The diesel value mantra for luxury brands

Luxury brands may have to develop a rational story to somewhat justify their premium tag

The Indian market is often described as a pyramid and the term got immortalized by Prof. C.K. Prahalad with his pioneering work on “Bottom of the Pyramid" marketing. Global companies and visitors are perforce subjected to the Dharavi visit, to see the underbelly of what was once called “Poverty Porn". But as we celebrate the bottom of the pyramid, the Indian market is also seeing the top of the pyramid gaining in size.

The Top of the Pyramid report from Kotak Wealth Management has some very interesting data and when juxtaposed with other market numbers, some more interesting questions. First the plain facts.

According to the report, there are 137,000 ultra high networth households in India. The report explains that to be in this elite list, the household needs to have a net worth of 25 crore, excluding the primary residence. The report in 2015 covered the top 12 cities and projected the numbers for the rest of the country. Interestingly, the overall numbers have grown from just about 62,000 in 2010-11 to 137,000 in 2014-15, a compound annual growth of 22%; net wealth has jumped from 45 trillion to 128 trillion, a 30% compound annual growth for the same period.

Since the definition of 25 crore has been constant, you may want to discount the numbers for inflation, but still these are pretty staggering numbers.

Now for some surprising numbers.

In his budget speech two years ago, finance minister P. Chidambaram, while levying a special tax, mentioned that the total number of income-tax assesses with a taxable income of 1 crore is just about 42,800. Rumour has it that at the 5 crore taxable income level, the number drops to just around 5,000.

Obviously, a large part of the ultra rich are able to do pretty deft tax planning, by parking their wealth in nice tax shelters. What else are they doing with the wealth? Are the Indian ultra rich behaving just like their international cohorts?

In a study done a couple of years ago, FCB Ulka’s Cogito Consulting discovered that penetration of luxury handbags is as yet very low, while stuff carried in a ladies handbag has kept growing. When they looked at a study from Hong Kong, they were in for a surprise.

Every young working girl, not just the ultra rich, had at least five luxury/semi-luxury handbags (brands like Miu Miu, Coach and Jimmy Choo were common); of course, Louis Vuitton is on every girl’s dream list and Hermes is seen as not-possible-in-this-lifetime luxury. The situation has started changing in India and over the last five years, brands like Michael Kors, Charles and Keith, Coach, Gucci, Louis Vuitton and even Hermes have started making their presence felt.

I suspect that women from high networth homes, after getting their feet wet with brands like Hidesign, are already stepping up to buy Michael Kors, if not a Louis Vuitton.

In line with the growth of the ultra rich, we are seeing growth of targeted media catering to this group. Magazines like GQ, Man’s World, Vogue, The Week Man are bursting with ads—most of them from luxury watches, bags and apparel makers. Even general interest magazines and newspapers are coming out with special supplements to cash in on this segmental opportunity.

The big question remains how ultra rich Indian consumers will take up luxury brands. Will they go the Chinese way, blindly chasing luxury brands, or will they evolve their own nuanced approach to these brands?

A few years ago, an analysis of luxury car sales threw up an interesting phenomenon. Almost all of them sold more diesel engine models than petrol engine ones. You may wonder what difference the fuel makes when you are paying upwards of 30 lakh for a car. The ultra rich, who are ready to fork out big money for the badge, also want to save money on the fuel cost of the car, hence opting for the diesel variant. Maybe it is here that the ultra rich in India differ from their international brethren. Will they seek to find value even in a luxury brand? Will they want greater resale value? Will they look for lower running and maintenance cost?

If this is true with luxury cars, what can be the lessons for other luxury brand marketers? I submit that there are several types of luxury goods buyers. A friend, who ran the business of one of the most famous Swiss watch brands, told me that almost 50% of their sales was for gifts; during Diwali for clients, during weddings as a welcome gift to the groom’s party.

This segment will behave differently and is not the only segment that the luxury brand marketers can build their business on. The real ultra rich they need to chase are the people who, I believe, will have the “diesel" mindset; they will look for value even in luxury brands, maybe resale value and some sign of ingredient value.

Luxury brands may have to develop a rational story to somewhat justify their premium tag. It may just be a “guaranteed buy-back" or “sterling silver buttons", and the Indian value-conscious ultra rich consumer will make the calculation in his head and pull out the wads of cash.

Ambi M.G. Parameswaran is adviser at FCB Ulka Advertising and is president of Advertising Agencies Association of India. He will take stock of consumers, brands and advertising every month. The views expressed are personal.