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The State of the Fashion Market in China

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Fashion Market in China Sami Muneer, SAP INTE RNA L


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China Luxury Market •  Growth, Demographics, Archetypes The Retail Challenge in China The Role of the Internet in Luxury Shopping in China Ecommerce Players So What? ©  SAP AG 2010. All rights reserved. / Page 2


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Growth of the China Luxury Market ©  SAP AG 2010. All rights reserved. / Page 3


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Luxury Segment* is Growing Driven by 3 Factors 1.  Wealth Increase Within largest cities Rapid urbanization in new areas 2.  First-hand Experience Overseas travel Local stores 3.  Access to Information Internet: social forums, editorials 15% online purchase in 2011 ($2.5B) Source: McKinsey, 2011 World Luxury Association Blue Book ©  SAP AG 2010. All rights reserved. / Page 4


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Driven by Wealthy and Upper Middle Class Spending is Concentrated in Top 5M Households Luxury Goods Consumption by Income Class* (RMB, US$ = 6.3RMB) 80 B > 1 MM (700K households; 20% growth) Ø 200K- 1MM (4MM households; 15% growth) Ø 100K-200K (13 MM household; fastest growth) 26% 50% 12% 2010 180 B 33% 40% Wealthy Growing number residents in lower-tier cities 22% Upper Middle Class Stretch budgets for occasional purchase 2015 Source: McKinsey, BCG *% don’t add to 100% due to other small segments ©  SAP AG 2010. All rights reserved. / Page 5 Very Wealthy Own assets greater than 10MM RMB Well-traveled


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But the Very Wealthy Travel and Spend There 60% of Luxury Spend is Overseas Luxury Goods Spend Bln RMB, 2010 (% CAGR) 25% Overseas (38% CAGR) 40% China (27% CAGR) 35% HK & Macau (45% CAGR) Drivers for Overseas Spend •  Higher prices on mainland •  Increased overseas travel by the wealthy •  RMB appreciation 212 Bln Total Source: McKinsey, 2011 World Luxury Association Blue Book, Bain Survey of 2000 consumers ©  SAP AG 2010. All rights reserved. / Page 6


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Most Local Spend is on Accessories, Cosmetics 70% of Mainland Purchase Source: Bain & Co. ©  SAP AG 2010. All rights reserved. / Page 7


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Growth of the China Luxury Market 1.  Market is growing 2.  Most shopping by the wealthy is overseas 3.  70% of luxury shopping on mainland is accessories, cosmetics ©  SAP AG 2010. All rights reserved. / Page 8


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Demographics and Archetypes ©  SAP AG 2010. All rights reserved. / Page 9


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China’s Luxury Consumer is Young Almost Half under 35 China: % of luxury shoppers under 45 (and under 35) US: % of luxury shoppers under 45 (and under 35) 73% 50% 60% Under 35 Trading Up: 35% traded up to more expensive brands last 2 years Seeking New Experiences: Spending on luxury services (spas, wellness, etc.) growing faster than that on luxury goods ©  SAP AG 2010. All rights reserved. / Page 10 55%


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2 Categories of the Young Population Impulsive “Yu Guang Zu” and Tech Savvy China Population Structure in 2010 60% of consumers buying foreign brand perfumes are under 34 25% 400MM Ages 15-24 35% Ages 25-34 Source: Accenture ©  SAP AG 2010. All rights reserved. / Page 11


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Growth of Mid and High-End Brands Influence of The Post-1980’s and Post-1990s Post 1980s Post 1990s Fast growth Fashion and TechSavvy More outdoor activities requiring “right” outfits ©  SAP AG 2010. All rights reserved. / Page 12 Born after “Cultural Revolution” Good jobs Sense of optimism


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Emergence of 3 New Archetypes Differing Emphasis on Luxury Household Distribution and Luxury Goods Consumption by Archetype 1% 3% 20% 45% Role Models: Shape fashion trends 5% Fanatics: Strong influence on consumers; online influence 40% 65% Core Buyers: Spends 12-20% of income on luxury goods (US$ 3K – 9K annually) 22% Middle Class Aspirants: Infrequent buyers, cautious spenders 51% 10% % luxury households Source: McKinsey, BCG ©  SAP AG 2010. All rights reserved. / Page 13 % luxury consumption


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Role Models (20% Spend) Rich, Young and Fashionable Socio-Income Profile: Corporate executives or self-employed Lives in Shanghai and Beijing Studied or worked overseas Buying Behavior: 10% of disposable income on luxury Most buying for at least 5 years Spontaneous Why they Buy: Feel unique rather than display wealth To indulge themselves What they Care About: Good service in stores is important Prefers to shop outside China ©  SAP AG 2010. All rights reserved. / Page 14


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Fashion Fanatics (5% Spend) Not Rich, But Researches and Spends More Socio-Income Profile: Earns $15K – 30K Incomes rising steadily Buying Behavior: 40% of disposable income on luxury Spends most free time on fashion trends Will buy on credit to be on cutting edge Why they Buy: Social acknowledgement of purchase Strong influence on others, sharing purchases and opinions online What they Care About: Planning and research: window shopping, online, editorials, celebrities, friends Cares less about store service ©  SAP AG 2010. All rights reserved. / Page 15


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Middle Class Aspirants (10% Spend) Occasional and Cautious Shopper Socio-Income Profile: Earns $9K – 30K Mid-level position in local or multinational Lives in Tier 2 or Tier 3 cities Buying Behavior: 9% of disposable income on luxury Less knowledge & experience Considerable research (2-3 months) Why they Buy: Aspire to higher social circles; feel successful Stand out from the crowd What they Care About: Price (hence fine with local brands) ©  SAP AG 2010. All rights reserved. / Page 16


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Top 5 Brands Account for 50% Sales Many Consumers Not Aware of Other Brands ©  SAP AG 2010. All rights reserved. / Page 17


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Demographics and Archetypes 1.  Young consumers are vital and relate to more and varied (price) brands 2.  Role Models primary shop overseas 3.  Fashion Fanatics should be targeted for adoption/promotion – they will attract the Aspirants ©  SAP AG 2010. All rights reserved. / Page 18


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The Retail Challenge ©  SAP AG 2010. All rights reserved. / Page 19


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36 Cities Constitute 75% of Luxury Market But This Will Change with Emerging Cities Other 620 cities BUT INCOME DISTRIBUTION WILL CHANGE TODAY 75% of luxury market captured by top 36 cities Breakdown within the top 36 cities 32% 25 developed cities2 25% 75% 120 100 80 60 40 40% 9 large markets1 Top 36 cities Distribution of Upper Middle Class 10% 85% 30% 65% 20 0 2010 2020 1.  Chongqing, Dongguan, Foshan, Guangzhou, Hangzhou, Nanjing, Shenzen, Tianjin, Wenzhou 2.  Includes cities as Xian, Taiyuan, Yantao Source: McKinsey, BCG, Reuters ©  SAP AG 2010. All rights reserved. / Page 20 28% 2 mega cities Next 300 Cities Top 100 Cities


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Retail Stores Need to Catch Up Particularly Difficult for Those W/ No Presence 57 Difference in Retail Presence between China and Japan 45 Hermes Example Brands with No Presence ©  SAP AG 2010. All rights reserved. / Page 21 Louis Vuitton ‘00s Chanel 8 ‘000s USA China 70 20 Benetton China 38 20 ‘00s Difference in Retail Presence between China and USA Japan 50 Zara Gap 5


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But Brands Need to Strike a Balance Between Growth and Exclusive Experience Source: Bain & Co. ©  SAP AG 2010. All rights reserved. / Page 22


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The Brand Experience Matters The Brands Differentiate on This Factor Haute Couture Designer Akris, Burberry Premium Market Ralph Lauren, Boss, Seven Commercial ©  SAP AG 2010. All rights reserved. / Page 23 Armani, Gucci, Prada Upper Premium Market Source: h&p Dior, Gaultier Marco Polo Luxury Market


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Difference in Exclusivity and Presentation Such Focus is Slowing Store Growth in China ©  SAP AG 2010. All rights reserved. / Page 24


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Exceptional Service In-Store Matters Primary Driver for Buying Decision in China Relative Importance in Buying Decision for Luxury Apparel 7% Activities In-Store Direct Marketing 13% •  Evaluated product Traditional Media 14% Word-of-Mouth 21% Internet Source: McKinsey, BCG ©  SAP AG 2010. All rights reserved. / Page 25 44% In-Store •  Spoke to salesperson •  Window shopping •  Read catalog


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Need to Position to Emerging Emotional States in China And be Perceived as Such Pursue Success and Status Professional Achievement, Social Status 60-70% of consumers relate More pronounced in high-tier cities Be Trendy (Female) or Stand Out (Male) Visible and Edgy More females skew toward being expressive More in high-tier cities Be Classic (Female) or Blend In (Male) Be comfortable More males skew toward laid-back Balanced Lifestyle/ Laid-Back Spend more on leisure and fun, “enjoy life” More pronounced in lower-tier cities ©  SAP AG 2010. All rights reserved. / Page 26


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The Retail Challenge 1.  Brands need insight of consumers in emerging cities 2.  Particularly difficult for many brands not yet in market (note: not haute couture) 3.  Need to position and be perceived to right emotional state 4.  Underscores need of influencers to shape perception ©  SAP AG 2010. All rights reserved. / Page 27


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The Role of Internet ©  SAP AG 2010. All rights reserved. / Page 28


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Role of Internet in Creating Awareness Unique Circumstances 21% •  25% of e-commerce demand for products not found in physical stores •  Country size limits the coverage of physical retailers. •  For many consumers, especially younger ones, first contact with a brand or type of product is online Internet 10% Brand’s website 43% Checked reviews online 52% Saw an ad Factors driving first awareness of brand online ©  SAP AG 2010. All rights reserved. / Page 29 •  Most shoppers start their search within Taobao (80% of 2010 volume) •  Taobao.com blocks the spider of the top search engine, Baidu.com •  Shoppers do not rely on search engine as in other countries •  Beyond discounts •  Uniqueness, convenience, fun of the discovery process


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Frequent Online Research but Fewer will Buy Rather Buy In-Store BUT They search often Frequency of online search for luxury brands Most will not buy online Intent of purchase 22% Will consider buying 43% Will NOT buy Better deal Easier for comparisons Less time consuming Authenticity concerns After-sales service, returns Payment security Note: online purchase higher for other items Source: KPMG study of 1300 respondents ©  SAP AG 2010. All rights reserved. / Page 30


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Importance of Social Reviews Due to Distrust of Merchants Due to consumer wariness and distrust of merchants 52% Visits official brand websites 19% Importance of social reviews and “opinion leaders” 20% Read or posted reviews 43% 0 10 China US, Europe Source: McKinsey, BCG ©  SAP AG 2010. All rights reserved. / Page 31 20 30 40 50 60 •  Bulletin-board services (BBS) •  Social networking sites e.g. RenRen, Youku, Kaixin •  3rd party review sites on Sina •  Media firms (CIC) that aggregate comments •  Brand sites with BBS


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Consumer-Generated Content Effective In Influencing Brand Choice Source: KPMG study of 1300 respondents ©  SAP AG 2010. All rights reserved. / Page 32


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Digital Platforms Getting Crowded But Emphasis on Social Media Attributes Burberry on Kaixin Lancome App on iPhone ©  SAP AG 2010. All rights reserved. / Page 33 Coach on Ren-Ren Bottega Veneta on Weibo


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Mobile Apps in Infancy For Search and Shopping of Lifestyle Purchases 120 100 80 60 40 20 0 Source: KPMG, AdChina ©  SAP AG 2010. All rights reserved. / Page 34 17% 5% % consumers using mobile to search % consumers using mobile to shop


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The Role of Internet 1.  Chinese spend considerable time on research 2.  They depend on social influencers for brand awareness, education 3.  But will not necessarily purchase high-end luxury items online 4.  Mobile is in its infancy for luxury shopping 5.  Social app attributes are key ©  SAP AG 2010. All rights reserved. / Page 35


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The Role of Chinese E-Commerce Players ©  SAP AG 2010. All rights reserved. / Page 36


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Fashion Brands Differ in their Online Sites On Presentation, Vividness and Information Vividness   Interactiv e   social share/ likes   own online Faceboo communit k page   y   Catalog (pricing info)   Brands   Tie r   Online Store Shoppin availabilit g   y   Zoom-in Design Christian Dior   1   No   Yes   No   Yes   No   No   Gaultier   1   Yes   No   No   Yes   No   Yes   Chanel   1   No   Yes   No   Yes   No   No   Versace   1   No   Yes   Yes   Yes   No   No   Armani   2   Yes   Yes   Yes   Yes   No   Yes   Yes   Gucci   2   Yes   Yes   Yes   Yes   Personal Likes   Prada   2   Yes   Yes   No   Yes   No   Yes   Fendi   2   Yes   Yes   Yes   Yes   Personal Likes   No   Dolce & Gabbanna   2   Yes   Yes   Yes   Yes   No   Yes   Burberry   3   Yes   Yes   Yes   Yes   No   Yes   Louis Vuitton   3   Yes   Yes   Yes   Yes   No   Yes   Boss   3   Yes   Yes   Yes   Yes   No   Yes   Calvin Klein   3   Yes   Yes   Yes   Yes   No   Yes   ©  SAP AG 2010. All rights reserved. /3   Page 37 Yes   Ralph Lauren   Yes   Yes   Yes   No   Yes  


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Yet E-tailers Attract Consumers in China Brands Creating Stores on Sites as Taobao LEADING CHANNEL MONO BRAND Own Site MULTI-BRAND Partner Taobao Glamour Sales Major brands as Armani, Bally $60Bln transactions 500k+ members Description Own ecommerce site, add-ons to corporate Brand site with own domain name + “Powered by Yoox” Brands establishing official sites for presentation Purpose/ Operations Marketing and consumer education Yoox offers ecommerce solution; same price, products Penetration ©  SAP AG 2010. All rights reserved. / Page 38 Promotions targeting priceconscious Event-driven promotions and limited inventory


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The Top 2 has 40% Market Share Taobao Mall and 360Buy ©  SAP AG 2010. All rights reserved. / Page 39


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And They Are Sticky Leading to Growth of over 30% for Leaders Other luxury segment players include: •  VIP Store: 500 luxury brand partnerships •  360 Fashion: social media news, new brands, integration to social platforms ©  SAP AG 2010. All rights reserved. / Page 40


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Global Internet Players Have Failed While Other Global Brands have Succeeded Internet companies struggled in China failed to failed to Retail BUT failed to Electronics Consumer Goods Autos Examples of companies tremendously successful in China failed to ©  SAP AG 2010. All rights reserved. / Page 41


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Different Social Networks ©  SAP AG 2010. All rights reserved. / Page 42


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The Role of Chinese E-Commerce Players 1.  Multi-label e-tailers are primary access points to consumers 2.  They are sticky and growing 3.  While foreign companies in other industries have succeeded in China, internet companies have failed ©  SAP AG 2010. All rights reserved. / Page 43


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Summary SO WHAT? ©  SAP AG 2010. All rights reserved. / Page 44


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Focus on the Entire Evaluation Process Touch Points Takes 2-3 Months for Chinese Consumer Brand Advertising Endorsements (celebrities) Editorial Stylists Social (friends, family) Awareness Info Search Evaluation of Alternatives Window shopping In-Store experiences Price, Avail. & Purchase Sensorial-rich mediated environment Mono-label Stores: Armani, Burberry PostEvaluation High-End Retailer: Neiman Marcus E-Tailers Time ©  SAP AG 2010. All rights reserved. / Page 45 Focus and Motivate Key Influencers;


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Examples of Growing Sites Awareness ! Decision Net-A-Porter: Comprehensive • Catalogs and shopping by designer, • What’s new, • Editorial • Many countries Asos: Engaging (1.6M fb likes) • Virtual wardrobes with tags to share, competitions • daily deals, marketplace for vintage • editorial; community reviews • inventory check from other sites, own labels • Mobile, iPad, PC ©  SAP AG 2010. All rights reserved. / Page 46


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New Start-Ups Focused on Influencers: Stylists Boutine: New Incentive Model • Financial ncentives for “stylists” to sell items via virtual catalogs • Focused on emerging designers who post items Stylist Pick: Professional Stylists • Popular stylist consultants and handbag/shoes • Fixed price • Own label ©  SAP AG 2010. All rights reserved. / Page 47


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Summary Target and Position to Consider TARGET Young Consumers Brand Education of Middle Class ©  SAP AG 2010. All rights reserved. / Page 48 POSITION Multi-Tier Brands Tier-2 and Tier-3 Cities Influencers as Fashion Fanatics Engagement Social Guidance: Awareness ! Purchase TEST NONCHINESE MARKETS FIRST


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