Luxury Retail Market

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Luca Ferro, Managing Partner, Value Partners India Milan, 25th November 2008

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! Luxury market in India 2007

Expected CAGR (2008-13)

100% = Euro 3.5 bn Luxury Services (Spas, Luxury hotels,...)

21%

Luxury Retail Growth Billion Euro

30%

17%

25% 33%

Luxury Retail

Luxury 62% Assets (Cars, luxury homes, Yatchs) 18%

25%

2.4

0.6

2007

0.8

2008E

2013E

• The luxury market in India is dominated by assets with retail commanding a small chunk of the total market • However, Luxury retail is showing a strong growth momentum despite the financial crisis compared to the slowdown in developed markets Source: ALTAGAMMA, Market reports, Value Partners Analysis 2

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" " " # " " " Population by Income class; Millions of people

CAGR 2007-12

1,203

Luxuriented ( > USD 100K) Future Potential (USD > 50K) Others (< USD 50K)

1,115 1.8 9.3

1,117 2.0 10.7

1,104

1,104

2007

2008E

1.3%

3.7

13%

21.5

15%

1,178

1%

•Primary consumers of luxury goods •Exposed and aware of the world-class living •Current focus on luxury assets and… •…aspirational brands (Guess, Tommy Hilfiger) •Moving towards ‘Bridge Segment’ in luxury retail

2013E

Source: EIU, NCAER, Market reports, News clippings, Value Partners Estimates 3

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" " " NOT EXHAUSTIVE

Apparel and accessories brands only 25

17** 8*

Luxury brands present in India (end 2005)

New brands entering in 2006-08

Brands present ONLY through franchising agreements (NO FDI allowed)

Luxury brands present in India (2008) Brands present MOSTLY through joint ventures (51% FDI permitted)

*Includes LV, Boss, Salvatore Ferragamo, Zegna,Moschino, … **Includes Giorgio Armani, Hermes, Brioni, Versace, Gucci, Armani Jeans, Bottega Veneta… 4

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$

$

" " "

Fashion Weeks • Two big fashionista gatherings - Wills Lifestyle India Fashion Week - Lakme India Fashion Week • Aim to make India a global fashion destination

Indian Designers

Sabyasachi Mukherjee

Manish Arora

Tarun Tahiliani

Rina Dhaka

• Increasing visibility in the global fashion arena - Rina Dhaka’s creations appeared in Marie Claire and Vanity Fair - Anamika Khanna,Manish Arora showcase their work at the Paris Fashion Week

Fashion Magazines • Play an important role in generating awareness of luxury products from a global perspective • Face association: ‘Bollywood Celebrity endorsments’ to create hype 5

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! Consumer attitude

• Increasingly becoming brand conscious

Attitude towards luxury goods

• “Old money” consumers with inherited wealth are already luxuriented and are increasingly showing a “European attitude” towards luxury - Subtle / ‘Brand Invisibility’ : luxury is about “knowing, not showing” - Exclusive designs and brands; afficionados of Prêt-à-Porter brands

• Indian consumer is always a value seeker (discounts ! )

• “Newly Affluent” consumers are quickly orienting to the world of luxe, and are looking to showcase their arrival - Flamboyant / ‘Brand Visibility’ : “Have it , flaunt it !” attitude - Progressing from aspirational to luxury brands but mostly in the bridge and diffusion segments • Indian luxury consumer is very demanding and likes to be pampered (house visits, personal calls, ...)

Product choice

• Menswear in India is already westernised and therefore apparel is the primary luxury product choice among them - Within apparel executive wear dominates casual wear • However in Womenswear, traditional outfits like ‘sarees’ still dominate and Accessories (shoes, handbags,perfumes) & Hard Luxury (watches, jewellery,pens) are in high demand 6

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$ #$ ' Shopping areas

&

New urban areas

De pa rtm en ts

Hi gh -st r

Ai rp or ts

Ho tel s

ee t

tor

Sh op pin gM all s

e

Protected areas

% " " "

Getting off the walls

• Currently non-existent but could be a future potential with better infrastructure • New / modernised airports have dedicated retail areas • Primary luxury retail destination in India: 80-90% of luxury retail POS • Restrictive environment with limited footfalls and visual impact

Breaking of architectural barriers

• No FDI allowed acting as a deterrent for foreign players • Domestic players are evaluating the opportunity • Accessories (perfumes, watches..) are retailed in mainstream dept stores • Do not offer the ambience and exclusivity desired by the luxury customer • Some multi-brand stores (Thanks, Kimaya, …) present in Mumbai and Delhi

• Recent phenomenon with malls opening in Delhi (Emporio) and Bangalore (UB City) • New malls planned in Mumbai and Delhi 7

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!

$

$

Grand Hyatt

Brands

• 6 monobrand stores • 10,000 sq mt dedicated to retail • Rentals of € 50-80 per sq mt

# !

Trident

Brands

• 7 monobrand stores • 2,000 sq mt dedicated to retail • Rentals of € 250-300 per sq mt

EXAMPLES IN MUMBAI

Taj Mahal

Brands

• 7 monobrand stores • 3,000 sq mt dedicated to retail • Rentals of € 200-300 per sq mt 8

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! ( $ Promiment “Luxury streets” globally 5th Avenue, New York

Monte Napoleone, Milan

• Destination for luxury customers: modern ambience and atmosphere, good climate, “mixing with elite”

! Prominent High streets in India Colaba Causeway, Mumbai

Connaught Place, New Delhi

• Uninviting for the luxury customer: cluttered, overcrowded, “mixing with commoners”, unsuitable climate conditions (hot and humid !) 9

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!

$ &

$

$ )

UB City, Bangalore ‘Collection Mall’ Exterior

Louis Vuitton store at UB City

• 23 luxury international monobrand stores • 12,500 sq mt dedicated to retail • Rentals of € 80-100 per sq mt per month

$

' DLF Emporio, Delhi Boss store in DLF Emporio

Tods store in DLF Emporio

• 80 international luxury monobrand stores • 32,000 sq mt dedicated to retail • Rentals of € 120-150 per sq mt per month 10

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( !

MONO BRAND STORES IN MUMBAI HOTELS

Euros, % of revenues Europe Revenue per sq mt

India • Low footfalls (10-15 per day) but a high conversion rate (50-70%) • Strong growth : 25-40% annually

15,000 – 54,000

5,000 – 14,000

35 – 40%

45 – 60%

• High import duty which is absorbed by some retailers

Rent (per sq mt)

10 – 20% (1,500 – 4,000)

20 – 35% (1,000 – 3,000)

• Comparable to Europe but coming down and revenue share model increasing

Personnel

15 – 25%

8 – 12%

Margin at store level

25 – 40%

(-20) – 12%

COGS

• Lower salaries of sales personnel

• High cost of setting up stores (~ € 3000/sq.m!) • Store margin much lower than in Europe 11

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!

$ $

$

&

'

Delhi

Cities Luxury ready cities Luxury ready by 2010-11

•80-100 mono-brand stores

Luxury ready by 2015-20

•‘Political Capital’ of India Chandigarh

•Luxury consumers: politicians, beauraucrats, businessmen & senior executives

Mumbai •35-40 mono-brand stores •‘Commercial Capital’ and home of the movie industry Bollywood •Luxury consumers: Filmstars, CEO’s and executives, socialites

• Currently only 2 luxury ready cities compared to 15 in China

Jaipur Ahmedabad

Kolkata

Surat Pune Hyderabad

Bangalore

Chennai

•25 – 30 mono-brand stores •‘IT Capital’ of India with an elite group of CEO’s and executives… •…but, Luxury retail has not made an impact due to “prudent” spending attitude of consumers

Kochi

Coimbatore

• Opportunities in emerging cities - 7 more in 2/3 years - Another 4 in 7/10 years

•Currently untapped has huge potential with high income and spending of consumers •Luxury consumers: filmstars, politicians, businessmen 12

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) # $

$

$

Key Success Factors Description

Have a long term Commitment / investment view

Find the right partner

• Treat the market as a long term opportunity and not as “the flavour of the month” - Be prepared to bear losses in the short-run and continue investing • Strong organizational commitment by assigning a senior manager to work with established local team • Partner with a reputed player that has a strong competence in - Retail - Consumer Understanding - Real estate • Track record of the partner in JVs with international players and a shared vision for the JV is critical

Get the merchandising right (customisation !)

• Customise the merchandising mix according to local flavor, body structure, climate, customer behavior,… - “Single Season” collections in most cities - More bright colours for womens apparel compared to Europe - More accessories for women - More executive wear rather casual wear for mens apparel 13

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* Luca.ferro @valuepartners.com

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