REPLAY Introducing and developing an Western Fashion Brand in Mainland China

1. REPLAY Introducing and developing an Western Fashion Brand in Mainland China Olivier PETRAGALLO - Sales&MKT Regional Manager

2. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA SUMMARY • Company and brand introduction • REPLAY in China • Apparel Market in China • Ways to expand a brand in China Olivier PETRAGALLO - Sales&MKT Regional Manager

3. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Company and Brand Introduction Fashion Box Group • An Italian group that owns the trademarks Replay,Replay & Sons and We are Replay (soon to be replaced by Red Seal and White Seal). • Brands which offer fashion for men, women and children of all age groups. • With total sales of 290 million Euros in 2009, the Group operates in more than 50 countries around the world, where products can be found in over 5,000 points of sale, including 230 monobrand free-standing stores and 170 monobrand corners. Olivier PETRAGALLO - Sales&MKT Regional Manager

4. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Company and Brand Introduction / Worldwide presence Olivier PETRAGALLO - Sales&MKT Regional Manager

5. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Company and Brand Introduction REPLAY • The Replay brand accounts for approximately 80% of the Group’s production. • The collections are the result of careful research in materials and the working of the fabrics, distinguished by elevated quality, attention to detail and creative style. • Replay collections offer around 800 items each season in over 30 classes of merchandise and are targeted to consumers in tune with current trends in search of originality and authenticity in their wardrobe selections. Olivier PETRAGALLO - Sales&MKT Regional Manager

6. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Company and Brand Introduction / Stores Olivier PETRAGALLO - Sales&MKT Regional Manager

7. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Company and Brand Introduction / Stores Olivier PETRAGALLO - Sales&MKT Regional Manager

8. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Company and Brand Introduction / Stores Olivier PETRAGALLO - Sales&MKT Regional Manager

9. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Olivier PETRAGALLO - Sales&MKT Regional Manager

10. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Olivier PETRAGALLO - Sales&MKT Regional Manager

11. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Olivier PETRAGALLO - Sales&MKT Regional Manager

12. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA REPLAY in China REPLAY has entered the market twice. • While it was the first Italian denim brand to enter the Chinese market in 1999,it failed to develop while its competitors, though they entered the game several years later. Main reason for failure was the wrong choice the company made when choosing their distributor, a manufacturing group from Singapore mainly interested in getting the brand’s MFG orders in China and the region • It started from scratch in 2007, appointing an new distributor, this time a real retailer, with a proven track in the market with brands like Miss Sixty, Episode, Jessica and Colour 18 among others Olivier PETRAGALLO - Sales&MKT Regional Manager

13. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA REPLAY in China • Over the past 4 years, 32 points of sale (POS) were opened, mainly corners within department stores, the balance being shop-in-shops within A-tier cities’ major shopping malls • The brand is available in 17 cities • Average size of a POS is 60 m2 • Average monthly turnover per POS is RMB 200,000 (around 120 pcs) • Opening pace for the upcoming 3 years is 20 POS per year to reach, by the end of 2012, a network of around 90 stores across the country Olivier PETRAGALLO - Sales&MKT Regional Manager

14. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA REPLAY in China Mapping of main players in the Chinese market Olivier PETRAGALLO - Sales&MKT Regional Manager

15. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China 1. General Data Urban China’s consumption of apparel to grow at rates in between 3 and 7% per year over the next 20 years Over the period, total spending in this segment is to triple to reach 1,100 billion RMB in 2025 Within the urban households categories, lower aspirants (earning in between 25 and 40,000 RMB per year) are the largest consumers of apparel products. In the coming years, upper aspirants (40 to 100,000 RMB per year) will become the largest consumers in this segment Olivier PETRAGALLO - Sales&MKT Regional Manager

16. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China China’s current share-of-wallet spent on garments is nearly 7.7%, much higher than the share-of-wallet observed in developed economies (4.3% in Japan, 3.4% in the US) With income to increase significantly, the share-of-wallet spent on garments is forecasted at 5.7% by 2025 Olivier PETRAGALLO - Sales&MKT Regional Manager

17. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA General comments on\ 2. General comments on branding The Chinese customers put more faith in brand names than Westerners (recent surveys shows 50% of the consumers would buy a product for the brand, only 33% in the US) Attraction of brand remains more practical than emotional (good apparel means good quality) Chinese consumers eager to switch brands and even price segments if they feel they would get more value for a similar price Recent years have seen a huge number of international brands enter the market with new product and promises, leading to Chinese consumers readily abandon one brand for the other Apparel market in China Olivier PETRAGALLO - Sales&MKT Regional Manager

18. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel Market in China Hence, Chinese consumers are still not that familiar with a lot of these global luxury goods brands, as these consumers have only recently entered the luxury consumption income bracket, and thus brand recognition and loyalty at this stage are still very weak. Need to keep a very close watch on consumption trends and focus on building sustainable brand loyalty, which is one of the key challenges here. Therefore, there’s a need to secure a marketing advantage through consumer insight and segmentation so as to ensure a long lasting brand loyalty by developing specific product characteristics and emotional brand affiliations Olivier PETRAGALLO - Sales&MKT Regional Manager

19. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China 3. Customer behavior China’s apparel market slowly moving from product-oriented to consumer-oriented Chinese consumers do like to browse, to check before buying such goods. Limited impulse buy for the time being Customer’s expectations of product quality have been steadily rising Increased attention to aesthetic and social value of a garment, vs. a former attention almost exclusively to the garment functions (protective, warmth, among others) Price still is a factor for consumer to judge quality (high price = high quality) Olivier PETRAGALLO - Sales&MKT Regional Manager

20. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China During immature stage of consumer behavior (limited experience with modern marketing messages), tendency to rely on brands with a proven track record Tendency to show to others when wearing a praised brands. Not till long ago, it would be common for them to leave their tags on a suit’s jacket sleeve Hence, brand importance is declining, factors increasingly influencing the purchase are now style, quality, fit, service and shop image. It is crucial to understand the customers locally (fits, sizes, color preferences… vary from one province to another); need to understand their needs and wants, their perception of foreign brands and their perceived quality/price for these brands Olivier PETRAGALLO - Sales&MKT Regional Manager

21. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China Chinese consumer need to know as much as possible about a brand, how it was born, how it grew at an international level, and how big is its presence across the globe Strong brand and product information makes these stores efficient (a high need for details and explanation, including technical aspects) Consumer increasingly educated, being less and less “foolable” by simple marketing artifacts. Even if the majority of consumers do pay attention and praise imported garments, they are at least as keen on buying a brand’s products for they cater to their fit and size needs. Compulsory to adjust some western fits. “Made by Replay” might be stronger than “Made in Italy” Olivier PETRAGALLO - Sales&MKT Regional Manager

22. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China 4. Distribution Compared to shopping malls, boutiques, and street stores , specialty stores (monobrand outlets) are the most popular apparel retail format appreciated and accepted by Chinese consumers Most retail formats are specialized by products whereas specialty stores are supplied by specific brands Strong brand information makes specialty stores make effective channels in attracting early sympathizers Olivier PETRAGALLO - Sales&MKT Regional Manager

23. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China Current apparel distribution composed mostly of monobrand stores A few multibrand stores (I.T, Joyce) have entered the market in the past years, but these examples remain specific. Monobrand stores are mainly concessions in department stores or shop-in-shops within Malls Very few opportunity for street shops, and most of the time these are not making money, they are more of a window in the market to both help the brand awareness and attract potential franchisees. Examples in Shanghai: HuaiHai Middle Road, Nan Jing West Road Olivier PETRAGALLO - Sales&MKT Regional Manager

24. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China Economic conditions offered for concessions in department stores are most of the time a percentage of the turnover, a percentage that can range from 18% up to 33% A percentage is often coupled with a minimum rent (translated in minimum turnover to achieve per m2). The department store will cash in whichever is higher Fixed rent prices (for shop-in-shops and street shops) have rocketed in major cities. In Shanghai, 5usd/m2/day is common on HuaiHai Road, rents on Nan Jing Xi Lu have reached 11.5usd/m2/day . Olivier PETRAGALLO - Sales&MKT Regional Manager

25. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China The retail market is beginning to reach maturity in Tier 1 cities like Shanghai. Thus the need to accurately target specific consumer groups is much more significant in these areas. As a result retailers are increasingly expanding into second and third tier cities like Qingdao, Nanjing or Tianjin. The attractiveness of these secondary regions is enhanced by the migration from the countryside to the regional cities, increasing the size of the second and third tier urban retail market. Olivier PETRAGALLO - Sales&MKT Regional Manager

26. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Apparel market in China 5. Market segments Initially there were two markets for apparel in China: 1. Low priced basic apparel sold under local brand names and offered in Chinese department stores, foreign hypermarkets or small family owned specialty chains 2. Luxury brands sold either in franchised boutiques or upscale department stores Due to the rapid growth of China’s middle class a new category has emerged Consumers in China’s middle class are increasingly sophisticated, demanding higher quality, variety and innovation from their retailers The new category is highly fragmented and is dominated by specialty casual brands from Hong Kong, such as Esprit (620 outlets), Giordano (950 outlets), and Baleno (1,280 outlets) Olivier PETRAGALLO - Sales&MKT Regional Manager

27. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China • Distribution agreement This is what has been mostly used by international brands entering the Chinese market over the past 10 years. Despite the size of the market (of the country), most brands have chosen to give an exclusive distribution agreement to local players being able to operate In Beijing like they would operate in Chengdu or Wulumuqi. Goal is to put the distributor in position to quickly achieve a ROI beneficiating from a larger area of operations. In order to succeed, distributor needs to have regional offices across the country, with teams in position for a daily control of the development as well as reporting channels enabling the distributor, and as a consequence, the principal, to appraise the situation in real-time Olivier PETRAGALLO - Sales&MKT Regional Manager

28. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China Advantages of using a local distributor (when the appointed distributor is identified properly): • Use a company which has the needed connections to get the business grow • Use a company which culturally understands all aspects of the apparel market • Use a company which most of the time can use synergies in their operations (most distributors do operate more than one brand and are therefore in a stronger position in the market) • Limit the entry investment to the minimum and guarantee margins for the principal Olivier PETRAGALLO - Sales&MKT Regional Manager

29. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China Disadvantages • Have a limited visibility of what’s happening unless there’s someone from the principal being physically involved in the operations • Medium to high risk of damaging the brand was the appointed distributor to decide to suddenly stop the operations, and this despite whatever legal terms agreed • Limit the profit of the operation to its wholesale level; given the growth perspective of China, this can represents substantial amounts of money • Convey a conservative message to the players in the market (“I am not strong enough, I am not interested enough, etc… to do it myself or at least as part of aJV) Olivier PETRAGALLO - Sales&MKT Regional Manager

30. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China 2. A JV agreement A growing number of brands have entered in JV agreements over the past couple of years. And REPLAY just went this way. This is the result of brands starting to show a stronger interest in the market tying deals with their existing distributor (REPLAY for instance) so as to accelerate the forecasted growth and start grabbing a higher share of the margins produced. It’s also the choice of new candidates wanting to control the operations right from the start without having (or wanting) to invest major amounts. Most JV agreements are 50-50, which on the one hand limits the risks of growth while on the other hand, can create blocks in the decision making process when cultures are far from being similar Olivier PETRAGALLO - Sales&MKT Regional Manager

31. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China 3. WOFE WOFE stands for WHOLLY OWNED FOREIGN ENTERPRISE, and this allows the principal to own their operations 100%. LV was the first company allowed to do so even though the law allowing this had not yet been passed. A WOFE enables the principal to have a full control of the all chain of operations, and is mainly used by major companies which have the investment capacity to put up regional operations all over the country, often grouped with MFG units. Tough it sometimes raise concern for consolidation (rules are strict and vary when it comes to capital export), most examples in the market are successes (CK, Inditex,…) Olivier PETRAGALLO - Sales&MKT Regional Manager

32. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China 4. Franchising This works with any of the previously introduced operationg structures. Franchising is one of the key ways, if not the only one, to reach out for 2nd and 3rd tier-cities. Regardless of the operating structure, this development method is the best way to achieve a proper expansion While 3rd-tier cities are not target markets for Replay, 2nd-tier cities are now increasing their attractiveness for us and other competitors as these are immature markets. There is an unsuspected amount of purchasing power in these cities. Wealthy people from these cities have had a tendency to travel to neighboring A-tier cities to spend their money: Suzhou/Wuxi/Hangzhou to Shanghai, Tianjin/Dalian/Qingdao to Beijing, etc… Olivier PETRAGALLO - Sales&MKT Regional Manager

33. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA Ways to expand a brand in China How does this work? The exclusive distributor becomes a master franchisee for the principal (and a franchisor for the market), and starts looking for franchisees, usually within a province so as to guarantee high enough a potential to people interested into the venture. The franchisee purchases from the master franchisee a mutually agreed amount of goods, paying a price which is a percentage (in between 42 to 48% of the retail price fixed by the franchisor). There are a serie of rules (the ones that applies to the distributor) at several levels of the operation, from fit-out of the store to goods display. Olivier PETRAGALLO - Sales&MKT Regional Manager

34. REPLAY – DEVELOPING AN INTERNATIONAL FASHION BRAND IN CHINA THANK YOU OPETRAGALLO@REPLAYHK.COM.HK Olivier PETRAGALLO - Sales&MKT Regional Manager