Middle Class Aspirants AMS 39 Chinese digital luxury retailing

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Agenda • China and the global market for luxury goods • Role of the internet in Chinese luxury consumption • Driving forces behind online growth • Online luxury goods customer segments • Future trends AMS 4

A Chinese Obsession?Globally the luxury goods market is thriving. China has emerged as a major driving forcebehind this vitality. In recent years, Chinese luxury goods purchases have surged.The domestic market is growing rapidly, as young, rich elites are reaching out to embracefiner fashions. The markets of Greater China continue to boom. And Chinese travellingabroad are becoming the leading consumers in major fashion destinations.Chinese consumers are fast becoming central to the global luxury goods industry AMS 5

The market for luxury goods is seeing exceptional growth globally Worldwide Luxury Goods Market by Area Luxury Spending CAGR 09-11 €200B 191 13% 171 5% 150 150 Other 26% Japan Asia-Pacific 100 13% Americas 50 Europe 9% 0 2009 2010 2011ESource: Bain & Company AMS 6

As China’s domestic economy has surged, demand for luxury goods has grown rapidly.Areas such as Shanghai’s bund abound with high-end stores for luxury brands of alldescriptions. AMS 7

China’s domestic market has grown twice as fast as the global market • China’s luxury goods market Chinese Personal doubled in size between 2009 and Luxury Goods Spending 2012 €20B • Extensive growth: luxury goods becoming more widely available 15 -In 2011, China saw almost as many new 15 openings of luxury retailer branches as Europe 13 and the USA combined - Luxury retailers have pushed out from the major (“tier 1”) cities to begin colonisation of tier 2 and 10 10 tier 3 cities - 66% of YOY growth comes from new customers 7 5 • Intensive growth: luxury consumers spending ever more on luxury goods -33% of growth comes from existing customers 0 increasing purchases 2009 2010 2011 2012E -Small high-end clientele developing heavy purchasing habit -Significant aspirant middle-class now spending above Western normsNote: 2011 estimate as per Bain; 2012 revenues estimated at 18% YOY growth from 2011 as per McKinsey forecast AMS 8Source: Bain & Company (China Luxury Market Study 2011); McKinsey & Company (McKinsey Insights China)

Consequently, Mainland China’s luxury goods market became the 5th largest in the world in 2010 Personal Luxury Goods Market – Ranking by In-Country Spending (2010)Source: Bain & Company; China Luxury Market Study 2011 AMS 9

However on a global scale, Chinese luxury purchases are even more significant Luxury goods purchases in Chinese Mainland consumers Chinese societies total €26.6B spend > €6B in Euro markets China €12.9B Taiwan €3.9B HK Macao €5.8B €0.8B Paris €4.3B Milan €2.0B S’pore €3.2BNote: Data based on 2010 revenues AMS 10Source: Bain & Company; China Luxury Market Study 2011

50% of luxury goods purchased in Milan and Paris are bought by visiting ChineseNote: Data based on 2010 revenues AMS 11Source: Bain & Company; China Luxury Market Study 2011

Chinese consumers are fast becoming the main drivingforce of global luxury Including purchases in Mainland China, Taiwan, Hong Kong, Macau & purchases by Mainland Chinese when travelling abroad, Chinese consumers drive 25% of all global luxury purchases AMS 12

Chinese consumers are more reliant on the Internet than othernationalities to… -…discover luxury brands -…research products -…and complete their purchasesAnd consequently, the internet accounts for an unusually largeshare of total purchases AMS 14

The in-store experience is still the most important factorin determining purchases AMS 15

However, the internet is the next most important influence in persuading Chinese to buy luxury goods Purchase influencersNote: Derived from regression of whether consumers purchased products from a luxury brand with whether they experienced a certain touchpoint and how the information was received (positively or negatively). Internet specific responses scaled to 100%. Survey products includeRTW, Bags, Shoes, Jewellery & Watches. Based on a survey of 2,422 consumers. NB: McKinsey survey therefore largely assumes correlationis causation AMS 16Source: McKinsey & Company; McKinsey Insights China (2010)

Amongst internet interactions, paid advertising and social reviews are of near equal importance in persuading shoppers to buy Purchase influencers: Internet onlyNote: Derived from regression of whether consumers purchased products from a luxury brand with whether they experienced a certain touchpoint and how the information was received (positively or negatively). Internet specific responses scaled to 100%. Survey products includeRTW, Bags, Shoes, Jewellery & Watches. Based on a survey of 2,422 consumers. NB: McKinsey survey therefore largely assumes correlationis causation AMS 17Source: McKinsey & Company; McKinsey Insights China (2010)

When researching, social media is the channel most commonly used to obtain information on luxury goods “Which channels of the Internet do you normally get information on luxury goods from?”Note: Social Media includes: SNS, Weibo (Chinese Twitter-style micro-blogs) and Blogs AMS 18Source: Bain & Company; China Luxury Market Study 2011

Although China has a vigorous and well establishedfashion press… AMS 19

…Online fashion bloggers are even more influential AMS 20

Chinese consumers’ opinions on luxury brands are heavily shaped by fashion blogs Consumers who say their opinions on luxury goods and brands are shaped by fashion blogsSource: Altagamma AMS 21

After researching online, Chinese luxury consumers are exceptionally likely to make purchases online % of Luxury Consumers Making Purchases OnlineSource: Altagamma AMS 22

As a result, the online share of luxury spending is far higher in China than elsewhere % of Luxury Consumers Making Purchases OnlineNote: China online figures understate sales by excluding direct retail by major brands2012 Figures include linear extrapolation based on YOY growth rates from 2010-2011Source: Data from Bain & Company (Global total, Global online, China total); iResearch (China online) AMS 23

These figures imply China has the world’s leading onlineluxury goods market AMS 24

What does this really tell us? • 13% online penetration vs. 3% online penetration as a global average is a tremendous difference • Given the uncertainty in measurement and differences in categorisation of “luxury” it’s possible the true figure is significantly lower However, we can reasonably conclude that the online market is significantly more important in China than in established markets AMS 25

Unique factors have led to accelerated development of China’s onlinemarket• Luxury brands are rapidly increasing their store footprint across China. However, this development has lagged growth in domestic demand and in many cases Chinese stores fail to match the range and experience offered by overseas stores. Underserved Chinese customers have turned to the internet to fulfil their needs.• Online behaviour varies by customer type. An unusually young, rich elite uses the internet as a tool of convenience to order luxuries as simply as ordering commodities. Fashion fanatics develop sizeable online followings from eager aspirants. And a growing core market turns to the web to flaunt their latest purchases, much as a peacock fans its feathers.• Collectively these factors make the online environment exceptionally important as a researching and purchasing medium for Chinese luxury shoppers AMS 27

A relatively undeveloped network of stores has contributed to the growth of online • Luxury brands have accelerated store roll-outs across Mainland China in recent years, with China receiving as many store openings in 2011 as the US and Europe combined • However, surveys suggest this roll-out is long overdue and that many luxury retailers are failing to provide an adequate level of service in their Chinese stores… -45% of Chinese who travel abroad to purchase luxury goods do so because they find the service and shopping experience superior - 69% say they find more variety when shopping overseas • For customers unimpressed with store service or located in un-served towns, online has grown in prominenceSource: World Luxury Association 2012 AMS 28

Wealthy Chinese are younger than their counter-parts in developed economies The average American millionaire is 64 years China’s average old millionaire is 39 years old With youth comes a deeper affection for internet shoppingSource: Li & Fung AMS 29

We can obtain a picture of China’s online shoppers bycombining several studies • A number of reports from leading consultancies and agencies have provided customer segmentation and demographic information on China’s luxury shoppers: -Hurun Wealth Report: Demographics on China’s emerging elite -McKinsey China Insights: Buying habits examining the share of income spent on luxury goods -Group M – CIC Internet Word of Mouth Social Media & Luxury Study: Online behaviours of a range of groups • Each of these reports uses different methodologies and has a different focus making them imperfectly compatible – however, combining aspects of these studies allows us to sketch a more robust picture of online luxury consumer behaviour AMS 31

McKinsey categorise luxury archetypes based on annual luxury spending and share of income spent on luxury Percentage of annual income Annual luxury spending spent on luxury goods 150 RMB150K 50% 42 40 100 30 70 20 18 50 45 11 20 10 8 0 0 Luxury Fashion Core Middle Luxury Fashion Core Middle Role Fanatics Luxury Class Role Fanatics Luxury Class Models Buyers Aspirants Models Buyers AspirantsMcKinsey’s original figures for annual spending, household proportions and share of total consumption are not internally consistent; andimply a different total market size. Information should not be used for market-sizing.Source: McKinsey Insights China (2010) AMS 32

Luxury role models AMS 33

Luxury Role Models are likely to be a driving force of online purchasing AMSImage Credit: Lifeisnothingwithoutstyle.com;Source: Hurun Wealth Report; Group M; China Daily, iResearch, McKinsey & Company 34

Fashion Fanatics AMS 35

“Fashion fanatics” are likely to be online opinion leaders AMS 36Source: Group M/CIC, McKinsey

Core Luxury Buyers AMS 37

“Core Luxury Buyers” are likely to shop offline but broadcast purchases online AMS 38Source: Group M/CIC, McKinsey

Middle Class Aspirants AMS 39

“Middle Class Aspirants” are more likely to search fordiscounted goods AMS 40

Summarising: these four groups likely have very differentbehaviours online • Luxury role models  • Likely to purchase online • Price insensitive • Range and service focused • Fashion fanatics  • Online opinion leaders • Weak likelihood to purchase online due to love of shopping experience • Style focused • Core luxury buyers  • Shai-sharers and online researchers • Influenced strongly by fashion fanatics and moderately by peers • Unlikely to buy online • Middle class aspirants  • Uncertain of purchases • Heavily reliant on online research • Likely to buy online only via off-price channel AMS 41

Brands need a digital vision of luxury The digital space is becoming crowded. A surge of private equity and venture capital investment has led to a number of high profile third party retailers attempting to address China’s digital luxury consumers. Full-price and off-price offerings abound. Active online followings have the potential to benefit brands. But luxury brands face the challenge of managing their relationship with a highly engaged digital population, whilst maintaining an aura of exclusivity. Employing common buzz-based digital techniques pioneered by FMCG brands will run counter to overall values. The over-riding challenge is to deliver a distinctive, high quality service that differentiates the excellent from the good. Those that discover how to do this using bits and bytes rather than leather and gold will lead the coming era. AMS 43

Beyond exclusivityTo re-create the sensation ofluxury in a digital setting we mustfirst appreciate the essence ofluxuryTo many, luxury means “rarity”But in a digital world, rarity isartificial: abundance is a CTRL+VawaySo brands and designers mustfind a deeper appreciation ofluxury to convey AMS 44

BeyondcraftsmanshipIn the seams of a fine coat or theworkings of a fine watch, thesensation of craftsmanship andexcellence become palpableBut in the digital world, the scopefor differentiation through qualityis limited. Flawless operation is aprerequisite for even the humblestof websites; and flamboyanttechnical genius is often perceivedas an intrusion or barrier. AMS 45

Perhaps… AMS 46

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The essence of luxury lies in emotion andstorytelling Beyond rarity and craftsmanship, the value of luxury goods stems from an emotional power If… luxury goods are an embodiment of fantasy in consumable art Then perhaps ownership buys… the freedom to redesign our self image; to borrow the manna of a designer or craftsman; to absorb the physical characteristics of fine leather or metal In the digital space where the physical becomes imperceptible, the promise of luxury goods must be established through a different narrative – stories and experiences that lend us the same ability to dream or elevate ourselves AMS 48

The luxury brand of the future is thedigital storyteller AMS 49

Matt Hunter is a digital marketing specialist with 8 yearsexperience. He previously worked at management consultancyBain & Company in London, Johannesburg and Sydney beforeheading digital marketing and product development atConfused.com, a successful UK internet business.He specialises in digital marketing, product development andstrategy.He holds an MA in Economics & Management from the Universityof Oxford, an MSc in Strategic Information Systems from CardiffUniversity and is currently completing the MIT-Tsinghua MBA inBeijing, China.<< Available for opportunities in digital marketing, tech start-ups orPE/VC funds; and roles with Asian exposure. >> Email: ProfessionalEnquiries@Gmail.com LinkedIn: http://cn.linkedin.com/in/digitaldirector matthunter.com DIGITAL ◊ PRODUCT DEVELOPMENT ◊ STRATEGY AMS 50

Appendix: Combining estimates from Bain & Companyand iResearch suggests ~13% penetration 2010 2011 2012China 9.6 12.9 15.2China Online 0.8 1.4 2.0China Online % 8.6% 10.8% 13.1%ROW 163.4 178.1 185.1ROW Online 3.7 4.2 5.5ROW Online % 2.2% 2.4% 3.0% • China online figures understate sales by excluding direct retail by major brands. 2012 Figures include linear extrapolation based on YOY growth rates from 2010-2011. Data from Bain & Company (Global total, Global online, China total); iResearch (China online) AMS 51