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- 15 Jun 2010
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Emerging Markets: Top Targets and Entry Barriers

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Luxury companies continue to invest in China and the Middle East, while India and Brazil are more problematic runners-up

Despite the enormous pool of buyers and potential for growth offered by India and Brazil, luxury groups are focusing instead on China and the Middle East. It seems that for luxury executives, the Middle East’s low tariffs, efficiently functioning business environment, huge retail space and established market for Western luxury goods, have the edge over sheer population size.

But, what it is about India and Brazil that is, in contrast, turning luxury groups off?

Comite Colbert, a French luxury lobby group whose 75 members generate roughly a quarter of total world luxury sales, reports that luxury companies are struggling to enter either country. In fact CEO Elisabeth Ponsolle des Portes went so far as to call India “a market on stand-by”. So, what are the barriers to entry?

A common complaint about India is the shortage of retail infrastructure, which means adding a large premium to any initial entry costs. Such is the shortage that Louis Vuitton and Chanel have been forced to operate largely out of luxury hotels. Indian bureaucracy is another barrier that luxury companies routinely face: “In India, we feel that if the state can do something to make our life more complicated, it will,” complained Mark Hayek, CEO of luxury watchmaker Blancpain.

Indian custom duties vary between regions but are uniformly exorbitant: often more than 100% and sometimes as high as 300%. Therefore wealthy travellers have a tendency to buy luxury goods while flying through Dubai, which cuts into potential Indian sales.

Similarly, rich Brazilians have shown a preference for purchasing luxury watches and handbags in London, Paris and Florida, in order to bypass the high custom duties they would incur at home. Here duties are also variable, often coming down to a custom officer’s interpretation of the rules. Hayek of Blancpain laments the lack of consistency: “there is no guarantee our products will enter the country as tariffs and rules change all the time.”

The upshot is that luxury companies including Comite Colbert and Blancpain are putting development plans in either country on the back-burner.

Hermes, who opened a shop in New Delhi in 2008, believes that India just needs to be looked at differently, rather than pessimistically. “I don’t see India as a fire that will take off like China did over the past 10 years” said CEO Patrick Thomas. “India will take much more time.”

However, not all companies are inclined to summon up the patience of Hermes.

And with the absence of VAT and the relative ease with which companies can conduct their business, the Middle East is more alluring to most.

The numbers reported by Bernstein reflect this absolutely: they asses that the Middle Eastern luxury market is worth about $8.53 billion or 4.5% of world sales, while India represents only 0.5% and Brazil 0.7%.

Analysts suggest that Dubai is nearing saturation, but that still leaves a multitude of other neighbouring Middle Eastern locations, including Abu Dhabi, Qatar, Kuwait and Bahrain to be explored. And since Abu Dhabi, Manaham in Bahrain and Doha in Qatar all have a higher luxury retail point-of-sale density than Seoul and Tokyo, luxury companies hope they can limit the teething problems which are plaguing early investment in Brazil and India.

Sources
Reuters
DNA India