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
China Luxury Market study 2010Bain POV
November 2010
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
2China Luxury Market study 2010
Agenda
• China luxury market overview
• Key trends of China luxury market
• Implications for luxury brands in China
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
3China Luxury Market study 2010
Asia over-performing, US spend jumping ahead of real recovery, and Japan still sluggish
2009
30%
38%
12%
5%
15%
€153B
2010E
30%
37%
11%
5%
17%
€168B
Worldwide Luxury Goods Market by Area
Americas
Europe
Japan
Asia-Pacific
Rest of World
YoY ‘09 vs ‘08
-9%
-12%
+10%
-8%
-2%
-14% -18%
-18%
+9%
-11%
-4%
@K
YoY ‘10E vs ‘09
+12%
+6%
-1%
+22%
+10%
+8%
+7%
+4%
-8%
+19%
+6%
+5%
@K
@K = at constant exchange rates
-9%
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
4China Luxury Market study 2010
Note: Bain analysis does not include the following: service, hotel, restaurant, alcohol, luxury car and yacht/private jetSource: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Euromonitor; Brand Interviews
Key highlights
• Domestic purchase as % of total luxury spend continued to increase, though still <50%
“As market matures and consumers become more sophisticated, domestic shopping will become more important in the future.”
International Director, Luxury brand
Total luxury spend by mainland Chinese reached ~RMB156B in 2009; but >50% spent overseas
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
5China Luxury Market study 2010
Strong growth momentum expected in 2010 across all luxury categories
0
20
40
60
80
100%
2009 China luxury goods market byproduct category (RMB B)
China luxury market
Other
WomenswearShoes
Jewelry
Menswear
Suitcases andhandbags
Watches
Cosmetics,perfume andpersonal care
RMB68B
~35%
~20%
20-25%
15-20%
~20%15-20%~20%
~20%
(09-10F)~23%
CAGR
• China’s domestic luxury market growthpicked up speed in 2H 2009 and reached RMB 68B; strong momentum continued in H1-2010
• 2010 expected to be a prosperous year for China luxury:
-~23% expected growth expressed in RMB-~30% expected growth expressed in Euros
• Watches and bags lead the growth; -Watches seeing clear rebound after ‘09, driven by mid-price range (RMB 25K – 50K)
-Suitcases and handbags expect to continue past growth trends, as major gift choice for personal and business
Key highlights
*Growth in RMB is ~23%; growth expressed in Euros factoring currency appreciation is ~30%Note; Only premium cosmetics are considered luxury goods in the “Cosmetics” categorySource: Expert Interviews; Brand Interviews; Literature Search; Bain Analysis
*
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
6China Luxury Market study 2010
In each luxury category, the top 5 brands account for ~50% of sales
0
20
40
60
80
100%
Cosmetics, Perfume &Personal care
16.9
Watches
15.5 8.4
Menswear
7.0 4.6
Shoes
3.8 2.8
Other
9.4
2009 China domestic luxury spend (RMB B)
Suitcases &handbags
Jewelry Women-swear
Total = RMB68B
Top 5 brands by category in alphabetical order
Note: Market value is composed of sales at retail value; “Other” category includes tableware/silverware, stationery, sunglasses, accessories and other niche luxury goods items; “Suitcases & handbags” includes smaller items such as wallets; ranking of luxury brands is in alphabetical order; Armani brand includes Giorgio Armani, Emporio Armani and Armani Collezioni
Source: Expert Interviews; Analyst Reports; Company Websites and Reports; Bain Estimates and Analysis
SHISEIDO
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7China Luxury Market study 2010
Louis Vuitton, Chanel and Gucci remained the most desired luxury brands in China in 2010
0
10
20
30
40
50%46%
Chanel
36%
Gucci
22%
Armani
20%17%
Rolex
14%
Cartier
11%
HERMES
8%
Prada
8%
Lancome
5%
% of mentioned (Jul 2010)
LouisVuitton
ChristianDior
1 122 3 5 6 4 7 9 8Rank (2009)
43% 4%25% 20% 13% 12% 18% 11% 9% 10%% of mentionedin 2009 survey
Note: Bain survey focuses on people who are interested in luxury brands, and therefore, brand desirability is very high;
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)
“What are the 3 brands that you desire the most?”
Top3
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8China Luxury Market study 2010SHA
Top 3 brands likely to be purchased (by category) have changed little from 2009
“What are the top 3 brands you are most likely to purchase in each category in 2010?”
Ranking improved in 2010 New to Top 3 in 2010
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)
Watches
Cosmetics, perfumes& personal care
Suitcases & handbags
Jewelry
Menswear
Womenswear
Shoes
1st 2nd 3rd
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
9China Luxury Market study 2010
Similar to 2009, majority of growth (~67%) in 2010 will come from new customers
Source: Bain Survey of Luxury Goods Consumers in Mainland China (2009: n=1,410; 2010: n=1,471); Expert Interviews; Brand Interviews; Customer Interviews; Analyst Reports; Company Reports; Literature Search; Bain Analysis
“Our new stores in T2/3 cities not only attract original consumers, but bring in many new consumers. People in these cities have strong desire for luxury goods.”
PR Manager, Luxury brand
“Emerging middle class in China is trying to improve the quality of their life, …this is one of the main drivers of growth of luxury sales in China.”
Research Analyst
Key highlights
• China market is supply driven; new store openings create new demand
• Are brands too focused on store openings and not enough on consumer experience and loyalty?
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
10China Luxury Market study 2010
In response to high growth, brands continue to expand store footprint aggressively in China
0
20
40
60
80
100
Dunhill
93
HugoBo
ss
89
Burb
erry
50
Ferra
gamo
48
Bally
46
Gucci
37
LV
34
Carti
er*
33
Hermès
**
20
Versac
e
19
Dior
19
Prad
a
15
Bulgar
i*
12
Tiffa
ny
12
Chan
el
6
Store Count of Selected Luxury Brand by end of August 2010
2006 Store Count
Stores increased from 2007 to 2009
Stores increased in 2010by end of August
*Cartier and Bulgari store data excludes its watch & leather wholesaling channels; **2 new Hermes stores will open in Sept in Nanjing and SuzhouSource: Analyst Reports, Literature Search; Brand Interviews
“We are encouraged by that the Chinese economy is back on a track of robust growth, particularly in consumer spending. So we will continue to invest in China and plans to open more stores in the future.”
Sales Director, Luxury brand
“The per store sales in the new store has exceeded that of our old store this year.”
Sales Director, Luxury brand
Key highlights
• For the 15 brands selected, ~80 new stores were opened in 2010 through end of August
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
11China Luxury Market study 2010
Agenda
• China luxury market overview
• Key trends of China luxury market
• Implications for luxury brands in China
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
12China Luxury Market study 2010
Six key trends have been identified in the China luxury goods market
Continued trend of increased domestic
shopping (vs. overseas)
1
Continued importance of
online platforms
4
Tier 2/3 cities continue to be the “new” battleground
2
Brand building efforts more localized & increasing
5
Consumers expect comprehensive and
differentiated service experience
3
• Continued growth of store openings by all brands• Improved timely availability of latest collections as well as enhanced service experience • Brands lowered operating margins to narrow price gap between China and other markets • However, lower price & better product selection remained top 2 reasons for overseas spend
• Consumers are becoming more sophisticated and demand better service experience both within and outside of China
• Brands continue to build large flagship stores for better consumer experiences; also, some brands have already localized after sales services
• Many retailers “buying back” franchise operations to regain control over brand
• Proliferation of real estate development in Tier 2/3 cities• Consumers’ attitudes in Tier 2 & 3 cities towards luxury and wealth similar to Tier 1 • However, talent shortage and rising labour costs are hurdles for growth in Tier 2 & 3 cities
• Company websites (in Chinese) and online community (social networking) platforms remain critical marketing channels in China, particularly among consumers age 25-44
• Emergence of online factory outlets, overseas websites and 3rd party agents are driving internet sales growth (but still small)
• Chinese-themed campaigns and support for social welfare/non-profit causes to enhance relevance of brands/image in Chinese consumers’ eyes
• China is front and center in Brands’ global marketing programs (e.g.: Chanel Paris-Shanghai fashion show in Shanghai, etc.)
Gifting increasing & more diversified
6• Gifting remains a significant driver of luxury goods purchase in China• Gifting has become more diversified in brands/products selection with rising popularity of
anonymous cash cards
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
13China Luxury Market study 2010
Domestic purchase still <50%, but growing; lower prices & broader products still top 2 reasons for overseas purchases
Source: Goldman Sachs Report; Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Literature Search; Expert Interviews; Customer Interviews
0
20
40
60
80
100%
# of responses
Reasons tobuy in China
Better sizeavailability
Access toservice after
sales
OthersAspired to be
VIP
Better shoppingexperience
Where bought?
China(44%)
OutsideChina(56%)
Reasons tobuy overseas
Betteravailability ofnew product
Broaderproductselection
Lower price
Frequent oversea trips
Better shoppingexperience
Lack of discountoutlet in China
Can't wait tilloverseas trips
(impulse)
“What % of luxury purchases (in value) are from overseas vs. in China? And why?”
1
Key highlights
• Mix of domestic vs. overseas purchasevaries a lot by category; for example:
- Cosmetics is very domestic- Expensive watches and jewelry are more
overseas
• Several brands have improved in many areas to increase attractiveness of domestic purchases:
- Smaller ticket items for impulse buys- Availability of latest collection at the same
time as in Hong Kong- Reduction in operating margin to partially
offset tax difference
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
14China Luxury Market study 2010
Consumers’ attitudes towards luxury brands in Tier 2/3 cities getting close to Tier 1 levels
Note: Tier 1 cities are Beijing, Shanghai, Shenzhen, Guangzhou; tier 2 cities are Chongqing, Tianjin + all remaining provincial capitals + other major cities; tier 3 cities are remaining prefectural cities
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Expert Interviews
0
20
40
60
80
100%
% of responses
Luxury goodshave supreme
quality
Bej
ing
Shan
ghai
Guang
zhou
She
nzh
enTie
r2/
3
88
79767981
Luxury goodsshow my taste
and style
80
64
76
5053
Luxury goodshave long
history
6659
43
5355
Luxury goodsmake medifferent
6255
4842
53
“Brand awareness and willingness to spend in many tier 2 cities are already close to the levels seen in the mega cities like Shanghai and Beijing.”
Researcher, TNS
2
“Why do you purchase luxury goods?”
0
50
100
150
200
Average spending by monthly familyincome in 2009 (RMB K)
RMB5-15K
1221
RMB15-20K
2931
RMB20-50K
6349
RMB50-100K
6972
> RMB100K
186
166
“How much money did you spend on luxury goods in 2009?”
Tier 1 cities
Tier 2/3 cities
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
15China Luxury Market study 2010SHA
Chinese consumers are becoming more sophisticated, and demanding better service experience
0
20
40
60
80%
Better CRM
63%
Moreprofessionaland warmservice by
sales people
57%
After-salesservice
(cleaning andmaintenance)
56%
Overallenhancedshoppingexperience
43%
% of responses
“Where should luxury brands improve their performance in China?”
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Brand Interviews; Customer Interviews
“Product itself is still important, but nowadays consumers begin to pay more attention to the ‘experience’ – how they are served during the shopping process, how they are approached for after sales, etc.”
Store Manager, Luxury brand
“ Luxury is not limited to the product, I also pay for the luxury experience and lifestyle which makes me feel unique.”
Luxury consumer
3
Key highlights
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
16China Luxury Market study 2010SHA
Internet continues to serve as an important marketing channel in China for luxury brands
“Where do you normally get information on luxury goods?”
0
20
40
60
80%
Magazine
72%
Internet
60%
Friends
48%
Storedisplay
51%
Others
% of responses
2006 survey 2009 survey 2010 survey
4
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471)
Key highlights
• Internet is approaching magazines as a key information source for consumers of luxury brands
• Brands invest to provide engaging consumer experience through their China website to promote brand heritage and culture
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
17China Luxury Market study 2010
More localized marketing efforts are seen in 2009, including social and non-profit activities
Source: Literature Search; Expert Interviews; Brand Interviews; Customer Interviews
Brands tried to link themselves with China in marketing campaigns…
• Exhibited 350+ fine jewelry pieces in Forbidden City (the Palace Museum), Beijing
“Cartier Treasures” Exhibition
“Search for the oldest Longines watch in China” Campaign
• Collected 336 antique Longines watches and selected 20 oldest watches in China
“Paris-Shanghai” Fashion Show
• Issued the 8th Metier D’Arts collection on a barge on Huangpu River, Shanghai
5
Luxury brands continue to actively organize charity events
“Singing Song for You” project
For China Children’s and Teenagers’ Fund (CCTF)
“Step into Pink”charity partyFor China Breast
Cancer Foundation
“New Vision, New Hope” event
For the Committee of Children Amblyopia Special Fund, CCTF
“Beichuan Rose Valley – Hermes Rose Garden”
projectFor China Siyuan Foundation
for Poverty Alleviation
Charity sales weekend
For Happiness Project
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
18China Luxury Market study 2010SHA
Gifting remains significant; cash cards enable diversification and drive brands to increase desirability
Source: Bain Survey of Luxury Goods Consumers in Mainland China 2010 (n=1,471); Expert interviews
0
20
40
60
80
100%
2008 2009 2010
Own
Gifting
“What percent of the luxury goods you’ve purchased is for gifting?
Own consumption?”
6
• Banks launch ExpressPay Cards as gifting card:- Anonymous, different face values- Can be used domestically and overseas in retailers
that accept UnionPay- However, can’t be recharged or used in ATM
• Other service companies such as Dept Stores also launched anonymous shopping cards
• These cards are increasingly used for gift giving:- Gift receiver has more freedom to choose the
brands/products he/she wants
Key highlights
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
19China Luxury Market study 2010
Agenda
• China luxury market overview
• Key trends of China luxury market
• Implications for luxury brands in China
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
20China Luxury Market study 2010
Implications for luxury brands in China
CRM
D
Brand building
Talent building
A
B
After-sales service
C
Main challenges ahead Implications for luxury brands
• Increasingly crowded market; several brands with undifferentiated image in the eyes of Chinese consumers
• Increase brand equity investment and differentiation
• Enhance relevance to China through local events & social/non-profit activities
• Increasing gap between consumer service expectations and brands’ ability to deliver, specially in Tier 2 & 3 cities
• Significantly upgrade investment in talent management: recruiting, training, career management and retention
• Chinese consumers expect to find after-sales service in China (even if they buy products overseas)
• Build/enhance after-sales service facilities and capabilities in China to cope with overall Chinese purchases, not just domestic
• More sophisticated Chinese consumers expect to be recognized and servedequally well, everywhere
• Build/enhance CRM systems to manage Chinese consumer base globally
Need to progressively shift focus from land grab/store openings to delivery of
consistently great consumer experience
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
21China Luxury Market study 2010SHA