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Impact of the Recession on the Luxury Goods Market According to our most recent survey, the global recession is having an adverse impact on the sale of luxury goods in Japan, the largest luxury goods market in the world. This study highlights the impact and steps luxury brands are taking to combat this trend

Fall 2008

| Copyright © 2008 Grail Research, a division of Integreon 2

Impact of the Recession on the Luxury Goods Market Executive Summary

Impact of Global Recession

The luxury goods market in Japan has traditionally been impervious to recession. However, now, there are signs indicating a slowdown

• 74% of the Japanese consumers think that there will be an economic slowdown

• 51% plan to spend less on luxury goods in the next 6 months than they did in the previous 6 months

To minimize the impact, luxury brands are

• Focusing on emerging markets such as BRIC

• Expanding into alternative channels such as m-commerce, e-commerce

• Shifting production to low cost markets

• Targeting new customer segments

Strategies Undertaken by Brands to Fight Recession

Market Overview Japan accounts for 41% of the worldwide luxury

goods market In Japan, luxury shopping is considered a social

occasion and the motive behind the purchase is to celebrate an event

Louis Vuitton is the most preferred brand, followed by Burberry and Gucci


Market Size • Over 30 MM consumers of luxury brands, accounting for 25% of the total population • “The breadth and diversity of luxury brands here is incomparable to anywhere else”

– W. David Marx, Japanese Consumer-Market Analyst, Diamond Agency, 2007 Drivers

• Preferred mode to demonstrate wealth, as traditional means (e.g. apartments) are small and expensive • Conformity and ‘fitting in’ culture drive the majority of consumers towards the few popular brands • New purchases driven mainly by entertainment / celebratory purposes; considered a social event • Department stores are preferred channel due to personalized customer service (despite higher prices)

Top Brands • 94% of Japanese women in their 20s own a Louis Vuitton handbag; 92% own products from Gucci,

more than 58% own a Prada item and over 51% possess a product with a Chanel label on it

Japan is the leading market for luxury brands in the world; Louis Vuitton is the most preferred brand

Most Preferred Brands in Japan1, 2008 (Percent) Global Luxury Brands Market Share by Country, 2006

Note: 1 Question - Think about the most recent occasion in which you purchased luxury branded clothing or accessories. What brand of luxury clothing or accessories did you buy at that occasion?”; Grail Analysis sample size n = 304 Source: Japan External Trade Organization (JETRO); Business Standard, May 2007; JapanInc., August 2008; Grail Research Survey on Luxury Brands, September 2008

Louis Vuitton

20% Burberry Gucci

Prada

Chanel D&G

Others

Japan 41%

US 17%

Europe 16%

China 12%

Others 14% 23%

13%

7% 6%

4% 27%

Impact of the Recession on the Luxury Goods Market Market Facts – Japan


Impact of the Recession on the Luxury Goods Market Market Decline in Japan (1/2)

Housewives and working women in their 30s and 40s who have a lot of disposable income are beginning to hold back on buying luxury brands, with which they previously rewarded themselves at times, because they are conscious of the current tough economic environment – Yasuhiko Hashimoto, Section Chief, Ginza Store, 2008 As Japan's economy heads toward recession and its stock market hovers around a 5-year-low, shoppers are closing their wallets, and the impact on European fashion houses has been dramatic – Reuters, October 2008

“ ” Note: 1Question - “What is your perception of the current economic environment in the next 6 months?”; 2Question - “How do you expect your purchases of luxury goods will change in the next 6 months?”); Grail Analysis sample size n = 304 Source: The Nikkei Weekly (Japan), June 2008; Grail Research Survey on Luxury Brands, September 2008

0%

15%

30%

45%

60%

51% 44%

5% 0%

20%

40%

60%

80%

22%

74%

5% Plan to spend more

money Plan to spend same

amount of money Plan to spend less

money

Perception of Current Economic Environment1 Consumers’ Expectations for Luxury Goods Spending – Next 6 Months Compared to Last 6 Months2

Despite the general belief that the luxury market is recession-proof, a recent Grail Research survey found signs indicating a slowdown in consumer spending on luxury goods in Japan

Economy will slowdown

Economy will stay the same

Economy will improve


Impact of the Recession on the Luxury Goods Market Market Decline in Japan (2/2)

Global recession impact on luxury brands

• LVMH: Witnessed a decline in sales by 6% in H12008

• Salvatore Ferragamo: Slashed prices in 2008 of 42 items by 7%-10% for the first time since the brand started operations in Japan

• Chanel: Held a month long sale of clothes and other items in July 2008

• Bally1: Slashed prices of some products by up to 20% in July 2008

• Osaka2: Reported a 9% y-o-y drop in revenue of 7 overseas brand shops in 2007

Other factors contributing to the decline in luxury sales are income stagnation and an aging population

Note: 1 Bally is a Swiss luxury brand; 2 Osaka is a luxury department store in Japan Source: The Daily Yomiuri (Tokyo), July 2008; Women’s Wear Daily, July 2008; The Economist, September 2008; JapanInc., August 2008

The global recession and other factors specific to the Japanese market are already affecting luxury brand sales


New Customer Segments

New Channels

Impact of the Recession on the Luxury Goods Market Businesses are Adapting to Cope with the Slowdown

Low Cost Markets Emerging Market Focus


Impact of the Recession on the Luxury Goods Market Strategy #1: Emerging Market Focus

Luxury brands are moving towards emerging markets to offset the slowdown in sales in more mature markets

Source: Ermenegildo Zegna Press Release, April 2008; India Business Insight, December 2007; The International Herald Tribune, September 2008; The Economic Times, September 2007; ‘Luxury Brands in China’, KPMG, 2007

Russia

Brazil

India

China

China, currently the 4th largest luxury goods market, is expected to become the 2nd largest market (after Japan) for luxury goods in 2015, with a 29% market share

• Cartier: Opening 6 new stores in Q4 2008, bringing the total to 28

• Burberry: Intends to have 100 stores in the next three years, up from the current 35

In 2009, Russia is expected to account for 7% of the global luxury goods market

• Burberry: Opened a store in Moscow in May 2008, bringing the total to 5

• Giorgio Armani, Bulgari and Prada: Opening stores with the help of local partners (e.g. Mercury, which owns the TSUM department store) to better understand the pulse of the local people

In 2007, the luxury goods market in Brazil grew by 17% and is expected to continue to grow at an annual rate of 20% • Ermenegildo Zegna: Opened its first

flagship store in Sao Paulo in April 2008

The size of the luxury market in India is expected to reach USD 30 Bn by 2015, up from USD 3.5 Bn in 2007

• Louis Vuitton: Plans to open 25 new outlets and launch a PE fund (worth approximately USD 600MM) to make investments in retail chains and brands


Impact of the Recession on the Luxury Goods Market Strategy #2: New Channels Recently, luxury brands have experimented with alternative channels to reach customers

e-Commerce m-Commerce

Luxury brands, which have been late adopters of e-commerce, are aggressively opening online stores • In 2008, Cartier announced the start of online shopping

in Japan • In 2007, Louis Vuitton started online sales by launching

an e-commerce option on its Japanese website “I think eventually every company that runs stores will have

e-commerce. Whatever the initial fears or reluctance, people are embracing it. It doesn't harm the brand in any way, and it's also very profitable“ - Mark Lee, CEO, Gucci

20% of Japanese consumers report purchasing more luxury goods using the Internet in the last year

Note: 1Question - “How have your shopping habits for luxury goods changed over the last year?; Grail Analysis sample size n = 304 Source: Japan External Trade Organization (JETRO); JapanMarketingNews; Grail Research Survey on Luxury Brands, September 2008; Lux Research Japan, July 2008

Luxury brands are incorporating QR codes in their mailers, ads and stores to encourage purchase • Quick response (QR) codes are images that shoppers

can scan and download through their camera phone to obtain more information about products or make purchases via their mobile phone

• Gucci and Ralph Lauren have been using QR codes in Japan, with the latter being the first to launch them in the US in August 2008

Cartier introduced mobile advertising through GQ and Glamour mobizines (small version of magazines that can be easily viewed on mobile devices)


Impact of the Recession on the Luxury Goods Market Strategy #3: Low Cost Markets

Source: World Luxury Association (WLA); La Tribune, September 2007; Women’s Wear Daily, December 2007

More structural measures are necessary. European luxury brands will need to start looking at global diversity in manufacturing and sales and general administration costs. – Luca Solca, Senior Research Analyst, European Apparel and Specialty Retailing, Sanford Bernstein, 2008

60% of the world's luxury brands will make their products in China by 2009 due to low manufacturing costs and increasing demand for products • Prada: Started to source and manufacture in Asia,

particularly China, due to unfavorable currency situation

• Burberry: Shifted production of shirts and some other items to China

• Louis Vuitton is considering setting up a shoe factory in Southeast India by the end of 2008. Shoe factories are currently in France, Spain and US

“ ”

Luxury brands are shifting their manufacturing base to emerging countries to leverage the cost advantage of these regions


Impact of the Recession on the Luxury Goods Market Strategy #4: New Customer Segments

Note: 1 Tier 2 cities include capital cities of provinces and cities at provincial level except Beijing, Shanghai, Guangzhou and Shenzhen; 2Tier 3 cities include cities at prefectures level Source: The Economist, September 2008; China Daily, October 2008; China Daily, May 2007

Shifting Focus from the Middle Class to the ‘New Rich’ In Japan, luxury brands are shifting focus from the middle class (considered to be

the major consumers of such goods) to the ‘new rich’ segment • This segment consists of individuals with assets worth Yen 100 MM (~USD

852,100) and engaged in sectors such as information technology, finance and medical services

• The shift is driven by the belief that the middle class spending crumbles during recession

Armani, Bulgari and Gucci opened flagship stores along with restaurants and spas in Tokyo, with the aim of attracting the wealthy from all over Asia

Louis Vuitton sends birthday cakes to its wealthy clients and shows them an exclusive bag (not for sale in shops) made of crocodile skin priced at roughly Yen 6 MM (~USD 58,961)

Opening Stores in Smaller Cities to Target the Growing Affluent Classes Louis Vuitton and Gucci have opened stores in smaller Japanese cities, where

individuals are still lured by the logo Cartier shifted focus from Tier-1 cities (Beijing, Shanghai) to Tier-21 (Nanjing,

Tianjin) and Tier-32 (Zhumadian, Zunyi) cities in China Launching Less Expensive Collections Polo Ralph Lauren announced plans of launching a lower price product range in

J.C. Penney department stores in the US

Luxury brands are polarizing, either targeting the ‘new rich’ segments with highly expensive offerings, or launching more affordable collections to expand their customer base


For More Information Contact:

Grail Research ([email protected])

Copyright © 2008 by Grail Research, a division of Integreon

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of Grail Research, LLC

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