Written by Raqueem Khan
Edited by Vani Rao
Next five years will see Fossil open 20-25 stores at an investment cost of $4.5 million
US-based watch and accessories manufacturer Fossil Inc. (NASDAQ:FOSL) has recently bagged headlines for its foray into smart watches manufacture with Google Inc. (NASDAQ:GOOG) termed Android Wear. Fossil, which reported global annual sales of $3.3 billion from its fashion accessories business in 2013, launched its first outlet in Mumbai in March 2014 after receiving approval to open fully owned stores in India in February 2013.
Fossil India Pvt. Ltd.’s Managing Director, Vasant Nangia, stated to The Times of India on March 19, 2014, that the company plans to invest R25 crore ($4.5 million) to set up more than 20 stores under its own brand in malls across India over the next three years. Fossil also plans to sell jewelry as it seeks to broaden its reach and boost its presence in a country that is famed for its customer-centric love for jewelry. The company is also planning to franchise stores under the WSI brand, which will sell all its brands such as Fossil, DKNY, Michael Kors, Emporio Armani, Diesel, and Skagen.
In a parallel development, Fossil is also looking to launch its e-commerce business in India, subject to approval from government authorities. Currently, Fossil sells its products on Flipkart, Myntra, and three other e-commerce sites.
Fossil to Target Malls and High Street
For now, Fossil will focus only on malls for the Fossil brand, where it seeks to get dedicated traffic and good brand exposure. India has about 400 malls, of which only a handful are relevant to Fossil. Fossil currently sells watches through multi-brand shops and department stores such as Shoppers Stop and Lifestyle. It also imports and sells Fossil leather goods and eyewear in India.
Fossil will have to comply with 30% local sourcing, as per which it is ramping up its watch production capacity at its manufacturing unit in Parwanoo, Himachal Pradesh. The Bangalore-headquartered Fossil India also makes watches for international brands such as Burberry, DKNY, Emporio Armani, and Diesel. For the year ended March 31, 2013, Fossil India reported a 60% increase in sales to R95.6 crore and a profit of R8.4 crore, according to company data.
Foray into Indian Watches Market
According to a 2012 study by the Associated Chambers of Commerce and Industry of India, India’s watch market was worth R5,000 crore in 2012, out of which organized retail accounts for 40%. While the Tata Group-owned Titan is the largest-selling watch brand with more than half the share of the organized market, it generates a majority of its sales from lower-priced products. On the other end of the spectrum are luxury watches such as Omega and Rolex, which targets a niche market and are unaffordable for a majority of Indians.
There is a huge gap between the low-to-mid segment and the luxury segment, a key area that Fossil is looking to address. Fossil, whose US market share in fashion watches is currently more than 40%, sells watches mostly priced between R5,000 and R25,000 in India, while the cost of the other brands in its portfolio go up to R35,000. This category of watches has a share of about 40% in the organized market, which is estimated at R2,500 crore.
Since India allowed 100% Foreign direct Investment (FDI) in single-brand retail in 2012, many foreign retailers are setting up shop in India, where growing disposable incomes are fueling the huge demand for luxury goods. The other foreign single-brand retailers to make a beeline for India are UK-based footwear company Pavers England and Swedish furniture giant Ikea. India, Asia’s third-largest economy behind China and Japan, is witnessing steady growth which is expected to outpace that of most major regional economies over the next few years. In addition, Fossil had benefited from the weaker rupee since it makes some of its watches locally, while other competitors were forced to raise prices because of high import duty.
Looking at the history of the entry of foreign brands, at the end of the 19th century, India’s maharajahs discovered a Parisian designer called Louis Vuitton and flooded his small factory with orders for custom-made Rolls-Royce interiors, leather picnic hampers, and modish polo-club bags. However, after independence, when India’s royalties lost much of their wealth, the order flow to Louis Vuitton dried up. Then in 2002, LVMH Group, the world’s largest luxury goods manufacturer, made a triumphant return to India, opening a boutique in Delhi and another in Mumbai in 2004, targeting the ‘nouvea-riche’, a new breed of maharajahs produced by India’s liberalized economy who were flush, flash, and growing in number.
Soon other brands turned their focus on India – the likes of Jimmy Choo and Gucci, Hermes Christian Dior, Cartier, Piaget, Tiffany & Co. (NYSE:TIF), Moschino, and others came calling. However, these foreign luxury retailers faced many growth barriers. One of the main challenges for these retailers was the high import duties, which made luxury goods expensive. Affluent Indians tend to travel widely and may simply buy elsewhere. Another major hurdle was finding a suitable retail space in the major Indian metros, since most designer boutiques are usually situated in five-star hotels and there were not many malls in India as yet.
Not long ago, few high-end merchants had any interest in the country, put off by its pervasive poverty and an unsophisticated retailing environment populated mainly by small, independent shops. The handful of luxury brands operating in India did so quietly, selling mainly from boutiques located in five-star hotels. There was virtually no other option, since India’s major cities lack streets the like of the Champ-Elysses in Paris, which provide symbiotic clusters of posh retailers. While India was in the midst of a mall-building boom, there are very few upscale shopping centers in which companies could showcase their luxury products alongside chic retail neighbors.
Foreign brands that got in early made rapid progress. Upscale watchmaker Tag Heuer has averaged 40% growth in India over the last three years, and plans to expand from 80 shops to 120 in the near future. Similarly, Jimmy Choo is looking to open 10 shoe stores in India.
Over the last few years, while we have seen many luxury brands enter, adapt, and succeed in the country, many have exited India and re-entered it with a better understanding of the market, a new strategy and, at times, a new Indian partner. For instance, German ceramics maker Villeroy & Boch re-entered the Indian market this year with a new business partner, Genesis Luxury, and has launched its first store in Mumbai. High-end Italian menswear brand Corneliani, too has a new partner in OSL Luxury Collections.
Rising Consumer Spending in India
The tremendously diverse culture in India has been rendered more complicated by its restrictions on FDI; however, it is still a high-potential market in the eyes of top retail brands. It is home to the world’s second-largest population—1.2 billion people—with a large and growing middle class. Industry experts predict a 15-20% retail growth over the next five years, based on strong macroeconomic conditions, rising disposable incomes, and rapid urbanization.
India recently relaxed its limits on FDI, which may help both domestic and foreign retail brands; and it is certainly encouraging the world’s largest players to give the Indian market serious consideration. India’s luxury business is worth $8.5 billion, and it is expected to reach $14 billion by 2016. But just setting up shop is not enough. Brands have to fundamentally change to engage a new audience. Ultimately, luxury is merely a state of the mind, as is of course, business strategy.
Made in India
Yves Carcelle, the international figurehead of the world’s biggest luxury brand Louis Vuitton, blasted India’s policy of imposing a 30% local sourcing requirement for luxury groups as ‘nonsense’. Unsaid but implicit in his blunt statement was the suggestion that in the world of luxury, history, geography, and quality were hugely important, the first two attributes having a significant bearing on the third. Decoded further, it meant that India simply could not provide all what it takes for Louis Vuitton products to retain their luxury edge.
Not all is lost though as Regis Fournier, the former India chief of Louis Vuitton, is setting up a manufacturing facility in India that will supply the world’s top luxury labels. His firm La Compagnie plans to invest R350 crore in a facility in Puducherry, to make shoe uppers for luxury footwear brands. It will subsequently produce 100% India-made high-end bags, clutches, and clothes for the global market.
The government recently allowed foreign retailers to set up majority-owned (with more than 51% shareholding) single-brand stores in India, but on the condition they would have to source 30% of their products from Indian vendors. However, foreign luxury brands, keen as they are to set up shop in India, are not as enthused by the sourcing conditions. One reason for this, say experts, could be a perception that countries such as India are not quite ready to supply or make a truly world-class luxury product.
India is one of the fastest growing markets for luxury products and, according to some industry estimates, it is the biggest luxury outsourcing destination today after China. It is also one of the biggest retail markets with sales expected to touch $15 billion by 2015. The number of malls has grown from one in 1999 to nearly 500 today. Research by Fondanzione Altagamma, the Italian luxury goods industry trade association, shows that Indians spend around $500 million every year outside the country on luxury goods.
The biggest reason is the perception issue. Irrespective of high-quality products, experts in the luxury business say the ‘Made-in-India’ label is still to cut ice with global buyers. Many of the local suppliers to big global brands have strict non-disclosure pacts, which forbid them from revealing names of clients as Western consumers are wary about buying asian products due to their poor perception about the quality of products, labor, and environment-related issues.
On a final note, if there has been one realization over the last 15 years, it is that unless luxury brands use a local approach, the boom that they have been waiting for will never come.