Fortnum & Mason is a luxury British retailer known for quality food, drink and gifts. It has a long history of trade with Asia dating back to the 1700s. While revenue declined in the early 2000s, Fortnum & Mason has seen strong revenue growth since 2007 through expanding internationally and refurbishing stores. It aims to further its presence in Asia and the Middle East to continue its recovery and growth.

1. SHOWCASE LAUNCH EVENT ON THURSDAY 5TH APRIL 2012

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4. WHY CHOOSE FORTNUM & MASON?
SHARED VALUES
Driven by
brand values,
not money
Dedication to
service
Commitment
to quality
Started in the
UK
Asia-focused
FLAG FORTNUM & MASON
» Non-profit with a defined set of values and clear brand identity » Luxury goods retailer with a focus on brand integrity over pure profit
» Membership of high-potential professionals and entrepreneurs » Customer base of discerning consumers and high-net-worth buyers
» A private members’ club run by members for members » Reputation for providing outstanding customer service
» Strives to provide members with the highest quality, value-added content » Strives to provide customers with the highest quality luxury products
» Founded in the UK in October 2011 » Founded in the UK in 1707
» Aims to establish a series of branches across Asia » Long trade connections with Asia, aims to expand Asian business

5. FORTNUM & MASON: A HISTORY OF TRADE WITH ASIA
1707 1744 1794 2004
» William was a footman in the » F&M’s engagement with Asia began with tea. In » The F&M Post Office was » F&M opened its first overseas
court of Queen Anne and used Europe it was the Dutch who started the founded, which had collections stores in Japan, setting up
to work just down the road business of tea drinking. It was socially frowned for letters and discounts for stores and tea shops in Tokyo
from F&M at St. James’. He upon initially in the UK to drink tea because soldiers and sailors. The Post and Osaka. F&M has
shared an apartment with people saw tea as being a risky luxury item – Office drew considerable performed strongly in Japan
Hugh Mason in Duke Street instead, coffee was the drink of choice traffic to the Piccadilly store due to the Japanese affinity for
and facilitated the continued English culture and quality
» While working in the court, » F&M’s trade in tea was sustained by a close
flow of goods between the UK domestic made goods coming
William came up with the idea relationship with the East India Company. This
and Asia, typically sent as from its culture of mono-zukuri
of remaking and selling on relationship enabled it to stock not only tea, but
presents to or from those on
unused candles from the royal almost any new product available from the
postings away from home
household for a profit Orient, including ginger and spices
1714 1767 1830 2011
» With the death of Queen » William Fortnum’s » As a result of the Opium Wars, F&M’s trade with China » F&M declared its intention to expand
Anne, an explosion in trade grandson Charles was temporarily brought to a halt. Consequently, F&M into at least one of China, the Middle
between the UK and Asia went into the began to trade with other Asian nations such as India East (Qatar, Abu Dhabi, Dubai and/or
began to create a middle class service of Queen and Sri Lanka, where the British colonies had begun to Kuwait) within a year
with more disposable income Charlotte, leading plant tea gardens. F&M became dependent on Indian
to an affiliation and Ceylon blends for its tea trade » F&M’s operations are to be franchised,
» William left the court of Queen with the Royal with chosen local partners picking up the
Anne and went into business Court and an » Tea drinking in the UK began to take off as a result of the costs of development and F&M doing
with Hugh, founding F&M at increase in Temperance Movement, which sought to dissuade the design and providing the products
181 Piccadilly as a grocery business people from drinking alcohol – tea was seen as an
store supplying quality food acceptable alternative. At this time, all the teas sold » India is also earmarked for expansion,
and other products through F&M were from China but at a later date
Source: Showcase presentation, Company data

6. FORTNUM & MASON: THE BRAND
INTANGIBLE WHAT FORTNUM &
» F&M aims to be “a prosperous and very MASON IS
English retailer of the most inspiring
products and service in the world across British cultural icon
food, drink, entertaining gifts for customers
who want the very best”
Luxury brand
» At the tangible level, F&M is an up-market
retailer and restaurateur. At a less tangible
level it is a luxury brand in the general
sense, and at the least tangible level a Up-market
retailer
British cultural icon in the unique sense
and
restaurateur
» At the tangible level, F&M offers customers
exclusive, exotic products. At a less tangible
level, it offers impeccable service, integrity TANGIBLE
and attention to detail, and at the least
tangible level a sense of privilege, WHAT FORTNUM &
understatement, elegance and uniqueness. INTANGIBLE MASON OFFERS
Privilege
» The intangible levels of what F&M is and Understatement
does add the most value to the business Elegance
and give it its competitive advantage. Uniqueness
However, each is dependent on the
sustained presence of the tangible levels:
Impeccable service
top-quality product and service, combined Integrity
with ongoing innovation such as continually Attention to detail
sourcing unique or rare products
» F&M adds value to other brands by Top quality product
association, as many new brands come to Exclusivity
F&M to make their name, selling in small Exoticism
quantities before going to supermarkets
TANGIBLE Source: FLAG analysis

7. FORTNUM & MASON: THE BUSINESS
» F&M primarily sells luxury
food, drink and gifts through 4
business channels: UK retail,
hospitality, direct shopping and
international retail
» Ordinarily, 75% of the UK
store’s regular customers are
from the UK, with 50% of these
coming from within the M25
and the other 50% from the
regions. During spring
however, at least 40% are
overseas visitors, and 60% over Direct International
UK retail Hospitality
the summer shopping retail
» O’seas customers currently
represent 25% of the business.
The majority are from W.
Europe, as F&M is very popular Piccadilly Private External Catalogue Overseas Airport
Restaurants Internet sales
store functions events sales retailers* concessions
with the French and Spanish.
US and Canada make up
another 25% of the business.
Japan is the biggest customer
base outside of the UK
UK Global Europe China UK airports
» F&M has no middle-men and
has direct relationships with
retailers only – effectively it is US/Canada Qatar
the wholesaler. The upside of
this arrangement is that F&M
has tight control over the way
and place in which its products Japan Dubai
are distributed and sold. The
downside is that this makes the
F&M business slower to grow Guam Abu Dhabi
as the direct relationship *Formerly overseas wholesale distributors –
model is less scaleable F&M began selling directly to retailers in 2003 Source: FLAG analysis

8. FINANCIAL PERFORMANCE: STRONG RECOVERY, CONTINUED GROWTH
2002 2003 2004 2005 2006
» Revenue was £40m, down 2.5% » Revenues dipped slightly to » Revenues ticked up slightly on » Revenue was £39m, down 2% on » Revenue dropped 3% on 2005 to
on 2001, with a profit of £0.7m £39.4m, down 2% on 2002, with a 2003 at £39.6m, with a slight 2004, with a loss of £1.3m and £37.7m, with a large £6.7m loss
and gross margins at 28.6%. The £0.4m profit and gross margins profit of £0.2m. Gross margins lower gross margins at 28% and tighter margins of 37.7%
fall in sales was due to a drop in softer at 28.5% nudged higher to 28.8% » Although overseas revenue » A number of factors impacted on
the number of UK store visitors » F&M decided to cease distributing increased 31%, UK revenues fell
» F&M launched a joint venture revenue: the London bombings,
and corporate hamper orders products overseas through local due to a depressed retail market.
with Mitsukoshi Japan’s leading the cost of the Piccadilly store
following September 11 2001 wholesalers (including Twining's), In response F&M closed several
quality retailer, opening two refurbishment, and a delay in
and began selling products directly non-core departments including
» In response to the fall in sales, concept stores within Mitsukoshi the Japanese store opening
to overseas retailers. This caused a clothing and antiques, and
F&M freezed salaries for in Tokyo and Nagoya. This programme.
significant initial reduction in approved a major refurbishment to
directors, management and staff overseas revenue, but the board resulted in a £2.1m fall in the Piccadilly store, a new website » F&M replaced its management
and opened the food hall and believed it was in the best long- overseas turnover which was and investment in marketing and board following several years of
patio restaurant on Sundays term interests of the F&M brand made up for by strong UK sales branding, and a third store in Japan bumpy performance
60.0 Source: Company data 40.00%
50.0 35.00%
40.0 30.00%
30.0 55.0 25.00%
46.0 47.1 51.2
20.0 40.0 39.4 39.6 39.0 37.7 39.4 20.00%
10.0 15.00%
0.0 10.00%
-10.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 5.00%
-20.0 0.00%
Net profit (£m) Revenue (£m) Profit margin (%)
2007 2008 2009 2010 2011
» Revenue pushed up strongly to » Revenue surged 17% on 2007 to a » Revenue rose again to £47.1m, with » Revenue leapt yet again to £51.2m » Revenue jumped 8% to a record
£39.4m, a 4% increase on 2006, record £46m, with a tighter loss of healthy margins of 31.2% and a despite the weak UK economy, with high of £55m, with gross margins
and gross margins were markedly £8.2m and softer gross margins at narrowing loss of £5.7m prior investments in the store holding up at 34.4% and a pre-
better at 39.4%. However, losses 27.9%. Growth was driven by refurbishment, exclusive product tax profit of £1.1m. Performance
continued to widen to £10.1m due strong performance in all four sales » Despite the strong sales growth the ranges, in-store events and displays
outlook was mixed, with strong improved across all sales
to the cost of the refurbishment channels bearing fruit, but corporate orders
consumer sales being offset by remained weak. A profit of £0.05m channels despite challenging
and investment in marketing » F&M established a World Duty Free
softer corporate demand due to was achieved and margins were a trading conditions, particularly
Store in Heathrow Terminal 5 and the direct shopping and
» Growth was driven by strong the recession. F&M responded to robust 34.5%
increased the number of stores in international operations
internet and mail order sales, the downturn by cutting costs and
Japan to 13. The refurbishment of » F&M had presence in 13 countries
particularly to corporates, together closing its US presence, serving the
the Piccadilly store was completed and continued to consider further » F&M announced intention to
with the Japanese operations and American market directly from the
and its new non-food departments openings. It ended its joint venture expand overseas operations to
wholesale arrangements in Russia, UK instead by mail order. The Japan with Mitsukoshi and began to sell
contributed significantly to the China, India and ME
Australia and elsewhere stores finally moved into profit direct to the Japanese market
dramatic increase in sales

9. THE CHINESE LUXURY GOODS MARKET: OPPORTUNITY OR CHALLENGE?
» In 2011 CEO Beverly Aspinall confirmed Forecast revenue growth rate for domestic luxury goods market to 2015
that F&M intends to open outlets in
China, the Middle East and India. In theory 40%
35%
the Chinese luxury goods market is a huge 35%
opportunity for F&M, as it is for any other 30%
premium retailer – a RMB ¥212bn (£21bn) 25%
20%
luxury market growing at 35% 20%
» Current market data indicates that the 15% 12% 12%
10%
mainstay of F&M’s business – luxury food 10%
5%
products – is of less interest to Chinese 5%
consumers than items such as watches, 0%
cosmetics and clothing – F&M has never China Brazil Middle East Americas Europe Japan
sold the former and has a limited range in
the latter, especially as it originally closed
this non-core line in 2005 in response to Mainland Chinese luxury spending patterns by total revenue (RMB ¥bn) for 2011
the weak UK retail market
25 22.5
20.6
» A McKinsey study published in March 20
2011, Understanding China’s Growing
15 11 10.6
Love for Luxury, indicated that a growing 8.7
10
number of Chinese are shying away from 5.6 4.6 3.5
conspicious consumption of luxury 5
towards more understated products, 0
which fits well with F&M’s largely English
values. However, the same study also
showed that many customers increasingly
want new product designs, labels or sub-
brands that reflect China’s heritage, which Sub-sector in which F&M has a significant offering
poses a challenge for F&M’s classic Sub-sector in which F&M has limited offering
product offering – with the possible Sub-sector in which F&M has no offering
exception of tea
Sources: Bain & Co. Luxury Goods Worldwide Market Study (2011), FreshMinds Research: Investing in the luxury goods market (2012)

10. POINTS FOR DISCUSSION
QUESTIONS
» How can Fortnum & Mason remain true to being an English retailer whilst
becoming relevant to Chinese consumers?
» What changes should Fortnum & Mason make to adapt itself to the Chinese
market? What should stay the same?
» What about India and the Middle East?