Strictly Private and Confidential April 2014 Fung Retailing Annual Conference 4 April 2014, Hong...

Strictly Private and Confidential April 2014 Fung Retailing Annual Conference 4 April 2014, Hong Kong Omni Channel Retailing The latest developments on the Chinese Mainland (Part 1) Colin Light PwC China Digital Consulting Leader

PwC April 2014 2 Omni Channel Retailing The latest developments on the Chinese mainland Presentation agenda 1 2 3 What are digital mega trends in China are defining the current retail revolution? How is digital and O2O transforming the whole customer journey? How are international retailers adopting digital solutions to improve performance? Colin Light China Digital Consulting Leader +[852] 2289 2655 [email protected]

Digital mega trends in China are defining the current retail revolution Mobile internet and smartphones Smartphone usage Social mediaMobile marketingPrivacy eCommerce mPayments

PwC April 2014 4 Omni Channel Retailing The latest developments on the Chinese mainland Mobile internet access The introduction of the smartphone in 2009 has seen mobile represent the primary method Chinese access the internet Mobile first Number of mobile internet users in China, % of internet access of mobile (2007 2013) With 81% of Chinese internet access over mobile content is being seen and interacted with through the small screen of a smartphone not a PC monitor 500M mobile Internet users in 2013, 80 million more compared to 2012 81% of Internet users use mobile to access Internet in China 288m mobile Internet users in US Source: CNNIC (2013) mobithinking (2013)

PwC April 2014 5 Omni Channel Retailing The latest developments on the Chinese mainland Smartphone usage by activity PwC research shows that Chinese consumers use their smartphones for a wider range of activities than international peers The most popular smartphone activities are the same in China as we see elsewhere Purchasing merchandise 71% China 32% U.S. Stream TV 69% China 25% U.S. Stream movies 71% China 21% U.S. Purchase movie tickets 32% China 7% U.S. Made dinner reservations 37% China 13% U.S. 31% China 8% U.S. 35% China 5% U.S. 95% China 97% U.S. 81% China 87% U.S. 88% China 87% U.S. News, weather & sports Finding a location Social networking But some activities are far more popular here than the rest of the world, particularly online transactions and content consumption Source: PwC "Mobile advertising: What do Chinese consumers want?" (2014)

PwC April 2014 7 Omni Channel Retailing The latest developments on the Chinese mainland User engagement with mobile marketing PwC research shows that Chinese users display high-levels of engagement for mobile as a channel for branded advertising Clicked accidentally Clicked intentionally and interacted with brand Clicked intentionally and did not interact with brand Did not click on an ad Our research on ad preferences showed that mobile ad relevance was likely to drive user engagement Liklihood to click on an ad if it was relevant to you and we also found that Chinese we actively engagingg with mobile ads far more than global peers Past month nature of mobile ad clicks UK 33% US 29% China 78% 26% 20% 34% 32% China 7% 10% 39% UK 6% 9% 49% 37% US 12.4% CAGR of China total advertising market 6.7% CAGR of China non-digital advertising 21.5% CAGR of China digital advertising

PwC April 2014 8 Omni Channel Retailing The latest developments on the Chinese mainland Willingness to share personal data Our research shows Chinese users are also much more willing to share their personal data if they receive something of value in return Source: PwC "Mobile advertising: What do Chinese consumers want?" (2014) Mining data to make inferences on user behaviour and preferences is only one approach however; advertisers in China shouldnt ignore possibilities to encourage users to openly share personal data with them UK 28% US 30% China 58% UK 27% US 26% China 59% Willingness to share personal data for a free app? PwC Mobile advertising: What do Chinese consumers want (2014) Willingness to share personal data for fewer adds?

PwC April 2014 9 Omni Channel Retailing The latest developments on the Chinese mainland eCommerce Chinas e-commerce (B2C & C2C) market will soon overtake the US as the worlds no. 1, and is projected to reach RMB3.6tn in GMV by 2016 Source: iResearch (2012) C2C market size B2C market size Online retail as % of total retail 1,304 1,850 2,450 3,020 3,600 Online Shoppers (M) (Penetration) Per Cap Spend. (RMB) 230 (46%) 270 (50%) 314 (53%) 358 (56%) 400 (58%) 5,6656,8857,8008,4489,000 Online (B2C,C2C) Retail Shopping Market by GMV(1) (Unit: RMB in billion) 7% US online retail as % of total retail The mix of C2C and B2C will change as consumers prefer to shop on B2C portals for the sake of product quality and variety choices

PwC April 2014 10 Omni Channel Retailing The latest developments on the Chinese mainland Mobile payments Consumers are also embracing mobile payments with Alipays mobile wallet application dominating global peers in mobile transaction volumes The Market Size of Chinas 3rd Party Mobile Payment 2010-2017 (in Billion Yuan) In China we are also seeing how mobile payment solutions are integrating with financial services to offer consumers a wide range of traditional banking products including: investments, money management and credit services Source: iResearch (2012) 133m Monthly unique users 906bn GMV mobile payments (2013) 15m Monthly unique Users (exc. WeChat payment) 52bn GMV mobile payments (2013) 167bn GMV mobile payments (2013) 143m active accounts 124bn GMV mobile payments (2013) 2m+ Users (2012)

So what does this mean for retailers and how is digital and O2O transforming the whole customer journey? DiscoverTransactFulfilUse and care

PwC April 2014 12 Omni Channel Retailing The latest developments on the Chinese mainland The impact of digital on retailers operating in China is far more pervasive than simply shifting spending patterns from bricks and mortar to online. We think of O2O as much than eCommerce Discover How is digital changing the way Chinese consumers are making decisions. Where are they going and what are they doing to learn, share and interact with products? Transact How frequently are Chinese users using alternative digital channels to make transactions and what sort of experience do they expect on-line or in-store? Fulfill In what ways does product availability and fulfilment options influence the decision for Chinese users to purchase from brands websites versus 3 rd parties Use and care What do Chinese consumers value in after-sales services and what expectations do they have for on-line support functions O2O

PwC April 2014 13 Omni Channel Retailing The latest developments on the Chinese mainland Digital Commerce Approach Our approach goes from strategy through to execution, defining the desired customer journey and implementing digital solutions to make it a reality Insight & analytics Solution deployment Customer design Understand your customers and define a strategic vision Design customer interactions across digital framework TransactDiscoverFulfillUse & care Agile delivery approach Ideate -> test -> learn Contextual O2O Social insight and listening Macro-location targeting Interactive in-store environments Mobile loyalty Digital wallet services eCommerce fulfilment Instore sensors and facial recognition Analytics apps Visualis- ations Performanc e managemen t Data warehouse Advanced analytics Data architecture Design, build and implement Digital commerce framework Business structuring An eCommerce journey for Tax Efficiency Assessing up Tax risk control vs. Saving opportunities Planning cross- border cash flow under current account VAT compliance & efficiency review for offline and online integration Import duty clearance & transfer pricing planning Regulatory compliance for online business Corporate structure review & planning for multi-channel retailing O2O Digital Commerce Solutions

PwC April 2014 14 Omni Channel Retailing The latest developments on the Chinese mainland A range of retailers like those within the Li & Fung group are implementing a range of digital solutions powered by analytics - to grow Luxury Casual / branded lifestyle Toys Grocery and beverage Interactive in- store environment Contextual O2O Social insights Micro-location Digital wallets Mobile loyalty BurberryLego VertuTesco MacysWalmart GapToys R Us Aurora Fashions Sephora Tesco Eat

PwC April 2014 15 Omni Channel Retailing The latest developments on the Chinese mainland Interactive in-store environment Enabling retailers to use digital to provide greater shopper engagement within the in-store experience Dual-screen advertisingInteractive billboards Augmented reality displaysIntegrated digital POS Consumers want access to product information, trusted opinions and deals regardless whether theyre shopping online, in store or both. Digital technologies enable retailers to create an immerse in-store environment that drives engagement and blurs the line between a digital and physical experience Benefits to retailers Integrated advertising experience Higher ROI and customer intent Extend from TV advertising to mobile or in-mall/store Use Analytics to deliver highly contextual, but privacy-aware, offers

PwC April 2014 16 Omni Channel Retailing The latest developments on the Chinese mainland Burberry Using digital technologies to create a physical manifestation of the Burberry online store 21%+ Retail profits YoY Takes a digital first approach as it adapts to customers wanting instant service and ongoing innovation. The flagship store is designed as a physical manifestation of their website, with digital mirrors, RFID chips, interactive displays What is the impact? 14%+ Retail revenues YoY "I've seen what happened to brands like Kodak that did not keep up with digital change. That's a lesson in what to avoid Angela Ahrendts, ex-CEO of Burberry (now Head of Retail at Apple) Digital and social media investments cited as the key reasons for improved retail performance Source: theonecentre

PwC April 2014 17 Omni Channel Retailing The latest developments on the Chinese mainland Lego Embracing digital technologies to turn interaction with Lego from bricks into clicks Once a traditional toy manufacturers, Lego is now one of the worlds most innovative businesses. The Digital Box uses augmented reality kiosks to provide an interactive 3D digital experience in store What is the impact? 5bn+ hrs/Y were spent on playing Lego across physical and digital "We see the digitization, as we call it, to be an important thing that we need to respond to and its critical to our strategy. John Goodwin, chief financial officer at Lego Physical and digital innovation and a superior interactive digital experience have been the key factors contributing to Legos leading market position Source: CoDesign, Geek, The WashingtonPost

PwC April 2014 18 Omni Channel Retailing The latest developments on the Chinese mainland Contextual O2O (Geo-location) Driving consumers from intent (online) to footfall (offline) through analytics and promotions Geo-location based services enables retailers to pinpoint customers exact location and deliver highly relevant content that engages and influences purchasing decisions or brand awareness Benefits to retailers Integrates in-store displays with online content to offer a true O2O shopping experience Identifies and rewards implicit loyal consumers Measures the effectiveness of promotional displays Drives incremental revenue Source: Entrepreneur, AT&T

PwC April 2014

PwC April 2014 19 Omni Channel Retailing The latest developments on the Chinese mainland Tesco Combining location based advertising and customer analytics to execute highly targeted campaigns 40% did, or intended to, take advantage of the offer Steps into location-based advertising by integrating billing information with location-specific data to trigger a SMS coupon when the target demographic enters geo-fences around designated Tesco stores What is the impact? 68% previously unaware of proposition Its about putting the customer in control, and enabling him or her to engage and transact with Tesco in whatever way best suits themphysically or digitally, transactionally or non-transactionally. Philip Clarke, CEO of Tesco Location based advertising raises awareness of discount offers to increase basket value and drive footfall Source: Weve

PwC April 2014 20 Omni Channel Retailing The latest developments on the Chinese mainland Vertu Pinpointing affluent shopping areas to drive footfall into high-end Vertu boutiques in London 24% click through rate for video Uses GPS tracking to geo-target affluent shopping areas in the UK to send users SMS ads and prompt them to call the nearest boutique. Sponsored mobile daily news and shopping app to integrate ads and video showcased products. What is the impact? 92 sec. time-in-ad doubled industry benchmark Working with [amobee] has shown us how powerful mobile advertising can be to reach a niche, luxury audience with smart media placement and sleek creative design. Mark Izatt, Head of Digital for Vertu Local mobile advertising boosts brand engagement and encourage customers to physically visit stores or register their interest via email Source: [amobee] Advertiser Solutions

PwC April 2014 21 Omni Channel Retailing The latest developments on the Chinese mainland Micro-location Retailers are deploying a range of digital technologies to bring online analytics to the bricks-and-mortar store Wi-Fi Video Audio Most retailers have been blind to customers in store. Micro-location enables retailers to identify and engage customers, following customers from outside the store, all the way to the POS to create a differentiated shopping experience Benefits to retailers Identifies priority shoppers to provide a more tailored service Benchmarking of display performance Analyse customer flows to determine the most effective layouts in-store

PwC April 2014 22 Omni Channel Retailing The latest developments on the Chinese mainland Macys Micro-location technologies like iBeacons enable retailers to create a differentiated in-store digital experience Offers retail-based iBeacons to prompt targeted deals and recommendations(tied with at-home browsing) for customers to peruse items. No need to open app to receive in-store alerts and recommendations. What is the impact? "Shopkick has had great success with our customers. Over half of the shopkick users have been to Macys because they use the app. Its been terrific. Martine Reardon, CMO, Macys Creates a bridge between the online and offline shopping worlds which improved the retail performance $500m revenue were driven for retail and brand partners in 2013 Source: macrumors

PwC April 2014 23 Omni Channel Retailing The latest developments on the Chinese mainland Walmart Using in-store location based tracking to improve the bricks-and-mortar retail experience 12% sales come from in-store mode Uses customers location to provide an app designed specifically for that store. The in-store mode can guide shoppers to find the product on their shopping list and enable them to scan bar codes to get product information What is the impact? 45% app users visit that store more often "Almost every facet of our lives has been transformed by a smartphone, almost every facet of our lives has been transformed by a smartphone." Gibu Thomas, mobile chief of Walmart Location based tracking and integration with online channels are the key drivers of footfall in- store Source: CNET

PwC April 2014 24 Omni Channel Retailing The latest developments on the Chinese mainland Social Retailers are using insights from social to make business impact across the entire organisation, not just the marketing department Social insights is about using powerful analytics to drive to the root-cases and identify business insights that can be converted into tangible changes in your business. Not pretty pie-charts Collect social data Analyse content Deliver insights Take business action Traditional social listening Social Insights

PwC April 2014 25 Omni Channel Retailing The latest developments on the Chinese mainland Gap Using social insights to understand the comparative performance of key store and product characteristics against competitors Social insights used to assess the performance of key product and in-store experience Assessing competitors against the same criteria allows comparable analysis Regular listening allows Gap to change processes and measure the impact in realtime

PwC April 2014 26 Omni Channel Retailing The latest developments on the Chinese mainland Digital Wallets Digital wallets are about much more than just payments, they connect the physical and digital worlds Brand awareness & targeted messaging Drive footfall and retail experience Loyalty rewards and retention Transactions, and closed loop ROI Analytics and insight

PwC April 2014 27 Omni Channel Retailing The latest developments on the Chinese mainland AURORA FAHIONS Uses PayPal Eagle Eye technology to create an OTT solution that bypasses the POS Enables customers with a PayPal account to make in-store purchases. It adapts to customers who have made online purchases using PayPal to process refunds and exchanges in-store What is the impact? Customers demand more from physical stores: outstanding service and a more personalised experience enabled by new technology. Catering for payment flexibility is a now a crucial part of ensuring we are providing customers with a seamless experience by merging digital commerce with physical retailing. Ish Patel, Group Omnichannel Director at Aurora Fashions Digital wallet creates a simple, secure way to use a mobile phone to pay in retail stores. This improves footfall and retail experience as well as linking advertising with fulfilment at the POS Source: retail assist, eagle eye

PwC April 2014 28 Omni Channel Retailing The latest developments on the Chinese mainland Tesco Digital wallets remove the barriers of different standards of contactless payment to speed up the payment process Announced the launch of a digital wallet to allow customers to scan their mobile phones when checking out, without the barrier of spending limits that are usually seen on other contactless payment systems What is the impact? As a retailer we know that if we dont embrace the digital culture were finished. It is as stark and as simple as that. Change or die! Mike McNamara, CIO of Tesco Expand multi-channel portfolio and speed customers through its checkouts, which potentially save on staffing costs. Sit alongside other digital services to make up a futuristic multichannel journey for its customers. Source: the Grocer, diginomica, ComputerWeekly.com

PwC April 2014 29 Omni Channel Retailing The latest developments on the Chinese mainland Mobile loyalty Smartphone users want to be influenced pre-purchase with exclusive benefits and experiential outcomes not just coupons and discounts Loyalty programs 46% Early access to sales 45% Exclusive updates about new products / services 39% Exclusive offers for those who downloaded the app 38% Early access or sneek peaks to new release 36% High-quality images and/or video 36% Services and VIP privileges for top customers 36% What features do affluent Smartphone owners want from a luxury brand mobile app Source: PwC worldwide study on mCommerce behaviour (2014), Luxury Institute and Plastic Mobile, "Mobile Apps and Commerce for Luxury Brands" (2012) 58%23%11%17% To inspireTo evaluateTo transactTo review When during your shopping process do you Chinese generally use their smartphone?

PwC April 2014 30 Omni Channel Retailing The latest developments on the Chinese mainland Sephora VIB Rouge club offers exclusive benefits for those who spend over $1,000 per year 1 Welcome me into the club 6 Allow me to share my privileges and experiences 2 Wow me with great content thats relevant to only me 3 Excite me with unique digital experiences 4 Make my purchasing easy and frictionless 5 Offer me rewards you know I care about

PwC April 2014 31 Omni Channel Retailing The latest developments on the Chinese mainland EAT. One of the first retailers to use loyalty to close the loop on advertising and redemption Took the first trial of iBeacon technology in the UK by launching a mobile loyalty app that enables customers to redeem offers by showing their phone at checkout. A game changer, redefining loyalty for the 21 st century Ramesh Bukka, Eat, Head of IT Strategic pillar in communicationsallows us to access more information about customer behaviour and how that can be influenced Holly Lee, Eat, Group Marketing Director Source: the Drum, Mobile Marketing

Thank You. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 2014 PwC. All rights reserved. PwC refers to the China or Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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