The decision earlier this year by the government of India to allow foreign direct investment in retailing marks a significant watershed for those in the jewelry business who have eyed, from distant shores, the promise that this market holds. To date, it is mainly foreign-made luxury watch brands that have been able to penetrate the red tape and retail fragmentation that characterizes the current business climate. But even these successes are often limited to franchises whose scope is, in turn, often confined to luxury hotels in cities such as Delhi and Mumbai. Investors now have a direct route to sell their wares, but what does India have to offer? What of the new consumer generation that is often lauded as being the key to fast-growing jewelry sales?
The recently published McKinsey Quarterly, focusing on India, provides some answers. It explains that there are “several Indias,” which can be seen most clearly in the country’s income pyramid. Sitting on top of the wealth pile are an estimated 1.2 million affluent households, referred to as “global India.” It’s only a third as large as the comparable segment in China, but it’s expanding by more than 20 percent a year. These households buy branded products and generally behave like their counterparts in developed markets. At the bottom lie 110 million households—“struggling India”—earning between $7,500 and $20,000 per year, and 40 million households representing “destitute India.” Between these rich and poorer segments lies the key to India’s retailing boom: “aspiring India,” defined as the 40 million middle-income households that earn $20,000 to $45,000 (adjusted for purchasing-power parity).
According to McKinsey’s research, “This new [aspiring] consumer group, growing by about 10 percent a year, is expected to comprise 65 million households by 2010.” Its emergence is signaled by the 55 million mobile phones currently in use in India. The sector takes on added importance because of the youth factor—70 percent of India’s population is below the age of 36.
Though there’s a strong economic case for foreign investors to enter the market directly, the main challenge remains getting the aspirational households to spend their disposable income on jewelry. “Luxury has been a characteristic of India’s elite for generations,” say Merrill Lynch analysts, who estimate the local luxury goods market at around 300 million euros. However, foreign jewelry firms wishing to seduce the middle-income households will require a more sophisticated retail environment, which will boost the development of brands—a key plank to lure aspirational, early adopters.
The development of brands is already moving to another level, primarily as some of the major Indian jewelry companies invest more heavily in diamond jewelry as distinct from solid gold items, while change in retailing is coming not just from the outside but also within—luxury shopping malls are being built and many more are being planned for major cities.
RETAIL: RINGING IN CHANGE
According to James Courage, chief executive officer of the Platinum Guild International, which works with 130 stores in India currently, the opening up of the retail scene to foreign companies is interesting on two levels. “Clearly, there will be a lot of development on the retail front, with businesses moving away from traditional local store concepts to bigger retail outlets, and secondly, as per China, we will see an increase in jewelry targeted at young people.” He also predicts that more “brands will come in from outside” as a result.
Among those who are often first to spot market potential, based on years of global expansion, are the luxury goods companies, and their entry into a market can signal the start of a new era of retailing. Patrick Normand, Cartier’s managing director for the Middle East, India, and Turkey, says the company is prepared to start selling jewelry in India—currently only watches, eyewear, and perfumes are sold through franchise operatives—and that it is a “strategic market” for Cartier. “There are some very powerful investors planning luxury shopping malls that we would be interested in talking to.” Cartier’s priority is “Delhi and Bombay. We would hope to start selling jewelry in these locations within the next two years.”
Though Normand says the decision to open up retailing to foreign companies is “very exciting,” he says some restrictions remain. For instance, “Stores are not allowed to open in nice residential areas; where stores can be opened up is really strict.” The likes of Bulgari and Tiffany sell jewelry only through franchises in India, a risk Cartier is not prepared to take. “Luxury retailing is not well developed, except in five-star hotels, but even here, visibility is low,” explains Normand. Cartier estimates that, based on Cap Gemini’s figure of 70,000 high-net-worth individuals in India, there are enough consumers to “sustain two Cartier boutiques.” The brand would “sell [jewelry] through Cartier stores only,” stresses Normand.
Cherie Tandon Saldanha, the Diamond Trading Company’s marketing director in India, welcomes the opening of the retail sector. “This is a very encouraging situation for the Indian diamond jewelry market. As more and more brands make an appearance, consumers will be treated to a variety of choices: [They] will get a whole lot of new, trendy, contemporary designs to choose from.” She believes that it will make existing Indian brands more competitive, while foreign brands will bring “the international look and feel” into the marketplace. “This will ensure that the diamond jewelry market will continue to expand and grow.”
“The retail sector is experiencing an exponential growth,” says Saldanha. “There is evidence to suggest that there is a shift from merely purchasing goods to an enhanced shopping experience. The unorganized sector is also realizing this and working toward giving consumers the entire shopping experience.” According to her, India’s consumer is becoming “quite choosy in terms of the quality of goods, the shopping experience, and the ambience in stores” and “the day will not be very far away when India begins to keep pace with the West.”
Rather than just competing with foreign jewelry brands, some Indian companies are collaborating with them to drive business in India. Gitanjali Gems, for instance, one of the most progressive jewelry firms in India today, was the country’s first branded jewelry manufacturer. It recently formed a joint venture with the Dubai-based jewelry manufacturer and retailer Damas to create a new brand for the Indian market—D’Damas. “The JV aimed to introduce international quality jewelry with Indian values,” says a spokesman for Gitanjali. In addition, Gitanjali will introduce some of the “world’s best-known brands into India under this collaboration with Damas,” as the latter already markets most of the big brand names in the Middle East. Gitanjali already markets another three main brands in India: Gili, Asmi, and Nakshatra. “India is a huge market, though it has been largely unorganized. Now with the opening up of the retail sector for single-brand stores, we have received inquiries from some big international brands interested in coming to India—initially, they could be retailing through our outlets.”
ROUTES TO SUCCESS
For foreign jewelry brands now planning to enter India on the back of the changes to retailing legislation, both the DTC and PGI have already done important groundwork in reaching the middle-market consumers. Brands are playing a crucial role.
There are more than 40 jewelry brands in India today, but the most successful and those driving spending are the diamond brands. According to the DTC, the Indian diamond jewelry market is already worth 66 billion rupees. “It is one of the fastest-growing markets in the world after the United States and Japan,” says Saldanha, and “is expected to grow to $75 billion by 2010.”
A quick look at some of the DTC’s figures on the market illustrate how diamonds have grown since the DTC launched its operations a decade ago: Diamond jewelry acquisition has grown by 55 percent; in 1996, only 13 percent of consumers had a preference for diamond jewelry—this is now 56 percent; and average stock of diamond jewelry in stores has risen to 23 percent, for example.
The DTC launched its first diamond jewelry brand, Nakshatra, in 2000. “[It] has revolutionized the branded jewelry sector in India with its unique concept, designs, and positioning,” says Saldanha. Having nurtured the brand, DTC recently signed a contract with Brightest Circle Jewelry Pvt. Ltd.—a company owned by three sightholders involved in the brand, including Gitanjali, Mahendra Bros., and Dimexon—to hand over Nakshatra in 2008. As India’s premier brand, its products range in price from 8,000 rupees to 200,000 rupees. The latest collection from the DTC is Sangini—designed for married couples.
“PGI initially decided to market platinum jewelry to the self-purchase segment,” says James Courage, which contrasts with the metal’s dominance of bridal jewelry in more developed markets. “We’ve seen a significant increase in the awareness of platinum and its value and have seen take-up in the gift and wedding segments.” PGI is excited by recent developments. “Local companies’ approach to marketing is reflecting other Western markets—it’s getting more sophisticated.”
The success of platinum in India to date has been based on marketing. “We focused on marketing right from the beginning. We set up designated platinum areas, and set up a platinum brand look with point-of-sales material,” says Courage. According to the DTC’s Saldanha, many marketing factors need to be improved to push diamond jewelry sales further, including higher spending on advertising, the scale of distribution in a fragmented industry, and the “rampant substitution by retailers.”
However, as foreign companies consider how best to enter the Indian market, they should not lose sight of the importance of tailoring the business model to local conditions. McKinsey offers four key guidelines to opening a successful business in India. First is the importance of offering “value at the right price,” with affordability the main component. Educate the consumer is another rule of thumb, which requires effective marketing campaigns. Third, foreign suppliers must “design to cost,” as the challenge is to make a profit at prices that Indian consumers can afford.
Finally, it’s vital to get the distribution right—no matter what opportunities exist to change the retail scene, McKinsey stresses that “the traditional network of local retailers will remain important for years, even if modern retailing continues to grow at the current rate of 25 percent a year.”