Challenges and Opportunities of China Luxury Market Giovanni Di Salvo

1. 16th April 2008 1 Challenges and Opportunities of China Luxury Market Giovanni Di Salvo

2. 16th April 2008 2 Market Size of China Luxury goods Country risks How did international leading brands approach China market? Major challenges and market trends.

3. 16th April 2008 3 About STRA_BRANDING A consulting firm founded in 2005 in Milan by L. Esposito and JL Ayroles. It opened a Hong Kong office for Asian markets in 2008. It provides consulting services to companies operating in fashion, accessories, food & beverage and design furniture industries. Problem-solving oriented, it offers tailored solutions based on a long experience and a strong know-how in the fashion and luxury markets. It provides consulting on brand and company strategy, sales and marketing, retail and organization, to Western and Asian companies.

4. 16th April 2008 4 Market Size of China Luxury goods China economy The 4th largest in term of nominal GDP (US$ 3.2 trillion), after US, Japan and Germany The 2nd largest in term of GDP at PPP GDP per capita: US$ 2,300. Urbanization rate: 41.8% in 2005. Over 700 million people still live in the countryside. China Luxury goods market: around US$ 3 billion Between 2-3% of worldwide sales of luxury goods 10-13 million active purchasers of luxury goods

5. 16th April 2008 5 Country Risks Aging population, increasing rural-urban income gap, and rapid environmental degradation Growing civil unrest: over 87,000 cases in 2005, mainly due to company privatizations, unpaid salaries, seizures of land and apartments Rising inflation: 8.7% in Feb 08. Inflation is especially affecting food and rentals No rule of law Consensus is based on continuous economic growth and nationalism

6. 16th April 2008 6 How did international leading brands approach China market? In the past - JVs, Management Service Contracts, Franchising, Wholesale First entrants: Max Mara, Ferragamo, Zegna, Hugo Boss, Burberry From 2004 FICE can get Retail and Import Licenses: Direct Investment or JV; Franchising agreements with 1 or more operators A mix of the two methods

7. 16th April 2008 7 How did international leading brands approach China market? Direct Investment: LV, Gucci, Prada, Chanel, Stefanel, Marni, Chloe�, etc. Benefits: Total control over brand image and quality standards Direct communication with actual and potential clients Direct learning of market characteristics, consumer behavior, different tastes and attitudes Long term return Disadvantages: Higher Investment and Investment Risk Slower development Short-Medium term loss

8. 16th April 2008 8 How did international leading brands approach China market? Franchising: Max Mara, Polo Ralph Lauren, Brook Brothers, DKNY, Moschino, Coach, etc. Benefits: Lower Investment and Investment Risk Faster development Leverage on Franchisee�s market knowledge and resources Immediate return Disadvantages: Lower control over brand image and quality standards Indirect and weaker feed-backs from final consumers Lower returns in the long term

9. 16th April 2008 9 How did international leading brands approach China market? A mix approach: By territory: Ferragamo, Hugo Boss, Valentino, Cartier By line: Giorgio Armani and Emporio Armani, Cartier

10. 16th April 2008 10 Major Challenges

11. 16th April 2008 11 Major Challenges continued

12. 16th April 2008 12 Market Trends Louis Vuitton, Gucci and Cartier are among the most aggressive brands in the market New brands are entering the markets in the last few years. Competition is going to increase Established brands as Max Mara, Zegna, Ferragamo, Hugo Boss, Dunhill need to re-position themselves Status and self-reward are still the strongest motivations of spending Men spending is still very important, however Women demand is growing faster Accessories and shoes (bags, slg, belts, eyewear, costume jewellery, etc.) sell more compared to ready-to-wear Casualware exceeds by far formalware Gift buying is still very relevant

13. 16th April 2008 13 Thank you!