One of the first traditional requisites for luxury brands has been to have a big and splendid store in the most expensive prime retail location in key places around the world.
They are always seeking places in the most important and famous streets, in addition to requiring bigger spaces to accommodate big “maison”- style luxury stores.
This choice is made for various reasons, including
With the never-ending requests from the luxury brands, stems the inevitable - an unavoidable increase in rental costs. Given the competition and the desire of luxury brands to be concentrated in the same area, rental inflation is a natural outcome. The limited availability of top spots results in further widening the gap between prime and secondary retail spaces.
Indian retail has traditionally been un-organised, but that started to change around a decade ago with the introduction of the mall culture in major cities. Added to this scenario is the entry of more and more European brands trying to tap into the Indian markets. The big locations in high streets around the city are already taken up. The current problem is that in India there aren't existing properties to satisfy some of the luxury requests, especially if they are required outside of malls. Thus luxury brands are searching for space that malls can’t give them anymore.
According to a study by Credit Suisse, Hong Kong has been boted as the most expensive city in terms of prime locations rental, followed by New York and Paris. In fact in the last five years the rental costs rocketed in Hong Kong, as in Shangai and Melbourne, because of the intense competition for prime locations, permanently low vacancy rates and most of all because of a limited supply of prime spaces. And India seems to follow these cities, in 2013 rents on the high street in south Mumbai rose faster than any of the world's main shopping districts, including New York's Times Square and Garcia D'Avila in Rio de Janeiro. Thus, even if Indian rental prices are not yet comparable to the European or American ones, they are growing really fast, forcing local retailers to give up their store and make space for international luxury brands.
However, even if a modest downward pressure is forecasted in Hong Kong, because of the anti-corruption campaign and the Mainland Chinese tourists who have decided to buy in other gateway cities now, it is undeniable that the rental cost inflation will continue to increase across the world, although at a slower rate.
In Europe for example upgrading stores or buying new ones remains the key focus for luxury brands, and in Asia, luxury companies have become more careful about rental costs, but the fixed costs are expected to increase anyway. Further East, in Japan, due to limited spots and increasing demand, the rental costs can just rise over time and the same is valid for US cities such as New York and San Francisco.
Companies are prepared to spend in advance to buy leases from the older owners of the shops, creating a highly competitive scenario. That is why nowadays operating leases are in trend compared to financial leases (operating leases are not reflected in a company's balance sheet), reflecting a significant acceleration in rental cost inflation for prime shopping locations.
Now the question is, in a world were ecommerce is growing more every month, why do luxury brands continue to spend so much on an "asset" (prime real estate store) that might soon turn in a liability?
The truth is that being in the place, both online and offline, remains a key focus for them, since they want to be able to provide a service to the consumer whenever and wherever he decides to shopping. However luxury brands have experienced a rapid growth in e-commerce, especially for important brands like Cartier. Indeed in contrast with the past, even jewelleries can now be successfully sold on internet.
In India, there is a boom in online retail and it seems that Technology and Indian fashion are the most important categories for customers. Indian fashion is a category with higher margins and is one of the most purchased category online.
Indian e-commerce has been growing at a scorching rate during the last years, becoming a mainstream trend. According to a recent study conducted by Accel Partners, Indian fashion is expected to grow by 400% in next three years. The issues regarding e-commerce for categories such as Indian fashion, are that touch-feel are still the fundamental selling point of the stores. Customers are very reluctant to purchase without touching-feeling-trying.
Despite these problems, everyday even more online stores for Indian fashion clothes are emerging, some of them launchged by Indian designers like Riyaz Gangji, proving that people are changing their minds.
From where we see it, we believe that ecommerce is certainly not the answer to all the problems of traditional retail (high rentals, revenue leakages, etc.) but it can certainly help in creating an extraordinary experience for our customers.