China Luxury Market Study 2010

Bain POV
November 2010

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Agenda

• China luxury market overview

• Key trends of China luxury market

• Implications for luxury brands in China

China Luxury Market study 2010 2

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Asia over-performing, US spend jumping ahead
of real recovery, and Japan still sluggish
YoY ‘09 vs ‘08 YoY ‘10E vs ‘09
@K @K
Worldwide Luxury Goods Market by Area
-8% -11% +10% +6%
€168B
5% -2% -4% +8% +5%
€153B
Rest of World 5% 17% +10% +9% +22% +19%
Asia-Pacific 15%
11% -12% -18% -1% -8%
Japan 12%

30% -14% -18% +12% +7%

Americas 30%

Europe 38% 37% -9% -9% +6% +4%

@K = at constant exchange rates

2009 2010E
China Luxury Market study 2010 3
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Total luxury spend by mainland Chinese reached
~RMB156B in 2009; but >50% spent overseas

Key highlights

• Domestic purchase as % of total

luxury spend continued to increase,
though still <50%

“As market matures and consumers

become more sophisticated,
domestic shopping will become more
important in the future.”
International Director, Luxury brand

Note: Bain analysis does not include the following: service, hotel, restaurant, alcohol, luxury car and yacht/private jet
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Euromonitor; Brand Interviews
China Luxury Market study 2010 4
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Strong growth momentum expected in 2010
across all luxury categories
2009 China luxury goods market by CAGR
product category (RMB B) (09-10F) Key highlights
RMB68B ~23%*
100% • China’s domestic luxury market growth
~20% picked up speed in 2H 2009 and reached
Other
RMB 68B; strong momentum continued in H1-
Womenswear ~20% 2010
80 Shoes 15-20% • 2010 expected to be a prosperous year for
Jewelry ~20% China luxury:
- ~23% expected growth expressed in RMB
Menswear 15-20%
60 - ~30% expected growth expressed in Euros
Suitcases and • Watches and bags lead the growth;
20-25%
handbags
- Watches seeing clear rebound after ‘09, driven by
mid-price range (RMB 25K – 50K)
40 - Suitcases and handbags expect to continue past
Watches ~35% growth trends, as major gift choice for personal and
business

20
Cosmetics,
perfume and ~20%
personal care
0
China luxury market
*Growth in RMB is ~23%; growth expressed in Euros factoring currency appreciation is ~30%
Note; Only premium cosmetics are considered luxury goods in the “Cosmetics” category
Source: Expert Interviews; Brand Interviews; Literature Search; Bain Analysis
China Luxury Market study 2010 5
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 In each luxury category, the top 5 brands
account for ~50% of sales
2009 China domestic luxury spend (RMB B) Total = RMB68B
16.9 15.5 8.4 7.0 4.6 3.8 2.8 9.4
100%

80

60

40

20

SHISEIDO
0
Cosmetics, Perfume & Watches Menswear Shoes Other
Personal care Suitcases & Jewelry Women
handbags -swear
Top 5 brands by category in alphabetical order

Note: Market value is composed of sales at retail value; “Other” category includes tableware/silverware, stationery, sunglasses, accessories and
other niche luxury goods items; “Suitcases & handbags” includes smaller items such as wallets; ranking of luxury brands is in alphabetical order;
Armani brand includes Giorgio Armani, Emporio Armani and Armani Collezioni
Source: Expert Interviews; Analyst Reports; Company Websites and Reports; Bain Estimates and Analysis China Luxury Market study 2010 6
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Louis Vuitton, Chanel and Gucci remained the
most desired luxury brands in China in 2010
“What are the 3 brands that you desire the most?”
% of mentioned (Jul 2010)
50%
46%
Top
3
40
36%

30

22%
20%
20 17%
14%
11%
10 8% 8%
5%

0
Louis Chanel Gucci Armani Christian Rolex Cartier HERMES Prada Lancome
Vuitton Dior
Rank (2009) 1 2 3 5 6 4 7 9 8 12
% of mentioned
43% 25% 20% 13% 12% 18% 11% 9% 10% 4%
in 2009 survey
Note: Bain survey focuses on people who are interested in luxury brands, and therefore, brand desirability is very high; Burberry ranked 16th
with mention rate of 3.2%. 2009, it ranked 10th, with 5% mention rate
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)
China Luxury Market study 2010 7
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Top 3 brands likely to be purchased (by
category) have changed little from 2009
“What are the top 3 brands you are most likely to
purchase in each category in 2010?”

1st 2nd 3rd

Cosmetics, perfumes
& personal care

Watches

Suitcases
& handbags

Menswear

Jewelry

Shoes

Womenswear

Ranking improved in 2010 New to Top 3 in 2010

Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)
SHA China Luxury Market study 2010 8
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
 Similar to 2009, majority of growth (~67%) in
2010 will come from new customers
Key highlights

• China market is supply

driven; new store openings
create new demand
• Are brands too focused on
store openings and not
enough on consumer experience
and loyalty?
“Our new stores in T2/3 cities not only
attract original consumers, but bring
in many new consumers. People in
these cities have strong desire for
luxury goods.”
PR Manager, Luxury brand
“Emerging middle class in China is
trying to improve the quality of their
life, …this is one of the main drivers
of growth of luxury sales in China.”
Research Analyst
Source: Bain Survey of Luxury Goods Consumers in Mainland China (2009: n=1,410; 2010: n=1,471); Expert Interviews; Brand
Interviews; Customer Interviews; Analyst Reports; Company Reports; Literature Search; Bain Analysis
China Luxury Market study 2010 9
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
In response to high growth, brands continue to
expand store footprint aggressively in China

Store Count of Selected Luxury Brand by end of August 2010 Key highlights
100 • For the 15 brands selected, ~80
93
89 Stores increased in 2010 new stores were opened in
by end of August 2010 through end of August
80
Stores increased from 2007 to 2009
“We are encouraged by that the
2006 Store Count Chinese economy is back on a
60 track of robust growth, particularly
50 48 in consumer spending. So we will
46 continue to invest in China and
40 37 plans to open more stores in the
34 33 future.”
Sales Director, Luxury brand
20 19 19
20 15
12 12
6 “The per store sales in the new
store has exceeded that of our
0 old store this year.”
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n Sales Director, Luxury brand

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Fe ber
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*Cartier and Bulgari store data excludes its watch & leather wholesaling channels; **2 new Hermes stores will open in Sept in Nanjing and Suzhou
Source: Analyst Reports, Literature Search; Brand Interviews
China Luxury Market study 2010 10
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Agenda

• China luxury market overview

• Key trends of China luxury market

• Implications for luxury brands in China

China Luxury Market study 2010 11

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
 Six key trends have been identified in the China
luxury goods market
1 Continued trend of • Continued growth of store openings by all brands
increased domestic • Improved timely availability of latest collections as well as enhanced service experience
shopping (vs. • Brands lowered operating margins to narrow price gap between China and other markets
overseas) • However, lower price & better product selection remained top 2 reasons for overseas spend
2
Tier 2/3 cities • Proliferation of real estate development in Tier 2/3 cities
continue to be the • Consumers’ attitudes in Tier 2 & 3 cities towards luxury and wealth similar to Tier 1
“new” battleground • However, talent shortage and rising labour costs are hurdles for growth in Tier 2 & 3 cities

3 • Consumers are becoming more sophisticated and demand better service experience both
Consumers expect within and outside of China
comprehensive and
• Brands continue to build large flagship stores for better consumer experiences; also, some
differentiated brands have already localized after sales services
service experience
• Many retailers “buying back” franchise operations to regain control over brand
4 Continued
• Company websites (in Chinese) and online community (social networking) platforms remain
critical marketing channels in China, particularly among consumers age 25-44
importance of
• Emergence of online factory outlets, overseas websites and 3rd party agents are driving
online platforms internet sales growth (but still small)

5 Brand building • Chinese-themed campaigns and support for social welfare/non-profit causes to enhance
efforts more relevance of brands/image in Chinese consumers’ eyes
localized & • China is front and center in Brands’ global marketing programs (e.g.: Chanel Paris-Shanghai
increasing fashion show in Shanghai, etc.)

6 • Gifting remains a significant driver of luxury goods purchase in China

Gifting increasing &
• Gifting has become more diversified in brands/products selection with rising popularity of
more diversified
anonymous cash cards
China Luxury Market study 2010 12
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
1
Domestic purchase still <50%, but growing; lower prices &
broader products still top 2 reasons for overseas purchases

“What % of luxury purchases (in value) are

from overseas vs. in China? And why?” Key highlights
# of responses
• Mix of domestic vs. overseas purchase
varies a lot by category; for example:
100% Others Frequent oversea trips - Cosmetics is very domestic
Aspired to be
Better shopping - Expensive watches and jewelry are more
VIP
experience
Better shopping
overseas
80 Lack of discount
experience Outside outlet in China • Several brands have improved in many
China Better areas to increase attractiveness of domestic
Better size (56%) availability of purchases:
60 availability new product
- Smaller ticket items for impulse buys
Broader - Availability of latest collection at the same
Access to product time as in Hong Kong
40 service after selection - Reduction in operating margin to partially
sales offset tax difference

China
20 Can't wait till (44%) Lower price
overseas trips
(impulse)
0
Reasons to Where bought? Reasons to
buy in China buy overseas

Source: Goldman Sachs Report; Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Literature Search; Expert Interviews;
Customer Interviews China Luxury Market study 2010 13
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2
Consumers’ attitudes towards luxury brands in
Tier 2/3 cities getting close to Tier 1 levels
“Why do you purchase “How much money did you spend
luxury goods?” on luxury goods in 2009?”
Average spending by monthly family
% of responses income in 2009 (RMB K)

100% 200
Tier 1 cities 186
88
Tier 2/3 cities 166
80 79767981 80
76
150
64 66
62
59
60 5355 55
53 53
50 48
Guangzhou
Bejing

Shenzhen

100
Shanghai

Tier 2/3

43 42
40 72 69
63
49
50
20 31 29
21
12
0 0
Luxury goods Luxury goods Luxury goods Luxury goods RMB RMB RMB RMB > RMB
have supreme show my taste have long make me 5-15K 15-20K 20-50K 50-100K 100K
quality and style history different

“Brand awareness and willingness to spend in many tier 2 cities are already close to
the levels seen in the mega cities like Shanghai and Beijing.”
Researcher, TNS
Note: Tier 1 cities are Beijing, Shanghai, Shenzhen, Guangzhou; tier 2 cities are Chongqing, Tianjin + all remaining provincial
capitals + other major cities; tier 3 cities are remaining prefectural cities
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Expert Interviews
China Luxury Market study 2010 14
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3
Chinese consumers are becoming more sophisticated,
and demanding better service experience
“Where should luxury brands improve
their performance in China?”
% of responses Key highlights
“Product itself is still important, but
80%
nowadays consumers begin to pay more
attention to the ‘experience’ – how they
63% are served during the shopping process,
how they are approached for after sales,
60 57% 56% etc.”
Store Manager, Luxury brand
43%
“ Luxury is not limited to the product, I also
40 pay for the luxury experience and
lifestyle which makes me feel unique.”
Luxury consumer

20

0
Better CRM More After-sales Overall
professional service enhanced
and warm (cleaning and shopping
service by maintenance) experience
sales people
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Brand Interviews; Customer Interviews
SHA China Luxury Market study 2010 15
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
4
Internet continues to serve as an important
marketing channel in China for luxury brands
“Where do you normally get
information on luxury goods?” Key highlights
% of responses
• Internet is approaching magazines as
80% a key information source for
72%
consumers of luxury brands
60%
60
51% • Brands invest to provide engaging
48%
consumer experience through their
40 China website to promote brand
heritage and culture

20

0
Magazine Internet Friends Store Others
display

2006 survey 2009 survey 2010 survey

Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)
SHA China Luxury Market study 2010 16
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
5
More localized marketing efforts are seen in
2009, including social and non-profit activities
Brands tried to link themselves with China in Luxury brands continue to actively organize
marketing campaigns… charity events

“Cartier Treasures” Exhibition

• Exhibited 350+ fine jewelry

pieces in Forbidden City (the “Singing Song for “Step into Pink”
Palace Museum), Beijing You” project charity party
For China Children’s and For China Breast
Teenagers’ Fund (CCTF) Cancer Foundation

“Search for the oldest Longines

watch in China” Campaign
“Beichuan Rose Valley
• Collected 336 antique Longines – Hermes Rose Garden”
project
watches and selected 20 oldest
For China Siyuan Foundation
watches in China for Poverty Alleviation

“Paris-Shanghai” Fashion Show

“New Vision, New Charity sales
Hope” event weekend
• Issued the 8th Metier D’Arts
For the Committee of For Happiness
collection on a barge on Children Amblyopia Project
Huangpu River, Shanghai Special Fund, CCTF

Source: Literature Search; Expert Interviews; Brand Interviews; Customer Interviews China Luxury Market study 2010 17
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
6
Gifting remains significant; cash cards enable
diversification and drive brands to increase desirability
“What percent of the luxury goods
you’ve purchased is for gifting?
Own consumption?” Key highlights
• Banks launch ExpressPay Cards as gifting card:
100% - Anonymous, different face values
- Can be used domestically and overseas in retailers
Gifting that accept UnionPay
80 - However, can’t be recharged or used in ATM
• Other service companies such as Dept Stores
also launched anonymous shopping cards
60 • These cards are increasingly used for gift giving:
- Gift receiver has more freedom to choose the
brands/products he/she wants
40
Own

20

0
2008 2009 2010

Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Expert interviews
SHA China Luxury Market study 2010 18
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Agenda

• China luxury market overview

• Key trends of China luxury market

• Implications for luxury brands in China

China Luxury Market study 2010 19

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
 Implications for luxury brands in China
Main challenges ahead Implications for luxury brands
A • Increasingly crowded market; several • Increase brand equity investment and
Brand brands with undifferentiated image in differentiation
building the eyes of Chinese consumers • Enhance relevance to China through
local events & social/non-profit activities
B • Increasing gap between consumer • Significantly upgrade investment in talent
Talent service expectations and brands’ ability management: recruiting, training, career
building to deliver, specially in Tier 2 & 3 cities management and retention

C • Chinese consumers expect to find after- • Build/enhance after-sales service

After-sales sales service in China (even if they buy facilities and capabilities in China to
service products overseas) cope with overall Chinese purchases, not
just domestic
D • More sophisticated Chinese consumers • Build/enhance CRM systems to manage
expect to be recognized and served Chinese consumer base globally
CRM
equally well, everywhere

Need to progressively shift focus from land

grab/store openings to delivery of
consistently great consumer experience
China Luxury Market study 2010 20
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
 SHA China Luxury Market study 2010 21
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent