Luxury Goods Worldwide Market Study

Spring 2011 Update

Milan, 3rd May 2011

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
2010: A new peak for luxury goods consumption

CAGR:
5,5%
BOOM
CONSOLIDATION EXPANSION CRISIS REBOUND
(DEMOCRATIZATION)

CAGR 04-07
8%

CAGR 07-09
CAGR 00-04
00 -5%
1,4%
CAGR 95-00
11% +12%

-8%
11% 10% 4% 12% 18% 4% 0% -3% 5% 8% 8% 6% -2%

Note: 2010 data continues be estimated (E) in this report as some privately-held
privately companies do not
finalize and report 2010 data until June or July 2011.
2
2010 Holiday Season fared better than expected

Worldwide Luxury Goods

Holiday Season
Market by Quarter

€6B €172B
• Traffic reach its highest level of 2010
€5B
• Consumers regaining confidence and
€6B
€2B showing a more positive attitude
€153B
• Strongest performance of top-end luxury
categories
+12% • Internet sales increasing shares over
traditional channels
-8% • Strong results for US department
stores: double digit growth at
2009 Q1 Q2 Q3 Q4 2010E
comparable store level
QoQ
growth 6% 16% 13% 14%

3
 Strong growth across the board except Japan,
with Mainland China the rising star
YoY ‘10E vs ‘09 YoY ‘10E vs ’09
Worldwide Luxury Goods Market by Area @ K exch. rates
+12% +8%

+12% +8%

Rest of World +23% +19%

of which Mainland China+30%
Asia-Pacific
±0% -10%
Japan

+16% +10%
Americas

Europe +9% +7%

4
US an undisputed leader; Greater China closing
the gap with respect to Japan
Market Ranking by Country (2010E, B€
€)

Note: Greater China is made up by China, Hong Kong, Macau and Taiwan
5
 Re-stocking
stocking drives hard luxury growth;
accessories still growing fast
YoY ‘10E vs ‘09
Worldwide Luxury Goods Market by Category
+12%

-1%

Art de la table +21%

Hard Luxury

+4%
Perfume and
Cosmetics

+17%
Accessories
of which Leather Goods+20%

Apparel +10%

6
Key drivers of luxury goods market for 2011

• Retail:: Strong results in first months of 2011 for all players

1 Europe, USA • Wholesale:: Boost in Fall/Winter ‘11 orders; restocking after the
stock-out
out holiday season

• Still stagnating and deflating market

• 11th March earthquake is impacting macroeconomic conditions and
2 Japan luxury market dynamics
• Recovery expected by year-end,
year also fueled by GDP growth due to
reconstruction

• Growth expected both in like-for-like

like and in terms of perimeter. Players
3 China are increasingly taking direct control over distribution
• Used as a “test market” for innovative retail experiments

Other “fast • Lifestyle changes drive luxury goods sales increase in Russia
4 growing” • Perimeter growth expected for the Middle Eastern region
markets
• Brazil continues its growth pace, with international brands starting to
invest heavily in retail

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1
Excellent results in Europe and US to date
Sell-out Retail Spring/Summer ‘10
• Strong results for Q1 2011
- Booming performance of flagship stores
- Russia recovering from consumption
decrease
• Double digit like-for-like growth
- Increase of in-store traffic
- Higher average ticket
• Strong impact of Asian tourist flows to
Europe, especially Chinese
• US department stores see positive sell-
out trends: +6% Jan, +12% Feb ’11,
+13% Mar ’11
• “Re-stocking effect” after a strong
holiday season
Sell-in Wholesale Fall/Winter ‘12
“All categories are growing incredibly,
especially leather goods and women’s
shoes.”
“After two very low sales campaign
menswear has come back to pre-crisis
level, even better.”
“We are receiving orders from partners
that have not shown up last years: they
are starting to buy and stock again.”
“Our wholesalers are continuing to
increase their budget, but we are
rationalizing our network.”
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2 Japan: slack consumption further weakened
by the earthquake
Japan

Japan Luxury Goods Market Trend (B€) • Japanese market has been losing share
since 2007, driven by macro-economic and
21 21 20 demographic drivers
18 18 -Mature consumers reducing their spending in
0%
-3%
luxury goods (baby boomers retiring)
-12%
0% -Young generations rejecting global brands
-18% -10%
o Lower purchasing power than previous
2006 2007 2008 2009 2010E generations
o Less dependence on Western trends
K @ Constant exchange rate o Digitalization of experience (less is more)

• Despite positive effect of JPY

appreciation in 2010 (+12% vs €), the
market stagnated in 2010

• In 2011 the market will also be affected

by the March 11 earthquake

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2
... leading to a strong drop in first quarter;
partial recovery expected by year-end
year
Japan: Earthquake Effect

Japan Luxury by Quarter • March 11th earthquake devastated Japan’s

(2010E -2011F) northern regions
Positive performance of • Nuclear risks forced luxury brands to close
department stores prior to Tokyo stores for over 10 days
earthquake
- Stores in the Osaka area not really impacted and
maintaining previous year performances

• Strong performance of luxury brands

immediately after store re-openings
re
• First signs of recovery are expected starting
in the 3rd quarter, also fueled by growing
GDP due to the reconstruction
-5% • Impact of earthquake also felt in mature
markets: Japanese consumers account for
~5% of EU sales through tourism
• Long
Long-term impact not expected to be
significantly negative
- Previous natural disasters (e.g. Kobe earthquake of 1995)
had low impact on luxury

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 3 Mainland China continues to be the fastest
growing market for luxury
Mainland China

Chinese (Mainland) Luxury Goods

Market Trend (2007-2011F, €B) • China will continue to be the fastest
€11.5B growing market for luxury
• It will become the third luxury market
€9.2B worldwide in 5 years
• Tier 2/3 cities will be the new
€7.1B
battleground for luxury brands, but growth
€5.9B also driven by strong organic growth
€4.5B CAGR 07-11F: • Overseas luxury market will still account
26%
for >50% of total Chinese luxury spending
• Consumers becoming more and more
sophisticated and selective: in-store
experience and after-sales service will
2007 2008 2009 2010E 2011F become a key success factor
@k exch. - Players are testing new store innovative solutions
YoY and digital initiatives in China
29% 31% 20% 30% 25%
growth

11
3 Chinese luxury consumers are increasingly
sophisticated and demanding
Retail-tainment Digitalization
• Big Shoppin-land: • Strong investments in
new multi-format digital marketing:
retail spaces are luxury consumer
making shopping a younger than in other
real entertainment markets
activity
• Fast growth of the e-
commerce channel

Fake? No, thanks! Brand loyalty

• No compromise on • Chinese are becoming

luxury: demand for more attached to
counterfeit products is Western brands.
decreasing fast; Brand loyalty is no
consumer too longer a Western
sophisticated phenomenon

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4 Emerging markets increasingly important on
the global chessboard
Luxury goods market
Brazil Russia 2010E: 4.8 €B
Key luxury cities:
Moscow, St. Petersburg

CAGR 10-13 : +5-10%

Luxury goods market India

2010E: 1.8 €B
Key luxury cities:
Sao Paulo

CAGR 10-13: +10-15%

M.East Luxury goods market 2010E:

4.1 €B Luxury goods market
Key luxury cities: Dubai, 2010E: 0.8 €B
Abu Dhabi, Doha, Kuwait City Key luxury cities:
Mumbai, Delhi
CAGR 10-13
13 : +10-12%
CAGR 10-13 : +5-10%

13
In 2011, luxury goods market will continue to
enjoy strong momentum ESTIMATES

Bain Forecast at 05/03/11 Growth by Geographic Areas

@ constant exchange rates @ constant exchange rates

Worldwide Luxury Goods Market (B€)

Europe +7%
Americas +8%
Japan -5%
Asia Pacific
+8% ex-China +15%
China +25%

RoW +7%

Total +8%
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Good basics will fuel medium term growth
ESTIMATES

Bain Forecast at 05/03/11

@ constant exchange rates

Worldwide Luxury Goods Market

€214-221B • Asia-Pacific, and especially China’s

booming economy, will drive luxury
€185B CAGR goods consumption
€172B 2011-2014 - Mainland and Greater China
- Touristic destination in Asia and
+5-6% Worldwide
• Consolidation of mature markets
+8% (US and Europe) which still hold the
majority of personal wealth
• New emerging markets becoming
material: Brazil and Middle East
(Saudi Arabia)

2010E 2011F 2014F • Japanese market recovery and

@ k exch. @ k exch stabilization

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The overall global balance will not change
significantly, but Asia will keep gaining share
Worldwide Luxury Goods Market by Area CAGR ’11-’14E
ESTIMATES
+5/6%

+6/7%

+10/11%
Rest of World

Asia-Pacific +1/2%
Japan
+4/5%

Americas

+4/5%
Europe

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Great job to date...
How to succeed in the next 15 years?
Worldwide Luxury Goods Market trend
(indexed 1995)
400?
What you have to get right
• China (as a symbol for all
emerging markets)
- Penetration
- Route to market
- Tailored value proposition

• Generational shift
- Baby-boomers retirement
223
- Japanese teenagers
- Generation Z (always
connected)
100
• Enhanced customer
experience
- Low loyalty and
satisfaction
1995 2010 2025F
- Integrated online and
offline experience
- Service
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 Choose your own formula... but get it right!
Store staff excellence
Category
management In-store
store entertainment
Service 2.0 Exploitation of underexposed
senses
Integrated offline/
online experience
4 walls
management

Experience
Generation China
shift
E-commerce and
mobile commerce Customer insight

Flexible sourcing
Viral marketing

Digital value proposition Flawless supply chain

Social network Organization Right locations

Communities Targeted collections

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