India’s union cabinet is standing by its local sourcing clause when it comes to foreign direct investment, making it difficult for luxury brands to enter the market on their own terms
“These [BRICS] countries are 25 per cent of the global gross domestic product, so we have to think about them,” Missoni CEO Alberto Piantoni remarked to WWD, during a recent visit to India. “Somehow they are more open and there is a new middle class growing very fast and they are anxious to know what is going on in the whole continent in terms of fashion. It is an opportunity and we have to do something about it.”
But as CPP Luxury’s Oliver Petcu recently asked, how do major international luxury brands
evaluate the potential of a certain market? How do they decide when and if to enter emerging territories? And what is the basis of their decision-making in pursuing a wholesale or mono-brand distribution strategy? He asks these questions as he believes luxury brands are making slow inroads into BRICS countries and repeating their own mistakes.
“Legislation, real estate, taxation, human resources, logistics, counterfeiting and marketing are among the most important challenges faced by luxury brands in major international luxury markets, especially in emerging ones,” he reveals. And with recent legislative changes in India and China, impacting both the price of the goods and the way in which they can be distributed, these complex challenges show no signs of abating.
In November 2011, we reported that India’s union cabinet agreed to allow 51 per cent foreign direct investment (FDI) in multi-brand and 100 per cent FDI in mono-brand retail. At the time this meant that luxury brands were finally able to open directly owned, operated and controlled boutiques, but since, political pressure has forced the addition of a local sourcing clause for mono-brand retailers.
In respect of proposals involving FDI beyond 51 per cent, mandatory sourcing of at least 30 per cent of the value of products sold would have to be done from Indian small industries/village and cottage industries, artisans and craftsmen. So for Louis Vuitton to set-up shop in Mumbai, they would need to source a certain percentage of products from India and further support the Indian local economy.
From India’s perspective, this is an admirable commitment to local industry but it presents clear and present danger for luxury brands that rely so heavily on provenance. Whilst India is well known for its textiles and hand embroidery, ‘Made in India’ carries significantly different connotations to ‘Made in France’ or ‘Made in Italy’. And when being French or Italian is a major part of your marketing mix and value proposition, is brand integrity at risk if some of this is lost?
“The new regulations in FDI are a joke in the perspective of the luxury goods industry,” remarked executive director of the Fondazione Altagamma, Armando Branchini, to WWD. “Thirty per cent of what is retailed in luxury has to be made by cottage industries and local craftsmen in India; it will be impossible for luxury goods, which represent a culture, a philosophy, a heritage, a DNA of a brand and a product line to move to change the business model to multibrand to fit into these markets.”
Brands of course can choose to enter the market with a local distributor or continue to supply multi-brand boutiques in a wholesale capacity. Missoni are said to be in serious talks with the Infinite Luxury Group, Christian Louboutin has launched in New Delhi’s DLF Emporio luxury mall. Genesis Luxury Fashion services the Indian market for Burberry, Paul Smith, Canali, Kenzo, Bottega Veneta and Jimmy Choo through branded stores.
Challenges aside, the outlook for India is optimistic. India was the second most attractive FDI destination in the world in 2010, according to the World Investment Prospects Survey 2010-2012. The country’s growth rate is expected to sail well above 8 per cent this year, in a bid to overtake China as the world’s fastest growing economy.
The Qatar Investment Authority, the Gulf state’s sovereign wealth fund, would be more than happy to invest up to $10 billion in India every year if the government moved to better facilitate foreign investors.
“It is a very promising market,” according to QIA’s executive director Hussain Al Abdulla. “The size of the middle-class is not less than 300 million, almost as big as Europe. The government needs to attract foreign investors in different cities to improve the standard of living. But a lot of de-regulation needs to happen. A lot of efficiency needs to come in.”