Deloitte-SECOO CIIE Blue Paper 2019 Analysis of Luxury Goods Consumption in China's Lower-Tier Cities Deloitte-SECOO CIIE Blue Paper 2019

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Deloitte-SECOO CIIE Blue Paper 2019 Analysis of Luxury Goods Consumption in China's Lower-tier Cities Deloitte-SECOO CIIE Blue Paper 2019 | Preface

Preface

After several years of downturns, areas, with consumption being No. e-commerce platforms and social global luxury goods industry has 1 driving force of economic growth platforms, the digital transformation gradually trended upwards since 2017. for five consecutive years. The luxury of luxury goods primarily shows at In recent years, China has played a goods market expands rapidly thanks the enterprise level. In other words, leading role in the growth of global to favourable government policies, the through digital technology, businesses luxury goods market. In 2018, China unleashed consumption potential in should continue to transform and spent $145.7 billion on luxury goods, lower-tier cities and the application decide on end-to-end supply chain, accounting for a whopping 42% of the and promotion of new technologies. In product supply, portfolio structure total global luxury goods market which 2018, online consumption growth rate and customer delivery logistics and to reached about $347 billion. China's of luxury goods in China reached 37%, introduce new customer experience, 2018 spending increased 7% over the accounting for nearly 14% of the total process and system based on new previous year. domestic market. infrastructure that integrates digital technology. As personal income growth rate Luxury brands have scaled up to the exceeds the overall economic growth application stage from the initial digital Our research reveals main trends of rate in China, the income gap keeps transformation phase. In addition to luxury goods consumption in markets narrowing between urban and rural marketing strategy through online across China's lower-tier cities: Deloitte-SECOO CIIE Blue Paper 2019 | Preface

• First-tier cities have the lion's share but • Rejuvenation, male consumers and mobile lower-tier cities catch up fast. In terms of the phone entertainment are the key buzzwords of market scale, luxury goods consumption in first- luxury goods markets across lower-tier cities. and second-tier cities accounts for half of the total As social media continues to showcase brands and market, accounting for 56% but third-tier cities consumer experience continues to be optimized and and below show a strong growth in spending innovated, luxury goods consumption is basking in and purchasing power. According to the online a trend of increasing rejuvenation. Data reveals that consumption data collected by Secoo over the past the number of male consumers has surpassed their year, third-tier cities and below swept the top 10 female counterparts in terms of online purchases spots in all three categories of annual purchase of luxury goods. More than 50% of consumers are frequency, the number of repeat consumers and between the age of 18 and 30. There is a significant three purchases or more. discrepancy in consumption characteristics and daily preferences between luxury goods consumers in lower-tier cities and those in first- and second-tier cities. Among the consumers in lower-tier cities, young males under the age of 30 account for a relatively high proportion that are more willing to pay for such products as men's clothing, men's shoes, 3C digital product and skin care product. Meanwhile, consumers in lower-tier cities have more leisure time for movies, group shopping, and mobile phone entertainment.

For brands, what it takes to succeed in multiple dimensions. Through the toward online channels. Consumers lies in precision marketing through analysis of consumer profiles, the live in first- and second-tier cities, on the digitalized multiple touch points broadcasting platform will emerge contrary, have a relatively diverse and big data-refined customer to be the new battlefields for luxury array of choices, which requires profiles. With rapid growth of luxury brands to further develop young multiple touch points for consumption goods consumption in lower-tier customers and consumer groups process. Therefore, digitalized omni- cities, differentiated strategies for in the lower-tier cities. On the other channels are better equipped to different-tier markets are imperative. hand, as consumers in lower-tier observe purchasing behaviour through On the one hand, big data tools and cities are limited in opportunities to horizontal multiple touch points technologies help luxury brands purchase luxury goods through offline and vertical consumption process target customers more accurately and channels, they are inclined to gravitate coverage, thus achieving precise better refine the customer profiles luxury goods sales and consumer management.

1 造有道智万物 |一、技术趋势

2 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 1: The rise of markets across lower-tier cities

Chapter 1: The rise of markets across lower-tier cities

Luxury consumption market is growing rapidly in China In 2017, China purchased one third of global luxury goods, making it the largest market for luxury goods. In 2018, consumption of luxury goods in China increased 7 percent to reach USD145.7 billion, accounting for 42% of the global luxury goods market of about USD347 billion. Moreover, it is estimated that by 2025, Chinese consumers will purchase more than half of all luxury goods in the world.

Figure1：Luxury goods sales are growing faster in China than elsewhere

60.00%

40.00%

20.00%

0.00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-20.00% Global Asia Pacific North America Western Europe China

Data source: Open Data, Deloitte Research

Figure2：China's proportion of global luxury goods Meanwhile, online sales of luxury goods are also growing consumption (2018) rapidly in China. In 2018, online sales in China reached USD5.3 billion, an increase of about 37% over 2017 and accounted for nearly 14% of the domestic luxury goods market. In 2019, 6% luxury goods e-commerce is experiencing explosive growth 8% as the government continues to introduce various incentive policies for luxury goods e-commerce. In 2019, online sales of 8% China luxury goods are expected to exceed USD7.3 billion in China. 42% US Europe The rapid growth in China's luxury goods market is largely 16% Japan driven by new policies promoting the ﬂow of luxury goods Other Asian consumption back to China home market , by the emergence countries Rest of the of new consumer groups and the continued rise in purchasing 20% world power in 4th- and 5th-tier cities, and by new technology enhancing user experience and precision marketing.

Data source: Open Data, Deloitte Research 3 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 1: The rise of markets across lower-tier cities

1.1 Policy changes promote flow of been introduced so that purchases 2019, import and export tariff rates luxury goods consumption back to of foreign luxury goods consumption were adjusted, with zero tariffs on China will take place inside China as much goods from Hong Kong and Macao. Foreign countries still serve as the as possible to help promote domestic main markets for luxury goods economic growth. Since 2015, the At the same time, luxury brands have purchased by Chinese consumers. State Council has cut tariffs five purposefully implemented more In 2018, luxury goods purchases by times in succession. In addition, the flexible sales policies and pricing Chinese consumers outside China implementation of the Electronic strategies in the Chinese Mainland, grew 64%. This is because average Commerce Law places restrictions on further squeezing the space of prices of products are higher in the purchasing agents – operators who operation for purchasing agents. As Chinese Mainland, 45% higher than in make purchases overseas on behalf of a result, luxury goods consumption Hong Kong, 50% more than in the US customers inside China - and directs has shown signs of flowing back and 70% higher than in France, mostly consumption to flow back to China. to China. In addition, luxury goods due to high tariffs on imported goods. In July 2018, the Chinese government purchases made inside China have cut import tariffs, which dealt a blow gained momentum as luxury goods In recent years, tariff policies designed to the shady channels frequently purchases made overseas have to attract luxury goods imports have employed by purchasing agents. In waned.

Figure3：Policies promoting the ﬂow of luxury goods consumption back to China

Date Policy

June 2015 Cut import tariﬀ rates on commodities including some clothing, shoes and skin care products. Cut import tariﬀs on suits, fur/leather garments, short boots, sports shoes, diapers and skin care product.

January 2016 Expanded commodity tariff cuts. Cut import tariffs through a provisional rate on goods with high tariff rates and a flexible demand including bags, clothing, scarves, blankets, vacuum cups and sunglasses.

January 2017 Adjusted tariffs on jewelry products, with the tariff cut on black pearls to zero, the largest reduction. Adjusted the tariff on musical instruments to 1%. Tariffs on skin care products and men's and women's clothing remained unchanged.

December Adjusted import tariffs on some consumer goods. Cut the average tariff on 187 items from 17.3% to 7.7%. 2017 Reduced tariffs on cosmetics including lipstick, eye shadow and perfume from 10% to 5%. Cut tariffs on luggage products from 20% to 10%, clothing from 14-25% to 5%-10%, and silk and scarf products from 14% to 5%.

July 2018 The average tariff cuts on commodities rose to 55.9%. Cut average tariffs on clothing, shoes, hats, kitchen products and fitness product from 15.9% to 7.1%. Reduced average tariffs on cosmetics including skin care and hairdressing products, as well some medical and health care products, from 8.4% to 2.9%.

January 2019 According to the Electronic Commerce Law, purchasing agents or individuals must have business licenses in the country of purchase and in China and pay tariﬀs in both places. Sellers or platforms violating the regulations can be fined RMB500,000 or RMB2 million respectively. Residents and visitors are allowed an extra allowance at port-of-entry duty-free shops on top of a duty-free allowance of RMB5,000 of goods purchased overseas. But the total amount should not exceed RMB8,000 above which goods will be subject to tariﬀs.

4 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 1: The rise of markets across lower-tier cities

Figure4：Comparison of growth in domestic and overseas luxury goods purchases (2013-2018)

0 2013 2014 2015 2016 2017 2018 -5

Growth of domestic luxury purchases Growth of foreign luxury purchases

Source: Open Data, Deloitte Research

1.2 The rise of markets for luxury goods across lower-tier cities

First-tier markets have large scale, but 3rd-tier markets and below are showing strong purchasing power In terms of market scale, Beijing and Shanghai lead in luxury goods consumption in China. First- and 2nd-tier cities account for 56% of luxury goods consumption. The proportion of consumers in the top ten cities exceeds 35%.

Figure5：China Luxury Goods Consumption by City Tier Figure6：China Luxury Goods Consumption by City

Beijing 9.70% 8% Shanghai 23% 8.40% Chongqing 3.70% 17% Tianjin 2.90% 1st-tier city -1 Chengdu 2.20% 2nd-tier city 3rd-tier city Shenzhen 2.10% 4th-tier city Hangzhou 1.60% 19% 5th-tier city Suzhou 1.60% 33% Guangzhou 1.50% Xi'an 1.40%

Source: Open Data, Deloitte Research

5 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 1: The rise of markets across lower-tier cities

In the meantime, 3rd-tier cities and below have begun to demonstrate strong purchasing power. Data from the Secoo platform from September 2018 and September 2019 reveals: 1)in annual purchase frequency category, 27 of the top 30 cities (approximately 90%) are 3rd-tier cities and below; 2)in repeat purchase category, 29 of the top 30 cities are 3rd-tier cities and below; and 3)in the category of three purchases or more, all of the top 30 cities are 3rd-tier cities and below. Across all three metrics, all of the top 10 cities are 3rd-tier cities and below.

Figure7：

City ranking Annual purchase frequency Repeat purchase 3 purchases or more (% of customers) (% of customers)

No. 1 Kizilsu Kirghiz (Xinjiang) Shihezi (Xinjiang) Shihezi (Xinjiang)

No. 2 Nujiang Lisu (Yunnan) Shannan (Tibet) Lasa (Tibet)

No. 3 Xishuangbanna (Yunnan) Lasa (Tibet) Rikaze (Tibet)

No. 4 Kelamayi (Xinjiang) Nujiang Lisu (Yunnan) Kashgar (Xinjiang)

No. 5 Urumqi (Xinjiang) Rikaze (Tibet) Garze (Tibet)

No. 6 Jiayuguan (Gansu) Changdu (Tibet) Nujiang Lisu (Yunnan)

No. 7 Guiyang (Guizhou) Xishuangbanna (Yunnan) Shannan (Tibet)

No. 8 Lasa (Tibet) Linzhi (Tibet) Xishuangbanna (Yunnan)

No. 9 Kunming (Yunnan) Diqing (Tibet) Kizilsu Kirghiz (Xinjiang)

No. 10 Diqing (Tibet) Garze (Tibet) Changdu (Tibet)

Data source: Secoo

Luxury goods consumption is growing rapidly in 3rd-tier cities and below, with Southwest and North China emerging as a force to reckon with Although the 1st- and 2nd-tier cities account for half the luxury goods market, the growth rate in 3rd-tier cities has surged ahead and even greater development potential has appeared in 4th-tier cities. In 5th-tier cities, the proportion of luxury goods consumers has exceeded 20%. Regions without luxury brand stores have huge room for potential growth.

6 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 1: The rise of markets across lower-tier cities

Figure8：Proportion of online luxury goods consumer and sales growth rates by tier of cities

35.00% 90% 80% 30.00% 70% 25.00% 60% 20.00% 50%

15.00% 40% 30% 10.00% 20% 5.00% 10% 0.00% 0% 1st-tier city 2nd-tier city 3rd-tier city 4th-tier city 5th-tier city

Propotion Growth Rate

Data source: Open Data, Deloitte Research

Online luxury goods consumers are mainly in East, Southwest and North parts of China, accounting for 63% of total population. The purchasing power of wealthy people in North China and Southwest China should not be underestimated.

Figure9：Geographical distribution of luxury goods consumption

30.00%

18.00% 16.00%

12.00% 9.00% 8.00% 7.00%

Northeast North China East China South China Central China Northwest Southwest China China China

Data source: Open Data, Deloitte Research

7 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 1: The rise of markets across lower-tier cities

1.3 New technology

Blockchain provides anti- Precision marketing of social counterfeiting tracking platforms + big data algorithms technology for luxury goods As big data advances and Chinese consumers are very algorithms become more precise, concerned about counterfeit advertising content better goods and there also exists a meets consumers' expectations. lack of trust. Both issues can Platforms such as TikTok, be addressed by blockchain WeChat, Taobao and Instagram technology. Through higher- focus on algorithm-oriented dimensional blockchain distribution strategies and take database technology utilizing advantage of big data. easy recording, anti-tampering, losslessness and trust-based Through social media algorithms, cooperation, blockchain will it is possible for luxury brands provide anti-counterfeiting to push content and goods technology for luxury goods. A to those who like them the system that applies blockchain most, achieving accurate, technology in supply chains effective communication and enables customers to verify the interaction while creating the source of product components shortest marketing conversion and monitor product location and path. Meanwhile, consumers time of processing, storage and will stay 2.6 times longer than delivery. average on a product page with videos. Throughout the purchase process, social media resonates with consumers, creating mutual trust and generating interactions. In doing so, consumers become more interested in a product.

8 9 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Chapter 2: Luxury Goods Consumers with Diﬀerent Interests in the Markets Across the Low-tier Cities

Data Description: The chapter is jointly written by Secoo Enabling Eco Cloud Insight Department and Deloitte Big Data Consumer Insights Team. And it mainly involves content of the research on luxury goods consumption behavior on the Secoo platform, as well as the daily interest and preference of luxury goods lovers in mainstream social media such as Tencent and Weibo. The data in the Blue Paper has been desensitized.

TGI Index: In the absence of a special statement, the TGI index (Target Group Index) in the report refers to the ratio of the target group behavior to the data market index users, revealing the difference in certain behavior between the performance of target group and the overall population. In general, characteristics of target group can be considered significant if TGI exceeds 100. In other words, the higher the value of TGI, the stronger the characteristics of the target group.

Definition of City Tier: Tier 1 cities including Shanghai, Beijing and Guangzhou; Tier 2 cities including Shenzhen, Chengdu, Wuhan, Dalian, Shenyang, Tianjin, Hangzhou, Ningbo, Nanjing, Chongqing, Changsha, Wuxi, Qingdao and Suzhou; The rest cities are defined as Tier 3 and below cities.

Compared with online luxury The analysis of Secoo internal data and In terms of daily interests, compared goods consumers in first- and main social networks data revealed with the broad interests in first- and second-tier cities, their purchasing that the purchasing preferences and second-tier cities, the preferences characteristics and daily interests of luxury goods consumers and mobile phone APP usage of the preferences show a significant in first- and second-tier cities show target group in low-tier cities are discrepancy from those in low-tier a significant discrepancy from those concentrated and less productivity cities. consumers in low-tier cities. In function related. The reason partially Generally, consumers in first- and addition, young male consumers lies in such factors as circle of friends, second-tier cities are considered account for an increasing proportion excess leisure time and discretionary traditional research objects of luxury in terms of goods consumption in low- time in low-tier cities. brands. However, as online purchasing tier cities. Unlike the subgroup trend in power and market share grow rapidly luxury goods brand in high-tier cities, To further analyze the social in third-tier cities and below, the report consumers in low-tier cities prefer data, the report selects three manages to highlight the consumer classic big brands. representative types of luxury goods characteristics and behaviour in low- consumers in low-tier cities: Smart tier cities. youth, Trendy fashion ladies and Business professionals. And the report will depict their consumption characteristics and preferences from diﬀerent dimensions.

10 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

2.1 Characteristics of online consumers in low-tier cities

The majority of online consumers in low-tier cities consist of young people under the age of 30, among whom males account for a relatively high proportion. These males prefer the classic luxury brands in terms of men's clothing, 3C digital products and skin care products. However, despite the high proportion of males making purchasese, females are the major users.

Overall, the number of male consumers has surpassed female consumers in terms of online luxury goods consumption. More than 50% of consumers are 18-30 of age. And the post-90s have become the main online consumers. But most consumers are married, followed by the unmarried (single) group.

There is a significant discrepancy between online consumers in low-tier cities and those in first- and second-tier cities. Among the consumers in low-tier cities, young males under the age of 30 account for a relatively high proportion. And most of these males are under-educated, and are newly-married or in a relationship. In contrast, online consumers in first- and second-tier cities are mostly over 30 years old, highly educated, most of whom are married.

11 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Figure10：Purchasing characteristics of target group in all-tier cities (TGI)

Overall Tier 1 Tier 2 TGI TGI

Gender Male 52%

Female

Age Below 17 Groups 18-24

25-30

31-35

36-40

41-50

Above 50

Education Primary school Middle school

High school

Junior college

University

Postgraduate and above

Relationship Single

In relationship

Newly married

Married

Date Source: Secoo - Deloitte Analysis

12 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

By comparing the proportion of sales of luxury goods in diﬀerent categories in all-tier cities, it can be found that online consumers in low-tier cities tend to spend more on categories such as men's clothing, men's shoes, 3C digital product and skin care product. As for consumers in first-tier cities, they prefer traditional luxury goods such as bags, watches, jewellery, women's clothing and women's shoes.

Figure11：Sales of top10 luxury goods categories in all-tier cities (Percentage Gap)

Tier 1 Tier 2 Tier 3 and Below GAP GAP GAP

Bag - -

Men's clothing -

Watch - -

Jewelry - -

Accessory -

Men's shoes -

Women's shoes -

3C digital product -

Women's clothing -

Beauty and skin care -

Date Source: Secoo - Deloitte Analysis

13 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

In terms of consumer brands, consumers in first- and second-tier cities focus more on low-key subgroup luxury brands or new brands while those in low-tier cities pay more attention to classic luxury brands.

From the sales data of men's clothing, consumers are more willing to pay for well-known luxury brands such as Emporio Armani and PRADA; in first-tier cities, new brands such as KENZO and CANADA GOOSE show a relatively good sales performance. And these new brands have the potential to penetrate markets in second- and third-tier cities.

Figure12：Sales of men's clothing brands in all-tier cities (TGI)

Tier 1 Tier 2 TGI TGI

BURBERRY

CANADA GOOSE

Dolce & Gabbana

Emporio Armani

GUCCI

HUGO BOSS

KENZO

Polo Ralph Lauren

PRADA

TOMMY HILFIGER

Date Source: Secoo - Deloitte Analysis

14 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

2.2 Daily interests of online consumers in low-tier cities

Recreational activities like movie and cosplay gain wide popularity among people in low- tier cities Consumers in first-tier cities have a wide range of interests in leisure and entertainment which are evenly distributed; Consumers in second-tier cities prefer TV series, painting, and music. Compared to other-tier cities, online consumers in low-tier cities particularly prefer movies and cosplay.

Figure13：Leisure and entertainment preferences in all-tier cities (TGI)

Overall Tier 1 TGI

Antiques 26.14%

Films 23.07%

TV series 22.82%

Games 18.50%

Sports live broadcasting 18.19%

Animation 17.23%

Painting 16.52%

Music 14.26%

Cosplay 12.88%

Theatrical plays 1.05%

Date Source: Secoo - Deloitte Analysis

15 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

In terms of the favorite movies of consumers in low-tier cities, they prefer such genre as love stories, drama and and science fictions over domestic movies or action films. In contrast, consumers in first-tier cities show little diﬀerence in film preference, with a slight higher proportion in horror films, European and US films and domestic films.

Figure14：Film preferences in all-tier cities (TGI)

Overall Tier 1 TGI

Comedy 8.74%

Love story 8.28%

Action 8.07%

Horror 5.86%

European 2.38% and US films

Science fiction 2.14%

Drama 1.80%

Domestic 1.77% films

Date Source: Secoo - Deloitte Analysis

16 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Online luxury goods consumers show a significant diﬀerence in their preferences for TV programs. Consumers in first-tier cities particularly prefer Korean and American TV series while those in second-tier cities are inclined to romance TV series. For consumers in low-tier cities, court TV series and comedies are their preferred choices.

Figure15：TV series preferences in all-tier cities (TGI)

Overall Tier 1 TGI

The Chinese mainland

Costume

South Korean

Idol fantasy

Romance

Comedy

Imperial Court

Date Source: Secoo - Deloitte Analysis

As a new form of entertainment, live broadcasting has garnered an increasing following among young people. Those in low- tier cities manage to keep up with the latest trend of fan-based entertainment while those in first-tier cities love traditional sports live broadcasts as live gaming broadcasting is preferred by those in second-tier cities.

Figure16：Live broadcasting preferences in all-tier cities (TGI)

Overall Tier 1 TGI Fan-based entertainment live broadcasting Live sports broadcasting Live gaming broadcasting

Date Source: Secoo - Deloitte Analysis

17 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Consumers in low-tier cities have more leisure time. And influenced by the circle of friends, they tend to use more non-productivity Internet APPs in daily life. Consumers in low-tier cities have more leisure time and discretionary time. Compared with consumers in first- and second-tier cities, those in low-tier cities are more inclined to purchase goods in group with friends and relatives, or chat with them in leisure time while those in first- and second-tier cities use a wide range of APPs in daily life, covering fields such as travel, shopping, audio & video, and office. These APPs have strong functionalities.

Figure17：Internet APPs preferences in all-tier cities (TGI)

Video and music

Audio and video entertainment

Group purchases

System tools

Office software

Transportation

Shopping

Chat and dating

Photography

Date Source: Secoo - Deloitte Analysis

18 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

With regard to daily news content, luxury goods consumers prefer news related to law, politics, local news and daily life while those in first- and second-tier cities pay more attention to topics such as entertainment, gossip, world news and fashion tips.

Figure18：News preferences in all-tier cities (TGI)

Entertainment/ celebrity/gossip

Local news

Law

Business and economy

World news

Politics

Daily life news

Fashion tips

Charity

Automobile news

Date Source: Secoo - Deloitte Analysis

19 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

The preference for automobile shows a strong relationship with the profiles of luxury goods consumers. Without the experience of the "urban diseases" of traffic jam, the local youth are inclined to travel by private cars. From the preference index, it can be found that consumers at the low-tier cities are fond of luxury automobile brands and those in first-tier cities prefer mid-high-end automobiles. As for those in the second-tier cities, their preference of various automobiles is evenly distributed.

Figure19：Automobile preferences in all-tier cities (TGI)

Mid-level automobile

High-end automobile

Luxury automobile

Low-end automobile

Date Source: Secoo - Deloitte Analysis

20 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

2.3 Profile of representative online luxury goods consumers in markets across low-tier cities

We select three representative types of luxury goods consumers in low-tier cities: Smart youth, Trendy fashion ladies and Business professionals. And the report will depict their consumption characteristics and preferences from different dimensions. Regarding the preferences for product category and brand, Smart youth focus on skin care products as Trendy fashion ladies give priority to mid- to high-end clothing and luxury brands while Business professions show interests in a wide range of brands, including mid- to high-end clothing brands, handbag brands and fast fashion brands.

Factors influencing the purchasing decisions vary among the three representative groups of potential consumers. For Smart youth, it's all how they look. They focus on the packaging and the colour of the products while remaining sensitive to costs. The Trendy fashion ladies pay attention to the overall product effects such as beauty and styling as well as the exquisite packaging while the Business professionals put the overall styling high on the agenda and also attach great importance to the shopping environment and shopping experience.

Figure20：Factors inﬂuencing the purchasing decisions of luxury goods consumers in low-tier cities (TGI)

Smart youth Trendy fashion ladies Business TGI TGI professionals TGI Exquisite packaging

Cost competitiveness

Beauty eﬀect

Shopping environment

Styling

Color scheme

Overall feel

Smell and taste

Product quality

Product design

Date Source: Secoo - Deloitte Analysis 21 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Daily interests show a wide difference between Business professionals and the another two representative groups of consumers. While Smart youth and Trendy fashion ladies love indoor activities, for example, listening to music, having pets and sharing photos and nail beauty on social media, Business professionals prefer outdoor activities such as sports and travel and they also have a rich experience in sharing shopping experience on social platforms.

Figure21：Interests of luxury goods consumers in low-tier cities (TGI)

Smart youth Trendy fashion ladies Business TGI TGI professionals TGI

Shopping

Music

Sports

Pets

Travel

Photography

Nail beauty

Food

Date Source: Secoo - Deloitte Analysis

22 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Among the ten popular tourist destinations in the third-tier cities or below, Smart youth will choose Southeast Asian countries such as Indonesia and Thailand as well as the shopping city of Hong Kong. Trendy fashion ladies prefer foreign countries such as France and South Korea. They also like domestic coastal provinces such as Guangdong and Jiangsu. As for Business professionals, they will often take domestic short-distance business trips, especially in the first-line cities or coastal areas.

Figure22：Tourism destinations of luxury goods consumer in low-tier cities (TGI)

Smart youth Trendy fashion ladies Business TGI TGI professionals TGI

Jiangsu province

Indonesia

Beijing

France

Thailand

Guangdong province

Shanghai

Hong Kong

South Korea

Japan

Date Source: Secoo - Deloitte Analysis

23 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Figure23：Summary of proﬁles of luxury goods consumers in low-tier cities

Smart youth Trendy fashion ladies Business professional

Follow the trend but more Quality brands Mixed luxury brands and fast down-to-earth fashion

Concerned "Technology, sports and "Fashion, animation and "Travel, food and animation" topic entertainment" automobiles" - This group of people with certain - This group of people are fond - This group of people are mainly economic means are fond of life. of hot electronic products, women in third-tier cities or below. For example, they love travel, food entertainment and sports. They They love to share notes on fashion and home furniture. When on a trip, have conducted in-depth research topics, and they are especially they focus more on accommodation on the photography eﬀect of interested in fashion clothing and experience. They often travel with electronic products, mainly mobile luxury goods. Moreover, they will their spouses and children, mostly for phones. And they will purchase share fashion tips on season- leisure and vacation. new or popular electronic products matching strategy and are willing to while comparing various factors indulge in clothing and handbags. such as APPs, charging speed, price, and purchasing channels.

Interests They are enthusiastic about topics They love indoor activities such as They love to socialize, love dancing, on weight loss and fitness, while nail beauty, having pets, listening to participating in galleries and attending focusing on astrology, ﬂoral designs music and doing PS. Also, they will parties. In addition, they love concerts and technology products. In participate in art-related activities, and sports activities. In leisure time, addition, they are concerned about but they will not do intense sports in they will socialize at bars for a drink. health and wellness, for example, leisure time. Photography, shopping and travel are to do massages from time to time. indispensable parts of their life. Moreover, they will also engage in relatively informal leisure and entertainment activities such as music and film.

24 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 2: Luxury Goods Consumers with Different Interests in the Markets Across the Low-tier Cities

Smart youth Trendy fashion ladies Business professional

Follow the trend but more Quality brands Mixed luxury brands and fast down-to-earth fashion

Consumer They are yearning for and pursuing With a relatively good economic They are repeat consumers of classic brands the exquisiteness of luxury goods means, they are particularly fond of luxury brands and they are content even with a medium economic mid- to high-end brands, as well as with high-quality fast fashion. means. Therefore, they are inclined flashy styles of design. to affordable luxury products such as cosmetics, skin care and affordable jewelry.

Tourism They will travel to domestic They are fond of domestic places such They mainly travel to domestic cities destinations places such as Gansu, Jiangxi as Heilongjiang and Chongqing as well such as Beijing and Hangzhou, as and Tianjin, as well as foreign as popular foreign countries for tours well as foreign destinations including destinations such as Argentina, and shopping such as Canada, France, Turkey, Portugal and Russia because Mauritius and Greece. Germany and Morocco. of business travel.

Factors When purchasing goods, they will They love cosmetics and pay attention They pay attention to the impact of influencing pay attention to the exquisiteness to the effect of beauty products. They the purchased items on personal purchasing of the packaging, the color scheme attach great importance to styling and styling; fashion and shopping decision and the cost competitiveness of fashion; The exquisiteness of product environment are also important the products. They will also take packaging is high on their agenda. considerations. In addition, they price into consideration when prefer elegant and classic product purchasing high-end products. design and simple and practical And they care about the effect and business style. overall feel when enjoying beauty services.

25 26 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 3: Differentiated low-tier market strategies

Chapter 3: Differentiated low-tier market strategies

With the rise of consumption in low-tier markets, markets across low-tier cities have more increasingly prominent opportunities. However, brands have limited understanding of consumers in those markets. As a result, they implement strategies for the Chinese market mainly based on the consideration of first- and second-tier markets. Considering the diﬀerent characteristics and preferences of consumers in markets across low-tier cities, luxury brands must carry out diﬀerentiated strategies targeting markets across low-tier cities if they are going to seize the opportunity. Among the many strategies, the following three aspects deserve further attention:

Refine the customer group classification and create a shopping experience from multiple dimensions The characteristics and demand of the new generation of consumers have gone through huge changes. As mention in Charpter Two, consumers in third-tier cities and below, with the rise of online consumers and male consumers in low-tier cities, have purchased far more luxury goods online than those in first- and second-tier cities. By means of big data tools and technologies, luxury brands can target customers accurately and refine the customer profiles in multiple dimensions.

Consumers in markets across low-tier cities have distinct interests and characteristics. They, for example, have more leisure time, prefer mobile phones and rely more on social media for entertainment. So, the focus should squarely be on social platform data. In the future, live broadcasting platforms with stronger influence and product promotion capabilities will be the new battlefields for luxury brands to further develop young customers and consumer groups in lower-tier cities.

In the first- and second-tier cities, customer groups have relatively diverse interests, resulting in scattered data. Therefore, it is important to influence customers both through online and offline approaches. Meanwhile, luxury brands and sales platforms can also provide full-range exclusive services for high-end customers through VVIP “private partners”. For high-end customers with high personalization requirements, high loyalty and high purchase volume, a long-term customer relationship can be established through “private partners” with specialized, highly-private and high-quality exclusive services. “Private partners” will be a part of the customers' lives, helping brand update launches and offer exclusive advice. And “private partners” will also provide consumers with opportunities to attend fashion shows with celebrities and priority rights to new products before official market release. It is exactly the “small privileges” that successfully satisfy the emotion of being special of the existing VVIPs. And it has also turned into an effective tool for luxury goods sales promotion, rendering luxury goods with a true sense of high class.

27 Deloitte-SECOO CIIE Blue Paper 2019 | Chapter 3: Differentiated low-tier market strategies

Further develop offline and online digitalization with differentiated marketing strategies for different tiers of cities and multiple touch points for consumers Due to different profiles of consumer groups, the consumption approaches differ in low-tier and first-tier cities. As consumers in low-tier city are limited in opportunities to purchase luxury goods through offline channels, they are inclined to do so through online channels. As for consumer groups in first-tier cities, they have a relatively dispersed focus, which requires multiple touch points for consumption approaches. The insights into the differences in consumption approaches require digitalized omni-channels, with which multiple touch points can open up to collect consumer data in a horizontal manner and coverage of the consumption approaches is provided so as to observe purchase behaviour in a vertical manner. Multi touch points include WeChat app, social media official account, UGC (user-generated content) community, luxury brand official website/APP, cross-border e-commerce platform and luxury flagship store of e-commerce platform. Through these digitalized touch points, brands can track or even feedback on consumers' perception from the idea generation stage to the purchasing decision-making stage by their browsing footprints. With the support of solid database and algorithm models, brands could conduct in-depth research on consumer data, thus analyzing potential consumer demand and creating a resonance point that can touch consumers; the vertical consumption process range from demand generation, product search, payment method, logistics channel to member management and after-sales service. Digitalized omni-channels manage to match marketing elements based on the preferences of different target customers, thus realizing precise luxury goods sales and consumer management.

Luxury brands continue to cultivate young consumer groups in low-tier cities by expanding the “Cosmetics” and “Sports” categories Through the analysis of profiles of potential luxury goods consumers in markets across low-tier cities, it can be found that skin care and cosmetics products as well as sports products will be important growth fields in future markets across low-tier cities. More and more luxury brands have tried to expand their business into cosmetic and sports product field. In addition, those brands will join fashion brands in an effort to lock in more young customers and seize market opportunities in advance.

Young consumers will generally choose standardized cosmetics as entry into the world of luxury products. Compared with other luxury items of high prices, cosmetics is not as expensive, with a low trial-and-error cost but a high turnover ratio. In addition, cosmetics are easily accessible on online platforms and will be a breakthrough point for touching more consumer groups in markets across low-tier cities. Moreover, market potential of luxury sports products cannot be underestimated. In the past two years, fitness industry has become a new trend. Grasping the huge market opportunity, luxury brands have launched sports products targeting the Chinese young consumer groups and more male consumers.

28 Deloitte-SECOO CIIE Blue Paper 2019 | Contacts

Contacts

Tianbing Zhang Sitao Xu Lydia Chen Deloitte Asia Pacific Consumer Deloitte China Deloitte Research Products and Retail Sector Chief Economist Director Leader Email: [email protected] Email: [email protected] Email: [email protected] Sheryl Yang Qingyi Wang Grace Ling Deloitte China Consumer Products Deloitte Research Deloitte China Consumer Products and Retail Sector Senior Specialist and Retail Sector Management Consulting Associate Email: [email protected] Management Consulting Partner Director Email: [email protected] Email: [email protected] Shuting Guo Deloitte Research Crystal Wang Flora Dai Associate Manager Deloitte China Consumer Products Deloitte China Consumer Products Email: [email protected] and Retail Sector and Retail Sector Financial Consulting Partner Management Consulting Associate Email: [email protected] Director Email: [email protected]

Special Thanks

Nicole Yang Rui Chen Secoo Enabling Eco Cloud Secoo Enabling Eco Cloud Data Insight CEO Associate Director Email: [email protected] Email: [email protected]

About Secoo

Founded In 2008, Secoo Group is the largest premium lifestyle omni-channel platform in China and Asia. Secoo is the only listed Luxury E-Commerce platform in China on the NASDAQ stock exchange with stock symbol 'SECO'. At the end of 2018, Secoo has over 27M high-end registered members. Secoo's HQ is located In Beijing, with branch offices in Shanghai, Hong Kong, New York, Milan and Malaysia.

29 Office locations

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