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Luxury market in ChinaHuge growth potential ahead

April 2013

Fung Business Intelligence Centre

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Table of Contents

Executive Summary 4

The Market 6

The Consumers 18

Competitive landscape and strategies of luxury players in China 23

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Luxury market in China 2013

Despite the weakened global economy and its subsequent impact on the luxury market, China’s

consumer market continues to demonstrate huge growth potential. The demand for luxury

goods in China continues to soar, driven by a number of positive factors such as the growing

number of affluent and middle class, rising household disposable income and higher luxury

spending, and increasing number of travelling Chinese.

The lucrative China market has presented abundant opportunities for global luxury players

to further establish their presence across the country. In this report, we will provide a general

overview of China’s luxury market and take a look at the preferences and behavior of Chinese

consumers. We will then assess the competitive landscape and operating strategies adopted by

luxury players in China.

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Executive Summary

The Market:– Global luxury sales were estimated to reach 212 billion Euro in 2012, up by 10%

year-on-year (yoy), of which, luxury goods sales in China were projected to reach 15

billion Euro in 2012. Bain & Company expected a 7% luxury consumption growth in

China in 2012, down from 30% in 2011 and 27% in 2010.

– The slowdown was partly attributable to a weaker economic growth in China, as

well as the growing trend of shopping luxury goods abroad. The recent ban on

spending public funds on luxury items for gifting might also have a negative impact

on luxury sales in China.

– Acceleration of Chinese consumers buying luxury products overseas is a trend to

watch. It is estimated that overseas consumption of luxury goods accounted for

around 60% of the total Chinese luxury spending in 2012, with watches, jewelry and

leather goods winning the top spots.

– Online luxury retailing is still testing the waters. Luxury brands that embrace online

sales in China will have to contend with several challenges including online fraud,

counterfeit products, and transaction security.

– China’s increasingly rich and luxury loving consumers continue to drive the

development of the luxury market. The growing number of affluent and middle class,

rising household disposable income, ongoing urbanization and rising luxury demand

in small cities, and a surge in the number of credit card users are major growth

drivers.

The Consumers:– Chinese luxury consumers are relatively younger than their overseas peers. Chinese

women and the “post-80s and 90s” generation are the major groups driving luxury

consumption in China.

– There are some signs of shifting preferences: with rising level of sophistication,

consumers in tier 1 and tier 2 cities now prefer low-key but unique luxury products.

However, some consumers in lower-tier cities may stil l prefer brands with

conspicuous logos.

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– Brand recognition continues to rise as Chinese consumers become more

sophisticated. Many luxury consumers in China are beginning to appreciate the

brand’s heritage and their purchasing decisions are often based on the rich cultural

heritage associated with the brand.

Competitive landscape and strategies of luxury players in China– Foreign players continue to dominate China’s luxury goods market, while domestic

brands are yet to establish a strong foothold in the global luxury arena. It is expected

that further fragmentation of consumer demand and behavior will open new doors

for domestic brands in the near future.

– Many luxury retailers that have successfully set up retail stores in tier 1 and tier 2

cities have started to make their entry into the lower tier cities in China.

– After many years of successful operations in China, many luxury brands gradually

shift from joint venture and franchising model to self-operated model; at the same

time, some successful local brand distributors evolve themselves to become brand

owners.

– Recently, some global luxury retailers are scaling down their expansion in China

due to slower growth in the luxury sector. Some of them are shifting from scale

expansion to improving existing store productivity.

– Social media has become an increasingly important marketing tool for luxury players

in China. Many of them are making huge digital marketing efforts to increase brand

equity.

– Luxury brands rely a lot on repeat purchase, thus maintaining customer loyalty is

crucial. It is common for luxury brands to offer special discounts or exclusive perks

for their VIPs. Meanwhile, the trend of launching “made-for-China” luxury goods

continues.

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The Market

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Luxury market in China recorded lackluster sales growth in

2012, but Chinese consumers remained the major driving force Global luxury goods market has continued to soar in 2012. According to Bain &

Company1, global luxury sales were estimated to reach 212 billion Euro in 2012, up

by 10% year-on-year (yoy) (see Exhibit 1), of which, luxury goods sales in China were

projected to reach 15 billion Euro in 2012. If taking Greater China area as a whole, which

includes Hong Kong, Macau and Taiwan, the total size of the luxury market in China was

expected to reach 27.3 billion Euro, surpassing Japan and becoming the world’s second

largest luxury goods market in 2012.

Exhibit 1: Worldwide personal luxury goods market trend, 2009-2012E

Source: Bain & Company – 2012 World Luxury Good Market Study

Having said that, the growth of luxury sales has started to decelerate since the fourth

quarter of 2011. Bain & Company expected a 7% luxury consumption growth in China in

2012, down from 30% in 2011 and 27% in 2010. The slowdown was partly attributable

to a weaker economic growth in China, as well as the growing trend of shopping luxury

goods abroad. Moreover, the recent ban on spending public funds on luxury items for

gifting that took effect on 1 October 20122 might also have a negative impact on luxury

sales in China.

1 Bain & Company - 2012 Luxury Goods Worldwide Market Study, October 20122 http://www.gov.cn/zwgk/2012-07/09/content_2179100.html

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Anti-gifting regulations in China Social gifting is an essential part of Chinese culture. Bain & Company estimated that

personal and corporate gifts accounted for 25% of luxury goods sales in China in 2012.

However, many people believe that lavish spending on gifting is always associated with

corruptions. Indeed, the Chinese top leaders have identified fighting corruption as their

top priority. As part of the anti-corruption campaign, in July 2012, the State Council

promulgated the Regulations on the Affairs and Administration of the Government

Agencies effective 1 October 2012. According to the regulations, government agencies

are prohibited from purchasing luxury goods.

As the new leadership in China pledged to increase efforts to curb corruption, it is

generally expected that the anti-corruption drive will slowdown corporate gift-gifting,

thereby weakening the demand for luxury goods. Having said that, some people believe

that this would only be a temporary phenomenon as gift-giving is deeply rooted in

Chinese culture.

Cosmetics and personal care products, womenswear and

menswear witnessed resilient growthAmong the major product categories, the yoy growth rates of cosmetics and personal

care products, womenswear and menswear were more resilient in 2012, up by 15%,

15%, and 12%, yoy respectively. Watches and jewelry, on the other hand, saw a notable

growth deceleration in 2012; the former recorded -5% yoy growth, and the latter

registered 5% yoy growth in 2012 (see Exhibit 2).

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Exhibit 2: Market share and growth rates of luxury sales in China by selected category, 2009-2012E

YoY growth rate by category 2009-2010 2010-2011 2011-2012E

Accessories 15% 20% 10%

Womenswear 27% 35% 15%

Footwear 20% 20% 10%

Jewelry 22% 20% 5%

Menswear 24% 30% 12%

Leather goods 30% 30% 10%

Cosmetics, perfume, and personal care products 22% 22% 15%

Watches 45% 40% -5%

Total 27% 30% 7%

Source: Bain & Company – 2012 China Luxury Good Market Study

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The travelling Chinese consumers spend more on luxury

overseasChinese consumers have strong preference for shopping luxury goods overseas. Bain &

Company estimated that overseas consumption of luxury goods (including Hong Kong

and Macau) accounted for around 60% of the total Chinese luxury spending in 2012, with

watches, jewelry and leather goods winning the top spots.

According to World Luxury Association3, during the Chinese New Year period from 20

January 2013 to 20 February 2013, Chinese consumers spent as much as US$8.5 billion

on luxury goods abroad, up by 18% yoy. Chinese consumers spent the most on luxury

watches, followed by leather goods, apparel, and cosmetics and perfume.

The rising tendency for Chinese consumers to buy luxury goods overseas is due in part

to the growing ease of travelling abroad4, as well as the price difference of luxury goods

sold in China and abroad.

– The easing of visa requirements for Chinese tourists travelling abroad has led to a

huge jump in the number of Chinese outbound tourists in recent years (see Exhibit 3).

China National Tourism Administration indicated that the total number of Chinese

outbound tourists exceeded 80 million in 2012, increased by 15% yoy. According

to a report by KPMG5, a majority (72%) of travelling Chinese consumers would

purchase luxury items during their overseas trips.

3 World Luxuary Association - Chinese overseas luxuary goods consumption during the Spring Festival, January 2013

4 Several countries have simplified their visa procedure for Chinese tourists, for example, Japan has not only relaxed the financial requirements for Chinese individual tourist visa applicants, but also extended the number of days that Chinese tourists can stay in the country from 15 to 30 days. South Korea has increased the maximum length of stay for Chinese multiple-entry visas holders from three years to five years. Canada has extended the validity period for multiple-entry visas up to 10 years since July 2011.

5 KPMG - Global Reach of China Luxuary, January 2013

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Exhibit 3: Number of Chinese outbound tourists, 2008-2012

Source: China National Tourism Administration

– The huge price gap between luxury goods sold in China and abroad has also led

to massive luxury consumption outflow. High import duties and consumption tax

levied on luxury goods imports have pushed up the prices of luxury goods in China

(see Exhibit 4); and a weak Euro against RMB has further deepened the price gap.

Further, increasing rental and labor costs and a relatively inefficient distribution and

logistics systems are some of the other factors that are attributable to the high

prices of luxury goods in China.

Exhibit 4: Consumption tax and import tariff on selected luxury products in China

Category Consumption tax Import tariff

Cosmetics 30% 6.5%-150%

Jewelry and precious stones 5%-10% 0%-130%

Luxury watches 20% 11%-100%

Automobile 1%-40% 25%-270%

Yachts 10% 8%-30%

Golf equipment 10% 12%-50%

Source: China Customs, compiled by the Fung Business Intelligence Centre

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Price savings is the main reason that Chinese consumers prefer shopping overseas. The

Fung Business Intelligence Centre has compared the prices of selected luxury goods

sold in Shenzhen and Hong Kong, we found that there is a substantial price difference

between luxury products sold in the two places; the price difference varies across

different brands and types of products, ranging from 11% to 40% (see Exhibit 5).

Exhibit 5: Price comparison of selected luxury products sold in Hong Kong and Shenzhen*

Price Price in Price in differenceBrand Product Hong Kong Shenzhen (% change (RMB) (RMB) in RMB)Burberry 100% cashmere scarf, 3,205 4,500 40.4%

size 30cm x 168cm

Dior Lady Dior handbag, median 24,439 29,000 18.7%

Dior Lady Dior handbag, large 27,243 32,500 19.3%

Hermès 100% silk scarf, 3,045 3,750 23.2%

90cm x 90cm

Cartier Tank watch, median 26,763 36,400 36.0%

Cartier Love bracelet 34,855 47,300 35.7%

Louis Vuitton Wallet, Sarah Monogram 4,127 4,850 17.5%

Louis Vuitton Wallet, Alexandra 4,808 5,350 11.3%

Monogram

Bottega Veneta Handbag, Maxi Veneta Hobo 20,392 25,480 24.9%

Chanel Handbag, classic, median 32,211 41,000 27.3%

Source: Fung Business Intelligence Centre

*Note: (1) as of 14 March 2013 (2) Exchange rate: 1 HKD = 0.801273 RMB

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Online luxury retailing is still testing the watersAs China’s online retail market is getting more mature, Chinese consumers have more

confidence and greater interests to purchase luxury goods online. According to the

aforesaid KPMG report, 40% of the survey respondents showed interests in online

shopping for luxury goods, compared with 22% in 2011. McKinsey & Company’s study6

also indicated that a small but growing number of Chinese shoppers are purchasing

luxury goods online. The survey indicated that among the surveyed respondents who

made purchases of luxury items at least once online in the past year rose from 2% in

2010 to 8% in 2012, and the amount they spent online increased from 1% to 3% of the

total expenditure.

Selling online: self-operated platforms vs. third-party B2C

platformsCurrently, there are two major ways for luxury retailers to sell online:

– Self-operated online platforms. Under this model, luxury brand owners sell their

own merchandise online through self-operated online platforms or websites. Brand

owners own the title to the goods. They manage the websites themselves and

responsible for marketing activities, logistics, after-sales services, etc. The online

platform of Coach7 is one such example.

– Third-parties B2C online luxury platforms. Many of these online luxury platforms

hire their own buyers to purchase luxury products overseas and resell them on

the online platforms; website operators generate profits from the price difference

between Mainland China and overseas. Some products sold on these platforms

are authorized by luxury brands. Ferragamo, for instance, has partnered with xiu.

com8 to sell selected authorized products online. However, not all online platforms

in China are authorized by the brands. Unauthorized products may not be able to

have the official warranty or enjoy the after-sales services provided by the brands.

There are risks that consumers may buy counterfeit products online.

6 McKinsey & Company - Luxury Without Borders: China’s New Class of Shoppers Take on the World. The McKinsey Chinese Luxury Consumer Survey, December 2012

7 http://china.coach.com/index.htm8 http://ferragamo.xiu.com/?s_id=xiu-shopinshop-1-1

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Eyeing the enormous potential of China’s online luxury market, a growing number of

foreign luxury online platform operators such as yoox.com and Neiman Marcus have

started to tap the China market, some of them offer free international shipping to China.

Despite the huge growth potential of the online luxury market, selling luxury products

online is not easy. China’s online retailing market is still not very well-regulated. Problems

such as online fraud, counterfeited luxury products, and transaction security remain some

major concerns. Supportive government policies to establish a fair and secure business

environment for online retailing are crucial. Meanwhile, brands and online luxury retailers

have to put more effort into building the reputation of their online platforms. For example,

secoo.com, a B2C platform selling luxury products, not only provides luxury products

appraisal and evaluation services to ensure the products sold via its online platform are

authentic, but also provides other value-added services such as handbag cleaning and

product repair services for their customers.

Positive drivers of China’s luxury market

Rapid increase in household disposable income

Household disposable income in China has grown consistently over the years. According

to the National Bureau of Statistics of China (NBS), growth of household disposable

income has been most prominent in the highest income segment, followed by the high

income and upper middle income segment, all registering double-digit compound annual

growth rates of 14.5%, 12.8% and 12.1%, respectively (see Exhibit 6). These groups of

individuals often have a voracious appetite for luxury goods and are the biggest spender

on luxury goods.

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Exhibit 6: Compound annual growth rates of household disposable income by income group, 2000-2011

Source: National Bureau of Statistics of China

It is expected that household income will continue to rise as the Chinese government

strives to double the per capita household income by 2020 to stimulate domestic

consumption.

Number of wealthy individuals grows at a rapid pace; the fast growing affluent and middle class drives luxury sales

According to Hurun Wealthy Report 2012, there were 1,020,000 wealthy individuals in

China with personal wealth of 10 million yuan or over by the end of 2011, up by 6.25%

yoy. The number of individuals with personal wealth more than 100 million yuan reached

63,500 in 2011, increased by 5.8% yoy. In 2011, Beijing has the highest number of

wealthy individuals in China, followed by Guangdong, Shanghai, Zhejiang, Jiangsu and

Fujian. 84% of the wealthy individuals live in the coastal areas in China, while less than

20% of the wealthy individuals live in the Northeast, Southwest, Central and Northwest

China.

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A joint report published by Knight Frank and CITI9 indicated that the world’s high net

worth individuals (HNWIs)10 have been gradually shifting towards the east. In 2011, there

were 18,000 HNWIs in Southeast Asia, while the number of HNWIs in America and

Western Europe were 17,000 and 14,000, respectively. The report also predicted that, by

2016, the number of HNWIs in China will double from its current level to 14,000.

On the other hand, the burgeoning middle class is one of the major forces driving luxury

consumption in China. The middle class, which is more sophisticated and westernized,

has higher income to support their international and sophisticated life style. They are

willing to pay a premium for convenience and high quality goods. McKinsey & Company11

projected that the number of middle- and high-income urban households in China will

increase from 181 million in 2012 to 366 million in 2030.

Ongoing urbanization and rising luxury demand in smaller cities

According to the NBS, at the end of 2012, China’s urban population stood at 712 million,

with urbanization rate reaching 52.6%. The government is making efforts to further push

forward urbanization. It is expected that the urbanization rate will be above 60% by 2020.

The Chinese government has been focusing on promoting the development of small-

and medium-sized cities and towns in recent years. McKinsey & Company predicted that

smaller cities with population less than 1.5 million will be the major force driving China’s

economy growth in the next two decades and they can form strong clusters with huge

economic potential. The rising consumption in these cities will create huge demand for

luxury goods. In fact, many luxury companies have already stepped into those cities. For

example, fashion luxury companies, Gucci, Burberry, Ermenegildo Zegna and Prada have

opened stores in Taiyuan; Gucci and Burberry have stepped into Zhengzhou in Central

China.

9 Knight Frank and CITI - The Wealthy Report 2012, March 201210 According to a joint report published by Knight Frank and CITI, The Wealthy Report 2012, HNWIs are

defined as someone having over US$25 million of investable assets.11 McKinsey & Company - What’s Next For China?, November 2012

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A surge in the number of credit card users is likely to stimulate immediate consumption of luxury goods

China is witnessing a surge in the number of credit card users. According to China

Banking Association12, in 2011, China's credit card transactions totaled 7.75 trillion

yuan, up 48% yoy; the number of credit cards issued was 285 million, up by 24.3%

yoy. MasterCard forecasted the number of credit cards in China to reach 900 million by

202013. The rapid expansion of the credit card market will help drive luxury sales in the

country.

12 http://www.china-cba.net/bencandy.php?fid=67&id=9350 13 MasterCard 2010 Forum - Seizing Vast Business Opportunities from China's Rapid Urbanization http://www.bloomberg.com/news/2010-09-10/china-to-pass-u-s-as-largest-credit-card-market-by-2020-

mastercard-says.html

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The Consumers

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Wealthy individuals in China are relatively younger than their

foreign counterpartsIn general, Chinese luxury consumers are younger than their overseas peers. According to

Roland Berger14, 60% of the Chinese luxury consumers are aged between 20 and 39, while

only 38% of the western European consumers belong to that age group (see Exhibit 7).

In western European countries, 21% of the luxury consumers are 60 years of age or

above, while only 7% of the Chinese luxury goods buyers are over 60 years of age. Hurun

Wealthy Report 2012 also showed that the average age of individuals who possess

assets of more than 10 million yuan in China is 39, and the average age of individuals

with assets more than 100 million yuan is 41.

Exhibit 7: Age distribution of Chinese luxury consumers, 2011

Source: Roland Berger - Chinese Consumer Report - Luxury

14 Roland Berger - Chinese consumers report – Luxury; A brand awareness upgrade. Welcoming a new era in the Chinese luxury market, October 2012

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Increase luxury spending by women and the youth Nowadays, women in China are more independent and have higher spending power

than before. Many of them have a strong appetite for luxury and are keen to reward

themselves with luxury products. They represent a core segment of the luxury market.

According to Hurun, in 2011, among the 1.02 million people with personal wealth above

10 million yuan, 40% of them were women. The Boston Consulting Group’s report15 also

pointed out that affluent women’s spending on personal luxury goods has increased from

25% in 2010 to 46% in 2012.

Apart from the rise of female consumerism, the youth population, particularly the “post-

80s and 90s” generation and the second generation of the country's wealthy elite, is

another major population driving luxury consumption in China. This group possesses

a distinctive set of values and buying preferences. They are ready to splurge on luxury

products. Although they may not be able to afford luxury goods themselves, they receive

substantial financial support from their parents and grandparents.

15 The Boston Consulting - The Age of the Affluent Group, November 2012

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Signs of shifting preferences: consumers in tier 1 and tier 2 cities

now prefer low-key but unique luxury products With rising level of sophistication, wealthy Chinese consumers in tier 1 and 2 cities are

becoming more discerning. They concern more about the history and culture of the

brands, and are generally less logo-oriented. Many of them prefer unique designs to

reflect their individual tastes. According to the aforementioned study by McKinsey &

Company, 51% of the respondents agreed or strongly agreed that “showing off luxury

goods is in bad taste”, the percentage was the same as that in Japan.

However, some consumers in lower-tier cities may still prefer brands with conspicuous

and easily recognized logos. These consumers may have just reached the income level

where they can afford luxury goods and would like show off their newly found social

status (see Exhibit 8).

Exhibit 8: Chinese consumers’ attitude toward purchasing luxury goods with conspicuous logo

Are you going to buy luxury goods with conspicuous logo in the future?"

Source: McKinsey & Company - Chinese Luxury Consumer Survey, December 2012

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Brand recognition continues to rise as consumers become more

sophisticated; brands with heritage have clear advantageWith increasing exposure to luxury brands, Chinese consumers have started to develop a

good knowledge of brands. The previously mentioned KPMG survey indicated that their

respondents recognized 59 luxury brands in 2012, up from 57 in 2010 and 43 in 2008,

and more than half of the respondents preferred to purchase well-known luxury brands,

and almost 70% of the respondents would pay a premium for well-known brands.

Moreover, many luxury consumers in China are beginning to appreciate the brand’s

heritage and their purchasing decisions are often based on the rich cultural heritage

associated with the brand. For instance, Gieves & Hawkes, a British menswear brand

owned by Trinity Group, is popular with Chinese consumers due to its history of being the

supplier of ceremonial uniforms to the British Royal family, British Army, and Royal Navy.

Chinese consumers greatly appreciate the royal association and are more inclined to view

the brand as being high class and high quality.

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Competitive landscape and strategies of luxury players in China

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Foreign players continue to dominate China’s luxury goods

marketChina’s luxury goods market is largely dominated by foreign players. Most Chinese luxury

consumers tend to favor foreign brands that have long history and unique brand heritage.

They also like to choose foreign luxury goods for social gifting. According to Hurun’s list

of Preferred Brands for Gifting by Men and Preferred Brands for Gifting by Women16,

Maotai is the only Chinese brand that is able to make a spot on the list.

Currently, only a few homegrown luxury brands

such as the menswear brand, Trands, the luxury

fashion brands, NE-TIGER and Shanghai Tang,

as well as the fine jewelry brand, Qeelin have

gained international recognition. While domestic

brands are yet to establish a strong foothold

in the global luxury arena, it is expected that

further fragmentation of consumer demand

and behavior will open new doors for domestic

brands in the near future.

Some foreign luxury retailers are eyeing the emerging local

luxury brands To further expand their brand portfolio and increase their presence in the China market,

some foreign luxury retailers are looking for opportunities to invest in local luxury

companies that have strong identity and growth potential. For instance, in December

2012, French luxury group, PPR acquired a majority stake in Qeelin, a Chinese fine

jewelry brand. And earlier in February 2012, L Capital Asia, a private equity fund financed

by the French luxury giant LVMH, acquired a 10% stake in Ochirly, one of the top fashion

brands in China. L Capital Asia also co-invested with the Chinese apparel company

Xin Hee Co., Ltd. in a mid-priced apparel brand QDA, and its first store was opened in

Beijing in March 201317.

16 Hurun - http://img.hurun.net/hmec/2013-01-15/201301151541117114.doc 17 http://www.morningwhistle.com/html/2013/Company_Industry_0307/217439.html

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The retail footprints: Luxury retailers have started to make

inroads into lower-tier citiesExhibit 9 shows the sales locations of selected luxury retailers in China. The cities are

ranked in the order of their respective competitiveness in the Annual Report on Urban

Competitiveness. Cities higher on the list are often perceived as those with greater

development potential and stronger economics influence. Indeed, the top four cities on

the list are the prominent tier 1 cities in China, namely Shanghai, Beijing, Shenzhen, and

Guangzhou.

Most luxury retailers have set up retail stores in tier 1 and tier 2 cities. However, the

ongoing urbanization, increasing income level and the rapid development of new

transportation network in China have made lower tier cities more competitive and

appealing to luxury retailers. Many luxury retailers have made their entry into the lower-tier

cities. It is expected that tier 3 and tier 4 cities will be important growth drivers in coming

years.

Among the selected luxury brands, menswear brands have the widest footprints. Most of

them have already expanded their presence in lower-tier cities. Cities such as Huizhou,

Ordos, Taizhou, Shanyu, and Yantian are popular destinations for luxury menswear

brands.

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Exhibit 9: The retail footprints: sales locations of selected luxury retailers in China (As of March 2013)

Louis Tiffany Ermenegildo Hugo Kent & Cerruti Gieves & Vuitton Hermès Chanel Gucci & Co Dior Burberry Armani Prada Zegna Fendi Ferragamo Boss Dunhill Curwen 1881 Hawkes D’URBAN1 Shanghai 3 3 5 8 5 5 6 11 3 8 1 5 9 11 5 9 9 62 Beijing 4 2 2 7 3 4 7 8 3 12 3 7 13 14 8 11 10 43 Shenzhen 1 1 1 1 2 2 1 1 2 1 1 5 2 7 5 3 24 Guangzhou 2 2 1 2 1 1 2 3 1 2 2 4 4 3 4 4 3 25 Tianjin 1 2 2 3 1 1 1 3 1 3 3 4 4 5 16 Dalian 1 1 1 1 2 2 1 1 2 1 2 2 1 1 1 2 7 Changsha 1 1 2 2 3 1 2 8 Hangzhou 2 2 1 2 1 1 3 2 2 5 2 5 3 3 2 2 19 Qingdao 1 1 1 1 1 2 1 1 1 1 1 10 Foshan 1 1 1 11 Dongguan 12 Suzhou 1 1 2 3 1 1 1 3 1 3 3 2 113 Shenyang 3 1 1 3 2 2 2 2 2 5 2 6 4 6 7 7 214 Wuxi 1 1 1 1 1 1 1 1 1 1 1 1 15 Nanjing 1 1 1 1 1 2 2 1 2 1 2 2 3 1 1 116 Wuhan 1 1 1 1 2 1 3 2 3 4 3 2 217 Ningbo 1 1 2 1 1 1 1 3 2 2 1 1 118 Xiamen 1 1 1 2 2 2 2 2 2 219 Jinan 1 2 1 1 2 3 1 2 3 1 120 Chengdu 1 1 2 1 2 3 4 1 5 1 3 6 6 7 5 4 321 Hefei 1 1 1 1 2 2 3 1 1 1 122 Dongying 23 Baotou 1 1 1 1 1 124 Ordos 1 1 1 1 1 125 Changzhou 1 1 1 1 1 1 1 26 Huhhot 1 1 1 1 1 1 1 1 1 27 Yantai 1 1 1 1 28 Zhongshan 1 29 Fuzhou 1 1 1 2 1 1 2 2 2 2 230 Chongqing 1 2 1 1 1 1 2 3 3 2 3 2 231 Xi'an 1 2 1 1 1 4 1 3 2 8 4 6 132 Changchun 1 1 1 1 3 1 1 1 1 2 1 33 Zhuhai 34 Harbin 1 1 2 1 2 3 1 1 2 4 2 2 3 2 235 Daqing 36 Zhengzhou 1 1 1 1 2 3 1 1 1 37 Yangzhou 1 1 1 38 Nantong 1 1 1 39 Shijiazhuang 1 1 1 1 2 2 1 1 1 140 Wenzhou 1 1 2 1 1 1 3 1 1 41 Xuzhou 1 1 42 Nanning 1 1 1 1 1 2 1 2 1 2 2 1 143 Zibo 44 Nanchang 1 1 1 1 1 145 Zhenjiang 1 46 Tangshan 1 1 1 1 1 47 Quanzhou 48 Taizhou 1 1 1 249 Kunming 2 1 2 1 2 1 2 2 3 3 1 1 1 150 Wuhu 51 Zhoushan 1 1 1 1 52 Huizhou 1 1 1 1 153 Maanshan 54 Weihai 1 55 Shaoxing 1 1

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Exhibit 9: The retail footprints: sales locations of selected luxury retailers in China (As of March 2013)

Louis Tiffany Ermenegildo Hugo Kent & Cerruti Gieves & Vuitton Hermès Chanel Gucci & Co Dior Burberry Armani Prada Zegna Fendi Ferragamo Boss Dunhill Curwen 1881 Hawkes D’URBAN1 Shanghai 3 3 5 8 5 5 6 11 3 8 1 5 9 11 5 9 9 62 Beijing 4 2 2 7 3 4 7 8 3 12 3 7 13 14 8 11 10 43 Shenzhen 1 1 1 1 2 2 1 1 2 1 1 5 2 7 5 3 24 Guangzhou 2 2 1 2 1 1 2 3 1 2 2 4 4 3 4 4 3 25 Tianjin 1 2 2 3 1 1 1 3 1 3 3 4 4 5 16 Dalian 1 1 1 1 2 2 1 1 2 1 2 2 1 1 1 2 7 Changsha 1 1 2 2 3 1 2 8 Hangzhou 2 2 1 2 1 1 3 2 2 5 2 5 3 3 2 2 19 Qingdao 1 1 1 1 1 2 1 1 1 1 1 10 Foshan 1 1 1 11 Dongguan 12 Suzhou 1 1 2 3 1 1 1 3 1 3 3 2 113 Shenyang 3 1 1 3 2 2 2 2 2 5 2 6 4 6 7 7 214 Wuxi 1 1 1 1 1 1 1 1 1 1 1 1 15 Nanjing 1 1 1 1 1 2 2 1 2 1 2 2 3 1 1 116 Wuhan 1 1 1 1 2 1 3 2 3 4 3 2 217 Ningbo 1 1 2 1 1 1 1 3 2 2 1 1 118 Xiamen 1 1 1 2 2 2 2 2 2 219 Jinan 1 2 1 1 2 3 1 2 3 1 120 Chengdu 1 1 2 1 2 3 4 1 5 1 3 6 6 7 5 4 321 Hefei 1 1 1 1 2 2 3 1 1 1 122 Dongying 23 Baotou 1 1 1 1 1 124 Ordos 1 1 1 1 1 125 Changzhou 1 1 1 1 1 1 1 26 Huhhot 1 1 1 1 1 1 1 1 1 27 Yantai 1 1 1 1 28 Zhongshan 1 29 Fuzhou 1 1 1 2 1 1 2 2 2 2 230 Chongqing 1 2 1 1 1 1 2 3 3 2 3 2 231 Xi'an 1 2 1 1 1 4 1 3 2 8 4 6 132 Changchun 1 1 1 1 3 1 1 1 1 2 1 33 Zhuhai 34 Harbin 1 1 2 1 2 3 1 1 2 4 2 2 3 2 235 Daqing 36 Zhengzhou 1 1 1 1 2 3 1 1 1 37 Yangzhou 1 1 1 38 Nantong 1 1 1 39 Shijiazhuang 1 1 1 1 2 2 1 1 1 140 Wenzhou 1 1 2 1 1 1 3 1 1 41 Xuzhou 1 1 42 Nanning 1 1 1 1 1 2 1 2 1 2 2 1 143 Zibo 44 Nanchang 1 1 1 1 1 145 Zhenjiang 1 46 Tangshan 1 1 1 1 1 47 Quanzhou 48 Taizhou 1 1 1 249 Kunming 2 1 2 1 2 1 2 2 3 3 1 1 1 150 Wuhu 51 Zhoushan 1 1 1 1 52 Huizhou 1 1 1 1 153 Maanshan 54 Weihai 1 55 Shaoxing 1 1

1 Shanghai2 Beijing3 Shenzhen4 Guangzhou5 Tianjin6 Dalian7 Changsha8 Hangzhou9 Qingdao10 Foshan11 Dongguan12 Suzhou13 Shenyang14 Wuxi15 Nanjing16 Wuhan17 Ningbo18 Xiamen19 Jinan20 Chengdu21 Hefei22 Dongying23 Baotou24 Ordos25 Changzhou26 Huhhot27 Yantai28 Zhongshan29 Fuzhou30 Chongqing31 Xi'an32 Changchun33 Zhuhai34 Harbin35 Daqing36 Zhengzhou37 Yangzhou38 Nantong39 Shijiazhuang40 Wenzhou41 Xuzhou42 Nanning43 Zibo44 Nanchang45 Zhenjiang46 Tangshan47 Quanzhou48 Taizhou49 Kunming50 Wuhu51 Zhoushan52 Huizhou53 Maanshan54 Weihai55 Shaoxing

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Luxury brands gradually shift to self-operated model, and some

distributors strive to become brand ownersFor many luxury retailers, when they first entered the China market, they either sold their

brand licenses to local distributors, or set up joint ventures with local partners. Many

of them also engaged in brand franchising. After many years of successful operations

in China, some of the early starters began to take back their brand licenses and run

their own self-operated stores. By running their own operation, luxury retailers can

better control their business and brand image, and enjoy better profits. Take Salvatore

Louis Tiffany Ermenegildo Hugo Kent & Cerruti Gieves & Vuitton Hermès Chanel Gucci & Co Dior Burberry Armani Prada Zegna Fendi Ferragamo Boss Dunhill Curwen 1881 Hawkes D’URBAN56 Taizhou 57 Taiyuan 1 1 1 1 3 3 2 2 2 2 1… 69 Urumqi 1 1 1 1 1 1 1 1 1 1… 73 Huzhou 1 1 1 1… 76 Haikou 1 1 1 1 1 1… 87 Jinhua 1 1 1 88 Yancheng 1 1 1 1 89 Yingkou 90 Jilin 1 1 1 … 92 Guiyang 1 1 1 2 2 2 2 1 93 Lanzhou 1 1 1 1 1 2 2 1 1… 99 Handan 2 1 1 1 1 1100 Panjin 1 1 Baoding 1 1 1 1 Bengbu 1 Dandong 1 1 1 1 1 Haining 1 Huainan 1 1 Inner Mogolia 1 1 1 Jinjiang 1 Kunshan 1 1 Ninghai 1 Leqing 1 Sanya 1 1 1 1 2 1 Shangyu 1 1 1 1 1 Xining 1 1 1 Yichang 1 1 1 1 Yiwu 1 Zhangjiagang 1 1

Source: Respective company websites, compiled by the Fung Business Intelligence Centre

Note: Only self-operated stores are included.

29


18 http://www.ft.com/intl/cms/s/0/52e412b2-5593-11e2-bdd2-00144feab49a.html#axzz2NImzrLvw

Louis Tiffany Ermenegildo Hugo Kent & Cerruti Gieves & Vuitton Hermès Chanel Gucci & Co Dior Burberry Armani Prada Zegna Fendi Ferragamo Boss Dunhill Curwen 1881 Hawkes D’URBAN56 Taizhou 57 Taiyuan 1 1 1 1 3 3 2 2 2 2 1… 69 Urumqi 1 1 1 1 1 1 1 1 1 1… 73 Huzhou 1 1 1 1… 76 Haikou 1 1 1 1 1 1… 87 Jinhua 1 1 1 88 Yancheng 1 1 1 1 89 Yingkou 90 Jilin 1 1 1 … 92 Guiyang 1 1 1 2 2 2 2 1 93 Lanzhou 1 1 1 1 1 2 2 1 1… 99 Handan 2 1 1 1 1 1100 Panjin 1 1 Baoding 1 1 1 1 Bengbu 1 Dandong 1 1 1 1 1 Haining 1 Huainan 1 1 Inner Mogolia 1 1 1 Jinjiang 1 Kunshan 1 1 Ninghai 1 Leqing 1 Sanya 1 1 1 1 2 1 Shangyu 1 1 1 1 1 Xining 1 1 1 Yichang 1 1 1 1 Yiwu 1 Zhangjiagang 1 1

56 Taizhou57 Taiyuan…69 Urumqi…73 Huzhou…76 Haikou…87 Jinhua88 Yancheng89 Yingkou90 Jilin…92 Guiyang93 Lanzhou…99 Handan100 Panjin Baoding Bengbu Dandong Haining Huainan Inner Mogolia Jinjiang Kunshan Ninghai Leqing Sanya Shangyu Xining Yichang Yiwu Zhangjiagang

Ferragamo as an example; it is reported that the company has been working on a plan to

take back some sub-franchisees in China to maintain their image18.

Meanwhile, some successful domestic brand distributors have tried hard to evolve

themselves and become brand owners. Trinity Limited, a high-end to luxury menswear

retailer in China, is a good example of how a brand licensee evolves itself and turn into

a brand owner. The company has subsequently in 2008, 2010, and 2012 acquired

the brand ownership rights of Kent & Curwen, Cerruti 1881, and Gieves & Hawkes,

converting the three licensed brands into self-owned brands.

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From aggressive stores expansion to improving store

productivityRecently, some global luxury retailers are scaling down their expansion in China due to

slower growth in the luxury sector. Some of them are shifting from scale expansion to

improving existing store productivity. For instance, Louis Vuitton recently announced that

it would slow down new store opening in China and focus on revamping and upgrading

existing stores. PPR Group also announced that it would cease Gucci’s new store

expansion in China in 2013. Burberry and Richemont also indicated plans to slow down

their expansion in the country.

Striking the right balance between store numbers and store productivity is not easy; many

luxury brands are working hard towards achieving it.

Social media becomes an increasingly important marketing tool Riding the boom of the e-commerce sector in China, many luxury retailers in China

are making huge digital marketing efforts to increase brand equity. Social media has

become an increasingly common marketing tool. Chinese consumers are becoming more

technology savvy and are increasingly getting used to using social media to interact with

brands, provide comments on products, and find new brands. According to a report by

PricewaterhouseCoopers19, consumers in China are more actively engaged with social

media: 57% of Chinese shoppers followed the brands on social media, while the global

figure was 38%.

Indeed, some local social networking platforms such as the Twitter-like microblogging

service Sina Weibo and Renren, the Chinese equivalent of Facebook are very popular

in China. For instance, the total number of registered Sino Weibo users totaled 368

million as of June 2012. Given the large number of Sina Weibo users in China and a

strong engagement of Chinese consumers with social media, many luxury retailers have

been actively using it as a tool to promote their latest products and interact with their

consumers. Exhibit 10 shows the number of followers of selected brands on Sina Weibo

as of 18 March 2013.

19 PricewaterhouseCoopers - Demystifying the shopper: 10 myths of multichannel retailing, January 2013

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20 http://online.wsj.com/article/SB10000872396390444772804577618682194946736.html

Exhibit 10: Number of Sina Weibo followers for selected luxury brands (As of 18 March 2013)*

Note: Only brands with active corporate Sina Weibo accounts are included

Source: Sina Weibo, compiled by the Fung Business Intelligence Centre

Maintaining customer loyalty is the key to successLuxury brands rely a lot on repeat purchase, thus maintaining customer loyalty is crucial. It

is common for luxury brands to offer special discounts or exclusive perks for their VIPs. For

instance, Louis Vuitton reportedly treated 10 of its most valuable Chinese customers to a

helicopter tour to Mongolia to watch a camel polo match; while Burberry has also conducted

special events for its VIPs, it is reported that the company had invited its top Chinese

spender from Shanghai to attend a famous fashion photography exhibition held in Beijing20.

To strengthen the brand’s appeal and highlight the skill of its craftsmen, Hermès had invited

some of its Italian professional handbag makers to their stores in China to show customers

the process of making leather handbags and shoes, from choosing leather to sewing, to the

final joining of the pieces of leather together.

Meanwhile, to win the hearts of China’s increasingly rich and luxury-loving consumers,

many brands have launched specific products tailored for the China market. For instance,

2013 is the Year of the Snake in China, several luxury brands have launched specially

designed products bearing the image of the snake. Exhibit 11 shows some of the snake-

themed products of selected luxury brands.

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Exhibit 11: Selected luxury brands and their snake-themed products or services

Brand Products or service

Dunhill Snake-themed cufflinks

Louis Vuitton Help customers to monogram a snake imprint on their luggage

or baggage

Burberry Chinese New Year handbag collection with snakeskin pattern

Vacheron Constantin Year of the Snake watch

Piaget Altiplano Chinese zodiac snake watch

Bulgari Snake-shaped necklace; light-up snake is installed across the

facades of the flagships in New York, Rome and Tokyo

Cross Year of the Snake Collection pen

Davidoff Year of the Snake edition cigars

Mercedes-Benz Year of the Snake-Inspired Mercedes-Benz G-Class

Source: Various news reports; Fung Business Intelligence Centre

© Copyright 2013 The Fung Business Intelligence Centre. All rights reserved.Though the Fung Business Intelligence Centre endeavours to ensure the information provided in this publication is accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of this material without prior written consent of the Fung Business Intelligence Centre is prohibited.

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