Global Jwellery

Global Jewellery Retailing 2008

Asia Pacific switches on to brands

Reference Code: DMVT0450

Publication Date: 7/08

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GLOBAL JEWELLERY RETAILING 2008 DMVT0450

© Datamonitor (Published 07/2008)

This report is a licensed product and is not to be photocopied

ABOUT VERDICT RESEARCH

Verdict Research is the UK’s leading authority on retailing and publishes unrivalled independent analysis of the retail industry. With almost 20 years experience, Verdict has close relationships with major UK retailers and access, at the highest level, to key executives working in the Top 300 retailers to hear their views at first hand. Verdict reports provide clients with a complete picture of the retail sector and unique forecasts to help UK retailers, manufacturers, service suppliers, investment analysts, consultants and the media with strategic planning.

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Table of Contents




TABLE OF CONTENTS

CHAPTER 1 EXECUTIVE SUMMARY 13

Key Findings 13

Main Conclusions 14

CHAPTER 2 MARKET ANALYSIS 18

Jewellery Market Definition 18

Introduction 19

Regional Markets 21

Japan 23

Asia-Pacific 25

Americas 29

Europe 30

Middle East & Others 32

Product Trends 34

Company Market Shares 37

Key Operating Statistics 40

CHAPTER 3 OUTLOOK & FORECAST 42

Key Issues 42

Where Will Global Economic Slowdown Bite? 42

Rise and Rise of Controlled Retail 43

Internet 44

Value Chain Integration 45

Table of Contents




Ethical Concerns 46

Rapid Rise in Commodity Prices 47

Forecast 49

Forecast Expenditure 2008-2013 49

Regional Expenditure 2008-2013 50

Expenditure by Product Group and Market Segment 2008-2013 53

Polarisation 55

Action Points 58

CHAPTER 4 BULGARI 60

Company Overview 60

Recent Key Developments (Jewellery & Watches) 61

Sales Performance 62

Current Trading 63

Store Portfolio 66

Outlook 67

CHAPTER 5 FINLAY 69

Company Overview 69

Recent Key Developments 70


Current Trading 71

Stores 73

Outlook 74

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CHAPTER 6 GITANJALI GROUP 75

Company Overview 75



Stores 79

Outlook 80

CHAPTER 7 LVMH 81

Company Overview 81

Recent Key Developments (Watches & Jewellery) 82


Current Trading 85

Outlook 87

CHAPTER 8 RICHEMONT 89

Company Overview 89

Recent Key Developments (Watches & Jewellery) 90


Product Split 94

Stores 96

Outlook 97

CHAPTER 9 SIGNET GROUP 99

Company Overview 99


Table of Contents





Current Trading 103

Store Portfolio 107

Outlook 110

CHAPTER 10 SWATCH GROUP 112

Company Overview 112



Current Trading 116

Stores 116

Outlook 117

CHAPTER 11 TIFFANY 118




Current Trading 120

Store Portfolio 123

Outlook 124

CHAPTER 12 TSUTSUMI 125



Stores 127

Table of Contents




Outlook 128

CHAPTER 13 ZALE CORPORATION 129




Current Trading 131

Stores 132

Outlook 133

CHAPTER 14 GLOSSARY 134

Abbreviations 134

Financial Statistics – VAT 134

Jewellery Market Definition 135

Table of Contents




LIST OF TABLES

Table 1: Jewellery market – global consumer expenditure on jewellery and watches 2003-2008e 18

Table 2: Jewellery expenditure by region 2003-2008e 19

Table 3: Y-o-y change % in global jewellery spend by region 2003-2008e 20

Table 4: Jewellery expenditure by market segment 2003-2008e 21

Table 5: Jewellery and watch expenditure by product group 2003-2008e 34

Table 6: Jewellery brands global market shares 2003-2008e 37

Table 7: Jewellery and watch brands key operating statistics years ending 2007/08 40

Table 8: Jewellery and watch brands key operating statistics in US$ years ending 2007/08 41

Table 9: Jewellery market – global consumer expenditure on jewellery and watches 2003-2013 49

Table 10: Global expenditure by region 2008-2013e 50

Table 11: Y-o-Y change in jewellery spend by region 2008-2013 50

Table 12: Jewellery & watch expenditure by product group 2008-2013 53

Table 13: Jewellery expenditure by market segment 2008-2013 54

Table 14: Summary of spend and growth in luxury and mass market segments 2008-2013 56

Table 15: Summary of global jewellery expenditure by region 2008-2013 57

Table 16: Bulgari company overview 2008 60

Table 17: Bulgari trading record 2003-2008e 62

Table 18: Bulgari trading record in US$ 2003-2008e 62

Table of Contents




Table 19: Bulgari retail stores 2002-2007 66

Table 20: Finlay company overview 2008 69

Table 21: Finlay trading record 2004-2009e 71

Table 22: Finlay number of retail locations 2003-2008 73

Table 23: Gitanjali company overview 2008 75

Table 24: Gitanjali group trading record 2004e-2009e 77

Table 25: Gitanjali Jewellery division trading record 2004e-2009e 78

Table 26: Gitanjali group trading record in US$ 2004e-2009e 79

Table 27: Gitanjali jewellery division trading record in US$ 2004e-2009e 79

Table 28: LVMH Group company overview 2008 81

Table 29: LVMH trading record 2003-2008e 83

Table 30: LMVH watches & jewellery division trading record 2003-2008e 84

Table 31: LVMH trading record in US$ 2003-2008e 84

Table 32: LMVH watches & jewellery division trading record in US$ 2003-2008e 85

Table 33: Richemont company overview 2008 89

Table 34: Richemont trading record 2003-2008 92

Table 35: Richemont trading record in US$ 2003-2008 92

Table 36: Richemont jewellery and watch maisons trading record 2003-2008 92

Table 37: Richemont brands number of retail stores 2003-2008 96

Table 38: Signet Group company overview 2008 99

Table 39: Signet Group trading record in $ 2003-2008 101

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Table 40: Signet divisional trading record in $ 2003-2008 102

Table 41: Signet Group retail stores 2002/03-2007/08 107

Table 42: Signet US stores 2006-2008 108

Table 43: Signet UK stores 2006-2008 109

Table 44: Swatch Group company overview 2008 112

Table 45: Swatch group trading record 2003-2008e 114

Table 46: Swatch Group watches & jewellery division trading record 2003-2008e 114

Table 47: Swatch Group trading record in US$ 2003-2008e 115

Table 48: Swatch Group watches & jewellery division trading record in US$ 2003-2008e 115

Table 49: Tiffany & Co. company overview 2008 118

Table 50: Tiffany & Co. trading record 2004-2009e 120

Table 51: Tiffany & Co number of retail stores 2003-2008 123

Table 52: Tsutsumi company overview 2008 125

Table 53: Tsutsumi trading record 2004-2009e 126

Table 54: Tsutsumi trading record in US$ 2004-2009e 127

Table 55: Zale Corporation company overview 2008 129

Table 56: Zale Corporation trading record 2003-2008e 131

Table 57: Zale Corporation number of retail stores 2003-2008e 132

Table of Contents




LIST OF FIGURES

Figure 1: Global jewellery expenditure per region, % share 2003 & 2008e 21

Figure 2: Share of global jewellery expenditure per region 2003 22

Figure 3: Share of global jewellery expenditure per region 2008e 23

Figure 4: Japan jewellery retail spend and growth 2003-2008e 24

Figure 5: Asia-Pacific jewellery retail spend and growth 2003-2008e 26

Figure 6: Americas jewellery retail spend and growth 2003-2008e 29

Figure 7: European jewellery retail spend and growth 2003-2008e 31

Figure 8: Middle East jewellery retail spend and growth 2002-2007e 32

Figure 9: Product share of jewellery expenditure 2003 35

Figure 10: Product share of jewellery expenditure 2008e 36

Figure 11: Operating margins of jewellery and watch brands 2007/08 39

Figure 12: Key issues for global jewellery retailing 2008 42

Figure 13: Y-o-Y growth by region 2008-2013 51

Figure 14: Global jewellery expenditure per region 2008 & 2013 52

Figure 15: Polarisation in global jewellery retailing 2008 55

Figure 17: Bulgari product sales split 2003 & 2008e 64

Figure 17: Bulgari regional sales split 2003 & 2008e 65

Figure 18: Finlay sales % by product area, 2003/04 & 2008/09e 72

Figure 19: LVMH regional sales, watches & jewellery 2003 & 2008e 86

Figure 20: LVMH sales by product area, 2003 & 2008e 87

Figure 21: Richemont product sales split 2002/03 & 2007/08 94

Table of Contents




Figure 22: Richemont brands regional sales split 2002/03 & 2007/08 95

Figure 23: Signet Group product sales split 2002/03 & 2007/08 104

Figure 24: Signet Group geographic sales split 2002/03 & 2007/08 106

Figure 25: Tiffany & Co regional sales, watches & jewellery 2003 & 2008e 121

Figure 26: Tiffany & Co. sales by product area, 2003 & 2008e 122

EXECUTIVE SUMMARY




CHAPTER 1 EXECUTIVE SUMMARY

Key Findings • Global expenditure on jewellery & watches will accelerate over the next

five years, growing by 35% to $318bn by 2013

• The fastest growing regions will be Asia-Pacific and the Middle East – up by 60.7% and 49.4% respectively

• The Asia-Pacific region, which includes China and India, will overtake current leader, the Americas, in 2011

• The Middle East, Russia, China and India are set for rapid growth despite current economic turbulence – unlike the US where significant pressure is being put on the middle and lower end

• Luxury brands are driving growth and spending in the luxury segment will double over the next five years to $94bn

• The luxury segment will grow its share of global expenditure from 20% to just under 30% by 2013

• The global significance of brands is highlighted by the Richemont and Swatch groups commanding 7.2% each of global expenditure ......

• ...... while a retail business such as the Signet Group only commands 1.8% despite its dominance in the US and UK markets

• Vertically integrated businesses with control of their supply chain are the most profitable

• Rising commodity prices and lower demand are squeezing mass market margins, whereas the luxury segment appears insulated

• Mass market retailers need to differentiate on more than price and should look at other sectors for inspiration

• The Internet is rapidly becoming a significant channel and is an opportunity to target and grow the male market extensively

EXECUTIVE SUMMARY




Main Conclusions

• Global expenditure on jewellery & watches will accelerate over the next five years, growing by 35% to $318bn by 2013. As rapid rises in newer markets compensate for slowdowns in mature markets we expect an average of 6.0% growth per year over the next five years, taking the market from $236bn in 2008 to $318bn in 2013.

• The Asia-Pacific region is set to consolidate its position as the largest market. Sales will grow by 61% over the next five years adding $41bn to existing spending and contributing 51% to total global growth as millions of consumers in India and China, as well as other fast-growing economies in the region, start to spend more money on jewellery as a status and fashion statement rather than just a store of wealth. Their focus will move from purchasing by carat weight to branding and design, boosting the value of the market.

• Asia-Pacific will overtake the Americas as the leading region for jewellery sales in 2011. The Americas (dominated by the United States) currently account for 34.0% of global spending on jewellery and watches. Slow growth in 2008 and 2009 will cost its crown. Asia-Pacific will grab top slot, going from 29% in 2008 to 35% share by 2013 widening the gap to 3.7 points.

• The Middle East and Other will be the second fastest growing region over the next five years at 49%. Up to 2008 the smallest region in the world in terms of spending, the Middle East and Other market is seeing explosive growth as income from oil and other commodities is spent on consumer goods, and luxury brands open up stores in new regional super-malls. The market will overtake Japan this year and be worth $32bn in 2013 – for a 10.2% global share compared with Japan’s 6.9%.

• The economic slowdown in the United States is putting significant pressure on the largest national jewellery market. The US market, particularly important for diamond sales, is suffering from the pressure on consumers' budgets, especially from higher oil prices and the effects of the credit crunch, with many retailers seeing falling comparable store sales. We expect slow growth in 2008 and 2009, with some recovery in 2010.

EXECUTIVE SUMMARY




• Despite the current economic turbulence, the rapid growth in markets like the Middle East, Russia, China and India will sustain the rate of increase in demand worldwide. Despite rises in precious metal prices affecting gold consumption in India, we predict that increasing incomes will encourage consumers to spend more at the luxury branded end of the market, sustaining global growth in 2008.

• Luxury brands are driving growth. Spending in the luxury segment will double over the next five years to $94bn. This will increase its share of the market from 19.9% to 29.6%. The turnover of major luxury retailers and brand owners like Richemont, LVMH, Swatch Group and Tiffany & Co is expanding faster than the market as a whole. They are benefiting from exposure to the top end of the market (which has so far seen little net impact from economic problems like soaring oil prices and the credit crunch) and from having brands with global appeal.

• The global significance of brands is highlighted by the Richemont and Swatch groups commanding 7.1% each of global expenditure. The jewellery and watch market is led by two Swiss-based companies that have capitalised on the reputation of watchmaking in Switzerland to corner a major share in the luxury watch market, with sales of prestigious mechanical watches, rather than electronic ones, and jewellery watches performing particularly strongly.

• However a retail business such as the Signet Group only commands 1.8% despite its dominance in the US and UK markets. As retail brands rather than product brands, mass market retailers have little to differentiate themselves from each other apart from price and service proposition. Expansion in mature markets is via acquisition of competitors or of resident local players if moving into new markets.

• Luxury brands also enjoy higher profit margins than mass market retailers. The likes of Richemont and LVMH have a stable of high profile brands that have global appeal and which they can sell directly to consumers via their own stores or via wholesale and franchise accounts. Greater brand control over their distribution channels has meant that these brands are retaining their status and this is reflected in their margins. Also, jewellery & watches are often an extension of a luxury clothing or accessories brand and

EXECUTIVE SUMMARY




can be presented in a much more inspiring environment than a typical jewellery specialist’s store.

• Vertically integrated businesses with control of their supply chain are the most profitable. The most profitable and successful brands and retailers are those that have control of their supply chain from raw materials to sale in the store. The common factor to the most profitable groups profiled in this report is that they control the production of a large proportion of what they sell. This gives them reliable supply, control over quality and unique designs. Those that do not have this are likely to be under greatest pressure from competition on price for similar product.

• Rising commodity prices and lower demand are squeezing mass market retailers’ margins further. Whereas the luxury segment also has to deal with rising commodity prices in precious metals and skill shortages, its premium price position – enforced by strong design values – and affluent customer base make rises easier to pass on, insulating it from margin squeeze. Mass market retailers on the other hand, with their less affluent customers who feel the pressures of the global credit crunch much more, find it harder to pass on price rises because there is little obvious justification or benefit to customers.

• Mass market retailers need to differentiate on more than price and should look at other sectors for inspiration. Jewellery specialists need to focus on innovation – in product, service, delivery channels and store environment. Investment in unique product with continual range innovation, as happens in the fashion sector, backed up with high quality service and distinctive store environments builds loyalty and ensures a retailer is top of mind when jewellery shopping. It also removes the focus on price and events to drive sales.

• The Internet is rapidly becoming a significant channel and should reach $15bn of sales in the US, Japan and Europe alone by 2013. The Internet provides vast opportunities to widen both geographical and customer bases and provides new ways of encouraging shoppers to buy – particularly men who are inveterate online shoppers and tend to feel intimidated by traditional jewellery retail environments. This offers high growth opportunities in watch sales and gifting.

EXECUTIVE SUMMARY




• Indeed men are creating new growth potential. The market in both jewellery & watches is set to grow consistently over the next five years with fashion driving the former and men the latter. Men are a strong target for watches – an acceptable piece of jewellery for men – and for gifts for partners. As men spend more money on their appearance in many developed markets and, indeed, developing ones we believe that expensive watches will increasingly be seen as an essential part of the male wardrobe.

• We predict that sales of jewellery will grow from $194bn to $263bn over the next five years while the smaller market segment of watches will rise from $42bn to $55bn. We expect both major market segments to see rapid growth in spending as consumers in developing markets acquire a taste for branded jewellery and status symbol watches.

MARKET ANALYSIS




CHAPTER 2 MARKET ANALYSIS

Jewellery Market Definition

• This report focuses on the retailing of jewellery made of precious metals, diamonds and other precious stones (i.e excluding costume jewellery) and watches, including both the mass and luxury branded segments. Our market is made up of consumer expenditure on these goods.

Table 1: Jewellery market – global consumer expenditure on jewellery and watches 2003-2008e

Total Sales Y-o-Y Change

Year $bn %

2003 174,616 4.52004 184,485 5.72005 194,514 5.42006 208,109 7.02007 221,840 6.6

e2008 236,123 6.4 Change % 2003-2008e 35.2%

Source: Verdict Research V E R D I C T

• We have divided the market regionally into Japan and the rest of Asia-Pacific (which includes China, India, and Australasia); the Americas, which is primarily the USA; Europe, which includes Russia; and the Middle East and Others, which is primarily the Middle East.

• Key industry players have been selected for a range of profiles, based primarily on size of turnover: from middle and mass-market operators like the Signet Group and Zale Corporation to top end luxury goods groups like Richemont and LVMH. Other smaller operators, like India's Gitanjali Gems are also considered on the grounds of their future potential for growth.

MARKET ANALYSIS




Introduction

Table 2: Jewellery expenditure by region 2003-2008e

2003 2004 2005 2006 2007 e2008 Region $m $m $m $m $m $m Americas 64,107 67,614 69,532 74,111 77,732 79,913 Rest of Asia Pacific 41,284 45,434 50,291 55,727 61,897 68,304 Europe 40,274 41,229 42,527 44,120 45,791 47,348 Middle East & Others 12,406 13,575 15,037 16,436 18,108 21,650 Japan 16,545 16,634 17,126 17,715 18,313 18,908 Total World 174,616 184,485 194,514 208,109 221,840 236,123 Note: Figures subject to computer rounding, which may affect totals Source: Verdict Research V E R D I C T

• The largest regional market is Asia-Pacific including Japan while the single largest market globally is the United States. Though the US grew healthily along with consumer spending levels, up to 2007, it has been of declining importance relative to the rapidly-growing Asia-Pacific region, which includes China and India as well as numerous other fast growing smaller economies like Korea and Taiwan.

• At the same time, the recent rise in the oil price as well as the absence of severe outside shocks – like the Gulf war in 2003 – has helped a rapid take-off of the Middle East region. Africa has also seen faster economic growth on the back of rising commodity prices, with the first signs of the emergence of a market for luxury goods in countries like South Africa.

• Jewellery and watches have in most markets traditionally been sold through either small independents or, particularly in Japan, through department stores. This situation is being modified by the expansion of major luxury groups and their business model of 'brand control' involving the opening of either wholly-owned or franchise stores.

• Department stores have come under pressure in markets like Japan and Germany as they have struggled to attract footfall from a less confident consumer. Also, there has been the emergence of mass market non-specialist competition from retailers like Wal-Mart in the US and, more recently, the rise of Internet pureplay operators like Amazon and Blue Nile.

MARKET ANALYSIS




• Another key channel is duty free – particularly airport retailing. A lot of expenditure on premium jewellery and watches, as with other areas of luxury spending, is linked with travel. Companies like Swatch aim to exploit this with their own retail operations, but it can be a volatile channel, as was demonstrated by the problems following SARS in Asia in 2003 and 2004.

• The overall market is not as volatile as the luxury component, tending to be stabilised by the middle and lower segments. Growth was slightly below average in 2003, but accelerated to reach a peak in 2006 of 7.0% driven by faster growth in the Americas, Europe and the Middle East. The following year saw a slowdown in the Americas, expected to intensify in the rest of 2008, but other areas, particularly Asia excluding Japan, have remained exceptionally buoyant.

Table 3: Y-o-y change % in global jewellery spend by region 2003-2008e

2003 2004 2005 2006 2007 e2008Region % % % % % % Americas 4.6 5.5 2.8 6.6 4.9 2.8Rest of Asia Pacific 9.4 10.1 10.7 10.8 11.1 10.4Europe 2.3 2.4 3.1 3.7 3.8 3.4Middle East & Others 0.0 0.0 0.0 0.0 0.0 0.0Japan -0.2 0.5 3.0 3.4 3.4 3.2 Total World 4.5 5.7 5.4 7.0 6.6 6.4 Source: Verdict Research V E R D I C T

• The extent of the problems suffered in 2003 and 2004 by the luxury market segment, defined as premium watch and jewellery brands like Tag Heuer and Bulgari, is demonstrated by the following figures. These are taken from the Verdict Research report, Global Luxury Retailing 2007. They show a marked contraction in the upper end of the market at a time when the rest of the sector was undergoing rapid expansion.

• With the upturn in luxury spending since 2005 and the recovery from factors like the Gulf war and SARS, the upper segment has actually been leading the market as the main luxury brand groups have seen buoyant sales. This has been particularly true of the very top end which, according to groups like Richemont, has continued to expand despite the problems being felt by the global economy such as financial instability and rising commodity prices.

MARKET ANALYSIS




Table 4: Jewellery expenditure by market segment 2003-2008e

2003 2004 2005 2006 2007 e2008Market Segment $m $m $m $m $m $m Luxury 29,602 27,840 31,028 37,253 42,549 47,062Y-o-Y change % -6.4 -6.0 11.5 20.1 14.2 10.6Mass Market 145,014 156,645 163,486 170,856 179,291 189,061Y-o-Y change % 7.0 8.0 4.4 4.5 4.9 5.4 Total 174,616 184,485 194,514 208,109 221,840 236,123 Note: Figures subject to computer rounding, which may affect totals Source: Verdict Research V E R D I C T

Regional Markets

Figure 1: Global jewellery expenditure per region, % share 2003 & 2008e

36.7

23.6 23.1

9.57.1

33.8

28.9

20.1

8.0 9.2

0

5

10

15

20

25

30

35

40

Americas Asia-Pacific Europe Japan Middle Eastand Other

%

2003 2008


MARKET ANALYSIS




Figure 2: Share of global jewellery expenditure per region 2003

2003

Americas36.7%

Asia-Pacific23.6%

Europe23.1%

Japan9.5%

Middle East and

Other7.1%


MARKET ANALYSIS




Figure 3: Share of global jewellery expenditure per region 2008e

2008

Asia-Pacific28.9%

Europe20.1%

Japan8.0%

Middle East and

Other9.2%

Americas33.8%


Japan

• Japan spearheaded the growth of luxury retail brands in the 1980s and 1990s and accounted for around a quarter of all global luxury sales – more if the spend Japanese tourists make abroad is included. It remains an important market for many of the premium watch and jewellery brands, for instance making up 13.0% of LVMH's sales of watches and jewellery in 2007 and 17.0% of Tiffany & Co's.

MARKET ANALYSIS




Figure 4: Japan jewellery retail spend and growth 2003-2008e

16.5 16.6 17.1 17.7 18.3 18.9

-0.20.5

3.03.4 3.4 3.2

0.0

10.0

20.0

30.0

40.0

2003 2004 2005 2006 2007 2008e

$bn

-8.0

-4.0

0.0

4.0

8.0 %


• However, we estimate Japan’s share of the world market has shrunk to 8.0% in 2008. The weakness of the Japanese economy and its currency have been the major factors behind this. The decline in the strength of the yen against the euro has meant brands have had to increase prices for imported luxury goods in Japan, which has had a further negative effect on sales.

• However, it is not just about money. Consumer spending patterns have changed, with a trend that is likely to become evident in other mature luxury markets in the future. Some Japanese luxury consumers are becoming tired of expensive goods, instead investing in studying or on spas and recreation – an area luxury brands are expanding into themselves, with hotels and spas.

• Department stores are particularly important for the distribution of jewellery and watches in the Japanese market. They have recently undergone

MARKET ANALYSIS




significant consolidation, with mergers between the larger groups aimed at cutting costs. Most recently Isetan and Mitsukoshi, which host a third of Tiffany & Co’s Japanese boutiques, completed a merger in April 2008.

• In response to this stagnant environment, luxury brands have been extending existing spaces or opening architecturally flamboyant flagship stores in Tokyo’s upmarket retail area of Ginza to lure back their wealthy Japanese consumers by offering a luxury retail experience.

• In 2002, seven luxury brands: Bulgari, Burberry, Cartier, Hermès, Harry Winston, Louis Vuitton and Tiffany & Co established the Ginza International Luxury Committee to orchestrate joint marketing campaigns to enhance the image of Ginza as a top shopping destination. Since then, Ginza has been witnessing the opening of innovative brand-conscious architecture, as luxury brands seek to outshine each other’s pioneering store designs.

• Despite its economic problems Japan is still an important market. Tokyo shoppers, with their discernment for quality and design, offer an insight into how new products will be received elsewhere in the world. For instance Bulgari launches some designs in Japan to measure market reception before launching in the US and Europe.

• Other specialist retailers have sought to cater for Japanese consumers’ fashion awareness by creating their own product ranges and so a point of difference from the rest of the market. For instance, jewellery chain Tsutsumi makes 90.0% of its own product in its own factories. It achieves high operating margins and slow but steady growth in a very difficult market.

• It is also considered an attractive market for outsiders despite its difficulties. In April 2008 the Hong Kong based company Digico Holdings bid for the 100 store chain specialist Verite. Digico is affiliated with the Indian specialist Gitanjali which has entered the US market via the acquisition of the Rogers and the Samuels retail chains.

Asia-Pacific

• The rest of the Asia-Pacific region includes two major jewellery consumer markets – China and India – as well as numerous smaller fast-growing ones

MARKET ANALYSIS




like Taiwan and South Korea. Australia’s economy has also seen rapid expansion in the past few years, partly due to the commodity price boom.

• As a consequence, Asia-Pacific excluding Japan is the second most important region in terms of jewellery expenditure, ahead of Europe and only behind the Americas. But it has made the greatest contribution to growth in the global market over the past five years, adding $27bn to expenditure.

Figure 5: Asia-Pacific jewellery retail spend and growth 2003-2008e

41.3 45.4 50.3 55.7 61.9 68.3

9.410.1

10.7 10.8 11.110.4

0.0

25.0

50.0

75.0

100.0

2003 2004 2005 2006 2007 2008e

$bn

-4.0

0.0

4.0

8.0

12.0 %


• Now that the Japanese market is virtually saturated, China is regarded as the industry’s Promised Land. It has been estimated that a country acquires an appetite for luxury goods when the average output per person reaches $5,000 to $7,000 a year, which was the level of prosperity in Japan at the end of the 1970s. In China’s wealthiest cities GDP per person was around $7,000 in 2006.

• China is a major consumer and producer of jewellery, exporting $8bn worth a year, according to industry estimates. It has a large volume watchmaking

MARKET ANALYSIS




industry which, according to the Federation of the Swiss Watch Industry, exported 638m watches in 2007, but at a very low average price of just $2.

• The size of the potential market is enormous. In 2007 there were estimated to be currently over 40m Chinese consumers of luxury goods, which is set to rise to 160m by 2011. China has 11 cities with a population of over 4m and around 34 cities with a population of at least 2m people.

• Though offering huge potential there are some challenges for investors in this market. Unlike the mature luxury department store formats of the West, in China there is a lack of suitable distribution channels as well as various economic and political concerns. The jewellery sector is highly fragmented, with an estimated 10,000 retailers. Most are small and operate only on a regional basis. With income inequality rising and mounting criticism of ostentatious consumption, the Chinese government increased taxes in 2006 on a number of items including imported luxury goods.

• China also has complex structures that are difficult for foreign luxury brands to deal with. For instance, there are four administrative districts in central Shanghai: each has its own VAT rate, requiring trading units to set a transfer pricing policy for moving stock from one store to another.

• That said there is considerable investment in retail taking place. Shanghai is China’s commercial capital and richest city and US department store Saks plans to open its first luxury store in Shanghai before the end of 2008 to sell branded high end fashion, shoes, jewellery, accessories, handbags, fragrances and cosmetics. Taiwanese group Pacific Sogo and the owner of Harvey Nichols, Dickson Concepts with its Seibu stores, is rapidly opening more stores throughout the region. Bulgari opened its biggest store in China in 2007, not in Shanghai, but in the industrial city of Shenyang, at the heart of China’s North-eastern rust-belt.

• The Chinese tend to spend on luxury goods when they travel. Visits to Hong Kong are characterised by spending on luxury goods, where taxes are lower. While establishing a brand can be expensive and complex, once it is established in China, tourists can be tapped further when they travel – and Chinese visits are overtaking Japanese in many European countries.

• India is another attractive market for luxury products, with its expanding middle class and relaxation on foreign investment in the retail sector. However in both regions it is hard to find the type of retail areas that will fulfil

MARKET ANALYSIS




customers’ requirements of a luxurious environment. While China has seen huge growth in big shopping malls, particularly in Shanghai, India lags far behind in retail infrastructure. In India many brands are forced to trade in hotel complexes rather than on high streets or in malls, which severely limits retail space and expansion. Like China, jewellery retailing is also highly fragmented, with around 97.0% of sales being made through traditional small, often single-store, operators.

• While finding suitable retail space represents one of the biggest problems for expansion in the Indian market, there are signs that this is beginning to improve. As many as 600 new malls are reported to be in the pipeline, though often on a much smaller scale than in the Gulf countries. The influential Gitanjali Group said it is planning a string of high-end wedding and luxury malls in eight cities across India. Other developments include United Breweries Group, which is planning a 120,000 sq ft luxury development in Bangalore due to open before the end of 2008. It is reported to have signed up luxury brands including Rolex, Omega and Mont Blanc.

• India, like China, is an exceptionally important player in the production and trade of jewellery, particularly for diamonds. In the year to March 2008, it exported $20.9bn worth of gems and jewellery, up 9.0% in local currency terms. It also has a traditionally high level of consumption of jewellery, with consumers seeing gold and diamond jewellery as an investment and purchasing large amounts of jewellery for the wedding season at the end of the year – which presents huge potential for the likes of the Bulgari and Richemont brands. The Akshaya Thritiya festival, held at the end of April and the beginning of May and believed to be an auspicious time for jewellery purchases, is also an important buying occasion.

• However, current high import duties in India make luxury goods expensive and affluent Indian consumers have a tradition of travelling overseas to make their luxury purchases – particularly to Dubai.

• Local manufacturers are keen to exploit opportunities presented by the market including the potential to develop local brands. The Tanishq brand, owned by watch and jewellery manufacturer Titan Industries, which is part of the TATA group, now has 91 stores with an annual turnover of $275m.

MARKET ANALYSIS




Americas

• The Americas are the second largest market in the world if Japan is included in the Asia-Pacific region – though as a mature market it has very different dynamics to the rest of the region. The Americas is dominated by the United States, with an estimated 78.6% share of the expenditure on jewellery and watches. Though it is host to major specialist multiple operators like Signet Group and Zale Corporation, their shares of the US market remain in low single figures and the leading retailer of jewellery is actually a non-specialist, Wal-Mart. The specialist sector is highly fragmented with over 23,000 retail operators, a figure which has been only gradually falling over the last decade.

• It is the largest market for diamond jewellery, which makes up 55.0% of sales according to industry estimates, with the US accounting for 50.0% of all

Figure 6: Americas jewellery retail spend and growth 2003-2008e

64.1 67.6 69.5 74.1 77.7 79.9

4.65.5

2.8

6.6

4.9

2.8

25.0

50.0

75.0

100.0

125.0

2003 2004 2005 2006 2007 2008e

$bn

-8.0

-4.0

0.0

4.0

8.0 %


MARKET ANALYSIS




jewellery of this kind sold globally. Other product areas including gold jewellery, are correspondingly less important than in other markets.

• The US jewellery market has also seen strong growth in Internet operators’ share, estimated to make around 7.0-8.0% of all retail sales, up from just over 2.0% a decade ago. Leaders in this channel of distribution include specialist Blue Nile and jewellery auction site Bidz.com, as well as Amazon.

• Other markets in the Americas such as Mexico and Brazil are much smaller but are seeing more dynamic growth and this is expected to provide some support to the region’s market in 2008. Mexico in particular has a comparatively well developed department store sector, led by local retailers El Puerto de Liverpool and Palacio de Hierro, which is an attractive channel of distribution for major brands.

• There is a divergence in the US market in 2008 between the upper and middle-to-lower segments. Zale Corporation has been forced to close stores and cut costs, as well as discounting heavily, while Signet Group has seen declining like-for-like sales in the US but, on the other hand, the upmarket retailer Tiffany & Co, has kept same store sales level, partly due to buoyant tourist trade at its New York flagship.

Europe

• The European market for watches and jewellery is led by Italy which, as well as being a major producer and exporter of jewellery in its own right, has very high consumption levels per capita. The value of the Italian market is also boosted by tourist spending in major cities like Venice, Rome and Florence.

• The second largest market in Europe is the UK, concentrated on the London market which has been supported both by wealthy expatriates from other countries as well as by high earners in the financial sector. Taking advantage of this, major luxury brands have recently invested heavily in store refurbishments and openings. Tiffany & Co, for instance, makes more than half its European sales in the UK and in March 2008 opened a store in Terminal 5 at Heathrow Airport. It plans to open a further store at the Westfield shopping centre in West London in Autumn 2008.

MARKET ANALYSIS




• Redundancies in the City of London in response to losses caused by the collapse of the US sub prime mortgage market could slow sales, but we believe this will not hit the core luxury market as much as products not covered here, such as prestige cars, private planes and yachts.

The third largest E

• The third highest European expenditure on jewellery and watches is in Germany. While Germans are not heavy spenders on jewellery, its spend per head on watches is higher than other markets. As the German economy recovers, its retail culture is beginning to move away from its discount bias towards higher spending as its economy improves and we expect it to generate much higher growth for luxury retail brands.

• Though not part of the EU 27, Russia is becoming a key influence on the performance of luxury brands. For example, jewellery and watch house Cartier opened its third store in Moscow in 2007 and parent Richemont saw its sales in Russia rise 38.0% in the year to March 2008. Enjoying the

Figure 7: European jewellery retail spend and growth 2003-2008e

40.3 41.2 42.5 44.1 45.8 47.3

2.3 2.43.1

3.7 3.8 3.4

0.0

20.0

40.0

60.0

80.0

2003 2004 2005 2006 2007 2008e

$bn

-8.0

-4.0

0.0

4.0

8.0 %


MARKET ANALYSIS




prosperity that rising oil prices have brought them, wealthy Russians are not just buying high end goods from luxury brands’ new stores in Moscow but travelling throughout Europe and buying in the brands’ home markets, too.

• To limit their exposure in a market still considered risky, most luxury brands have operated through franchises or with local partners, such as Mercury, Bosco di Ciliegi and JamilCo, which reduces their profit. Mercury is Russia’s largest luxury goods retailer which works in partnership with global brands including the jewellers Tiffany & Co and Bulgari.

• The European market overall has shown fairly sluggish growth since 2003, never exceeding 4.0% a year, held back by slow consumer spending increases in key countries like Italy and Germany, even if 2006 and 2007 have seen some acceleration. In 2008, despite the rapid increases in Russian spending, we expect the region’s market as a whole to slow again.

Middle East & Others

Figure 8: Middle East jewellery retail spend and growth 2002-2007e

12.4 13.6 15.0 16.4 18.1 21.6

1.7

9.410.8

9.3 10.2

19.6

0.0

10.0

20.0

30.0

40.0

2003 2004 2005 2006 2007 2008e

$bn

-15.0

0.0

15.0

30.0

%


MARKET ANALYSIS




• Though political unrest in the Middle East and war in Iraq had a negative impact in the early part of the century, the Middle East has enjoyed particularly strong growth from 2004, thanks mainly to the development of huge luxury shopping areas.

• Dubai has been a main factor in the rapid growth of the past three years. Luxury retail is all about mall development – with bigger and more spectacular malls being unveiled every year. For instance, the giant Mall of the Emirates opened in stages from 2005 onwards with 2.4m sq ft of retail space hosting branches of Bulgari, Mont Blanc and Tiffany & Co. It is set to be surpassed later in 2008 by the giant Mall of Arabia, with around 1,000 stores and a gross leasable area of 4.0m sq ft just in its first phase.

• Local operators have sprung up to cater for the rapid growth in the local jewellery market, for instance Damas Jewellery which has around 75 stores. It is one of the four companies that in 2003 formed a joint venture, Style Avenue Middle East, to own and operate Saks Fifth Avenue department stores in the Gulf region under licence.

• A number of other upmarket department stores are considering opening branches in Dubai malls. In March 2007, French operator Galeries Lafayette announced it would be opening a 192,000 sq ft branch in the Dubai Mall by the end of 2008. Meanwhile the $825m sale of Barneys New York in 2007 to the Dubai-based Istithmar investment firm may open up the possibility of an opening of the US luxury goods department store in the Middle East.

• Coinciding with the retail expansion is the increase in tourist traffic through Dubai, especially of high-spending European and Japanese visitors. Dubai’s projection of 15m visitors by 2010, once dismissed as optimistic, now looks in reach, despite conflict in the Middle East. India is proving to be another captive market for luxury retailers in Dubai as affluent Indians fly there for regular shopping trips.

MARKET ANALYSIS




Product Trends

Table 5: Jewellery and watch expenditure by product group 2003-2008e

2003 2004 2005 2006 2007 2008eProduct Group $m $m $m $m $m $m Jewellery 142,791 151,690 159,893 171,208 182,362 193,967Y-o-Y Change % 4.5 6.2 5.4 7.1 6.5 6.4Watches 31,825 32,794 34,621 36,900 39,177 41,770Y-o-Y Change % 4.3 3.0 5.6 6.6 7.0 6.8 Total 174,616 184,485 194,514 208,109 221,840 236,123 Source: Verdict Research V E R D I C T

• Jewellery is by far the larger of the two product sectors, making up some 82.1% of the market in 2008, while watches comprise just 17.9%. Jewellery purchases have been affected by the rise in the price of precious metals. In the case of gold, while in value terms many markets have continued to grow, volumes sold have declined markedly. This is particularly the case in price sensitive markets like India. This effect is expected to reduce the potential for growth in the jewellery sector for 2008 below that for watches.

• The watch market lagged at the beginning of the decade, hit in the middle and lower segments in some regions by the rise of the mobile phone both as a status toy and more practically as a means of telling the time.

• However, the upper segment is now booming on the back of considerable product innovation and the prestige status of really expensive watches incorporating precious metals, mechanical movements and even ornamental jewellery.

• These high end watches are predominantly sourced from just one country, Switzerland, which has recently seen a boom in its exports. In 2007 they were worth Sfr 16.0bn ($13.1bn), up 16.2% on 2006, with watches in 18 carat gold up 24.9% on the previous year. Sales value of mechanical watches rose 19.3%.

MARKET ANALYSIS




• As a result, the watch sector has outgrown spending on jewellery in three of the last four years. The principal beneficiaries of these trends have been Swiss-based groups like Rolex, Richemont and Swatch, whose sales of top end brands have boomed in the past year.

• Other luxury companies with less exposure to the premium watch market have expanded their presence in the sector. Tiffany & Co signed a 20-year agreement with the Swatch Group in 2007 for the production, marketing and distribution of watches under the Tiffany name. Meanwhile, LVMH acquired top end watch brand Hublot in April 2008, widening its brand portfolio in the sector further.

Figure 9: Product share of jewellery expenditure 2003

2003

Jewellery81.8%

Watches18.2%


MARKET ANALYSIS




Figure 10: Product share of jewellery expenditure 2008e

2008

Jewellery82.1%

Watches17.9%


MARKET ANALYSIS




Company Market Shares

Table 6: Jewellery brands global market shares 2003-2008e

2003 2004 2005 2006 2007 e2008Company % % % % % % Richemont 6.0 6.0 6.5 6.8 7.1 7.1Swatch Group 5.7 5.8 6.0 6.0 6.7 7.1Signet 1.7 1.7 1.8 1.8 1.9 1.8LVMH 1.6 1.5 1.6 1.8 1.8 1.8Tiffany 1.4 1.4 1.5 1.5 1.6 1.7Gitanjali Gems --- 0.2 0.3 0.4 0.7 1.0Bulgari 1.4 1.4 1.4 1.3 1.3 1.2Zale 1.5 1.5 1.5 1.4 1.2 1.2Gitanjali Gems --- 0.2 0.3 0.4 0.7 1.0Finlay 0.4 0.4 0.4 0.4 0.4 0.5Tsutsumi 0.4 0.4 0.4 0.4 0.4 0.3 Total Market Share 20.1 20.3 21.4 21.8 23.1 23.7 Note: Market shares are for calendar years, based on companies’ estimated brand sales at full retail prices


• For market shares we have estimated individual companies' global sales at full retail prices, taking account of the mark up that retailers can be expected to make on what they pay on a wholesale basis.

• There is a virtual tie at the top of the table between Richemont and Swatch Group, both of which benefit from their importance in the high end watch market. They have both profited from having a portfolio of high profile names, including Cartier, Jaeger-LeCoultre and Vacheron Constantin for Richemont and Blancpain, Breguet and Omega for Swatch.

• It is no coincidence that they also enjoy similarly high operating margins of just under 21.0%, ahead even of their rival international luxury group LVMH. Some of the common factors that make them so profitable include the ownership of almost all the watch brands they sell, their scale of operations

MARKET ANALYSIS




and their control of the whole value chain, in many cases right from watch component level up to the sale to the final consumer.

• The Signet Group, which does not have the same market penetration as the largest two players because of its lack of wholesale distribution, is nevertheless the largest specialist player in the largest jewellery market, the US. Though it suffers from competitive pressures in fragmented markets, it also enjoys considerable scale economies in areas like marketing, sourcing and store operations. Its operating margin, though low by comparison with the luxury players, is respectable when set against local rivals like Finlay and Zale Corporation.

• Luxury giant LVMH is a comparative newcomer to the field of jewellery and watches, having only set up its division in this sector in 1999. Its profitability is not as great as its luxury competitors Swatch Group and Richemont, but is rising rapidly as it acquires scale and efficiency. Its concentration on store-based retailing rather than wholesale distribution means the overall value of its brand share is nowhere near as great as these two.

• Tiffany & Co has increased market share gradually over the past five years due to store expansion. As with the two leaders, it enjoys high margins because it is seen first and foremost as a product brand just as much as a retail brand, with consumers paying to have Tiffany & Co on their jewellery and watches. It, too, controls the production process, manufacturing more than half of its jewellery and processing two-fifths of the diamonds it sells.

• Indian-based jewellery manufacturer and retailer Gitanjali is the newcomer to the pack of leading global players, having moved into the US market with its acquisition of Samuels Jewelers in December 2006 and Rogers Jewelers in November 2007. It also operates 38 stores in the Indian market and its brands have around 1,250 points of sale across India. It is intent on moving in the opposite direction from the luxury groups, up the value chain from manufacturing into branded distribution and retailing. It is also an affiliate of Hong Kong based Digico Holdings which has ventured into the Japanese market with the bid for local Japanese specialist Verite.

• Bulgari, though close to average in profitability, has actually seen a slight decline in its share of the market for a number of reasons. First its sales growth has not been as dynamic as some players. Also it has diversified into other areas such as accessories and perfumes.

MARKET ANALYSIS




• The smallest brand listed here, Tsutsumi, is one of Japan's largest specialist operators and has a record of steady, profitable growth. Again it controls its own production – and reaps the benefit of an above average profit margin.

Figure 11: Operating margins of jewellery and watch brands 2007/08

2.1

4.2

6.9

9.6

13.2

15.1

15.6

16.6

16.9

18.0

20.6

20.9

0.0 5.0 10.0 15.0 20.0 25.0

Finlay

Zale

Gitanjali

Signet Group

Average

Bulgari

Average

Tsutsumi

LVMH

Tiffany

Swatch Group

Richemont

%


MARKET ANALYSIS




Key Operating Statistics

Table 7: Jewellery and watch brands key operating statistics years ending 2007/08

Year to Currency SalesY-o-Y

Growth Op

Profit Op

MarginCompany % % % Bulgari Dec-07 € 1,091 8.2 165 15.1Finlay Jan-08 $ 836 13.1 17 2.1Gitanjali Gems Mar-08 Rs 21,621 93.8 1,484 6.9* LVMH Dec-07 € 833 13.0 141 16.9Richemont Mar-08 € 5,302 9.8 1,108 20.9Signet Group Jan-08 $ 3,665 3.0 351 9.6* Swatch Group Dec-07 SFr 4,456 19.7 920 20.6Tiffany Jan-08 $ 2,939 14.8 530 18.0Tsutsumi Mar-08 ¥ 31,706 4.2 5,251 16.6Zale Corporation Jul-07 $ 2,437 -0.1 103 4.2

* Jewellery & watches divisions only Note: Rs=Rupees, SFr=Swiss Francs


MARKET ANALYSIS




Table 8: Jewellery and watch brands key operating statistics in US$ years ending 2007/08

Year to * Revenue * Operating Profit Company $m $m Bulgari Dec-07 1,473 222Finlay Jan-08 836 17Gitanjali Gems Mar-08 537 37LVMH Dec-07 1,125 190Richemont Mar-08 7,514 1,570Signet Group Jan-08 3,665 351Swatch Group Dec-07 3,712 766Tiffany Jan-08 2,939 530Tsutsumi Mar-08 278 46Zale Jul-07 2,437 103 * Converted at average exchange rates for financial years Source: Verdict Research V E R D I C T

OUTLOOK & FORECAST




CHAPTER 3 OUTLOOK & FORECAST

Key Issues

Figure 12: Key issues for global jewellery retailing 2008

Key issues for

global jewellery retailing

2008Physical

distribution channels

Internet

Economic slowdown

Ethical concerns

Commodity prices rise

Value chain integration

Key issues for


2008Physical


Internet

Economic slowdown

Ethical concerns



Key issues for


2008Physical


Internet

Economic slowdown

Ethical concerns




Where Will Global Economic Slowdown Bite?

• Many economic institutions, in particular the IMF, have become considerably more gloomy about the economic outlook for 2008 and beyond. In April, the IMF downgraded its forecasts for global economic growth in 2008 from 4.2% to 3.7%, a pronounced slowdown on 2007's 4.9% expansion.

• The IMF forecasts the US economy will go into a mild recession in 2008 and see virtually zero growth in 2009, while the Euro area, the UK and Japan will all see it slow to under 2.0%. By contrast, China is forecast to grow at 9.3% in 2008 and 9.5% in 2009, with India following it at 7.9% and 8.0%.

OUTLOOK & FORECAST




• The main risks it sees are from protracted financial market turmoil and knock-on effects from the US housing sector and from the problems in controlling inflation in emerging countries.

• The impact on growth in the global jewellery market is highly dependent on the performance of two key markets: the United States and the Asia-Pacific region. The Americas (79.6% of which is accounted for by the US) account for 34.0% of the market and we expect it to create 22.4% of the growth in the next five years, while Asia-Pacific (excl Japan) makes up 28.9% of spend, but we expect it to generate half of the growth in the next five years. Including Japan it makes up 41.8% of spend and 54.3% of projected growth.

• In both regions, economic problems can be expected to have their worst effects on consumers lower down the economic spectrum. The sub prime crisis and rising fuel costs are likely to impact on middle-to-lower income consumers in the US, though there may be some effects at the upper end from employment and bonus cutbacks in the financial sector.

• In emerging economies like China and India, inflation in basic items like foodstuffs and fuel are likely to have a similar pattern of impact, with those at the top end of the income scale remaining relatively unscathed because of the low proportion of their spending accounted for by such basics.

• Results for the first quarter of 2008 are varied. For instance, while Richemont and LVMH's sales growth actually accelerated, Bulgari saw a marked downturn, particularly in Europe and the US. In the mass market, US retailer Zales only managed to increase sales in February, March and April by aggressive clearance activity, while Signet Group saw like-for-like US sales in its Q1 fall by 4.7%. Tiffany & Co's sales in the first quarter to the end of April were down 4.0% in the US, excluding the New York flagship, but up strongly in Asia-Pacific and Europe. In this situation, short term forecasts are difficult to make, but the balance of risk lies on the downside of current economic projections – above all for mass market retailers.

Rise and Rise of Controlled Retail • The trend towards brands opening their own stores where previously they

might have sold on a wholesale basis through other retailers has continued unabated. This has been a strong trend for luxury brands and in their most recent financial years, Bulgari and Tiffany & Co have opened 17 more stores each and Richemont 65 more.

OUTLOOK & FORECAST




• The prime reason retailers give for this kind of investment is based on the 'brand control' business model, where the luxury houses are able to determine every single aspect of how their brands are presented from store interiors to staff training and how merchandise is ranged and displayed. It also captures an additional section of the value chain in the form of mark-up from wholesale to retail prices.

• In an upturn, this integration of retail is an advantage, with rising turnover from stores more than compensating for the additional costs to which the company is exposed. This upside from operational gearing is most evident from the results of Richemont, which has gained 13.8 percentage points in operating margin in the past five years, to place it top among the 10 companies profiled in this report at 20.9%.

• The potential downside to this strategy comes if there is an unexpected worsening in the economy and a downturn in sales of jewellery. Having increased their fixed cost base, brands could have to cut back their operations without the flexibility they might have had before in simply reducing production and wholesale turnover. In this light, while wholly-owned stores offer the greatest control, they also endure the greatest risk, and brands would be ill-advised to do away with the half-way house of franchise operations, where some of the risk lies outside their field of responsibility.

Internet • The Internet has made significant inroads into the jewellery and watch

market in a way that might not have been expected for such high value items even as recently as five years ago. The prospect of security problems during the delivery process might have put customers off and the inability to 'try before you buy' might also have been an obstacle.

• In reality, in its most developed market, the United States, Internet jewellery retail is booming. According to the US Department of Commerce, some 7.4% of sales were made through this channel in 2007, up from 6.4% the year before. The leading specialist player in the sector is Blue Nile, which increased its sales in 2007 by 26.9% to $319.3m. In 2004 it entered the UK market and in 2005 Canada, relaunching both of them in 2007. In the past year, its international sales have grown 108.1%, demonstrating how explosive growth can be in this distribution channel.

OUTLOOK & FORECAST




• A major part of its success has been due to the level of information and guidance it offers its customers online, in particular allowing men to make a much more informed gift choice when buying jewellery for their partners and also overcoming consumers' fear factor in entering an upmarket jewellery retail environment.

• Established players have also exploited the Internet as a means of distribution. For instance, Tiffany & Co, which launched online sales in 1999, achieved online turnover of $150m in 2007. As online retailing standards improve in information and presentation, as well as quality of service, more of the higher end brands and operators may consider this channel, but expansion is more likely to be concentrated at the middle and lower end of the market where the savings made on store operations combined with geographical coverage make it a highly attractive channel..

• Given the rate of growth of online retail jewellery sales, it is quite likely that they could reach a 10.0% share of the market in the next five years in the regions where Internet retailing is most developed. Applying that to just the US, European and Japanese markets alone, this channel could be worth $15.0bn by 2013.

Value Chain Integration

• The most successful retailers in this report are principally the ones that have the greatest level of value chain integration, often taking the product through from raw material stage (in the case of diamonds) to sale to the final consumer. This is true of all Top Three companies by operating profit margin of the 10 profiled in this report.

• This trend is likely to intensify for a number of reasons. In the watch sector, the recent expansion of demand at the top end has caused shortages of skilled workers and manufacturing capacity. To guarantee supply continuity, and as a means of supporting their reputation for quality, most of the major watch houses are investing in manufacturing both through organic growth and acquisitions, for instance of component makers.

• Similar considerations have driven the vertical integration of operations for diamond sourcing. For instance, Signet Group's US business has recently developed a rough diamond sourcing initiative to secure regular supply and reduce costs.

OUTLOOK & FORECAST




• Taking control of jewellery manufacture has also been seen as a way of ensuring unique design and rapid response to fashion trends. This is the case with Japanese brand Tsutsumi, which has expanded profitably in an exceptionally tough home market as a result.

• Value chain integration has been one of the driving forces behind profitability in jewellery and watches in recent years, but in the longer term, it also has potential downfalls. Companies involved in it need to avoid the possibility of being trapped into product areas that are no longer fashionable in the market. Disposing of a whole manufacturing division is considerably more difficult and costly as an operation than simply terminating a supply agreement with an outside manufacturer. Active management of these production resources in line with long term consumer trends will be a crucial part of brands' success in the future.

Ethical Concerns

• In the most developed markets – principally the US, Europe and Japan – the purchase decision for consumers buying jewellery has become complicated beyond initial considerations about choice of materials, price, design and branding, with the rise of concerns about where the product comes from and how it has been manufactured.

• Of particular concern have been so-called blood diamonds sold to fund armed conflict in African countries. The industry's response has been the Kimberley Process, launched in 2003, an international certification scheme for diamonds to guarantee them as conflict-free and to make sure that diamonds linked to conflict-torn areas did not enter the supply chain.

• The Kimberley Process Certification Scheme appears to have been largely successful in cutting off the market for conflict diamonds and in increasing the proportion sold through legitimate channels.

• Gold mining has also been an area of concern on environmental and other ethical grounds. To tackle these concerns, the Council for Responsible Jewellery Practices was set up in May 2005 and now has 70 members including retailers, wholesalers, miners, diamond traders and cutters and gold refiners.

OUTLOOK & FORECAST




• Despite these efforts, the jewellery industry continues to face criticism for its sourcing policies. Deeper Luxury, a controversial report in November 2007 by conservation group WWF-UK criticised major jewellery groups including Bulgari, Richemont, Swatch and Tiffany & Co. for their performance on environmental and social matters and corporate governance. Its findings were rejected by the CRJP, but it demonstrates that the issue of ethical and sustainable sourcing is not one that is going to go away.

• As retailers and brands take more control of their supply chains, they will become ever more accountable for what happens in them. At present, concern among consumers about ethical consumption may be confined to a minority in the most developed markets, but maintaining and extending guarantees about how jewellery and watches are sourced and manufactured will be of increasing importance in projecting global brand image in future.

Rapid Rise in Commodity Prices • The rise in the price of precious metals, in particular those most commonly

used in the jewellery businesses – gold, silver and platinum – is potentially one of the most important sources of cost increases for jewellery retailers.

• In the case of gold, the rise has been particularly steep since 2005, and comparing an average for the first four months of 2008 with 2003, there has been a rise of 154.0% in US dollar terms. Because of its appreciation, the increase in price in euro terms has been more moderate, rising just 89.0%. The rise in the price of silver has been even steeper, with a dollar increase of 261.0% and a euro price increase of 169.0%.

• This rise in prices has a number of causes, ranging from increasing industrial usage of precious metals to speculative dealing on the future values of commodities. The role of precious metals as a store of value in uncertain times is also a major factor, particularly with the decline in value of the US dollar and the growing impact of the credit crunch.

• The most profitable luxury players including Richemont and Swatch Group are less likely to suffer from this trend, as they have both large operating margins and a greater reliance on the watch market where, compared with jewellery, raw materials are often a lesser determinant of value than expertise in manufacturing. The same is not true of mass market jewellery operators who are being forced to raise their prices – not an easy thing to undertake when consumers' budgets are already under pressure.

OUTLOOK & FORECAST




• Both gold and silver reached a price peak in March 2008 at over $1,000 and $21 an ounce respectively, but as this report was being compiled both had begun to fall back again in response to slightly improved confidence in financial markets.

• However, the price peak is not yet over for some precious metals, particularly platinum. According to a poll of analysts published in May 2008, production problems in South Africa and an increase in demand for platinum for use in catalytic converters for cars will cause more than a 50.0% rise in the price of platinum from $1,304 in 2007 to an average of $2,000 in 2008 and to $2,100 in 2009.

• While consumption of gold continues to rise in the most dynamic markets like Russia, in some more price sensitive markets price increases are having a major impact on consumption levels. According to the Bombay Bullion Association there was a 54.0% decline in Indian gold imports in May 2008 compared with a year earlier.

• Though some moderation may be expected in commodity prices, a fall back to levels seen earlier this decade is not likely and therefore a long term impact on the profitability of jewellery retailing is almost certain. The question is whether brands will be able to pass this cost increase on to their customers. This is most likely to be possible where branding and design are more important than how much precious metal or how many carats of diamond consumers receive for their money. This is yet another factor that is almost certain to boost the luxury end of the sector and hold back the mass market in the next five years.

OUTLOOK & FORECAST




Forecast

Forecast Expenditure 2008-2013

Table 9: Jewellery market – global consumer expenditure on jewellery and watches 2003-2013

Total Sales Y-o-Y Change

Year $bn %

2003 174.6 4.52004 184.5 5.72005 194.5 5.42006 208.1 7.02007 221.8 6.6

e2008 236.1 6.4

2009 250.9 6.22010 266.9 6.42011 283.7 6.32012 300.1 5.82013 317.8 5.9

Change % 2003-2008e 35.2 2008-2013 34.6


• We expect spending on jewellery and watches to continue to grow up to 2013 with fastest rise in 2010 as the US.

• We expect the health of the jewellery market to be supported in the next two years by vigorous growth in the Asia-Pacific (excluding Japan) and Middle East regions as these both continue to enjoy rapid economic expansion.

OUTLOOK & FORECAST




Regional Expenditure 2008-2013

Table 10: Global expenditure by region 2008-2013e

2008 2009 2010 2011 2012 2013 Region $m $m $m $m $m $m Rest of Asia-Pacific 68,304 76,205 84,090 92,311 100,620 109,745 Americas 79,913 81,984 85,431 89,829 93,750 97,777 Europe 47,348 48,974 50,746 52,362 54,131 56,125 Middle East & Others 21,650 24,146 26,572 28,610 30,463 32,351 Japan 18,908 19,553 20,108 20,571 21,150 21,820 Total World 236,123 250,862 266,947 283,683 300,114 317,818


Table 11: Y-o-Y change in jewellery spend by region 2008-2013

2008 2009 2010 2011 2012 2013 Region % % % % % % Rest of Asia-Pacific 10.4 11.6 10.3 9.8 9.0 9.1 Americas 2.8 2.6 4.2 5.1 4.4 4.3 Europe 3.4 3.4 3.6 3.2 3.4 3.7 Middle East & Others 19.6 11.5 10.0 7.7 6.5 6.2 Japan 3.2 3.4 2.8 2.3 2.8 3.2 Total World 6.4 6.2 6.4 6.3 5.8 5.9


• As it experiences rapid growth rates in the next couple of years, the Asia-Pacific market (excluding Japan), already close behind the Americas, is set to overtake the Americas by 2011 and finish the half-decade some $41.4bn larger. This assumes that Asia-Pacific economies have sufficient momentum to ride out any downturn in the US and continue to grow at a rapid pace over the next five years – for the rapid increase of luxury consumers to continue.

OUTLOOK & FORECAST




Figure 13: Y-o-Y growth by region 2008-2013

0.0

5.0

10.0

15.0

20.0

25.0

2008 2009 2010 2011 2012 2013

Rest of Asia-Pacific

Middle East & Others

Total

Americas

Europe


• While we expect the established European economies to slow down in pace, the regional market will be sustained by extremely rapid growth in the Russian market, boosted by continued high oil prices and increasing exposure to international luxury brands.

• The same factor is likely to be at play in the Middle East and other markets, where high prices for oil and other commodities will allow economic growth to continue and along with it the expansion of the infrastructure necessary in terms of malls and branded jewellery stores. However, some decline in commodity prices can be expected from 2008's unsustainable peaks as importing nations find ways of conserving energy. This will cut back growth rates in the Middle East and Other region, where economic prosperity is heavily dependent on commodities, later in the period.

OUTLOOK & FORECAST




Figure 14: Global jewellery expenditure % share per region 2008 & 2013

33.8

28.9

20.1

9.2 8.0

30.8

34.5

17.7

10.2

6.9

0

5

10

15

20

25

30

35

40

Americas Asia-Pacific Europe Middle Eastand Other

Japan

%

2008 2013


• Japan's slow growth will lead it to be demoted to the role of smallest region market by 2013, as it is overtaken by the Middle East and the rest of the world. Japan’s generational attitude shift towards different spending patterns and priorities and a less conspicuously label-led retail culture is likely to contribute to lower rates of expansion. Japan’s ageing population will also reinforce this situation by restraining overall consumer spending levels.

OUTLOOK & FORECAST




Expenditure by Product Group and Market Segment 2008-2013

Table 12: Jewellery & watch expenditure by product group 2008-2013

2008 2009 2010 2011 2012 2013

Product Group $m

$m $m $m $m $m

Jewellery 193,967 206,150 219,706 234,059 248,046 263,238 Y-o-Y Change % 6.4 6.3 6.6 6.5 6.0 6.1 Watches 42,156 44,712 47,242 49,624 52,069 54,579 Y-o-Y Change % 6.8 6.1 5.7 5.0 4.9 4.8 Total 236,123 250,862 266,947 283,683 300,114 317,818


• Watches are currently enjoying faster rates of growth than jewellery and we expect this growth to remain strong. However, fashion trends do not last forever, and it is possible there may be overexposure of major brands, which leads us to believe there will be a slight slowdown from 2010 onwards. Nevertheless, both sectors will continue to see a strong rise in spending throughout the period.

OUTLOOK & FORECAST




Table 13: Jewellery expenditure by market segment 2008-2013

2008 2009 2010 2011 2012 2013 Market Segment $m

$m $m $m $m $m

Luxury 47,062 54,645 62,046 70,981 81,742 94,134 Y-o-Y Change % 10.6 16.1 13.5 14.4 15.2 15.2 Mass Market 189,061 196,217 204,901 212,702 218,372 223,683 Y-o-Y Change % 5.4 3.8 4.4 3.8 2.7 2.4 Total 236,123 250,862 266,947 283,683 300,114 317,818


• Trends to growing income inequality in many countries, possibly as a consequence of globalisation and the increasing mobility of the rich in choice of domicile and tax regime, are likely to continue. This will boost the luxury segment of the jewellery market. We expect it to see consistently higher rates of growth up to 2013 than the mass market segment.

• At the lower end of the market, there is a greater sensitivity to price, together with greater competition on comparable product. Unique design and branding are less important than, say, precious metal content in determining price. In an environment where consumers purchase from many different rival retail sources, the growth in the value of sales is likely to be less buoyant.

OUTLOOK & FORECAST




Polarisation

Figure 15: Polarisation in global jewellery retailing 2008

Polarisation in the Global Jewellery Market

Luxury Mass market

High growthHigh margins

GlobalConsolidation

Low growthLow margin

LocalFragmented

Branding/marketingInnovation

Fashion trendsWealth

Emerging markets

Occasions/eventsMarketing

Fashion trendsPrice

Commodity pricesEconomic factors

Supply/skill shortagesDistribution channels



Characteristics

Growth drivers

Growth inhibitors

Polarisation in the Global Jewellery Market

Luxury Mass market

High growthHigh margins

GlobalConsolidation

Low growthLow margin

LocalFragmented

Branding/marketingInnovation

Fashion trendsWealth

Emerging markets

Occasions/eventsMarketing

Fashion trendsPrice





Characteristics

Growth drivers

Growth inhibitors


• Over the next five years the luxury segment will continue to outperform the mass market, doubling in size, and increasing its share of the global jewellery market from 19.9% to 29.6%. Not only does the luxury segment enjoy high growth but also operators benefit from much higher margins than mass market retailers – despite suffering from the same kind of problems of high commodity prices and limited capacity and skills in the supply chain.

OUTLOOK & FORECAST




Table 14: Summary of spend and growth in luxury and mass market segments 2008-2013

Luxury

segment Mass

marketLuxury

segmentMass

marketLuxury

segment Mass

market $m $m Growth % Growth % Split % Split %

2008 47,062 189,061 10.6 5.4 19.9 80.12013 94,134 223,683 15.2 2.4 29.6 70.4

Change 2008-13 47,072 34,623 100.0 18.3 +9.7points -9.7points


• Branding plays a huge part in this, particularly in building aspirational status and conveying value that exceeds the actual commodity costs of similar products. Innovation and fashion is more prevalent in luxury brands and create more frequent reasons to purchase, whereas mass market jewellery is largely dependent on events such as marriages and anniversaries to drive demand.

• Furthermore luxury brands through their high profile marketing have global appeal, and watches and jewellery are not as restricted by local tastes and styles as other products. Consumers in emerging markets like India and China are used to buying by carat (weight) but as their economies and tastes develop are beginning to be influenced by branding in their purchasing habits which offers retailers yet more potential.

• The development of directly owned store chains is retaining brand control and establishing a physical embodiment of the brand values that is often diluted when product is sold via third parties. However the operating costs of a retail chain become a burden in economic downturns with rising operating costs and lower demand – but luxury brands are very attractive to franchise partners and wholesale customers, which means the brand can spread risk not only over markets but also over different distribution channels.

• Mass market retailers on the other hand suffer the greatest risk. They are often dependent on price as the differentiator, which in an era of rising operating and commodity costs is increasingly difficult to sustain – evident in the tight margins these businesses are operating on.

OUTLOOK & FORECAST




Table 15: Summary of global jewellery expenditure by region 2008-2013

2008 2013Difference

2008-13Difference

2008-13 Region $m $m $m % Rest of Asia Pacific 68,304 109,745 41,441 60.7 Americas 79,913 97,777 17,864 22.4 Europe 47,348 56,125 8,777 18.5 Middle East & Others 21,650 32,351 10,701 49.4 Japan 18,908 21,820 2,913 15.4 Total World 236,123 317,818 81,695 34.6


• The attraction of fast growing developing markets is far easier for luxury brands to exploit than mass market retailers from mature markets as the latter have little to offer that is different from local mass market operators. Indeed the likes of Gitanjali in India and Tsutsumi in Japan are proving more effective than Western counterparts. They have built fully integrated businesses and Tsutsumi has established a distinct positioning in the middle market which should be transferable in the fast growing Asia-Pacific region.

• Gitanjali meanwhile is expanding into the US via acquisitions. In this mature market a major jewellery retailer, Friedman's, filed for Chapter 11 in January 2008 and other operators are not looking too healthy. This creates opportunities for new entrants to pick up businesses very cheaply and Gitanjali also has the advantage of controlling its supply chain. This fully integrated system provides greater flexibility in meeting demand as well as security of supply.

OUTLOOK & FORECAST




Action Points

• Global jewellery retailing is still highly fragmented and dominated by small, often family-run, independent specialists, even in mature markets. Increasing costs of commodities are making it not only more expensive to buy in product but also more expensive to run a retail business. This is not just restricted to mature Western markets but universally.

• Luxury brands are more insulated from the challenges in the market because of their higher margins and global appeal and they have an affluent customer base that is less affected by economic downturns than those on low incomes.

• Mass market chains are finding it the toughest. Their margins are being squeezed despite their scale. To take advantage of growth opportunities in developing markets they need to focus on adapting the successful factors in luxury retailing to their own businesses:

1. Develop distinctive retail brands – for a mass market jewellery retailer this means via its stores and service and its product selection. Too many mass market jewellery chains are interchangeable to consumers, with little to differentiate from each other. Yet smaller chains such as Boodles, Links of London, Folli Follie in the UK demonstrate how it is possible to produce a distinctive store proposition;

2. Innovate – in product, service, delivery channels, store environment. As above there is little to differentiate from one jewellery store to another, but investment in unique product backed up with high quality service builds loyalty and ensures a retailer is top of mind when jewellery shopping. A consistent programme of continual range innovation will give customers a reason to come to a store repeatedly to see the latest season's collections. The effectiveness of this approach has been shown in the fashion sector by Spanish retailer Zara, which drives customer traffic in this way;

3. Create a vertically integrated business – to ensure supply and skills and to generate higher margins through ability to maximise sales. This may not necessarily come through direct ownership of manufacturing facilities, but perhaps with close long term relationships with particular suppliers, for instance for exclusive product ranges;

4. Invest in marketing – an integral part of brand building. Having unique products and top quality service means that marketing does not have to

OUTLOOK & FORECAST




focus solely on price or events to drive footfall. Building relationships with customers and having regular communication via direct communications can drive traffic to stores and websites, generating higher sales;

5. Expand into new distribution channels. The Internet provides vast opportunities to widen both geographical and customer bases. It also provides new ways of encouraging shoppers to buy. American online retailer Blue Nile has succeeded in reaching out to new customers, and winning over other retailers', by using its website to educate them about jewellery in a friendly, jargon-free way. This has allowed it to attract customer groups such as the male gift shopper who perhaps might have felt intimidated by traditional jewellery retail environments. Also, it provides excellent customer service, giving additional reassurance in making a purchase;

6. Target new markets. Men are a big online opportunity for jewellery retailers. Frequent online shoppers, they are easier to reach via this channel than through stores. They are also a strong target for watches – an acceptable piece of jewellery for men – and for gifts for partners. As men spend more money on their appearance in many developed markets and, indeed, developing ones we believe that expensive watches will increasingly be seen as an essential part of the male wardrobe. In particular, their technical specifications – such as the number of different complications (any feature beyond the simple display of hours, minutes, and seconds), how they are made and from what materials – are calculated to appeal to the male psyche.

BULGARI




CHAPTER 4 BULGARI

Company Overview

Table 16: Bulgari company overview 2008

Founded: 1884 Headquarters: Rome Chairman: Paolo Bulgari Vice-chairman: Nicola Bulgari CEO: Francesco Trapani CFO: Alberto Nathansohn Share of global jewellery retail market 2008e: 1.2% Brand Portfolio: Bulgari, Bulgari Accessori, Bulgari

Parfums, Bulgari Time, Cadrans Designs, Crova, Daniel Roth, Gérald Genta, Prestige D’Or

Source: Company information V E R D I C T

• The Bulgari company is publicly quoted on the Milan Stock Exchange but 52.0% owned by the Bulgari family. Over the past 30 years, the company has diversified from its original business of jewellery into complementary product areas. Starting with watches, it has added perfumes, cosmetics and accessories. Most recently it has extended into the leisure sector, with hotels and resorts.

BULGARI




• Bulgari was founded in 1884 when Sotirio Bulgari moved from Greece to Italy and opened a store in Rome in Via Sistina. This was replaced in 1905 by a store in Via Condotti, which is the point of reference of all international Bulgari stores.

• The popularity of its jewellery among celebrities in the 1950s and 60s led to international recognition and the opening of stores in New York, Geneva, Monte Carlo and Paris. In 1977, Bulgari launched its first watch, Bulgari Bulgari, and in 1980 founded a Swiss company, Bulgari Time, to design and produce its watches. A period of strong growth followed during which it developed its fragrance business through another new company, Bulgari Parfums, founded in Switzerland in 1993. Later in the decade it launched its silk collection, leather accessories and eyewear and in 2004 opened the Bulgari Hotel in Milan.

• In 2000 the group, together with other partners, created the private equity fund Opera, investing in services and luxury goods including furniture, footwear and speedboats. However in May 2007, the group disposed of most of its holdings in the Opera private equity businesses to concentrate on its core activities.

Recent Key Developments (Jewellery & Watches)

• In December 2007 Bulgari bought Swiss watchmaker Finger, which specialises in making cases for complicated and high end watches. This is the latest jigsaw piece in its strategy of building a vertical watchmaking operation.

• Since the Millennium the company has expanded significantly through acquisitions. In 2000 it acquired high end watchmaking brands Daniel Roth and Gérald Genta followed in 2004 by Crova, a high end jewellery manufacturer.

• In 2005 Bulgari made three further investments: two Swiss companies in the watchmaking sector – 50.0% of Cadrans Design producing dials for high end watches and 51.0% of Prestige d’Or producing metal watchstraps; and 100.0% of the Italian leather goods firm Pacini, renamed Bulgari Accessori.

• Bulgari also entered into a joint venture in 2004 with LLD Diamonds, a subsidiary of the Leviev Group, the world’s largest producer of cut diamonds. This ensured a constant supply of stones and at the end of 2005 the company launched the Bulgari Diamond collection of one-off designs to exploit this buoyant market.

BULGARI




• To take advantage of strong growth in accessories Bulgari has begun a network of 21 accessory stores, starting in 2005 with two dedicated stores. By the end of March 2008 it had 20 stores that were either accessories standalones, dual jewellery and accessories stores or stores with dedicated accessories floors.

• A joint venture between Bulgari and Luxury Group (a division of Marriott International) led to the opening of the Bulgari Hotel in Milan and the Bulgari Hotels and Resorts project was expanded in 2006 with a new resort in Bali. Both these operations are performing well and a restaurant and café opened in Ginza and Omotesando in Tokyo in 2007 have proved an ‘extraordinary triumph’ says the company.

Sales Performance

Table 17: Bulgari trading record 2003-2008e

Year to December 2003 2004 2005 2006 2007 e2008

Sales €m 759.0 828.0 919.0 1,009.0 1,091.0 1,156.0Y-o-Y Change % -1.8 9.1 11.0 9.8 8.2 6.0Operating Profit €m 117.0 134.0 143.0 157.1 164.5 ---Operating Margin % 15.4 16.2 15.5 15.6 15.1 ---

Source: Bulgari, Verdict Research V E R D I C T

Table 18: Bulgari trading record in US$ 2003-2008e

Year to December 2003 2004 2005 2006 2007 e2008

Sales $m 980.0 1,069.0 1,187.0 1,303.0 1,409.0 1,494.0Y-o-Y Change % -1.8 9.1 11.0 9.8 8.2 6.0Operating Profit $m 151.0 173.0 185.0 203.0 212.0 ---Operating Margin % 15.4 16.2 15.5 15.6 15.1 --- Note: Exchange rate six year average 2003-08 see Glossary


BULGARI




• In the year to December 2007, Bulgari saw a marginal slowing in its sales growth, from 9.8% in 2006, to 8.0%, reaching a total of €1,091.0m. Operating profit rose by 4.7%, bringing the operating margin down to a still very healthy 15.1% from a peak of 16.2% in 2004.

• Apart from rising commodity costs, particularly in gold, and the growing strength of the euro pulling operating margin down, the opening of three flagship stores in the latter half of the year and the costs of setting up a skincare project – and related marketing and promotion expenses – exacerbated the effect.

• Jewellery was the main driver of growth, with sales growth accelerating to 20.1% at comparable exchange rates (14.4% in euros). By Q4 2007 jewellery had produced 17 quarters of growth for Bulgari and growth was maintained in 2007 due to new product launches and updates.

• Watches were the next most successful category, with an increase of 8.2% in comparable exchange rates terms (2.0% in euros). Growth was hindered by restricted production capacity due to lack of components, highlighting the importance of building a vertically integrated business.

• In the accessories category, sales rose just 1.2% in comparable exchange rates (-5.1% in euros). This division was up against very strong comparatives and is dependent on Japan, a key market for it. That said, company-owned stores produced double digit growth during the Christmas period.

• Europe, the second most important market after Asia, saw growth of 10.3%, while the Americas saw sales rise an extremely fast 21.0%. The most rapid growth came from Asia excluding Japan, up 41.2%.

Current Trading

• The first quarter of 2008 saw a notable slowing in the sales performance of Bulgari, with a rise of 7.1% at comparable exchange rates, to €237.1m. This compares with a growth rate of 13.1% in the fourth quarter of 2007.

• The growth rate in the second largest market, Europe, collapsed to just 2.7% (from 10.5% in the previous quarter), with Italy performing particularly badly (down 14.8%) and UK sales falling. France and Germany performed better. American growth slowed to only 1.8% (from 13.5%). Asia and the Middle East

BULGARI




continued to grow healthily, at 11.4%. Even Japan produced a positive growth rate – though only 1.6% in such a difficult market this is relatively strong..

• Jewellery sales were the worst hit, falling to 4.6% growth from 20.4% growth in the fourth quarter of 2007. The company attritributed this slowdown mainly to a particularly strong comparable quarter in 2007, when sales had risen 24.2% for this product area against 2006. However, accessories sales recovered.

• Costs of investment in flagship stores and new markets, as well as watch production, resulted in a fall in operating profits of 15.5% to €21.9m. Despite this the company forecasts growth for the full year in sales and operating profit with net profit of between 8.0% and 12.0%. However, we are more cautious.

Figure 16: Bulgari product sales split 2003 & 2008e

40.5

32.2

7.3

18.0

2.0

40.7

26.0

9.2

20.3

3.8

0

5

10

15

20

25

30

35

40

45

Jewellery Watches Accessories Perfumes Other

%2003 2008

Source: Verdict Research reorder Americas after Rest of Asia V E R D I C T

BULGARI




• Jewellery remains Bulgari's core product area, at 42.1% of sales in 2007, though we estimate that relative underperformance will reduce this to 40.7% in 2008. In 2007 it continued to benefit from the strong performance of recently launched, more fashionable lines. New launches during the year included an extension of the B.zero1 line and new collections: Parentesi Openwork and Elisia.

• Though watch sales suffered from a shortage of components, they were nethertheless buoyed by the new Bulgari Bulgari and women's Assioma D watches.

• Accessories suffered from strong comparables in 2006 and the continued poor performance in Japan. Despite this, wholly-owned stores offering a more upmarket selection showed double-digit growth, particularly around Christmas.

Figure 17: Bulgari regional sales split 2003 & 2008e

38.9

14.3

21.918.8

6.1

37.4

13.1

21.2 21.8

6.5

0

5

10

15

20

25

30

35

40

45

Europe Americas Japan Rest of Asia MiddleEast/other

%

2003 2008

Source: Verdict Research reorder Americas after Rest of Asia V E R D I C T

• The greatest contribution to growth over the past five years has come from the Rest of Asia region, including China, which we expect to have risen 3.0 percentage points by the end of 2008, to 21.8% of sales. The widening of Bulgari's wholly-owned store network in China has been a major factor.

BULGARI




Store Portfolio

Table 19: Bulgari retail stores 2002-2007

Year to December Store Numbers Year-on-year Change %

2002 175 12.92003 185 5.72004 194 4.92005 207 6.72006 228 9.72007 245 7.5


• Bulgari has recently invested heavily in creating its own network of stores. The 13,000 sq ft flagship on Fifth Avenue, New York, was reopened in April 2007. In Tokyo, a new flagship was opened in Omotesando in October, followed by a second in November in Ginza. Asia has been a major focus of development, with 16 stores opening in the period from 2005 to 2007.

• At the end of December 2007 Bulgari had 245 stores, of which 54 were travel retail branches, 42 were franchisees and 149 were wholly-owned. During the year, 16 more wholly-owned stores were opened and one more franchise.

• By the end of the first quarter to the end of March in 2008, the total had increased by four, with three more travel retail branches, three more wholly-owned stores and two fewer franchise stores.

BULGARI




Outlook

• Core business exposed to cost risk, though positioning makes it more resilient.. Though it is only one of the cost areas of Bulgari's jewellery business, raw materials are an important determinant of its profitability. Though gold and silver prices declined in late Spring 2008, they are both a long way above where they were only three years ago. Platinum, on the other hand, it appears has yet to reach its peak. With jewellery making up two-fifths of turnover, sustained high cost levels in this sector are likely to dent future profits despite price rises the company has instigated. Its positioning as a luxury brand makes it more desirable for consumers – and the intrinsic value of the product makes jewellery a longterm investment that should never lose its value.

• Long term expansion plan includes acquistions. Bulgari has a long term strategy for expansion of its brand. Luxury hotels, accessories, fragrances, even wine are all part of its ambitious strategy to build the Bulgari brand worldwide. Apart from wider growth opportunities this provides, it reduces some of the risk of focusing on jewellery, where costs are rising so steeply, but also provides effective and relatively cheap marketing of the brand, raising its profile internationally with new customers. CEO Francesco Trapani has not ruled out a major acquisition – though there is no major brand it is currently targeting. Another watch or jewellery business could fit well with existing businesses and expertise and gain from forecast market trends by providing scale and manufacturing capacity. An established accessories business could give it a stronger footing and faster progress in that sector.

• Vertical integration is a major competitive strength. Since 2000, Bulgari has extended and deepened its involvement in the production of both jewellery and watches. This is the logical extension of the brand control model that Bulgari is also pursuing in the distribution of its products through the opening of wholly-owned stores. The advantage is in Bulgari taking control of its supply chain, ensuring maintenance of both the quantity and quality of the product it sells. However it has yet to reap the full benefits of this strategy. It still reports problems matching supply with demand in watches and does not have the critical mass in wholly-owned stores to fully drive sales and margin benefits.

• Appealing to a younger market widens its audience. Bulgari’s brand image has been boosted by its stylish and contemporary fine jewellery collections. Bulgari has stepped up its launch rate for new collections and is successfully

BULGARI




catering to a younger, more fashionable consumer as well as customers looking for unique high end jewellery. Its strong watch collections have also lifted its consumer profile, particularly with male consumers. The indications are that luxury jewellery and watches will take over from designer handbags as the next aspirational fashion product, playing to Bulgari’s strengths and putting it in a prime position to take advantage of the trend.

• International expansion reduces risk as well as boosting sales. Bulgari has a wide geographical spread. To some extent, it has compensated for slow growth in Europe, the US and Japan in the first part of 2008 with faster expansion in the rest of Asia, particularly China. Furthermore it has core products – jewellery, watches and perfume – that are easily transferable across borders and cultures. Doing this via company-owned stores, which have proved a success, should guarantee significant sales increases eventually, in spite of initial capital investment costs.

FINLAY




CHAPTER 5 FINLAY

Company Overview

Table 20: Finlay company overview 2008

Founded: 1887 Headquarters: New York Chairman & CEO: Arthur E Reiner President and Chief Operating Officer: Joseph M Melvin Executive VP and Chief Merchandising Officer: Leslie A Philip Senior VP and Director of Stores: Edward J Stein Senior VP, Treasurer and CFO: Bruce E Zurinick Share of global jewellery retail market 2008e: 0.5%

Brand Portfolio: Bailey Banks & Biddle, Carlyle & Co, Congress Jewelers, Park Promenade

Source: Finlay Enterprises, Verdict V E R D I C T

• Finlay Fine Jewelry, owned by Finlay Enterprises, was founded as a jewellery mail order house in 1887 and taken over by diamond merchant Abraham Hirshberg in 1924. It expanded in the New York area with its own stores and in 1942 moved into department store concessions, selling its standalones in 1954.

• The company was bought in 1968 by a publicly listed company, Seligman & Latz, which ran it until it was taken private in 1985. In April 1995, the company returned to the stockmarket when its parent, Finlay Enterprises, undertook an initial public offering.

• The company predominantly focuses on running jewellery departments in the stores of other retailers including Bloomingdale's, Macy's, Bon Ton, Dillard's and Gottschalks.

• In May 2005, Finlay returned to standalone store operation with the purchase of Carlyle & Co Jewelers, whose stores are concentrated primarily in the South-eastern United States. Its fascias include Carlyle, JE Caldwell and Park Promenade. In November 2006, it added Congress Jewelers in Florida

FINLAY




and a year later it bought the 70-strong upmarket chain Bailey Banks & Biddle from mass market competitor Zale Corporation for $200.0m.

• The acquisition of Bailey Banks & Biddle added to Finlay's debts, which at the end of 2007/08 totalled $424.2m. It currently pays a significant amount of interest, equal to 3.6% of turnover in 2007/08.

• While the jewellery departments sell items costing usually between $100 and $1,000, with an average price of $272, the standalone stores are much more upmarket, with an average sale price of $1,300.

Recent Key Developments

• The company is vulnerable to changes in strategy by retailers hosting its jewellery departments. At the end of 2006, department store chain Belk ended a licence agreement for 75 of Finlay's locations in its stores, which had generated $51.9m in sales annually. Belk also bought the Parisian store chain from Saks Incorporated, closing another 33 Finlay departments in July 2007.

• Macy's, with which Finlay has its most important relationship (accounting for 52.0% of sales in 2007/08), also announced restructuring measures in February 2008 that will result in the closure of 94 departments by the end of the year which generated $120m in annual sales.

• Macy's sale of its Lord & Taylor division to NRDC Equity Partners in October 2006 also resulted in department closures for Finlay, with licence agreements for 47 of them to be terminated at the end of January 2009.

FINLAY




Sales Performance

Table 21: Finlay trading record 2004-2009e

Year to January 2004 2005 2006 2007 2008 2009e

Total Sales $m 614.0 627.0 689.0 739.0 835.9 995.0Y-o-Y Change % --- 2.1 10.0 7.2 13.1 19.0Operating Profit $m 16.0 17.0 * 18.0 9.6 * 17.4 ---Operating Margin % 2.6 2.7 2.6 1.3 2.1 --- * Excludes charges for impairment of goodwill of $77.3m in 2005/06 and $3.0m in 2007/08

Source: Finlay, Verdict Research V E R D I C T

• The company suffered a difficult year for sales in 2007/08. Though they increased 13.1% to $835.9m, this was due to the acquisition of further standalone stores. In comparable terms, sales fell 1.4%.

• The company said it had a particularly difficult Christmas season in 2007 due to a tough retail environment. Operating profits before a charge for impairment of goodwill were $17.4m, compared with $9.6m the year before.

Current Trading

• The first quarter of 2008/09 saw only a marginal improvement in performance compared with the fourth quarter of the previous year, with comparable store sales declining 4.5% compared with 6.4% in the preceding three months.

• Total sales rose 25.9% to $205.1m due to the acquisition of the Bailey Banks & Biddle stores. Losses from continuing operations rose to $8.9m from $5.0m in the first quarter of 2007/08.

• For the rest of the year it is forecasting comparable store sales to be between flat and up 1.0%.

FINLAY




Figure 18: Finlay sales % by product area, 2003/04 & 2008/09e

25.8

22.0 21.8

14.8 15.6

28.0

17.9

14.0

19.021.1

0

5

10

15

20

25

30

Diamonds Other Gems Gold Watches Other

%

2003/2004 2008/09e


• Finlay has seen an increase in the importance of diamonds in its turnover, in line with US specialist market leader Signet Group, though the proportion is still low compared with Signet's chains. The proportion of sales accounted for by watches has risen, largely due to the acquisition of the standalone stores where they are a larger part of the sales mix.

FINLAY




Stores

Table 22: Finlay number of retail locations 2003-2008

Year to January 2003 2004 2005 2006 2007 2008

* Locations 1,011 972 962 1,009 758 793Y-o-Y Change % --- -3.9 -1.0 4.9 -24.9 4.6 * Incudes both in-store departments and standalone stores

Source: Finlay Enterprises, Verdict Research V E R D I C T

• Finlay has seen a rapid contraction of its network of locations in the past five years, totalling 21.6% over the period. At the end of 2007/08, its total of 793 locations comprised 687 in-store departments, 350 of them in branches of Macy's, as well as 69 Bailey Banks & Biddle stores, 32 Carlyle stores and five Congress stores.

• During 2008/09, Finlay expects to open 10 new locations, including four Carlyle stores and two Bailey Banks & Biddle stores. It will also close 15, in addition to the 94 Macy's and 47 Lord & Taylor departments scheduled for closure.

FINLAY




Outlook

• Already feeling the impact of the economic downturn. Finlay suffered a poor fourth quarter in 2007/08. Though the first quarter of 2008/09 was very marginally better, comparable store sales remain under pressure. The company is forecasting flat or increasing comparable store sales for the year as a whole, implying a return to positive growth across the remaining three quarters, particularly in the crucial run-up to Christmas. Given the current economic climate, this looks rather on the optimistic side. Should conditions deteriorate, its wafer thin operating margins could disappear.

• Move upmarket is a positive one. The acquisition of Bailey Banks & Biddle has given the company both a wider nationwide presence and exposure to a more upmarket customer base. In theory, this should move it away from the middle and lower income customer base which is suffering most from current economic problems like high fuel prices. However, the question does have to be asked, if it is such a good business, why did Zale Corporation dispose of it?

• Reliance on department stores as hosts has caused Finlay problems. In theory, selling through other companies' stores relieves Finlay of the costs and risks of owning or leasing its own retail property. However the downside, as it has found out in the past couple of years, is that licence agreements can be rapidly terminated should circumstances or department store strategies change.

• Move into standalone stores will need careful management. Jewellery in the United States is a very competitive market and making a nationwide business work on a very sparse network of just 106 stores will be a very tough job. Finlay is a newcomer to the business of running standalones and it will have to work very hard to make them into a coherent and consistently profitable enterprise given its lack of scale.

• Debt burden is a worry. Finlay's debt interest in 2007/08 was $30.6m, compared with operating profits (excluding impairment of goodwill) of $17.4m. It will need to manage its cashflow carefully to reduce its debt burden and this will not be an easy task in a tough retail environment.

GITANJALI GROUP




CHAPTER 6 GITANJALI GROUP

Company Overview

Table 23: Gitanjali company overview 2008

Founded: 1986 Headquarters: Mumbai, India Chairman & Managing Director: Mehul Choksi Executive Director (Finance): G. K. Nair Head, Jewellery Division: Priti M. Choksi CEO International Jewellery Business: Neher Modi Share of global jewellery retail market 2008e: 1.0%

Watch & Jewellery Brand Portfolio:

Asnil, Canadia Diamonds, Collection g, D'damas, Desiré, Giantti, Gili, Maya, Nakshatra, Rogers Jewelers, Samuels Jewelers, Sangini, Vivaaha


• Founded in 1986 by jewellery entrepreneur Mehul Choksi, the Gitanjali Group has its background in diamond and jewellery manufacturing. It now has interests ranging from retail to infrastructure and property development.

• In 2006, the company undertook an initial public offering, which raised $76m for the owners, followed by bond issues and other fund raising which added another $290m.

GITANJALI GROUP




• One of Gitanjali's competitive advantages is that (in a group of three companies) it is on the list of Diamond Trading Company sightholders, that is authorised bulk buyers of diamonds, allowing it to access reliable and well priced supplies. In February it also acquired a 70.0% stake in diamond distributor and processor Tri-Star Worldwide, which buys Canadian-mined diamonds directly from mining company BHP Billiton.

• It has two diamond processing facilities in Borivili in Mumbai and Surat in Gujarat and three of its own jewellery factories, with more planned in special economic zones in Hyderabad and elsewhere in India.

• Its strategy is to move from diamond processing, manufacturing and wholesaling into areas of activity with higher value added, specifically jewellery and lifestyle retail. In particular it is targeting the US market, which it estimates accounts for 45.0% of worldwide diamond jewellery sales, and China.

• In the Indian market it sees an opportunity in the estimated 97.0% of sales that are made through unbranded traditional family jewellers, which it believes will shift to branded multiple retailing. The company also expects a shift from gold jewellery to diamonds and from traditional, heavy designs to lighter weight, more fashionable items.


• Gitanjali signed a joint venture deal in November 2007 with Italian jewellery and watch manufacturing company, Morellato and Sector group, setting up a new company, Morellato India. It will distribute the group's brands, which include John Galliano, Just Cavalli Jewels, Just Cavalli Time, Sixty Jewels and Roberto Cavalli Timewear, both on a wholesale basis and through 50 new stores.

• In December 2007, the Gitanjali group signed a memorandum of understanding to set up a joint venture with Italian fashion group Mariella Burani. The company, to be called Mariella Burani India, will develop and distribute collections of clothing, leather goods and jewellery.

• The company has recently moved to raise its profile outside India. For instance, in 2007 it sponsored the Indian Film Academy Awards, held in the UK, featuring Bollywood movie star Shilpa Shetty.

GITANJALI GROUP




• Its recent fundraising has enabled Gitanjali to make a series of acquisitions. In December 2006 it made its first US purchase, buying 97.0% of US jewellery retailer Samuels, with 17 stores, 80 department store shop-in-shops and a turnover of $100.0m. In November 2007, Gitanjali also acquired Rogers jewelers with 46 stores and annual revenues of around $80.0m.

• In January 2008 it also bought the Nakshatra jewellery brand from diamond giant De Beers.

• It aims to develop its watch business and believes luxury watches can be made in India in modern manufacturing facilities.

• In 2007, Gitanjali set up its Lifestyle division, to act as its luxury and retail arm, with the intention of opening up to 200 stores in major towns and cities across India, ranging from 5,000 sq ft to 15,000 sq ft, as well as mini-malls of over 80,000 sq ft. The stores are expected to sell both Gitanjali's brands and those of Morellato India.

Sales Performance

Table 24: Gitanjali group trading record 2004e-2009e

Year to March 2004e 2005e 2006 2007 2008 2009e Total Sales Rs.m 8,764 13,996 24,000 34,674 48,280 62,281Y-o-Y Change % --- 60.0 71.4 44.5 39.2 29.0Operating Profit Rs.m --- --- 849 1,557 2,364 ---Operating Margin % --- --- 3.5 4.5 4.9 ---

e = Verdict estimates

Source: Gitanjali, Verdict Research V E R D I C T

• In the year to March 2008 the group reported another year of strong growth, though there was a decelleration. No doubt the slowdown in consumer spending in Europe and the US would have hit its sales.

GITANJALI GROUP




Table 25: Gitanjali Jewellery division trading record 2004e-2009e

Year to March 2004e 2005e 2006 2007 2008e 2009e

Total Sales Rs.m 2,815 4,504 7,722 11,156 21,621 36,756Y-o-Y Change % --- 60.0 71.4 44.5 93.8 70.0Operating Profit Rs.m --- --- --- 844 1,484 ---Operating Margin % --- --- --- 7.6 6.9 --- e = Verdict estimates


• The jewellery division outperformed and we expect it to continue on this path – though at a slower rate because of the influence of its regional markets in Europe and the US. The Rest of the World now accounts for 60.9% of the group’s revenue with India taking the remainder.

GITANJALI GROUP




Table 26: Gitanjali group trading record in US$ 2004e-2009e


Total Sales $m 201.0 321.0 551.0 796.0 1,108.0 1,429.0Y-o-Y Change % --- 60.0 71.4 44.5 39.2 29.0Operating Profit $m --- --- 19.0 36.0 54.0 ---Operating Margin % --- --- 3.5 4.5 4.9 --- e = Verdict estimates Note: Exchange rate six year average - see Glossary


Table 27: Gitanjali jewellery division trading record in US$ 2004e-2009e


Total Sales $m 65.0 103.0 177.0 256.0 496.0 843.00Y-o-Y Change % --- 60.0 71.4 44.5 93.8 7.0Operating Profit $m --- --- --- 19.0 34.0.0 ---Operating Margin % --- --- --- 7.6 6.9 --- e = Verdict estimates Note: Exchange rate six year average – see Glossary


Stores

• According to press reports, Gitanjali has around 20 stores in China in cities including Beijing and Shanghai, with plans for another 100 in the next year.

• The company plans to increase its store total in the United States by between five or 10 by the end of 2008/09, and to add another fifty stores the following year, either through acquisitions or through new store growth.

• In India, it has plans to increase its store space from 120,000 sq ft to 650,000 sq ft by the end of 2009, with 32 single brand stores and 132 multi-brand locations. At the beginning of 2008 it had 10 of its own stores and 28 franchisee branches.

GITANJALI GROUP




Outlook

• Rapid expansion through acquisition set to continue. Gitanjali group is an emerging force in international jewellery retailing and is targeting the US market for further acquisitions in the near future. If it has deep enough pockets then there are likely to be plenty of opportunities for it in a US market where retailers are suffering in a downturn and it could emerge very rapidly as a significant player.

• Vertical integration is a competitive advantage. Gitanjali's philosophy is to 'cut out the middleman', controlling the whole value chain right up to the retail customer. At the moment, most of its business is still in supplying others with its branded products, but this is rapidly shifting to being a retailer in its own right. As a result, profitability should rise, but it will have to work hard to develop its brands and their images to maximise operating margin.

• Joint ventures offer additional sources for growth. The joint venture agreements that Gitanjali has signed will give it instant access to Italian brands and the prestige that goes with them in the jewellery sector. In the short term, this is is a very attractive proposition as the luxury segment is one of the strongest in retail and also more insulated from economic downturn than the mass market. The negative aspect is that it will not receive all of the benefit from selling these brands.

• Watches may be a future path for development. Gitanjali is keen to move outside its original field of jewellery to related market sectors, including watches. This is a long term development goal, because the watch market is already very effectively carved up between China at the cheap end and Switzerland in the premium segment. Indian producers will find it hard to establish themselves, but the watch segment is set to continue to perform well and therefore offers good growth potential.

• Other markets are also likely to provide growth, but not easily. Gitanjali has its eyes on the Chinese market, where it hopes to develop its own store network. This is not likely to be easy, given the fragmented nature of the Chinese market and difficulties like variations in local taxation. Few locally-based retailers have managed to create store chains there and for an outsider it will be even more difficult without the benefit of strong high end branding.

LVMH




CHAPTER 7 LVMH

Company Overview

Table 28: LVMH Group company overview 2008

Founded: 1987 Headquarters: Paris Chairman & CEO: Bernard Arnault CFO: Jean-Jacques Guiony LVMH Group MD: Antonio Belloni President, Watches & Jewellery Business Group: Philippe Pascal Share of global jewellery retail market 2008e: 1.8% Watch & Jewellery Brand Portfolio:

Chaumet, De Beers, Dior Watches, Fred, Hublot, Louis Vuitton Watches, Omas, TAG Heuer, Zenith


• The formation of Louis Vuitton Moët Hennessy, or LVMH, in 1987 through the merger of Louis Vuitton and Moet Hennessy, created the world's largest luxury goods group, headed by entrepreneur Bernard Arnault, currently believed to be France's richest man.

LVMH




• Some 47.4% of shares in LVMH are owned by the Groupe Arnault, Bernard Arnault's holding company, though it controls over 63.0% of the voting rights. His successful integration of various famous aspirational brands into the group inspired other luxury companies into doing the same. Thus the Gucci Group (as part of PPR) and Richemont have also created extended portfolios of luxury brands.

• LVMH's watches & jewellery division was formed in 1999, originally comprising Swiss watch houses Ebel, Tag Heuer and Zenith, as well as Christian Dior Watches, jewellery houses Chaumet and Fred, and Italian writing instruments company Omas. In July 2001 it set up a jewellery retailing joint venture with diamond company De Beers.

• LVMH’s strategy is to concentrate investments on its established brands such as Louis Vuitton. It disposes of those that are struggling, for instance watch brand Ebel, which it sold to the Movado group in 2004. For others, such as Fendi, store renovation has to come before any other substantial investments. It has also bought out minority interests in acquired brands such as Fendi and Donna Karan, simplifying ownership structures for faster decision making.

Recent Key Developments (Watches & Jewellery)

• Tag Heuer, known for its prestige and sports chronographs, recorded strong double digit growth in 2007 in all markets. It expanded its best known lines – Aquaracer, Carrera, and Link – by adding new models for men and women, including the new Grand Carrera line of automatic watches and its store network via franchises in The Far East, Bahrain and South Africa.

• It continued to advertise using a line-up of high profile ‘ambassadors’ that complement its upmarket and sports positioning including Tiger Woods, Maria Sharapova, Brad Pitt, Uma Thurman, Formula 1 stars Kimi Raikkonen and Lewis Hamilton and Indian actor Shah Rukh Khan.

• Zenith launched its sports-inspired Defy line, which was awarded the Geneva Watchmaking Grand Prize in 2007. It also expanded its range of high end watches and in early 2008 launched its new Chronomaster Grande Date watch. It did particularly well in Europe, China, the US, Russia and the Middle East and made significant improvements to its profitability.

LVMH




• Montres Dior links high end luxury watches with fashion and benefited from advertising campaigns featuring actress Sharon Stone, the 'face' of the successful Christal jewellery watch line – though she caused some consternation over remarks she made concerning China and its relationship with Tibet at the Cannes Film Festival in May 2008.

• Chaumet produced good sales growth and improved profits boosted by the development of its business in China, Taiwan and South Korea and greater productivity from its existing stores. It also opened boutiques in London, Singapore, Russia and the Middle East in 2007 with further openings in Q1 2008 in Tainan (Taiwan), Riyadh and Jeddah.

• De Beers added its first watch collection in 2007 and launched its first transactional Internet site for the United States, www.debeers.com. It was also highly active in extending its retail portfolio, with new locations in Japan, Seoul, Moscow, Taipei, Houston, Washington, Dubai and Jeddah.

• In April 2008, LVMH acquired the Swiss watchmaker Hublot from its founder Carlo Crocco, and a company controlled by Jean-Claude Biver, Hublot's manager since 2004. Based in Geneva, the company had turnover of more than SFr150m ($123m) in 2007 through 300 points of sale worldwide.

• Its watches mix precious metals like gold and platinum with technical metals like titanium, ceramics and diamonds. Its Big Bang collection ranges in price from €8,000 to €300,000.

Sales Performance

Table 29: LVMH trading record 2003-2008e

Year to December 2003 2004 2005 2006 2007 2008e

Total Sales €m 11,962 12,481 13,910 15,306 16,481 17,635Y-o-Y Change % -5.8 4.3 11.4 10.0 7.7 7.0Operating Profit €m 2,182 2,173 2,522 3,052 3,429 ---Operating Margin % 18.2 17.4 18.1 19.9 20.8 ---

Source: LVMH, Verdict Research V E R D I C T

LVMH




• The group continued its recovery in 2007 from the slump of 2003 and 2004 when the luxury market struggled from declines in tourist travel and the recession in Japan, and several of LVMH’s brands underperformed. Sales rose 7.7% to €16,481m, while operating profits hit €3,429m, up 12.4%, with operating margin increasing to 20.8% – the highest level this century.

• Profit was principally driven by the largest luxury division, fashion and leather goods, with sales rising 7.8% to €5,628m and operating profits increasing 12.0% to €1,829m.

Table 30: LMVH watches & jewellery division trading record 2003-2008e


Total Sales €m 502.0 500.0 585.0 737.0 833.0 908.0Y-o-Y Change % -9.1 -0.4 17.0 26.0 13.0 9.0Operating Profit €m -48.0 -10.0 21.0 80.0 141.0 ---Operating Margin % neg neg 3.6 10.9 16.9 ---


• That said the watches & jewellery division, although the smallest, saw the fastest sales growth, at 13.0%, reaching €833m and the fastest profits growth, up 76.3%, to €141m. Tag Heuer made a major contribution to the increase, due to new openings of both wholly-owned and franchise stores and an expanded department store distribution. Zenith also saw strong sales in Europe, China, Russia, the US and the Middle East.

Table 31: LVMH trading record in US$ 2003-2008e


Total Sales $m 15,451 16,121 17,967 19,770 21,288 22,778Y-o-Y Change % -5.8 4.3 11.4 10.0 7.7 7.0Operating Profit $m 2,818 2,807 3,258 3,942 4,429 ---Operating Margin % 18.2 17.4 18.1 19.9 20.8 --- Note: Exchange rate five year average – see Glossary


LVMH




Table 32: LMVH watches & jewellery division trading record in US$ 2003-2008e


Total Sales $m 648.0 646.0 756.0 952.0 1,076.0 1,173.0Y-o-Y Change % -9.1 -0.4 17.0 26.0 13.0 9.0Operating Profit $m -62.0 -13.0 27.0 103.0 182.0 ---Operating Margin % neg neg 3.6 10.9 16.9 --- Note: Exchange rate five year average – see Glossary


Current Trading

• The first quarter of 2008 (January to March) saw 5.2% growth in LVMH group revenues to €4,002m, held back by the rising euro, which cut 7.0 percentage points off growth. Growth was strong in all the core markets, with the US up 10.0% in US Dollar terms, Asia (excluding Japan) up 12.0% and Europe up 8.0%. Only Japan saw a decline in local currency sales, down 4.0%.

• Performance in the watches & jewellery business was much better than for the group as a whole, with sales rising 11.6% to €211m. Europe saw an exceptional 19.0% rise, while the US and Japan saw only mid-to-low single digit percentage growth, hit further by the rise in the value of the euro.

• Tag Heuer did very well due to the success of the Grand Carrera collection, De Beers grew strongly, particularly in the US, and all the main brands saw double-digit percentage growth.

• LVMH’s organic sales, that is those with comparable structure and at constant exchange rates, were up 12.0% over Q1 following a 13.0% rise in 2007, with watches & jewellery outperforming other divisions in both periods at +19.0%.

LVMH




Figure 19: LVMH regional sales, watches & jewellery 2003 & 2008e

36.0

26.0

16.0

12.010.0

30.0

25.0

12.0

16.0 17.0

0

5

10

15

20

25

30

35

40

Europe United States Japan Rest of Asia Rest of World

%

2003 2008e


• LVMH has seen a significant shift in the past five years in where it sells its watches & jewellery, with Europe down six percentage points to 30.0% while the Rest of the World, which includes the Middle East and Africa, has experienced the strongest growth, through store expansion, stressing the importance of these regions in future growth.

LVMH




Figure 20: LVMH sales by product area, 2003 & 2008e

42.9

34.7

18.2

4.2

44.3

33.8

16.6

5.3

0

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50

Other Fashion & LeatherGoods

Perfumes &Cosmetics

Watches &Jewellery

%

2003 2008e


• Watches & jewellery are only a small part of the LVMH empire, even though growing share. We estimate the division will reach just 5.3% of overall sales in 2008, despite the rapid rate of growth. They are dwarfed by the Other category (which includes retail chains such as DFS and Sephora, as well as wines and spirits) and by fashion and leather goods.

Outlook

• Little sign of impact from economic slowdown. Though it has been hit heavily by the rising euro, LVMH's sales in local currency terms remain buoyant. The US, Europe and Asia all remained healthy, for the first quarter of 2008 at least, even if Japan suffered from falling consumer spending. The strength of its luxury brands and its global spread are a key advantage. The rapid growth of emerging economies is generating a luxury consumer in new markets that compensates for slowdowns in mature markets.

LVMH




• Tag Heuer is set to lead sales increases in the watches & jewellery business. The brand has enjoyed strong trading as a result of new product launches and advertising campaigns and is increasingly tackling new markets in Asia and even South Africa. Its strategy of allying itself with stars from sports with truly global reach like Formula 1 seems to be paying off and there is no reason why this success should not continue – this positioning appeals to a very wide market.

• E-commerce is a clear opportunity for growth in all of LVMH’s luxury goods. The company is ahead of many of its competitors with its transactional website for De Beers. This gives it experience in online sales that it can use for other brands especially in products such as watches, jewellery and leather accessories, all of which lend themselves to Internet shopping and are set to become much higher growth sectors.

• Acquisitions provide additional growth potential. The purchase of Swiss watch brand Hublot, in April 2008, shows that LVMH retains an appetite for further acquisitions should it find brands with the right positioning coming on to the market. Though brands retain their individuality there is scope for scale economies – particularly in administration and marketing – but in such a specialised market these acquisitions give LVMH’s watch and jewellery division access to a wider array of specialist skills.

• Improving productivity. The watches & jewellery division was loss-making over 2002-2004 and has struggled to achieve a margin above 5.0% in the 21st Century. The division recovered in 2005 and has made a huge jump in profit over the past year, +76.3% on sales up 13.0%. Though its operating margin at 16.9% is the highest it has achieved this century, it is still half that of the fashion & leather goods division – and we believe there are opportunities to improve further on this. Organic growth is the strongest in the group, marketing is making space more productive and new product development is making LVMH’s watch & jewellery brands more attractive to retail partners.

• Watches & jewellery are an area for cross-fertilisation between brands. LVMH has potential to expand the watch and jewellery ranges of its brands outside the specialist division. It has been active in this kind of cross-fertilisation in other fields, for instance launching new perfumes for Fendi and Pucci in 2007. In view of the watch and jewellery category's superior growth over the past year, this is likely to be a focus of future development.

RICHEMONT




CHAPTER 8 RICHEMONT

Company Overview

Table 33: Richemont company overview 2008

Founded: 1988 Headquarters: Geneva Executive Chairman: Johann Rupert Group CEO: Norbert Platt Group Finance Director: Richard Lepeu Share of global jewellery market 2008e: 7.1% Brand Portfolio:

Jewellery Maisons: Cartier, Van Cleef & Arpels Specialist Watchmakers: A Lange & Söhne, Baume & Mercier, IWC, Jaeger-LeCoultre, Officine Panerai, Piaget, Vacheron Constantin Writing Instruments Maisons: Montblanc, MontegrappaLeather & Accessories Maisons: Alfred Dunhill, Lancel Others: include Chloe, Polo Ralph Lauren Watch & jewellery Company, Purdey, Shanghai Tang


• Richemont was created in 1988 by the spin-off of international assets owned by the Rembrandt Group of South Africa (now Remgro) with interests from tobacco and financial services to wine, spirits and luxury goods.

RICHEMONT




• The Richemont group operates in five key luxury areas: jewellery, watches, writing instruments, leather & accessories, and clothing. Each of the Richemont brands, or maisons as it calls them, has its own distinct identity. The independence of the maisons in the group is fundamental to the group's strategy for future growth.

• In addition to its luxury goods interests, Richemont holds a significant investment in British American Tobacco. In May 2008, following a review in November 2007, the company announced it was considering plans to restructure the company which would separate its luxury goods business from its other interests, including the investment in BAT. The two entities would comprise a luxury business with its headquarters in Switzerland and an investment vehicle based in Luxembourg. A date has yet to be set for this change to be completed.

Recent Key Developments (Watches & Jewellery)

• The group’s most successful brand is Cartier. Cartier's product range spreads across 10 product categories including lighters, small leather goods, and handbags, but it is dominated by fine jewellery and watches. Since 2003 it has modernised its traditional image through its advertising, designs and retail presence. It has employed both freelance and in-house designers to rejuvenate its classic designs: two-thirds of whom are women and two-thirds aged below 35, key factors in introducing greater fashionability to its ranges and proposition.

• Following several new watch launches over the past two years, in April 2007 it launched the Ballon Bleu in April 2007. Other product launches in 2007/08 included the Inde Mystérieuse high end jewellery collection, the Love Bijoux collection, the Pasha Seatimer and Cartier Libre jewellery watches.

• The brand has global appeal and is one of the strongest performing brands in the group. This has made it ideal to exploit the growing luxury sector in the Far East. Cartier has 18 stores in mainland China in 2008 and nine in Hong Kong and Macao.

• Van Cleef & Arpels continued its policy of launching high end jewellery collections in 2007/08, with the Ballet Précieux and Atlantide ranges. It also plans to develop its watch ranges, which have recently grown in sales volumes and average price. This policy’s success is reflected in strong sales to its wholesale partners (which includes franchises).

RICHEMONT




• Piaget, which is both a jeweller and a watchmaker, launched its new Magic Hour watch in October 2007. The Limelight Party II collection combined both watches and high end jewellery, while the more accessible end of the price range was extended with the addition of the Miss Protocole ring, based on a successful watch design.

• A Lange & Söhne is positioned at the top end of the watch market. Its launches included the new Saxonia line and the Lange 31 watch.

• The other five specialist watch maisons all saw significant new product introductions, including the relaunch of the Patrimony line by Vacheron Constantin, the Radiomir 10 Days GMT watch at Officine Panerai and the relaunch of the Da Vinci and Pilot watches at IWC.

• Richemont is extending its watch manufacturing capabilities for Jaeger-LeCoultre (a new manufacturing plant will open in 2010), for Montblanc and for IWC (to be completed in summer 2008, with further expansion in 2009).

• Writing instrument maison Montblanc is increasingly targeting the jewellery and watch markets. For example, in Autumn 2007 it launched its first ever haute horlogerie (high end watchmaking) range, Montblanc Collection Villeret 1858 and a new diamond jewellery collection. Women's jewellery accounts for 6.0% of retail sales.

• In 2006, Richemont formed a partnership with the Polo Ralph Lauren Watch & Jewellery Company to design and create luxury watches and fine jewellery. Distribution will be through Ralph Lauren boutiques as well as wholesale to independent jewellery and luxury watch retailers. This represents Richemont’s first venture with a luxury fashion designer and is also Polo Ralph Lauren’s first entry into the precious jewellery and luxury watch business. First product lines are due to be launched in Autumn 2008.

Sales Performance

• Richemont's operating margin has taken off in the past five years, almost tripling since 2003. In the year to 31 March 2008, total sales rose 9.8%, which was not as healthy as the previous two years, but still strong. Operating profit rose 21.0%, helped by improved manufacturing efficiencies and comparatively contained increases in operating and central costs.

RICHEMONT




Table 34: Richemont trading record 2003-2008

Year to March 2003 2004 2005 2006 2007 2008

Total Sales €m 3,651 3,375 3,671 4,308 4,827 5,302Y-o-Y Change % -5.4 -7.6 8.8 17.4 12.0 9.8Operating Profit €m 259 296 485 741 916 1,108Operating Margin % 7.1 8.8 13.2 17.2 19.0 20.9

Source: Richemont, Verdict Research V E R D I C T

Table 35: Richemont trading record in US$ 2003-2008

Year to March 2003 2004 2005 2006 2007 2008

Total Sales $m 4,716 4,359 4,742 5,564 6,235 6,848Y-o-Y Change % -5.4 -7.6 8.8 17.4 12.0 9.8Operating Profit $m 335 382 626 957 1,183 1,431Operating Margin % 7.1 8.8 13.2 17.2 19.0 20.9 Note: Exchange rate five year average – see Glossary


Table 36: Richemont jewellery and watch maisons trading record 2003-2008

Year to March 2003 2004 2005 2006 2007 2008

Jewellery Maisons * Total Sales €m 1,994.0 1,808.0 1,938.0 2,227.0 2,435.0 2,657.0Y-o-Y Change % --- -9.3 7.2 14.9 9.3 9.1Operating Profit €m 421.0 367.0 456.0 616.0 667.0 767.0Operating Margin % 21.1 20.3 23.5 27.7 27.4 28.9 Watch Maisons * Total Sales €m 808.0 780.0 870.0 1,063.0 1,203.0 1,378.0Y-o-Y Change % --- -3.5 11.5 22.2 13.2 14.5Operating Profit €m 80.0 95.0 145.0 227.0 274.0 376.0Operating Margin % 9.9 12.2 16.7 21.4 22.8 27.3

* All product sales


RICHEMONT




• The jewellery and watch maisons enjoy operating margins above those of the rest of the group, with jewellery particularly consistent in its performance. These categories have both seen significant increases in profitability since the downturn caused by SARS and the Gulf War in 2003/04.

• The jewellery maisons enjoyed a 9.1% sales growth to year end March 2008, to €2,657.0m, with 15.0% increase in operating profits to €767.0m. Cartier's sales growth was stable in all regions except Japan, where it lagged. The watchmaking maisons outperformed the rest of the group, with a 14.5% increase in turnover to €1,378m. IWC and Jaeger-LeCoultre performed especially strongly.

• The group also singled out Van Cleef & Arpels, IWC and Baume & Mercier as improving their operating profitability. All of this led to both divisions producing their highest operating margins of the past six years and well ahead of comparable luxury group LVMH’s watches & jewellery division which produced an operating margin of 16.9% in the year to December 2007.

• However Richemont includes sales of all products through its Jewellery and Watch maisons, including clothing and accessories which generally have very high margins in luxury brands.

RICHEMONT




Product Split

• The company has increasingly seen a blurring of the lines between the maisons in terms of which product areas they specialise in, for instance with Montblanc's non-pen turnover making up 48.0% of its sales.

Figure 21: Richemont product sales split 2002/03 & 2007/08

54.6

22.1 23.3

48.1

23.728.2

0

10

20

30

40

50

60

Jewellery Watches Other

%

2002/03 2007/08

Note: 2002/03 figures based on maison sales


• Therefore Richemont now reports sales by product category as well. In 2007/08, jewellery product sales made up 48.2% of turnover and watches 23.7%, up 12.9% and 9.4% respectively.

• By distribution channel, retail sales made up 41.8% in 2007/08 and wholesale 58.2%, the two channels having largely kept pace with each other in terms of expansion in the past five years. Retail sales were boosted both by strong performance from existing stores as well as by new openings.

RICHEMONT




Figure 22: Richemont brands regional sales split 2002/03 & 2007/08

42.7

19.0 19.3 19.0

43.2

19.1

13.2

24.4

0

5

10

15

20

25

30

35

40

45

50

Europe Americas Japan Asia-Pacific Exc.Japan

%

2002/03 2007/08


• The Asia-Pacific region (excluding Japan) saw the strongest growth in 2007/08, up 21.1% (31.0% at constant exchange rates). This was driven by China with spectacular 54.0% growth, and Hong Kong, up 39.0%.

• The largest single market, Europe (including the Middle East), grew by 13.0%. The smallest markets were the fastest growing. Russia, making up 2.0% of sales, rose 38.0% and the Middle East, accounting for 4.0%, increased 42.0%.

• Sales in the Americas were up 13.0% at constant exchange rates, but due to the depreciation of the US Dollar, this translated into only 3.0% growth. Japan continues to be a difficult market, with a 3.0% rise at constant exchange rates translating into a fall of 3.0%.

• Cartier saw growth both in developed markets and in emerging ones like China, Russia and the Middle East, while Piaget sold well in Europe and Asia-Pacific. This region also saw strong performances from Jaeger-LeCoultre and IWC, where it now makes up 20.0% of sales.

RICHEMONT




Stores

Table 37: Richemont brands number of retail stores 2003-2008

Year to March 2003 2004 2005 2006 2007 2008

Company-owned 538 552 577 664 673 738Y-o-Y Change % -0.4 2.6 4.5 15.1 1.4 9.7 Franchised 307 313 364 431 481 574Y-o-Y Change % -10.8 2.0 16.3 18.4 11.6 19.3 Total 845 865 941 1,095 1,154 1,312Y-o-Y Change % -4.4 2.4 8.8 16.4 5.4 13.7


• There was heavy investment in Richemont's store network, with 65 net new openings of wholly-owned stores and 93 of franchises, taking them to totals of 738 and 574 respectively. Cartier refurbished eight stores (including New Bond Street in London, and Ginza in Tokyo) and opened 11 including six more major ones, concentrating on China, including Hong Kong, Moscow and Istanbul. At end-year it had 18 stores in China and 255 worldwide.

• The company is taking a cautious line on store development and refurbishment to minimise the risk of carrying expensive store estates in a downturn. It also recognises that for brands that are generally centred around watches & jewellery a large store on several floors is inappropriate. For its Cartier store in Ginza Tokyo it made a bold statement by extending the façade up to the roof, covering the whole frontage of the building – but did not open more floors – just kept the same sales area in-store.

• Other jewellery & watch maisons expanded. Van Cleef & Arpels' store total rose by 11 to 65 and Piaget added seven stores to make a total of 52.

RICHEMONT




Outlook • Jewellery and watch maisons remain the powerhouse of Richemont's

profitability. Despite improved performance from the rest of its portfolio of maisons, Richemont's watch & jewellery businesses still make up 90.3% of its divisional profits and 76.1% of its sales. In particular the watch maisons have improved their operating profit very strongly in the past five years, including 37.2% in the latest year.

• Richemont continues to stretch its price architecture into the high end of the market, especially in watches. In the belief that margins and brand sustainability are better at the high end, Richemont has encouraged brands to trade up by targeting the high end of their specific segments and markets. This continued in 2007/08 with Officine Panerai, for instance, launching its new Manifattura collection with prices over €10,000.

• Expansion of watch manufacturing will ensure reliable supply chain and reinforce this move upmarket. In 2008 and 2009, Richemont is set to invest in new and expanded manufacturing capability, allowing it to cope with the rapid rise in sales of the watch maisons. Cartier has also introduced watches bearing the Poinçon de Geneve quality hallmark, meaning it is now accepted as one of the limited number of high end watch manufacturers. This will reinforce its reputation for exclusivity.

• Richemont still has potential for growth in mature markets. Despite the high profile of its brands, such as Cartier, Richemont has not exploited either the European or North American markets to their full potential. While its venture with Ralph Lauren is targeting worldwide sales it also gives it the opportunity to learn more about the US market and for it to expand its own brand and product reach in this large market.

• Emerging markets provide yet greater opportunities and have the potential to counterbalance any slowing in core markets. At the moment, Richemont is pursuing China as the biggest expansion opportunity. Though it makes up just 5.0% of total sales at present, it has grown by 54.0% in the past year. The demand for watches and jewellery in emerging luxury markets such as Russia, China and India plays to Richemont’s product strengths. The cultural taste differences that exist in clothing and accessories are less pronounced in watches and jewellery, which tend to have global appeal. India still imposes high duties on imported watches and jewellery, but once it becomes a much freer market the potential for

RICHEMONT




Richemont brands will be enormous. Exposure to these markets could counter any slowing of performance in Western Europe and the US.

• Trading appears to be accelerating rather than slowing, with no ill effects from the credit crunch. Richemont's sales in April 2008 increased by 24.0% at constant exchange rates, implying a quickening in growth. Richemont's executive chairman Johann Rupert believes that oil price rises are recycling money into oil producing regions like the Middle East and Russia. Richemont is well placed to take advantage of both these markets.

SIGNET GROUP




CHAPTER 9 SIGNET GROUP

Company Overview

Table 38: Signet Group company overview 2008

Founded: 1950 v Headquarters: London Chairman: Sir Malcolm Williamson Group Chief Executive: Terry Burman Group Finance Director: Walker Boyd US Chief Executive: Mark Light UK Chief Executive: Rob Anderson Share of global jewellery retail market 2008e: 1.8% Brand Portfolio: Kay Jewelers, Jared The Galleria Of

Jewelry, H Samuel, Ernest Jones, Leslie Davis, JB Robinson, Marks & Morgan and others


SIGNET GROUP




• In 1950, Leslie Ratner opened a jewellery store in Richmond, Surrey and expanded the business both through acquisitions and store openings. Leslie's son, Gerald Ratner took over running the business in 1985, and the following year Ratners, as it was then known, bought H Samuel. This fascia was founded in 1862 in Liverpool, with the first store opening in Preston in 1890, and is the oldest part of the Signet Group.

• The company entered the US market in 1987, buying Ohio-based retailers Sterling and Westhall. Further US and UK acquisitions followed up to 1990, when it bought Kay Jewelers in the US.

• In 1991, Gerald Ratner made a famous gaffe about the quality of Ratners' products and was forced to step down and ultimately resigned from the Board in November 1992. In 1992 the company was renamed as Signet Group and UK stores that remained after a 300-store closure programme during 1992-94 were rebadged under the H Samuel and Ernest Jones names. It also launched its Jared store format in the US.

• It now operates four main fascias – H Samuel and Ernest Jones in the UK and Kay Jewelers and Jareds in the US. The US now accounts for 73.8% of the Group’s sales.

• H Samuel targets the mass market and focuses on value and promotional offers. It has a transactional website.

• Ernest Jones targets the top end of the middle market and those on medium to higher average incomes and also has a transactional website.

• Kay targets a wide audience with an authoritative range offering good value and high quality customer service. Most of its stores are sited in major shopping malls and it has a transactional website.

• Jared – The Galleria of Jewelry is the company’s off-mall (out-of-town) format. It target households with a higher income than Kay’s typical shopper and, as a destination store, offers a larger range and wider amenities such as a crêche and a coffee lounge. The website is not yet transactional but will be later in 2008.

• In the US the company operates in-house credit facilities which are used in the case of just over 50.0% of US sales.

SIGNET GROUP





• In June 2006, Signet Group confirmed that it had held preliminary discussions with rival US jewellery retailer Zale Corporation regarding a merger, but that talks had been terminated.

• The company announced in January 2008 that it would review its primary listing and domicile in the UK in the light of the growth of US shareholders on its register. After consulting with its shareholders, the board subsequently announced that it believed shareholders, on balance, would support a move of the primary listing to New York and a change of domicile to Bermuda. A proposal is expected to be put to shareholders during the summer of 2008.

Sales Performance

Table 39: Signet Group trading record in $ 2003-2008

Year to end January 2003 2004 2005 2006 * 2007 2008

Group Sales $m 2,446 2,697 3,005 3,154 3,559 3,665Y-o-Y Change % --- 10.3 11.4 5.0 12.8 3.0Group Operating Profit $m 297 341 395 375 416 351Group Operating Margin % 12.1 12.7 13.2 11.9 11.7 9.6 * 53 weeks Note: Signet is registered as a plc in the UK. The above results are translated into $ reporting

Source: Signet Group, Verdict Research V E R D I C T

• The year to 2 February 2008 was a more difficult one than 2006/07, with sales rising 3.2% on a comparable basis (there were 53 weeks in 2006/07) to $3,665.3m. Group like-for-like sales fell 0.7%, the first annual decline since 1992/93, while operating profits fell 15.6% to $351.3m.

SIGNET GROUP




Table 40: Signet divisional trading record in $ 2003-2008

Year to end January 2003 2004 2005 2006 * 2007 2008 US Sales $m 1,730 1,867 2,061 2,309 2,652 2,706UK Sales $m 715 830 944 845 907 960 US Sales growth % --- 7.9 10.4 12.0 14.9 2.0UK Sales growth % --- 16.1 13.7 -10.5 7.3 5.8 US Operating Profit $m 209 225 265 301 327 262** UK Operating Profit $m 97 126 143 88 103 105 US Operating Margin % 12.1 12.1 12.9 13.0 12.3 9.7UK Operating Margin % 13.6 15.2 15.1 10.4 11.4 10.9 * 53 weeks ** Excludes head office and central costs Note: Signet is registered as a plc in the UK. The above results are translated into $ reporting


• The US business was hit by a particularly weak fourth quarter – the most important as it provides the highest share of sales in the year, around 40.0%. In Q4 2007/08 like-for-like sales were down 8.6% against a rise of 2.7% over the previous nine months.

• Total US sales were up 4.0% against the same 52-week period the year before, but fell by 1.7% like-for-like on the same basis. Operating profits fell 19.6% on a 52-week basis, to $262.2m, with operating margins falling from 12.3% to 9.7%. A lower level of sales, promotional activity and higher raw material costs all contributed to lower operating margins.

• The UK business fared better, despite slower growth in sales at constant exchange rates and on a 52-week basis of 2.0% to $959.6m. Operating profits were down just 1.3% on a comparable basis, to $105.1m, while operating margin fell from 11.4% to 10.9%. Ernest Jones performed best, with like-for-like sales on a comparable basis up 2.9%. As with the US, the fourth quarter was difficult, with UK like-for-like sales down 1.7%.

SIGNET GROUP




Current Trading

• Results for the first quarter of 2008/09 to 3 May showed another contrast in perfomance between the US and the UK. Group sales rose 1.0% to $822.5m, while operating profit fell 18.9% to $43.8m, hit by deteriorating operating margin in the US. In the US, like-for-like sales declined by 4.7% and fell 0.2% in total to $630.9m, despite new space and a reasonable Valentine's Day period (due to better weather than in 2007). Operating margin fell to 7.2% from 9.5%.

• The UK was much more buoyant, with like-for-like sales growth of 5.3% and total turnover growth of 4.0% at constant exchange rates, producing an operating profit of $2.7m compared with a loss of $1.9m in the comparable period in 2007. Management noted at the time of the Q1 results that given the uncertain consumer environment and high Q2 comparatives, this level of performance was not expected to continue.

• In response to increases in commodity costs, in particular gold, the US division increased prices and realigned pricing architecture in three tranches after Valentines Day, in mid- and late-March. The objective of the price increases was to at least maintain the full year gross margin at last year’s level and offset not just higher commodity costs but also greater promotional activity and changes in the sales mix to cheaper product.

• In the light of the slowdown in sales and the economic outlook the company has realigned its strategy for more cautious growth, cutting back on inventory levels and costs, including staff hours and marketing budgets.

• It intends to continue investing in the business but less aggressively in the short term. Therefore instead of the 10.0% space growth of the past three years it is cutting back to 4-5% growth each year in 2008/09 and 2009/10. Investment in customer service to enhance the customer experience will continue in the US.

• In the UK there will be refurbishments and relocations of 35 Ernest Jones stores, instead of the 46 originally planned, while the resiting of H Samuel to larger stores in better locations will continue. With retail demand slowing down sharply in the UK and new space in abundance there should be plenty of opportunities for the company to achieve favourable deals on sites in the

SIGNET GROUP




UK – particularly where it is looking for larger stores for its H. Samuel fascia.. Though it will ultimately have fewer H Samuel stores, those remaining should be more productive.

• The level of bad debts has increased, but so has the credit portfolio, reflecting no doubt the squeeze on consumers’ disposable income. The company is instigating more rigorous checking and collection systems to mitigate risk.

Figure 23: Signet Group product sales split 2002/03 & 2007/08

56.4

12.59.2

12.39.7

62.7

12.510.2

12.8

1.80

10

20

30

40

50

60

70

DiamondJewellery

Gold Jewellery Other Jewellery Watches Other

%

2002/03 2007/08

Note: Others includes royalties and licensing


• Diamond jewellery is the predominant category in Signet Group's product mix, mainly due to its importance in the US business, where it makes up 75.0% of sales. Gold and other jewellery as well as watches play a much less important role in the business overall. The UK chains are different, with an even mix of watches, gold and diamond jewellery. They have become much more focused on the core jewellery and watch sectors over the past five years, with declining sales of other items like gifts.

SIGNET GROUP




• The company has exclusive agreements with some suppliers. For instance, its Leo Diamond range is unique to Signet in both the US and UK. These diamonds are supplied by Leo Schachter and are measured and certified for their superiority over standard cut diamonds. A second certificate from the International Gemological Institute (IGI) verifies carat weight and grading and gives a unique number (invisible to the human eye and lasered on the girdle of the diamond).

• In addition, Signet has developed the Peerless Diamond and Hearts Desire ranges in the US, both based on ideal cut diamonds.

• In the US it has, since 2005/06, begun to source its own rough diamonds for cutting and polishing through contract manufacturers as a means of improving security of supply and reducing costs. This is expected to be expanded significantly in 2008/09. Most of the US division's diamond cutting and jewellery manufacture is carried out in Asia under contract.

• In the UK business, manufacturing is done under contract for 27.0% of the diamond merchandise and 20.0% of the gold merchandise, through a buying office in Vicenza in Italy. In 2007/08, the four largest watch suppliers and one jewellery supplier made up 26.0% of product purchased.

SIGNET GROUP




Figure 24: Signet Group geographic sales split 2002/03 & 2007/08

70.573.8

29.526.2

0

10

20

30

40

50

60

70

80

2002/03 2007/08

%

US UK


• The US has increased as a proportion of the business in the past five years following rapid store expansion in that market and a gradual contraction in the number of stores in the UK.

SIGNET GROUP




Store Portfolio

Table 41: Signet Group retail stores 2002/03-2007/08

Year to end January US Store Numbers UK Store Numbers

2003 1,050 610 2004 1,103 604 2005 1,156 602 2006 1,221 593 2007 1,308 581 2008 1,399 563


• In total over the US and UK Signet operates nearly 2,000 stores and has been focusing more recently on expanding its off-mall space in the US. It has a criterion of looking for a 20.0% internal rate of return on investment over five years and until now has exceeded this. However the tough trading environment is going to make this more difficult to achieve.

SIGNET GROUP




Table 42: Signet US stores 2006-2008 Year end January 2006 2007 2008 Kay Sales $m 1,290 1,487 1,490Stores numbers 781 832 894* Average sales per store $000 1,665 1,815 1,710Average store size sq ft 1,170 1,270 1,270 Jared Sales $m 534 664 756Stores numbers 110 135 154* Average sales per store $000 5,453 5,676 5,341Average store size sq ft 4,700 4,900 4,900

* Only stores that have operated for full financial period


• In 2007/08, Signet Group's main expansion came from 40 off-mall openings of Kay stores as well as 19 openings of its Jared The Galleria Of Jewelry format. In total some 91 stores were added, taking Kay to 894 from 832 branches, Jared to 154 from 135 and smaller regional chains to 351 from 341.

• Kay is the largest speciality jewellery retail chain in the US by turnover, targeting households with incomes between $35,000 and $100,000, with an average sale price of $327. The Jared chain operates at the upper end of the middle market, with household incomes ranging from $50,000 to $100,000 and an average sale price of $747.

• In 2008/09, a slowing is expected in store development, with 36 net new openings, most of them off-mall branches of Kay or of Jared. However, this will still increase space by 4-5%. In the long term, the group believes there could be potential for over 1,430 Kay branches, 300 Jared stores and around 700 regional stores.

SIGNET GROUP




Table 43: Signet UK stores 2006-2008 Year end January 2006 2007 2008

H Samuel Sales £m 256 268 257Stores numbers 386 375 359Average sales per store £000 681 695 722Average store size sq ft 1,091 1,100 1,100 Ernest Jones Sales £m 208.5 218 219Stores numbers 207 206 204Average sales per store £000 1,065 1,079 1,105Average store size sq ft 862 870 870


• The UK stores total fell by 18 to 563, with 17 closures of H Samuel branches and two of Ernest Jones stores, with just one H Samuel branch opened. At the year end 282 H Samuel stores had been refitted to a new, customer-friendly format as part of a programme started in 2001, including 16 refits or resites in 2007/08. Another 23 are expected in 2008/09. H Samuel is increasingly focusing on larger stores and closing smaller ones.

• Signet uses sales per store as a measure of productivity and on this basis the UK produced an uplift in 2007/08. Though H Samuel’s sales were down because of a reduction in store numbers its like-for-like store productivity increased by 3.9%.

• For Ernest Jones the increase was less, 2.4%, but it produces the highest store productivity of Signet’s fascias. On a straight sales per sq ft basis it produces £1,270 per sq ft – over $2,400. Though Jared has the largest sales per store $5,3m its typical store sales per sq ft is only $1,090. The advantage however should be that Jared stores, being off-mall, should have lower rents and operating costs than Ernest Jones stores which are typically in prime, high-footfall locations in premium shopping centres.

• That said, though both Kay and Jared average sales per store have been increasing, they both declined over the past year – by 5.8% and 5.9%

SIGNET GROUP




respectively – which puts further pressure on margins as current trading conditions are unlikely to boost sales.

Outlook

• Size brings some economies of scale. As the largest speciality jewellery retailer in the both the US and UK, Signet leverages its size to deal directly with suppliers to obtain advantageous terms. That said there is no Group buying and very little buying synergies given the differences in merchandise between the two divisions. Its scale does allow it to buy directly from manufacturers as against wholesalers – 50% of its diamond jewellery in the US is bought as loose polished stones and the jewellery is manufactured under contract.. It also negotiates exclusive rights to some branded ranges. In addition, its operational economies in running stores and particularly in marketing nationwide retail brands in the large US market are a major advantage. These will continue to give Signet Group a significant edge on its mass market competitors particularly the large number of independents.

• Still potential for US expansion. Both the Jared and Kay formats have potential for further growth in market penetration in the US, the latter particularly in off-mall locations, where it is best placed to win customers from independent specialists. This will intensify the benefits derived from Signet's scale, but only as long as space productivity can be maintained. A short term slowing of its expansion plans is a wise move to avoid the risk of rising costs without the corresponding increases in sales.

• Exposure to the US and UK markets is a short term disadvantage. Though there is potential for long term share gain in the US, the largest national jewellery market in the world, Signet is likely to be disadvantaged in the short to medium term due to its concentration on two countries where household debt problems are most intense, particularly for its core customers in the mass market. Conversely it lacks exposure to regions like Asia, Eastern Europe and the Middle East where growth is likely to be more buoyant in the next two years.

• Positioning also creates problems. Though Signet has done much to differentiate its store environments and customer service from competitors, its position as a mass market specialist with a focus on diamonds creates further challenges. Most importantly, its customers’ discretionary spending is squeezed harder by economic downturns than those at the top end. Secondly, its core business, the sale of diamonds, is driven very much by

SIGNET GROUP




events such as weddings, anniversaries, Christmas and Valentine’s Day. By using other means to drive sales – such as fashion which is driving sales of pearls currrently – it may be able to reduce its dependence on such occasions for instance.

• Higher participation in exclusive and branded product would be an advantage. Traditionally, most middle market jewellery has been unbranded, yet the power of branding is proved by the continuing success of the luxury end of the market. Signet has been working to differentiate itself by creating exclusive ranges, for instance Julien Macdonald in H Samuel and the Jane Seymour collection in Kay. It also offers exclusive lines from jewellery brand LeVian and its own Peerless and Hearts Desire ranges in the US. However, there is room for further growth in this direction if Signet wishes to create a truly differentiated appeal and avoid direct price-based competition on similar product to its rivals’. Though its proposition is based on the quality of service and merchandise, in an economic downturn price becomes top-of-mind with consumers. High profile own brands build all year round appeal and higher margins than suppliers’ brands deliver and exclusivity.

• Expansion into new markets would be a risk, but may be necessary in the long term. Signet Group has decided that its medium term future as a mass market retailer lies in its existing markets, particularly in the US, where it believes it can double its existing store space. However, with better development of its own exclusive product ranges, Signet Group might be better placed to expand into dynamic markets like the Middle East and Asia and the growing 'new' European countries. We predict the US will be slower growing than these regions in the next five years and it is certainly a highly competitive market. Therefore Signet should not exclude regions outside the US and UK for future development. An acquisition of an existing operator in one of these markets, having a natural fit with its existing propositions, with high quality real estate and shop fit, and a strong supply chain,, would provide a quick, and less risky, entry. This is a model Digico Holdings and its affiliates are using. Though there is sense in battening down the hatches in the current economic climate Signet does risk being left behind.

SWATCH GROUP




CHAPTER 10 SWATCH GROUP

Company Overview

Table 44: Swatch Group company overview 2008

Founded: 1983 Headquarters: Biel, Switzerland Chairman: Nicholas G Hayek Vice-chairman: Peter Gross President: Nick Hayek Jr CFO: Edgar Geiser Share of global jewellery retail market 2008e 7.1%


Balmain, Breguet, Blancpain, Certina, ck watch & jewelry, Endura, Flik Flak, Glashütte Original, Hamilton, Jacquet Droz, Léon Hatot, Longines, Mido, Omega, Rado, Swatch, Swatch Bijoux, Tiffany & Co, Tissot, Union Glashütte


• The Swatch Group was founded in 1983 by the merger of two Swiss Watchmakers, ASUAG and SSIH, each of which owned several of well established Swiss watch brands. SSIH was originally founded in 1930 through the merger of Omega and Tissot and ASUAG was formed in 1931. They were combined to make a new group, SMH, headed by engineer Nicholas G Hayek.

SWATCH GROUP




• The formation of SMH was in response to a major crisis in the Swiss watch industry in the 1970s as a result of cheap new electronic products from Japan. Nicholas Hayek's aim was to respond to competition with a new, low cost, artistically inspired watch – the Swatch. In 1998, SMH was renamed as the Swatch Group.

• The company is now the world's leading manufacturer of finished watches, as well as making jewellery, watch movements and components. It supplies almost all the components necessary both for its own watches and those made by other Swiss watchmaking groups and its nano-mechanical and nano-electronic subsidiaries supply other industries outside the sector.

Recent Key Developments • The Swatch Group carries out a vast range of marketing and sponsorship

activity aimed at putting the Swatch and other group brands permanently in the public eye. Sports timing is particularly important to the image of the group, in particular the Olympic Games. In 2007, examples of Swatch marketing included support or sponsorship of events including the World Beach Volleyball Championships (held in the unlikely setting of Swiss ski resort Gstaad), the Swatch O'Neill Big Mountain Pro snowboarding competition, and the freestyle motocross Red Bull X-Fighters Tour 2007.

• The group sponsors 30 sportsmen and women involved in beach volleyball and a variety of extreme or action sports. They include nationalities ranging from Chinese to Brazilian, Norwegian and American.

• The luxury and prestige brands all nurture their own associations with particular types of sports. For instance during 2007 Blancpain was involved in the World Arabian Horse Championships in Paris and the International Arabian Horse Championships in Dubai. It is also involved in classic and vintage car racing and the Monaco Yacht Show.

• In April 2007 an agreement was signed between Swatch Group and Chinese hotel and travel company Jing Jiang Group for the redevelopment of a Shanghai landmark, the Peace Hotel South Building, in a strategic location at the corner of Nanjing Road and the Bund – Shanghai's waterfront. It will open later in 2008 and combine both a store and an 'artists' hotel', where selected artists will be able to live and work.

SWATCH GROUP




• The following month Swatch Group opened the Nicholas G Hayek Center in the Ginza shopping district of Tokyo, incorporating seven monobrand boutiques (Blancpain, Breguet, Glashütte Original, Jaquet-Droz, Leon Hatot, Omega and Swatch), offices, exhibition halls and hanging gardens.

• In December 2007, Swatch Group increased its shareholding in the largest watch retail chain in China (166 stores at the end of 2007) Xinyu Hengdeli from 7.25% to 8.09%.

• In the same month it announced a strategic alliance with US jeweller Tiffany & Co for the development, marketing and distribution of watches under the US company's name.

Sales Performance

Table 45: Swatch group trading record 2003-2008e


Total Sales SFr.m 3,828 3,981 4,292 4,820 5,646 6,493Y-o-Y Change % --- 4.0 7.8 12.3 17.1 13.5Operating Profit SFr.m 594 645 735 973 1,236 ---Operating Margin % 15.5 16.2 17.1 20.2 21.9 ---

Source: Swatch Group, Verdict Research V E R D I C T

Table 46: Swatch Group watches & jewellery division trading record 2003-2008e


Total Sales SFr.m 2,921 3,141 3,437 3,723 4,456 5,080Y-o-Y Change % --- 7.5 9.4 8.3 19.7 14.0Operating Profit SFr.m 516 552 626 738 920 ---Operating Margin % 17.7 17.6 18.2 19.8 20.6 ---


SWATCH GROUP




• The first half of 2007 showed very rapid growth of 19.6% in local currency terms (20.0% in Swiss Francs) in sales in the watches & jewellery division, with net sales of SFr 1,997m and operating profits of SFr 353m, up 20.9%. The luxury segment, led by Blancpain, Breguet and Omega, was particularly strong, while in the other price categories, Longines and Tissot saw sales grow quickly. Sales grew by double digits in Asia, America and Europe but were flat in Japan due to the low Yen and poor economic situation.

Table 47: Swatch Group trading record in US$ 2003-2008e


Total Sales $m 3,145 3,271 3,526 3,960 4,639 5,334Y-o-Y Change % --- 4.0 7.8 12.3 17.1 13.5Operating Profit $m 488 530 604 799 1,015 ---Operating Margin % 15.5 16.2 17.1 20.2 21.9 ---

Note: Exchange rate six year average – see Glossary


Table 48: Swatch Group watches & jewellery division trading record in US$ 2003-2008e

.Year to December 2003 2004 2005 2006 2007 2008e

Total Sales $m 2,400 2,581 2,824 3,059 3,661 4,174Y-o-Y Change % --- 7.5 9.4 8.3 19.7 13.5Operating Profit $m 424 454 514 606 756 ---Operating Margin % 17.7 17.6 18.2 19.8 20.6 ---



• In the second half of the year, growth was just as fast, with total net sales in the jewellery & watch division rising 19.7% for the full 12 months, to SFr 4,456m. Operating profits increased 24.7% to SFr 920m. Asia and the Middle East saw high double digit growth, while increases in America, Europe and Oceania were also in double figure percentages. Operating

SWATCH GROUP




margins were protected against rising prices in precious metals, diamonds and other raw materials by some price increases.

Current Trading • The company said sales grew strongly in January and February 2008,

despite a negative currency effect due to the strength of the Swiss Franc. We have estimated slower growth of 14.0% for the watches and jewellery division for the year as a whole, to take account of this currency effect in expectation of slowing growth in major markets like the United States.

Stores • Distribution of Swatch products is mainly handled via a network of retailers

selected by local group subsidiaries or agents. However, the group has also increasingly set up its own stores. They are either monobrand shops, selling individual Swatch Group brands, or multibrand boutiques.

• Monobrand stores are in prestige locations in high profile shopping areas of cities including New York, London, Tokyo, Paris, Shanghai and Beijing. Blancpain, Breguet, Jaquet Droz, Léon Hatot, Omega and Swatch all have monobrand stores. Its 13-strong multi-brand fascia, Tourbillon, also sells collections from Blancpain, Breguet, Glashütte Original, Jaquet Droz, Léon Hatot and Omega. It is in a mixture of resort towns and major cities.

• The group also runs the Tech-Airport fascia, with 27 points of sale as at the first quarter of 2008, offering watches, gems and jewellery in four major French airports. During 2007, Omega opened 14 monobrand flagship stores, three of them in Beijing, where it will be the official timekeeper for the Olympic Games. Around 30 franchise boutiques were opened, bringing the total to 120. Breguet opened stores in Moscow, Paris, Singapore and Tokyo while Blancpain added boutiques in Beijing, Hong Kong, Macao, Mumbai and Singapore. Swatch operates online in the US, the UK, Sweden, Germany, Switzerland and Japan.

SWATCH GROUP




Outlook

• The Swatch Group is in an immensely powerful competitive position. Not only does it own a large portfolio of extremely high profile watch brands, but also it has a central position in the supply chain of the Swiss watch industry. This control over production and branding is the central reason for its very high profitability, as well as the economies of scale that the sheer size of the business offers.

• Exposure to the top end of the watch market will help profit margins and growth. While it has developed a small presence in the jewellery market, Swatch's concentration on the top end of the watch sector means it is less exposed to current economic circumstances than groups where midmarket brands or jewellery are a significant proportion of sales. It has seen some increase in costs from rising commodity prices, but its market positioning has allowed it to increase prices so far with little ill-effect.

• Retail development is being pursued rapidly. Swatch already has a huge global distribution network, but it is reinforcing the presence of its brands with a rapid store opening programme. Again the sheer size of the group gives it the advantage over competitors in securing the resources necessary to roll out a retail presence rapidly in expensive key locations.

• Well positioned for the Beijing Olympics. The group's leading prestige brand, Omega, will receive a huge amount of coverage in its role as timekeeper at the Olympic Games. That, combined with its growing standalone store presence, will act as an ideal launchpad for future growth in the Chinese market.

• Partnerships could be beneficial. Swatch is building crucial partnerships with companies in related sectors, namely with Tiffany & Co in the jewellery sector and Chinese watch retailer Xinyu Hengdeli. It has yet to be seen how these will grow and whether the co-operation with Tiffany & Co will remain limited to creating and selling watch ranges. Likewise, Swatch's stake in the Chinese retailer is only small, but full-scale partnership would give Swatch a retail presence at a crucial time in the Asia market's development.

TIFFANY & CO




CHAPTER 11 TIFFANY

Company Overview

Table 49: Tiffany & Co. company overview 2008

Founded: 1837 Headquarters: New York Chairman & CEO: Michael J. Kowalski President: James E. Quinn CFO: James Fernandez Share of global jewellery retail market 2008e 1.7%

Watch & Jewellery Brand Portfolio: Tiffany & Co, Iridesse, Elsa Peretti, Paloma Picasso, Tiffany-Schlumberger, Frank Gehry


• Tiffany was founded by Charles Lewis Tiffany in 1837, when he opened a store in downtown Manhattan, incorporating the company in 1868. The company's reputation grew on the back of inspirational design and innovations like the Tiffany diamond ring setting.

TIFFANY & CO




• Its global reputation was cemented by the film of Truman Capote's novel, Breakfast at Tiffany's, featuring Audrey Hepburn, released in 1961. Although it operated stores in Paris and London before World War II, it only returned to overseas markets from 1972 onwards, starting with Japan and moving into Europe with a London store opening in 1986. It floated on the New York Stock Exchange in 1987.

• Its main business is in the US, which accounts for 59% of sales. There it operates 70 stores (at the end of January 2008) under the Tiffany & Co. name, as well as a much smaller Iridesse chain of 16 pearl jewellery stores. Some 86% of the group's sales are made up of Tiffany branded jewellery, although it does sell watches, silverware, china, stationery, perfumes and accessories. While it has a large presence in the Japanese market (17.0% of sales), mainly comprising operations within Mitsukoshi and other department stores, the principal focus of recent development has been in other markets, particularly the Asia-Pacific region and Europe.

• The company is the sole licensee for designs sold under the names of designers Elsa Peretti (making up 11.0% of sales) Paloma Picasso and the late Jean Schlumberger, as well as the architect Frank Gehry.

• The company also runs a well-established catalogue and online retail business in the US, mailing out 19.5m catalogues a year (2006/07) and 771,000 orders. It also has transactional websites in the UK and other countries including Japan and Canada and an informational website in China.

• Diamonds are central to the Tiffany business, with 48% of sales including them in one form or another, and since 2003 it has set up its own rough diamond processing operations, accounting for 40% of its needs. It also manufactures 59% of the jewellery it sells, in facilities in Rhode Island and New York state.


• In 2007, Tiffany & Co signed a 20-year agreement with The Swatch Group setting up a strategic alliance for the design, manufacture, distribution and marketing of watches under the Tiffany trademark. Although Tiffany already sells some watches (2% of sales), the range will be replaced under the new arrangement.

TIFFANY & CO




Sales Performance

Table 50: Tiffany & Co. trading record 2004-2009e

Year to End January 2004 2005 2006 2007 2008 2009e

Total Sales $m 2,000 2,205 2,395 2,561* 2,939* 3,233Y-o-Y Change % 17.2 10.2 8.6 10.7** 14.8 10.0-

Operating Profit $m 355.519 294.529 383 431 530 ---Operating Margin % 17.8 13.4 16.0 16.8 18.0 --- Note: Figures from 2007 onwards exclude Little Switzerland retail business, with turnover of $52.8m in 2007/08 and $87.6m in 2006/07. ** On a comparable basis


• Overall, 2007/08 was a very successful year for Tiffany, with net sales rising 14.8% to $2,939m and operating profits up 23.1% to $530m. In the US, performance was boosted by a 7.0% rise in comparable store sales, with both more transactions and a higher average transaction value, with more high value purchases by customers. Diamond jewelllery sold well and the New York store's sales were also helped by higher tourist spending.

• International retail sales grew even more strongly, rising 15.0% on a constant exchange rate basis. The Asia-Pacific region (excluding Japan), enjoyed a 26.0% rise in comparable store turnover at constant exchange rates, while in Europe, where the UK makes up over half the sales, it rose 13.0% on the same basis. Japan saw a decline of 5.0%, due to poor economic conditions and lack of consumer confidence.

• Overall, operating margin grew from 16.8% to 18.0%, because sales increased relative to both fixed and operating costs in the US, although new stores and store operating costs rose in line with sales in international retailing.

Current Trading

• The first quarter of 2008/09 to the end of April saw more difficult conditions in the US. While the New York flagship store was buoyed by tourist spending,

TIFFANY & CO




with sales up 16.0%, the remainder of its US business saw comparable store sales fall 4.0%. Overall in the US, comparble store sales were flat. The Asia-Pacific region was boosted by new store openings, with turnover rising 10.0% in constant currency terms, and Europe rose 30.0% on the same basis. Operating profits rose 17.5%, to $103.3m.

• Overall, international sales are expected to outweigh the US slowdown, and the company forecasts full-year sales up 10.0%.

Figure 25: Tiffany & Co regional sales, watches & jewellery 2003 & 2008e

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Europe OtherInternational

%

2003/04 2008/09e


• Tiffany’s Japanese business has been severely hit by the downturn in the department store sector there and as a result has contracted dramatically. However, the overall proportion of overseas sales has expanded due to the outperformance of the Asia-Pacific region and Europe, with a combination of positive comparable store sales, new branch openings and favourable currency movements.

TIFFANY & CO




Figure 26: Tiffany & Co. sales by product area, 2003 & 2008e

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• While Tiffany does sell product in other categories, jewellery is becoming even more important to the business as a whole, particularly pieces incorporating diamonds. The new venture with Swatch can be expected to provide a significant lift to Tiffany's watch turnover, which until now has remained very limited.

TIFFANY & CO




Store Portfolio

Table 51: Tiffany & Co number of retail stores 2003-2008

Year to End January 2003 2004 2005 2006 2007 2008

United States 47 51 55 59 64 70Y-o-Y Change % 6.8 8.5 7.8 7.3 8.5 9.4

Japan 48 50 53 50 52 53Y-o-Y Change % 2.1 4.2 6.0 -5.7 4.0 1.9

Asia Pacific 20 22 24 25 28 34Y-o-Y Change % - 10.0 9.1 4.2 12.0 21.4

Other* 16 18 19 20 23 27Y-o-Y Change % 6.7 12.5 5.6 5.3 15.0 17.4

Total 131 141 151 154 167 184Y-o-Y Change % 4.0 7.6 7.1 2.0 8.4 10.2

*Other includes stores in Europe, Canada and Central/South Americas.


• Tiffany has been growing its store portfolio rapidly in the past five years, with a particularly strong pace of development in 2007/08, opening 21 stores (10 of them outside the US and Japan) and closing four branches, three of them in Japan.

• The company plans to accelerate its store opening programme in 2008/09, with six new branches in the US and 18 in overseas markets. They will include locations in Los Angeles (two), West Hartford (Connecticut), Uncasville Mohegan Sun (Connecticut), Columbus (Ohio) and Pittsburgh. International openings already planned include Australia, Belgium, Germany, the UK (Heathrow Airport), Spain, Ireland, China (two stores) and Japan (four).

• In May 2008 Tiffany announced it would be opening a new 2,800 sq ft store in the Westfield shopping centre in White City in west London, scheduled for autumn 2008.

TIFFANY & CO




Outlook

• Home market in the US appears to be slowing. The 2007/08 financial year as a whole was a good one for Tiffany, but the fourth quarter of the year and the first of 2008/09 have seen US sales grind to a halt, only being saved by the effects of tourist spending in New York. The home market still accounts for 57% of sales, so if the economy suffers a recession in 2008 and into 2009, this is likely to hit Tiffany's performance.

• International business remains buoyant. Aside from the depressed Japanese market, Tiffany is performing well internationally, both in Europe and in the Asia-Pacific region. It has considerable scope for growth in both, since its presence in both is small compared to some luxury groups. It also has potential for growth in other regions like Latin America. This should counteract any underperformance in the US.

• Watches provide a growth opportunity. The venture set up with Swatch to produce and sell Tiffany watches provides a whole new area for potential growth for the business, which until now has had only a tiny business in this buoyant market segment. If it does manage to increase its sales in this area, it will also provide a counterbalance to the very high dependency on diamond jewellery, which could be vulnerable to future fashion trends.

• Store growth will increase market share. Like other jewellery businesses, Tiffany still has a comparatively small market share. Its growing store network, both in the US and in its newer markets will enable it to capture market share from competitor jewellers lacking Tiffany's high-profile brand name and unique product offer. Its emphasis on own-brand and exclusive product development will give it a further advantage in expanding in overseas markets.

TSUTSUMI




CHAPTER 12 TSUTSUMI

Company Overview

Table 52: Tsutsumi company overview 2008

Founded: 1962 Headquarters: Warabi, Saitama Prefecture, Japan President & Representative Director: Sieji Tsutsumi Director of Administrative Division: Satoshi Tagai Share of Global Jewellery Market 2008e: 0.3% Brand Portfolio: Satsuma Jewelry, Tsutsumi Jewelry


• Tsutsumi was set up in 1962 by its president, Seiji Tsutsumi, incorporating as the Tsutsumi Precious Metals and Crafts Company in 1973 and then changing its name to Tsutsumi Jewelry in April 1988.

• Three years later, in September 1991, it undertook an initial public offering and is now listed on the Tokyo stock exchange.

• The company has around 160 stores, centred on the Tokyo region, where the company is based, but ranging from Osaka in the south of Japan to Tohoku region in the north. It also sells its products on a wholesale basis, often through department stores and through a transactional website. Retail accounts for around 90.0% of its revenue, the rest is via wholesale.

• Tsutsumi's business model is based on in-house production, and this supplies about 90.0% of all the jewellery it sells. The company’s activities include gem purchasing, manufacturing and processing.

TSUTSUMI




• Its three factories produce in the region of 1m rings and accessories every year, using 340,000 carats of gems a year and six tons of gold and platinum.

• Extensive vertical integration of the business has enabled the company to maximise its margins and compete in a very tough Japanese retail environment.

• Its market positioning is based on reasonably priced, casual jewellery styles, mostly for every day wear, with an emphasis on pretty, feminine styles. Typical prices range from $40 for silver and crystal jewellery to $120 for a ring incorporating 14 carat white gold and diamonds. Prices are often discounted heavily, by up to a third.

Sales Performance

Table 53: Tsutsumi trading record 2004-2009e

Year to March 2004 2005 2006 2007 2008 2009e

Total Sales ¥m 26,891 27,194 29,518 30,441 31,706 33,291Y-o-Y Change % 2.1 1.1 8.5 3.1 4.2 5.0Operating Profit ¥m 5,674 5,267 6,064 5,893 5,251 ---Operating Margin % 21.1 19.4 20.5 19.4 16.6 ---

Source: Tsutsumi, Verdict Research V E R D I C T

• Tsutsumi has seen growth in each of the past five years in a national jewellery market that has been exceptionally difficult. Its operating profit margin, though reduced in 2007/08, is above the average of 15.6% for the group of 10 companies profiled in this report.

TSUTSUMI




Table 54: Tsutsumi trading record in US$ 2004-2009e

Year to March 2004 2005 2006 2007 2008 2009e

Total Sales $m 241.0 243.0 264.0 272.0 284.0 298.0Y-o-Y Change % 2.1 1.1 8.5 3.1 4.2 5.0Operating Profit $m 51.0 47.0 54.0 53.0 47.0 ---Operating Margin % 21.1 19.4 20.5 19.4 16.6 ---


Source: Tsutsumi, Verdict Research V E R D I C T

• The financial year 2007/08 was another year of growth, with sales rising 4.2% to ¥31.7bn, though operating profits slipped back slightly to ¥5.3bn. The first half was particularly difficult, with sales falling 1.7% to ¥14,043m, but trading recovered and the second half was considerably better.

• Results presented by the company suggest that second half sales were up 9.3%, comparing 2007/08 with the previous year. We forecast continued growth of 5.0% for 2008/09.

Stores

• Tsutsumi's stores are in a mixture of locations, ranging from shopping malls, and city centre shopping areas to railway stations. In March 2008 it had 162 stores, which it aims to increase by about 10 every year.

• Store interiors are modern, sleek and minimalist, with midfloor cabinet-tables and cream, white and chocolate coloured materials.

TSUTSUMI




Outlook

• Tsutsumi will continue its steady growth. Despite the exceptionally difficult retail climate in Japan in the last decade, the company has managed to expand and maintain high profit margins, which is a rare achievement in the middle-to-lower price segment of the jewellery market and is testament to the value of having a vertically integrated business in jewellery retailing. Also its positioning of its well priced product aimed at casual every day wear has managed to tempt female consumers to spend on jewellery for themselves as part of their general wardrobe budget, rather than seeing products as special one-off purchases.

• Store expansion could be accelerated. It appears Tsutsumi is being run on an exceptionally conservative basis, with only 10 stores opening a year. Given the profitability the company enjoys, it might be possible to accelerate this to build up the chain's nationwide presence. Given the problems being experience by department stores, which account for much of Tsutsumi's wholesale turnover, it will need to add to its portfolio of standalones to compensate for this.

• Tsutsumi's business model could be exported overseas. Though it would require the company to take on considerably more risk than it has done until now, and distribution costs will be higher, it could find it has a more widespread appeal outside the Japanese market, especially in the rest of the Asia-Pacific region.

• Other market segments could be pursued. At the moment, Tsutsumi is mainly focused on the middle-to-lower end of the market. It might be possible to develop ranges or formats aimed at the level of the market just below the international designer jewellery brands, where price still remains an important part of the buying decision. Tsutsumi's competitive business model could give value for money but at a higher price point, which might attract customers looking for special occasion items like bridal jewellery.

ZALES




CHAPTER 13 ZALE CORPORATION

Company Overview

Table 55: Zale Corporation company overview 2008

Founded: 1924 Headquarters: Irving, Texas President & CEO: Neal Goldberg Executive VP and CFO: Rodney Carter Executive VP and Chief Sourcing & Supply Chain Officer: Gilbert P Hollander Group Senior VP and Chief Merchandising Officer: Stephen R Lang Share of global jewellery retail market 2008e: 1.2%


Gordon's Jewelers, Mappins Jewellers of Canada, Peoples Jewellers, Piercing Pagoda, Plumb Gold, Silver and Gold Connection, Zales Jewelers, Zales Outlet


• Zale Corporation was founded in 1924 by Morris and William Zale with a single jewellery store in Wichita Falls in Texas. The business expanded in the pre-war period, helped by offering its customers credit-based purchase plans. In 1958 it floated on the stock exchange and grew rapidly by diversifying into other retail sectors, reaching 1,700 stores in the 1970s.

• In 1986 Zale Corporation was the subject of a leveraged buyout by Peoples Jewellers of Canada, and Austrian crystalware company Swarovski. It continued to expand, buying Gordon's Jewelers in 1989.

ZALES




• Its fortunes hit a nadir in 1992 when it filed for Chapter 11 bankruptcy, but by the late 1990s trading had recovered, allowing it to make further acquisitions, including Piercing Pagoda in 2000.

• All its sales are now in the US, Canada and Puerto Rico. Its main retail chains are: Zales Jewelers, a mass market retailer offering moderately priced jewellery; Zales Outlet, catering for women with slightly higher incomes buying for themselves; Gordon's Jewelers, another moderately-priced retailer focusing on a reputation for good customer service; Peoples and Mappins, occupying a similar position to Zales in the Canadian market; and Piercing Pagoda, aimed at opening price point customers for precious jewellery. It also operates transactional websites for Zales and for Gordon's.


• In November 2007, Zale Corporation sold the upmarket Bailey Banks & Biddle jewellery retail business with 70 stores for $200.0m to Finlay Fine Jewelry Corporation.

• The company announced a cost-cutting programme in February 2008 aimed at reducing costs by $65.0m. It included reducing the head office job count by 225, equivalent to 20.0% of the total, an increase in the number of planned store closures by 23 to 105 and a reduction in capital spending from $85.0m in 2007/08 to $45.0m in 2008/09.

• The company has recently expanded the amount of product it sources directly from manufacturers and suppliers, rising from 27.0% in 2005/06 to 35.0% in 2006/07. It also has a diamond procurement and assembly operation, which accounted for an increasing proportion of Zale Corporation's total sales in 2006/07, rising to 8.5% from 4.4% in the previous year.

ZALES




Sales Performance

Table 56: Zale Corporation trading record 2003-2008e

Year to July 2003 2004 2005 2006 2007 2008e

Total Sales $m 2,212.0 2,304.0 2,383.0 2,439.0 2,437.0 2,212.0Y-o-Y Change % 0.9 4.2 3.4 2.3 -0.1 -9.2Operating Profit $m 163.0 176.0 178.0 81.0 103.0 ---Operating Margin % 7.4 7.7 7.5 3.3 4.2 ---

Source: Zale Corporation, Verdict Research V E R D I C T

• Zale Corporation saw a slight decline of 0.2% in comparable store sales in the year to 31 July 2007, with total sales virtually level at $2,437.1m. Operating profits were $103.1m, a 27.1% improvement on the previous year's figure. Profits were helped by improved cost control and gross margins, as the company moved away from an aggressive pricing strategy pursued in the previous financial year.

Current Trading

• Sales and profits were disappointing according to the company in the first six months of 2007/08 to the end of January. Revenues for the period were down 5.4% to $1,205.1m. Comparable store sales fell 5.1% as the number of transactions fell 8.0%. The kiosk jewellery segment of its business, which principally covers entry price-point chain Piercing Pagoda, saw the biggest decline, down 10.9%, mainly due to store closures. Operating profits fell by 47.2% to $50.0m.

• The third quarter, to the end of April, saw an improvement in sales performance, with comparable store sales up 5.8% as the group undertook an aggressive stock clearance.

ZALES




Stores

Table 57: Zale Corporation number of retail stores 2003-2008e

Year to July 2003 2004 2005 2006 2007 2008e

Zales 755 757 767 784 789 780Y-o-Y Change % -0.3 0.3 1.3 2.2 0.6 -1.1 Gordon's 287 287 287 293 282 270Y-o-Y Change % -3.7 0.0 0.0 2.1 -3.8 -4.3 Peoples 167 163 168 175 193 190Y-o-Y Change % -2.3 -2.4 3.1 4.2 10.3 -1.6 Piercing Pagoda 813 798 812 817 793 723Y-o-Y Change % -5.1 -1.8 1.8 0.6 -2.9 -8.8 Other 212 229 311 280 207 182Y-o-Y Change % 0.0 8.0 35.8 -10.0 -26.1 -12.1 Total 2,234 2,234 2,345 2,349 2,264 2,145Y-o-Y Change % -2.7 0.0 5.0 0.2 -3.6 -5.3

Source: Zale Corporation, Verdict Research V E R D I C T

• After seeing some expansion in its store portfolio in 2004/05, 2006/07 saw cutbacks in Zale Corporation's retail network. All 76 locations of the Peoples II chain were closed as well as 38 Piercing Pagoda branches.

• The disposal of the Bailey Banks & Biddle chain, as well as other closures are expected to bring the final year-end total down to 2,145 stores in July 2008, a fall of 5.3%.

• In the first half of 2007/08, the company spent $24.0m to open 22 new stores for its fine jewellery chains and four new kiosks, as well as on refurbishments and relocations. By the end of 2007/08 it expects to have spent another $34.0m on 30 new stores and kiosks as well as work on existing stores.

ZALES




Outlook

• Zale Corporation faces a very tough US market. Unlike fellow US jewellery retailers Signet Group and Tiffany & Co, Zale does not have the advantage of being able to balance off its exposure to the middle and lower end of the market with either premium or overseas businesses. In the third quarter of 2007/08 its clearance activity flattered its sales but has severely hurt its profitability, which was already under pressure at just 4.2% operating margin in 2006/07.

• Consumers to come under further pressure from credit crunch and oil prices. Zale Corporation's customers are likely to find their budgets squeezed by the impact of fuel price increases and, being a discretionary spending item, jewellery is likely to be one of the first items to be cut. This has shown up in the falling number of transactions in the group's stores as consumers simply cancel shopping trips for non-necessities.

• Scale of operations offers some compensation. As well as enjoying considerable operational economies of scale, Zale will be able to exploit its buying power and possibly claw back some margin, though this will be difficult in a situation where raw materials prices have been rising, particularly for gold, silver and platinum.

• Zale Corporation is now the second placed specialist in the US market. It has been overtaken by Signet Group, which now has a turnover of $2.7bn a year and a much stronger operating margin and so is better placed to weather any downturn. Zale is likely to come under severe competitive pressure from its larger rival and is likely to resort to more cost cutting to preserve its remaining profitability.

GLOSSARY




CHAPTER 14 GLOSSARY

Abbreviations GDP: Gross Domestic Product

PPP: Purchasing power parity

OOT: Out-of-town

VAT: Value Added Tax

Y-o-Y: Year-on-year

Financial Statistics – VAT

In company profiles, where we are quoting or working with sales figures provided by a company, the sales are ex-VAT. Therefore, operating margins are quoted and calculated on ex-VAT sales.

In The Market section all sector sales figures and consumer spending data include VAT.

Currencies: The symbol $ refers to the United States Dollar unless otherwise specified (e.g. A$ for Australian Dollar). Rs refers to Indian Rupees and SFr for Swiss Francs.

Exchange Rates: Year by year conversion of local currencies to the US Dollar has been avoided due to the distorted view this would give of comparisons between years. Currencies have been converted at six-year (2003-2008e) average values against the United States Dollar.

Computer rounding: Some percentages do not add to exactly 100 due to computer rounding.

Source – Verdict Research: Where sources such as government data and company accounts fail to provide a comprehensive market picture, Verdict produces estimates by corelating and extrapolating from the most reliable sources available, including expert in-house views.

GLOSSARY




Jewellery Market Definition

• This report focuses on the retailing of precious jewellery and watches i.e. excluding costume jewellery. Our market is made up of consumer expenditure on these goods.

• We have divided the market regionally into:-

– Japan;

– the rest of Asia-Pacific (which includes China, India, and Australasia);

– the Americas, which is primarily the USA and Canada;

– Europe, including Russia and all countries on the European Continent;

– and the Middle East and Others, which is primarily the Middle East.

• The profiles included were selected as key industry players that cover the spectrum of operators – from major luxury groups like Richemont and LVMH, to mass market operators like Signet Group and Zale Corporation and newcomers like India's Gitanjali Gems.

Part of Verdict’s European Retail report series

Global Jwellery

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