Impact of the Recession on the Luxury Goods Market

According to our most recent survey, the global recession is having an adverse impact on the sale of luxury goods in Japan, the largest luxury goods market in the world. This study highlights the impact and steps luxury brands are taking to combat this trend Fall 2008

Impact of the Recession on the Luxury Goods Market

Executive Summary
Impact of Global Recession

The luxury goods market in Japan

has traditionally been impervious to recession. However, now, there are signs indicating a slowdown

74% of the Japanese

consumers think that there will be an economic slowdown

51% plan to spend less on

Market Overview
Japan accounts for 41% of the worldwide luxury
goods market

luxury goods in the next 6 months than they did in the previous 6 months

In Japan, luxury shopping is considered a social

occasion and the motive behind the purchase is to celebrate an event
Strategies Undertaken by Brands to Fight Recession

Louis Vuitton is the most preferred brand, followed

by Burberry and Gucci

To minimize the impact, luxury

brands are Focusing on emerging markets such as BRIC Expanding into alternative channels such as mcommerce, e-commerce Shifting production to low cost markets Targeting new customer segments
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Impact of the Recession on the Luxury Goods Market

Market Facts Japan
Japan is the leading market for luxury brands in the world; Louis Vuitton is the most preferred brand
Market Size Over 30 MM consumers of luxury brands, accounting for 25% of the total population The breadth and diversity of luxury brands here is incomparable to anywhere else
W. David Marx, Japanese Consumer-Market Analyst, Diamond Agency, 2007

Drivers Preferred mode to demonstrate wealth, as traditional means (e.g. apartments) are small and expensive Conformity and fitting in culture drive the majority of consumers towards the few popular brands New purchases driven mainly by entertainment / celebratory purposes; considered a social event Department stores are preferred channel due to personalized customer service (despite higher prices) Top Brands 94% of Japanese women in their 20s own a Louis Vuitton handbag; 92% own products from Gucci,
more than 58% own a Prada item and over 51% possess a product with a Chanel label on it

Global Luxury Brands Market Share by Country, 2006

Others 14% China 12% Japan 41%

Most Preferred Brands in Japan1, 2008 (Percent)

Louis Vuitton Burberry Gucci Prada 7% 6% 4% 27% Chanel D&G Others 13% 20% 23%

Europe 16%

US 17%

Note: 1 Question - Think about the most recent occasion in which you purchased luxury branded clothing or accessories. What brand of luxury clothing or accessories did you buy at that occasion?; Grail Analysis sample size n = 304 Source: Japan External Trade Organization (JETRO); Business Standard, May 2007; JapanInc., August 2008; Grail Research Survey on Luxury Brands, September 2008
| Copyright 2008 Grail Research, a division of Integreon

Impact of the Recession on the Luxury Goods Market

Market Decline in Japan (1/2)
Despite the general belief that the luxury market is recession-proof, a recent Grail Research survey found signs indicating a slowdown in consumer spending on luxury goods in Japan
Perception of Current Economic Environment1 Consumers Expectations for Luxury Goods Spending Next 6 Months Compared to Last 6 Months2
60%

80%

60%

45%

40%

74%

30%

51% 44%
15%

20%

22%
0%

Economy will slowdown

Economy will stay the same

5% Economy will improve

0%

5% Plan to spend more money Plan to spend same amount of money Plan to spend less money

Housewives and working women in their 30s and 40s who have a lot of disposable income are beginning to hold back on buying luxury brands, with which they previously rewarded themselves at times, because they are conscious of the current tough economic environment Yasuhiko Hashimoto, Section Chief, Ginza Store, 2008 As Japan's economy heads toward recession and its stock market hovers around a 5-year-low, shoppers are closing their wallets, and the impact on European fashion houses has been dramatic Reuters, October 2008

Note: 1Question - What is your perception of the current economic environment in the next 6 months?; 2Question - How do you expect your purchases of luxury goods will change in the next 6 months?); Grail Analysis sample size n = 304 Source: The Nikkei Weekly (Japan), June 2008; Grail Research Survey on Luxury Brands, September 2008
| Copyright 2008 Grail Research, a division of Integreon

Impact of the Recession on the Luxury Goods Market

Market Decline in Japan (2/2)
The global recession and other factors specific to the Japanese market are already affecting luxury brand sales
Global recession impact on luxury brands LVMH: Witnessed a decline in sales by 6% in H12008 Salvatore Ferragamo: Slashed prices in 2008 of 42 items by 7%-10% for the
first time since the brand started operations in Japan

Chanel: Held a month long sale of clothes and other items in July 2008 Bally1: Slashed prices of some products by up to 20% in July 2008 Osaka2: Reported a 9% y-o-y drop in revenue of 7 overseas brand shops in
2007

Other factors contributing to the decline in luxury sales are income stagnation and
an aging population

Note: 1 Bally is a Swiss luxury brand; 2 Osaka is a luxury department store in Japan Source: The Daily Yomiuri (Tokyo), July 2008; Womens Wear Daily, July 2008; The Economist, September 2008; JapanInc., August 2008
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Impact of the Recession on the Luxury Goods Market

Businesses are Adapting to Cope with the Slowdown

New Channels

Emerging Market Focus

Low Cost Markets

New Customer Segments

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Impact of the Recession on the Luxury Goods Market

Strategy #1: Emerging Market Focus
Luxury brands are moving towards emerging markets to offset the slowdown in sales in more mature markets
In 2009, Russia is expected to account for 7% of the global luxury goods
market

Burberry: Opened a store in Moscow in May 2008, bringing the total to 5 Giorgio Armani, Bulgari and Prada: Opening stores with the help of local
partners (e.g. Mercury, which owns the TSUM department store) to better understand the pulse of the local people Russia

In 2007, the luxury goods market in Brazil

grew by 17% and is expected to continue to grow at an annual rate of 20% Ermenegildo Zegna: Opened its first flagship store in Sao Paulo in April 2008 India

China

China, currently the 4th largest

luxury goods market, is expected to become the 2nd largest market (after Japan) for luxury goods in 2015, with a 29% market share

Brazil

Cartier: Opening 6 new The size of the luxury market in India

is expected to reach USD 30 Bn by 2015, up from USD 3.5 Bn in 2007 stores in Q4 2008, bringing the total to 28

Burberry: Intends to have

100 stores in the next three years, up from the current 35

Louis Vuitton: Plans to open 25

new outlets and launch a PE fund (worth approximately USD 600MM) to make investments in retail chains and brands

Source: Ermenegildo Zegna Press Release, April 2008; India Business Insight, December 2007; The International Herald Tribune, September 2008; The Economic Times, September 2007; Luxury Brands in China, KPMG, 2007
| Copyright 2008 Grail Research, a division of Integreon

Impact of the Recession on the Luxury Goods Market

Strategy #2: New Channels
Recently, luxury brands have experimented with alternative channels to reach customers
m-Commerce e-Commerce

Luxury brands are incorporating QR codes in their mailers,

ads and stores to encourage purchase Quick response (QR) codes are images that shoppers can scan and download through their camera phone to obtain more information about products or make purchases via their mobile phone Gucci and Ralph Lauren have been using QR codes in Japan, with the latter being the first to launch them in the US in August 2008 Cartier introduced mobile advertising through GQ and Glamour mobizines (small version of magazines that can be easily viewed on mobile devices)

Luxury brands, which have been late adopters of ecommerce, are aggressively opening online stores In 2008, Cartier announced the start of online shopping in Japan In 2007, Louis Vuitton started online sales by launching an e-commerce option on its Japanese website I think eventually every company that runs stores will have e-commerce. Whatever the initial fears or reluctance, people are embracing it. It doesn't harm the brand in any way, and it's also very profitable - Mark Lee, CEO, Gucci 20% of Japanese consumers report purchasing more luxury goods using the Internet in the last year

Note: 1Question - How have your shopping habits for luxury goods changed over the last year?; Grail Analysis sample size n = 304 Source: Japan External Trade Organization (JETRO); JapanMarketingNews; Grail Research Survey on Luxury Brands, September 2008; Lux Research Japan, July 2008
| Copyright 2008 Grail Research, a division of Integreon

Impact of the Recession on the Luxury Goods Market

Strategy #3: Low Cost Markets
Luxury brands are shifting their manufacturing base to emerging countries to leverage the cost advantage of these regions
60% of the world's luxury brands will make their
products in China by 2009 due to low manufacturing costs and increasing demand for products

Prada: Started to source and manufacture in Asia,

particularly China, due to unfavorable currency situation

Burberry: Shifted production of shirts and some

other items to China

Louis Vuitton is considering setting up a shoe

factory in Southeast India by the end of 2008. Shoe factories are currently in France, Spain and US

More structural measures are necessary. European luxury brands will need to start looking at global diversity in manufacturing and sales and general administration costs. Luca Solca, Senior Research Analyst, European Apparel and Specialty Retailing, Sanford Bernstein, 2008

Source: World Luxury Association (WLA); La Tribune, September 2007; Womens Wear Daily, December 2007
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Impact of the Recession on the Luxury Goods Market

Strategy #4: New Customer Segments
Luxury brands are polarizing, either targeting the new rich segments with highly expensive offerings, or launching more affordable collections to expand their customer base
Shifting Focus from the Middle Class to the New Rich

In Japan, luxury brands are shifting focus from the middle class (considered to be
the major consumers of such goods) to the new rich segment

This segment consists of individuals with assets worth Yen 100 MM (~USD
852,100) and engaged in sectors such as information technology, finance and medical services

The shift is driven by the belief that the middle class spending crumbles during
recession

Armani, Bulgari and Gucci opened flagship stores along with restaurants and spas
in Tokyo, with the aim of attracting the wealthy from all over Asia

Louis Vuitton sends birthday cakes to its wealthy clients and shows them an
exclusive bag (not for sale in shops) made of crocodile skin priced at roughly Yen 6 MM (~USD 58,961) Opening Stores in Smaller Cities to Target the Growing Affluent Classes

Louis Vuitton and Gucci have opened stores in smaller Japanese cities, where
individuals are still lured by the logo

Cartier shifted focus from Tier-1 cities (Beijing, Shanghai) to Tier-21 (Nanjing,
Tianjin) and Tier-32 (Zhumadian, Zunyi) cities in China Launching Less Expensive Collections

Polo Ralph Lauren announced plans of launching a lower price product range in
J.C. Penney department stores in the US

Note: 1 Tier 2 cities include capital cities of provinces and cities at provincial level except Beijing, Shanghai, Guangzhou and Shenzhen; 2Tier 3 cities include cities at prefectures level Source: The Economist, September 2008; China Daily, October 2008; China Daily, May 2007
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