Does the sector speak Chinese?

The luxury goods sector went through a dramatic change during the last few years. Until the mid ‘90s, the luxury goods sector was an European affair. All the main brands were in the hands of Italian, French, UK or German designers / entrepreneurs. At the end of the 90s the entire luxury goods sector went through a huge consolidation process, driven mainly by a few large players building up a multi-brand/multi-product strategy. Several acquisitions took place in the accessories ( and Segio Rossi acquired by ), in the watches sector (Richemont acquisition of Jaeger Le Coutre, IWC and Lange Sohne brands) and many others always in the European region. No foreign buyer was “allowed” in the magic circle. The European and American markets were booming. The new economy created many new rich people able to sustain strong growth in the domestic markets for the luxury goods brands. The booming stock markets fueled strong purchases of luxury suits, cars, boats and no brand was developing eastern than the German borders, with the exception of the Japanese market which represented a large market in particular for accessories. The luxury goods sector was only temporarily affected by the burst of the bubble of the new economy and by dramatic events of the September 11 attacks recovering quite quickly a good growth pace, sustained by improved financial markets. Actually, as shown in the table below despite the overall economic downturn and the strong decrease in consumption expenditure in Europe and in the USA since the collapse of Lehman Brothers in 2008, the worldwide luxury goods industry has steadily grown over the past decade, showing resilience to the crisis and the negative events of the last few years. The sector is expected to grow from a total market of approximately €173bln sales in 2010 (excluding cars and boats markets) to approximately €212bln in 2012.

Worldwide luxury goods spending (excluding boats and cars) Turnover € bln

Subprime & High growth SARS 9/11 financial despite of outbreak crisis global crisis

212 192 170 167 173 159 147 153 136 128 133 133 128

2000-2012E CAGR +28,7% 2009-2012E CAGR +17,7%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E

But something has changed. The Western European and American economies have been severely affected by the financial crisis outburst in 2008, followed by the most recent crisis of the Euro due to the enormous debt incurred by some of the main European countries. Most European countries, with the exception of Germany, are reporting negative or very low growth rates of their GDP, with unemployment and bankruptcy rates at record highs. However the luxury goods industry is performing very well, with all the main brands reporting record revenues and profit growth. Where is this growth coming from? Who is fueling such an impressive growth to the luxury goods sector, which seems to be unaffected by the illness of its main domestic market? The new riches from the Far East and Middle East economies and Russia. In 2011, , , Korea and Middle East demand of luxury goods continued to grow sharply, consolidating their presence in the global market place. Asia-Pacific Area (excluding Japan) confirmed its outstanding performance with the highest increase in sales (+25% vs. 2010). Year 2012 is estimated (actual numbers are not yet available) to be the third year in a row of double-digit growth for the luxury goods market (+10% vs. 2011): Asia has become and remains the major growth engine (estimates: +23% vs. 2011).

Luxury goods total turnover geographic breakdown Turnover € bln

10% 212 11% 192 5% 13% 10% 173 5% 9% 11% 10% 5% 9% 153 26% -9% 20% 11% 23% 5% 4% 25% 18% 12% 16% 13% 39% 31% 10% 31% 31% 11% 33% 6%

4% 35% 38% 12% 37% 11% 37%

2009 2010 2011 2012E Europe Americas Asia-Pacific Japan Rest of the world

This trend is also confirmed by the luxury spending as % of 2011 GDP: the most important Eastern countries have now reached or overtaken , and US, whose contribution in terms of production and consumption expenditures have been driving the luxury goods market for decades.

Luxury spending as a % of 2011 GDP

1,7%

0,9% 0,7% 0,6% 0,6% 0,4% 0,4% 0,4% 0,4% 0,3%

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

Asia Pacific region is the fastest growing geographical area, experiencing a CAGR of 46% between 2009 and 2012E. The region is expected to represent 20% of the global luxury goods demand in 2012 (excluding Japan), with €42bln in sales (€35bln in 2011). Asia Pacific will continue to be the fastest growing geographical region also in the near future, with Altagamma1 forecasting a CAGR in the range of 10% - 11% between 2011 and 2014. The main growth driver in the Asia-Pacific region has been, and continues to be, the overall increase in demand for luxury goods in China, with a 20% growth estimate in 2012. Chinese GDP has been rapidly growing at nearly 10% per year. This has resulted in enhanced buying power and consumption expenditure of consumers in China, which is expected to further fuel the expansion of the Chinese and Asia-Pacific luxury goods market.

2009-2012E Chinese market evolution Turnover € bln

15,0 20% 12,5 36%

9,2 30% 7,1 5,9 20%

2008-2012E CAGR +28,3%

2008 2009 2010 2011 2012E

Domestic sales of luxury goods in China have grown by a CAGR of 28,3% since 2009, and are estimated to exceed €15bln in 2012, accounting for approx. 35% of the total Asia-Pacific Area and 7% of the total global luxury goods sales. forecasts that China will be the fastest growing market in Asia-Pacific (with an increase in sales of 15% to 20% between 2011 and 2014) and will become the third largest luxury goods market globally in the next five years.

1 Altagamma is an association of luxury goods players.

2012E Asia Pacific luxury goods market by country Turnover € bln

South Korea Japan China 8,3 19,7 15,0 Taiwan Hong Kong 4,5 India Thailand 7,9 1,0 1,4 Singapore 3,5

But what happened to the luxury goods “magic circle”? What happened to the European designers and luxury goods entrepreneurs? They discovered that the growth for their brands and for their businesses was not any longer restricted to their domestic and mature markets. The Japanese world, for decades the only one targeted marginally by the main European brands, was not any more alone. Tourists from China, Korea and other countries in the Far East as well as from the Middle East and Russia are flocking to Europe. They can benefit from a new and significant wealth driven by their growing economies and they have become heavy spenders on luxury goods. In Asia and Eastern Europe, new entrepreneurs as well as large domestic players in the retail industry are willing to financially support, and with local distribution expertise, the European brands in order to develop and strengthen new distribution channels in those growing countries. They have large financial resources and intend to leverage on the expertise and the heritage of the iconic European brands: a new “win-win” combination has arisen. European can offer the heritage, the expertise. They can bring know-how while Asian players can bring money, distribution capacity and, most of all, a window on a new fast growing market. So suddenly the “magic circle” has been opened to new comers. Asia Pacific area has become the strategic focus of many global luxury goods companies. Several European brands are raising new capital in order to expand their footprint in Asia while some took preparative steps. Foreign brands are seeking for new investors and partnerships with the aim of developing or strengthening their presence in the area and better understanding local needs and spending habits (i.e. IPO on the Hong Kong Stock Exchange occurred in 2011). Many European companies have considered to or have already expanded their distribution network in the region through new mono brand stores: for instance, Ermenegildo has planned to open up to 30 stores in Asia in 2012. In details, China accounted for about 70% of the overall new store openings undertaken by the main luxury operators in 2011. Furthermore, Tod’s has opened 38 new DOS in Asia since 2007, while Prada has enlarged its Asian network sharply after the IPO (Prada opened 16 new DOS in Asia (excl. Japan) in 2011, reaching a network of 115 stores in the area).

Other big players, such as Ferragamo, also considered to go public on an Asian Stock Exchange. Ferragamo eventually chose the Italian Stock Exchange, but previously sold an 8% stake to an Hong Kong tycoon Mr Peter Woo Kwong-ching. Gucci and Bottega Veneta expanded their network by opening more than 200 DOS in Asia since 2007. The companies, in the luxury goods sector, have opened their share capital to the new world. Some of the recent European luxury transactions have been performed by a Far East players, able to pay higher prices thanks to the foreseen important synergies and growth opportunities in their markets. These buyers know that the European market is really too sophisticated to be entered with their own products, so they try to buy local iconic brands in order to benefit from their existing know-how and expertise as well as strong brand awareness. Asian and Middle Eastern players with strong distribution network can leverage on the European premium brands to exploit the opportunity of extending / consolidating their presence in growing emerging markets. In 2011 Thai Company Central Retail Corporation completed the acquisition of the historical and well known Italian department store chain La Rinascente. Fung Brands, the Hong Kong investment firm, acquired Belgian luxury leather company Delvaux and most recently French house Sonia Rykiel: Fung Brands’ strong distribution network will help these brands to become better known in the world’s fastest growing luxury markets. It is a news of these days that (the Italian hand bag manufacturer and retailer) opened its capital to Li & Fung. Also Middle Eastern businesses are pursuing the opportunity to expand through acquiring established European brands. In February 2011, Dubai retailer Group bought house Gianfranco Ferré with plans to invest up to €100m in the business post acquisition, the first wave of which will be used to pay down debts and open 50 Ferré stores worldwide. In July 2012, Qatar’s Mayhoola for Investments acquired Valentino for approx. € 700 mln. Benefiting from access to new funds, the Italian premium brand has launched a major international expansion plan, with new store openings in Asia, Europe and Middle East. In 2011, E-Land, the Korean conglomerate, acquired Mandarina Duck and Coccinelle (both advised by Vitale & Associati), two historical Italian leather goods brands. In year 2012, the famous Italian lingerie and luggage brand Yamamay/Carpisa (advised by Vitale & Associati), signed an agreement with the private equity arm of Banca Intesa for a minority stake disposal through a capital increase in order to fuel its international expansion plans. The table below show the recent M&A transactions with an Italian target. Most of the buyers are from the Far East region.

Selected deals in the Italian luxury personal goods industry

Announced Target Luxury Bidder Deal value Target company Bidder company EV/EBITDA date country category country (€mln)

Jul-12 Valentino Fashion Group S.p.A. Italy Apparel Mayhoola for Investments S.P.C. Qatar 729 32.5 x

Dec-11 Coccinelle S.p.A. Italy Accessories E-Land Co. Ltd South Korea 35 6.9 x

Nov-11 Colombo Via Della Spiga S.r.l. Italy Accessories Cheil Industries Inc South Korea 5 n/a

Nov-11 S.p.A. Italy Apparel PPR SA France 300 30.0 x

Watch & Nov-11 Gianmaria S.r.l. Italy Simest S.p.A. Italy n/a n/a Jewellery

Jul-11 Mandarina Duck S.p.A. Italy Accessories E-Land Co. Ltd South Korea 78 n/a

Braccialini Family; Cassa di Risparmio di San Miniato S.p.A.; S.r.l. NEM SGR S.p.A.; Jul-11 Italy Accessories Italy 38 8.8 x (80% stake) Sviluppo Imprese Centro Italia SGR; Equilybra capital partners S.p.A.; HAT Holding S.p.A.

Moncler S.p.A. Jun-11 Italy Apparel Eurazeo SA France 418 11.8 x (45% stake)

May-11 La Rinascente S.r.l. Italy Retail Central Retail Corporation Ltd Thailand 260 11.0 x

Ballantyne May-11 Italy Apparel Mubadala Dubai n/a n/a (40% stake)

Apr-11 Belstaff International Limited Italy Apparel Labelux Group GmbH Austria 119 31.9 x

Watch & Mar-11 S.p.A. Italy LVMH Moet Hennessy Louis Vuitton SA France 3,870 24.8 x Jewellery

Salvatore Ferragamo Italia S.p.A. Mar-11 Italy Apparel Peter Woo Kwong-Ching (private investor) Hong Kong n/a n/a (8% stake)

United Arab Feb-11 Gianfranco Ferré S.p.A. Italy Apparel Paris Group International L.L.C. n/a n/a Emirates Cheil Industries Inc; South Korea; Nov-10 Gianfranco Ferré S.p.A. Italy Apparel Prodos Capital Management LLC; n/a n/a USA; Salmar Shipping Sutor Mantellassi Luxury S.r.l. Mar-09 Lario 1898 Calzaturificio S.p.A. Italy Apparel Italy 5 17.0 x (E-Land Co. Ltd)

This recent trend, which is envisaged to continue at least in the foreseeable future, will probably make the sector even more global. As mentioned before a new “win-win combination” has arisen: new growth for the European brands and new expertise and heritage for the Far East in an industry were more and more Mandarin is going to be the most widely spoken language.