China Luxury Market study 2010

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China Luxury Market study 2010Bain POV

November 2010


2China Luxury Market study 2010

Agenda

• China luxury market overview

• Key trends of China luxury market

• Implications for luxury brands in China



Asia over-performing, US spend jumping ahead of real recovery, and Japan still sluggish

2009

30%

38%

12%

5%

15%

€153B

2010E

30%

37%

11%

5%

17%

€168B

Worldwide Luxury Goods Market by Area

Americas

Europe

Japan

Asia-Pacific

Rest of World

YoY ‘09 vs ‘08

-9%

-12%

+10%

-8%

-2%

-14% -18%

-18%

+9%

-11%

-4%

@K

YoY ‘10E vs ‘09

+12%

+6%

-1%

+22%

+10%

+8%

+7%

+4%

-8%

+19%

+6%

+5%

@K

@K = at constant exchange rates

-9%



Note: Bain analysis does not include the following: service, hotel, restaurant, alcohol, luxury car and yacht/private jetSource: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Euromonitor; Brand Interviews

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

Total luxury spend by mainland Chinese reached ~RMB156B in 2009; but >50% spent overseas



Strong growth momentum expected in 2010 across all luxury categories

0

20

40

60

80

100%

2009 China luxury goods market byproduct category (RMB B)

China luxury market

Other

WomenswearShoes

Jewelry

Menswear

Suitcases andhandbags

Watches

Cosmetics,perfume andpersonal care

RMB68B

~35%

~20%

20-25%

15-20%

~20%15-20%~20%

~20%

(09-10F)~23%

CAGR

• China’s domestic luxury market growthpicked up speed in 2H 2009 and reached RMB 68B; strong momentum continued in H1-2010

• 2010 expected to be a prosperous year for China luxury:

-~23% expected growth expressed in RMB-~30% expected growth expressed in Euros

• Watches and bags lead the growth; -Watches seeing clear rebound after ‘09, driven by mid-price range (RMB 25K – 50K)

-Suitcases and handbags expect to continue past growth trends, as major gift choice for personal and business

Key highlights

*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” categorySource: Expert Interviews; Brand Interviews; Literature Search; Bain Analysis

*



In each luxury category, the top 5 brands account for ~50% of sales

0

20

40

60

80

100%

Cosmetics, Perfume &Personal care

16.9

Watches

15.5 8.4

Menswear

7.0 4.6

Shoes

3.8 2.8

Other

9.4

2009 China domestic luxury spend (RMB B)

Suitcases &handbags

Jewelry Women-swear

Total = RMB68B

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

SHISEIDO



Louis Vuitton, Chanel and Gucci remained the most desired luxury brands in China in 2010

0

10

20

30

40

50%46%

Chanel

36%

Gucci

22%

Armani

20%17%

Rolex

14%

Cartier

11%

HERMES

8%

Prada

8%

Lancome

5%

% of mentioned (Jul 2010)

LouisVuitton

ChristianDior

1 122 3 5 6 4 7 9 8Rank (2009)

43% 4%25% 20% 13% 12% 18% 11% 9% 10%% of mentionedin 2009 survey

Note: Bain survey focuses on people who are interested in luxury brands, and therefore, brand desirability is very high;

Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)

“What are the 3 brands that you desire the most?”

Top3


8China Luxury Market study 2010SHA

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?”

Ranking improved in 2010 New to Top 3 in 2010


Watches

Cosmetics, perfumes& personal care

Suitcases & handbags

Jewelry

Menswear

Womenswear

Shoes

1st 2nd 3rd



Similar to 2009, majority of growth (~67%) in 2010 will come from new customers

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

“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

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?



In response to high growth, brands continue to expand store footprint aggressively in China

0

20

40

60

80

100

Dunhill

93

HugoBo

ss

89

Burb

erry

50

Ferra

gamo

48

Bally

46

Gucci

37

LV

34

Carti

er*

33

Hermès

**

20

Versac

e

19

Dior

19

Prad

a

15

Bulgar

i*

12

Tiffa

ny

12

Chan

el

6

Store Count of Selected Luxury Brand by end of August 2010

2006 Store Count

Stores increased from 2007 to 2009

Stores increased in 2010by end of August

*Cartier and Bulgari store data excludes its watch & leather wholesaling channels; **2 new Hermes stores will open in Sept in Nanjing and SuzhouSource: Analyst Reports, Literature Search; Brand Interviews

“We are encouraged by that the Chinese economy is back on a track of robust growth, particularly in consumer spending. So we will continue to invest in China and plans to open more stores in the future.”

Sales Director, Luxury brand

“The per store sales in the new store has exceeded that of our old store this year.”

Sales Director, Luxury brand

Key highlights

• For the 15 brands selected, ~80 new stores were opened in 2010 through end of August



Agenda






Six key trends have been identified in the China luxury goods market

Continued trend of increased domestic

shopping (vs. overseas)

1

Continued importance of

online platforms

4

Tier 2/3 cities continue to be the “new” battleground

2

Brand building efforts more localized & increasing

5

Consumers expect comprehensive and

differentiated service experience

3

• Continued growth of store openings by all brands• Improved timely availability of latest collections as well as enhanced service experience • Brands lowered operating margins to narrow price gap between China and other markets • However, lower price & better product selection remained top 2 reasons for overseas spend

• Consumers are becoming more sophisticated and demand better service experience both within and outside of China

• Brands continue to build large flagship stores for better consumer experiences; also, some brands have already localized after sales services

• Many retailers “buying back” franchise operations to regain control over brand

• Proliferation of real estate development in Tier 2/3 cities• Consumers’ attitudes in Tier 2 & 3 cities towards luxury and wealth similar to Tier 1 • However, talent shortage and rising labour costs are hurdles for growth in Tier 2 & 3 cities

• Company websites (in Chinese) and online community (social networking) platforms remain critical marketing channels in China, particularly among consumers age 25-44

• Emergence of online factory outlets, overseas websites and 3rd party agents are driving internet sales growth (but still small)

• Chinese-themed campaigns and support for social welfare/non-profit causes to enhance relevance of brands/image in Chinese consumers’ eyes

• China is front and center in Brands’ global marketing programs (e.g.: Chanel Paris-Shanghai fashion show in Shanghai, etc.)

Gifting increasing & more diversified

6• Gifting remains a significant driver of luxury goods purchase in China• Gifting has become more diversified in brands/products selection with rising popularity of

anonymous cash cards



Domestic purchase still <50%, but growing; lower prices & broader products still top 2 reasons for overseas purchases

Source: Goldman Sachs Report; Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Literature Search; Expert Interviews; Customer Interviews

0

20

40

60

80

100%

# of responses

Reasons tobuy in China

Better sizeavailability

Access toservice after

sales

OthersAspired to be

VIP

Better shoppingexperience

Where bought?

China(44%)

OutsideChina(56%)

Reasons tobuy overseas

Betteravailability ofnew product

Broaderproductselection

Lower price

Frequent oversea trips

Better shoppingexperience

Lack of discountoutlet in China

Can't wait tilloverseas trips

(impulse)

“What % of luxury purchases (in value) are from overseas vs. in China? And why?”

1

Key highlights

• Mix of domestic vs. overseas purchasevaries a lot by category; for example:

- Cosmetics is very domestic- Expensive watches and jewelry are more

overseas

• Several brands have improved in many areas to increase attractiveness of domestic purchases:

- Smaller ticket items for impulse buys- Availability of latest collection at the same

time as in Hong Kong- Reduction in operating margin to partially

offset tax difference



Consumers’ attitudes towards luxury brands in Tier 2/3 cities getting close to Tier 1 levels

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

0

20

40

60

80

100%

% of responses

Luxury goodshave supreme

quality

Bej

ing

Shan

ghai

Guang

zhou

She

nzh

enTie

r2/

3

88

79767981

Luxury goodsshow my taste

and style

80

64

76

5053

Luxury goodshave long

history

6659

43

5355

Luxury goodsmake medifferent

6255

4842

53

“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

2

“Why do you purchase luxury goods?”

0

50

100

150

200

Average spending by monthly familyincome in 2009 (RMB K)

RMB5-15K

1221

RMB15-20K

2931

RMB20-50K

6349

RMB50-100K

6972

> RMB100K

186

166

“How much money did you spend on luxury goods in 2009?”

Tier 1 cities

Tier 2/3 cities



Chinese consumers are becoming more sophisticated, and demanding better service experience

0

20

40

60

80%

Better CRM

63%

Moreprofessionaland warmservice by

sales people

57%

After-salesservice

(cleaning andmaintenance)

56%

Overallenhancedshoppingexperience

43%

% of responses

“Where should luxury brands improve their performance in China?”

Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Brand Interviews; Customer Interviews

“Product itself is still important, but nowadays consumers begin to pay more attention to the ‘experience’ – how they are served during the shopping process, how they are approached for after sales, etc.”

Store Manager, Luxury brand

“ Luxury is not limited to the product, I also pay for the luxury experience and lifestyle which makes me feel unique.”

Luxury consumer

3

Key highlights



Internet continues to serve as an important marketing channel in China for luxury brands

“Where do you normally get information on luxury goods?”

0

20

40

60

80%

Magazine

72%

Internet

60%

Friends

48%

Storedisplay

51%

Others

% of responses

2006 survey 2009 survey 2010 survey

4


Key highlights

• Internet is approaching magazines as a key information source for consumers of luxury brands

• Brands invest to provide engaging consumer experience through their China website to promote brand heritage and culture



More localized marketing efforts are seen in 2009, including social and non-profit activities

Source: Literature Search; Expert Interviews; Brand Interviews; Customer Interviews

Brands tried to link themselves with China in marketing campaigns…

• Exhibited 350+ fine jewelry pieces in Forbidden City (the Palace Museum), Beijing

“Cartier Treasures” Exhibition

“Search for the oldest Longines watch in China” Campaign

• Collected 336 antique Longines watches and selected 20 oldest watches in China

“Paris-Shanghai” Fashion Show

• Issued the 8th Metier D’Arts collection on a barge on Huangpu River, Shanghai

5

Luxury brands continue to actively organize charity events

“Singing Song for You” project

For China Children’s and Teenagers’ Fund (CCTF)

“Step into Pink”charity partyFor China Breast

Cancer Foundation

“New Vision, New Hope” event

For the Committee of Children Amblyopia Special Fund, CCTF

“Beichuan Rose Valley – Hermes Rose Garden”

projectFor China Siyuan Foundation

for Poverty Alleviation

Charity sales weekend

For Happiness Project



Gifting remains significant; cash cards enable diversification and drive brands to increase desirability

Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Expert interviews

0

20

40

60

80

100%

2008 2009 2010

Own

Gifting

“What percent of the luxury goods you’ve purchased is for gifting?

Own consumption?”

6

• Banks launch ExpressPay Cards as gifting card:- Anonymous, different face values- Can be used domestically and overseas in retailers

that accept UnionPay- However, can’t be recharged or used in ATM

• Other service companies such as Dept Stores also launched anonymous shopping cards

• These cards are increasingly used for gift giving:- Gift receiver has more freedom to choose the

brands/products he/she wants

Key highlights



Agenda






Implications for luxury brands in China

CRM

D

Brand building

Talent building

A

B

After-sales service

C

Main challenges ahead Implications for luxury brands

• Increasingly crowded market; several brands with undifferentiated image in the eyes of Chinese consumers

• Increase brand equity investment and differentiation

• Enhance relevance to China through local events & social/non-profit activities

• Increasing gap between consumer service expectations and brands’ ability to deliver, specially in Tier 2 & 3 cities

• Significantly upgrade investment in talent management: recruiting, training, career management and retention

• Chinese consumers expect to find after-sales service in China (even if they buy products overseas)

• Build/enhance after-sales service facilities and capabilities in China to cope with overall Chinese purchases, not just domestic

• More sophisticated Chinese consumers expect to be recognized and servedequally well, everywhere

• Build/enhance CRM systems to manage Chinese consumer base globally

Need to progressively shift focus from land grab/store openings to delivery of

consistently great consumer experience

China Luxury Market study 2010

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