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The implantation of luxury
in Sri Lanka
Coralie Simon
Agnès Trucco
The implantation of luxury in Sri Lanka
Implanting an industry in a country is no easy task, particularly nowadays where
healthy consumer spending, and increased exposure to global brands, it is no
coincidence that Sri Lanka is ranked 15th by ...
There are two main sorts of services that can be found in the Sri Lankan luxury
hospitality industry:
a) Traditional luxur...
perfectly true. Generation X always wants quite all of it, but in a different way. It is the
role of the luxury hospitalit...
Source :Wikipédia
II. Why set up in Sri Lanka
The 2013 study on the AT Kearney’s Global Retail development index shows tha...
represents 5% of the population who lives abroad so who cannot vote and so have no
political voice within Sri Lanka. The o...
Luxury hotels are already implanted in that country, but regarding luxury goods no
major brands have entered the market ye...
Furthermore, wages in Sri Lanka have evolved and skilled human resources have
competitive salaries. The know-how is improv...
Hilfiger. There are so many opportunities in this country for luxury industries to develop
their business there.
Other zon...
For tourism, a lot of luxury hotels with luxury services keep on attracting lots of
different tourists as it has been deve...
Companies in the process of entering a new market have to conduct a number of
analyses to determine whether or not to ente...
independence, the Tamil Tigers. The Sri Lankan military defeated the opposition in May
2009, bringing the civil war to an ...
territorial limits of Sri Lanka. It’s commonly a tax on domestic consumption of goods and
services. Its standard rate is 1...
A point to raise would be the level of corruption in the public sector in Sri Lanka; which
includes the Department of Cust...
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The implantation of luxury in Sri Lanka


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The implantation of luxury in Sri Lanka

  1. 1. The implantation of luxury in Sri Lanka Coralie Simon Agnès Trucco StéphaneVarsi
  2. 2. 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,
  3. 3. 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 palaces.
  4. 4. There are two main sorts of services that can be found in the Sri Lankan luxury hospitality industry: 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 earlier. 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 eastern countries. 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
  5. 5. 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 wilderness. 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 everyday life. 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 (, 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 Luxury Society.
  6. 6. Source :Wikipédia 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 luxury tourism. a) Population 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 Lankan customs. 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
  7. 7. 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. b) Demand 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 both sectors. 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…
  8. 8. 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. c) Economy 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
  9. 9. 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
  10. 10. 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.
  11. 11. 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 custom regulations. 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.
  12. 12. 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 investment climate. 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
  13. 13. 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 authoritarian drift. d) Taxes 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
  14. 14. 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. e) Customs 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.
  15. 15. 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. Conclusion 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”.