CHINA AND CHINESE CUSTOMERS IN GLOBAL LUXURY GOODS MARKET CLAUDIA D'ARPIZIO FEDERICA LEVATO 19 TH SEPTEMBER 2017
PERSONAL LUXURY GOODS MARKET 2016E: CONSOLIDATING IN THE NEW ERA 85B '96 SORTIE DU TEMPLE 92B 96B '98 '97 170B 173B 167B 159B '07 '10 '08 '06 153B 147B '09 '05 128B 133B 136B 133B 128B '01 '04 '02 '00 '03 108B '99 DEMOCRATIZATION CRISIS '96-'16E CAGR CHINESE BULIMIA 192B '11 218B 224B 212B '14 '13 '12-1% 251B 249B '15 NEW NORMAL '15-16E YoY Current Exch. rate '16E +6% ±0% Constant Exch. rate 2
CHINA REPRESENTS 7% OF THE GLOBAL MARKET, BUT CHINESE ARE ALREADY ~30% OF LUXURY CONSUMERS GLOBAL PERSONAL LUXURY GOODS MARKET (2016E B) BY REGION BY CONSUMER NATIONALITY Rest of World 249B 5% Rest of World 249B ~8% Rest of Asia 13% Other Asian ~10% China 7% Japan 9% Chinese ~30% Americas 33% Japanese ~11% American ~23% Europe 33% European ~19% 2016E 2016E
LUXURY IN CHINA HAS DEVELOPED IMPORTANTLY, MORE RECENTLY SHOWING MORE MATURE DYNAMICS MAINLAND CHINA PERSONAL LUXURY GOODS MARKET (2009-2016E B) @K 10 12 15 15 15 18 17 +16% -2% +4% -2% 2017F + 6/ + 8% 2010 2011 2012 2013 2014 2015 2016E Chinese providing robust impulse to Mainland China, experiencing rebound with healthier local consumption after years of stagnation - Government actively and successfully stimulating 'proper' domestic consumption fighting grey market and increasing customs controls to limit foreign shopping - Locals increasingly preferring to buy luxury in home market mostly driven by lower price differentials, although they are still often on the 20-30% range - Increasing relevance of Chinese middle class, which is on average travelling less abroad vs. current Chinese consumer base - However, wealthy Chinese luxury consumers are still travelling and buying much abroad, also because luxury goods shopping experience at home is less satisfying if compared with their luxury experiences overseas (more limited product assortment, more basic in-store experience and quality of customer service)
CHINA HAS BEEN THE KEY EXPANSION REGION AFTER 2009 FOR BRANDS, NOW RE-ASSESSING THEIR PRESENCE ESTIMATED NUMBER OF RETAIL STORES FOR SELECTED BRANDS (2015) 154 136 Opened in 2015 Opened in 2014 Opened in 2013 Opened in 2012 and before 115 115 111 74 60 60 56 56 According to my information, 20% of Louis Vuitton s stores in China will have disappeared by mid-next year: that is a closing rate of about one store per month, 55 45 44 40 36 36 36 33 30 28 22 Industry expert 22 12 11 2015 opened 2015 closed Armani Coach Hugo Boss Montblanc Dunhill Ferragamo Bally Gucci MK Zegna Burberry Bottega LV Prada Cartier MCM Versace D&G Tiffany Bvlgari Dior Hermes Tory Burch Chanel 7 19 6 1 1 3 0 1 14 0 0 2 1 3 1 4 3 4 4 0 1 0 3 0 4 3 11 0 5 2 3 5 1 4 2 6 4 0 2 1 1 0 0 1 2 1 0 0 Total 78 58 THE AVERAGE NET STORE OPENING PER BRAND WENT FROM 6,7 IN 2013 DOWN TO 3,3 IN 2015
CHINESE PROVIDING NEW IMPULSE AFTER '09, OFFSETTING A SLOWDOWN OF MATURE MARKETS' CONSUMERS GLOBAL PERSONAL LUXURY GOODS BY CONSUMER NATIONALITY ( B) RoW Other Asian Nationality breakdown ~ 8% Chinese Japanese American European ~10% ~30% ~11% ~23% ~19% 1995 2000 2005 2010 2016E GLOBAL PERSONAL LUXURY GOODS SPENDING PATTERNS BY MARKET Luxury goods are bought by Luxury shopping is done Other tourists Regional tourists Locals Locally Americas Europe Asia Japan American European Chinese Japanese
BEING THE UNIQUE MARKET GROWTH DRIVER, RECENTLY REBOUNDING AFTER SLOW DOWN AND INCREASINGLY LOCAL GLOBAL PERSONAL LUXURY GOODS BY CONSUMER NATIONALITY ( B) 2012-2016E EVOLUTION M. CHINA VS. M. CHINESE GLOBAL SPENDING (2016E B) CAGR '12-'16E @K ~2% Total market Real terms trend ~74 In Japan In Americas In Asia Total market excl. Chinese spending ~ -2% 17 Local M. China In Europe In China M. Chinese Total personal luxury goods market slightly contracting in the 2012-16E period if excluding spending of Chinese consumers Chinese consumers' spending reduction in 2016 has led to global market stagnation, but resurgence is ongoing in 2017 with healthier local consumption providing robust impulse to Mainland China
OVER THE COURSE OF ONLY A FEW YEARS THE CHINESE CONSUMER HAS UNDERGONE A PROCESS OF MATURATION LUXURY CONSUMERS PROFILE BY NATIONALITY "Enthusiastic" "Maturing" "Mature" "Detached" ILLUSTRATIVE
CHINESE CONSUMERS HAVE BECOME MORE OPINIONATED AND DEMANDING WHEN IT COMES TO PRODUCTS & STYLE Will you purchase products with visible logos in the future? In the next three years, you tend to buy more fashionable luxury brands with more design elements. Compared with traditional big names you tend to buy more emerging luxury brands in next three years CHINESE CONSUMERS OPTING FOR MORE UNDERSTATED AND NICHE PRODUCTS AND BRANDS, OFTEN PREFERRING CATEGORY SPECIALISTS
QUESTIONING THE LUXURY EQUATION AS THEY SHIFT TO OFF-PRICE Will you increase your spending on luxury in outlets next year? OUTLETS EXPANDING THEIR FOOTPRINTS HIGHLIGHTS Outlet malls were initially limited to mature markets but have now started to grow in China to: - Intercept a more value conscious consumer - Compensate for struggling full-price retail business - Destock the vast retail networks of stores they have been opening However, there is some concern over the longterm growth outlook due to cannibalization of full price sales
7 KEY SEGMENTS TO DESCRIBE WORLDWIDE LUXURY CONSUMERS Conservative I buy it safe Opinionated I know it! Disillusioned I'm so over it! Hedonist I love it! Omnivore I want it all! Wannabe I desire it! Investor It's worthy? I buy it!
CHINESE CONSUMER PROFILE FAST EVOLVING, ALSO THANKS TO NEW WAVE OF CONSUMERS Luxury consumers by cluster REGION, NATIONALITY & SHOPPER TYPE Consumer and consumption patterns evolution Hedonist Disillusioned Investor Conservative 32% 29% Omnivore Opinionated Opinionated Wannabe 17% Conservative 2013 12% Hedonist Omnivore 5% Investor 4 % Wannabe 2 % Disillusioned Omnivore consumers, key original cluster strongly losing share, both due to sophistication (evolution towards Opinionated profile) and to limited 'new blood' Opinionated becoming the first cluster, growing thanks to the new wealthy and intercepting some of the old Omnivore Wannabe major discontinuity element, passing from second-last to second cluster and characterized by the highest growth, propelled by the booming middle class 2020F ILLUSTRATIVE Overall less 'bulimic' approach to consumption of luxury goods - reduction of Omnivore 13-'20 trend ~25% Opinionated ~20% Wannabe ~18% Omnivore ~15% ~15% Hedonist Conservative 5% 2 % Disillusioned Investor More discerning consumers purchasing also other brands (premium or local ones) and other categories (e.g. experiential luxury, art) growth of Opinionated Lower spending per capita and more focused on Accessible brands boom of Wannabe
THIS PROCESS OF MATURATION HAS BEEN "FORCED" BY MULTIPLE ENDOGENOUS AND EXOGENOUS FACTORS 1 OVER-EXPOSURE TO LUXURY 2 DIGITAL AND MOBILE PROLIFERATION 3 SHIFT TO EXPERIENTIAL LUXURY Most luxury brands heavily invested in the Chinese market in the last 10-15 years, opening extensive store networks, thus their presence in China quickly went from being the novelty to the being the norm Luxury exposure has turned omnivore Chinese consumers into more confident, discerning and opinionated luxury connoisseurs, now with a real thirst for newness Digitalization has disrupted the retail industry, and especially China has rapidly become the most advanced retail e-commerce market in the world, characterized by a strong mobile first purchase pattern Luxury goods impacted at a lower scale until now, but online is forecasted to become the preferred way to shop for many new consumers, especially in 2 nd and 3 rd tier cities Changes in social norms together with the "moralization" campaign have started to discourage the purchase and display of luxury goods as social enablers Following the lead of mature markets, also Chinese consumers have started to shift spending from luxury goods to luxury "experiences" (i.e. high end travel, hospitality and F&B)
1 AFTER ~10 YEARS OF COMPULSIVE SHOPPING OF ICONIC PRODUCTS, CHINESE CUSTOMER IS LOOKING FOR SOMETHING NEW AND UNIQUE In the past 80% of sales come from carry-over products, especially in China where consumers have worked through their wish list of iconic and "socially-enabling" products. Now that most of the list has been tickedoff they are craving for something new but equally compelling The 2.55 today and its re-edition Executive, absolute luxury brand Birkin, Kelly and Alma bags Coco Chanel with her 2.55 first launched in 1955
2 DIGITAL INCREASING IMPORTANCE FOR CHINESE CONSUMER ENGAGEMENT & SALES IN LUXURY GOODS CONSUMER ENGAGEMENT Where do you normally get information on luxury goods? E-COMMERCE SHOPPING Has your online spending on luxury goods increased vs last year? BRAND AGGREGATOR SHOPPING Have you purchased items in these luxury department stores/brand retailers? % of respondents VS 2014 Internet & mobile apps Magazine 31% 78% +3% -4% Friends 29% +1% In-store sales 20% -2% TV ads 8% -1% Email 7% -2%
2 AND EXPECTED TO KEEP GROWING SHOWING A HUGE UNTAPPED POTENTIAL ONLINE PERSONAL LUXURY GOODS MARKET BY GEOGRAPHY (2005-2016E B) CAGR +26% CAGR +27% 19,0 ~7% 23% 24% China Asia EMEA 2016E Online penetration 7-8%* 9-10% 5-7% China online market in general is much more developed vs. global average and m-commerce is progressively becoming the standard with a crucial role of mobile payment methods However, online penetration in luxury goods in China is only ~7-8%* in line with global average, showing a huge untapped potential 19% 15% 1,4 66% 2005 *official channels 4,5 13% 24% 63% 2010 46% 2016E Americas 10-12% Luxury brick and mortar penetration is forecasted to decline in favour of online, since the country's size and the increasing dissatisfaction deriving from traditional retail experience will make e- commerce the preferred way to shop for many new consumers, especially in 2 nd and 3 rd tier cities
3 EXPERIENCE GAINING TRACTION OVER PRODUCT IN GLOBAL LUXURY MARKETS GLOBAL LUXURY GOODS MARKETS BY TYPE (2008-2016E B) In-home luxury experiences accelerating on both high quality design and art, the latter increasingly legitimated as alternative investment Out-of-home luxury experiences gaining traction benefiting from the growth of luxury travellers and increasing self-indulgence 22% 12 10 8 Out-of-home luxury experiences Accessible and Aspirational luxury cars Absolute luxury cars Luxury Cars consistently top performing segment, especially on the Absolute segment, fostered by the Chinese market growth despite recent deceleration Luxury toys less dynamic than top cars, still waiting to surf the Chinese wave on Yachts and Jets 6 4 Luxury toys In-home luxury experiences Luxury consumable experiences Luxury goods 2 0 2 4 6 8% '08-'12 CAGR (%) Luxury goods slowing down in recent years after being the fastest growing category Luxury consumable experiences consistently positive fostered by luxury consumers redirecting their spend toward new and more personal high-end cocooning Note: Out-of-home luxury experiences include hotels, cruises and restaurants, luxury toys includes private jets, yachts and Absolute cars, luxury consumable experiences include beauty, wines & spirits and food & beverage, in-home luxury experiences including high quality design and fine art
3 AND CHINESE CONSUMERS ARE THE KEY TARGET FOR FASHION/LUXURY PLAYERS ACROSS ALL CATEGORIES CHINESE PENETRATION OF GLOBAL LUXURY GOODS MARKETS (2016E B) 249 39 438 46 66 183 33 18 7 2 1.081 Real terms trend 25% Share of Chinese spending Personal Luxury Goods Fine art Luxury Cars Luxury Food Luxury Wines & Spirits Luxury Hotellerie High-quality Luxury design Private Jets Luxury Yachts Luxury Cruises Total 2016E
CHINESE LUXURY CONSUMERS WILL EVOLVE AND CONTINUE TO DRIVE FUTURE GROWTH POSITIVE MACROECONOMIC & DEMOGRAPHIC FUNDAMENTALS CONSUMER EXPENDITURE EXPECTED TO KEEP GROWING Despite the recent slowdown in China's economic growth, consumption is expected to grow in line with growing population (+32M people by 2030) and by an overall GDP increase WITHIN AN EVOLVING SOCIO-DEMOGRAPHIC PICTURE NEW WAVE OF YOUNGER MILLENNIAL CONSUMERS (consumers of 25-30ys the prevailing group in next 3-5ys) GROWING URBAN MIDDLE CLASS (5x growth rate vs. total population) WORKING WOMEN CATCHING UP (today already counting for 3/5 of market) INCREASING "INDIVIDUALISM" (traditional family loosing 5 pp share by 2030) A younger and more sophisticated generation of educated, travelers and tech-savvy consumer, with markedly different tastes and consumption habits will dominate the market - Chinese luxury consumers are already younger than their European and American counterparts (avg. 33 years) Enlarging luxury customer base especially at the bottom of the wealth pyramid and in secondary cities - Value-for-money becoming a key purchasing driver due to slow down in Chinese urban disposable income, benefitting both lower-end brands & entry price items Women have become and will continue to be an important rising consumer base in the Chinese luxury goods market as they are catching up with men in the workplace - Women's self consumption trend will drive different performance of categories Shift toward more private, personal purchases and increasing spending on lifestyle and experiential categories Growing interest for real estate investments STRONG CONSUMER BASE EXPANSION AT THE BASE OF THE PYRAMID VS. MORE MATURE HIGH SPENDERS HARDER TO WIN
ENLARGING THE CUSTOMER BASE WITH YOUNGER AND MORE OPINIONATED CONSUMER LUXURY CONSUMERS GROWTH FORECAST BY NATIONALITY AND GENERATION 50M+ New consumers Luxury market mainly boosted by Generation Y and Generation X Generation Y market value almost entirely driven by the Chinese middle class ¾ ca. of total Generations X Y Z Generation X benefitting from a higher luxury spending due to changing consumption habits across regions 2015 2020 Consumer Nationality 2015 2020 Consumer Generation Generation Z approaching the market, although still representing a very small share in 2020 YOUNGER (AND MORE OPINIONATED) CHINESE CONSUMERS WILL BE EVER MORE RELEVANT TO THE GROWTH OF THE LUXURY MARKET
People, Passion, Results!
CLAUDIA D'ARPIZIO, PARTNER BAIN & COMPANY LUXURY GOODS VERTICAL Claudia has spent 23 years advising multinational luxury and fashion clients on everything from strategy and new product development to innovation and organizational change. She is also the lead author of Bain's annual Luxury Study, one of the most cited sources of market information in the luxury industry. In 2009, Claudia was also recognized as one of the Top 25 Consultants in the World by Consulting Magazine. FEDERICA LEVATO, PARTNER BAIN & COMPANY LUXURY GOODS VERTICAL Over the last 12 years, Federica has led more than 200 assignments in the fashion and luxury industry on issues relating to corporate and brand strategy, portfolio management, marketing and communication, and more. Alongside Claudia D Arpizio, Federica is the co-author of Bain s annual Luxury Study, one of the most cited sources of market information in the luxury industry. 18