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Moving Up In The World

Moving Up In The World

September 26, 2010

Why do middle level brands in the West move upmarket when they come to India?

Have you been to a high-end mall in India lately? I've been to a few, most recently DLF Emporio in New Delhi and Palladium in Mumbai. What's striking is that truly high end shops are cheek by jowl with middle market ones. In clothing and accessories, for instance, you'll see Louis Vuitton and Chanel but then you'll see Zara and Mango as well.

As another example, at Palladium, Neutrogena has its own trendy-looking boutique. This seems strange to someone living primarily in North America, where Neutrogena is a drug store brand and would never rate its own boutique.

So what is going on here? There seems to be a pattern of brands that are at the middle of the market in the West promoting themselves at the top end of the spectrum when they go to India. One fairly obvious explanation is that in doing so they can charge a premium over what they would abroad. To put it in economic terms, a luxury brand tends to face a demand curve that is less price-sensitive, or less "elastic" in jargon, which correspondingly supports a higher mark-up over cost, and hence a higher profit level.

This perfectly plausible-seeming explanation is contradicted by two facts: first, the prices actually aren't that much higher than abroad, making allowances for the higher taxes in India; and second, the level of sophistication of the Indian consumer has increased exponentially as of late, making it difficult to palm off an inferior product as a superior one.

I remember when Mercedes Benz first came to India, some years ago. They tried to sell a model that was outmoded in Europe, and Indian consumers cottoned on to this fact, turning away in droves. They were savvier than the German automaker had given them credit for. Nowadays, Mercedes and the other luxury automakers sell the same models in India as they do abroad -- the only difference being that they also sell versions with smaller power plants, better suited for Indian road conditions than the hulks engineered for the German Autobahn.

None of which helps to resolve the mystery I began with. Perhaps the deeper explanation is cultural. Having been a society that survived in austerity for so many generations, both before and after Independence from the British, it's only in the past twenty years since liberalization, in truth really only in the last decade since the economy has really taken off, that Indian consumers have been able to indulge their pent-up desire for mass consumption, conspicuous or otherwise.

What results is the phenomenon that one may dub "mass exclusivity". Mass market brands are cloaked in the garb of exclusivity, such as being sold in fancy boutiques. This makes the experience of consuming them more ritualized than in the West, and therefore more satisfying to the Indian consumer than to her more jaded Western counterpart.

This is a pattern we've seen in other countries, as they latterly develop mass consumer societies. Ever been to a Pizza Hut in Eastern Europe? They're posh-looking restaurants with table linen and a wine list, unlike the rather more tatty lunch counters we're used to seeing in North America.

And so it goes in India and other emerging economies, and it's not likely to change anytime soon. So if you're tired of grabbing your cappuccino at the drive-through Starbucks on the way home from work, it might be time to move back to India. You can park yourself at the tony coffee bar on the top floor of the Emporio and watch the rich and famous go by for forty rupees a cup. Sounds like my cup of coffee.


  • mridul
    28.02.13 10:39 AM
    please tell me about effect of more using foreign brands
  • Atheist Indian
    Atheist Indian
    19.06.12 06:59 PM
    I was almost about to put it up, but it appears the commenter Loknath already did. Its all about PPP. In Spanish or French purchasing power, Zara might be considered a 'consumer' brand but given that in India, a price tag of Rs. 2500+ for a pair of jeans is very upmarket for the average Indian's income, it classifies here as a premium brand. A McDonalds 'happy meal' considered a cheap option in United States, costs upwards of Rs.170 in India, which is pretty much what you'd pay for a nice meal of chicken/mutton lunch at a sit-down restaurant in India.
  • amrit
    14.02.11 01:53 PM
    you managed to see "mango" in Emporio!! unlikely....most of this mishmash is part of the bad brand mix planning from the Mall developers.....India's luxury infrastructure is anyways non-existent. so the luxury retailers have very few choices...
  • hellokitty
    12.10.10 08:59 AM
    actually, i think that you will find at dfl emporio mall in new delhi that the zara, mango and other midlevel brands are in a SEPERATE mall altogether called dlf promenade.
    perhaps its time for nri's visiting india to get their facts right before the wax eloquent on all things indian.
  • Loknath
    10.10.10 12:15 AM
    I would like to further add.. Just to make the contrast stark and more realistic..

    If Pizza were a product in the basket of goods that India uses to measure purchasing power parity, then a 10 dollar large pizza in the US should be priced at Rs.125 in India.. all things accounted for. Adding a little more for the exborbitant rents in India that can put even times square to shame, I would say Rs.150.. but the price of a large 12 inch regular Pizza with 2 toppings on the menu I have at home is Rs.325!! I get a coke free with it. Assuming this to be reference price of pizza and working our way back, it should cost about 27 dollars (note I have used a conversion of 12 Rupees for a dollar..realistic PPP) in the United States.. Any takes, Bill Gates would think twice before ordering one.

    Thats unhygenic considering the manpower (the customer service, delivery boys, waiters get who get paid about Rs.7-8K a month that in parity terms would be equivalent 700 dollars a month in the US.. Hey does anyone know of a Pizzahut boy still making only 700 dollars a month in the US. I presume it would be at the minimum 1800 dollars (assuming he is a full time employee and the franchise owner respects the minimum wage laws)

    What the Government of India doesnt expect us Indians to do is to subscribe to Pizza huts and Levis jeans when you can have chappati with a curry for 40 rupees or much less in rural areas (in Kerela you get two appams with chana curry for 12 rupees) and a lungi for 100 rupees that are the products used for PPP basket of India (or such to the effect)

    Prof Vivek: Time for a new measure of parity that we can call "Global citizens PPP" or "Aspirational PPP" (based on products and services that people aspire to have..we got draw a realistic line though and limit some assumptions in the sample survey). I am definite on such a measure India would be one the most expensive countries in the world following some countries like Nigeria and Pakistan. (As I said it so happens that rich in third world countries are just sufficient clientele for the foreign products..the wife of a corrupt defense minister of Uganda can change 10 Louis Vuittons purses a month and there are several such to offset.
  • Loknath
    09.10.10 11:40 PM
    Confess not having read the original post while I posted my comments on the main linkedin page. Pasting the comments here. Would love to see this discussion growing and alive. A very serious topic it makes

    Yes this irks me too.. making luxury of just about everyday use products and services and being able remain a luxury for a long time. According to me this(phenomenon) is a one the many qualfiers that makes a particular country third world country

    My take on this

    Some corporations view the whole world as a "dollar" market i.e. "I dont care whats your currency..I want my royalties and bottomline in dollars". In the initial days of liberalization several "western" cafes and restaurants were catering to the likes of noveau rich desi people (they still do) e.g. the price of a pizza in pizzahut in India is the same as it would cost in NYC or London or Tokyo (size, portions, quality being accounted for). Now pizzahut spends in Rupees and expects Dollar revenues and certain section of the people dont seem to mind shelling out 300 rupees for a Pizza. The franchising model works...assured royalties. A pair of levis jeans made by Arvind Mills cost the same in India and elsewhere.

    Talking of Indian corporations, it can get even dirty. Knowing best the weakness of Indians (easy customers for frills), the owners of these corporations suck the last leech. Take Kingfisher beer marketing KF premium and commanding a premium..Germans wont even call it a piss, Jet airways.. audacity to claim itself as a superior airline with a free meal and on time take-offs to justify double the difference in fares, Hotels and holiday chains where room rents are more than the monthly salary of an average Indian. Similar products and services in the first world cost just about at price levels where even the lowest income bracket can afford without the pinch.

    To analyze further..the corporations in India though crib about "tough competition" and business being "highly competitive" and such make-believe cases by the CEO's and media while what is needed to set them straight are few thousand more such corporations and thats when we talk of efficient markets. Right now they are having it very easy. Moreover Indians being largely deprived and poor until recently find these kind of products and services and all the associated snobbery very flaterring and wont mind swiping their credit cards that are again a luxury at annualized costs of 50% plus and these companies know that very very well. They also know that a little over 4% of India makes their potential clientele and they are happy only to serve them. They dont need people who would bargain. Enough absolute numbers who have disposable incomes higher than Americans or Europeans in the same bracket.

    We will take another 50 years of competition and free trade to fix this
  • Vivek Dehejia
    Vivek Dehejia
    28.09.10 06:42 PM
    Thank you, Nethra and Sruthi, for your comments. Perhaps the explanation is the one I discounted, the lack of sophistication of the Indian consumer and/or the appeal of the foreign brand as exotic.
  • Sruthi
    28.09.10 10:54 AM
    Great article ! I think any american / western brand will have a high place in India because it will complete amongst other local brands as a "foriegn " brand. These "foriegn" brands understand the local market well enough to market themselves that way in India ... So the experience of buying Neutrogena in India seems all the more special and "foriegn" ...esp most Nuetrogena buyers in India might not not know that its just a drug store product back in the land where it originated :)
  • Nethra
    27.09.10 11:43 PM
    I always wonder why people run behind foreign brands when they are as ordinary as ours. Just like dogs...we prefer adopting a foreign breed that would be very much a street dog there but we don't like our own local breed.
  • Vivek Dehejia
    Vivek Dehejia
    27.09.10 08:21 PM
    BB and Mathew:

    Thank you both for your perceptive comments. They both suggest that brands in India are still evolving, so location in a mall eg in a branded boutique may be acting a a signal or 'billboard' as you (BB) put it, and brand value itself is evolving as you (MM) put it.

    A fascinating topic for research - I hope some of my students are seeing this! :)
  • Mathew Mathew
    Mathew Mathew
    27.09.10 07:52 PM
    For most consumers in the West brands work like religion. For them it's either Coke, Nike, BMW... or Pepsi, Adidas, Lexus...; rarely both. Brand affinity is built over a long period of time just like the way brands are created in the first place. After all what's a brand? It's just a perception of a value. Value for the money spent on a product/service and the satisfaction of experiencing it.

    It might take a while before the Indian consumer finds her true value in a brand and swear by it.
  • BB
    27.09.10 04:48 PM
    Interesting and well observed. Must confess, that I haven't been to the latest malls in India... or the in the US. But perhaps what you are observing in India is specific to malls - mallificaiton so to speak - rather than specific to India. Malls in the US usually have some sort of economic / status segregation in which there are some truly top end shops (often on top literally) but then also big box retailers as well. Then in cities, middle-market retails like to locate near (but not quite at) the location where top markets congregate. For example H & M 's first store in the US was on 5th Avenue, yesteryear's tony shopping street and a few blocks down from the big names still there. But still - only a few blocks south in the end. This at could explain your Zara example, but not your Neutrogina example. That's a puzzle. I have two theories, one economic one non-economic. The economic is that those who can afford to buy any of the foreign brands at the moment are all still rich by the Indian income distribution, and so you have a compression in the income distribution of brands so to speak. The non-economic one is that perhaps these brands are hoping to establish a reputation by location advertising. Since mass retailing has not yet arrived in India outside malls, malls are as much billboards as places to sell. In any case, thought-provoke piece. Now pardon me while I go and drink my Tetley tea... BB

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