +13% 0% +15%

0.01 2.04 0.02 0.07 0.21 1.58 0.01 0.05 0.02 0.16 0.18 0.23 0.21 0.27 0.22 0.28

Stationery Home Dcor Watches Electronics Wines and Spirits

0.94 0.03 0.04 0.77 0.03 0.03 0.38

Fine Dining +40% Spa Travel

2.45 0.00 0.27

Personal Care

1.01 0.75

Cars

+36%

+24%

0.27
Apparel and Accessories +30%

0.96 0.73

Jewelry

+30%

0.44

0.49

Hotels

+10%

1.44

1.44

Real Estate

0%

2009

2010

2009

2010

2009

2010

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

over the past year and is estimated to have reached USD 5.75 billion in 2010. Luxury market growth is in line with theforecasted 5 year growth forecast - set out in our report published 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 slowdown in luxury real estate. Of particular interest to note is the growth rates enjoyed by market leaders - high double digits led by a combination of same store sales and footprint expansion. There continues to be a steady stream of new players entering the market across different segments. The luxury cars market, which has witnessed significant traction over the past four years, saw the entry of globally revered brands such as Aston Martin and Ferrari. The luxury bikes market seems to be finally kicking into the next gear, with brands like Ducati and Harley Davidson making their presence felt in this space. The luxury products market witnessed the entry of brands like Hermes and Paul & Shark in the apparel space, and brands like Kiehl's and L'Occitane 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 market entry strategies. Instead of setting up shop in luxury malls, as has been the trend over the past few years, Hermes has ven-

tured into market with standalone stores in iconic buildings in Mumbai and Pune. Another interesting development was the number of private equity deals that have transpired in the luxury space over the past 12 months, such as L Capital acquiring a stake in Genesis Luxury and Franklin Templeton acquiring a stake in Kimaya. While players continue to move cautiously in the luxury market, there is an increasing sense of buoyancy and optimism amongst 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 the radar of most players as a long-term growth market. Our projections for 2015 of an expected market size of USD 14.72 billion (USD 5.38 billion products, USD 1.45 billion services and USD 7.9 billion assets) remain unchanged.
Consumers Evolving Faster Than Anticipated

Consumers in India are evolving quite rapidly - in fact, the pace of change is much higher than that anticipated by most luxury players. Some of highlights of emerging trends include: New cities and catchments on the luxury map: Chennai, Hyderabad and Pune are now confirmed luxury destinations with several brands opening stores in these cities (Hermes, Paul & Shark, Diesel, Canali, Tumi etc). Stores in cities beyond Mumbai, Delhi, Bangalore now account for 23% of the stores. In addition new catchments in Mumbai (North Mumbai/Juhu) and Delhi (Gurgaon) are becoming popular destinations for luxury. This is an acknowledgement of the wealth in these cities/catchments and the readiness of the brands to go

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

Category Jewelry Electronics Stationery Cars Fine Dining Travel Apparel and Accessories Wines and Spirits Watches Personal Care Hotels Real Estate Yachts 2009 Market 2009-10 Growth (USD mn) Estimated Actual 730 21% 30% 160 9 745 270 32 205 180 50 230 440 1440 2 22% 20% 32% 10% 15% 30% 22% 27% 20% 10% 15% 12% 35% 25% 36% 40% 22% 30% 25% 29% 24% 10% Negligible Negligible Key Drivers Increasing gold and diamond prices and low price elasticity Increasing supply (modern trade) Increasing supply and usage as gifting item New brands and better pricing due to local production Footprint expansion; new brands Increasing inbound tourism New entrants; footprint expansion Increasing consumer awareness Increasing supply through higher distribution reach Introduction of new brands New hotels; footprint expansion High interest rates, lower supply and expected market correction Inadequate infrastructure

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

there to tap the demand. This will most certainly add to the demand for luxury products. Car dealerships are the most penetrated with more than 50% of their dealerships outside the metros (Mumbai/Delhi/Bangalore/ Hyderabad/Chennai) - towns where luxury car dealerships are present are Ahmedabad, Bhubaneshwar, Chandigarh, Coimbatore Goa, Guwahati, Jaipur, Kochi, Kolkata, Ludhiana, Pune, Raipur, Surat. These are potential destinations for luxury products as well as services and assets. Increasing adoption of global trends: Consumers today are accepting and adopting international customs and trends at a much faster pace than anticipated. India no longer continues to be the 'lagging' market that takes time to adapt to global changes. Consumers are wellinformed and increasingly demanding about latest trends - especially in the luxury products space. In categories like apparel & accessories and personal care, the key criteria for purchase is no longer price parity with international markets (which is almost expected as a 'given' criteria), but the availability of the latest collections. In fact, while brands do launch their latest collections in India at the same time as they do in other markets, consumers still complain about width and depth of range. Retailers hence have to walk the fine line between trying to provide as much variety and choice to provide consumers with exactly what they want (e.g. fit in apparel is becoming much more important) while managing the economics of inventory and likely obsolescence, given the still small market. Another interesting example is that of recent trends in wine consumption. While India has traditionally been a red wine market, this summer, the consumption of white wine went up from the typical 30% to over 50% of the market. This mirrors trends in the European market, where consumers prefer white wine in warm weather. Lowering 'badge consciousness': Indians have typically been highly badge conscious. Thus, selling 'famous brands' and products with prominent logos has always been easier than introducing new brands. While the 'badge' is - and will probably continue to be an important factor in our market for some time to come, consumers are now increasingly willing to move beyond the very popular brands, brands that well known in other markets and have a clear and unique value proposition. In the apparel space for instance, there are a growing number of takers for brands that are differentiated and have a strong 'point of view'. Several new brands like Etro, Paul & Shark, Hackett and Superdry are making their mark in a market that wanted to stick only to the likes of Armani,

Versace and Hugo Boss. Throwing open doors to new consumers: Luxury players are slowly but surely focusing on new consumers. The traditionally wealthy who know their Guccis from their Versaces, know where to buy, at what price, just as the 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 (small and medium enterprise owner) that are becoming important. A key trend being adopted by companies is to 'catch them young'. Given the fast growing and upwardly mobile nature of the youth segment in India today, this seems to be a logical move for luxury companies. While the youth segment does not contribute to a significant percentage 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 segment we believe is still underleveraged. A real estate implication of this desire to target the "new consumer" is the firm conclusion that luxury needs to move out of its cocoon in five star hotels and experiment with crossover formats where luxury rubs shoulders with lifestyle. Palladium in Mumbai is a great example where Burberry and Zara are right opposite each other and the consumer doesn't seem to mind. While luxury malls like DLF Emporio offer a true luxury experience to the connoisseur, India probably needs more in-between formats that are good enough for luxury and great for premium, while luxury retailing in five star hotels, will most certainly stagnate. Growing importance of digital media: The next few years are likely to see a paradigm shift in the way companies 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 a means to reach out the once hard-to-reach yet net savvy Indian consumer. Online retailing is being suggested as the medium of choice to target luxury consumers in cities outside the metros. In India, in all industries the "last mile" is the biggest challenge. Combine that with the "needle in a haystack" nature of the luxury consumer in this country of 1 billion+ and the problem becomes one that can seriously constrain growth. Distribution and reaching the right consumer at a reasonable cost is the big divide that separates the aware consumer and the eager seller. Internet allows disintermediation like no other medium does. The attraction is hence not difficult to understand. Traditional wet blankets like low internet

penetration do not deter the proponents, since the penetration amongst the target population is high. Online retailers on their part are working on models that would appeal to a broader set of consumers (e.g. myntra.com, fashionandyou.com etc) and some have attracted PE funding as well. The products/sevices that would be most amenable to internet retailing in the first wave would be those where the consumer 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 for gifting (e.g. small jewellery). While for net savvy consumers in 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 is little evidence of successful breakthrough innovation in actual selling yet.
Challenges and Constraints to Continue

In our previous report, we had listed a numbers of challenges faced by players in the Indian luxury. A year later, there has been little progress made against these and both regulatory and infrastructure constraints continue to plague the market. Of all the challenges that had been identified, most progress has probably been made on the consumer awareness front.

Reaching the target consumer: Awareness and perhaps more importantly - aspiration levels - have certainly gone up in the last year, driven no doubt by the increased supply in the market. Brands are experiencing growth upwards 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 is clear indication that luxury retailers are willing to go beyond their zone of comfort. As can be seen from the table below, the penetration of brands across the country is now much better than a year ago. Many CEOs that we spoke to agreed that micro-segmentation of the market is essential, though absence of data implies the need for focused effort. The hardest to reach is probably the SME segment. Reservations about luxury purchases: The Indian consumer continues to surprise players. Reservations are clearly declining, yet a lot still needs to be done:

a. Experimentation: The extremely experimental nature of the consumer is coming in handy. Brands tell absolutely unique stories that brands tell about how the most unlikely consumers make purchases. "Have money, will buy, but please treat me well' seems to be what the consumer is saying. b. Price parity: The message about the value conscious nature of the consumer is now very clear to the brands. Hence eliminating unnecessary frills, matching prices to Dubai and Singapore is now more or less a given. Except US, the wonderland of fantastic pricing and the preferential pricing in home countries in Europe for brands, brands are trying to match the close shopping alternatives such as Dubai and Singapore c. Indianization: Too little on this front so far. The need actually is becoming far more obvious though. Whether it is a preference for two-tone metal watch belts in India against the rubber belt revolution that is sweeping the rest of the world or the need for garments that will flatter the figure of the Indian middle aged woman, the need has never been more obvious. For example, for the Middle East markets where traditional wear dominates women's wear, luxury brands have introduced abayas. We await some significant steps by brands in this direction. Admittedly it won't be easy to create customized collections for a market which is still very small and designers and brand CEOs both would need a lot of convincing before we see, substantial Indianization. Infrastructure limitations - no end in sight: Availability of high quality real estate at the right prices continues to be the key concern for growth. With five star hotels losing their sheen as 'preferred' luxury destinations, and high streets still to emerge as a credible alternative, 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, continues to be a challenge for most luxury players. Mall activity which had slowed down in 2009, has caused a setback with very limited new space being available immediately. No new news here, players need to either wait and watch or get together, create luxury properties collectively or wait for what developers will offer. Regulation - some hope: The regulatory structure has largely remained unchanged over the past year. In some cases (eg: wines and spirits), new duties and age restrictions have been introduced, which are likely to have negative impact on the luxury market. FDI in multi-brand retail is not likely to be permitted any time in the near

10

future, putting a dampener on plans of many players. Reports of the proposed 100% Foreign Direct Investment (FDI) in single brand retail have caused some excitement in a market which has been waiting for a change in regulation for the last several years without any succor. Most luxury brands would want a 100% control on their destiny if they want to consider serious investment in a country. A 100% subsidiary also means greater psychological commitment from the brand, which leads to greater awareness and understanding of the unique issues on the ground and a much greater desire to work towards changing them, all of which will be welcome consequences. For most international brands, the party is still on in China and South East Asia is a much larger and easier market, so why would they not wait till India decides to liberalize its regulations? We believe if the Government actually manages to push through 100% FDI in retail, many international players who have been sitting on the fence 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 if' as it would allow multi-brand formats to enter, a necessity for getting the consumers to experience many brands while the market matures. Lack of Skilled Talent: There has been very little change on this front. High quality talent continues to be limited. 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 around setting up an educational ecosystem to provide for talent to the luxury industry. Supply constraints: Perhaps due to the above factors and partly due to alternative growth opportunities in China and South East Asia, the market still remains supply constrained. Expansion is still slow, Mumbai and Delhi still the hub of action and store footprints and product distribution is still low. We believe the industry should look at luxury cars as an indication of the potential. Luxury cars have continuously defied growth projections even though ticket prices for cars are one of the highest, duties on cars are undoubtedly the highest, roads are pathetic and most of these are cars to be self-driven in a country where the rich don't drive. To be fair, a car is perhaps unmatched as a status symbol, you can't carry it in your suitcase from abroad and "fit" is much less important. However luxury car dealerships enjoy the highest penetration amongst any luxury category and should be an indicator of the latent demand scattered around the country. On the whole, however, challenges

exist and are not likely to be resolved easily in the near future. In such a situation, what could happen if the global financial turmoil impacts India and fears of a slowdown turn serious?
Potential impact of a slow down? Maybe not much

As business news from the West becomes more and more discouraging and inflation and interest rates dampen the enthusiasm in the Indian market, business discussions in all industries in India inevitably touch upon the likely impact of a slow down. The nascent luxury industry should worry about what a slow down could mean for them. As we discussed this issue with several business leaders, while we noticed a certain cautiousness, there was a clear feeling that the impact if any is likely to be muted if at all. The reasons are perhaps not far to see. In the last recession in 2008-2009, the industry did not de-grow or stagnate, it just grew at a slower rate. While the market size potential lost was around 10% during that period and international brands did defer their entry plans, it wasn't a huge dampener on the spirit of the players. The feeling amongst CEOs is that domestic consumption in India is more insulated than we think it is. Unique characteristics such as wedding driven purchases (which are funded from inherited wealth, savings or debt depending on who the consumer is and hence relatively immune), wealth driven consumption not income driven for the millionaires and the relatively small ticket prices of at least the product segment explains this belief. What could go wrong? Serious job losses if they happen could dampen the spirit of the young consumer and force them to conserve than spend and a severe recession might mean that the wealthy might defer purchases not because they can't afford, but they might not want to be seen spending. Given all the new opportunities that are unfolding themselves while challenges continue to exist, what should companies do? We explore potential solutions in the next section.
Uniquely 'Indian' Solutions Needed

The key challenge for players in the Indian luxury market is that the market is small, growing fast but not exponentially and while growth is evident, bottomline rewards are insufficient. The key question to hence think about is what could be done to liberate the constraints on growth, so that it turns exponential and while we wait for it to happen, how do we find a way to make some money? Aggressive market making moves may be good for the growth objective and also provide first mover advantage in the long term, but could be risky in the short term. Too cautious an approach and sooner or later, the global parent might lose interest or patience

11

and decide to withdraw and reenter later. It is worthwhile remembering that for a global luxury brand, India is only one of the many options available for growth. With China proving to be not only a fast growing, but also a lucrative market, companies could choose to play a wait and watch game in India, while focusing on the larger Chinese market. We believe that the right approach would be a combination approach that allows companies an opportunity to grow without losing their shirt, while preparing them for capturing exponential growth. We believe there are three paths that luxury players could choose to take in India. 1. Grow Cautiously - Most players have chosen adopt a wait and watch route to market. Companies following this path have largely focused on expanding in select cities such as Mumbai and Delhi. While this is a fairly safe ploy, the downside to this strategy would be that companies risk losing out to other players that take more aggressive steps. Working within the confines of this strategy, there are few measures around 'getting basics right' that companies can take to ensure that they remain preferred players in the luxury space: a. Targeted marketing - Luxury brands need to invest in continual brand building and marketing activities to stay 'top of mind' with consumers. This becomes all the more important in the luxury products space, where brands need to decide how best to channel marketing monies - and balance between providing an outstanding store look & feel and targeted marketing activities. b. Superior range and availability - For companies that are not looking to make bold moves in the market, providing sufficient range and width of products and services is crucial. Based on interviews that we conducted, lack of sufficient range and non-availability of latest merchandise is the single biggest reason for Indian consumers to continue to make purchase outside India. Another factor that is often overlooked by luxury players is the need to ensure high availability of products - stock-outs are simply not tolerated by luxury consumers c. Pricing parity - Competitive pricing with international markets is now expected almost as a 'given' by most Indian consumers. With increasing price transparency available to consumers, companies need to ensure that pricing is not significantly higher than international market d. Ladder products - While we had spoken about lad-

der brands last year, there is also a need to have products 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 position in the market, companies can choose to experiment in select areas. This enables players to make strategic investments, with relatively low risks a. Customized product offering - Luxury players need to develop customized product offerings and tailored solutions for the Indian market. This will not help overcome the concern around sufficient range availability, with consumers getting access to products available only in India, but will also help increase brand loyalty. This is not a move that is new to luxury players - for instance, in the apparel space, several top design houses like Christian Dior and Alberta Feretti sell designer 'abayas' that retail for as much as USD 10,000 in Saudi Arabia. While there has been some movement in this space in the past few months, such as Hermes and Marc Jacobs designing sarees and Zegna and Canali retailing Nehru jackets, there is clearly a long way for most players to go. b. Frugal luxury model - There is little 'luxury' that players have in running a luxury business in India. As one of the luxury CEOs said, "In India, you need to run luxury the frugal way". We couldn't agree more. Companies in India need to find a 'local' model that works in the context of infrastructure challenges, high rental costs, low real estate availability and lack of skilled talent. Indian consumers are used to different scales for infrastructure in the Indian environment and abroad (as seen in the case of the housing market in Mumbai for instance) and are quite amenable to making do with a 'frugal' luxury model. On the other hand, expectations of service are extremely high. We continue to believe that working with smaller store formats till such time that real estate rentals become reasonable is perhaps the only option, apart from using the store as a base for serving a much wider clientele by taking the store (i.e. products) to the consumer's home. 3. Market Making - To gain first mover advantage in high potential sectors, companies could look at bold 'market making' moves. While these could require higher upfront investment, the benefits in the long run are likely to be significant.

12

a. Focus on the SME consumer: Amongst all the target consumer segments, we believe it is this segment that needs the greatest attention and offers the greatest returns on investment. This segment comprises of owners of small and medium sized businesses, have enough surplus cash for spending, traditional in mindset, largely unaware of luxury products and brands, are not readers of fashion magazines, not very internet savvy, do not have clear tastes or preferences and still feel intimidated or hesitant when dealing with flashy, big, stiff upper lip brands. This segment needs the real education and hand holding. The rest will find their way to the brands one way or the other, but this segment has to be made aware, educated, 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 the money, but don't feel they have the status and want to use the money if they could to "arrive". Their children are already spenders, having been educated abroad or in good institutions in India. Converting this consumer will however mean that brands have to walk the extra mile for these consumers. The largest luxury category - jewellery- thrives precisely on this very segment and here we believe brands still need to learn a lot and bring about changes in the way they go about attracting and converting these consumers. A stiff, aloof, impatient approach will not work, rather an 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 to strongly consider domestic production. This will help bring down entry prices and make luxury products accessible to a significantly larger percentage of the population. One segment that has effectively utilized this concept is the luxury car market - which is beginning to reap significant rewards. Government policies, 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 social media are beginning to play a much larger role in luxury consumption than ever before. Companies can

use the internet to reach consumers in a targeted manner 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 corporate level, companies still need to build scale to set off high overheads and break even. A high level assessment of the productivity and cost structure required for profitable single store operations (apparel and accessories example) is given below: Lower footfalls translating to lower sales productivity, lower gross margins due to duties and discounting,and much higher rentals characterize the Indian model. Lower salaries is the only succor, leaving a small store level profit. The model is hence very delicately poised and explains why some brands could lose money even at the store level. Getting the store size and rental right is critical for store profitability and managing overheads and getting the right scale is critical for the chain economics to work out favorably. The good news is that many players report that they are making money at the store level, and overall profitability is within sight based on scaling up plans. A model which starts to make money at the store level is right for attracting growth capital - where infusion of capital will help acquire scale faster, thus improving the economics of the chain.
Figure 4. Business model for India, apparel and accessories example
P&L Item Revenue/Sqft/day (INR) Gross Margin Rentals (% of revenue) Other Costs (% of revenue) Global 110 - 170 ~70% 10-15% 20-25% India 60-80 55-60% 25-30% 15-20%

In summary, we are likely to see continued investment in the India luxury space. A few market making moves by leaders in this space will help exponentially increase growth. Based on industry interviews, sentiment seems to be positive and the general opinion is that the Indian market is likely to remain reasonably insulated from the likely global downturn. The Indian luxury market thus seems well on course for a healthy growth of ~20% in the years ahead.

13

LUXURY MARKET IN SOUTH EAST ASIA A STUDY IN CONTRASTS

CHAPTER 3

LUXURY MARKET IN SOUTH EAST ASIA A STUDY IN CONTRASTS

Most studies on the luxury industry in India typically compare the market with China, to draw upon best practices and takeaways for local players. While China is indeed the fastest growing market for luxury companies globally, it is quite different from India culturally as well as in size and scale. In this section, we focus on a comparison of the India luxury market, specifically the luxury products' segment, with that of South East Asia - comprising Singapore, Thailand, Malaysia, Philippines, Vietnam and Indonesia,. There are several reasons why this makes for interesting comparison. South East Asia, like India, is both culturally heterogeneous and geographically 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 South East Asia is much more established than that in India, and there are several differences between the two geographies, there are still a few key insights to take away from the growth of this market.

The luxury products market in South East Asia - focusing on apparel & accessories, personal care and jewelry - is estimated to be USD 8 billion today, around 6-7 times the size of the Indian 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 dominated by jewellery, apparel and accessories form the largest segment - over 60% - of the South East Asian market.

Extremely high consumer awareness levels and aspirations: The South East Asian luxury consumer cuts across age, profession and social class boundaries. Unlike India, luxury consumption is not limited primarily to traditionally wealthy families, businessmen or successful professionals in the corporate sector. Even consumers that earn USD 10,000 per annum are willing to spend on luxury products, unlike in India, where rupee millionaires (with incomes of USD 20,000) still hesitate to venture

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

SEA Luxury Product Market Growth (USD Bn)
Vietnam Philippines Indonesia Thailand Malaysia Singapore Apparel & Accessories

+16% +16%
2 5

11

Thailand & Indonesia expected to grow faster than the other SEA countries +14% 8
1 0 1 1

+15%
1

16
0 3 3

2005
Personal Care

2010 +7% +7%

2

2015
3

1 2 0

2005
Watches & Jewellery 8

2010 +22% +24%

1

2015
3

4
0 1 3 1

0 0

4 0

2005

2010

2015

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

2005 2010 2015 Watches & jewellery category has been fastest growing due to the growing number of nouveau rich (new millionaires) & growing upper middle class households purchasing them

Source: A.T. Kearney research and analysis

17

into this space. In fact, in a survey conducted by A.T. Kearney, 40% of South East Asian consumers with annual 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 spend more than 20% of their income on luxury items. If the propensity to buy in India were only half as much, we would see an explosive growth in the luxury market in the country. High luxury product availability driving growth: A key driver of luxury growth has been increasing supply over the past few years. Cities like Singapore and Kuala Lumpur are preferred destinations for luxury product sales for people from all over South East Asia. Singapore in particular, with its multitude of high-end shopping malls, wide range of product offerings and competitive pricing, attracts with tourists across the globe looking for a world class luxury shopping experience. Luxury shopping has been typically limited to malls and department stores, unlike Europe with its array of luxury high streets. Interestingly enough, both luxury discounters or factory outlets and online retailing of luxury goods - channels that have picked up in a big way in the more developed markets - are yet to take off in South East Asia. Easy payment options: A big driver of growth in the market has been the availability of flexible payment plans (installments), which make luxury products accessible to a wide base of consumers. With high penetration of

credit cards and most companies willing to adopting flexible pay options, South East Asia seems set for increasing adoption of luxury products. Men are the new Gem: The South East Asian luxury market has seen the rise of a whole new consumer segment - metro-sexual men. Greater media exposure and increasing image consciousness has led to extremely high demand for male grooming products . There is a big potential to tap into this market and expotentially grow the luxury segment. Think global act local: Given the diverse nature of the market, adapting to local tastes has been a crucial success factor for most luxury players. Interestingly, this is especially important in the apparel sector, where over 90% 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 global brands to partner with local brands or boutiques and tapping into local designer talent.

While the Indian luxury market still has a long way to go to catch up with South East Asia, there are several trends and practices that global players looking at increasing presence in the India could learn from. As mentioned in the previous chapter, a strong supply side push, with customized models for the local market, is necessary for the next wave of growth in India.

18

SECTOR SPOTLIGHT: WINES & SPIRITS HICCUPS ON THE HIGH ROAD

CHAPTER 4

SECTOR SPOTLIGHT: WINES & SPIRITS HICCUPS ON THE HIGH ROAD

We have seen in Chapter 2 that the Indian luxury market has had robust growth despite impending global slowdown. We shall now turn the spotlight on one exciting category - luxury Wines and Spirits. This is a very interesting category largely male dominated, growing despite strong regulatory and commercial barriers, and dominated by a few large players who can drive change. We have stuck to the definition of luxury that we have used earlier. Luxury in wines and spirits have includes all products with retail price above USD 75 per bottle.
Luxury wines and spirits - small but fast growing

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.

Figure 7. Luxury Market Segmentation in India by value (2010)

Other Spirits 1% White Spirits 4%

Wines 10%

The total alcoholic beverages market in India has grown to USD 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

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

Whiskey 85%

670

Source: A.T. Kearney Analysis

+25%

The luxury market has grown in line with our estimates last year. The market is dominated by whiskey.
220 175

2009
Source: A.T. Kearney Analysis

2010

2015e

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

21

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

Whiskey Wine Vodka Specialty Spirits Wine

85%

78% 56% 55% 38%

India
Source: Datamonitor, A.T. Kearney Analysis

France

Russia

China

USA

sumers drink wine with meals. Similarly Russians prefer vodka. Indians do not associate liquor with food. Whiskey is the most acceptable form of social drinking and is accompanied by snacks. Another difference in the Indian market is the size by regions. South is the biggest market and East the smallest. In South, the regional population is highly receptive to new products and flavours, and hence companies prefer to launch new products in the region. In North, most of the high-end market resides in cities like Delhi, Gurgaon, Chandigarh and 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 East, luxury sales is lower than those of other regions, as income levels and awareness among the majority of consumers are far below those of their counterparts in other regions. Having looked at the market structure, let us now understand the key drivers for growth, peep into the world of the Indian luxury consumer, identify opportunities for companies and assess challenges facing the industry.
Growth drivers - consumer and supply led

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

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 disposable 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, pub and party culture in metros are all driving consumption at the higher end. Even though the per capita consumption has increased over the past few years, a comparison with other countries shows that it can increase further. This will come both from adding new consumers as well as increasing consumption from existing ones.

West 25-30%

North 20-25%

East 10-15%

South 35-40%

Source: Euromonitor, A.T. Kearney Analysis

22

Figure 10. Per capita consumption (in liters) of alcohol in India

3.7

and bars is relatively easy; consumers don't mind trying out new drinks even though they may be expensive. This behavior is not restricted to any particular category of alcohol, but can be observed across whether it is whiskeys, wines, white or specialty spirits. 3. Improved supply: Along with the increased demand from aspiring consumers, improved supply dynamics have also fuelled growth. International travel and duty free purchases have got Indians hooked to international brands which were either not available or were expensive due to duties. Having got used to it, these same consumers are now shopping for the same in the country when they can't get it duty free. Organized retail is aiding the availability of high-end liquor. Over the past few years, we have seen many exclusive organized liquor stores, which have spurred availability of more brands across urban and semi-urban centers. Some examples are Dom Perignon Bar in Delhi and exclusive liquor area in hypermarkets. Similarly, liquor companies are investing in marketing and promotional initiatives. They have started targeted promotions, like tasting and appreciation sessions to drive consumption. This creates awareness among new consumers , especially in the wealthy, but less aware segments with traditional preferences. Liquor companies are also actively pushing traditional retailers to grow and focus on premium consumers. While this upscaling of the supply side is most visible in the metros, the demand for premium products extends well beyond as even these consumers trade up. Brands are also sprucing up their distribution network to serve these customers.
Indian consumer - luxury seeking and tough to

2.9

2007

2010

Source: WHO, A.T. Kearney analysis

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

16.0

8.0

3.7

Russia

China

India

please

Source: WHO, A.T. Kearney analysis

The Indian luxury consumer is unique. We conducted a survey among high-end liquor consumers to gain an understanding of their attitudes and behaviors. Some interesting insights emerge: 1. Awareness: Small and Medium size enterprise owners have the least awareness to luxury wines and spirits. Their consumption habits are traditional and liquor being a social taboo in their circles, they have the resources but are constrained in their consumption. They have the means, but companies need to educate them on highend liquor. This segment is also the least taste conscious. 2. Price consciousness: All segments except the traditionally wealthy families tend to be highly price conscious, self employed and young professionals are the most price

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

23

Figure 12. Luxury wines and spirits - consumer segment insights

Traditionally Wealthy Families & Large Industrialists

Criteria

Medium Size Enterprise Owners

Corporate Executives

Self Employed Professionals

Young Professionals

Awareness Taste Consciousness Price Consciousness Badge Consciousness Propensity to buy overseas
Source: A.T. Kearney consumer survey Very High Very Low

conscious. In the case of liquor this is directly linked to propensity to buy overseas. All segments buy from abroad. The consumer hates to pay the very high duties and does not mind stocking up every time he/she travels abroad. A peculiar, behavior observed with respect to price consciousness is that it depends on the consumption occasion. Purchase for personal consumption is most sensitive to price, but when someone else is paying for it (e.g. paid for by the employer) or when the consumer is entertaining to impress he/she is willing to spend more.. While this reflects the overall luxury products market, there are subtle differences when it comes to wines and spirits. Thus, we see that small and medium size enterprise owners are much less aware of luxury liquor than any other category, due to traditional societal taboo on drinking. As a contrast, when compared to apparel, we find most badge consciousness to be exhibited by young professionals, while in luxury liquor, it is exhibited by traditionally wealthy families. 3. Taste: Taste is the most critical purchase driver in all liquor categories. Within categories, whiskey and vodka consumers are most brand conscious. Consumers like and remember the taste of their favourite brands and go seeking them in all categories. This behavior is most pronounced in whiskeys with their distinctive tastes and flavours and comparatively least in vodkas where some mixer is normally used, with wines falling in between. In vodkas, variety of flavors is becoming an interesting purchase driver. This can be attributed to the evolving taste patterns among younger consumers and their willingness to experiment.

4. Brand loyalty - highest for wiskey, switching - highest in wines: Although seen to some extent in all liquor categories, loyalty is highly dominant in whiskey consumption. Although some amount of switching does take place in whiskey, it takes place between brands in a similar price range. Wine consumers are at the other end of the spectrum and switch their brands regularly. This is partly due to 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 vineyard are all important and together combine to create the "brand'. One needs to be a frequent wine consumer to know the wine you prefer. With very little exposure still to wines, consumers tend to decide based on
Figure 13. Purchase drivers for different liquor categories
9% 0% 0% 6% 11% 18% 15% 12% 24% Brand image & name 8% 0% 1% 9% Setting 2% 1% Brand advertising 8% Flavour variety 11% 12% Convenience / Availability Price

59%

52% 42%

Taste

Whiskey

Wine

Vodka

Source: A.T. Kearney consumer survey

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

24

The few consumers who are brand loyal usually stick to more famous "go-to brands" which they have tried/heard of earlier, not necessarily because they have chosen them from many alternatives. Vodka consumption is split approximately equally among loyalists and switchers. Like whiskey, vodka consumers experiment within price categories and the presence of various flavors and extensive marketing encourages switching.
Figure 14. Brand loyalty and switching for different liquor categories
0% 22% 0% 4% 7% 7% Look for value for money Slowly trade up as per my lifestyle

Figure 15. Place of consumption for different liquor categories

20% 35% 50%

Off trade

80% 65% 50%

On trade

Whiskey

Wine

Vodka

Source: A.T. Kearney consumer survey

40% 33% 73%

Switch regularly

44% 23%

47%

Loyal

Whiskey

Wine

Vodka

hence this aspect needs to be explored carefully. As an example, the carbonated beverages industry has taken great efforts to pair their drinks with food items and create bundled offerings. The pairing of alcohol with food can be used by companies to design their marketing and promotional campaigns, and tasting sessions.
Opportunities for growth

Source: A.T. Kearney consumer survey

Vodka consumers however, rarely trade down. 5. Consumption location - on-trade more popular channel. This is not surprising given that fewer Indian consumers are comfortable drinking at home. A deeper look into consumption patterns elaborate the various outlets within the on trade channel which vary between categories. Wine is consumed more frequently at restaurants and large 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 can be 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 on liquor (which they import duty free and hence liquor is a high margin driver) which in turn limits consumption. 6. Pairing with Indian food still nascent: Wines are primarily paired with meals and is a good driver of consumption internationally. In India, consumers normally have water with their meals, while liquor is in the form of pre-dinner cocktails. Fundamental changes in consumption habits is the most sustainable form of growth and

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 consumption in underpenetrated consumer segments, geographies and occasions. Underpenetrated consumer segments: Traditionally under penetrated consumer segments are the small and medium enterprise owners and their families. This is a profitable, but traditionally untapped segment. Awareness, education, facilitating experimentation, attractive pricing and convenient distribution to encourage them to uptrade to luxury liquor will be needed to get this consumer class to start consuming Underpenetrated geographies: While metros will continue to drive growth, penetration and focus on Tier 2 cities and currently under-penetrated states (regulation permitting) need to be focused upon. Under penetrated categories: India is largely a whiskey market. Just as vodka consumption is gradually increasing, companies should drive consumption of other categories like champagne, liquers and other spirits. This will need to go hand in hand with change in consumption habits - hence difficult, but as has been proven in case of wines (wine drinking was unknown in the country, not so long ago) and white spirits, continuous promotion will

25

eventually make it happen. Underpenetrated occasions: The pairing of alcohol with food can be a very good lever to encourage consumption. This aspect needs serious consumer research.

Overall, there is enough headroom for growth in the luxury wines and spirits category. The luxury market is e a small part of the overall market, though the drivers and opportunities are similar for luxury and premium liquor are similar. Companies in this sector can drive increased consumption by increasing the variety, experience and availability to consumers.
Challenges for the industry

Having looked at the growth opportunity, we now turn our attention at three key challenges that face the industry - prohibition mindset, regulatory and commercial barriers and absence of good national liquor. 1. Prohibition mindset. While most countries have some kind of prohibition laws that seek to control and curtail alcohol distribution and consumption, Indian regulation literally creates multiple countries within one country. A very strong pre-independence prohibition mindset still dominates government policy and makes it very hard for

companies to sell or distribute and consumers to consume. On the other hand, this sector contributes significantly to the revenues of state governments, creating enough barriers for changing any policy that could leave the states poorer. The prohibition mindset gets manifested in the controls on distribution and very high taxes (import duty and excise duties and is best exemplified in the differences in the extent of prohibition across states. In few states like Gujarat, Nagaland and Mizoram, alcoholic drinks are simply banned. Alcohol prohibitionists are active in other states like Kerala. As late as June 2011, Andhra Pradesh government launched a new anti-alcohol campaign to propagate the policy of prohibition. The regulations also greatly control the channel through which the product is distributed. If a company wants to conduct a sponsorship event they cannot source directly from the wholesaler but need to buy their own product from a retailer. This makes sponsorship events also very expensive. Figure 16 explains the extent of prohibition in every state (colour codes - green - low, red - very high 2. Regulatory and commercial barriers. Liquor tax rates in India are the highest, compared to most Asian economies. This increases the price of liquor in India, artificially creating barriers for in-country purchases. This always drives purchase of liquor while returning from

Figure 16. Levels of prohibition in select Indian states

Region North State Delhi Punjab Haryana Chandigarh Uttar Pradesh Rajasthan Jammu and Kashmir Uttarakhand West Bengal Bihar Orissa Meghalaya Manipur Mizoram Nagaland Andaman and Nicobar Maharashtra Gujarat Goa Daman and Diu Tamil Nadu Andhra Pradesh Karnataka Kerala Lakshadweep Prohibition Levels Age and Duty Driven Prohibition Age and Supply Driven Prohibition Age Driven Prohibition Low prohibition Supply Driven Prohibition Supply Driven Prohibition Supply Driven Prohibition Holy cities are complete prohibition, rest is duty driven Supply Driven Prohibition Low Prohibition Low Prohibition Age Driven Prohibition Complete Prohibition Complete Prohibition Complete Prohibition Low prohibition Age and Supply and Duty Driven prohibition Complete Prohibition Low Prohibition Low prohibition Supply Driven Prohibition Supply and Duty Driven Prohibition Low prohibition Supply and Duty Driven Prohibition Complete Prohibition

East and North East

West

South

Source: A.T. Kearney Analysis

26

Figure 17. Statewise liquor market structure in India

Low Rs. 10-Rs. 50 per proof liter

Sikkim Pondicherry Goa Arunachal Pradesh Daman and Diu

Manipur

Excise Duty

Mizoram
Medium Rs.50-Rs.100 per proof liter

Gujarat Nagaland Lakshadweep

Bihar Uttar Pradesh Madhya Pradesh Jharkhand Chhattisgarh Haryana Himachal Pradesh

Karnataka Orissa Assam Meghalaya Tripura

High Rs.100 and above per proof liter

Delhi Tamil Nadu Kerala Andhra Pradesh

Rajasthan Punjab Uttarakhand

Maharashtra West Bengal Jammu and Kashmir

Prohibition *States in bold are larger markets

Source: A.T. Kearney Analysis

Govt. controlled

Auction

Open

Type of Distribution Market

overseas. Eg. even compared to Europe, prices are much higher due to tariffs - For instance a Moet Chandon bottle costs approximate USD 40 in France as opposed to USD 100 in India. Similarly, liquor tax and regulation structure in India is very skewed. Every state has a different law and import duties for alcohol are very high. The law seeks to discourage consumption by imposing constraints on the consumer and the seller in multiple forms - complete prohibition, permit requirements, high import duties, controlled distribution, high tax rates etc. Due to the skewed tax structure, there is thriving grey market in wines and spirits. This is a problem for companies since they have no control over the quality, counterfeit goods and this channel. It causes brand dilution and is a threat to sales. State governments meanwhile are unwilling to change this structure, due to the revenue generation from the industry. 3. Absence of a good national liquor. This is a key reason why alcohol is not part of our consumption habits and is still considered a taboo on many dinner tables. Countries with high per capita consumption have a strong national liquor. French and Italians have wines, Scots have scotch, USA has bourbons, Japan the sake, Russia and Poland have Vodka. All these are a big source of forex, employment and national pride and also form part of consumption habits. This also creates a negative

image of alcohol in India. 4. Distribution challenge: The multiple statewise regulation means that it is impossible to create a national luxury liquor chain and traditional outlets are slow to change. Talent is not easy to get due to stigma associated with the industry. Also not all outlets are ready to sell liquor. 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 challenges that aredaunting. We believe there are a handful of initiatives that the industry should focus on as the Indian consumer find its position in the world of luxury wines and spirits. 1. Lobbying to standardize laws and regulations: Companies will have to combat the Prohibition Mindset head-on by emphasizing the lifestyle and entertainment connotation of wines and spirits. Change in this arena will be slow to come, given that it is a politically difficult proposition for governments to be seen as promoting alcohol. Liquor also being a major revenue stream complicates matters. Companies need to emphasize the need for a reasonable duty structure to prevent the grey mar-

27

ket and a uniform and standardized regulation across the country to prevent cross state movement of liquor within the country. The industry should lobby for standardization of the tax structure and other regulations that govern consumption and distribution.A good opportunity to get the regulation simplified would the GST (proposed Goods and Service tax) that is expected to be implemented next year. While alcohol and tobacco have been kept out of GST primarily due to resistance from the states, the industry should lobby for migration to GST, since the next round of systemic reforms will be some time away and pushing through a major regulatory change will bring big relief. Even if the duty remains the same as it is today a simplified business environment would be a quantum leap forward. Companies should also clearly articulate that they are against irresponsible drinking by taking the high moral ground and promoting causes causes such as prevention of drunken driving. It is not the absolute amount of tax as the variations and different administrative mechanisms that create multiple countries within a country. 2. Invest in Domestic Production: Possibly the best way to overcome the all pervasive prohibition mindset is to focus on domestic production of luxury liquor. High end liquor that can be produced locally would be able to enjoy a duty free access to the Indian market. As we have seen in the case of wines, domestic production has created a positive attitude on the part of the government apart from creating pride amongst consumers. Creation of employment, foreign exchange earning potential and creating an Indian luxury brand are key value proposition levers that need to be driven. This will also allow companies to develop product ranges which are possibly more suited to the Indian palate. 3. Invest in Developing the Market a. Educate the SME owner consumer segment: The Indian consumer is still at the early stages of the learning curve when it comes to high end wines and spirits. The consumer tends to consume a narrow range of brands compared to the very large range available in most other markets and even in duty free shops - the popular shopping destination for Indian shoppers. While education of all segments of the Indian consumers continues to be a high priority, the specific priority is to focus on the small and medium enterprise owner segment. This segment has the requisite spending ability and can be encouraged to trade up to luxury brands or enhance the range of their consumption basket. Companies can educate consumers through focused initiatives such as tasting ses-

sions and on-trade promotion events, where the consumer gets to experience the product in the right ambience along with the imagery and legacy of the brand. Champagne brunches offered by five star hotels for example have become quite popular and have got the consumer to experience and gradually ask for champagnes. b. Social drinking and Food Pairing: The traditional image of "drinking to get drunk" needs to change to a more developed country concept of "social drinking" in a responsible way on the one hand and pairing with food on the other hand. Wine would go with continental food, sake with Japanese. The promotion of social drinking is essential because most state governments have created rigid laws in the country based on the belief that alcohol consumption leads to uncivilized behavior and is harmful to the society. It is necessary to change this image of alcohol in minds of consumers are show it as a sophisticated and moderate means of having fun - allowing consumers to enjoy new flavours and experiences. Pairing alcohol with Indian food is potentially the largest opportunity for wines. We believe companies need to do a lot more research on Indian food habits and find opportunities for connecting liquor consumption with those. 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 provide an experience. This however, is still very nascent there are very few purely high end outlets, given the difficulties 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 are a very important channel - the five star hotels get to import liquor duty free and make very high margins. Unfortunately retailers have not taken a similar favorable stance. A potential solution would be identify a few top end retailers and encourage them to move away from the low end of the market. Differing regulations will prevent emergence of a liquor retailing chain. Indian travel retail (duty free) does add significantly to revenues where the duty free revenues are counted as part of the Indian business. Buying on "arrival" has been encouraged by attractive pricing in Indian duty free and opportunities to buy when you travel out and collect when you return schemes. This allows consumers to avoid lugging liquor on flights while still enjoying the best of 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 creativity is enough given the huge opportunity and the complete lack of flexibility. In summary, while we do believe this market will continue to

grow in excess of 25%, companies are facing multiple hiccups in their journey. Steely determination and a faith that the consumer will eventually force open this market should keep the large players going and new ones excited about entry.

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SECTOR SPOTLIGHT: PERSONAL CARE FAIR, BUT NOT YET LOVELY

CHAPTER 5

SECTOR SPOTLIGHT: PERSONAL CARE FAIR, BUT NOT YET LOVELY

Personal care market in India is estimated to be around USD 3.2 bn in 2010 and includes cosmetics, skin care, fragrances and hair care products. It is still early stages for this category in India with miniscule per capita spend on personal care as compared to other developed and developing countries

While the segment is still very small in India, the growth rate has been robust. It has grown at 24% in 2010 as compared to our earlier projection of 20% and is expected to grow to ~USD 700 million by 2015. This would make it 13% of the total personal care market. Fragrances dominated luxury market: In India, the luxury personal care segment is quite different from the overall personal care market. The mass and premium segments of the market are dominated by hair and skincare products, while makeup and fragrances form a small share. The luxury segment, on the other hand, is dominated by fragrances, which constitute over 50% of the total luxury personal care market. A key reason is that luxury consumption (except jewellery and designer apparel) is still dominated by men in the Indian market, and fragrances is the only personal care category that

Luxury Personal Care

We have defined the luxury personal care market to include all cosmetics and skin care products priced at greater than USD 25, fragrances priced at more than USD 50 and hair care products priced at more than USD 10 per bottle Luxury personal care market is estimated to be around 8% of the overall segment adding up to ~USD 280 million in 2010. This Indian market is fairly small compared to neighboring Asian markets like China and South East Asia.

Figure 18. Per capita spend (USD) on personal care across countries
245 215 192 163

93 54 18 3 India China Brazil Poland Russia USA UK France

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

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

+20% 700 +22% 2,000 2,133

280 156 280 2007 2010 2015 South East Asia China

India

Source: Euromonitor, A.T. Kearney Analysis

appeals to the entire male population. Additionally, fragrances are one of the first products consumers buy as they acquaint themselves with luxury brands. Fragrances allow consumers to "experience" a big luxury fashion brand at a fraction of what it would cost to buy a suit or a watch. Fragrances have also been much more widely available in department store formats, where other products of the same luxury brands would never be found. Make up is a small sub-segment in luxury, but growing rapidly at 30-35 %. Key drivers are rising disposable incomes, increase in the number of working women and consequent increasing focus on personal grooming. The market structure is also very different compared to other

countries including Asian neighbors. There are multiple structural reasons for these differences like Infrastructure availability: This dominance of skin care and make-up in other Asian countries can also be explained by the availability of high quality retail infrastructure that allows brands to sell and consumers to 'experience' the skin care products. Varying skin requirement: While having "good skin" that is radiant and glowing is an important part of beauty in most other countries (all western countries, even Japan, Korea and China), in traditional India, beauty archetypes are typically restricted to fair "complexion", pretty eyes and long black hair. Traditional solutions: In addition, for skincare, tradi-

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

Skin Care 28%

Hair Care 22%

Skin Care 19%

Hair Care 55% Make Up 12%

Make Up 9%

Fragrances 51%

(a) Total Market

Fragrances 4%

(b) Luxury Market

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

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Figure 21. Breakdown of Personal Care Market by Value (2010)

Figure 22. Decision making criteria for personal care purchases

Salesperson 6%

19 29 9 58 20 51 13 3 26

22

Skin Care

Price 6%

15

Make up

27

Fragrances Brand Reputation 30% Past Experience 58%

36 22 India 26 25

Hair Care

China

Russia

Brazil

Source: Euromonitor, A.T. Kearney Analysis

Source: Consumer Survey, A.T. Kearney analysis

tional home remedies are available in abundance in India and these are considered to be "good enough" even for wealthy consumer classes. But another key element is the small base of the Indian market. As the category expands, it is expected that the structure of Indian market will also start mirroring the global markets. This will mean increased growth for skin care and make up.

icantly lower, since the luxury brands have to rub shoulders with premium and even mass labels.. Open to experiment: The Indian consumer is open to experimenting with new brands and brand loyalties are still very low. This is only to be expected for a category like personal care which is nascent in India. This would be a good time for luxury brands to make a push and start inculcating strong brand loyalties amongst consumers. Stock up on overseas trips: Consumers still make a sig-

The Indian Personal Care Consumer - willing to experiment

A consumer survey among high income consumers provides interesting insights about the personal care consumers in India:

Figure 23. Brand Preferences

I frequently experiment with new brands 3%

Experience with the product is the key decision making criteria: Most luxury personal care users typically make purchases based on previous experience. There appears to be a vacuum in terms of adequate product knowledge being provided at the point of purchase, leading to consumers having to rely on past experience. Interestingly, price happens to be the least important factor. Consumers tell us that these being small ticket items of frequent use, they do not mind spending a little extra, if they find products that really appeal to them. Boutiques are the preferred channels: People prefer shopping in standalone stores over other retail formats because in standalone stores people are able to experiment and feel the products. In other formats like the departmental stores, the whole brand experience is signif-

I usually stick to my brands 24%

I am open to experimenting, but I have some preferred brands 73%

Source: Consumer Survey, A.T. Kearney analysis

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Figure 24. Purchase location preferences

as well as gifting. Compared to several other categories such as designer apparel, jewellery, watches, penetration of personal care products in this occasion is still limited. Services penetration: Services have driven the consumption of the premium products The target consumers for luxury are accustomed to using services of high end salons. It is now time to get the same consumer to trade up, using top end salons as routes for exposure to the brand. Tie ups with top end salons can also be a way of directly reaching the target consumer or for developing a better understanding of their tastes and preferences.
Challenges hurting the industry

I only buy overseas 15%

I only buy in India 11%

I buy in both places but more overseas 32%

I buy in both places but more in India 34%

I buy approximately equal amounts in India and overseas 9%

Source: Consumer Survey, A.T. Kearney analysis

nificant proportion of their personal care purchases abroad. The key reason for this is that consumers feel that the range and availability of products in India is low. Our interviews with luxury personal care consumers also clearly reveal certain trends that could translate into tangible growth opportunities.

Opportunities for growth

Greater beauty consciousness, much earlier: Slowly, but surely, Indian consumers are changing their tastes and preferences.

Fairness and hair as beauty archetypes are strong, but focus on skin and youth is increasing Consumers are starting young, with girls in their early teens beginning to use basic beauty services Openness to using chemical based skin care products is quite high, breaking the myth of traditional, home remedies being the preferred skin care solution. Men's grooming is a new trend in India; the concept of the metrosexual male is taking off - driven by Bollywood and the fashion industry. This is a big trend in South East Asia and China, though still in nascent and small in India.

Consumer awareness: Consumer awareness for personal care is much lower than other categories like apparel and accessories which have been around longer and have a more broader appeal in India. Limited customization & availability: Luxury brands in the personal care space have only now started showing some active push in the market. Boutiques by Lancome, Clarins, Estee Lauder have had a salutary effect on brand building and spreading awareness. Many other brands operate through a distributor which limits the amount of involvement of the brand in the market. Given the small size, India specific innovations have been limited and in many cases even the range available is low. Channels and Infrastructure: The infrastructure issues that plague the rest of the industry challenge this industry even more. With limited personal care focused MBOs (multi-brand outlets), it is hard for the brand and consumer to find each other. In standalone boutiques, low awareness drives low sales productivity and at high rentals makes the store viability a longer journey, necessitating patience. Department stores have even masstige brands in the same adjacencies making it an unviable option for luxury brands. Talent shortage: No new news again. Experienced associates with high levels of product knowledge and the right attitude to encourage, coach and convert are difficult to find. Problem is more acute at the store manager level.

Action agenda for the industry

Weddings: Weddings are big spending occasions in India and drive growth of many luxury categories. Spends are relatively immune to inflation and economic cycles. Weddings are an important driver of consumption in the professional personal care services segment (bridal skin care and makeup)

We believe the industry could take several actions to enhance the growth of this category: Believe in the market: There is enough evidence to show that it is possible to grow in the Indian luxury market certainly and also to start making money. Supply side innovations

36

and push have played a big role in the same. Focus and attention from the majors are absolutely necessary to open up the market. Educate, Customize, Enhance status appeal: The Indian consumer is willing to learn, experiment and adapt fast if she is given the right product and experience at the right price. This is now being proven across categories. There is also enough evidence that the consumer spends pretty substantial sums when the "status" value proposition is clear. Players need to find a way to help the consumer communicate the status value of their purchases. Customizations are necessary and the sooner brands do it, the sooner will they start seeing breakthroughs. Collectively create luxury personal care zones: Players could get together to create "luxury personal care zones" in top end malls to differentiate themselves from the masstige segment as well as to create a draw where the consumer can experience a wide variety of luxury brands. Enhance penetration: Penetration of luxury personal care

brands is much lower than other categories. A simple first step would be to follow the luxury apparel/accessories brands as they penetrate the metros. These being small luxury items, brands could be a little more aggressive and even target the "high footfall but cross-over" kind of malls while defending their positioning. Promotions and Experience: End of season sales have played a good role in getting more and more Indians to get their first experience of luxury. While this might not apply to personal care, brands need to find ways and means to get the consumer to experience the brands. Wine tasting sessions have likewise helped. Promotions and experience sessions need to be targeted. In summary, while the luxury personal care market has strong fundamentals and looks set for steady growth, there are still a number of barriers between the consumer with the ability to spend and successful brand performance. A strong collective push by luxury players will be required to tap the potential of the market.

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APPENDIX

APPENDIX I
I. Geographical Footprint of Luxury Product Brands
Category Accessories Apparel & Accessories Apparel & Accessories Apparel Apparel & Accessories Apparel & Accessories Apparel, Accessories and Personal Care Apparel, Accessories and Personal Care Apparel & Accessories Apparel & Accessories Apparel & Accessories Personal Care Apparel & Accessories Apparel & Accessories Apparel & Accessories Apparel & Accessories Accessories Apparel & Accessories Apparel & Accessories Personal Care Home Dcor Personal Care Apparel & Accessories Watches Personal Care Apparel & Accessories Apparel & Accessories Apparel Accessories Apparel Accessories Accessories Apparel Brand Name Alfred Dunhill Blues Clothing Bottega Venetta Brioni Burberry Canali Chanel Christian Dior Collective Diesel Ermenegildo Zegna Estee Lauder Etro Gucci Hermes Hugo Boss Jimmy Choo Just Cavali Kimaya Lancome Lladro L'Occitane Louis Vuitton Omega Parcos Paul and Shark Paul Smith Salvatore Ferragamo Tod's Tom Ford Tumi Van Cleef and Arpels Versace Total Stores 3 8 3 2 5 6 2 3 3 9 4 3 3 3 3 3 3 2 10 11 11 8 4 5 2 4 3 4 3 1 2 1 2 131 Mumbai 1 1 1 1 1 1 1 1 1 2 1 1 1 1 1 1 1 0 2 1 1 1 2 2 1 1 0 2 1 0 0 1 1 33 Delhi 1 6 1 1 2 2 1 2 1 1 1 1 1 2 1 1 1 1 4 4 1 3 1 1 1 1 1 1 1 1 0 0 1 42 Bangalore 1 0 1 0 1 1 0 0 1 1 1 1 1 0 0 1 1 0 1 4 2 2 1 1 0 0 1 1 1 0 1 0 0 26 Chennai 0 0 0 0 0 1 0 0 0 1 0 0 0 0 0 0 0 1 1 1 2 0 0 1 0 1 1 0 0 0 1 0 0 11 Hyderabad 0 0 0 0 1 1 0 0 0 1 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 0 0 0 0 0 0 6 Others 0 1 0 0 0 0 0 0 0 3 0 0 0 0 1 0 0 0 2 1 4 2 0 0 0 0 0 0 0 0 0 0 0 13

Source: Company websites

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II. Geographical footprint of Luxury car dealerships

Category Cars Cars Cars Bikes Cars Cars Cars Cars Brand Name Aston Martin Audi BMW Ducati Ferrari Jaguar/Land Rover Mercedes Porsche Total Stores 2 15 19 3 2 9 24 5 79 Mumbai 1 2 2 1 1 1 4 1 13 Delhi 1 1 2 0 1 1 3 1 10 Bangalore 0 1 1 1 0 1 1 0 5 Chennai 0 1 1 0 0 1 1 1 5 Hyderabad 0 1 1 0 0 1 1 1 5 Others 0 9 12 1 0 4 14 1 41

Source: Company websites

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APPENDIX II
Acknowledgements
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Bhavesh Somaya - Diageo Bruno Yvon - Moet Hennessey Danielle D'Lima - Wine Society of India Darshan Mehta - Reliance Brands Dinesh Dayal - L'Oreal Gulam Zia - Knight Frank Ishu Datwani - Anmol Jewellers Kiran Gill - Lakme Studios Manishi Sanwal - LVMH Pradip Hirani - Kimaya Ratish Pandey - Bose Corporation Rahul Balachandra - YLG Renu Basu - Taj Hotels Resorts and Palaces Sanjay Kapoor - Genesis Colors Shakeel Kudrolli - Aquasail Sharmistha Ray - Art Expert Stafford Braganza - Lancome Suvodeep Das - Kaya Skin Clinic Vikram Madhok - Abercrombie and Kent Vinod Bamalwa - Nemichand Bamalwa and Sons Jewellers Viren Bhagat - Jeweller Yashovardhan Saboo - Ethos Swiss Watch Studios

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APPENDIX III
A.T. Kearney Team
Neelesh Hundekari - Principal and Head - Luxury and Lifestyle Practice, India Saurine Doshi - Managing Director, India Hemant Kalbag - Vice President and Partner, Head - Consumer Industries and Retail Practice, Asia Pameela Pattabiraman - Principal, Consumer Industries and Retail Practice, India Himanshu Bajaj - Principal, Consumer Industries and Retail Practice, India Subhendu Roy - Manager, Consumer Industries and Retail Practice, India Manoshi Kamdar Avanti Maluste Ritika Tawani

CII Team
Amita Sarkar, Senior Director, CII Atreyee Talapatra, Consultant, CII

About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organization, playing a proactive role in India's development process. Founded over 116 years ago, it is India's premier business association, with a direct membership of over 8100 organizations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialized services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. CII has taken up the agenda of "Business for Livelihood" for the year 2011-12. This converges the fundamental themes of spreading growth to disadvantaged sections of society, building skills for meeting emerging economic compulsions, and fostering a climate of good governance. In line with this, CII is placing increased focus on Affirmative Action, Skills Development and Governance during the year. With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

About A.T. Kearney

A.T. Kearney is a global team of innovative, insightful and collaborative experts who deliver creative, meaningful and, above all, sustainable results. We're a team of management consultants that generates powerful strategic insights to address practical, real-world needs - and we see each project through to completion. By daring to challenge conventional thinking, we create customized approaches, rightly suited to our clients' challenges, which help them achieve both immediate and long-term business objectives. With deep expertise across a wide range of global industries, and a proud legacy of collaboration, we pride ourselves on delivering great outcomes for every one of our clients. We believe, above all else, that by doing good, we will do well for our clients, ourselves and our community. We do this with passion for people, ideas and the world in which we live.
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REFERENCES
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Datamonitor Euromonitor International Federation of Swiss Watch Industry, World Distribution of Swiss Watch Exports, 2011 HVS, India Hotel Industry Survey, 2009-2010 IWSR, India, 2011 Merrill Lynch and Cap Gemini, World Wealth Report, 2011 Probe Equity Research, 2011 Research on India, Wines, 2010 SIAM, Automobile Sales in India, 2010-2011 WHO, World Health Statistics, 2011

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