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INTERNAL
Fashion Market in China
Sami Muneer, SAP

©  SAP AG 2010. All rights reserved. / Page 2
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?

Growth of the
China Luxury Market

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
Source: McKinsey, 2011 World Luxury Association Blue Book
15% online
purchase in
2011
($2.5B)

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

But the Very Wealthy Travel and Spend There
60% of Luxury Spend is Overseas
Luxury Goods Spend
Bln RMB, 2010 (% CAGR)
40%
China
(27% CAGR)
35%
HK & Macau
(45% CAGR)
25%
Overseas
(38% 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

Most Local Spend is on Accessories, Cosmetics
70% of Mainland Purchase
Source: Bain & Co.

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

Demographics and
Archetypes

China’s Luxury Consumer is Young
Almost Half under 35
73% 50%
60% 55%
China: % of luxury shoppers under 45
(and under 35)
US: % of luxury shoppers under 45
(and under 35)
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

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

Growth of Mid and High-End Brands
Influence of The Post-1980’s and Post-1990s
Post 1980s
Born after “Cultural
Revolution”
Good jobs
Sense of optimism
Post 1990s
Fast growth
Fashion and Tech-
Savvy
More outdoor
activities requiring
“right” outfits

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

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

Fashion Fanatics (5% Spend)
Not Rich, But Researches and Spends More
Earns $15K – 30K
Incomes rising steadily
Buying Behavior:
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
Planning and research: window shopping,
online, editorials, celebrities, friends
Cares less about store service

Middle Class Aspirants (10% Spend)
Occasional and Cautious Shopper
Earns $9K – 30K
Mid-level position in local or multinational
Lives in Tier 2 or Tier 3 cities
Buying Behavior:
Less knowledge & experience
Considerable research (2-3 months)
Why they Buy:
Aspire to higher social circles; feel successful
Stand out from the crowd
Price (hence fine with local brands)

Top 5 Brands Account for 50% Sales
Many Consumers Not Aware of Other Brands

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

The Retail Challenge

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

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

But Brands Need to Strike a Balance
Between Growth and Exclusive Experience
Source: Bain & Co.

The Brand Experience Matters
The Brands Differentiate on This Factor
Commercial
Premium
Market
Upper Premium
Market
Designer
Haute
Couture
Marco Polo
Ralph Lauren,
Boss, Seven
Akris, Burberry
Armani, Gucci,
Prada
Dior, Gaultier
Luxury
Market
Source: h&p

Difference in Exclusivity and Presentation
Such Focus is Slowing Store Growth in China

Exceptional Service In-Store Matters
Primary Driver for Buying Decision in China
44%
In-Store
14%
Word-of-Mouth
21%
Internet
13%
Traditional
Media
7%
Direct
Marketing
Activities In-Store
•  Evaluated product
•  Spoke to salesperson
•  Window shopping
•  Read catalog
Relative Importance in Buying Decision
for Luxury Apparel

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
Balanced Lifestyle/ Laid-Back
Spend more on leisure and fun, “enjoy life”
More pronounced in lower-tier cities
Be Classic (Female)
or Blend In (Male)
Be comfortable
More males skew
toward laid-back
Be Trendy (Female) or
Stand Out (Male)
Visible and Edgy
More females skew
toward being
expressive
More in high-tier cities

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

The Role of Internet

Role of Internet in Creating Awareness
Unique Circumstances
21%
Internet
52%
Saw an ad43%
Checked
reviews
online
10%
Brand’s
website
•  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
•  Most shoppers start their search within
Taobao (80% of 2010 volume)
•  Taobao.com blocks the spider of the
top search engine,
•  Shoppers do not rely on search engine
as in other countries
•  Beyond discounts
•  Uniqueness, convenience, fun of the
discovery process
Factors driving first
awareness of brand online

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

Importance of Social Reviews
Due to Distrust of Merchants
0 10 20 30 40 50 60
43%
Read or
posted
reviews
20%
52%
19%
Visits official
brand
websites
US, Europe
China
Due to consumer wariness
and distrust of merchants
Importance of social
reviews and “opinion
leaders”
•  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

Consumer-Generated Content Effective
In Influencing Brand Choice
Source: KPMG study of 1300 respondents

Digital Platforms Getting Crowded
But Emphasis on Social Media Attributes
Burberry on Kaixin Coach on Ren-Ren
Lancome App on
iPhone
Bottega Veneta on Weibo

Mobile Apps in Infancy
For Search and Shopping of Lifestyle Purchases
Source: KPMG, AdChina
0
20
40
60
80
100
120
% consumers
using mobile to
search
% consumers
using mobile to
shop
17% 5%

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

The Role of Chinese
E-Commerce Players

Fashion Brands Differ in their Online Sites
On Presentation, Vividness and Information
Brands

Tie
r

Online
Shoppin
g

Store
availabilit
y

Vividness

Interactiv
e
social
share/
likes

Faceboo
k page

own
online
communit
y

Catalog
(pricing
info)
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

Gucci
2
Yes
Yes
Yes
Yes

Personal
Likes
Yes

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

Ralph Lauren
3
Yes
Yes
Yes
Yes
No
Yes

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

The Top 2 has 40% Market Share
Taobao Mall and 360Buy

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

Examples of companies
tremendously successful in China
Autos
Consumer
Goods
RetailElectronicsGlobal Internet Players Have Failed
While Other Global Brands have Succeeded
Internet companies
struggled in China
failed to
failed to
BUT
failed to
failed to

Different Social Networks

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

Summary
SO WHAT?

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

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

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

Summary
Target and Position to Consider
Young
Consumers
Multi-Tier
Brands
Brand
Education of
Middle Class
Tier-2 and
Tier-3 Cities
Engagement
TEST NON-
CHINESE
MARKETS
FIRST
Social
Guidance:
Awareness !
Purchase
Influencers as
Fashion
Fanatics
TARGET POSITION

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