In this blog post, Azmat Motiwala, a fifth-year BBA LLB student at Symbiosis Law School, Pune and a student of Diploma in Entrepreneurship Administration and Business Laws by NUJS provides a brief overview of the most suitable business structure that can be adopted to sell luxury brands in India. 

Introduction

The typical consumer of luxury brands is striving for excellence. Therefore as per their psychology, if they find a trait that is less or they wish to enhance their personality, they try to fill it in with a suitable brand which represents the same symbolic value. Sometimes, they may find that brand defining their own personality, and they may even wish to express themselves in that way. In recent years, the global market for luxury brands has been expanding drastically.

Before getting into the suitable business structure to sell luxury brands in India, it is important to gain competitive intelligence about the current market for luxury brands in India and track key industry trends, opportunities and threats.

The following will need to be studied at first:-

• Market size for luxury brands in India
• Analysis of supply-side and demand trends in the Indian Market
• Detailed segmentation of International and Local Products
• Probable future of luxury brands in Indian Market

Indian Consumer Market

It is of paramount importance to note that the current market size is a very small fraction as compared to the global market.

According to KPMG-ASSOCHAM India Luxury Summit 2014, India is responsible only for 1-2% of the global luxury market. Further, India’s contribution to the luxury industry is less than a tenth of that of China. The growth in luxury retailing is certainly not in line considering India’s status as the second fastest-growing economy. In terms of brand presence, of 500 leading international luxury brands, only 30% are present in India, while over 70% are present in China. A classic case is that of Louis Vuitton; it has 35 stores in China against three in India.

In India, leading Indian auto brands such as Tata and Maruti, each has around 3,000 dealerships across the country, while luxury brands may have fewer than 100.

The principle reasons for the same are diversified consumers, untrained staff and lack of infrastructure. Price conscious Indian consumers prefer to buy the products of the same brands from overseas where the variety offered is better, and the price also turns out to be more cost friendly. It is advisable for a luxury brand in India to have future aspirations to sell their product globally as that could attract huge profits.

Yet, Indian luxury brands are no longer a myth in India. The luxury market has grown at 23 per cent since 2006. The luxury products market such as apparel, watches, jewellery, spirits, electronics, etc. has grown at 30%, reaching a market size of $2 billion. The luxury assets like cars, homes and yachts have grown at 25% and has a market size of $2.8 billion.

In the last year, 50 luxury outlets (product stores and car showrooms) have been added to the 200 that existed, and they are not concentrated only in the metros. If one looks at the luxury car showrooms, 15 out of the 18 new showrooms in the last one year have been added in non-metros. One can see that there is a market waiting to be tapped beyond the metros as well.

The hospitality sector is also among the richest luxury brands in India. Besides its 24 properties and 5 premier brands in India, Hyatt Hotels and Resorts will launch its luxury brand Andaz this year in New Delhi. Hilton will open its second luxury Conrad property in Bengaluru next year and is exploring opportunities for bringing in Waldorf Astoria and Curio-A collection by Hilton.[1]

Probable future of luxury brands in India

Most households earning one million or above annually opt for luxury goods in India. With the significant growth of this income group, luxury retail in India is expected to witness steady growth in the coming years.[2] Preferences of dining at five-star hotels, buying high-end luxury products such as electronics, jewellery, personal care, etc. have been adopted by a larger percentage of people in 2015.

Homegrown luxury brands

Indian market can provide a perfect platform for luxury brands as the country has traditional expertise in textiles, leather, personal care (Ayurveda) and jewellery. Ritu Kumar, Tarun Tahiliani and Sabyasachi are some leading Indian designers. Hidesign is an example of a premium leather brand; Forest Essentials is taking Ayurvedic recipes into high-end personal care.

In addition, the royal heritage of India provides the perfect platform for high-end luxury services-hospitality, fine dining, spas. Taj, Oberoi, ITC have all created a name for themselves internationally as well.[3] Titan, Gitanjali Gem and PC Jewellers have been featured, for the first time in top 100 luxury goods brands globally in the ‘Global Powers of Luxury Goods 2016’ report of Deloitte.[4]

From the above study the following can be gathered:-

• The market for the concerned luxury brand may not be too promising
• Since large amount of capital is required and losses can be anticipated as well, a suitable business structure should be adopted to safeguard everyone’s interest
• Advertisement and promotion using very famous faces and associating the brand with known brands are essential
• Having a registered trademark would make the brand more supreme
• Since the capital required is very high, a business structure with lesser conditions and tax implications should be adopted

After understanding the above, it becomes evident that a sole proprietorship or partnership should be ruled out. This is because the capital required to make luxurious goods will be large and the liability in case of losses will be very heavy on each person. Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities.

As mentioned above, the price-conscious Indian consumers may not pick up the product at once. It is more suitable to have a Company where liability is limited by a number of shares. In this way, the burden is shared in case of losses and profits are divided as per contribution. Issuing shares to the public would be convenient to raise more capital. However, if this brand is completely new, it may not enjoy the trust of the investors. No common man would want to invest in a new brand they know nothing about.

Also, since the goods in question here, are so complex or high-quality, it should be this esoteric nature of the products would be what attracts customers, and the exclusive nature of even knowing about your company’s products. It gives customers the thrill of being with the “in” crowd and drives up the value of your brand because of its rarity. [5]

Keeping this, in mind, it is always more feasible for a new luxury brand to start as a private limited company. The superior quality and feel of the product, sales, marketing, superior customer service and symbolic value, is what will attract success. A private company can later be converted into a public company, and once it wins the confidence and recognition of the public, it can increase its capital by issuing more shares to shareholders and increasing its members. It can then expand widely and also be listed on the stock exchange. It can then commence sales worldwide as well.

It is, however, advisable to initiate this luxury brand through a private limited company which is limited by shares. The prerequisites required for a private company is also lesser than that of a public company. The minimum paid-up capital is one lakh rupees, and the number of members must be restricted to 200. A considerable advantage for the private company is for further issue of capital. Under Section 62 a public company proposing to increase its subscribed capital by allotment of further shares must, in certain cases, offer them to the existing members. But the section does not apply to a private company which is, therefore, free to allot new issues. A private company may convert into a public company by default or by choice.

Various Private Companies are using different means for private placement by issuing different shares, debentures, etc. Established Public Companies today are now having a partnership with Jabong, Amazon, Flipkart, Paytm, etc. so as to increase their electronic commerce as well.

Start-Up Of A Luxury Brand

A full action plan for Startups in India (“Action Plan”) was launched by the Prime Minister in New Delhi on January 16th, 2016. An entity here being a private limited company / limited liability partnership or a registered partnership firm incorporated/ registered in India shall be considered as a “startup” if:

1. It has been in existence for less than 5 years from the date of its incorporation/ registration,
2. If its turnover for any of the financial years has not exceeded INR 250,000,000 (approximately USD 3,687,810 and;
3. It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

 The various incentives which have made available to startups are:-

• Incentives by RBI
• Tax Incentives
• Incentives for ease of doing Business.

Start-ups have been exempted from paying income tax for a period of 3 years. They are allowed a 100% deduction of profits in computing the total income of the startup. This exemption must be claimed by the startup for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

In order to get the startup off the ground, the startup is generally capitalised by either the promoters themselves or by an “angel investor”. Venture capital is a type of private equity capital with high-growth potential for generating a return through an eventual liquidity event such as an IPO or trade sale of the company.

Conclusion

Owing to the above market reports and observations, it has become evident that though the Indian Market is small in size where it comes to the consumers buying luxury brands from India, it can also be seen that the market appears to be very promising for the future. The high amount of youth population in India is also a very favourable factor for the same. Since profit and losses are uncertain, it is always advisable to have a company limited by shares over a sole proprietorship or partnership or unlimited company.

A suitable business structure for an unknown entrepreneur would be that of a private limited company, which, on reaching the required turnover and winning the confidence and recognition of the Indian Market could then convert itself into a public company and also be listed on the stock exchange. This would facilitate further growth and expansion. On the other hand, a known leader may start the luxury brand as a public limited company as they are already recognised by the public. An example of this would be if the Ambani or Tata Group wishes to initiate a new luxury brand of automobiles or watches, they could easily issue transferable shares for the public.

References:

[1]http://economictimes.indiatimes.com/articleshow/53819398.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[2] http://lcbs.edu.in/luxury-retailing-india/

[3] http://indiatoday.intoday.in/story/luxury-market-in-india-luxury-goods-products/1/228450.html

[4] http://www.mydigitalfc.com/fashion-and-style/3-indian-brands-top-100-global-luxury-goods-list-110

[5] http://www.euromonitor.com/luxury-goods-in-india/report