LUXURY GOODS WORLDWIDE MARKET STUDY Fall−Winter 2015

A time to act: How luxury brands can rebuild to win

By Claudia D’Arpizio, Federica Levato, Daniele Zito and Joëlle de Montgolfi er Claudia D’Arpizio and Federica Levato are Bain & Company partners, and Daniele Zito is a manager. All three are based out of the fi rm’s Milan offi ce. Joëlle de Montgolfi er is the practice area senior director for Retail, Luxury and Consumer Products in EMEA. She is based out of the fi rm’s Paris offi ce. All four are members of Bain’s Global Retail and Luxury practices.

Table of contents

Executive summary ...... pg. 1

1. Luxury spending trends in 2015 ...... pg. 5

2. Regional highlights ...... pg. 9

3. Distribution trends ...... pg. 15

4. Individual category performance ...... pg. 21

5. Outlook for the future ...... pg. 27

Page i Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Page ii Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Executive summary

Currency ﬂ uctuations and globe-trotters boost the personal luxury goods market, but real growth slows

The 14th edition of the Bain Luxury Study, published by Bain & Company for Fondazione Altagamma, the trade association of Italian luxury-goods manufacturers, analyzed recent developments in the global luxury- goods industry.

The overall luxury industry tracked by Bain & Company comprises 10 segments, led by luxury cars, luxury hospitality and personal luxury goods, which together account for 80% of the total market. The industry surpassed €1 trillion in retail sales value in 2015 and delivered healthy growth of 5% year over year (at constant exchange rates), driven primarily by luxury cars (8%), luxury hospitality (7%) and ﬁ ne arts (6%).

Aided by global currency fl uctuations and continued purchases by “borderless consumers,” the personal luxury goods market—the “core of the core” of luxury and the focus of the Bain Luxury Study—ballooned to more than €250 billion in 2015. That represents 13% growth over 2014 at current exchange rates, while real growth (at constant exchange rates) has eased to only 1% to 2%. The slowdown confi rms a shift to a “new normal” of lower sales growth in the personal luxury goods market, which we highlighted in previous analyses. The challenge for luxury brands in this environment is to successfully navigate market volatility driven by currency swings and fl uctuating tourist fl ows.

Currency swings affect regional performance

Boosted by a strong US dollar, the Americas emerged as the biggest global region for personal luxury goods purchases. However, in real terms, the US market did not deliver. The “super-dollar” was too expensive for many global tourists and, although local consumption grew, it was barely sufﬁ cient to offset the decline in tourism revenue.

Europe posted sound growth, primarily fueled by Chinese and US tourists attracted by a weak euro. The old con- tinent has become “the world’s largest in-season outlet.” Our analysis of European tax-free shopping data, conducted in partnership with Global Blue, showed that Chinese tax-free purchases in Europe increased by 64% while tax-free purchases by American tourists in Europe grew by 67%, primarily in the high end of the luxury spectrum. Meanwhile, Russian and Japanese travelers cut their tax-free spending in Europe by 37% and 16%, respectively.

Page 1 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Across Asia, performance varied widely:

• Japan has proven to be a consistent champion in both real and nominal terms, as a sound base of local consumers and the emergence of Chinese tourists looking to capitalize on currency ﬂ uctuations are driving sales.

• South Korea shined, with €11 billion in retail sales value, growing at 4% in constant exchange rates despite the negative impact of the Middle East Respiratory Syndrome in the second half of the year.

• Hong Kong and Macau faded, primarily due to government reforms against graft and the gray market (respectively €7 billion and €1 billion in retail sales value, both declining at 25% in constant exchange rates).

• Local spending in Mainland China continued to contract slightly.

Chinese consumers play a primary role in the growth of luxury spending worldwide. They account for the largest portion of global purchases (31%), followed by Americans (24%) and Europeans (18%). Chinese shoppers continue to spend far more abroad than in Mainland China, which accounts for only 20% of their global purchases. However, the depreciation of the euro boosted the country to the global luxury podium; it is now the third-biggest market in the world, after the US and Japan. The most popular travel destinations for Chinese luxury shoppers shift—typically to Europe, South Korea or Japan—in response to currency ﬂ uctuations, which create temporary favorable price gaps.

Chinese consumers play a primary role in the growth of luxury spending worldwide. They account for the largest portion of global purchases (31%), followed by Americans (24%) and Europeans (18%).

Wholesale still dominates, but company-owned retail and e-commerce are growing faster

Wholesale is still the dominant selling channel within the personal luxury goods market, capturing 66% of the total market. However, retail continues to gain share, driven by network expansion (600 new directly operated stores opened globally in 2015, a decline from the 750 opened in 2014) and growth in same-store sales (13% at current exchange rates). The wholesale channel’s slower performance stems from three factors: the ongoing “retailization” of luxury (converting franchised locations into company-owned stores or joint ventures); the lackluster performance of US department stores across product categories (particularly in leather goods); and the decreasing sales of Asian watch retailers, which are coping with excessive stock and a reduction in the overall store network.

E-commerce grew to a 7% market share in 2015, nearly doubling its penetration since 2012. Special- ized e-commerce players are outperforming the market globally, with Chinese e-tailers progressively extending their geographic reach and gaining share on a global basis. The e-commerce sites of Euro- pean and American retailers (such as department stores) continue to grow, a response to customers’ demands for an omnichannel experience. Luxury brands are losing share online overall, with highly

Page 2 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

variable performance: The largest brands with established direct online and omnichannel platforms are outperforming but the majority of brands still lag, especially European brands.

Luxury globe-trotters have also fueled the performance of airport retail, which posted a 29% growth rate in current exchange rates (18% in constant exchange rates) and now accounts for 6% of the global luxury market.

With the growing middle class in markets such as China seeking good quality and good value, and consumers in mature markets looking for bargains, the off-price channel has more than doubled to nearly €26 billion. Markdowns are also increasing in prevalence across more than 35% of the luxury market.

Accessories remain the leading category

Among speciﬁ c categories of personal luxury goods, accessories remained the leader, capturing 30% of the market and growing by 3% in 2015 (at constant exchange rates). That was faster than the next two largest categories, apparel (which grew 2% at constant exchange rates) and hard luxury (which contracted by 3%). Within accessories, high-end shoes (4%) continued to grow faster than leather goods overall (2%). Jew- elry was the star category within hard luxury, growing at 6% in constant exchange rates, while watches were strongly hit by the channel overstocking in Asia and contracted by 6% in constant exchange rates.

Page 3

• The global luxury market tracked by Bain & Company comprises 10 segments, including personal luxury goods, cars, luxury hospitality, 1. luxury cruises, designer furniture, fi ne food, fi ne wines and spirits, yachts, private jets and fi ne art. The overall market exceeded €1 trillion in 2015. Luxury spending Growth in the luxury car market was solid, up 8% from 2014, driven by positive trends in both the trends in 2015 US and Europe. Luxury hotel sales, up 7%, benefi ted from steadily growing demand, particularly in Europe.

• Personal luxury goods—the “core of the core” of luxury and the focus of the Bain Luxury Study— ballooned to more than €250 billion in 2015, more than tripling over the past 20 years. This represents 13% growth over 2014 at current exchange rates, while real growth has slowed to only 1%–2%.

• The year was marked by a strong depreciation of the euro vis-à-vis most global currencies, resulting in a double-digit positive impact on the overall market value. Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 1: The global luxury market exceeded €1 trillion in 2015, posting overall growth of 5%, driven by cars, hospitality and ﬁ ne arts

Worldwide luxury market, 2015E (€ billions) 7 2 1,044 32 21 40 45 64 176

405

253

Personal Luxury Luxury Fine wines Fine Fine Designer Private Yachts Luxury Total 2015E luxury goods cars hospitality and spirits food art furniture jets cruises Growth, 13% 15% 17% 10% 13% 19% 9% 14% 2% 16% 14% 2014–15E Growth, 1–2% 8% 7% 3% 4% 6% 4% –1% –1% 4% 5% 2014–15E (at constant exchange rates) Note: Discrepancy in total is due to rounding Source: Bain & Company

Figure 2: Currency ﬂ uctuations inﬂ ated the personal luxury goods market to more than €250 billion, while real growth slowed down

Global personal luxury goods market, 1994−2015E (€ billions)

SARS Socioeconomic turbulence

September 11 Spike in Subprime and Chinese stock $/€ financial crisis market turmoil exchange rate 253 Year-over-year growth at current exchange rates 218 224 Year-over-year growth at constant exchange rates 212 192 170 167 173 159 153 147 136 13% 128 133 133 128 3% 3% 108 1–2% 92 96 85 7% 3% 73 77

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

Source: Bain & Company

Page 6 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 3: Exchange rate ﬂ uctuations resulted in a double-digit growth rate

Global personal luxury goods market at current and constant exchange rates, 2013−2015E (€ billions)

253 26

Year-over-year growth at current exchange rates 3% 13%

Year-over-year growth at constant exchange rates 3% 1–2%

3 7 224

−1

218

2013 Constant Currency 2014 Constant Currency 2015E growth effect growth effect Source: Bain & Company

Figure 4: The general trend was a depreciation of the euro vis-à-vis most other global currencies

Evolution of key currencies against the euro 2014 vs. 2013 2015E vs. 2014

US 0% 19%

UK 5% 11%

Switzerland 1% 14%

Russia –17% –23%

Brazil –8% –12%

Japan –8% 4%

Mainland China 1% 18%

Hong Kong 0% 19%

South Korea 4% 12%

Singapore –1% 10%

United Arab Emirates 0% 19%

Saudi Arabia 0% 19%

Source: Bain & Company

Page 7

• Boosted by a strong dollar, the Americas emerged as the biggest global region for personal luxury goods purchases. The US alone accounted for €79 2. billion of the €85 billion regional market (or more than 90%), and remains the largest global market by far, bigger than the next four combined (Japan, Regional China, Italy and France). However, in constant exchange rates, the US market did not deliver. highlights • The depreciation of the euro also boosted Mainland China to the No. 3 spot in terms of global luxury value, overtaking Italy and France and trailing only the US and Japan. However, local spending in Mainland China (which represents only 20% of global Chinese shoppers’ purchases) continued to contract slightly.

• New York City, Paris and London are the largest luxury cities globally, each representing a market in excess of €10 billion. Luxury goods purchases in New York City alone outweigh those across all of Japan.

• Since 2009, the US market has contributed 1.7 times as much growth in absolute value as the largest growth contributors in Asia. Mature markets in Europe also contributed meaningful growth over the period, equivalent to 80% of the growth Asia contributed. The UK and France contributed 20% more growth in absolute value than China did over the period.

• Chinese consumers played a primary role in the growth of luxury spending worldwide: they made up the largest portion of global luxury purchases (31%), followed by Americans (24%) and Europeans (18%). In 2000, Japanese consumers represented more than one-quarter of global luxury purchases; they now account for only 10%.

• Luxury consumers in mature markets, such as Europe, the US and Japan, tend to purchase locally. However, growth in these regions increasingly depends on spending by tourists. Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 5: The Americas became the biggest global region in 2015, primarily because of the “super dollar”

Personal luxury goods market by region, 2007–2015E (€ billions)

CAGR CAGR CAGR Rest of world (’07−’09) (’09−’15E) (’14−’15E) 253 0% 11% 17% 224 218 Japan –9% 3% 13% 212 192 Asia 9% 14% 11% 173 170 167 153

Europe –5% 6% 9%

Amer- –10% 11% 18% icas

2007 2008 2009 2010 2011 2012 2013 2014 2015E Note: Growth rates in current exchange rates Source: Bain & Company

Figure 6: The US remained the largest global market but did not deliver real growth; China joined the global luxury podium

Personal luxury goods, top countries, 2015E (€ billions)

78.6 72.1

China

France

Italy 20.1 17.9 17.3 17.1 15.6 11.9 10.8 Japan 8.1 6.8 3.2

US Japan China Italy France UK Germany South Middle Hong Russia Korea East Kong

Global rank 1 2 5 3 476 8 10 9 11 in 2014 Growth in euros 20% 13% 17% 6% 10% 16% 14% 16% 19% –11% –25% 2014–2015E Growth in local 0% 9% –1% 6% 10% 5% 14% 4% 0% –25% –2% currency, 2014–2015E Source: Bain & Company

Page 10 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 7: Local spending in mainland China continued to contract in real terms; mainland China accounts for 20% of global Chinese shoppers’ purchases

Personal luxury goods market in Where shoppers from mainland China bought mainland China, 2007–2015E (€ billions) luxury goods in 2015E, by region (%)

Year-over-year growth at current exchange rates Rest of world 18 Japan Year-over-year growth at constant exchange rates 15 +17% Americas 15 15

13 ±0% Europe –2% 10

CAGR ’07−’13: 7 +23% –1% 6 Asia 5

Mainland China

2007 2008 2009 2010 2011 2012 2013 2014 2015E

Source: Bain & Company

Figure 8: New York City, Paris and London each account for more than €10 billion of luxury sales; luxury goods purchases in New York City outweigh those across all of Japan

Personal luxury goods, top cities, 2015E (€ billions)

13 13

9 8 7 66 6 555 4 4 4 4 3 3 3 3

New Paris Tokyo Hong Las Honolulu Milan Taipei Osaka Miami Moscow York Kong Vegas City Japan London Seoul Beijing Los Shanghai Rome Munich Singapore Dubai Angeles Source: Bain & Company

Page 11 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 9: Since 2009, the US market alone contributed 1.7 times as much absolute value growth as Asia; Europe contributed 80% of the growth of Asia

Personal luxury goods: growth contribution in absolute value, by region and top contributing market, 2009–2015E (€ billions)

37.4

x1.7 21.6 Japan ~80% US 18.3 Hong Kong Italy Germany South Korea

France

China UK

Russia –1.3 Americas Asia Europe Source: Bain & Company

Figure 10: Chinese consumers now represent about one-third of the global market, up from only 1% in 2000; Japanese consumers, who accounted for a quarter of the market in 2000, now make up 10% of global purchases

Global personal luxury goods market by consumer nationality, 2000–2015E (€ billions)

Rest of world

Asian

Chinese

Japanese

American

European

2000 2010 2013 2014 2015E

Source: Bain & Company

Page 12 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 11 : Europe is largely supported by tourists; consumers from mature markets buy primarily domestically

Personal luxury goods spending by local Personal luxury goods spending by consumer nationality consumers vs. tourists by region, 2015E (€ billions) and location of purchases, 2015E (€ billions) Regional Rest of Rest of 83 tourists 85 20 18 ~45 world ~60 ~25 ~80 world 100% 100% Europe Europe Americas Japan Americas Americas 80 80 Extra- regional Asia tourists China 60 60 Americas

Europe Asia 40 40

Japan Local 20 consumers 20 Europe

0 0 Europe Americas Japan Mainland European American Japanese Chinese China consumers consumers consumers consumers Source: Bain & Company

Page 13

• Wholesale was still the dominant selling channel within the personal luxury goods market, capturing 66% of market share. However, retail continued 3. to gain share. It is up 2 percentage points in 2015 and is growing twice as fast as the wholesale channel at current exchange rates. Distribution trends • Retail and monobrand distribution continued to be winning formats.

• E-commerce grew to 7% market share in 2015, nearly doubling its penetration since 2012. The channel was particularly strong in the Americas, and is skewed to the accessories and fashion categories.

• Luxury globe-trotters have fueled the performance of airport retail, which posted a 29% growth rate in current exchange rates (18% in constant exchange rates) and now accounts for 6% of the global luxury market.

• With the growing middle class in markets such as China seeking quality and good value and consumers in mature markets looking for bargains, the off-price channel has more than doubled in the past three years, to nearly €26 billion.

• Markdowns were also increasingly prevalent across more than 35% of the luxury market, particularly in department stores, specialty stores and e-commerce platforms. Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 12: Wholesale still dominates among distribution channels, but company-owned retail grows faster

Personal luxury goods market, by channel, 2007–2015E (€ billions) CAGR (’07–’15E) 253

224 218 212

192

173 170 167 Wholesale 3% 66 153 68 69 71 72 73 79 78 75

34 Retail 11% 29 31 32 27 28 21 23 25

2007 2008 2009 2010 2011 2012 2013 2014 2015E

Source: Bain & Company

Figure 13: Retail and monobrand distribution continue to be winning formats

Global personal luxury goods market, by channel and format, 2015E (€ billions)

2014−2015E growth trend in real terms 6% 253 253 7% 10%

23% Multibrand 47% Wholesale 66%

25%

Market share 29% Monobrand 53% Retail 34%

Monobrand Department Specialty Off-price Online Airport Global Global stores stores stores stores luxury luxury

Source: Bain & Company

Page 16 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 14: The online luxury market has grown tenfold since 2005, rising to 7% market share

Online personal luxury goods market, 2003–2015E (€ billions)

7% Year-over-year growth at constant exchange rates 16.8

4% 12.0

9.8

3% 7.7

2% 5.8 4.5 Online market share 1% 3.5 2.9 2.2 2.6 1.7 1.0 1.3

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E Year-over-year growth 37% 31% 29% 18% 12% 21% 29% 29% 33% 27% 22% 40%

22% Source: Bain & Company

Figure 15: The online channel is particularly strong in the Americas and is skewed to the accessories and fashion categories

Online personal luxury goods market, 2015E (€ billions)

16.8 16.8 Other 5%

Rest of world 19% Hard luxury 11%

Beauty 17% Europe 25%

Apparel 27%

Americas 56%

Accessories 40%

By geography By category

Source: Bain & Company

Page 17 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 16: Luxury globe-trotters have fueled the performance of airport retail

Airport personal luxury goods market, 2012−2015E (€ billions)

Market share 6% Other 2% 14.1 14.1 14.1 Rest of world 9% Hard luxury 10%

Americas 16% Apparel and accessories 13%

Market share 4% CAGR 8.7 +18% Europe 31%

Beauty 75%

Asia and Japan 44%

2012 2015E By geography By category Growth since 2014 29% Growth since 2014 (at constant exchange rates) 18% Source: Bain & Company

Figure 17: The off-price channel has more than doubled over the past three years

Off-price personal luxury goods market, 2012−2015E (€ billions)

Market share 10% Other 1% 25.9 25.9 25.9 Beauty 5% Rest of world 20% Hard luxury 9%

Europe 21%

Market share 5% 12.6 Apparel and CAGR accessories 85% +27% Americas 59%

2012 2015E By geography (%) By category (%) Growth since 2014 35% Growth since 2014 (at constant exchange rates) 23%

Source: Bain & Company

Page 18 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 18: The share of markdown is quickly increasing across formats and reaches over one-third of the total market

Global personal luxury goods market, share of markdown by format, 2015E (€ billions)

Growth trend for markdown 253 in real terms

Apparel Beauty Accessories Hard luxury Markdown ~35%

Monobrand Department Specialty Off-price Online Airport Global stores stores stores stores luxury

Source: Bain & Company

Page 19

• Accessories remained the leading personal luxury goods category, capturing 30% of the global market and growing by 3% in 2015 (at constant 4. exchange rates). Apparel was the second-largest category (at 24% of the market, with 2% growth at constant exchange rates), followed by hard Individual category luxury (22% of the market, contracting by 3%). performance • The performance of the fashion and apparel category was slightly soft, with both women’s and men’s ready-to-wear segments (accounting for €30 billion and €29 billion in retail sales value, respectively) growing at only 2% in constant exchange rates.

• Within hard luxury, jewelry (with €16 billion in retail sales value) was the star category, growing at 6% in constant exchange rates, while watches (€36 billion in retail sales value) suffered from overstock in Asian channels and contracted by 6% in constant exchange rates.

• Within accessories, the growth of high-end shoes (€16 billion in retail sales value) continued, surpassing that of leather goods (€43 billion in retail sales value) and growing at 4% vs. 2% at constant exchange rates.

• Within the beauty category, fragrances (€23 billion in retail sales value) and cosmetics (€27 billion) grew at moderate rates in constant exchange rates (2% and 1%, respectively, at constant exchange rates). Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 19: Accessories have been the biggest personal luxury goods category since 2011; they remain the fastest growing

Personal luxury goods market, by category, 2007–2015E (€ billions) CAGR CAGR 253 (’07–’09) (’09–’15E) Other –10% 4% 224 218 212 Beauty –3% 5% 192

173 170 167 153 Hard luxury –7% 11%

Apparel –8% 7%

Accessories –1% 12%

2007 2008 2009 2010 2011 2012 2013 2014 2015E Source: Bain & Company

Figure 20: Ready-to-wear posted soft positive growth, with different dynamics across menswear and womenswear

Men's ready-to-wear Luxury men's ready-to-wear market, 2013–2015E (€ billions) • Casual wear posting low single-digit growth, while formal wear continues 29 to suffer 26 26 - Mixed performance within both segments, with Absolute brands experiencing a very sound trend, offset by negative Aspirational and 13% lackluster Accessible brands 1% 2% • Outerwear, denim and cashmere categories outperforming, in line with 2014 - Growing success of fur and shearling - Denim maintaining momentum also driven by a new fashion twist and 2013 2014 2015E the success of customization services

Women's ready-to-wear Luxury women's ready-to-wear market, 2013–2015E (€ billions) • Overall positive trend for women's ready-to-wear, with high resilience 30 across markets and categories 26 26 - Brisk growth of denim and outerwear across the board - At the extremes of the spectrum, activewear and haute couture showing strong dynamism 14% - Daywear positive trend driven both by Absolute brands and first lines 3% 2% and Accessible segment - Formal wear lagging behind in terms of growth due to the underperfor- mance of Aspirational brands 2013 2014 2015E Year-over-year growth at Year-over-year growth at • Increasing brandization of patterns and creative motifs as new icons of current exchange rates constant exchange rates the category

Source: Bain & Company

Page 22 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 21: Within accessories, shoe sales continue to outpace leather goods

Leather goods Luxury leather goods market, 2013–2015E (€ billions) • Overall trend undermined by prices (excluding Accessible brands) - Brands’ attempts at preserving the entry price range by offering a wider 43 selection of lower-priced items were effective from a volume standpoint only, 36 38 causing the price mix to decline - Surging success of the off-price channel and increasing promotional activity 14% by full-price stores 5% 2% • Ongoing polarization among segments - Absolute brands outgrowing the overall category, while Aspirational brands show mixed performance, with ongoing turnaround of key brands 20132014 2015E - Highly volatile consumers affecting brands in the Accessible segment

Shoes Luxury shoes market, 2013–2015E (€ billions) • Consistent positive performance of shoes, the status symbol at the price sweet spot - Outperformance of the Absolute segment 16 13 14 • Men's segment continuing on its positive trajectory, women's showing 16% increased dynamism 6% 4% - Ongoing sneaker phenomenon now influencing other segments (e.g., formal shoes with thick rubber sole) 2013 2014 2015E • Lifestyle brands registering slightly brisker growth than shoe specialists Year-over-year growth at Year-over-year growth at current exchange rates constant exchange rates

Source: Bain & Company

Figure 22 : Within hard luxury, jewelry continues growing, while watches remain affected by a negative trend in Asia

Watches Luxury watches market, 2013–2015E (€ billions) • Luxury watches still impacted by Asian uncertainty - Asian retailers overstocked with declining sales and shrinking store networks 38 • Exposure to Swiss watchmakers impacted the overall category, with the Swiss 36 36 franc appreciating over the euro and consequent price adjustments • The Absolute segment performs better; Europe is buoyed due to touristic +7% purchases in brands' own stores +0% −6% • The impact of smartwatches remains limited to the premium segment (not competing with high-end time pieces playing on different value dimensions) - Luxury brands launch their own smartwatches and smart accessories for watches, with limited volumes 2013 2014 2015E

Jewelry Luxury jewelry market, 2013–2015E (€ billions) • Luxury branded jewelry continues to outperform the overall category • Strong performance of Absolute and high-ticket items 16 13 14 • Jewels remain among top preferred investments due to intrinsic value of +18% raw materials +8% +6% • The global demand for diamonds is still growing but at a more modest pace, particularly in Asia as a consequence of the slowdown started last 2013 2014 2015E year and the protests in Hong Kong Year-over-year growth at Year-over-year growth at • For new store openings, Asian retailers rebalance the product offer toward current exchange rates constant exchange rates more jewelry than watches Source: Bain & Company

Page 23 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 23: Within the beauty category, fragrances are on a positive trajectory; skincare’s performance is lackluster

Fragrances Luxury fragrances market, 2013–2015E (€ billions) • Mature markets post mixed performances, with Chinese and Middle Eastern demand continuing to rise - The growth in mature markets is mainly driven by price increases despite an increasing weight of promotions 23 20 20 • The top end of the market, exclusive lines and essences, and artisanal niche brands are outperforming 11% - Growing interest for customized products 2% 2% - Brands refocus storytelling on scents, ingredients and nose • Travel sizes experience a sustained trend 2013 2014 2015E

Cosmetics Luxury cosmetics market, 2013–2015E (€ billions) 27 • Makeup is the main growth engine in the category, offsetting the overall 23 24 performance of skin care 15% - Sound trend of makeup across subcategories 2% 1% - Devices show strong dynamism within skin care, while other subcategories suffer • Premium Korean brands are increasingly popular among Asian consumers 2013 2014 2015E - Western players looking for potential acquisitions Year-over-year growth at Year-over-year growth at current exchange rates constant exchange rates

Source: Bain & Company

Page 24 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Page 25

• The main challenge facing most luxury brands is establishing the right pricing model. The rise of e-commerce and global tourism growth create 5. greater transparency around international price differentials. In addition, price-conscious luxury shoppers are struggling to reconcile the price of Outlook for luxury products with their real value. As a result, luxury brands must assess how to mitigate volatility the future and how best to deliver at local and global levels. This includes managing inventory to accommodate ﬂ uctuations in tourist spending and coordinating pricing and markdowns across markets and channels.

• Luxury brands also face a host of tough issues such as rethinking the size of their store footprint and the role of brick-and-mortar shops in a world of growing digitization, as well as ﬁ guring out how to delight local customers even as masses of tourists ﬂ ock to establishments in mature markets. Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 24: Strategic international pricing is becoming the main issue to be tackled in the industry

Until recently ...... then ...... now

• Relentless price increases • Exogenous effects • Increasingly price- over the past 5−10 years exacerbating price conscious luxury - To gain more exclusive differentials globally consumers look for positioning and sell to (currency fluctuations, international bargains, emerging consumers import resulting in a change in with high disposable tariff cuts) the market equilibrium income • Internet allowing full price • Brands tactically adjust • High price differentials transparency international pricing, maintained across regions sometimes with shortsighted approaches - To maximize touristic flows and local consumption (Japan)

Mature consumers are cut off from an industry they can't fully afford anymore and whose real value is strongly questioned, while emerging consumers struggle in truly matching price and value of these products

Source: Bain & Company

Figure 25: The global personal luxury goods market: 10 key takeaways for 2015

A mature market strongly impacted by macroeconomic and sociopolitical events

Markets and consumers Route to market Value proposition

Still a Western market but Retail and monobrand are still Consumers shop across boosted by masses of the favorite formats in which categories and price points, borderless consumers to invest guided by an informed point of view on players’ Chinese consumers are the The current retail footprint strategies top nationality, increasingly is under scrutiny in traveling across regions some locations Growing value awareness and blurred pricing Consumers from mature E-commerce is starting to strategies are questioning markets become more become disruptive, yet brands the overall value proposition demanding are still struggling with it of luxury and detached Wholesale formats try to hold ground while attempting to modernize

Tactical channels such as off-price and airport retail become increasingly strategic

Source: Bain & Company

Page 28 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

Figure 26: Key strategic questions for luxury players going forward

How to reduce brand performance volatility at global and local levels?

Markets and consumers Route to market Value proposition How to rethink the size, role How to manage globe- and format of the retail How to (re)build trotting consumers? network? aspiration, credibility and trust for luxury products? How to remain strategi- How to maximize the cally focused on local effectiveness of all distribu- customers? tion channels in an How to broaden brand omnichannel world? territories and platforms to bond with tomorrow's How to reengage consumers? disillusioned consumers How to strategically in mature markets? manage full prices and markdowns within and across channels?

How to turn digital (besides e-commerce) into a competitive advantage?

Source: Bain & Company

Figure 27: Key strategic themes for luxury CEOs

Markets and consumers Route to market Value proposition

Design a “locally global” pricing strategy and execution

Refocus distribution strategy and footprint with a Personalize customer forward-looking perspective experiences in store Master brand content and storytelling

Evolve toward a value-driven “fast luxury“ model Locally tailor value propositions: assortment, buying, marketing Foster consumer engagement across all touchpoints

Develop, grow and retain best-in-class talents

Source: Bain & Company

Page 29 Luxury Goods Worldwide Market Study | Bain & Company, Inc.

App endix: Bain’s global luxury goods market study methodology

Revenues tracked at retail sales value • Revenues at retail sales value represent total sales valued at retail price (final price paid by consumers at point of purchase) • Each player’s consolidated sales are brought back to retail sales value through the following methodology

Application of estimated markups Retail Retail by geography and category

Wholesale Wholesale at retail value

Licenses Licenses at retail value Application of estimated royalty rates and markups by geography Player consolidated sales Player sales at retail value and product category

Bottom-up and top-down estimates Bottom-up Top-down cross-check

• Category-specific data in the main geographic markets • Comparison between market breakdown and turnover breakdown of key players • Expert interviews (top management of brands, distributors, department stores) Player 1 Player 2Player 3 Player 4... Player 290 Total • Consistency check and fine-tuning

Source: Bain & Company

Page 30 Key contacts in Bain’s Luxury Goods practice

Europe, Claudia D’Arpizio in Milan ([email protected]) Middle East Federica Levato in Milan ([email protected]) and Africa Daniele Zito in Milan ([email protected])

Marc-André Kamel in Paris ([email protected]) Joëlle de Montgolﬁ er in Paris (joelle.demontgolﬁ [email protected])

Serge Hoffmann in Munich ([email protected])

Oliver Merkel in Johannesburg ([email protected])

Americas Darrell Rigby in Boston ([email protected])

Asia-Paciﬁ c Bruno Lannes in Shanghai ([email protected])

About the Bain Luxury Goods Worldwide Market Study

Bain & Company analyzes for Fondazione Altagamma the market and ﬁ nancial performance of more than 290 leading luxury-goods companies and brands. This database, known as the Luxury Goods Worldwide Market Observatory, has become a leading and much-studied source in the international luxury-goods industry. Bain has published its annual ﬁ ndings in the Luxury Goods Worldwide Market Study since 2000. The study’s lead author is Claudia D’Arpizio, a Bain partner in Milan. Fondazione Altagamma is led by Andrea Illy, who was named chairman in 2013. Shared Ambit ion, True Re sults

Bain & Company is the management consulting ﬁ rm that the world’s business leaders come to when they want results.

Bain advises clients on strategy, operations, technology, organization, private equity and mergers and acquisitions. We develop practical, customized insights that clients act on and transfer skills that make change stick. Founded in 1973, Bain has 53 ofﬁ ces in 34 countries, and our deep expertise and client roster cross every industry and economic sector. Our clients have outperformed the stock market 4 to 1.

What sets us apart

We believe a consulting ﬁ rm should be more than an adviser. So we put ourselves in our clients’ shoes, selling outcomes, not projects. We align our incentives with our clients’ by linking our fees to their results and collaborate to unlock the full potential of their business. Our Results Delivery® process builds our clients’ capabilities, and our True North values mean we do the right thing for our clients, people and communities—always.

For more information, visit www.bain.com