By  on April 5, 2010

NEW DELHI — India could become a leading market for luxury goods in Asia over the next decade, according to a report by research firm Sanford C. Bernstein Limited.

India’s luxury market is relatively small at the moment, constituting only half a percentage point of total global demand, or less than 1 billion euros, or $1.36 billion at current exchange, the bank’s analysts wrote. But they went on to cite the overall strength of the Indian economy and the luxury market’s untapped potential for growth.

The report said India’s market is in its “very early days,” lagging some 10 years behind China. Bernstein estimates the Mainland Chinese luxury market to be worth 6.6 billion euros, or $8.98 billion.

India’s economy has seen strong, steady development in recent years: its GDP grew at a compound annual growth rate of 6.8 percent between 1995 and 2008. But Indians’ per capita GDP is less than half that of China’s. And India has a significantly lower number of high-net-worth individuals compared with China, though the populations of both countries are similar.

Still, Bernstein said two factors will drive India’s future growth: urbanization and demographics. The movement of rural Indians into towns and cities, coupled with the fact that more than 35 percent of the population is under the age of 14, means there is a “sizeable new customer base,” the report said.

Even now, there is plenty of untapped demand, according to the analysts. India has 13 cities with populations of two million or more and 30 cities with at least one million inhabitants. Yet international brands have contained their presence to three cities: Delhi, Mumbai and Bangalore — and they have a limited presence at that. A sample of 15 brands, including Dunhill, Salvatore Ferragamo, Louis Vuitton and Gucci, had a collective total of just 35 stores, according to the research.

Bernstein said there are major opportunities for brands in at least nine cities that are reaching the “tipping point” of average annual incomes at $7,000.

One reason luxury brands haven’t expanded much in India is the scarcity of appropriate retail space. Until recently, any high-end brand wanting to enter India set up shop in the lobby of a five-star hotel, which attracted a limited number of shoppers. But Bernstein noted 90 percent of luxury stores were now located in luxury shopping malls, the first of which, DLF Emporio, opened in Delhi in 2008.

India’s tight rules on foreign direct investment are the other big barriers to growth here, according to Bernstein. Single-brand foreign retailers are required to have a local partner to expand here. But opening up the market would help more brands establish an Indian presence, the analysts wrote.

Luxury brands also need to develop a range of strategies to tap into a diverse pool of consumers from “old money industrialists” to younger people working in the flourishing technology sector, the report said. Some cultural forces — from Bollywood movies to Indians’ gift-giving traditions — could be used to market across these differences, it added.

“Winners in the next decade will be those brands who have been able to seize the penetration opportunity and to master nuances of local demand levers,” the report said.

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