New Delhi: Ashok Som is associate dean of the global MBA programme at Essec Business School, Paris-Singapore, founder of the India Research Centre at Essec, and director of the global management programmes on luxury and retail management (in partnership with the Indian Institute of Management, Ahmedabad). In New Delhi to attend the Mint Luxury Conference, he spoke in an interview about the luxury business. Edited excerpts:
You are working on something called the logic of luxury in emerging markets. What exactly does that mean?
There are brands that have been built in Europe over a considerable amount of time. The evolution of luxury brands is a very interesting story. The evolution brings in a kind of path dependency where small families tried to make something which they were good at, like jewellery. Some of them gathered together and started small shops in Paris. That is how the jewellery industry was created, like Cartier etc.
Similarly, some people worked with leather and transporting goods and that is how LV (Louis Vuitton) was created. Then some people thought of creating something for horses, due to their importance at that time, and that’s the birth of Hermes.
At this present point of time, two countries hold 95% of the luxury goods as we see it—if we don’t extend it to retail like houses or private jets and such.
The main luxury market is mainly five main divisions—watches and jewellery; leather and accessories, perfume and cosmetics; wine and champagne and selective retail.
There was a guy who came some 20-25 years, Bernard Arnault, who made an industry out of these small family owned houses. He acquired 60 brands and made this huge group called LVMH, which houses 60 brands and he made a business that is global.
Being a professor of international business strategy, I’m trying to understand the country of origin effect and the fact that most of the brands are out of two countries but today the market is not in these countries.
If we see a brand or product, 30-40% is sourced from other places, made in other countries and then finally finished in the home country of the brand—France or Italy. And then 90% of the products are sold outside these countries, and out of that 60% is in Asia. The logic is not anymore the same. The logic is I have a product which I source outside but I am confident enough to charge such a premium in every market. This is an interesting logic, because what is my value added—I have only the design and the brand value and more or less the marketing power.
It’s a lot like the story of Nike, which is not a luxury story. What does Nike have? It outsources everything and sells all over the world. Today, the model is not exactly like Nike, because you won’t buy a luxury good if it’s not made in France or Italy—but 50% is sourced from this country.
There are plenty of instances of Indian goods of such a nature. Family-owned and of great quality and design. In India, the raw material is there, the knowhow is there and so is the manpower—why isn’t there an Indian luxury brand.?
In international business, it’s called country of origin effect. This means that if you source important silk or something else like shahtoosh, which is rare, you can sell that abroad at a premium price. But if you say it is produced in China, you cannot ask the premium price.
It’s not a negative persona but how the country was perceived in the last 200 years. China has positioned itself as a mass manufacturer while India is still trying to find a place between agriculture and services.
What’s stopping India from becoming a maker of luxury goods like France and Italy?
In India, we are very short-term oriented. Countries like France or Italy, because they were stable, could see longer term. So, no company is looking at short term. You need 10 years of investment in brand building where you have to prove that you are a brand to reckon with in the domestic market, then you can go out. But the Indian brands are concerned solely with quarterly sales and how to maximize them for the three-month period.