Luxury demand soars—meet the under-the-radar company cashing in big

First, luxury watchmaker Franck Muller opened a boutique store in India, targeting a niche yet lucrative market where the average price of their watches hovers around ₹700,000. It's noteworthy to see a high-end brand like this entering the Indian market.

On the other hand, the smartwatch industry is facing challenges. According to a report by IDC, the smartwatch market declined by 27.4% year-over-year, dropping to 9.3 million units in Q2 2024. The average selling price fell from ₹2,100 ($25.6) to ₹1,700 ($20.6) due to price cuts and inventory clearances. However, advanced smartwatches from brands like Apple and Samsung saw a 21.9% growth, with their market share rising from 1.5% to 2.5%, generating about ₹470 crore in revenue.

The takeaway? Mass-market smartwatches are struggling, but demand for premium timepieces—whether luxury watches or advanced smartwatches—is rising, signalling a shift toward higher-end products.

Ethos Ltd, India's largest luxury watch retailer, is at the forefront of this trend. The company, which went public in 2022, has seen its stock quadruple in value, delivering an annual return of about 105% in just two years. Impressive, but can Ethos sustain this growth, or are we approaching the peak of the luxury watch boom?

India's wealth fuels luxury market growth

India is currently the world’s fifth-largest economy and is climbing the ranks quickly. The International Monetary Fund (IMF) projects India to be the only major economy growing above 6% in both 2024 and 2025, twice the global average of 3.2%, and ahead of China. If this trajectory holds, India could become the third-largest economy by 2030, according to the World Economic Forum.

As India's economy grows, so does its middle class and consumer spending. Deloitte notes that currently one in four households falls into the upper-middle to high-income brackets, a figure expected to double by 2030. This rising wealth signals significant growth potential for luxury markets, including watches, jewellery, cars, and fashion. Ethos, which specializes in luxury retailing, stands to benefit as the luxury goods market could be worth ₹70,000 crore by 2025.

The premium and luxury watch market alone is projected to surge from ₹6,610 crore in FY20 to ₹11,890 crore by FY25, with a compound annual growth rate (CAGR) of 12.5%. High-end watches, priced above ₹10 lakh, are the fastest-growing segment, expected to more than double in value.

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India’s super-rich are also on the rise. The number of ultra-high-net-worth individuals (worth over $30 million) is set to increase by 58.4% in the next five years, while the high-net-worth population (assets over $1 million) is projected to double to 1.65 million by 2027.

What is Ethos doing about this opportunity?

Ethos Ltd is on track to surpass the ₹1,000 crore revenue mark in FY25, following ₹999 crore in revenue this past fiscal year. However, this success wasn't always guaranteed.

Before the pandemic, growth was sluggish, with net profit margins below 3%, and the company even faced losses in certain years.

So, what changed after 2021? It wasn’t just the evolving market or India’s demographic advantages driving Ethos’s growth. Let’s explore the key strategies that made the difference.

Factor #1: Expansive store network

Ethos doesn’t just buy watches to resell; it has built an extensive network of stores across metro cities and tier 2 and 3 locations.

With over 60 stores, including multiple brand outlets (like Ethos and Ethos Summit) and exclusive brand outlets, Ethos has established a strong retail footprint.

Why is this a game-changer?

Luxury watch brands such as Vacheron, JLL, and Panerai produce only 20,000 to 60,000 timepieces annually (some even fewer than 10,000). Opening their own stores everywhere is not only cumbersome but also costly. This is where retailers like Ethos provide a practical solution, enabling luxury brands to reach customers efficiently. Notably, 70-80% of global brand sales are made through retailers.

Ethos has another advantage—its parent company, KDDL Ltd., founded in 1981, has long-standing relationships with these luxury brands through exporting watch dials. This legacy has helped Ethos secure more brands and exclusive deals, allowing them to offer a broader range of over 7,000 unique timepieces.

The result? A solid foothold in the market, with Ethos commanding around 20% of the organized luxury watch segment and 13% of the overall watch market.

Factor # 2: Solid online presence

Displaying over 7,000 luxury watches in a physical store isn’t feasible—that’s where Ethos’s strong online presence comes into play.

Ethos isn’t just experimenting online; they’ve mastered it with the support of an in-house digital team. This team includes trained watch specialists and luxury consultants who provide personalized assistance to customers, whether it’s answering queries via their online portal or guiding them through their purchases. Shopping for luxury watches online becomes as personal as visiting a store.

The omni-channel approach has been a game-changer for Ethos. Here's why:

Vast Selection: Ethos’s online platform offers a catalogue of 5,000 to 7,000 SKUs, a range that simply can’t be accommodated in a physical store.

Broader Reach: Ethos’s online presence extends its reach to customers in smaller towns, tapping into a growing market of luxury buyers beyond metro cities.

This strategy has paid off significantly, with online sales now contributing 30% of Ethos’s total billings.

Factor # 3: A second life for luxury watches

What do you do with a luxury watch you no longer wear? Who would buy it?

Ethos has addressed this by creating a market for pre-owned luxury watches, providing owners with a clear exit option and liquidity. Entering the Certified Pre-Owned (CPO) market in 2019, Ethos made a savvy and innovative move.

Ahead of the curve in India, Ethos established a dedicated CPO luxury watch lounge in New Delhi and an online platform at www.secondmovement.com. They guarantee authenticity, meticulously refurbish each watch at a state-of-the-art facility, and sell them with certification and a two-year warranty.

In the last fiscal year, this segment contributed ₹50 crore, accounting for about 5% of their total sales.

Factor # 4: Building relationships and loyalty

Ethos has cultivated a robust customer database over the years, largely through its flagship membership program, Club Echo, which has been running for 14 years.

Club Echo goes beyond tracking purchases; it provides valuable insights into customer preferences while fostering loyalty through perks that encourage repeat business. This approach helps Ethos reduce servicing costs and maintain direct, effective communication with customers, keeping them at the forefront of the luxury watch market.

What’s next for Ethos?

Ethos has been making strategic moves, and the impact is evident in their numbers. In FY20, their net profit margin stood at a modest 2%. By FY24, it had climbed to 8.3%. This isn’t just growth—it’s a transformation, driven by the strategies mentioned earlier.

Looking ahead, profit margins may inch up to around 9%, though dramatic increases aren’t expected, as Ethos remains primarily a retailer. Unless they acquire a major brand, which seems unlikely, significant jumps in profitability are not on the horizon.

For growth, Ethos isn’t limiting itself to watches.

They’ve recently ventured into the luxury luggage segment through an exclusive deal with LVMH’s Rimowa, opening their first store in 2023. Additionally, they’re exploring high-end jewellery, partnering with brands like Messika and Bvlgari.

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While these are early days for these ventures, the company remains optimistic about future growth.

The reason?

Global luxury players have recognized the untapped potential in India. Brands like Tiffany & Co. and Cartier have already established a presence, expanding their reach through both physical stores and online platforms. This creates a promising environment for Ethos to carve out its niche in the ₹8,000 crore market.

If Ethos secures around 5% of this market by FY28, it could add approximately ₹400 crore to its revenue. Factoring in continued growth in their core watch sector, along with potential gains from new ventures in jewellery and other luxury goods, Ethos could approach a revenue target of ₹2,200 crore by FY28. This would likely result in a net profit near ₹180 crore, effectively doubling current figures.

If this growth strategy unfolds as planned, Ethos could be positioned for strong success, with its expansion into new luxury markets driving substantial gains in both revenue and market share.

Risks remain

Dependence on mall traffic: A large portion of Ethos’s sales comes from stores located in premium malls. While this may seem promising, it’s also a gamble. The success of these stores is tied to mall foot traffic. If a mall fails to attract enough visitors or if there are delays in new mall openings, Ethos’s sales could suffer.

High working capital needs: Ethos’s business model demands substantial cash investment, particularly in inventory management. In FY24, the company held ₹439 crore in inventory against ₹999 crore in sales, meaning nearly 44% of sales value was tied up in inventory. As Ethos expands into new categories like jewellery and luxury travel bags, managing working capital becomes more complex. These new product lines often require higher upfront investments and may take longer to turn a profit. Missteps in managing these resources could strain Ethos’s financial health.

Adapting to consumer preferences: The luxury sector requires constant innovation and adaptation to evolving consumer tastes. Ethos’s ability to stay relevant is key; falling out of step with market trends could weaken its appeal.

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As Ethos broadens its scope, it will be interesting to see how the company navigates these challenges while pursuing its ambitious growth plans. It’s a story worth following closely.

Disclaimer: The data used in this article is sourced from the company's annual report. Forecasts are based on our own assumptions.

This article is meant to share insightful charts, data points, and thought-provoking opinions. It is not a recommendation. If you're considering an investment, please consult your financial advisor. This article is for educational purposes only. The views expressed are my own and do not reflect those of my current or former employers.

About the author: Parth Parikh has over a decade of experience in finance and research. He currently leads the growth and content vertical at Finsire and has a strong interest in Indian and global stocks. He holds an FRM Charter and an MBA in Finance from Narsee Monjee Institute of Management Studies. Parth has previously held research roles at several companies.

Disclosure: The writer and his dependents do not hold any of the stocks discussed in this article.