BULGARIA Luxury Market MARKET REVIEW 2009

1. BULGARIA Luxury Market MARKET REVIEW 2009

2. Table of Contents • I. BULGARIA ECONOMY • II. LUXURY MARKET BULGARIA • FASHION • ACCESSORIES • JEWELRY / WATCHES • HOSPITALITY • SPA • AUTO • OTHER LUXURY SEGMENTS • REAL ESTATE DATA – RETAIL

3. I. BULGARIA ECONOMY Population Positive tendencies observed in the basic demographic development indicators during the last years continue in 2008. There is a delay in the rates of population decrease mainly due to the improved indicators on natural population movement, increased life expectancy and decreased influence of international migration. Main problem of the country demographic development is the still high mortality level, relatively lower life expectancy compared to the other European countries, as well as the negative net international migration. Nevertheless, the positive tendencies observed in the demographic development during the last years are a good basis for overcoming of the serious demographic crisis passed during the last decade of previous century. Arrivals of visitors from abroad to Bulgaria in 2008 Almost eight million people arrived in Bulgaria in 2008, from which five million only from the EU. Top countries for the number of visitors are Romania, Turkey and Greece. The purpose of visit is mostly holiday and recreation. Almost all visitors from Turkey are in transit, as well as half of the visitors from Romania. Output In March 2009 according to the NSI business inquiries the industrial confidence indicator fell by 3.2 percentage points compared to its February level. The decrease was due to the lower demand and the pessimistic managers’ expectations about the production activity in industry over the next 3 months. At the same time the level of stocks of finished products increased. By preliminary operative data the gross domestic product (GDP)in the fourth quarter of 2008 amounted to EUR 9,558 million at current prices and GDP per capita was EUR 1,248. Compared to the fourth quarter of 2007 the real volume of GDP grew by 3.5%.

4. Private consumption In January 2009 the consumer confidence indicatordecreased by 6.7 percentage points in comparison with October 2008 (respectively by 8.0 percentage points for urban consumers and by 4.3 percentage points – for rural). The negativism in consumer’s assessments about the current economic situation in the country increased. In the fourth quarter of 2008 for individual consumption of the populationwas spent 75.8% of the produced GDP. The real increase of the indicator was 1.8% in comparison with the respective quarter of 2007. In the fourth quarter of 2008 the external balance of goods and services was negative. The imports of goods and servicesexceeded the value of the exports by BGN 4 915.3 million. Compared to the respective quarter of 2007 the exports of goods and servicesdecreased in real terms by 6.0% and the imports - by 3.2%. Economic environment In 2008 GDP growth slowed down to 6.8% year-on-year in Q3 2008, compared to 7.1% YoY in the previous quarter. From January to September 2008 the GDP increased by 7.0% amounting to EUR 24.56 bln. FDI decreased by 11.55% YoY to EUR 5.3 bln in January-November 2008. Inflation slowed down to 11% in September 2008, compared to 15,3% in June 2008. For the first nine months of 2008 inflation stood at 7.4%. Unemployment in Bulgaria went down to 5.1% in Q3 2008, from 5.8% in Q2 2008. Employment in the private sector went up by 7.7% y/y. The average monthly wage in Q3 2008 increased by 2.5% q/q to BGN 523 (EUR 268). IMF forecasts GDP growth of 2% in 2009.

5. II. LUXURY MARKET BULGARIA Third largest Eastern European market after Poland and Romania, Bulgaria aims at becoming a regional magnet for international investments in all industry areas. Top foreign investors in Bulgaria are Lukoil, OTP, CEZ, Telekom Austria, OTE, National Bank of Greece, Global Steel, Unicredit Group / HVB, EVN, Viva Ventures / Advent International, Solvay, Raiffeisen Bank, American Standard, Bank Austria. Tourism and industrial manufacturing remain the two focal points of the Bulgarian industry. The wealth of the people is concentrated in four large cities – Sofia (also the capital), Varna, Russe and Burgas. Much as in Romania, Hungary and Poland, the wealthiest people live in the capital city, which also concentrates the majority of luxury businesses. Bulgarians have a strong affinity for all luxury branded products or services. Luxury brands are means of standing out, showing off and differentiating themselves. Much like their Romanian counterparts, Bulgarians love Italian brands and all things shiny, flashy, gold, which stand out easily. It comes as no surprise that Dolce Gabbana, Moschino or Cavalli are top selling brands in the Bulgarian market. Tourism is mainly concentrated on the Black Sea side and the mountain area in the centre of the country. Bulgaria attracts mostly mid level package holiday tourists from all over Europe, the average holiday being 5 days. In contrast, the capital city of Sofia fails to attract tourists, the great majority of visitors being corporate travellers. The lack of tourism sites, the modest infrastructure (buses, trams and metro are still from the 60s), the poor condition of hotels - all contribute to keeping away travellers.

6. General retail The Sofia luxury retail presents the same issues as the Bucharest one. There is no street dedicated to luxury brands and services. Although in Sofia, there is the Vitosha street, it is still a disturbing mix between mass market brands, cheap boutiques. Also, the hotel shopping galleries are becoming empty, with most brands migrating to street locations. Hotel galleries seem less and less attractive to luxury brands. The largest shopping centre in Sofia, offering 130 selected shops with luxury brand goods is the Mall of Sofia. The mall is four stories tall and has a total of 70,000 m² of built-up area, of which 35,000 m² belong to the commercial and entertainment sector. The other shopping mall in Sofia - City Centre Sofia is another place of interest for visitors and citizens. It is spread on 3 floors and features more than 100 brand collections on a total built-up area of 44,000 m². The most developed segments of the luxury industry are: perfumery /selective retail, hospitality, chocolaterie /confisserie, optics (sunglasses, frames). The Bulgarian market lacks luxury SPA, five star deluxe hotels and several luxury car dealers.

7. 1. FASHION The most important players on the Bulgarian luxury fashion market are local retailers MDL and SMG FASHION. Retailer MDL currently owns in franchise the following brands: D&G, Trend Box, Ermenegildo Zegna, MaxMara, Furla, Marella, Max&Co., Marina Rinaldi. The best performing brands are Zegna, D&G. MDL is also the local franchisee of mass market brands: Benetton, Sisley, Palmers, PennyBlac, Motivi and Marc Cain. RetailerSMG FASHION LTD. is is one of the pioneers of the local luxury fashion market, having started its operations early 2003. SMG Fashion Ltd. is the franchisee of Escada Margaretha Ley, Escada Sport, Betty Barclay,Cerruti 1881Apriori Escada Group. Much like MDL, SMG Fashion also operates mass market brands: Jeans Point (Kenvelo), Junior (multi-brand store for children's apparel), Satin (multi-brand home wear store) SMG Fashion Ltd was also the first luxury fashion retailer to open a multi-brand store in Varna which sells Betty Barclay, Cerruti 1881 & Cerruti Jeans, Kenzo, Elle and Timberland for kids. Judging from the retail exposure and reflected by our surveys is the fact that Italian luxury frashion brands dominate the local retail luxury market. Unfortunately, most of the diffusion lines D&G, Just Cavalli, Armani Jeans, Versace Jeans, GF Ferre sold on the local market are outlet merchandise mixed with counterfeit products. Such multibrand shops openly sell these brands throughout the major shopping malls and galleries in the capital Sofia. Most of these brands are aware of such overexposure and their logos being put on every multibrand ship, yet they motivate their lack of initiative to curve this issue, with the fact that some do not have a franchised monobrand presence and therefore it is more difficult to educate the consumer. Yet, the reality seems to contradict this statement. Although D&G now has a local franchisee and a monobrand location (Sheraton Sofia), the D&G logo is widely displayed at multibrand shops, most products being labelled Ittiere IT Holding, which no longer has the right to produce D&G apparel (since early 2008).

8. FASHION (continued) Late 2008 has also seen the closing down of the Emporio Armanifranchised store in Sofia, which has come as a shock, especially considering the awareness of the Italian brands in Bulgaria . To us this does not come as a surprise, we have anticipated this situation since opening. The poor management and customer service of the local franchisee are the main reasons behing the closing of the store. We would also argue that an important part was also played by the Armani Group itself, having approved an unfortunate and oversized location. Canaliopened a monobrand store in 2008 in Sofia, within a centrally located stand alone store of approximately 120 square meters. Our market sources indicate the brand has had a successful launch on the Bulgarian market, being the first real competitor for Zegna. There are no reported sales available, yet it seems they are on a positive track. A limited collection of Brioni is available at VMV multibrand store. The only French brands present in monobrand representation are is Guy Laroche, Cacharel and Marithe Francois Girbaud, each with a stand alone location within shopping centres. Pradaapparel is sold in two multi brand stores, yet with limited collection pieces on Vitosha Street. The 2 stores are owned by the same retailers which franchised Emporio Armani. There is a strong interest toward GUCCI and LVMH. The following brands  recently opened: Paciotti, Guess, D&G, Salvatore Ferragamo, Dior, Bottega Veneta, YSL, Chloe, TODS  in a Multibrand Boutique, Marccain. Prices are generally similar to those in Italy or Germany, observing the RRP (Recommended retail price) The estimated turnover for 2008 for a stand alone franchised location in Sofia is on average 1.8 million euro. In comparison to 2007, therehas been an increaseof up to 20%. We estimate the total value of the luxury fashion apparel at EUR 65 million, excluding the outlet merchandise.

9. FASHION (continued) Estimates for 2009 Major changes in 2009 include drop of sales by 20-25% for the first quarter.The downfall will continue for the rest of 2009, we estimate a recovery Nov/Dec 2010 As some developers struggle for financing, certain projects are likely to be postponed or cancelled. Rental levels will slightly diminish as the market becomes more tenant-driven. Demand for contemporary retail space remains stable from large international retailers already set for market entry.

10. 2. ACCESSORIES Most of the accessories brands are included in multi brand concepts, the market leader being IT Holding with a presence in more than 10 multi brand stores (Ferre, Just Cavalli, D&G). Most of these multi brand stores are in malls – Mall of Sofia, City Center Mall, Central Department Store. IT holding is closely followed by Aeffe Group with several multibrand locations including Pollini, Moschino, Alberta Feretti Market leaders are D&G, Versace, Ferre and Moschino. Sales of Prada and Ferragamo accessories have slowed down late 2008 and will continue the trend. We believe both brands will recover and show their real sales potential once a monobrand store will open, with the correct representation, both merchandising and collection wise. The only mono brand luxury accessories is Furla, with steady growing sales throughout 2008 and a stable level even in 2009/2010. We reckon Furla has proved successful during crisis because of its lower pricing on Made in Italy leather accessories. In comparison with Bucharest, there are no specialized shoes multi brand stores, most of the shoes collections being part of multi brand or mono brand stores. Similar with what is happening on the fashion segment, diffusion lines sold on the local market are outlet merchandise mixed with counterfeit products, which also affects sales of accessories.

11. 3. JEWELRY / WATCHES Most luxury watches brands are present in the market in multi brand concepts. The most important luxury watches and jewelry retailers are LA TIARA (Bvulgari, Chopard,), Royal House (Rolex, Vacheron Constantin, Cartier, Piaget etc) and Maestro (Audemars Piguet, Chopard etc. La Tiara and Maestro each have 2 locations, with dedicated corners for their key brands. La Tiara is also the exclusive distributor of Vertu on the Bulgarian market, having opened recently a Vertu monobrand shop. 2008 was also the opening year of the Rolex monobrand shop, emphasizing the commitment of the brand for the emerging markets in Central and Eastern Europe. Sales for jewelry/ watches are still at a relatively low level, many Bulgarians still preferring to buy from abroad. Just like the case with Rusia and the Ukraine, we are facing a level of discretion imposed many times by wealth accumulated in unlawful ways.

12. 4. HOSPITALITY Sofia’s five star hotels are: Radisson, Sheraton, Kempinski, Hilton, Grand Hotel, Holiday Inn. According to Bulgarian criteria, there are two more five-star hotels in Sofia – Anel and Arena di Serdika, but, price-wise, Anel is rather a four-star establishment, whereas Arena di Serdica’s marketing labels it a boutique hotel. Many of the hotels such as Kempinski, Grand Hotel or Hilton have lost their shine due to the fact they haven’t been renovated since their opening. The Kempinski and the Sheraton are in the poorest condition, with the renovation process being very slow. Public spaces and restaurants fail to attract the local high class, who prefer independent restaurants. Sheraton Luxury Collection Hotel has received a face lift in 2008, placing it on top for prefferences. The most important boutique hotels are: Le Fleur and Crystal Palace, with Le Fleur standing out. Its daring design and its central location on pedestrian Vitosha street makes it a favourite to discerning travellers. The newest hotels are Radisson and Holiday Inn, both with modern facilities and amenities. Average rack rates for five star hotels are: - 200 euro for the new hotels or renovated rooms within the 5 star hotels - 90 euro for the un-renovated rooms within the 5 star hotels Averrage rack rates until mid 2008 were around 110 euro. In Prague and Vienna the price was 160 euro (excluding breakfast and VAT). By comparison, Bucharest is more expensive, with an average price of about 140 euro. Apart from expenses for their traditional activities, most of the five-star hotels (except Grand Hotel Sofia), have accumulated excessive outstanding debts. This explains why in 2008 the owners of both Kempinski and Radisson tried selling the hotels, but with the financial crisis gaining strength, the timing was wrong and no deals were signed.

13. HOSPITALITY (continued) There is little cause for optimism that 2009 will be any better: as companies cut costs, five-star accomodation is among the first to go. Business in Europe is expected to drop overall by 10 per cent, which is likely to be mirrored in Bulgaria. There is an average of 1250 beds in five-star hotels, available year-round, with an average occupancy rate of 57%. This translates to 260 000 overnight stays, or a turnover of 26 million euro . There are no five star deluxe hotels and no official plans to develop such hotels. The five star hotel market is already crowded, with over 70% of the target market being corporate. Contrary to the sense of doom surrounding the economic crisis and the vexed business outlook for the coming year, the tourist sector, or hotel business in particular, made great strides last year.In terms of business, this sends a positive message in spite of the economic crisis and the number companies filing for Government financial assistance. It appears that hotel business in the country is healthy. Revenue in the tourist sector increased by 8.4 per cent in 2008, reaching 741 million leva. The NSI is quick to note, however, that the aforementioned figures only represent the official side of the business, implying that last year's actual growth in the sector was even higher. 120 news hotels opened doors in Bulgaria in 2008, according to data released by the National Statistical Institute. This is an 8% increase bringing the total number of hotels in Bulgaria to 1 646. 43,3% of all hotels, and 63,8% of all hotel beds are located on the Bulgarian Black Sea coast. A total of 3 217 accommodation facilities existed in Bulgaria in 2008, including hotels, motels, camping sites, and lodges. The total number of beds in these facilities increased by 7,3% in 2008 to reach over 293 000 beds. The number of overnight stays in Bulgaria's accommodation facilities grew by 1,2% (or by 215 000) compared to the 2007 figures, reaching a total of over 18,3 million overnight stays.

14. HOSPITALITY (continued) Opportunities Five-star hotels in Sofia reported a drop of seven per cent in revenue in 2008, blaming the encroaching global financial crisis. However at least four of the world’s top hotel brands are interested in the local market and are now in talks with potential partners. Marriott, Hyatt, Movenpick and Intercontinental are all interested in Bulgaria, with the latter already having signed a preliminary contract for a hotel. The first news about a new arrival came from Intercontinental Hotels Group, which inked a preliminary agreement with local firm International Capital Group, owned by the Sigma Capital fund. Marriott has been testing the waters for several years. The chain is likely to use one of three brands it owns – Marriott Hotels, Renaissance Hotels or Courtyard. Hyatt is currently looking for an interesting potential for development. The chain will enter only after it has identified a potential project on a key location in the centre of Sofia. Switzerland’s Movenpick Hotels and Resorts is looking for opportunities to enter the market. The company is especially interested in central Sofia and areas near the airport, aiming for a hotel with a 200-room capacity with conference halls and restaurants.

15. 5. SPA Growing interest in the construction of spa centres resulted in increased real estate prices in some popular Bulgarian spa resorts. However, SPA tourism remains relatively undeveloped in Sofia despite its considerable growth potential. Health, fitness, well being, SPA or better called self pampering is still an huge untapped opportunity in Eastern European countries. The SPA sector, one of the least developed segments of the luxury industry in Central and Eastern Europe, is gaining strength in becoming a viable opportunity which is positively stimulated by the actual financial crisis. Until now, the SPA concept was represented only by health clubs and cosmetics and hair parlor.

16. 6. AUTO Luxury car sales are dominated by: BMW, Audi, Mercedes, Maseratti, Hummer (new cars). Rolls Royce, Bentley, Ferrrari or Aston Martin do not have showrooms or direct representations. The number of luxury cars sold officially on the Bulgarian market are half of those sold in Romania. Officially there are two Rolls Royce registered in Sofia, whereas Bucharest has 5 registered. Boom times in the Bulgarian automotive market are set to end in 2009 as a result of the global credit crunch and the country’s economic slowdown, according to BMI’s latest Bulgaria Automotives Report. Most Bulgarian car importers forecast annual new car sales growth of 17-23% over the next five years. Toyota Balkans has delivered the most optimistic forecast, with 30-45% annual growth, leading to up to 110,000 car sales by 2010. The Bulgarian car market grew by 18.5% year-on-year (y-o-y) in H108 to 28,001 units, while bus sales rose 175% to 163 units and truck sales grew 60% to 2,025 units, according to the Bulgarian Association of Car Manufacturers (SVAB). A major fleet deal with the Ministry of the Interior saw Opel top sales, with an 11.6% market share and sales of 3,240 units. As a result, Toyota slipped into second place with 2,779 cars sold, representing a market share of 9.9%. However, the Dacia Logan remained the best selling model in Bulgaria, with 1,218 units sold. Iveco led the truck market with 781 units sold, marking a 35.7% share of sales, followed by Mercedes with 33.3% and 728 sales. Isuzu topped bus sales. The overall rate of growth in the Bulgarian automotive market was 20.5%, the second highest in the European Union (EU) after Lithuania’s 36.2%, albeit from a very low base. The market is likely to pick up from 2011 as economic growth recovers and credit availability widens, with annual sales set to reach around 99,350 units by 2012. BMI doubts that the growth rates seen in recent years are unlikely to be repeated unless economic growth returns to over 6.0% – a rate that we think is unlikely over the next five years. In comparison with other countries in Central and Eastern Europe (CEE), Bulgaria’s automotive market will remain low in per capita terms.

17. 7. OTHER LUXURY SEGMENTS FINE ARTS / REAL ESTATE Christie’s Great Estates, the international luxury real estate company that is part of Christie’s auction chain, has an office in Kempinski Hotel, Sofia. Opportunities seem limited in the area, with only five luxury properties for sale available at the moment. Offers range from renovated country mansions to luxurious estates on the river side. Prices also range from a few hundred thousand euros to 1.6 million euros for a luxurious estate. PERFUMERY / SELECTIVE RETAIL Aries Commerce took over in 2008 the franchise for Darphin, a french luxury brand. On the parfumery/ selective retail segment, the largest store operator is Beauty, with a controlling interest from Marionnaud of France. Most of Beauty locations are in Malls or shopping centres. There are no luxury perfumery brands present (i.e Annick Goutal recently launched in Bucharest)

18. OTHER LUXURY SEGMENTS (continued) ORGANIC CONCEPTS / CHOCOLATERIE Sofia has an authorized Godiva dealer and a Lindt franchise shop (Vitosha street), with both brands expanding their operations in Horeca. In comparison with similar capital cities like Bucharest and Belgrade, there are no organic / local organic concept stores or local brands in Sofia that have developed in this luxury segment. HOME / INTERIOR DESIGN The most important presences are Armani Casa (through the exclusive dealer Martineli), Laura Ashley (franchised store), Nobo (located on the top floor of the Central Department Store) Martineli sells furniture, accessoriies but also construction material for the luxury market, with a turnover of over 3 million euros. The Romanian furniture manufacturer Mobexpert dominates the medium and superior furniture segments with a major location in Sofia. Lalique, Baccarat and Rosenthal (Versace) are carried by two multibrand stores specializing in home and interior decorations.

19. 8. REAL ESTATE DATA - RETAIL Shopping Centers and Malls The total inventory of operational shopping mall space is 170,000 m2 by the end of 2008, represented by 10 shopping mall projects. The new supply of 31,000 m2 delivered in the second half of 2008 comes from Park Mall in Stara Zagora and two smaller schemes in Pleven. In H1 2009, the opening of the first shopping mall in Bourgas will also mark the official launch of Carrefour hypermarkets on the Bulgarian market. Another three shopping malls are scheduled to open in Sofia, Plovdiv and Bourgas in 2009. If they are all realized the total stock of contemporary shopping mall space will increase with 114,000 m2. Country-wide, there are 839,000 m2 of shopping malls space in the active pipeline (i.e. under construction) withplanned delivery in 2009-2011. Based on the amount of shopping mall space in the active pipeline, the markets in Rousse and Varna appear set for saturation. It is expected, however, that some of the projects will be significantly delayed or not reach completion at all, thus preventing oversupply. Ultimately, the markets will determine which projects are viable. The remaining cities in Bulgaria are still far from saturation. Demand for high street space remains high, with only few locations available. Generally, demand is directed towards malls with good concept design, sufficient parking, professional management and secured financing.