Global luxury brand owners who have set up shop in India to tap the growing affluent class seem to have gone wrong in estimating the break-even point, says the man who brought labels such as Gucci to the country.
"Luxury brand owners went wrong in their estimate of returns. For example, brand owners estimated they would clock $1,000 worth of sales per store square feet, while in reality, they could only manage about $500," Murjani group chairman Mohan Murjani, who brought a host of top fashion houses to India, said here Wednesday.
India's rapidly growing high-end retail market is expected to increase from the around $3.5 billion in 2008 to $30 billion by 2015.
Murjani, in an address at a conclave on the luxury sector, said "franchisors" (brand owners) had pegged gross margins at about $500 per square feet, while it was found later that margins were half of that.
"Brand owners kept $100 as markdown (discounts) while they had to shell out as much as $125, this brought down the net margin from an estimated $400 to $125," he said.
The head of the Murjani group, which has helped develop the Tommy Hilfiger label and has exclusive distribution agreements with the likes of Gucci, Jimmy Choo, Calvin Klein and FCUK, said luxury brands entering India expected profits from day-one while their Indian partners invested but totted up losses.
"There was an imbalance in partnerships between franchisors and franchisees. Agreements should be equally beneficial or at the least fairly beneficial," Murjani said.
Maintaining that many investments were ill-timed, he said a lot of brands came when rentals were sky high. "That coupled with low sales drove down margins. Rentals have started coming down but one needs to have patience in India," he added.
Murjani also chided foreign fashion and luxury brands for charging more in India because of the high duties on luxury items.
"Luxury product buyers travel across the world. There is no reason he will buy a product at 20-25 per cent higher price than abroad."