#1BAIN & COMPANY DE 2011 China Luxury Market Study Bain Point of View December 2011 This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent#24 = 1 Agenda • China luxury market overview ● Key trends of China luxury market Implications for luxury brands in China the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 2#3Mainland China ranked top 5 globally in 2010, while Greater China (incl. HK & Macau) already among top 3 Personal Luxury Goods - Ranking by Country (2010, B€) €50B 48.1 40- 30- 20- 18.1 (RMB 159B) 17.7 17.5 13.3 (RMB 87B) 9.6 9.0 8.3 10- 6.3 5.3 4.8 4.7 0. USA Japan Greater Italy France China China (Mainland) UK Germany South Middle Hong Russia Korea East Kong (including HK & Macau)* = *Indicates luxury spend in Mainland China, HK & Macau Note: 2010 Euro/RMB exchange rate =9.0 Source: Bain luxury goods worldwide study 2011; Bain Survey of Luxury Goods Consumers in Mainland China 2011 (n=1,959); Bain analysis This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 3#4Total luxury spend by mainland Chinese reached RMB212B in 2010; ~60% spent outside mainland Total China luxury spend (RMB B) 156 CAGR (09-10) 36% 212 100% Overseas (Rest of world) 38 Overseas (Rest of world) 52 38% 80- 60- HK & Macau 50 HK & Macau 72 45% 40- KEY HIGHLIGHTS Overseas (including HK/Macau) spending showed strong growth; HK & Macau account for >50% of oversea spend - Trend expected to continue in 2011/12 -Driven by RMB appreciation and increased oversea travels • Purchase in Mainland continued to increase, however still <50% "The price gap between domestic & overseas remains; and with RMB appreciation, consumers are travelling abroad more and buying a lot overseas. // VP, Luxury watch distributor Mainland 68 20- Mainland 87 27% 0 2009 2010 Source: Bain Survey of Luxury Goods Consumers in Mainland China 2011 (n=1,959) This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA JUOJ LOUIS VUITTON 2011 Bain China Luxury Market Study_Media release_vf 4#5Phenomenal growth in 2010 across categories; momentum continued in 2011 with a gradual softening in Q4 2010 Mainland China luxury goods market by product category RMB 87B CAGR (08-09) (09-10) (10-11F) 17% 27% 25-30% 100% Other 14% 15% Womenswear 14% 27% 80- Shoes 17% 20% ~15% ~30% 15-20% Jewelry 17% 22% ~25% Menswear 17% 24% 25-30% 60- Leather goods 20% 30% 25-30% Cosmetics, 40- perfume and 22% 22% ~22% personal care 20- Watches 0 China luxury market 12% 45% ~40% KEY HIGHLIGHTS • China's domestic luxury market growth picked up speed in 2010 and reached RMB 87B • 2011 expected to be another good year for China luxury; however a gradual softening in consumption appeared in Q4 • Watches and leather goods lead the growth - Watches saw a clear rebound after '09, driven by economic recovery and aggressive brand marketing - Leather goods expect to continue past growth trends, as major gift choice for personal and business *Growth in RMB is ~27%; growth expressed in Euros factoring currency appreciation is ~35% Note: Only premium cosmetics are considered luxury goods in the "Cosmetics" category Source: Expert interviews; Brand interviews; Literature search; Bain analysis This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 5#6Brands continue to expand aggressively in 2010, however, some slowing down evidenced in 2011 Store Count of Selected Luxury Brand by end of September 2011 125 114 104 104 100- • New stores opened for 69 75- 69 50- 25- select brands - 2009: ~150 - 2010: ~160 - 2011 (by end Sep): ~90 57 56 56 52 45 38 37 30 TU Ermenegildo Zegna BOSS ARMANI dunhill BALLY BURBERRY Salvatore Ferragamo GUCCI COACH Opened in 2011(by end of Sep 2011) Opened in 2010 Opened in 2009 Opened in 2008 Opened before 2008 20 19 19 18 16 7 VERSACE BVLGARI * PRADA CHANEL HERMÈS TIFFANY & CO. LOUIS VUITTON Dior Cartier* *Cartier and Bulgari store data excludes watch counters KEY DRIVERS • Some investment reduction planned during 2008-2009 crisis • Some brands are making conscious decisions to reduce the pace of expansion and focus more on store performance improvement • Despite high growth of commercial real estate, brands are being more selective on top quality locations with great infrastructure & management • Talent shortage and rising labor cost remain major hurdles for store expansion, especially in tier 2/3 cities "We are intentionally slowing down the expansion, because we have already established great awareness, and we will be very selective on locations to open new stores." PR Director, Luxury brand Note: Armani brand includes Giorgio Armani, Emporio Armani and Armani Collezioni; Dior brand includes Dior Ladies and Dior Homme Source: Analyst reports; Literature search; Brand interviews This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 6#7>60% of growth in 2011 continue to come from new customers, however share from existing customers improved China luxury market (RMB B) 115 I New customers Existing customers 105- Total spending 95- 85- 14.9 110.8 8.8 (63%) 12.5 87.1 (37%) 6.2 75- (67%) 68.4 (33%) 65 55 2009 2010 2011 Est KEY HIGHLIGHTS • China market is still supply driven; new store openings create new demand • A gradual shift towards store performance improvement expected "As more brands open new stores in tier 2/3 cities, more people have access to luxury goods, and brands are attracting many new customers.” PR Manager, Luxury brand "Many brands are starting to move from land grabbing stage to performance improvement." Source: Bain Survey of Luxury Goods Consumers in Mainland China (2009: n=1,410; 2010: n=1,471; 2011: n=1,959); Expert interviews; Brand interviews; Analyst reports; Company reports; Literature search; Bain analysis Industry expert This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 7#8In each luxury category, the top 5 brands account for ~50% of sales 2010 China domestic luxury spend (RMB B) 100%- 80- 22.5 Total = RMB 87B 20.6 11.0 8.7 5.6 4.6 3.5 10.6 60- Cartier 40- LONGINES OMEGA 20- ROLEX T + TISSOT Watches CHANEL Dior ESTEE LAUDER LANCOME SHISEIDO Cosmetics, Perfume and Personal care Top 5 brands by category in alphabetical order CHANEL ARMANI GUCCI BOSS AN HERMES BURBERRY LOUIS VUITTON unhil PRADA Bregi Zago Leather goods BYLOAN Cartier BALLY ARMAN BURBERRY CUCCI GHAKEEL TIFFANY LONES VUATION WC Aqab Menswear TOD'S FRADA Shoes Other Jewelery Women's wear Note: Market value is composed of sales at retail value; "Other" category includes tableware/silverware, stationery, sunglasses, accessories and other niche luxury goods items; "Leather goods" includes smaller items such as wallets; ranking of luxury brands is in alphabetical order; Armani brand includes Giorgio Armani, Emporio Armani and Armani Collezioni Source: Expert interviews; Brand interviews; Analyst reports; Company websites and reports; Literature search; Bain analysis This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 8#9Louis Vuitton, Chanel and Gucci remained the most desired luxury brands in China in 2011 "What are the 3 brands that you desire the most?" % of mentioned (Oct 2011) 50% 46% 40- 38% 30- 20- 10- 30% Top 3 22% 15% 15% 14% 14% 8% 8% 0 Louis Chanel Gucci Vuitton Dior Armani Hermes Rolex Cartier Prada Burberry Rank (2010) 1 2 3 5 4 8 6 7 9 16 % of mentioned 46% 36% 22% 17% 20% 8% 14% 11% 8% 3% in 2010 survey Note: Bain survey focuses on people who are interested in luxury brands, and therefore, brand desirability is very high Source: Bain Survey of Luxury Goods Consumers in Mainland China 2011 (n=1,959) This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 9#10BJ/SH: a few new brands entered top 3 in BJ/SH compared with overall China market in 2010 Watches Cosmetics, perfumes & "What are the top 3 brands you are most likely to purchase in each category in 2011?" 1st OMEGA CHANEL 2nd Cartier Dior BJ/SH ONLY 3rd ROLEX LANCÔME NEW personal care Leather goods LOUIS VUITTON GUCCI NEW Menswear GIORGIO ARMANI Ermenegildo Zegna HUGO HERMÈS PARIS BOSS 8055 NEW Jewelry TIFFANY & CO. Cartier BVLGARI NEW Shoes Salvatore Ferragamo PRADA BALLY NEW CHANEL BURBERRY Dior Womenswear ☐ Ranking improved in 2011* New to Top 3 in 2011* * Ranking compared with view on overall China market in 2010; not for BJ/SH only Source: Bain Survey of Luxury Goods Consumers in Mainland China 2011 (n=571 for BJ/SH) This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 10#11Gifting remains a significant part of luxury spending "What percent of the luxury goods you've purchased is for gifting vs. own consumption?" % of luxury spending 100- 80- 60- 40- 20- Gifting Own 0 2009 2010 2011 VUITION NANEL CHA 23NYW3 ** "Giving luxury goods as business gifts can show my taste and social status, also it makes the recipients feel important and respected. Luxury consumer // "Luxury gifts always pleasantly surprise my clients and they help me get the deal done more easily." Source: Bain Survey of Luxury Goods Consumers in Mainland China 2011 (n=1,959); Literature search Luxury consumer This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 11#12Agenda 4 = 1 • China luxury market overview Key trends of China luxury market Implications for luxury brands in China the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 12#13Brand landscape is becoming more dynamic; cautiously optimistic outlook on China luxury market Strong growth in 2010 & majority of 2011; with a more dynamic and active brand landscape "2010 was a recovery year for luxury watch market with an unprecedented high growth." VP, Luxury watch distributor "With such a fast growing and dynamic market, brands are doing everything they can to ride the growth and strengthen their presence in China." China CEO, Luxury brand Overall business environment remains positive with a few uncertainties "We are still having quite good growth during Q4 of 2011, just not as spectacular as the first 3 quarters...We are cautiously optimistic about 2012." China MD, Luxury brand "Overall we are quite positive and confident about the China market; but there are things happening that we don't have enough visibility. China MD, Luxury brand This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 13#14Brand landscape is becoming more dynamic; cautiously optimistic outlook on China luxury market Strong growth in 2010 & majority of 2011; with a more dynamic and active brand landscape 1 Continued expansion into tier 2/3 cities, with a slower pace 2 Leading brands emphasizing more and more on improving customer experience 3 Acceleration of online platforms as channel for brand marketing and ecommerce 4 Heritage-focused brand building activities 5 Emerging Chinese-culture- inspired luxury brands 6 Risk of negative media exposure Overall business environment remains positive with a few uncertainties • Overall macroeconomic environment favors continued growth, despite recent economy slowdown • Consumers confidence remains high; level of sophistication rising™ This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 14#151 Tier 2/3 cities continue to be an important battlefield for luxury brands in China # new stores opened since 2008 (by end of Sep 2011) 80- 70 61 60- 40- 20- ARMANI dunhil BOSS COACH HUGO BOSS Salvatore Ferragamo Ermenegildo Zegna Tier 1 cities Tier 2 cities Tier 3 cities 46 45 35 35 34 30 28 26 23 20 14 12 12 12 11 6 GUCCI BALLY LOUIS VUITTON Cartier * BURBERRY Dior BVLGARI* Total # stores in China (by end of 104 104 114 52 57 56 45 69 Sep 2011) *Cartier and Bulgari store data excludes watch counters Note: Tier 1 cities are Beijing, Shanghai, Shenzhen, Guangzhou; tier 2 cities are Chongqing, Tianjin + all remaining provincial capitals + other major cities; tier 3 cities are remaining prefectural cities HERMÈS TIFFANY & CO. VERSACE Source: Analyst reports; Company websites; Literature search; Brand interviews; Bain analysis This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 15 PRADA 38 37 56 30 19 19 16 20 18 7 CHANEL#162 Many brands upgrading existing stores and building larger ones to improve shopping experience Dior expanded Shanghai Plaza 66 store to 2 floors in 2010 (480 M²) Burberry opened largest China store in Beijing in 2011 (1200 M²) MaxMara opened 3rd largest store WW in Chengdu 2011 (720 M²) Source: Literature search BURBERRY MaxMara MaxMara LV opened flagship store with VIP room in Hangzhou in 2010 (1900 M²) Ermenegildo Zegna Zegna opened SH concept store in 2010 (1100 M²) This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 16#173 Proliferation of online marketing through social media to generate excitement and increase mindshare Social media has become most popular info source for luxury consumers "Where do you normally get information on luxury goods on internet?" How Brands actively exploring various Chinese social media platforms NAAM % of respondents who use Internet as info source 100% 79 80- 68 68 60- 40- 20- 31 0 Social media* News portals Video portals BURBERRY Burberry on Kaixin Coach on Renren LANCOME 並受网友喜愛的产品 Bottega Veneta on Weibo LOUIS VUITTON *Social media includes blogs, microblogs and BBS Source: Bain Survey of Luxury Goods Consumers in Mainland China 2011 (n=1,959); Literature search; Site visits; Bain analysis Lancome on iPhone app LV on Jiepang This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 17#183 Luxury ecommerce in China is emerging but still nascent; various operating models exist High Level of brand control Low Operating model Provider example Descriptions Mono brand Self-operated Luxury brands operate and maintain own e- commerce sites directly - Possibly with some external assistance on major site renovations, logistics, etc. Usually as add-ons to corporate websites • Mostly for marketing and consumer education purpose in China Burberry Partnership YOOX.COM • Brand official site with brand's own domain name + "Powered by Yoox" • Yoox offers complete e- commerce solution -Site maintenance, interface design, logistics, customer relationship management service Same price, products as retail stores Armani Bally EMPULAN BALLY Multi brand Online outlets GLAMOUR-SALES 惠奢华享生活 • Promotions targeting price- conscious consumers • Sell end of season products and discounted at 30 ~70%, avg. 45% • Event-driven promotion and exclusive to members (+500k in China) ⚫ Limited inventory and consignment model with brands Hugo Boss, Bulgari, D&G, etc Brand example Source: Literature search This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 18#194 Brands deepening communication efforts with consumers by actively showcasing culture & heritage... Brands showcasing culture & heritage Y LOUIS VUITTON in top tier museums "Louis Vuitton Voyages" Exhibition Exhibited iconic travel pieces & handbags with history of travel in National Museum of China, Beijing from May to Aug 2011 之旅章 LOUIS VUITTON VOYAGES A FEWTON TOWN POSPROW QUIS VUITTON "125 years of Italian Magnificence" Exhibition BVLGARI Showcased 600 pieces of Bulgari jewelry & its 125-year history in National Museum of China from Sep to Nov 2011 CHANEL "Culture Chanel" Exhibition Exhibiting >400 pieces from Chanel's past and present, including paintings, drawings, etc, at National Art Museum of China from Nov to Dec 2011 BVLGARI 中国国家博物馆 Source: Literature search This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent CULTURE CHANEL SHA 2011 Bain China Luxury Market Study_Media release_vf 19#205 Chinese luxury brands emerging, although still at experimental stage; some with support from Western luxury companies Brand origin Brand concept Market strategy SHANG XIA ("UP DOWN") • Brand co-created by Hermes and Chinese designer - · Hermes created Shangxia brand in 2008 with Chinese artist Jiang Qiong'er as brand CEO & Creative Director • Chinese heritage deeply rooted, with Chinese craftsmanship - · Pushed Chinese influence from product design further to utilize Chinese artisans and rare local materials like zitan wood - Product launch once a year with many items taking months to make - Offers handcrafts, clothing & accessories • Target Chinese customers and then expand outside China - 1st store launched in Shanghai in Sep 2010 and plan to launch stores in Beijing and Paris by 2013 - 60-70% customer base are Chinese opinion-leaders with wide age range and deep cultural background Qeelin • Jewelry brand created by Hong Kong designer & French entrepreneur - Founded and opened its first store in Paris in 2004, entered Mainland China in 2008 • Integrate traditional Chinese inspiration and French craftsmanship - Each piece of jewelry has a remarkable Chinese culture inspired symbol • Aim to obtain international recognition first 9 boutiques around the world, with steady expansion plan - Plan to open store in Shenyang, Dalian in the future • Plan to expand into luxury watch category Qeelin Source: Literature search Qeelin Qiri Cir Coeur de Lotus THD Wulu This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 20#216 With prosperity of online media, luxury brands need to proactively manage negative media exposure in China • Luxury brands getting more scrutiny from consumers and authority Luxury brands are scrutinized for quality issues, some even got penalized Increasing complaints on brands' inadequate after-sales service in China, which is often complex and time consuming - Many brands don't have customer service hotline in China "Chinese consumers used to assume that luxury brands have superior quality simply because of their big name and high price. However, consumers are becoming more aware of their legal rights in recent years." Lawyer, China Consumer Association Brands sometimes unintentionally got associated with negative publicity • Prosperity of online media facilitated broadcasting of negative events, especially those related to social tensions such as labour dispute, corruption, quality issues, etc Showing-off of luxury products often cause unprecedented public discussions and criticisms on social media "Luxury brands have been building their premium image with good quality and cultural background. But they often get associated with showing-off of wealth, which may have negative impact on them." // Industry expert Brands need to be more sensitive to media exposure risks & proactively manage PR in China Source: Literature search This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 21#22Brand landscape is becoming more dynamic; cautiously optimistic outlook on China luxury market Strong growth in 2010 & majority of 2011; with a more diverse and active brand landscape 1 Continued expansion into tier 2/3 cities, with a slower pace 2 Leading brands emphasizing more on improving customer experience 3 Acceleration of online platforms as channel for brand marketing and ecommerce 4) Heritage-focused brand building activities (5) Emerging Chinese-culture- Inspired luxury brands 6 Risk of negative media exposure Overall business environment remains positive with a few uncertainties • Overall macroeconomic environment favors continued growth, despite recent economy slowdown • Consumers confidence remains high; level of sophistication rising Evolving regulatory environment requires close monitoring and compliance by brands This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 22#23Overall business environment remains positive with some uncertainties Macro economy Consumer Regulatory environment Increasing number of HNWIS, affluent households & middle class with rising disposable income • Slow down of store expansion -High-end shopping malls becoming increasingly important compared to department stores, powered by booming commercial real estate market • Consumer confidence remains high - Individual luxury spend expected to maintain or increase • Rising level of sophistication - New needs & expectations to be satisfied • Still male dominant market; women categories catching up - Business gifting still important part of luxury spending • Potential reduction of luxury import tariff may impact domestic/overseas consumption of certain categories • New regulations on prepaid cards to curb corruption • More stringent quality standard and process for importation may cause delay of new product introductions into China market This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 23#24Agenda 4 = 1 • China luxury market overview • Key trends of China luxury market Implications for luxury brands in China the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 24#25Implications for luxury brands in Chinal A B C D E Organic growth/ exclusivity Digital marketing Superior service Talent building Explosion of social media • Main challenges ahead As more brands have established broad presence through expansion, there is increasing need for of ensuring availability while maintaining exclusivity Digital platforms getting more crowded, and difficult for brands to fully engage consumers and maintain luxury image/experience online. • More sophisticated Chinese consumers demanding services (shopping & after-sales) that are consistent across China and more personalized • Talent shortage remain major obstacles for brand expansion and organic growth, especially in Tier 2 & 3 cities • Multiple cases of luxury brands being exposed to an extent that's unheard of before · Exposure/vulnerability to PR risks Implications for luxury brands • Be selective on locations for geo expansion • Focus on improving shopping experience, offering differentiated products/services, etc to boost organic store growth and stay exclusive • Choose media and formats carefully • Maintain clear brand positioning and personality • Ensure sufficient training and tracking/ incentive mechanism to deliver professional service • Maintain consistent service level across shops in all city tiers • Continue to invest in talent management: recruiting, training, career management and retention • Actively monitor and manage potential PR risks exacerbated by online media exposure This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 25#26Bain contacts To schedule an interview with Bain & Company, please contact: INTERNATIONAL PRESS • Cheryl Krauss at email: [email protected] or +1 646-562-7863 at email: [email protected] • Frank Pinto or +1 917-309-1065 CHINESE PRESS • Pinky He • Dan Dai at email: [email protected] at email: [email protected] or +86 21-2211-5585 or +86 21-2211-5570 This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent SHA 2011 Bain China Luxury Market Study_Media release_vf 26#27BAIN & COMPANY ②