Digital fuelling the future luxury growth

Federico Bonelli, Principal BCG

Milan, November 17th

1

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

After years of strong growth the luxury market is slowing

down to a low single-digit growth (+2-3% p.a.)

1. Personal goods include: accessories, apparel, watches & jewelry, perfume & cosmetics Source: BCG/Altagamma True-Luxury Global Consumer Insight report 2015, CEO presentation

Growth of the personal luxury goods1 market @ Retail value – Historical and forecast

291285280257

233207

0

100

200

300

400

€B @ current exchange rate

1.6% 4.9%

10.6%

2015

323

~27

2014 2013 2012 2011 2010 2009

~364

2020E

2-3%

X CAGR excluding

Forex effect X

CAGR including

Forex effect

2

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Less growth and more competition: there will be

winners and losers

1. Average delta growth of 10 public luxury companies / groups Source: BCG Analysis

Growth

dividend1 +/- 3 pts

Personal luxury growth (CAGR %)

+/- 5 pts +/- 9 pts

1996-2001

9%

5%

7%

2002-2007 2008-2014 2015-2020E

2-3%

3

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

The next decade:

a Consumer-centric era

'80s '90s '00s 2015 next decade

• Style & Design for

elites

• Temple of Desire

• The rise of

Global Brands

• Retail as part of

Brand experience

• "Real estate rush"

• Consumer: engine

of top line and

margin growth

+Consumer Design +Brand +Retail

4

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

60%

2/3 of future growth expected to be organic

Last decade growth by component2 Upcoming decade growth by component2

Total

growth

100%

Volume

20%

20%

Emerging

markets

35%

Traditional

Markets1

25%

Price

- Mix

40%

Organic growth

(LFL)

Retail expansion

100%

Total

growth

Volume

30%

Price

- Mix

40%

Emerging

markets

10%

Traditional

markets1

20%

30% 70%

Organic growth

(LFL)

Retail expansion

.

1. Europe (Italy, France, UK, Germany, Spain, Nordics), US and Japan; 2. Refers to personal luxury (apparel, accessories, hard luxury, Perfume & Cosmetics) Note: Last decade Personal Luxury market CAGR growth ~5%; upcoming decade Personal Luxury market CAGR growth ~2-3% Source: Bernstein / BCG analysis

5

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Ingredients of the growth:

further polarization in terms of channels and categories

Channel

Category

Δ 2009-2015 = 116 €B Δ Expected @ 2020 = 42 €B

Contribution to luxury market growth (%)

1. Small leather goods Source: BCG 2015 specific survey, BCG-IPSOS market research; BCG Luxury Market model

Decrease of watches

and unbranded jewelry

not balanced by growing

branded jewelry

Focus of next slides

Retail

Wholesale

Online 16%

37%

46%

-1%

Online

Retail

Wholesale

51%

51%

24%

38%

Shoes

Perfumes & Cosmetics

Watch & Jewelry

Apparel

Bags & SLG1

21%

11%

6%

32%

Bags & SLG1

19%

Apparel

Watch & Jewelry

44%

24%

Shoes

-19%

Perfumes & Cosmetics

6

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

From retail rush to portfolio rationalization

+8pp

RoW

48% 50%

Japan

50%

100%

Americas

52% 42%

APAC

61%

47%

Europe

61%

47%

Total

57% 49%

2015 2014

Note: Analysis based on a database of more than 6.500 luxury stores in the world Source: Bernstein / BCG analysis

% of stores

by region 100% 39% 21% 23% 5% 12%

Closures = openings

in 2014

Luxury Stores closures as % of openings by geography

More than 1 closure out of 2 openings

Focus on Retail

7

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Existing retail network under pressure with rents exploding in

most luxury capitals

1. Values based on the first half of 2016 Note: Hong Kong: Causeway Bay; London: New Bond Street; New York: 5th Avenue; Paris: Champs Elysée; Tokyo: Ginza; Milan: Montenapoleone Source: Cushman and Wakefield Main Global Streets; BCG analysis

Trend 2009-20161 of rent / mq cost in high luxury streets

(Index 100 = 2009)

80

100

120

140

160

180

200

220

240

2009 2013 2015 2014 2012 2011 2010 20161

New York

London

Paris

Milan

Hong Kong

Tokyo

Index 100 = 2009

Rent/ mq (k€)

2009 20161

12.2

5.5

12.6

7.7

5.4

6.7

23.3

12.4

23.8

13.3

8.7

12

Focus on Retail

8

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Less traffic, stable conversion, higher rents = Lower returns

2005 2015

~4.3 M€ ~4.8 M€

~500 € ~750 €

~ 8 K ~7 K

~ 13% ~ 13%

~5.5 K€ / sqm ~8.5 K€ / sqm

21 K€ / sqm 24 K€ / sqm

Note: Analysis performed on a subset of Personal Luxury Brands Source: Public data, Interviews with experts, Cushman & Wakefield Valuation report, BCG analysis

Example of a 200 sqm luxury apparel store in Milan, via Montenapoleone

Traffic (#)

Conversion rate (%)

Average ticket (€)

Clients (#)

Rent / sqm

Sales / sqm

Sales / store (M€)

~ 57 K ~47 K

x 3,8 x 2,8

Focus on Retail

9

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Digital, as eCommerce and enabler of the omnichannel

experience, will be key for future growth

2-3%

50%

60%

80%

65%

Expected personal luxury market growth in 2015-2020

eCommerce contribution to future luxury market growth

Personal luxury purchases influenced by digital

Luxury consumers asking for a real omnichannel experience:

flawless delivery and full recognition across channels are key

Luxury consumers influenced by Word of Mouth:

half of the impact coming from Social Media and Blogs

10

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

eCommerce will represent half of the future luxury market

growth

229300 ~320

~44

(12%)

2015

323

23

(7%)

2010

233

5

(2%)

+2-3%

+7%

2020E

~364

eCommerce Offline

Note: Personal luxury market includes Accessories, Apparel, Watches & Jewelry, Perfumes & Cosmetics; at current exchange rates Source: BCG Study, Exane market research

6%

37%

1-2%

14% E-Commerce

Offline CA

GR

~50% of overall market

growth in the next 5 years

from eCommerce

Re

tail

va

lue

by

ch

an

ne

l in

B €

Act. 2010-2015 Exp. 2015-2020E

1

11

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

6 out of 10 luxury purchases are digitally influenced

41

9

42

0

20

40

60

80

100

Researched Online

Purchased Offline

Store solo Online solo

8

Total

100

Showrooming (viewed in store,

purchased on line)

Omnichannel

58%

Source: BCG 2015 ad hoc study (10'000 respondents in 10 countries)

"Where have you bought the last item purchased? Where have you researched it?"

% of respondents on

last purchase

2

12

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Less ROPO more eCommerce for impulse purchase categories

1. Researched Online Purchased Offline Source: BCG 2015 ad hoc study (10'000 respondents in 10 countries)

47% 45% 40% 38% 32%

9% 11% 10%

9% 8% 9%

42% 41% 42% 42% 43%52%

41%

9%

8%7%

Store solo

ROPO1

Perfumes &

cosmetics

Showrooming

Shoes Apparel

Pure online

Handbags Hard luxury

6%

Total

6% 5%

"Where have you bought the last item purchased? Where have you researched it?"

% respondents

2

Impulse purchase + _

13

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Channels blurring even faster for Millennials

% of respondents on

last purchase

44

11

8

100

37

Total Online solo Showrooming (viewed in store,

purchased on

line)

Researched

Online

Purchased

Offline

Store solo

47

100

9

38

Online solo Total Showrooming (viewed in store,

purchased on

line)

7

Researched

Online

Purchased

Offline

Store solo

Generation X, Baby B. and Silver (36+ yr.) Millennials (18-35 yr.)

53% 63%

"Where have you bought the last item purchased? Where have you researched it?"

Source: BCG 2015 ad hoc study (10'000 respondents in 10 countries)

3

+10 pts

14

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Millennials always connected also when in store

Check prices via mobile

when in store

Look at the product

information in store

Look for coupons or

promotions online when in

store

2.1x

Non-Millennials

22%

Millennials

45% 1.8x

Non-Millennials

24%

Millennials

44%

Millennials

43%

1.7x

Non-Millennials

25%

% of respondents

Source: BCG Millennials research overview, BCG analysis

3

15

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

1. % of respondents for which it is somehow important / very important / not negotiable that a brand can be reached through different channels Source: BCG 2015 ad hoc study (10'000 respondents in 10 countries)

Omnichannel

index1

~80% of consumers asking for Omnichannel; integrated

delivery and recognition across channels are key

% of respondents

46% 44%36%

40% 40%39%

14% 16%25%

Millennials Gen. X Baby B.

& Silver

Not negotiable /

Very Important

Somehow

important

Not important

86% 84% 75%

Avg.

44%

24% Being recognized

across all channels

31% Integrated

delivery service

Intregrated

CRM

Same product

assortment

13%

Consistent

brand image

10%

22%

"How important is it for you that a brand can be

reached through different channels?"

"What do you expect when dealing

with multiple channels?"

% of respondents

4

16

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Sees dress in

magazine

advertisement

The multichannel integrated customer journey

Customer journey: Designer dress purchase

Ships dress and

receives preferred

size

Inspire Make aware

Help decide

Sell Support

Physical In store

Physical Out of store

Digital In Store

Digital Out of Store

Reward loyalty

Uses

iPhone to

complete

purchase Gets fashion

advice from

store

personnel

Checks loyalty

balance online

Posts review

on Twitter

Uses iPad App to

find matching

accessories

Checks

Dressfinder

App on

iPhone

At home, tries on dress &

prints return label

Scans QR

code for

details

online

Source: BCG analysis

4

17

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Word of Mouth 1st influence lever, driven by Millennials

Seen wore 15%

Events 18%

Celebrities 21%

Tailored

offers 22%

Store

windows 31%

Magazines2 31%

Brands

websites 37%

TV &

Movies 38%

WoM1 66% 31% 35%

1 Includes WoM, Social Media and Other Social blogs 2. Editorials and Commercial in Magazines 3. Including phases of awareness, consideration, conversion Note: multiple choices possible, out of top 3 ranks; Source: BCG 2015 ad hoc study (10'000 respondents in 10 countries)

" Which of following sources of information has an impact on your purchase journey3?"

2013 Gen. X + Baby B.& Silver Millennials

14%

17%

14%

27%

37%

38%

36%

32%

64% 35% 29%

16%

19%

29%

17%

24%

23%

38%

43%

68% 28% 40%

13% Seen wore

Celebrities 20%

Events 20%

Tailored

offers 22%

TV &

Movies 24%

Brand

websites 34%

Store

windows 39%

WoM1 43%

Magazines2 50%

32% 11%

2015

% of respondents

Digital WoM Physical WoM

5

18

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Social media and blogs the real engine of Word of Mouth

for Millennials

6%5%

+23%

Physical

Social

Media

Blogs

2015

66%

31%

24%

11%

2013

43%

32%

1. WoM Digitalization index: calculated as Social Media & Blogs influence vs. WoM physical influence 2. Including phases of awareness, consideration, conversion Note: multiple choices possible, out of top 3 ranks Source: BCG 2015 ad hoc study (10'000 respondents in 10 countries)

WoM

digitalization

index1

0.3

28%

29%

11%

35%

19%

11% Blogs

Physical

Social

Media

Millennials

68% 64%

Gen. X + Baby

B.& Silver

1.5 1.2

" Which of following sources of information has an impact on your purchase journey2?"

1.1

% of respondents

5

19

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Key takeaways

2-3%

50%

60%

80%

65%

Expected personal luxury market growth in 2015-2020

eCommerce contribution to future luxury market growth

Personal luxury purchases influenced by digital

Luxury consumers asking for a real omnichannel experience:

flawless delivery and full recognition across channels are key

Luxury consumers influenced by Word of Mouth:

half of the impact coming from Social Media and Blogs

Thank you

bcg.com | bcgperspectives.com

21

Copyr

ight

© 2

016 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Federico Bonelli Principal – Milan

Federico Bonelli is a Principal in BCG Milan Office, core member of the Luxury Practice and Consumer Group.

He has 8 + years consulting experience.

He has a deep experience in luxury, fashion and retail industry, developed advising more than 40 leading companies and

private equity funds over the past 7 years across 4 continents (Asia, North America, South America, and Europe) and all

main categories (Apparel, leather goods & accessories, hard luxury, fragrances,...).

Relevant experience:

• Transformation: participated to the transformation of a global luxury Group with focus on merchandising and retail, restructured

a leading Italian premium apparel brand with strong focus on company retailization, re-designed and implemented organization

model for a leading apparel global company, defined and implemented new commercial organization centrally and in regions /

country for a global premium brand, led a 1-year turnaround program of a major Italian jewelry brand

• Corporate strategy: assisted the leading global premium fitness equipment player during IPO process, defined commercial

turnaround and retail network re-design of luxury brands, assessed market values and potential, defined distribution strategies

by channel / region, defined internationalization and route-to-market strategies for new / emerging markets, identified best local

business models, defined pricing, brief-to-buy and product offer strategic review

• Business planning: developed economic and financial models, analyzed investment requirements and implications, forecasted

retail openings evolution and wholesale boost operations, modeled e-commerce launch and licensing operations, supported JV

and distribution agreements definition and negotiation, developed asset valuation models for luxury real estate

• M&A activities: contributed to fashion / luxury due diligences, assessed market attractiveness and evolution, evaluated and

developed business plans, scouted potential acquisition targets, defined portfolio strategy scenarios for PE and corporations

• Supported Italian Ministry of Economic Development in defining roadmap and governance model to re-launch Italian Fashion

System

• Contributed to the "True-Luxury Global Consumer Insight" (all 3 editions) developed by BCG in collaboration with Altagamma

Prior to join BCG Federico worked for Bain & Company as a core member of Fashion & Luxury practice. He has a bachelor

degree in physics and a master degree in theoretical physics from the University of Milan.

He is an Italian native speaker, and he is fluent in English and French.