EQUITIES

LUXURY GOODS

Best Of: Brand Trivialisation

30 JUNE 2015 For the convenience of our clients, we are re-publishing and updating the most significant research

insights lest they were lost in the flow of big reports.

Brand trivialisation risk is not something you can anticipate from sales and profit trends You will eventually see an impact on sales and profits – by which time it is too late. Yet, the seeds

of brand equity destruction are sown long before one sees the pernicious results.

We think that analysing brand perception, brand distribution and product range architecturecan help in anticipating and detecting trivialisation risk before it materialises:

1. Is the brand obvious to all? Or is it ‘hiding in plain sight’? Hard luxury brands offer a better

scale vs visibility ratio. We use Google and Baidu hits as well as website traffic statistics as proxies

of brand ubiquity.

2. Is distribution directly controlled? Brand exclusivity as perceived by consumers rests heavily

on their building the equation Price = Value. Direct retail maximises price discipline.

3. Is the ratio of full-price stores to factory outlets high or low? If luxury is about perceived

exclusivity, then in the ideal world factory outlets would not exist. The more products there are

‘walking’ on the street – bought at full price or not – the greater the impression of ubiquity.

4. Is the brand identified with a few specific products? The narrower the sales mix and the

stronger the brand association with a specific product, the higher the risk of brand trivialisation.

5. What is the ratio of spontaneous top-of-mind recognition to volumes in circulation?

Spontaneous top-of-mind recognition correlates with intention to buy = desirability. At equal top-of-

mind recognition levels, we prefer brands with a smaller ‘installed base’ / higher average price.

When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler

brands could be more vulnerable to brand trivialization. Louis Vuitton, by contrast, looks less at

risk, especially on distribution grip.

Luca Solca (+44) 203 430 8503 luca.solca@exanebnpparibas.com

Paola Bertini (+44) 207 039 9521 paola.bertini@exanebnpparibas.com

Hui Fan (+44) 203 430 8507 hui.fan@exanebnpparibas.com

Available on

Key valuation metrics

Rating Mkt cap Price TP Upside P/E (x) EV/EBITA (x)

(EURm) (LC) (LC) 15e 16e 15e 16e

Burberry (=) 9,856 15.9 19 20% 19.8 18.3 13.4 11.9Hermès Int. (=) 36,702 352.0 300 -15% 35.6 32.1 22.6 20.0Hugo Boss (+) 7,040 102.0 130 27% 17.4 15.0 12.9 11.0Kering (+) 20,462 162.5 200 23% 16.6 14.4 14.3 12.3Luxottica (=) 28,771 60.5 59 -2% 30.1 26.8 18.8 16.8LVMH (+) 82,014 163.6 180 10% 20.5 18.6 13.5 12.2Prada (=) 11,163 37.7 45 20% 21.2 19.9 14.4 13.2Richemont (+) 42,205 77.7 90 16% 19.0 17.4 13.7 12.3Swatch Group B (+) 19,557 373.7 485 30% 14.8 13.2 11.2 9.5

* Prices at 29 June 2015

See Appendix (on p11) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures.

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 2

The art of managing luxury brands is to navigate the paradox of selling exclusivity by the thousands – or millions – depending how successful one is. If you accept our definition of luxury – luxury is being cool by having something other people don't – maintaining the perception / illusion of exclusivity is vital for brand equity resilience. In this report we bring together a number of ideas on how to assess and measure brand trivialisation risk. We apply these ideas to score the companies and brands we cover. Finally, we draw investment conclusions from these scores and the risk profiles we ascertained.

Brand trivialisation risk is not something you can anticipate from sales and profit trends. Of course, you will eventually see brand trivialisation’s impact on sales and profits – by which time it is too late. We are convinced that the seeds of brand equity destruction are sown long before one sees the pernicious results. When brands take steps to grow their top lines and expand their margins, they need to be mindful of the impact on their brand equity. This is the period and process we want to focus on in this report.

We think that analysing brand perception, brand distribution and product range architecture can help in anticipating and detecting trivialisation risk before it materialises:

1. Is the brand obvious to all? Or is it ‘hiding in plain sight’? We like big brands

that are not obvious to consumers. Scale brings competitive advantage in a fixed cost

business. But high visibility and ubiquity bring high brand trivialisation risk. We use

Google hits, Baidu hits and website traffic statistics as proxies of brand ubiquity; we

conclude that hard luxury brands offer a better scale vs. visibility ratio.

2. Is distribution directly controlled? Or is it largely dependent on wholesale?

Brand exclusivity as perceived by consumers rests heavily on their building the

equation Price = Value. That is why when you ask the price of something in a well-

managed store – try LV or Chanel – the typical reply is “the value of this product is…”

Direct retail maximises price discipline. The end-of-season sales habitually held by

multi-brand wholesale customers destroys brand equity.

3. Is the ratio of full-price stores to factory outlets high or low? If luxury is about perceived exclusivity, then in the ideal world factory outlets would not exist. In fact, they bring brands to a broader audience, offering them at a fraction of their full price. The notion that these are products from the past season – if they are indeed so – is a weak excuse: the more products there are ‘walking’ on the street – bought at full price or not – the greater the impression of ubiquity.

4. Is the brand identified with a few specific products? The narrower the sales mix and the stronger the brand association with a specific product, the higher the risk of brand trivialisation. This is the reason behind the demise of many premium brands – Crocs, Timberland, Locman, etc. It is also the key to the ‘mystery’ of why Hermes does not increase the availability of its Birkin and Kelly handbags, even as it produces new models.

5. What is the ratio of spontaneous top-of-mind recognition to volumes in circulation? We like top-of-mind brands as spontaneous top-of-mind recognition correlates with intention to buy = desirability. At equal top-of-mind recognition levels, we prefer brands that have the smaller ‘installed base’ / higher average price. This, we think, bodes well for future full-price volume development.

When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton by contrast, looks less at risk, especially on distribution grip.

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 3

Figure 1: Luxury is about selling a promise of exclusivity – Commercial success risks undermining brand equity

Source: Exane BNP Paribas

Exane BNP Paribas Research Luxury Goods

Figure 2: When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton, by contrast, looks less vulnerable, especially on distribution grip

Source: Exane BNP Paribas Analysis

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 5

Figure 3: Hard luxury brands are better at 'hiding in plain sight’ Retail Equivalent Brand Footprint (EUR bn) Brand exposure as measured by Google hits

Note: “brand footprint” calculated on the basis of retail equivalent sales: 1 retail = 2.5X wholesale = 10X license

Source: Company reports, Google (20/06/2013), Exane BNP Paribas estimates

Figure 4: Off-price engagement at lowest risk would entail choosing options that offer a combination of high brand control and low full-price contamination

Source: Exane BNP Paribas

0 2 4 6 8 10 12

Tiffany

Prada

Coach

Omega

Burberry

Armani

Hermès

Gucci

Calvin Klein

Cartier

Louis Vuitton

Rolex

Chanel

Ralph Lauren

Retail-Equivalent Sales (EUR bn)

0 100 200 300 400 500

Omega

Tiffany

Rolex

Cartier

Calvin Klein

Burberry

Armani

Prada

Hermès

Ralph Lauren

Gucci

Coach

Louis Vuitton

Chanel

Google Hits (m)

Low High

3. Multi-brand in-store end-of-season

"explicit" discounting

1. Mono-brand in-store end-of-season

"explicit" discounting

2. Mono-brand in-store end-of-season "soft" discounting

7. Multi-brandonline pure-play

discounters

6a. Multi-brand physical discounters /

chains

6b. Multi-brand physical discounters /

independents

5. Mono-brand physical off-price store / franchised-

wholesale

4. Mono-brand physical off-price store / concession

Low

Brand Control

Fu

ll-P

rice

Co

nta

min

atio

n

High

Exane BNP Paribas Research Luxury Goods

Figure 5: Chanel, Hermès, LV and Loro Piana are probably the most ‘virtuous’ in off-price engagement. Moncler, Burberry, Hugo Boss, Prada and Gucci seem more exposed to off-price risk

Source: Exane BNP Paribas Luxury POS Database, Retailers’ websites, Exane BNP Paribas Industry Experience

Physical Mono-brand In-Store Multi-brand Online Discounters

Outlet Sales Off 5th Bergdorf Goodman Yoox Century 21 TK Maxx

Gucci √ √ √ √ √ √ √Bottega Veneta √ √ √ √Saint Laurent √ √ √ √ √ √ √Balenciaga √ √ √ √ √A McQueen √ √ √ √ √Stella McCartney √ √ √ √ √ √ √Brioni √ √ √ √ √ √LV √Fendi √ √ √ √ √ √ √Celine √ √ √ √Kenzo √ √ √ √ √ √ √Marc Jacobs √ √ √ √ √ √ √Givenchy √ √ √ √ √ √Pucci √ √ √ √ √DKNY √ √ √ √ √ √ √Christian Dior √ √ √ √ √ √Loro Piana √ √ √

Hermès Hermès √ Chanel Chanel √ √ Burberry Burberry √ √ √ √ √ √ Hugo Boss Hugo Boss √ √ √ √ √ √ √

Prada √ √ √ √ √Miu Miu √ √ √ √ √Chloe √ √ √ √ √ √Dunhill √ √ √ √ √Tod's √ √ √ √ √ √ √Cucinelli √ √ √ √ √ √Ferragamo √ √ √ √ √ √Moncler √ √ √ √Armani √ √ √ √ √ √ √Corneliani √ √ √ √ √ √Dolce & Gabbana √ √ √ √ √ √Valentino √ √ √ √ √ √ √Versace √ √ √ √ √ √ √Zegna √ √ √ √ √Furla √ √ √ √ √Tory Burch √ √ √ √ √Kate Spade √ √ √ √ √Michael Kors √ √ √ √ √ √Ralph Lauren √ √ √ √ √ √Coach √ √ √ √

Multi-Brand In-Store Sales Stockists

Kering

American brands

LVMH

Prada

Richemont

Italian brands

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 7

Figure 6: US luxury players tend to rely more on physical outlet stores to deal with unsold merchandise

Soft Luxury brands - # Physical Factory Outlets

Survey of 360 outlet centers in 30 countries.

Source: Exane BNP Paribas Proprietary Luxury POS database (updated as of June 2015).

0 50 100 150 200 250

ChanelHermès

Isabelle MarantLV

PucciShanghai Tang

Stefano RicciBalenciaga

Stella McCartneyKiton

LancelMiu Miu

KenzoA McQueen

BrioniCeline

KooplesCoccinelleCorneliani

Christian DiorCucinelli

LoeweGivenchy

FendiGerald DarelLongchamp

ChloeChurch's

MajeSaint LaurentPatrizia Pepe

SandroZadig & VoltaireBottega Veneta

PinkoLoro Piana

MonclerMarc Jacobs

Dolce & GabbanaTory Burch

PradaTod's

DunhillValentinoVersace

GucciFerragamo

ZegnaFurla

BurberryDKNY

Kate SpadeArmani

Hugo BossMichael KorsRalph Lauren

Calvin KleinCoach

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 8

Figure 7: US luxury players tend to rely more on outlet stores: Kors and Coach at c.3–4 POS / Outlet

Outlet Stores (#) Mono-brand POS (#) POS / Outlet Store (x)

Kors 142 483 3.4

Coach 231 1024 4.4

Versace 28 134 4.8

Dunhill 22 125 5.7

Tory Burch 20 123 6.2

Moncler 16 107 6.7

Burberry 52 409 7.9

Hugo Boss 94 935 9.9

Pinko 13 140 10.8

Hour Passion 4 44 11.0

Patrizia Pepe 11 133 12.1

Dolce & Gabbana 20 254 12.7

Prada 21 269 12.8

Marc Jacobs 19 257 13.5

Saint Laurent Paris 9 122 13.6

Gucci 30 422 14.1

Kiton 3 45 15.0

Chloe 9 144 16.0

Brioni 5 84 16.8

Cucinelli 6 108 18.0

Bottega Veneta 13 239 18.4

Fendi 8 193 24.1

Loewe 6 149 24.8

Maje 9 227 25.2

Celine 5 142 28.4

Lancel 3 92 30.7

Sandro 12 378 31.5

Christian Dior 6 203 33.8

Bulgari 6 255 42.5

Longines 2 85 42.5

Miu Miu 3 163 54.3

Tissot 3 165 55.0

The Kooples 5 283 56.6

Sw atch 11 713 64.8

Balenciaga 1 97 97.0

Tiffany 3 301 100.3

Blancpain 0 37 -

Breguet 0 34 -

Cartier 0 292 -

Chanel 0 307 -

Hermès 0 305 -

Isabelle Marant 0 18 -

IWC 0 64 -

JLC 0 65 -

LV 0 453 -

Omega 0 348 -

Patek Philippe 0 3 -

Piaget 0 85 -

Pucci 0 51 -

Rolex 0 97 -

Shanghai Tang 0 43 -

Stefano Ricci 0 43 -

VCA 0 125 -

TOTAL 851 11,417 13.4

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 9

Figure 8: The relative weight of off-price vs full-price stores at Marc Jacobs and Dunhill has shrunk significantly since our last check

Survey of 360 outlet centers in 30 countries.

Source: Exane BNP Paribas Proprietary Luxury POS database (updated as of June 2015)

Figure 9: The narrower the sales mix and the stronger the brand association with a specific blockbuster product, the higher the brand trivialisation risk Product Category Concentration - % Sales

Source: Company reports, Exane BNP Paribas estimates

Apr-13 Jun-15

Marc Jacobs 30 14

Dunhill 9 6

Gucci 19 14

Chloe 21 16

Celine 35 28

Lancel 36 31

Bottega Veneta 21 18

Burberry 9 8

Fendi 25 24

Christian Dior 29 34

Prada 11 13

Kors 3 3

Coach 3 4

Saint Laurent Paris 8 14

Tory Burch 4 6

Miu Miu 24 54

Balenciaga 27 97

POS / Outlet Store

Leather RTW Footwear Watches Jewelry OtherMoncler 0% 100% 0% 0% 0% 0%Omega 0% 0% 0% 100% 0% 0%Bottega Veneta 86% 6% 6% 0% 1% 2%Cucinelli 9% 85% 4% 0% 2% 0%Louis Vuitton 80% 5% 10% 1% 2% 2%Tod's 25% 0% 75% 0% 0% 0%Prada 69% 16% 14% 0% 1% 0%Celine 69% 16% 14% 0% 1% 0%Burberry 32% 58% 3% 1% 0% 6%Cartier 4% 0% 0% 52% 35% 9%Miu Miu 60% 20% 18% 0% 0% 2%Marc Jacobs 53% 25% 15% 1% 2% 5%Gucci 58% 16% 14% 5% 2% 5%Fendi 58% 16% 14% 5% 2% 5%Hermès 44% 24% 4% 4% 10% 14%Saint Laurent 44% 24% 22% 0% 1% 9%Ferragamo 33% 13% 43% 0% 2% 8%Chanel 32% 14% 3% 3% 5% 43%

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 10

Figure 10: The higher the GM%, the higher the trivialisation risk for a brand – were it to be perceived as expensive, rather than precious Average Retail Price (EUR) vs. Gross Margin (%) – by brand

Source: Company reports, Exane BNP Paribas Analysis & Estimates

M. Jacobs

Moncler

Ferragamo

Saint Laurent

Burberry

Cucinelli

Tod'sMiu Miu

Fendi

Gucci

Louis Vuitton

Prada

Tiffany

Bottega Veneta

CelineHermès

Omega

Cartier

50%

55%

60%

65%

70%

75%

80%

85%

0 1000 2000 3000 4000 5000 6000

Ach

ieve

d G

ross

Mar

gin

%

Avge Retail Price (EUR)

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 11

DISCLOSURE APPENDIX Analyst Certification We, Paola Bertini, Hui Fan, Luca Solca, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views expressed in this research report.

Non-US Research Analyst Disclosure The research analysts named below were involved in preparing this research report. Research analysts at Exane Ltd and Exane SA are not associated persons of Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). These non-U.S. analysts are not subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Paola Bertini Exane Ltd Hui Fan Exane Ltd Luca Solca Exane SA Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Ltd is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom, and Exane Inc. is regulated by FINRA and the U.S. Securities and Exchange Commission in the United States.

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