Luxury market in China, 2010

March 2011Li & Fung Research Centre

2

p.20IV. Competitive landscape and movements

of luxury players in China

p.12 III. Distinctive features and developments of

China’s luxury market

p.6II. Solid fundamentals of China’s luxury

market

p.3I. Overview

In this issue:

p.29 V. Appendix

I. Overview

3

4

Luxury sales in China grew strongly in 2010

• According to Bain & Company, sales of global luxury goods[1] were projected to reach 168 billion Euros in 2010, up by 10% year-on-year (yoy). Luxury sales in China is estimated to reach 9.2 billion Euros; growth in China was the strongest in the world.

• Estimates by Bain & Company of growth of luxury sales in 2010:

• On the other hand, McKinsey predicted that luxury sales in Chinawould reach US$27 billion in 2015.

[1] Bain analysis on luxury sales does not include service, hotel, restaurant, alcohol, luxury car, yacht and private jet.[2] Growth expressed in Euros factoring currency appreciation. Growth expressed in RMB would be 23%.

Country/ region 2010 growth(est.)

U.S. 12%

Europe 6%

Asia-Pacific(excluding Japan)

22%

China 30%[2]

5

Luxury retail prices grew at a faster rate in 2010

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2007 2008 2009 2010Source: Hurun, June 2010

Exhibit 1. China’s luxury living index, 2007-2010

• According to Hurun, China’s Luxury Living Index[3] increased from 4.6% in 2009 to 11.3% in 2010, up by 6.7 percentage points (ppt) yoy.

[3] The Luxury Living Index in 2010 compares the annual price changes of a basket of 58 luxury goods and services, including properties, automobiles, watches, jewelry, tobacco, education, clubhouse and traveling from 1 June 2009 to 1 June 2010.

II. Solid fundamentals of China’s luxury market

6

7

Impressive growth of household disposable income

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Lowest Low Lower

Middle

Middle Upper

Middle

High Highest

CA

GR

(2000 -

2009)

(%)

10102020202010% of

Population

Exhibit 2. Growth in household disposable income, 2000 – 2009

Source: National Bureau of Statistics of China (NBS)

• According to the National Bureau of Statistics (NBS), residents’ income has been increasing steadily in China over the past years.

• The highest income segment has shown the most impressive growth,reaching a CAGR of 15.0% from 2000 to 2009.

8

Number of wealthy households in China has reached a critical mass;

burgeoning middle class is another force to be reckoned with

• Wealthy households in China have reached a critical mass. According to Hurun, China has 875,000 individuals with personal wealth[4] of more than 10 million yuan and 55,000 individuals with more than 100 million yuan as of December 31, 2009, up by 6.1% and 7.8% yoy respectively.

• Beijing, Guangdong and Shanghai are home to 48% of individuals with personal wealth of more than 10 million yuan in China. Beijing has the highest number of wealthy people in China.

[4] The Hurun Wealth Report takes into account all private wealth, including privately-held businesses, private residences and art collections, in addition to investable assets. The report refers to statistics from December 2009.

9

Number of wealthy households in China has reached a critical mass;

burgeoning middle class is another force to be reckoned with (cont’d)

• Merrill Lynch and Capgemini reported that there were 477,000 high net worth individuals (HNWIs)[5] in China in 2009, up by 31.0% yoy.

• The wealth of China’s HNWIs jumped by 40.4% yoy to reach US$2,347 billion in 2009. China has the second largest HNWIspopulation in Asia Pacific, after Japan.

• The burgeoning middle class is another major force to be reckoned with. According to Euromonitor, the middle class[6] population in China was 85.5 million in 2008 and the number is expected to reach 104 million by 2011.

[5] HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables and consumer durables.

[6] According to the definition provided by the NBS, middle class is a group of people with annual income of between 60,000 yuan and 500,000 yuan.

10

Trend of trading up continues

• Chinese consumers are trading up. The more discerning Chinese consumers now become growingly brand- and quality-conscious and are less price-sensitive. They are spending more on luxury goods.

• The trend of trading up is well reflected in motivators behind luxury purchases. According to KMPG, five out of the top 6 reasons for luxury purchases in 2009 are personal and emotive, rather than functional.

313835To enjoy luxurious, high quality lifestyle

353736To enhance my self-confidence

433740To reflect my personality

434142For formal occasions

622744To pamper myself, treat myself well

624654To reward myself

%%%

FemaleMaleOverall

Exhibit 3：Top 6 reasons for purchasing luxury goods, 2009

Source: KPMG, May 2010

11

Trend of trading up continues (cont’d)

• On the other hand, KPMG also interviewed China’s middle-class consumers for their luxury consciousnesses in 2009. 41% of respondents claimed that they long for luxury goods although they could not afford them currently. China’s middle-class consumers are keen to move up the curve.

III. Distinctive features and developments of China’s luxury market

12

13

• China’s wealthy are generally much younger. According to Hurun,the average age of people who own 100 million yuan and 10 million yuan asset in China is 43 and 39 years old respectively.

• On average, China’s wealthy are 15 years younger than their foreign counterparts.

China’s wealthy are generally younger

14

• Different from overseas, China’s luxury market is predominately male-driven, with a big pool of young entrepreneurs and businessmen as main groups of customers.

• Men have a lion’s share of the country’s wealth. According to Forbes and China Construction Bank, male accounted for 76.9% of the high net worth individuals[7] in China in 2010.

• But as more women climb the ladder in the workplace, women’s purchasing power is not to be ignored.

China’s luxury market is predominately male-driven

[7] With investible private assets worth over 10 million yuan.

Exhibit 4. High net worth individuals in China, 2010

76.90%

23.10%

Male

Female

Source: Forbes and China Construction Bank, December 2010

15

• China has a long tradition of gift-giving. Apart from personal use on a regular basis, gifting is also an important driver for luxury consumption in China.

• According to a survey by Albatross and Ruder Finn, 29% of the respondents[8] said they bought luxuries as gifts for family and friends, and 28% bought luxuries in China for business gifting.

• Business gifting is more popular in China than Hong Kong and Taiwan.

Gifting is an important purchase motivation

[8] The 2010 China Luxury Forecast surveyed 1,100 luxury consumers in Shanghai, Beijing, Guangzhou, Taiwan and Hong Kong and 17 second-tier cities in Mainland China between March and April 2010. The average income of those surveyed was approximately 250,000 yuan.

28%

28%

36%

11%

8%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Greater China

China's first-tier cities

China's second-tier cities

Hong Kong

Taiwan

Exhibit 5 Percentage of luxury shoppers in China, Hong Kong and Taiwan who purchased luxuries for business gifting, 2010

Source: Albatross and Ruder Finn, August 2010

16

• Chinese consumers today are growingly sophisticated. With more solid luxury brand knowledge, they are making more informed purchase decisions. Brands with a unique story or history can win consumers’ hearts more easily.

• Chinese consumers have much stronger preference towards foreign luxury brands.

Brand matters most in luxury purchase decisions;

strong preference for foreign brands

17

• The pricing of luxury merchandise in mainland is generally higher than overseas markets because of consumption tax and import duties. With increasing income, Renminbi appreciation against the US dollar and easing travel restrictions, many Chinese consumersare keen to shop for luxuries abroad.

• According to Bain & Company, Chinese consumers spent 87 billion yuan on luxury purchase abroad (including Hong Kong and Macau) in 2009, representing 56% of the total luxury purchase. In 2009, the total luxury spending abroad by Chinese consumers increased by 8% yoy.

• Hong Kong is among the most visited destinations for luxury spending due to its proximity to the mainland.

Mainland tourists are keen to shop for luxuries

abroad

18

• According to Bain & Company, the Internet has become the second most important information source for luxury consumers inChina. In 2010, 60% of luxury consumers gained the information of luxury brands via the Internet, just behind magazines (72%).

• Chinese consumers show increasing enthusiasm in purchasing luxuries online. According to the aforementioned survey by Albatross and Ruder Finn, around half of the surveyed respondents in Greater China are willing to purchase luxury goods online; female (48%) showed more interest than male (40%). Consumers in Beijing and Shanghai are the most open to online luxury shopping.

Online retailing is winning appeal

19

• Some companies are trying to tap the huge potential. For example, powered by Italy-based online luxury retail operator YOOX Group, Emporio Armani launched its online store in China in November 2010, becoming the first foreign luxury company to go online in China.

• Other online luxury retailers in China include: Glamour-sales (魅力惠), vipstore (佳品網), wooha (呼哈網) and Meici (美西網) etc.

• More are joining the battlefield:–YOOX planned to launch a Chinese version of its e-commerce site thecorner.com by the end of 2011 and yoox.com in 2012. –it is reported that 360Buy (京東商城), one of China’s largest B2C online retailers, planned to launch toplife.com to sell luxury goods.

• However, it should be admitted that most luxury players in China have a wait-and-see attitude towards selling their products online due to difficulty to deliver to consumers a luxury shopping experience, logistics, after-sale service and risk of counterfeit products.

Online retailing is winning appeal (cont’d)

IV. Competitive landscape and movements of luxury players in China

20

21

• Foreign players dominate China’s luxury market. Super-brands such as Louis Vuitton, Chanel and Gucci have a stronghold.

• Meanwhile, domestic brands are virtually absent in China’s luxury scene. However, some domestic players have strived to move up the value ladder and hope to get a place in the premium market. For instance:

– NE·TIGER (東北虎), which claimed itself to be China’s first luxury apparel brand, has set up studios in the U.S., France, Italy and Russia in the past few years.

– Trands (創世) and Kweichow Moutai (貴州茅臺) are two other domestic brands that have gained recognition.

• Though, we should admit that these domestic brands have only minimal presence in the luxury segment. There is still a long way to go for domestic players to rival their foreign counterparts.

Foreign players dominate China’s luxury market

22

• Many luxury companies operate a portfolio of brands. Effective portfolio management help companies achieve synergies in areas such as logistics and other back-end management tasks, it can also increase luxury companies’ bargaining power, especially towards landlords.

• Examples:

– The LVMH Group owns Louis Vuitton, Marc Jacobs, Kenzo, Loewe, Fendi, Givenchy, Donna Karan, etc.

– The PPR Group owns Gucci, Bottega Veneta, Yves Saint Laurent, Balenciaga, Boucheron, Sergio Rossi, etc.

– Richemonts owns Alfred Dunhill, Cartier, Piaget, Montblanc, Chloé, etc.

– Trinity owns 2 international brands, including Cerruti 1881 and Kent & Curwen, and operates the retail licenses for 4 brands across Asia-Pacific, including Altea, D’urban, Gieves & Hawkes, Intermezzo

– Ports Design Ltd engages in retailing business under the brand names PORTS and BMW Lifestyle. It was also granted the retail distribution license for Armani, Ferrari and Vivienne Tam in China.

Many luxury companies operate a portfolio of

brands to enhance bargaining power

23

• To translate opportunities into profits, many luxury retailers have embarked on rapid retail network expansion in China.

– Luxury retailers generally have the most sales locations in top cities such as Beijing and Shanghai; inland provincial capitals are also the chief targets

– Male-oriented luxury players have more extensive footprints

(See Appendix for the retailing network of selected luxury retailers in China.)

Retailing network of luxury retailers

24

• High-end department stores and specialty stores are the major distribution channels for luxury products in China.

• In recent years, many brands have sought to build highly visible flagship stores in China’s key cities to showcase their products to luxury consumers.

– LVMH built two flagship stores in Huai Hai Road and Pudong in Shanghai in April 2010.

– Jaeger-LeCoultre also opened its largest flagship store in China, located in Huai Hai Middle Road of Shanghai in 2010.

– Other companies such as Hermès and Armani are also actively acquiring properties for building flagship stores.

• Competition for prime retail locations in China is getting fierce as more and more luxury retailers embark on aggressive expansion and store enlargement plans.

Opening flagship stores in prime locations

25

• Many luxury retailers are competing hard for super-sized and quality retail space in China in order to maximize visibility and offer more product lines within a single store. This undoubtedly has driven up retail rentals for prime shopping locations.

• Unlike super brands which often receive more favorable terms from landlords, many lesser-known luxury brands now face more frequent lease terms reviews and even relocation as super brands take up prime spaces. Today, some second- and third-tier luxury brands have sought to enter multi-brand stores to stay in the game.

Opening flagship stores in prime locations (cont’d)

26

• Foreign luxury brands have entered China mainly by:

– (1) investing directly into the China market by establishing wholly foreign-owned enterprises (e.g. LVMH, Giorgio Armani, and Chanel);

– (2) working with distributors and agents, such as Shandong DishangGroup (山東迪尚集團), Dickson Concepts (International) Ltd., etc.

• In the 1990s when most luxury brands first entered China, many of them chose to work with distributors or agents. But in the past few years, a growing number of companies have opted for establishingwholly foreign-owned enterprises to strengthen control.

– Burberry spent 70 million pounds in 2010 to buy back the distribution rights of all of its 50 stores in mainland China.

– Longchamp also bought out its distributor in China in 2010. Coach completed acquiring the retail businesses in Hong Kong, Macau, and China from a Hong Kong-based distributor ImagineX Group (俊思集團) in April 2009.

Increasing direct ownership

27

• Luxury companies in China are making huge marketing efforts to increase brand equity. Apart from media advertising, many carry out event sponsorships, loyalty programs and fashion shows.

– Cerruti 1881 jointly held an exhibition with Sotheby's in 2010.

– In 2009, Cartier launched an exhibition in the Forbidden City.

• Besides, as repeated purchase is highly important in high-end and-luxury fashion market, many brands have initiated their VIP programs and conduct targeted promotional events for its members.

Luxury players spend huge sums of money on

brand marketing

28

• Some luxury brands have launched new product line or created newbrands specifically for Chinese consumers.

– Hermès launched a new brand “Shang Xia” tailoring to its Chinese clientele. The brand offers a wide range of “affordable luxury goods”exclusive in China.

– In 2010, BMW introduced a limited edition “M3 Tiger” to commemorate the year of Tiger in the Chinese calendar.

– Chloé introduced a limited edition bag in red in 2010 to celebrate its 5th year anniversary of entering China.

Launch of “made-for-China” luxury goods to cater

to the taste of Chinese consumers

29

V. Appendix

29

Appendix: Sales locations of selected luxury retailers in China (as of 31st of January

2011)

Rank City

Alt

ea

A

qu

ascu

tum

Armani Brooks Brothers

Burberry Can

ali

C

err

uti

1881 Dunhill

D'U

rban

Ermenegildo Zeg

na

Gia

nn

i V

ers

ace

G

ieves &

Haw

kes

Giv

en

ch

y

Gu

cci

IN

TE

RM

EZ

ZO

Ken

t &

Cu

rwen

Lan

vin

Lo

ng

ch

am

p Louis Vuitton P

rad

a Salvatore Ferr

ag

am

o Tod's

1 Shenzhen 深圳 3 2 2 2 4 2 5 3 1 3 1 1 6 1 2 1 2 1

2 Shanghai 上海 10 10 9 4 5 10 11 7 9 2 7 4 4 3 8 2 4 3 3 6 2

3 Beijing 北京 1 9 7 4 6 5 7 15 3 6 3 8 3 4 5 4 3 3 8 2

4 Guangzhou 廣州 5 3 2 1 3 2 2 2 1 2 1 3 1 1 2

5 Tianjin 天津 3 1 1 1 1 1 2 1 2 2 1 1 1 1 1 1 2 1

6 Dalian 大連 2 1 2 2 2 2 2 1 1 2 1 2 1 1 1 1 2 1

7 Qingdao 青島 2 1 2 1 3 1 1 1 1 1 1 1 1 1

8 Suzhou 蘇州 3 1 1 2 1 3 1 2 1 1 3 1 1 1 3 1 1 2 1

9 Hangzhou 杭州 3 2 2 1 3 3 1 1 1 1 1 2 3 2

10 Shenyang 瀋陽 3 2 1 2 2 2 4 2 3 1 2 1 1 1 2 1 2 1 2 2

11 Dongguan 東莞

12 Changsha 長沙 3 2 2 2 1 1 1 1 1

13 Wuxi 無錫 1 1 1 1 1 1 1 1 1 1 1 1 1

14 Wuhan 武漢 3 1 1 2 2 1 2 2 1 1 1 2 1 1 1

15 Xiamen 廈門 1 1 3 2 2 2 1 2 2 1 1

16 Ningbo 寧波 1 1 2 2 2 1 1 1 1 1

17 Nanjing 南京 1 1 1 1 1 2 1 1 1 1 1 1 1 1 1

18 Hefei 合肥 5 1 1 1

19 Chengdu 成都 4 2 2 3 2 1 4 1 3 1 2 1 2 1 3 1 2 1 2

20 Foshan 佛山 1

21 Dongying 東營

22 Jinan 濟南 1 1 1 1 1 1 1 1

23 Changchun 長春 1 1 1 1 1 1 1 1 1 1 1 1 1

24 Ordos 鄂爾多斯

25 Zhuhai 珠海

26 Yantai 煙臺 1 1 1 1

27 Changzhou 常州 1 1 1 1 1

28 Zhongshan 中山

29 Hohhot 呼和浩特 2 1 1 1 1 1 1

30 Fuzhou 福州 1 1 1 2 1 2 1 2 1 1

Rank City

Alt

ea

A

qu

ascu

tum

Armani Brooks Brothers

Burberry Can

ali

C

err

uti

1881 Dunhill

D'U

rban

Ermenegildo Zeg

na

Gia

nn

i V

ers

ace

G

ieves &

Haw

kes

Giv

en

ch

y

Gu

cci

IN

TE

RM

EZ

ZO

Ken

t &

Cu

rwen

Lan

vin

Lo

ng

ch

am

p Louis Vuitton P

rad

a Salvatore Ferr

ag

am

o Tod's

31 Nanchang 南昌 2 1 1 1 1 1 1

32 Xi'an 西安 3 1 1 2 2 2 2 2 1 2 1 3 1 1 1 1

33 Baotou 包頭 1

34 Zhengzhou 鄭州 1 2 1 2 1 1 1 1 1 1 1

35 Chongqing 重慶 4 1 1 1 4 1 1 1 1 1

36 Nantong 南通 1

37 Shijiazhuang 石家莊 2 1 1 2 1 1 1 1 1

38 Wenzhou 溫州 1 1 2 2 1 1 1

39 Harbin 哈爾濱 4 1 2 1 4 2 3 2 1 3 1 4 1 2

40 Daqing 大慶

41 Zibo 淄博

42 Yangzhou 揚州

43 Ma'anshan 馬鞍山

44 Shaoxing 紹興 1

45 Nanning 南寧 2 1 1 1 1 1 1 1

46 Urumuqi 烏魯木齊 1 1 1 1 1 1 1 1 1 1

47 Kunming 昆明 3 1 1 1 1 3 1 1 1 1 1 1 1 1 2 1

48 Kelamayi 克拉瑪依

49 Zhenjiang 鎮江 1

50 Xuzhou 徐州 1 1

51 Tangshan 唐山 1 1 1

52 Taiyuan 太原 1 1 1 1 1 1 1 1 1

53 Zhoushan 舟山

54 Huizhou 惠州

55 Taizhou 台州 1

56 Weihai 威海

57 Jiaxing 嘉興

58 Anshan 鞍山

59 Taizhou 泰州

60 Yinchuan 銀川 1

…

71 Huzhou 湖州 1 1 1

72 Haikou 海口 1 1

Rank City

Alt

ea

A

qu

ascu

tum

Armani Brooks Brothers

Burberry Can

ali

C

err

uti

1881 Dunhill

D'U

rban

Ermenegildo Zeg

na

Gia

nn

i V

ers

ace

G

ieves &

Haw

kes

Giv

en

ch

y

Gu

cci

IN

TE

RM

EZ

ZO

Ken

t &

Cu

rwen

Lan

vin

Lo

ng

ch

am

p Louis Vuitton P

rad

a Salvatore Ferr

ag

am

o Tod's

75 Lanzhou 蘭州 2 1 1 1

87 Guiyang 貴陽 1 1 1 1 1 1 1 1 1

96 Zhanjiang 湛江 1

97 Xiangtan 湘潭 1

104 Handan 邯鄲 1 1 1 1 1 1

113 Changde 常德 1

116 Sanya 三亞 1 1 1 1

123 Dandong 丹東 1 1 1 1

133 Yichang 宜昌 1

139 Chenzhou 郴州 1

153 Huainan 淮南 1

173 Kunshan 昆山 1 1

-- Shangyu 上虞 2 1 1 1

-- Hengyang 衡陽 1

-- Manzhouli 滿洲里 1

-- Jiangyin 江陰 1

-- Yueyang 岳陽 1

-- Zhangjiagang 張 家港

1 1

-- Yiwu 義烏 1 1 1 1 1 Total 3 103 44 26 49 47 64 104 42 60 19 61 17 31 12 67 3 14 36 15 51 23

Source: Li & Fung Research Centre, respective company websites

Note: The 50 most competitive Chinese cities in 2009 are listed in this article;

the cities afterwards without the presence of selected luxury retailers are

omitted.

1

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