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India promises market potential but challenges remain for luxury brands

While luxury brands are increasingly entering the Indian market, proving India’s potential as a destination for luxury products, they face some formidable challenges, including high import duties, lack of quality retails space and the ever-present threat of counterfeiting

In the past decade, Indian consumer purchasing power and appetite for luxury products has surged. The number of ultra-high-net worth individuals has also increased exponentially; according to the Hurun Global Rich List 2018, India has climbed to the third spot and now boasts a staggering 131 billionaires. India’s success story does not end there – experts expect its gross domestic product to approach $6 trillion by 2022, doubling the present number of billionaires.

Luxury brands are increasingly entering the Indian market, proving the country’s potential as a destination for luxury products and accessories. According to the Associated Chambers of Commerce and Industry of India, the luxury market is worth $18.5 billion and has the potential to reach $100 billion.

While this market potential looks promising, various cultural, regulatory and legal issues could prove challenging for luxury brands when it comes to settling and prospering in India.

Destination shopping

Wealthy Indian consumers who can afford luxury brands tend to make their purchases during business and leisure travel to London, Singapore, Dubai or Hong Kong to avoid high import duties. As a result, luxury brands face complex business decisions over whether to shore up their presence in India – opening shops could prove unprofitable if potential consumers continue to fly out for destination shopping

Government regulations

According to the latest government policy, providing a tax identification number is now mandatory for transactions above Rs250,000 (approximately $3,800). In addition, the government move to reduce cash transactions for high-value purchases has led to a decline in luxury-brand sales, as consumers find having to divulge transaction details to the government overly intrusive. Yasho Saboo, CEO and founder of Ethos Watch Boutiques, commented on this policy change: “Our business is getting impacted especially at certain price points. While we welcome the government’s move to reduce cash transactions and curb black money, we believe it should be done in a phased, gradual manner. This shouldn’t lead to people buying overseas and not in India.”

The Goods and Service Tax is rapidly becoming a major obstacle for luxury goods manufacturers. The government has imposed a 28% tax on luxury goods; the highest rate available. This has led to the perception that luxury goods are especially expensive in India. Further, it has made even affordable luxury brands inaccessible to aspiring consumers.

The high import duty – averaging 30% to 40% – is another major challenge for luxury brands in India and is in sharp contrast to the rates in other Asian countries. Many brands argue that India is losing business as a result. Certainly, high import duty and high-end prices are dampening the enthusiasm of luxury brands eyeing India as a business destination.

Infrastructure

Another conspicuous reason why luxury brands are steering clear of India is the lack of quality retail space – beyond a few airport shopping centres or five-star hotels – and the absence of upscale malls and market streets. India’s few malls are limited to city locations and not all of these can provide the ambience which luxury brands consider essential to maintaining brand quality. When planning to open stores in Tier 2 and Tier 3 cities, luxury brands prefer small and medium-sized retail outlets over malls, favouring the quality of the space over the volume. However, these small and medium-sized retail outlets can be easily overshadowed by the hustle and bustle of cities. When compared to first or second-world countries, these outlets differ dramatically in look, feel and surroundings.

Legislation

Indian law allows for 51% foreign direct investment (FDI) in multi-brand retail and 100% in mono-brand retail. This means that luxury brands can be directly owned, controlled and operated in India. However, to protect local industry, a further clause has been added which makes it mandatory that where FDI is above 51%, at least 30% of the value of products sold must be sourced from Indian small industries, as well as village and cottage industries, artisans and craftsmen. This is onerous for luxury brands, as it may require them not merely to change their business model, but to alter their brand DNA.

Counterfeiting

According to the Associated Chambers of Commerce and Industry of India, the market for fake luxury goods in India is likely to reach Rs60 billion in 2018 and is one of the major challenges for luxury brands. Brand owners worry that a high number of fakes of a specific brand can lead to brand dilution and whittle away selling power. They often struggle to decide whether to act against cheap copies, which are clearly not purchased by target customers but which dent the brand’s image. Simultaneously, increasing internet access and smartphone penetration has resulted in new sales channels for counterfeit products. Such online counterfeits are more visible than the physical sale of cheap copies. Further, online counterfeiters can use pictures of genuine products to entice consumers into making a purchase. The government’s current investment policy – which permits FDI in the business-to-business e-commerce sector, but not the business-to-consumer (B2C) sector – is also fuelling counterfeit trade. Thus, most e-tailers – including Amazon, Flipkart, Snapdeal, Paytm mall and Jabong – use a marketplace business model, with suppliers storing goods on the e-tailer’s behalf, then delivering them once orders have been placed, so as not to fall under the B2C model. This model depends on e-tailers expanding their supplier base in order to provide goods at competitive prices. However, supplier due diligence often takes a back seat, meaning that counterfeit and infringing goods have become increasingly common. Thus, luxury brand owners are increasingly allocating budget and resources to run extensive take-down notice programmes and take court action against select operators.

The one glimmer of light is that the courts are demonstrating that they will come down heavily on copycats.

Recent case law

In *Burberry Limited v Digaaz.Com/Digaaz-Ecommerce Pvt Ltd*, defendants were using Burberry Ltd’s registered trademarks BURBERRY and BURBERRY CHECK to sell counterfeit products on their website www.digaaz.com. The court decided the matter *ex parte* after repeated unsuccessful attempts to prompt the appearance of the defendants and issued an order of permanent injunction, restraining the defendants from using the plaintiff’s mark in any manner.

In *Cartier International Ag v Gaurav Bhatia*, a heavy discount had been offered by the defendants for goods sold online carrying the marks CARTIER PANERAI, VACHERON CONSTANTIN and JAEGER LECOULTRE, which were alleged counterfeits. Based on complaints made to the authorities by various deceived customers, and relying on several screenshots from the website and other evidence, the court granted a decree of permanent injunction and heavy punitive damages of Rs10 million (approximately $156,773).

In *Gucci v Gautham Chand*, the plaintiff contended that the GUCCI mark has attained a worldwide reputation for its goods. Further, the brand name GUCCI has been registered in numerous countries around the world, including India, for several decades. On the other hand, the defendants, a company selling cables and wires, had adopted a similar trade name and logo with the clear intention of riding on Gucci’s goodwill and reputation. The Delhi High Court recognised Gucci’s statutory and common law rights in its mark. Thereafter, the defendants were categorically restrained from using any such mark, logo or trade name which is deceptively similar to GUCCI, even if the trade sector is entirely different.

Comment

However, despite these court actions, counterfeiting remains a major challenge for luxury brands. In addition, high-end fashion and luxury brands are worrying about recent trends in the distribution of counterfeit goods, which include:

  • the import of factory seconds which are then offered for sale at a heavy discount either online or through organised special venue sales in five-star hotels, which do not disclose that the products are not under warranty;
  • What’sApp groups offering counterfeit products;
  • the copying of designs to produce replicas (particularly in the apparel industry); and
  • social media platforms selling and distributing counterfeit products.

While India has a strong legal framework for combatting counterfeiting and piracy, the challenge for rights holders comes from enforcing these laws and the somewhat cumbersome procedures established by them. Policymakers must address these challenges to attract investment and not lose tax revenue to counterfeiters