The implantation of luxury in Sri LankaDocument Transcript
The implantation of luxury
in Sri Lanka
The implantation of luxury in Sri Lanka
Implanting an industry in a country is no easy task, particularly nowadays where
industries are faced by saturation in developed countries.
In response to this stagnation and with the rise of globalization, the world has witnessed
rapid expansion strategies towards developing markets.
The industry of luxury is no exception. Indeed, over the past 15 years, luxury brands
have been seeking promising implantationswithin the five major emerging national
economies: Brazil, China, India, Russia, and South Africa. But as these markets begin to
ripen, companies are looking beyond the BRICS, aiming their business towards other
countries with large potential, particularly in Asia and Latin America. These markets,
though small in total retail market size, appeal to businesses targeting a concentration of
wealth and seeking to be first movers in fast-growing markets.
Additionally, technology is transforming the way of approaching a developing market.
As access to information is made more and more available, shoppers ‘expectations and
behaviors are evolving in all part of the world. Thanks to Internet, people have a better
apprehension of luxury brands and, even in developing countries, they are more inclined
to purchase online. According to partner for retail practice at A.T. Kearney, Ms. Ben-
Shabat, “you can test a market via ecommerce before investing in stores”. This enhances
incentives for firms to develop in emerging markets.
Global expansion strategies must be analysed carefully as each market presents unique
challenges that require unique strategies for a successful implantation. A cautious study
on the macro-economic environment, specific variables related to luxury, and growth
potential is indispensable. After confronting challenges, in China for instance, luxury
brands need to favour more cautious strategies and chose sites more carefully before
beginning an aggressive expansion.
We have brought our focus on Sri Lanka.
Sri Lanka, commonly nicknamed the wonder of Asia or the pearl of the Indian Ocean,
truly is a unique destination. In spite of its’ small size, it possessesthe highest
biodiversity in Asia; its diverse landscapes range from tropical forests to white sand
beaches. It is an important producer of tea, coffee, gemstones, coconuts, rubber, rice, and
cinnamon. Sri Lanka’s rich history and culture has made it a major touristic destination
and was proclaimed as the best travel destination for 2013 by Lonely Planet.
Considered as a newfound hub by luxury retailers, Sri Lanka is undeniably on the radar.
The island of serendipity is also called a “little gem” due to its’ small population with
unique characteristics of wealth and consumer focus and a huge growth potential.Since
the civil war ended in 2009, Sri Lanka has known a significant growth, thanks in part to
foreign investments and an improved political and economic stability. Tourism is
reaching unprecedented levels:from 856,000 tourists in 2011; it reached a record 1
million in 2012, andhas the ambition to welcome 2.5 million visitors in 2016.
GDP figures demonstrate a significant growth from 42.067 billion USD in 2010 to 59.42
billion USD 2012. Despite the global economic crisis, Sri Lanka is one of the few
countries with a positive GDP growth.
Post-war stability also brings infrastructure development, and as urbanization
increases, demand for luxury goods is growing.With a growing middle and upper class,
healthy consumer spending, and increased exposure to global brands, it is no
coincidence that Sri Lanka is ranked 15th by A.T. Kearney’s Global Retail Development
Index of 2013which states that it is “thriving with fresh investment”.
Indeed, Sri Lanka appears to be an attractive place to develop the industry of luxury
goods. The government is planning on making Sri Lanka a major luxury destination.
Furthermore, in June 2009, Bloomberg predicted that Sri Lanka would become the Hong
Kong of the Indian subcontinent. As of today, a few major brands have implanted their
business on the island, one of them being Rolex,but forecasts announce that it is only a
matter of time before other major brands join in. As many foreign apparel retailers are
increasingly drawn to Sri Lanka, there have been numerous projects to develop
shopping centers in major cities such as Colombo and Kandy.
First of all, in the case of Sri Lanka, luxury hospitality has to be taken separately; as
tourism is currently booming, luxury hotels are already implanted and measures of
developmenthave been taken. Secondly, there has to be a focus on the positive elements
for the implantation of luxury goods: a growing demand and a developing urbanization.
And finally, potential barriers to entry do have to be analyzed before choosing to enter.
These could include customs regulations, politics, taxes and culture.
I. Luxury hospitality
When studying luxury in Sri Lanka, one of the first things noticeable is that there are
several types of luxuries and that they are not entering the market at the same speed.If
luxury retailers haven’t yet fully entered the market, luxury hospitality is currently
booming. Tourism is a key part of the local economy and it has been constantly growing,
particularly since the end of the civil war in 2009.To answer the needs of tourists, luxury
hotels and resorts developed and are currently booming as more and more major
groups are investing in Sri Lanka.
The Sri Lankans have a particularity of adjusting hospitality to their guests.There are
many ways to enjoy luxurious places on the Ceylon Island as ways of offering the client a
luxurious experience differ from hotels. The way of approaching the client depends on
the clientele’s goals and expectations. In Sri Lanka, as in many emerging economies,
hospitality is taking in consideration that there are many ways to live & feel the
experience. It is interesting to focus on the luxury diversification in hospitality and the
different types of approaches.
To understand the Sri Lankan luxury industry, it is important to understand that Sri
Lanka built itself trough a plurality of cultures and traditions: Indian, Arabic and
Portuguese at first, but also during the Dutch and British colonization period. This
succession of occupation by strangers led to the diverse of ways of living, and the wealth
of the island is due to the global trade thanks to main industries like spices, tea or
precious stones, but also thanks to the architectural environment.
This last point in particular offers the Sri Lankan luxury hospitality business a style that
can’t be copied, except in other Eastern countries of the commonwealth. This heritage
from the British Empire gave to the island a singular signature in the architecture of its
There are two main sorts of services that can be found in the Sri Lankan luxury
a) Traditional luxury hospitality
The first category is extremely influenced by western cultures and isn’t very
representative of the Sri Lankan one. These hotels are usually based in old palaces
mostly built by British colons. When the country gained independence in 1948, those
huge palaces had to be reused. Years and years of occupation led the people to copy the
western way of living and to create hotels following this model. This demonstrates the
ability of Sri Lankan entrepreneurs to adapt their facilities to western civilization needs.
This type of luxury hospitality is easily recognizable: the hotels are mainly located in big
cities, which used to be appreciated places by colons. The architecture has nothing to do
with the traditional Sri Lankan culture, since buildings are typically based on colons’
plans. All of the hotels follow this plan. It’s called the Colonial Chic Style. White painted
wood, numerous columns and bay windows overlooking on the inside plaza, most of the
time arranged with a swimming pool, to meet the expectations of western tourists.
While the exterior reminds of a mix between exotic ambient (straw roof, exotic woods)
and metropolitan style (general architecture), the inside design of those buildings are
the perfect representation of what you can find in western countries: Large lounges with
a very stifling decoration, on the edge of kitsch, bedrooms with the traditional standards
of luxury hospitality: bathtubs, marble, “Louis XV” style most of the time, and other
characteristics of the occidental luxury precepts copied by Sri Lankan businessmen to
seduce wealthy western people and provide them the same comfort they are used to.
The main target is the generation of the baby boomers. This generation generally isn’t
used to luxury hospitality, or to any sort of luxury at all. Hotels try to provide those
people benefits, which used to be reserved to a certain elite. Actually, not all of the baby
boomers could offer themselves a holiday in luxury hotels, but the ones who could were
very attracted by those places where they couldn’t even imagine going some years
b) The new kind of luxury in hospitality
The secondcategorydiffers greatly from the first one and can be considered more loyal
to the island, much more authentic. With time, expectations changed. In fact,
globalization has brought people together and in the meantime, countries tried to
diversify their offers to the tourists, who became one of the main parts of the wealth in
This is one of the main reasons why luxury hospitality has evolved a lot over the past 30
years. While baby boomers just wanted to discover new sensations trough luxury way of
life in hotels, the generation X benefited of huge changes. Thanks to globalization,
tourism became something common to more and more people. The standard way of
living increased, and after the traditional car and house, people wanted to offer
themselves new perspectives of evolution. To achieve this ambition, good-bye old-
fashioned palaces, continental style and huge bedrooms! Exit western style and services:
People want to live a unique experience and escape their everyday life. Good-bye to the
old continent and 5 stars deluxe hotels in European capitals. People don’t want to go and
sleep in clichéd baroque style buildings with perfect room service. Actually, it’s not
perfectly true. Generation X always wants quite all of it, but in a different way. It is the
role of the luxury hospitality industry to adjust their offer and propose to the client a
unique and tailored luxurious experience.People no longer want to feel at home when
visiting, they want to experience something new and feel immersed in the culture while
not giving up luxury.
This is the most representative of the generation X. They want to benefit luxury at the
maximum, but they would like to do so without realizing it. How can hospitality
businessmen compute that? By giving to their hotels something western style luxury
hotel can’t provide: authenticity. Meaning a luxurious authenticity. Colonial style is no
longer the go-to hotel in Sri Lanka and standards of decoration have evolved too.
This type of hospitality can be considered as a fake immersive luxury. The type of
authenticity expected by the client is an ideal view of the country and not necessarily the
actual Sri Lankan way of living. Even the architecture, which used to be a cultural image
of what used to be Sri Lanka during the British Empire isn’t representative anymore.
Indeed, materials and architectures are most of the time influenced by European
architecture styles movement such as minimalism, or “eco friendly” buildings.Recent
hotels represent the western idea of the eastern exotic architecture. The tourist wants to
feel closer to nature; many hotels consist of individual bungalows built in the middle of
An interesting fact is that while in the traditional luxury hospitality business, directors
try to provide western services; directors of those immersive hotels are doing their best
to make the client forget about the western way of life. With the basic stay come many
activities, all related to the local culture: Ayurveda massages, elephant rides and visit of
local villages, everything is done to share a culture and immerse the tourist.
It is interesting to see how much luxury hospitality has evolved since the globalization.
Clients are now more demanding than before; it is crucial for hotels to stand out by
giving the client a unique experience.
While Europe continues to provide its “baroque style” luxury hospitality, countries like
Sri Lanka catch needs of a population who tries more and more often to escape their
More and more major hotel groups are investing in Sri Lanka. The government is
encouraging major tourist developments that are nonetheless respectful of the
environment. An example is the Heritance Tea Factory in Kandapola, a restored tea
factory, offering the client a glimpse into Sri Lanka’s history and relationship with tea
trade, which accounts for 15% of the nation’s GDP. The tea garden is pesticide-free and
uses a Bio Mass Gasifier to reduce its overall greenhouse gas emissions.
To site a major tourist development project: the Kalpitiya Dutch Bay development. Many
hotels will rise up, one of them being a 7 star palace. Other facilities will develop, such as
a marina, a seaplane harbor, a golf court, an underwater tourist visitor’s center and a
luxury beachfront development. The company, Havicus Sri Lanka real estate
development (www.havicus.com), has several developments around the country. All
located in a prime beachfront area. “The villas are all built with keeping in mind that real
luxury is nothing more than excellence and perfection. Some of the villas are real
masterpieces of architecture” according to an article by Magda Vandenbussche-Knop in
II. Why set up in Sri Lanka
The 2013 study on the AT Kearney’s Global Retail development index shows that
developing markets are an important source of growth. Sri Lanka occupies the 15th rank
on that index and is a destination to be considered for global retailers’ strategic
investment. The market attractiveness of the country represents 16.6% even if the
country risk is high (60.5%). Given the International Luxury Travel Market report, Asia
is the 2nd top cited luxury destination and 1st current growth destination. Sri Lanka is
one of the Asia / Pacific’s main countries most active in promotion and development of
In 2012, the Sri Lankan population was up to
20.33 million people with 1 to 1.3% of annual
growth since 1975. Given a recent survey, 17%
of the population is urban and different ethnic
groups can be found in this country. Indeed,
74.33% of the population is Sinhalese, 11.2% are
Tamils and 9.2% are Moors. The multiplicity of
ethnic groups diversifies the future potential
demand of goods and especially luxury goods. Sri
Lankans are getting wealthier, having less
children, ageing better and has a strong literacy
rate (Sri Lanka is the most literate population of south Asia). Their desires in terms of
goods have evolved. Wealthy people want to possess goods that are close to those
possessed by Western people. However, the customs, traditions and notion of luxury
aren’t the same. As well as the Indian population, Sri Lankans are very discreet and
modest people; they don’t haveaextravagant behavior. They won’t wear clothes that are
too shiny or flashy in public. Especially luxury brands will have to adapt their goods to
this way of life. They will succeed in seducing a Sri Lankan person by the raw materials
of its goods, the quality of its services and the image it will convey that must match Sri
The average household has changed, now an
average Sri Lankan family counts 4.2 people
and the wife earns money, so family income is
higher than few years ago. The average
household income per month is Rs. 46,207 in
2012. In nearly 2.5 years, the income
household has increased by 26%. The gap
between rich and poor has narrowed and 2
main classes of people have emerged, one that
participates in globalization and the other that
has been left out. The group of people
influenced and actors of the globalization in Sri
Lanka is gathering the Numties and the New
Working Class. The Numties are the CEO’s and managers who earn high salaries, which
have increased between 4 and 5 times since the 1990’s. The New Working Class
represents 5% of the population who lives abroad so who cannot vote and so have no
political voice within Sri Lanka. The other part of the population is not really influenced
by globalization yet. So for now, the percentage of population potentially interested in
luxury goods can be considered as relatively low, at least less than 20% but Sri Lanka is
a promising country regarding its future growth and improvement of its inhabitant’s
quality of life.
Finally, there is a rise of the private sector essentially in big cities of Sri Lanka such as
Colombo, Negombo, and Jaffna, which employed the major part of the population. This
rise has created the New Urban Middle Class, and it is common thinking that the
presence of an important middle class within a country is the key of a sustainable
growth. These people are influenced by developed countries inhabitant’s way of life,
earning more money and so have different needs and wants, which create opportunities
of new sector development in the country, which strengthen the economy.
Indeed, since the end of the civil war in 2009, the country is regaining growth and power
and there is evidence of a growing middle class. So, there is an evolution of the demand
and the consumption from the inhabitants, especially in the big cities of the country. In
fact, the distribution of the household income in new working class families has evolved
and changed. First, more than 50% of the income was used in food purchase. Given a
recent survey of the department of census & statistics, the household expenditures are
now more important in non-food expenses. So there are opportunities of business in
We can see on the table that Sri
Lankan people tend to spend
more money in different goods
and services than before, so there
are really many opportunities for
developing businesses there. The
Transport, Communication as
well as Clothing, Textiles & Foot
wear demands have been
increasing over the past few years and is not ready to stop yet.
The part of the population influenced by the globalization, as well as the Numties, is
considered as modern consumers. The globalization context has influenced their
demand and consumption and there is in Sri Lanka and especially in big cities, the
proliferation of modern restaurants, luxury cars…
Luxury hotels are already implanted in that country, but regarding luxury goods no
major brands have entered the market yet. So there are lots of opportunities for this
sector to grow and succeed in such a country, especially as it has become a country
visited by millions of people each year. Tourists come from every part of the world and
this trend is not ready to decrease yet. Indeed, Sri Lanka is really focused on developing
tourism, which is one of its key economic sectors. Furthermore, nowadays we can
consider that luxury travelers have clear objectives. Ostentatious services or goods no
longer attract them but they focus on authenticity and experiential travel, looking for
unique goods. Sri Lanka is called the island of gems. The country is known and famous
for its beautiful and unique gemstones that could constitute a special raw material for
luxury goods, and respond to this new concept of luxury for tourists as well as for the
inhabitants. This is a unique destination where wealthy people enjoy staying. Luxury
brands could develop partnerships there with all the luxury hotels already settled in
order to be seen by tourists.
Since a few years, Sri Lanka seems to have maintained a strong resilient economy. The
economy rate of the country has improved, thanks to the strengthening of the services
sector, and to diverse government policies, which foster foreign direct investment.
Given the Board of Investment of Sri Lanka, these policies are the following:
Total foreign ownership is permitted across almost all areas of the economy.
No restrictions on repatriation of earnings, fees, capital, and on forex transactions
relating to current account payments.
Safety of foreign investment is guaranteed by the constitution.
Existence of a transparent and sophisticated legal and regulatory framework.
Covering all prerequisite business law enactments.
Bilateral investment protection agreements with 28 countries and double
taxation avoidance agreements with 38 countries.
Source : Board of Investment of Sri Lanka
Furthermore, wages in Sri Lanka have evolved and skilled human resources have
competitive salaries. The know-how is improving as well as the quality of the final goods
and the salaries, which remain still less expensive than in western countries. That could
be considered as an advantage for businesses to settle down their industry in Sri Lanka,
especially for luxury brands whose products need more hours of work and higher know-
how for their creation.
The Sri Lankan currency is the Sri Lankan Rupee (LKR) which rate has constantly
increased since the 1980’s. Today the rate change is 1 LKR for 0.00765 USD, which is
pretty interesting for the transactions.
Sri Lanka is relatively dependent on importation. More than half of its importations
represent manufactured goods. At the same time, Sri Lanka exports a lot and the main
products exported are manufactured goods as well. 42% of its manufactured goods
exportations are clothes. So Sri Lanka is not an isolated island at all, it has a lot of
business relationships with many other countries. Indeed we will see a little later that
one of the key sectors of Sri Lanka is textile and clothing. The labor force and the raw
materials are less expensive and so the exportations are more economically favorable
for other countries.
d) Location and connectivity
Sri Lanka remains a developing country and not every place in this country looks
favorable for investment. The most developed zone in the country is its economic
capital: Colombo. It is the biggest city in Sri Lanka and almost every Sri Lankan
industrial company has its headquarters there. The country and its economic capital are
being implicated since 1977 in an economic policy oriented towards a market and a
business of exportation. They are in close relationship with other countries of Europe
and America for exchanges. The United States are the main market of Sri Lanka for
exportation. India is also the biggest supplier of Sri Lanka. A lot of luxury industries
already outsourced in Sri Lanka such as Victoria’s Secret, Liz Claiborne and Tommy
Source : Board of Investment of Sri Lanka
Hilfiger. There are so many opportunities in this country for luxury industries to develop
their business there.
Other zones especially in the south of Sri Lanka are prospering places for a business
development. Furthermore, Sri Lanka has ports and maritime access close to other
countries such as India, which is a very dynamic place for luxury industries as well. This
closeness with India can constitute strength for luxury brand settlement in Sri Lanka.
Given the Board of Investment of Sri Lanka the following graph indicates the several
zones favorable for a business development.
Certain zones in Sri Lanka are duty free and Luxury brands can be found. Colombo and
Hambantota ports have been declared as free ports as well as airports in Katunayake
and Koggala. These zones are favorable to the development of businesses thanks to their
tax preferences, which attract foreign investors.
Sri Lanka also possesses shopping malls especially in Colombo where different shops
can be found such as Barefoot, Paradise Road and Cottage Craft. It is a prospering place
for new luxury industries to settle because they will have a large visibility for
inhabitants and tourists.
e) Key sectors for investment
Since the end of the civil war, Sri Lanka has benefited from a growth in different
economic sectors. The most dynamic sectors are tourism, food industry, textile and
clothing, banks and insurances.
About textile and clothing, this industry represents an essential part of the country’s
economy. Indeed it represents 43% of its total exportation and 39% of its industrial
production. This sector hires three quarter of the population. Sri Lanka possesses
unique gemstones and material that can seduce and interest luxury companies.
About the food industry, Sri Lanka is already efficient in terms of luxury tea production.
For tourism, a lot of luxury hotels with luxury services keep on attracting lots of
different tourists as it has been developed previously.
III. Potential barriers of entry
Before implanting a business in a country, one must carefully study potential barriers of
entry. Each country has specific characteristics and it is important to understand all of
these aspects. Sri Lanka does possess potential obstacles for the implantation of luxury
goods. Some aspects that must be studied include Sri Lankan culture, politics, taxes and
a) Sri Lankan culture
In order to predict the potential success of implantation, one must most definitely
understand the country’s core culture. Sri Lanka has a particularly rich civilization,
influenced by many factors, and it is primordial to appreciate its’ specificities. If it is true
that Sri Lanka has a growing demand for luxury goods, this only concerns a subsection
of the population;the majority remains very close to traditionalprinciples.
Mostly, current culture has been influenced by its long history and its Buddhist heritage.
South Indian influences are visible in many aspects as well as Portuguese, Dutch, and
British colonization. Indeed, what stands out in this country is the melting pot of
cultures and religions that varies from region to region. Each ethnic group has its own
language and religious traditions.
Religion plays an important role in molding the Sri Lankan culture and traditions.
Buddhism, the religion of the majority of people in Sri Lanka (70.2% as of 2011), is given
a place of preference in the national constitution and public life, although significant
portions of the population also practice Hinduism (12.6%), Islam (9.7%), and
Christianity (7.4%). Except in the case of Christians, who are drawn from a variety of
ethnic groups, these religious traditions map directly onto the three major ethnic
groups: Sinhala/Buddhist, Tamil/Hindu, and Muslims.Sri Lankan Buddhists and Hindus,
in particular, share a number of foundational beliefs and ritual practices. The moral
codes of both of these religious traditions recommend moderation and restraint. Indeed,
Buddhism’s view on consumerism differs greatly from Western views, which
concentrate on self-interest, maximizing profits, and individual gains. Buddhism
ultimately tries to make human ethically mature and encourages material needs to be
minimized. Thus, this spiritual approach to economics doesn’t resemble the typical
culture in which luxury has been thriving. Sri Lanka has a more conventional culture,
which is obviously influenced by the prominent religions prevailing the country. The Sri
Lankan way of life is very simple and filled with humility and happiness; it is no
coincidence that the Sri Lankans are known to have a very great sense in appreciating
the simple things in life such as nature. The people of Sri Lanka live modestly. To
approach the Sri Lankan market, the luxury industry must apprehend this vision.
In order to successfully implant luxury goods, the population has to be taken into
account. Development measures still have to be done towards a significant part of the
population to increase demand. However, traditional beliefs and consumerism are not
necessarily incompatible; China can best demonstrate that in spite of being a Buddhist
society, demand for luxury goods is particularly strong.
Companies in the process of entering a new market have to conduct a number of
analyses to determine whether or not to enter. Other than culture, specific aspects
related to the ease of doing business in a country are crucial to study. It is important to
understand the local environment to begin a strategy for entering the new market.
These include market attractiveness, laws regarding property, the political situation,
taxes, and customs regulations.
b) Market attractiveness
The official name of the island is the Democratic Socialist Republic of Sri Lanka. It's
economy is shifting away from its traditional agricultural base to include production for
an international market, a shift accelerated by a major policy change in the 1977
transition from a socialist-style, state controlled economy to a free market economy lead
by the private sector. If there is an effort made by policy makers to make Sri Lanka a
more capitalistic market, the country has undeniably been marked by socialist
influences; Most of the land is currently owned by the state and is leased to private
individuals and companies. Religious establishments also own substantial tracts of land.
Traditionally, private property is passed from parents to children, leaving theoretically
little land for the real-estate business. In practice, however, the real-estate sector is a
growing industry due to developing urbanization and growing demand.
Concerning the registration of property, Sri Lanka was ranked 145 out of 189 by Doing
Business, which measures business regulations throughout the world. There are 8
procedures to register property in contrast to an average of 6 in South Asia. It takes 52
days and costs 5.1% of property value, compared to an average of 99.4 days and 7.2% of
property value in South Asia. According to A.T. Kearney’s Global Retail Development
Index for 2013, Sri Lanka is ranked 15th out of 30, right below India and above Saudi
Arabia, so it would be a country to consider for the development of luxury. Its market
attractiveness, referring to the profit possibilities available, was ranked 16.6%. This is
an important factor to consider when deciding whether or not to enter the market.
Thisrelatively low rank may be due to the small market size and the measures that have
to be taken before effectively implanting luxury in Sri Lanka and indicates the need for
further investigation. The country risk indicator is 60.5% (100 being low risk), the time
pressure indicator is 58.6% (100 suggesting urgency to enter) and the market
saturation is 81.8% (100 being not saturated). These ranks imply that Sri Lanka is still
an emerging market but, though not ideal, there is high potential in the future, meaning
that investing may be profitable.
Though it has long been neglected during the 30-year civil war, overall infrastructure,
including transportation and utilities, surpasses that of South Asian and almost all
Southeast Asian countries. In this aspect, Sri Lanka is indeed an attractive destination for
implantation but still needs stronger infrastructure and transparency to improve its
c) Political situation
The political situation has to be studied before entering the market. For any industry,
including luxury, instabilitysignifies a risk of government failure.
The divergence of ethnicities is visible in Sri Lankan politics. Although the people usually
live peacefully, these divergences have led to a 30-year civil war. The conflict opposed
the government (Sinhalese majority) to a militant opposition fighting for their
independence, the Tamil Tigers. The Sri Lankan military defeated the opposition in May
2009, bringing the civil war to an end. During this period, along with causing many
hardships for the population, the economic situation was at a low point. Since the end of
the war, many aspects have changed and politics are shifting, aiming for a more stable
situation. There are significant efforts to rebuild the image of the country. Being in a
period of peace, there is a huge room for the economy to grow and to attractnew
investors. The Central Bank expects a 7.5% growth in 2014 and the International
Monetary Fund expects a 6.5% growth between 2013 and 2014, given the government is
able to build a policy buffer to address unexpected events.
In practice however, the notion of stable government in Sri Lanka is questionable.
MahindaRajapaksa, the actual president, is somewhat totalitarian. He is the absolute
ruler of the country, being head of state, parliament and military. The concept of checks
and balances between inter-connected governance is not applied in Sri Lanka.
Furthermore, the UN Human Rights Council (HRC) is calling for actions to restore the
rule of law, investigate rights abuses and alleged war crimes by government forces and
the opposition; the Liberation Tigers of Tamil Eelam, to delegate authority to Tamil and
Muslim areas of the north and east, and demanded the implementation of a Lesson
Learnt and Reconciliation Commission.Rajapaksa’s government, in which his brothers
hold key roles such as Defense Secretary and Economic Development Minister, refused
to comply with HRC’s resolution and no credible investigation has been conducted to
recognize war crimes and human rights violations during the 30-year civil war. The
absence of power delegation and the denial of minority rights are increasing ethnic
tensions in a post war situation with a dangerously growing authoritarian drift.
The military is very present and controlling in Tamil regions.There is a big issue
concerning military land confiscations and undermining of the Tamil ethnicity, with no
effective right of appeal and no fair process for handling land disputes.These issues are
increasingly getting problematic as tourism is booming and major hotel groups are
developing.In some regions, the land acquired by these groups sometimes belong to
civilians that fled the war, they would come back only to find out that the government
had appropriated their property. Hundreds of people complained to have received to
compensation for hotel developments on their land.
To enter a new market, a steady government in the country in question is required. In
developing countries, one of the major risks indeed concerns the threats of a failing
government and any eventual outbreak. If the Sri Lankan government is trying to
maintain a positive image for foreign investors, actual efforts are too weak and there is
room for improvement. The state is highly controlled by the military and responds
violently to protests from the Tamil community and other citizens concerned by the
Another element to analyze is the taxes applied in the country. Sri Lanka has had a
history of socialist influences. The way of living is significantly higher than in other
South Asian countries. In comparison, education is mandatory and free even in rural
regions and literacy rates are particularly high. These advantages are translated by a
considerable higher taxation than its entourage.
Concerning the different taxes in Sri Lanka, the principal one is the VAT (Value Added
Tax) for goods imported into the country and goods and services supplied within the
territorial limits of Sri Lanka. It’s commonly a tax on domestic consumption of goods and
services. Its standard rate is 12%. All importations are subject to duty, taxes and other
charges. There is the Import Cess based on units of measures like weight or quantity
with a rate between 1 and 45% and the Ports & Airports Levy with a rate of 5%. All
people making up a business in Sri Lanka will be subject to these taxes.
According to Doing Business (who ranked Sri Lanka 171 out of 189 countries on tax
policies), the total tax rate, measuring the amount of taxes and mandatory contributions
payable by the business in the second year of operation, expressed as a share of
commercial profits is set at 55.1%, compared to an average of 40.6% in South Asia and
41.3% in OCDE countries. However, profit taxes, the amount of taxes on profits paid by
the business as a percentage of commercial profits, is 1%, compared to a 16.8% average
in South Asia, and a 16.1% average in OCDE countries.
Nonresident companies are subject to tax on their profits and income derived from Sri
Lankan sources. If the standard rate of corporate income tax is 28%, companies in the
business of import, as it would be the case for luxury goods, are subject to tax at a rate of
40%. In the case of luxury hotels, tourism is considered as a priority sector so the tax
rate is 12%.Furthermore, a three-year tax holiday is granted to businesses providing
manor houses or thematic bungalows to tourists.
In 2012, Sri Lanka made paying taxes less costly for businesses by abolishing the
turnover tax and social security contribution and by reducing corporate income tax,
value added tax among others.
With its’ strategic geographic position in the Indian Ocean, Sri Lanka has a history of
being a major “trade center”. It has indeed been an important center in the trading
routes since ancient times because of its important ports along the East-West routes.
Arab traders were drawn to Sri Lanka and many stayed, adding Islam to the island’s
religions. Christianity was later introduced due to the attraction of the island for
colonizers. Hence, Sri Lanka’s rich culture is mainly due to its commercial attractiveness.
Today, Sri Lanka remains an important commercial center. Currently, a port in South
Colombo is being built; the Hambantota port is also being built in the south of the
island.The government intends to transform Sri Lanka into a major center of naval,
trade, air, energy, and knowledge. Sri Lanka is currently ranked as the most liberalized
economy in South Asia.
For the luxury industry to join a new market, there has to be a study on customs
regulations in the country in question. As luxury goods have to be imported into the
country, it is important to analyze the process, and verify the method that is more
advantageous. The particularity of Sri Lanka is that it is an island; therefore there are no
concrete ways of maximizing profits through a specific method of importation.
The actual Sri Lanka Customs administration is a department under the Ministry of
Finance and Planning. There are over two thousand employees working for the
Department. According to Doing Business, the cost to import (“the cost associated with
all procedures required to import goods, including for documents, administrative fees
for customs clearance and technical control, customs broker fees, terminal handling
charges and inland transport”) is set at US$ 775 per container, for an average of US$
1,968 in South Asia, and US$ 1,090 in OCDE countries.
A point to raise would be the level of corruption in the public sector in Sri Lanka; which
includes the Department of Customs as it collects the second highest amount of public
revenue. Bribery and corruption impede economic progress and questions the stability
of the state. Sri Lanka is ranked 92 out of 180 countries and has been given a poor grade
of 3.2 on the corruption perception index by Transparency International. For a more
stable government, there has to be a decision on reestablishing judicial independence
and an independent bribery commission.
As the luxury industry is seeking new markets for implantation, Sri Lanka appears to be
a strategic choice. Tourism is reaching unprecedented rates so the need for luxury
hospitality is increasing and many development projects are currently being invested
upon. The population has a growing upper middle class, increasingly interested in
luxury goods. Although some adjustments would have to be made to attract this
particular melting pot of cultures that represent Sri Lanka, demand is present and
growing. However, potential barriers of entry have to be carefully analyzed. Its’
authoritarian drift is questioning its’ post war political stability and may dissuade
potential investors to enter the market.
As said by Magda Vandenbussche-Knop in an article issued in Luxury Society:
“Although, today Sri Lanka has no major luxury brand representation, visiting the
country is already a luxury experience. Soon, in a few years, all this will change. Let’s just
hope that the island will remain the gem of the Indian Ocean”.