2015 China Luxury Market Study

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent2015 China Luxury Market trendsCan it rebound?Jan 20, 2016 This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent2SHA160120_China luxury report 201 ...Source: Bain analysis Executive summaryIn 2015, the China luxury market declined ~2% to ~113 billion RMB, impacted mostly by the slowdown in watches, men’s wear and leather goods; North and Northeast regions were most impactedLFL store sales and traffic continued to decline, even among newly introduced brands, prompting store closures, cautious network expansion and increased focus on revamping core store networksOn the mainland, shopping malls and department store traffic continued to decline while the number of outlet malls continued to grow; overseas purchase destinations shifted: Japan, Korea (except during the MERS virus crisis), the eurozone and Australia grew strongly while Hong Kong and Macau shrank significantly; the Daigou market declined due to brands’ efforts to close price gaps, tightening of government controls and emerging cross-border e-commerce salesGrowing customer digital engagement continued and brands continue to increase their digital marketing budget; several brands are experimenting with online channels (brand.com or third-party platforms), but overall full-price e-commerce business for brands remains small (except for cosmetics)Customers’ growing individualism continued the trend toward fashion and exclusivity; smaller,fashion-orientated brands are still gaining popularity; meanwhile, luxury experience spending continued to increaseOutlook for 2016: No major changes are expected in the macro environment while the rising middle class becomes more sophisticated and knowledgeable about luxury; overseas channels will likely stabilize (and Daigou will decline) while expansion of global pricing by leading brands and the government efforts to localize consumption will spur domestic growthGlobal pricing, as a key reaction to increasing parallel channels and overseas purchases, was started by Chanel and gradually adopted by several brands1234567Trend continued and amplified from 2014 New trend in 2015 This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent3SHA160120_China luxury report 201 ...020406080100%2015WatchesCosmetics,perfume andpersonal careSuitcases andhandbagsMen's wearJewelryShoesWomen's wearAccessories~RMB 113BCAGRCAGRCAGR2015 Mainland China luxurymarket by category (RMB B)-11%10%5%-1%5%8%10%8%(12–13)2%-13%7%0%-10%2%8%11%0%(13–14)-1%-10%5%-5%-12%7%2%10%-6%(14–15E)-2%Note: Only include purchase conducted by Mainland Chinese living in mainland China, exclude HK, Macau, Taiwan Chinese and other foreigners who live in China; Only premium cosmetics are considered luxury goods in the cosmetics categorySources: Brand interviews; lit research; Bain analysis Overall, the mainland China luxury market continued to decline in 2015 by ~2 %, to 113BRMB• Market deceleration amplified:- Rebasing from anti-corruption and anti-gifting not over yet- Significant impact from economic slowdown and stock market crash in Q2/Q3• Continued rebalancing between male and female - Cosmetics, women’s wear and jewelry continued to lead the growth in 2015 - Men’s wear and watches continued to decline1 This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent4SHA160120_China luxury report 201 ...Geographic disparity continued; North/Northeast regions struggled while East outperformed • Generally North/Northeast China suffered more on luxury mostly due to: - Higher impact from anti-corruption rebasing due to prior higher dependence on business gifting- Oversupply of shopping malls in some cities such as Shenyang brought in more competition for foot traffic, forcing brands to redistribute their footprint - Local economic slowdown- Strong competition from neighboring tourism destinations—for example, Japan and Korea• Beijing is holding up better than the rest of the north and northeast regionsNORTH/NORTHEAST • Performance varies among brands• Key cities in the west such as Chengdu and Chongqing have been growing in importance for major brands due to fast-growing local economies and strong local purchasing power • East (especially Shanghai) is the biggest winner this year in luxury performance- Less rebasing from anti-gifting- Stronger up-and-coming middle classWEST AND SOUTH EASTSource: Bain analysis 1 This information is confidential and was prepared by Bain & Company solely for the use of our client; it is