Fashion Market in China

INTERNAL

Fashion Market in China Sami Muneer, SAP

© SAP AG 2010. All rights reserved. / Page 2

China Luxury Market •  Growth, Demographics, Archetypes

The Retail Challenge in China The Role of the Internet in Luxury

Shopping in China Ecommerce Players So What?


Growth of the China Luxury Market


Luxury Segment* is Growing Driven by 3 Factors

1. Wealth Increase Within largest cities Rapid urbanization in new areas

2. First-hand Experience

Overseas travel Local stores

3. Access to Information Internet: social forums, editorials

Source: McKinsey, 2011 World Luxury Association Blue Book

15% online purchase in 2011 ($2.5B)


Driven by Wealthy and Upper Middle Class Spending is Concentrated in Top 5M Households

80 B

50%

2010 2015

> 1 MM (700K households; 20% growth)

180 B

Luxury Goods Consumption by Income Class* (RMB, US$ = 6.3RMB)

Ø 200K- 1MM (4MM households; 15% growth)

Ø 100K-200K (13 MM household; fastest growth)

12%

33%

40%

22%

26%

Source: McKinsey, BCG *% don’t add to 100% due to other small segments

Very Wealthy Own assets greater than 10MM RMB Well-traveled

Wealthy

Growing number residents in lower-tier cities

Upper Middle Class Stretch budgets for occasional purchase


But the Very Wealthy Travel and Spend There 60% of Luxury Spend is Overseas

Luxury Goods Spend Bln RMB, 2010 (% CAGR)

40% China

(27% CAGR)

35% HK & Macau

(45% CAGR)

25% Overseas

(38% CAGR)

Drivers for Overseas Spend •  Higher prices on mainland

•  Increased overseas travel by the wealthy

•  RMB appreciation

212 Bln Total

Source: McKinsey, 2011 World Luxury Association Blue Book, Bain Survey of 2000 consumers


Most Local Spend is on Accessories, Cosmetics 70% of Mainland Purchase

Source: Bain & Co.


Growth of the China Luxury Market 1.  Market is growing 2.  Most shopping by the wealthy is

overseas 3.  70% of luxury shopping on

mainland is accessories, cosmetics


Demographics and Archetypes


China’s Luxury Consumer is Young Almost Half under 35

73% 50% 60% 55%

China: % of luxury shoppers under 45 (and under 35)

US: % of luxury shoppers under 45 (and under 35)

Under 35

Trading Up: 35% traded up to more expensive brands last 2 years Seeking New Experiences: Spending on luxury services (spas, wellness, etc.) growing faster than that on luxury goods


2 Categories of the Young Population Impulsive “Yu Guang Zu” and Tech Savvy

China Population Structure in 2010

400M

M

25% Ages 15-24

35% Ages 25-34

60% of consumers buying foreign brand perfumes are under 34

Source: Accenture


Growth of Mid and High-End Brands Influence of The Post-1980’s and Post-1990s

Post 1980s Born after “Cultural Revolution” Good jobs Sense of optimism

Post 1990s Fast growth Fashion and Tech-Savvy More outdoor activities requiring “right” outfits


Emergence of 3 New Archetypes Differing Emphasis on Luxury

% luxury households

Source: McKinsey, BCG

40%

22%

% luxury consumption

51%

45%

3% 1%

10%

65%

5%

20% Role Models: Shape fashion trends

Fanatics: Strong influence on consumers; online influence

Core Buyers: Spends 12-20% of income on luxury goods (US$ 3K – 9K annually)

Middle Class Aspirants: Infrequent buyers, cautious spenders

Household Distribution and Luxury Goods Consumption by Archetype

Emergence of 3 New Archetypes Differing Emphasis on Luxury


Role Models (20% Spend) Rich, Young and Fashionable

Socio-Income Profile: Corporate executives or self-employed Lives in Shanghai and Beijing Studied or worked overseas

Buying Behavior: 10% of disposable income on luxury Most buying for at least 5 years Spontaneous

Why they Buy: Feel unique rather than display wealth To indulge themselves

What they Care About: Good service in stores is important Prefers to shop outside China


Fashion Fanatics (5% Spend) Not Rich, But Researches and Spends More

Socio-Income Profile: Earns $15K – 30K Incomes rising steadily

Buying Behavior: 40% of disposable income on luxury Spends most free time on fashion trends Will buy on credit to be on cutting edge

Why they Buy: Social acknowledgement of purchase Strong influence on others, sharing purchases and opinions online

What they Care About: Planning and research: window shopping, online, editorials, celebrities, friends Cares less about store service


Middle Class Aspirants (10% Spend) Occasional and Cautious Shopper

Socio-Income Profile: Earns $9K – 30K Mid-level position in local or multinational Lives in Tier 2 or Tier 3 cities

Buying Behavior: 9% of disposable income on luxury Less knowledge & experience Considerable research (2-3 months)

Why they Buy: Aspire to higher social circles; feel successful Stand out from the crowd

What they Care About: Price (hence fine with local brands)


Top 5 Brands Account for 50% Sales Many Consumers Not Aware of Other Brands


Demographics and Archetypes 1.  Young consumers are vital and

relate to more and varied (price) brands

2.  Role Models primary shop overseas

3.  Fashion Fanatics should be targeted for adoption/promotion – they will attract the Aspirants


The Retail Challenge


36 Cities Constitute 75% of Luxury Market But This Will Change with Emerging Cities

75%

75% of luxury market captured by top 36 cities

25% Other 620 cities

Top 36 cities

Breakdown within the top 36 cities

28% 2 mega cities

32% 25 developed

cities2

40% 9 large markets1

1.  Chongqing, Dongguan, Foshan, Guangzhou, Hangzhou, Nanjing, Shenzen, Tianjin, Wenzhou 2.  Includes cities as Xian, Taiyuan, Yantao Source: McKinsey, BCG, Reuters

TOD

AY

BU

T IN

CO

ME

DIS

TRIB

UTI

ON

W

ILL

CH

AN

GE

0

20

40

60

80

100

120

2010 2020

Distribution of Upper Middle Class

Top 100 Cities

Next 300 Cities

85% 65%

10% 30%


Retail Stores Need to Catch Up Particularly Difficult for Those W/ No Presence

45

20

57

38

50

8

Japan

China Difference in Retail Presence between China

and Japan Hermes Louis Vuitton Chanel

‘00s

20

‘00s

70

‘000s

5

USA

China Difference in Retail Presence between China

and USA Benetton Zara Gap

Example Brands with No

Presence


But Brands Need to Strike a Balance Between Growth and Exclusive Experience

Source: Bain & Co.


The Brand Experience Matters The Brands Differentiate on This Factor

Commercial

Premium Market

Upper Premium Market

Designer

Haute Couture

Marco Polo

Ralph Lauren, Boss, Seven

Akris, Burberry

Armani, Gucci, Prada

Dior, Gaultier

Luxury Market

Source: h&p


Difference in Exclusivity and Presentation Such Focus is Slowing Store Growth in China


Exceptional Service In-Store Matters Primary Driver for Buying Decision in China

44% In-Store

14% Word-of-Mouth

21% Internet

13% Traditional

Media

7% Direct Marketing

Activities In-Store •  Evaluated product

•  Spoke to salesperson

•  Window shopping

•  Read catalog

Relative Importance in Buying Decision for Luxury Apparel



Need to Position to Emerging Emotional States in China And be Perceived as Such

Pursue Success and Status Professional Achievement, Social Status

60-70% of consumers relate More pronounced in high-tier cities

Balanced Lifestyle/ Laid-Back Spend more on leisure and fun, “enjoy life”

More pronounced in lower-tier cities

Be Classic (Female) or Blend In (Male)

Be comfortable More males skew toward laid-back

Be Trendy (Female) or Stand Out (Male) Visible and Edgy

More females skew toward being expressive

More in high-tier cities


The Retail Challenge 1.  Brands need insight of consumers

in emerging cities 2.  Particularly difficult for many

brands not yet in market (note: not haute couture)

3.  Need to position and be perceived to right emotional state

4.  Underscores need of influencers to shape perception


The Role of Internet


Role of Internet in Creating Awareness Unique Circumstances

21% Internet

52% Saw an ad 43%

Checked reviews online

10% Brand’s website

• 25% of e-commerce demand for products not found in physical stores

•  Country size limits the coverage of physical retailers.

•  For many consumers, especially younger ones, first contact with a brand or type of product is online

• Most shoppers start their search within Taobao (80% of 2010 volume)

•  Taobao.com blocks the spider of the top search engine, Baidu.com

•  Shoppers do not rely on search engine as in other countries

•  Beyond discounts •  Uniqueness, convenience, fun of the

discovery process

Factors driving first awareness of brand online


BUT

Frequent Online Research but Fewer will Buy Rather Buy In-Store

Source: KPMG study of 1300 respondents

They search often Frequency of online search for luxury

brands

Most will not buy online Intent of purchase

43% Will NOT buy

22% Will consider

buying

Better deal Easier for comparisons Less time consuming

Authenticity concerns After-sales service, returns Payment security

Note: online purchase higher for other items


Importance of Social Reviews Due to Distrust of Merchants

0 10 20 30 40 50 60

43%

Read or posted

reviews

20%

52%

19%

Visits official brand

websites

US, Europe

China


Due to consumer wariness and distrust of merchants

Importance of social reviews and “opinion leaders” •  Bulletin-board services

(BBS) •  Social networking sites e.g.

RenRen, Youku, Kaixin •  3rd party review sites on

Sina •  Media firms (CIC) that

aggregate comments •  Brand sites with BBS


Consumer-Generated Content Effective In Influencing Brand Choice

Source: KPMG study of 1300 respondents


Digital Platforms Getting Crowded But Emphasis on Social Media Attributes

Burberry on Kaixin Coach on Ren-Ren

Lancome App on iPhone

Bottega Veneta on Weibo


Mobile Apps in Infancy For Search and Shopping of Lifestyle Purchases

Source: KPMG, AdChina

0

20

40

60

80

100

120

% consumers using mobile to

search

% consumers using mobile to

shop

17% 5%


The Role of Internet 1.  Chinese spend considerable time

on research 2.  They depend on social influencers

for brand awareness, education 3.  But will not necessarily purchase

high-end luxury items online 4.  Mobile is in its infancy for luxury

shopping 5.  Social app attributes are key


The Role of Chinese E-Commerce Players


Fashion Brands Differ in their Online Sites On Presentation, Vividness and Information

Brands Tier

Online Shopping

Store availability

Vividness Interactiv

e social share/likes

Facebook page

own online community

Catalog (pricing info) Zoom-in Design

Christian Dior 1 No Yes No Yes No No

Gaultier 1 Yes No No Yes No Yes

Chanel 1 No Yes No Yes No No

Versace 1 No Yes Yes Yes No No

Armani 2 Yes Yes Yes Yes No Yes

Gucci 2 Yes Yes Yes Yes Personal Likes Yes

Prada 2 Yes Yes No Yes No Yes

Fendi 2 Yes Yes Yes Yes Personal Likes No

Dolce & Gabbanna 2 Yes Yes Yes Yes No Yes

Burberry 3 Yes Yes Yes Yes No Yes

Louis Vuitton 3 Yes Yes Yes Yes No Yes

Boss 3 Yes Yes Yes Yes No Yes

Calvin Klein 3 Yes Yes Yes Yes No Yes

Ralph Lauren 3 Yes Yes Yes Yes No Yes


Yet E-tailers Attract Consumers in China Brands Creating Stores on Sites as Taobao

Own Site

Partner

Taobao

Glamour Sales Penetration

Description

Purpose/ Operations

Major brands as Armani, Bally

$60Bln transactions 500k+ members

Own ecommerce site, add-ons to

corporate

Brand site with own domain

name + “Powered by Yoox”

Brands establishing

official sites for presentation

Promotions targeting price-

conscious

Marketing and consumer education

Yoox offers ecommerce

solution; same price, products

Event-driven promotions and limited inventory

MONO BRAND MULTI-BRAND

LEADING CHANNEL


The Top 2 has 40% Market Share Taobao Mall and 360Buy


And They Are Sticky Leading to Growth of over 30% for Leaders

Other luxury segment players include: •  VIP Store: 500 luxury brand partnerships •  360 Fashion: social media news, new brands, integration to social platforms


Examples of companies tremendously successful in China

Aut

os

Con

sum

er

Goo

ds

Ret

ail

Ele

ctro

nics

Global Internet Players Have Failed While Other Global Brands have Succeeded

Internet companies struggled in China

failed to

failed to

BUT

failed to

failed to


Different Social Networks


The Role of Chinese E-Commerce Players 1.  Multi-label e-tailers are primary

access points to consumers 2.  They are sticky and growing 3.  While foreign companies in other

industries have succeeded in China, internet companies have failed


Summary SO WHAT?


Focus on the Entire Evaluation Process Takes 2-3 Months for Chinese Consumer

Touc

h Po

ints

Time

Awareness

Info Search

Evaluation of Alternatives

Price, Avail. & Purchase

Post- Evaluation

Mono-label Stores: Armani, Burberry High-End Retailer: Neiman Marcus E-Tailers

Brand Advertising Endorsements (celebrities) Editorial Stylists Social (friends, family) Window shopping In-Store experiences

Focus and Motivate Key Influencers;

Sensorial-rich

mediated environment


Examples of Growing Sites Awareness ! Decision

Net-A-Porter: Comprehensive • Catalogs and shopping by designer, • What’s new, • Editorial • Many countries

Asos: Engaging (1.6M fb likes) • Virtual wardrobes with tags to share, competitions • daily deals, marketplace for vintage • editorial; community reviews •  inventory check from other sites, own labels • Mobile, iPad, PC


New Start-Ups Focused on Influencers: Stylists

Boutine: New Incentive Model • Financial ncentives for “stylists” to sell items via

virtual catalogs • Focused on emerging designers who post items

Stylist Pick: Professional Stylists • Popular stylist consultants and handbag/shoes • Fixed price • Own label


Summary Target and Position to Consider

Young Consumers

Multi-Tier Brands

Brand Education of Middle Class

Tier-2 and Tier-3 Cities Engagement

TEST NON-CHINESE MARKETS

FIRST

Social Guidance:

Awareness ! Purchase

Influencers as Fashion Fanatics

TARGET POSITION

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