In luxury, it takes time to build scale: Darshan Mehta

Reliance Brands Ltd (RBL), the wholly-owned arm of Mukesh Ambani-led Reliance Industries Ltd that sells affordable luxury and premium brands in India, will celebrate a decade of setting up its first retail outlet in March 2020. It started with a Diesel store, which was delayed by a year in the aftermath of the global financial crisis. The company, which has tie-ups with almost 50 brands, including Paul&Shark, Ermenegildo Zegna, Diesel, Bottega Veneta, and Pottery Barn, is also expected to close the year with ₹3,000 crore in revenue. That will make it one of the top purveyors of branded goods competing with the likes of Arvind Brands and Aditya Birla Retail, which play in a much wider market addressing the middle class.

At a time when the outlook for consumer demand is tepid and luxury car sales have plummeted, RBL continues to open new stores and tie up with more brands to expand its portfolio horizontally to offer more categories. This year, it inked a deal with exclusive jewellery maker Tiffany & Co. after a 30-month courtship and made its first global acquisition with the buyout of toy retailer Hamleys.

Darshan Mehta, 55, president and chief executive of Reliance Brands, talks to Fortune India about the recent changes in taxation, the lack of premium real estate, and the incidence of digital in the luxury business. Edited excerpts:

The government had sought to penalise luxury goods with goods and services tax (GST), charging such goods the highest slab. How has that worked for your business?

When GST happened three years back, it was a big tipping point for our industry. Since we own the biggest chunk of the mid- to high-end of the fashion market, it was a big moment for us. The rationalisation of tax structures brought two things to our business: It brought a line of sight to profitability and set the critical mass—both are important components of any business.

There was a multiplicity of taxes. As we imported our goods, there was the basic customs duty, the countervailing duty (CVD), service tax, and sales tax. Now, we have only two taxes: the basic customs duty (BCD) and value-added tax (VAT), and all other taxes are subsumed inside it. Further, the scrapping of octroi and other state entry taxes meant that we could move our merchandise between states very easily. Earlier it used to take six days to move a shirt from Delhi to Kolkata but now it’s just overnight. Though VAT has gone up a bit, it has really created one market and removed duplicity of taxes. VAT is 12% on clothing and 15%-20% on leather items, so it is 12% or 15% or 18% on our goods, which is fine for our line of business.

Is the lowering of corporate taxes going to affect your business? Can luxury goods become more affordable in the new tax regime?

It won’t affect our business much as our pricing depends on the imported cost of the merchandise. In India, we are still seeing first-generation money, which understands value through a different lens. Our customers know what a Hugo Boss shirt costs, unlike its customers in the U.S. or Burberry’s customers in the U.K. The mindset of deriving value in India is different. So whatever are the duties, our store prices in India will largely reflect global prices. And in the short run, the changes in corporate taxes won’t affect the luxury business. Also, the business requires a lot of upfront investment, as setting up luxury stores can be expensive. While we can quickly achieve stores-level positive Ebitda [earnings before interest, taxes, depreciation, and amortisation] margins, it will take a while to achieve profit after tax.

Hamleys was a big step forward. What plans do you have for the business?

We have had the Hamleys franchise for nine years and we were offered to buy the business five years ago. The deal didn’t go through as we found it expensive. The Hamleys transaction is important as it signals that we can also be acquisitive and are serious about the aspirations of our business. Future plans for Hamleys are in the works. The advantage is that we understand what works within the business and what doesn’t. For starters, we quietly moved in and started making changes months after we bought it. The transaction was concluded in May and we brought in a U.K. CEO by July, and as of October, we have a new global CEO. In the coming months, we will finalise our business plans, as its earlier owners were in a rush to sell it and had not invested enough in the business.

Most of your brands and their associated companies are small and profits are hard to come by. How will you deliver business value?

When we first looked at the affordable luxury market in India, in a price point about Tommy Hilfiger, there was literally nothing. We had to create that market from scratch. So, when we started we had to build the market horizontally in various categories—clothing, shoes, accessories, home, mother care, etc.— and we brought in non-competing brands so that we could occupy as much mind space as possible. We are still in that mode—to expand our reach with more brands, and we continue to sign three-four partners every year. If you look at it, we have started growing vertically in several businesses. In the ninth year of Hamleys, we have crossed 100 stores. As an example, that is unparalleled in any part of the world. Forget the U.K., it’s not happened in any other part of the world. Mind you, it is a very profitable franchise too. Likewise, in Superdry we have 100 points of sale. We have 38 mono-brand stores and another 60-plus of what you call shop-in-shop, but all run by us. So that’s 100 points of sale. For Steve Madden, we have more than 100 points of sale; for GAS, it is 80 points of sale. In luxury, it takes a long time to build scale. For example, for a long time Paul&Shark had only two stores in China—one each in Shanghai and Beijing. It is only in the latter part that the proliferation happened.

Reliance is not known much for joint ventures (JVs). The luxury companies you have tied up with are small and boutique. Is there any involvement of the group’s management at all? Mr. Mukesh Ambani?

You will be surprised with the amount of inputs we get from the group and the reviews have gotten deeper for my own benefit. Ranjit Pandit, who was earlier an independent director on the RIL board, is now on our board. Also, there has never been a case when Mr. Ambani has refused to meet the partners. When we had bought Genesis [Colors], the Canali brothers were coming and they wanted to meet Mr. Ambani as they wanted to know their new partners. They eventually met him in his residence on a Saturday. Likewise, several heads of our JV partners have met group resources.

Lack of good real estate has, to an extent, stymied the growth of the luxury business in the country. How have you been able to circumvent that?

It is true that most of the real estate currently considered luxury came up several years back but in the next one year we will have two new luxury outlets coming up in Mumbai. Two new malls are opening up in Maker Maxity and Jio World Centre, both in the Bandra Kurla Complex, in the coming months. Last year, the Palladium in Chennai opened. So, we can say something is moving now as far as real estate goes.

But we have created alternative channels like home shopping and trunk shows over the years for our brands. We even sell through e-commerce for brands like Hugo Boss and Michael Kors. For example, for Hugo Boss, we have about 600 customers who have bought online more than five times and we have more than 2,000 customers who have bought more than twice. And, this is not a discount model but the online partner picks up the pricing through software from our databases and then delivers the inventory in our store to the customer. So, this is basically optimising the store inventory through online sales.

Likewise, in Quest Mall in Kolkata, RBL has started a 200 sq. ft. virtual store, the first of its kind, where customers can order Bottega Veneta and Jimmy Choo merchandise on an iPad which will be brought to them at their preferred location. This sort of omnichannel sales contributes 13% to our sales. In smaller cities like Ahmedabad, Lucknow, and Chandigarh, where there are no luxury properties, RBL has opened a composite store that will house many brands under one roof. Lucknow is the capital of the most populous state and there is no outlet for a businessman who has a `500-crore business to shop. We have to find ways of reaching the customer and that’s where our growth lie.