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Tailoring the Luxury Experience the Luxury and Cosmetics Financial Factbook 2019 Edition Contents 04 Executive Summary 36 Luxury Industry Overview

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Tailoring the Luxury Experience the Luxury and Cosmetics Financial Factbook 2019 Edition Contents 04 Executive Summary 36 Luxury Industry Overview Tailoring the luxury experience The Luxury and Cosmetics Financial Factbook 2019 Edition Contents 04 Executive summary 36 Luxury industry overview 10 Financial parameters A Enhancing heritage with new communication levers A Discounted cash flow (DCF) and valuation parameters B Retail trends and challenges Sales growth; earnings before interest, taxes, depreciation and Rising game-changing technologies B amortization (EBITDA) margin; and capex ratio C C Trading multiples 48 Cosmetics market overview A Key themes driving the beauty industry D Transaction multiples 30 Industry overview B Focus group: natural and organic A Industry overview 66 Appendix A Detailed tables of main financial parameters and market multiples B Contacts The information in this pack is intended to provide only a general outline of the subjects covered. It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Accordingly, EY accepts no responsibility for loss arising from any action taken or not taken by anyone using this pack. The information in this pack will have been supplemented by matters arising from any oral presentation by us, and should be considered in the light of this additional information. If you require any further information or explanations, or specific advice, please contact us and we will be happy to discuss matters further. Tailoring the luxury experience I The Luxury and Cosmetics Financial Factbook 2019 Edition Page 4 Executive summary Executive summary Page 6 Executive summary Executive summary Roberto Bonacina Tailoring the luxury experience The newcomers are giving shape to a new paradigm revolving around the concept of “coolness,” featuring Partner exclusivity, the ability to provoke and disrupt, the desire to Head of M&A, Fashion and Luxury EY-Parthenon vision for the future of the luxury industry and the challenges reach customer intimacy, the willingness to communicate EY Advisory S.p.A. | Milan, Italy a purpose and, of course, sexiness. Their reliance on [email protected] for heritage and digitally native brands online channels to grow and achieve sales has put into +39 335 138 1950 This year's report confirms that the trend that has been question the relevance of brick-and-mortar retail in the new era. Elena De Cò witnessed in the luxury goods industry in recent years is continuing, with fast growth in the premium, entry to Indeed, the future of retail has been thoroughly debated in Associate Partner luxury, perfume, and cosmetics categories. recent years, finding a way to support in-store traffic after Head of EY-Parthenon — Fashion & Luxury the rise of digital (-30% store traffic from 2012 to 2018). EY Advisory S.p.A. | Milan, Italy The year 2019 marks a new era for the luxury fashion and cosmetics players; the rules of the game have changed The numbers of store closures have been surpassing the [email protected] numbers of store openings. However, despite the fact +39 347 4167979 and old winners must learn how to play differently to stay at the top. According to EY, those who have excelled in that more than 70% of purchases are influenced by online the past need to know how to redefine themselves, while channels, physical transactions remain almost 90% of the preserving their identity. They must find ways to tailor total purchases. The brick-and-mortar footprint remains a a unique luxury experience for each customer, beyond “must have,” although the retail channel, usually EBITDA the product offered. Traditional players face competition dilutive for multichannel companies, is under increasing from digitally native brands, or newborns with a strong profitability pressure. How do companies provide required e-commerce and social media presence, a diversified go- shareholder returns? How can they drive high-conversion to-market strategy, and loyal customer base, all derived traffic to stores? How do they make sure customers from an innovative identity that feels closer to the new entering the store find what they are looking for, enjoy a generation of luxury shoppers. stunning shopping experience, make purchases and exit the store feeling even more emotionally engaged with the brand? Tailoring the luxury experience I The Luxury and Cosmetics Financial Factbook 2019 Edition Executive summary Page 7 Executive summary Executive To win the game in an arena where the most important concept is that of coolness, Consumers expect brands to share and reflect their growing passion for social and fashion companies have many cards to play that can lead to an improved retail environmental causes, as well as concerns over risks related to long-term exposure to conversion rate. The areas to invest in should be intelligence (predictive analysis), chemical substances, resulting in, one the one hand, more natural and organic labels, product development (including agile development and digital prototypes), lean and on the other, a growing appeal for minimalistic beauty based on tradition, rituals production, and optimized merchandising and buying. The in-store customer and simple regimens — something previously seen in Japan. The growing level of product engagement should be supported by digital technologies and evolved loyalty programs. sophistication will see the role of influencers and makeup artists rise as they become a key vehicle to inform consumers about the new offering and its potential. The beauty and cosmetics industry is also undergoing rapid transformation. It has been evolving from a female-only industry to include men and men-specific products The key question now is who is better positioned to successfully tailor the luxury starting in the early 2010s, and it is now expected to develop a gender-neutral experience and succeed in this new landscape: heritage, digitally native or heritage approach. Industry products must reflect such evolution by reaching higher standards brands that understand the new rules of the game? of personalization and inclusion, providing gender-specific products is no longer enough to meet consumers’ evolving tastes and beauty ideals. Product offerings today should result from a careful analysis of the consumer and be tailored to their skin type, needs and color, all of which can be achieved through new technologies, including, but not limited to, skin detection and recognition tools. Roberto Bonacina Elena De Cò [email protected] [email protected] Tailoring the luxury experience I The Luxury and Cosmetics Financial Factbook 2019 Edition Index evolution Index 100 150 200 250 300 350 400 Page 8 Page EY luxury and compared index evolution cosmetics major with indices • below. reported are index includedintheEY themaincompanies of performance aboutthestock insights Some e-commerce. andluxury disruption technological from derived expectations asprofit China,aswell particularly inAsia, base consumer anexpanding by ismainlydriven growth sectors, andcosmetics the luxury in Both index). theSTOXX and2.2%of theS&P 7.3%of to 24.7%(compared of return with ayearly &Poor Standard thanthe better performed Index 2019),theEY March 2018to March (from year During thelast 11.5%. of return yearly 210%andwithanaverage of return with atotal 2019Edition FinancialFactbook Cosmetics includedin thecompanies by (represented index andcosmetics luxury EY The companies listed in main luxury markets identified and other relevant companies. Data is drawn from S&P Capital IQ. and STOXX Europe 600 indexes using January 2008, 1, as astarting date (rebased to100). Compounded annual growth rate (CAGR) is compoundedrelative weights have by the been average revised growth for each rate. The company panel is principally comprised of those luxury Note: 50 0 strategic relevance of web sales for high-end brands. Furthermore, Furthermore, high-endbrands. for sales web of relevance strategic demandandgrowing investor strong reflecting range, price anticipated $19previously $17 to its above at$20each, priced 44.2millionshares sold company The plans. ambitious expansion helpfund $884mto 21,2018,raising debutonSeptember trading inits price offer thelast above 35% surged stock whose Farfetch, e-tailer clothing UKluxury theIPOof by marked was year Last the company (13.9%)unchanged. the company holdingof its keep neededto the shares of one-third acquire to agreed plansinChina), expansion andFarfertch JD.com, of subsidiary Holding(a Group Kadi placement: aprivate realized also Farfetch DuringtheIPO, product. withunwanted beingstuck risk of don they because retailers thantraditional atahigherpremium trade often as Farfetch, Jan-08 The EY index is arepresentation of the luxury and cosmetics companies analyzed within the factbook. Aspecific weight has been attributed to each company included in the EY index based on its market capitalization. The Mar-08 May-08 (Base as 100 January of 2008) 1, Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 ’ Jul-09 ishigher, index andcosmetics luxury theEY of return total The (S&P). s index Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 11years thelast over themarket ) hasoutperformed Sep-12 ʼ s inclusion after its initial public offering (IPO) after eventual delisting and semi-annually. Finally, the evolution of the EY index has been compared tothose of the S&P 500 Nov-12 S& Jan-13 P Mar-13 May-13 Jul-13 Sep-13 ST Nov-13 OX Jan-14 Mar-14 X May-14 Jul-14 Sep-14 EY Nov-14 I Jan-15 ndex Mar-15 May-15 Jul-15 marketplace Sep-15 “ s strategic partner fueling s strategic Nov-15 ’ Jan-16 Mar-16 May-16 Jul-16 and Luxury The Sep-16 Nov-16 ” Jan-17 such companies, Mar-17 May-17 Jul-17 Sep-17 t carry the t carry Nov-17 ’ Jan-18 Mar-18 May-18 March 31,2019 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 • • • • 34 19 10 with a record high share price performance.
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