Presentation given by Michael Zakkour @michaelzakkour at Fashion Institute of Technology on Oct 3 - China Fashion, Beauty and Status A Year on the Frontlines of China's Apparel and Luxury Market.

1. One Year on the Frontlines of China’s Apparel and Luxury Markets Michael Zakkour Principal, Technomic Asia Credit: Jewel Willett Fashion Institute of Technology October 3, 2011

2. “Daywear, eveningwear and beachwear…” In 1985, we were told what cold war Russian women and fashion were like….

3. They lied…

4. Communist China has no fashion, no luxury, & no botox…

5. Not true: But there really was no luxury, status or beauty for a long period In the Mao era, people gave little thought to their appearance. Worrying about beauty was regarded as vain and decadent. Film actresses were more likely to wear sack-like clothes to cover their curves than sexy dresses that showed them off. Beauty pageants were banned and the act of trying to look beautiful was often equated with prostitution. Women were encouraged to look ordinary. They wore sexless Mao suits as did the men. Things like make up and stockings were regarded as symbols of bourgeois decadence. During the Cultural Revolution women were taught to conceal their femininity. They could be beaten for wearing the slightest amount of lip stick or eye liner. Red Guards sometimes stopped women in the street whose hair was deemed too long and cut it.

7. “Before the economic reforms we weren’t getting enough food to eat, so we paid little attention to how we looked. Today we have enough to eat and we care a lot about how we look.”

9. Geographical landscape Developed - Shanghai Developing - Dongguan Emerging - Chengdu Undeveloped – 1000 cities

11. Second largest economy in the world

12. 300 million new middle and upper class consumers

13. Racing the world to the top, not the bottom

14. Shifting from “factory of the world” to “mall of the world”

16. Corruption

17. Ability to manage a diverse, complex and regional market

18. Significant environmental challenges

19. Strained infrastructure

20. State control of communications

21. Too few key resources (energy, water, oil)

22. Constant need to create jobs

24. Becoming true “market economy”

25. Moving up the value chain

26. Vibrant group of young, new urban consumers

27. Strengthening technology capability

28. Emerging new global companies

30. 80% of successful companies are in China for China***i.e. those with long-term market growth target >15%, increasing China investment and are optimistic or very optimistic about China **i.e. those who are very profitable in China with positive cash flows

31. How US companies are faring 2010 was a strong year for U.S. companies in China, achieving record results… Source: Amcham-Shanghai 2010 China Business Report; Technomic Asia

32. For many luxury brands, the goal seemed a long way off…

33. There were confusing signals

34. …and some subtle messaging

35. …and it was not what they expected when they got there…

36. …leaving them tough choices!

38. The Chinese consumer market is exploding as tens of millions of people join the middle class every year (300 million and counting).

39. The accessory market for women is booming

40. There is a new appetite for “affordable luxury.”

41. There is a growing appetite for niche brands.

42. New channels mean new opportunities.

44. Foreign brands have a dominant presence in the luxury market; and the market is now truly open to brands in the mid- to high-end segments.

45. Department stores and specialty stores are the major distribution channels for branded apparel.

46. Online apparel sales have boomed in the last 18 months.

47. Brands and retailers are investing in Tier 2, 3, 4 cities.

48. Franchises are gaining a foothold, especially among companies with mass market positioning.

49. Multi-brand stores and multi-brand boutiques are increasing in importance.

51. Children’s apparel is another boom category, growing at an annual rate of 15%; casual and sports footwear is growing almost as fast, and could reach annual revenues of $7 billion by 2013.*

52. Chinese consumers are brand conscious, but not brand loyal. A 2010 McKinsey survey found that 45% of Chinese consumers think well-known brands have better quality.*

54. Affordable luxury/niche brand explosion The following are companies that are succeeding in the affordable luxury, premium brand, SME space in China - based on our interviews and secondary research

55. Channels There are two key channels and three emerging channels for the apparel and accessory brand to consider selling through: Department stores and shopping malls are found in commercial areas of all levels of cities, more in tier 1 and 2 cities: Targeting mid- to high-end customers and known for high price but reliable quality They rent space to distributors and many brands rent space for their own shops Still dominate apparel and accessory sales today Fierce competition means the brand has to perform or they will be dropped Standalone stores Apparel retailers can open standalone single brand stores anywhere in China They give more control over brands, sales and inventory but can be expensive to open Real estate deal is key Demographic and consumer behavior is critical to understand

57. At the end of 2010, China had 457 million Internet users, 35.1% of whom shop online. Popularity of Online Activities (2010) Internet Use and Penetration (2010) Note: Growth represents % increase in # users, not % users. Source: China Internet Network Information Center Statistical Report on Internet Development in China; Note that broadband internet users above do NOT include mobile internet users. e-commerce in China

59. 45% of the overall cosmetics and toiletries sales in 2010. We anticipate this segment to continuously rule the market with strong double-digit compound annual growth rate (CAGR) forecast for 2011-2015.

60. Moisturizers, whitening agents, advanced therapy will grow at least 12% per year for five years.

61. Female dominated, but men’s and boy’s market catching up -.

62. New middle and upper classes demand foreign color cosmetics and skin care products and will pay a premium for it – Estee Lauder, L’Oreal and Sephora are all doing very well in China.

64. Chinese women are not used to using perfumes. They prefer skin care and beauty products, favor neutral colors and eschew make up or hair styles regarded as aggressive. Bit that is changing.

66. The proportion of female buyers is the highest of any country in the world, and the average age of buyers is lower than in the US and Europe.

67. “Ask any middle-class Chinese what would be his or her first luxury purchase and the answer will most likely be a Swiss watch.” PatekPhillipe, Rolex and Omega

68. 100 million Chinese travelers by 2020.

70. Who are these 400 million new customers? Account Executive Liu – Age 28, AE at the Shanghai office of a major UK Advertising Agency. Holds BA (Tsinghua) and MBA (Liverpool) Income $35,000 per year. Spends 50% of income on clothes, makeup, shoes, music and movies. Preferred brands: Burberry, Apple, Pizza Hut, Shanghai Tang. “Saving is for mom. I’m a woman on the move.” Students at Fudan University (Never heard of it? You will.) The millennial generation. Have never known the “old” China, spend a lot of time and money online. Truly little emperors. Preferred brands: McDonald’s, EA Video Games, Disney, Li Nang. “We are the world.”

72. Online, Online, Online

73. Understanding that China is not an Eastern US or Europe

74. The nexus of China, the Internet and the modern supply chain

75. Local management

76. Strategy before structure

78. A “snapshot” view of the market

79. Unexpected competition – over supply

80. Lack of due diligence in partner selection

81. Poor relationship management

82. Not enough support for the local operation

83. Naive financial planning