Image: Selvaprakash Lakshmanan for Forbes India
Despite the increasing number of super rich in India, the country’s luxury market is still nascent and developing.
Currently, there are several global brands that are looking to enter India but many of them feature in the prestige and masstige categories, rather than being pure luxury brands.
However, India is once again attractive as an investment destination and “we are on the hunt”, says Narayan Ramachandran, 54, managing director (India) at L Catterton Asia, a consumer-focussed PE firm formed in 2016 through the partnership of Catterton, LVMH and Groupe Arnault. Excerpts from an interview with Forbes India.
Q. How do you view the luxury market in the country and the opportunities within the sector, given that income levels have gone up significantly over the past five to six years?
There are about 250,000 millionaires in India and this group is growing at about 25 percent a year. [Consultancy firm] Wealth-X predicts we will have about 900,000 millionaires by 2023. Despite this, the true luxury market in India is still nascent and developing gradually. This is true for most luxury segments—fashion, accessories, handbags, luggage, cosmetics, fine-dining and even high-end consumer services like spas and travel. It is true that aggregate income has gone up, but that has just lifted India from a lower middle-income country to a middle middle-income country. Our experience in Japan, China and [South] Korea suggests that the speed of luxury market penetration increases dramatically only after a country has reached upper middle-income status of say $5,000 to $7,000 per capita. As India becomes prosperous, one should expect some similarity in the growth of luxury brands as it has happened elsewhere. However, the past may not be a prologue, and this is for two reasons: One, the buying philosophy of Millennials may turn out to be quite different from earlier generations and, second, the power of social media threatens to change the very nature of brand consciousness and loyalty.
Q. It’s been a while since L Capital Asia—as L Catterton Asia was earlier called—has invested in India. After Genesis Luxury, Fabindia and PVR, there has been a pause. What are the reasons behind it and what is your strategy going forward?
We invest in each of our target countries in Asia based on the attractiveness of the country, the specific investment at a point in time and the time horizon of the investment. We are not obligated to invest in any country or make any investment if it is not attractive to us. In India, we invested in all the three companies that you mentioned from the first fund, which had a corpus of about $640 million that was raised in 2009-10. Our second fund [of around $1 billion] was raised in 2013-14 and we saw limited opportunity in India at that time, particularly relative to other markets like China, Singapore and [South] Korea. Now that we have exited from two of our portfolio companies—Fabindia and PVR—we are scouting for some new opportunities. India is once again attractive and we are on the hunt. Also, the big momentum in retail in recent years has been in ecommerce. Experience from the US and China has taught us that eventually things will settle down, and retail and ecommerce will merge into, what is now fashionably being referred to as, ‘omni-channels’. With retail firms once again viewing brick-and-mortar and online as channels, rather than as fundamentally different businesses, we can get back to business in India.
Q. Are more global brands looking to enter India at a time when the European market is undergoing a slowdown? What are the challenges plaguing them?
Global brands are indeed looking to enter India. I would say the approach to entry is generally thoughtful and deliberate. Overall, I would say prestige and masstige brands are doing this more than pure luxury brands. One of the brands in our portfolio, Pepe Jeans, for instance, has built a very successful business in India. Brands like Ikea are taking their time, but planning their entry meticulously. One needs to plan and be methodical because there is an overall concern about the development of modern retail infrastructure in India. There are simply not enough quality malls developed or being developed, and where they exist, rental costs are high compared with global and regional standards, particularly given the level of sales that are generated. This is a broader issue, tied intrinsically to the high cost of real estate in India, as well as the time, money and effort it can take to get any large project going in the country.
Q. How would you compare the luxury market in India with the rest of the world? Are there any comparisons with China?
While luxury sales worldwide are under pressure, sales to Asian consumers have been strong over the years. Consumption power is still growing in Asia, both in terms of the number of middle-class as well as the number of millionaires. In the long term, India is attractive for consumer goods across the spectrum. Approximately 3 percent of households in China are affluent, and this will rise to about 7 percent in 2020. India will take roughly another 10 years—say in 2030—for affluent households to account for 7 percent of overall households. So, stylistically speaking, India is 10 years behind China in its luxury market. But, as I said, the past may not be a prologue.
Q. Why did L Capital think of going for a merger with private equity fund Catterton?
Through the merger, that happened earlier this year, L Catterton Asia will become the largest global consumer-focussed investment firm, with six distinct and complementary fund strategies focusing on consumer buyout and growth investments across North America, Europe, Asia and Latin America, in addition to prime commercial real estate globally. Now, L Capital Asia in its new avatar as L Catterton Asia will focus on aspirational lifestyle brands for the Asian consumer.
Q. Several e-tailers have come up in the last few years to tap the luxury segment.What is your take on this burgeoning sector when it comes to the sale of luxury products?
In the prestige and luxury segments, the false dichotomy between e-tailing and retailing will go away. Brands will matter and they will reach consumers through both channels. The digital domain will impact how people perceive, shop and relate to brands both online and offline. Today, consumers are getting more and more sophisticated and they value brands with originality in design, creativity, functionality, relevance and storyline. In that respect, the retail channel—be it online or offline—may not be as important.
Q. What is your view on private equity investments in the luxury space? What is the kind of returns you expect from your portfolio companies?
In Asia, we invest in aspirational brands. In different countries this means different things. In [South] Korea, for instance, it could mean a fast-growing, near-luxury cosmetic brand like Clio. In Australia, it could mean an iconic brand like bootmaker RM Williams. In India it could mean a prestige brand that stays true to its provenance and brand promise like Fabindia. These brands are on long-term journeys that will lift them from being small domestic brands to brands with potentially very large footprints. Private equity can partner with brands like these not just once but many times in their journey. We often joke that PVR has done rather well since our exit. But that means we have done our job of helping set up the company for a long and successful future.
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(This story appears in the 09 December, 2016 issue of Forbes India. To visit our Archives, click here.)