LUXURY GOODS China Online Boom: ...yet to come for Ostrich Luxury Brands 21 FEBRUARY 2017 at 05:29* We go back to surveying how western luxury goods brands are faring in the Chinese digital market, following up on our two previous reports: China Online Boom - No Country for Ostrich Brands; Best Luca Solca of: China Online Boom: Ostriches are lifting their heads from the sand. (+44) 203 430 8503 [email protected] China is the most advanced digital market in the world Melania Grippo Digital payment penetration in China is 50 times higher than in the USA, largely still relying on (+39) 02 89 63 1724 [email protected] plastic. FMCG online penetration has reached the mid-teens. Big-box retailing in China makes shopping malls and department stores in the USA look like the garden of Eden. Guido Lucarelli (+39) 02 89 63 1726 [email protected] Western luxury brands in China are still lagging behind Only 21 of the 34 brands we have analysed operate an e-commerce mono-brand website in China. Even more remarkable is that the largest brands, such as LV, Hermès, Gucci, Prada, Ralph Lauren and Swatch, do not have an ecommerce mono-brand site. For comparison, 31 out of 32 brands Specialist sales surveyed operate an e-commerce mono-brand website in the USA, and 30 out of 32 in the UK. David Tovar Digital proficiency in China is 46% – against 55% in our latest digital competitive map (DCM). (+44) 203 430 8677 Burberry, Michael Kors and Cartier are the only exceptions Contactlab Burberry stands out in China as strong leader on the Strategic Reach axis for exploiting all possible Marco Pozzi (+39) 02 28 31 181 ecommerce channels as well as on the Digital Customer Experience Axis, excelling in customer [email protected] service and style advisory. Michael Kors and Cartier are close behind Burberry on the Digital Francesca Borgonovo Customer Experience axis thanks to personal services and customer service. (+39) 02 28 31 181 [email protected] It is less than ideal that digital luxury is still dominated by local champions Xian Zhang This is less than ideal: 1) the amount of grey market products (and outright fakes) still seems very (+39) 02 28 31 181 high – western luxury brands have mono-brand websites of which they are not aware; 2) digital can [email protected] rapidly become very relevant for Chinese consumers, as they are young, tech savvy, and eager to Kuiling Song embrace change; and 3) western luxury brands have a fragile digital position, as they have a (+39) 02 28 31 181 sketchy presence with their most relevant consumer nationality. [email protected] * Date and time (London Time) on which the investment recommendation was finalised. It may differ from the date and time of broad dissemination on the website.See Appendix (on p88) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures. Contents Executive Summary _______________________________________ 3 Detailed Results _________________________________________ 15 Methodology ________________________________________________________ 15 Strategic Reach in China ______________________________________________ 18 Digital experience for Chinese Customers _________________________________ 43 E xane BNP Paribas Research & Contactlab Luxury Goods 21 FEBRUARY 2017 page 2 Executive Summary We go back to surveying how western luxury goods brands are faring in the Chinese digital market, following up on our two previous reports: China Online Boom - No Country for Ostrich Brands; Best of: China Online Boom: Ostriches are lifting their heads from the sand. China is the most advanced digital market in the world Digital payment penetration in China is 50 times higher than in the USA, largely still relying on plastic. FMCG online penetration has reached the mid-teens. Big-box retailing in China makes shopping malls and department stores in the USA look like the garden of Eden. Western luxury brands in China are still lagging behind Only 21 of the 34 brands we have analysed operate an e-commerce mono-brand website in China. Even more remarkable is the fact that the largest brands, including LV, Hermès, Gucci, Prada, Ralph Lauren and Swatch, do not have an ecommerce mono-brand website. This compares with almost all the brands (31 out of 32) operating an e-commerce mono-brand website in the USA, and 30 out of 32 in the UK. Digital proficiency in China is 46% – against 55% from our most recent DCM. Western digital luxury still seems where we had left it two years ago. Burberry, Michael Kors and Cartier are the only exceptions Burberry stands out as strong leader on the Strategic Reach axis in China for exploiting all possible ecommerce channels (e-commerce mono-brand, flagship online store on Tmall, online store on WeChat, JD.com, Secoo.com and 5Lux.com) as well as on the Digital Experience Axis excelling in customer service and style advisory. Also Ray-Ban ranks high on the Strategic Reach axis thanks to the capability to engage Chinese customers via Content localization and Social Media presence. Michael Kors and Cartier are close behind Burberry on the Digital Customer Experience axis thanks to personal services and customer service. It is less than ideal that digital luxury is still dominated by local champions This is less than ideal: 1) the amount of grey market products (and outright fakes) still seems very high – western luxury brands have mono-brand websites of which they are not aware; 2) digital can rapidly become very relevant for Chinese consumers, as they are young, tech savvy, and eager to embrace change; and 3) western luxury brands have a fragile digital position, as they have a sketchy presence with their most relevant consumer nationality. E xane BNP Paribas Research & Contactlab Luxury Goods 21 FEBRUARY 2017 page 3 China is the most advanced digital market in the world Mobile payment penetration in China is 50 times higher than in the USA, largely still relying on plastic. FMCG online penetration has reached the mid-teens. Big-box retailing in China makes shopping malls and department stores in the USA look like the garden of Eden. Figure 1: Mobile payment penetration in China is 50 times higher than in the USA, largely still relying on plastic (1/2) Transaction value of third-party payments (USD trn) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2015 2016e 2017e 2018e 2019e USA China Source: Forrester Research, iResearch Note: Post-2015 figures are forecast, renminbi values converted to USD at current rate Figure 2: Digital payment penetration in China is 50 times higher than in the USA, largely still relying on plastic (2/2) E-commerce mix by payment methods China USA PrePay Others Others Postpay Bank Pre-Paid Pre-Paid PrePay 2% 2% 3% 2% Transfer 4% 3% 3% 6% Cash on Delivery 4% Cash on Credit card Delivery 34% 7% Bank Transfer 6% Debit Card 9% eWallet 60% eWallet Credit Card 20% Debit card 10% 25% Source: Worldpay “Global payments report”, November 2016 E xane BNP Paribas Research & Contactlab Luxury Goods 21 FEBRUARY 2017 page 4 Figure 3: In China, there is a broad acceptance of digital payment solutions like WeChat Pay (Tencent) and Alipay (Alibaba) China’s mobile-payment market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2014 2015 Tencent Alipay Others Source: iResearch, The Wall Street Journal 22/05/2016 Figure 4: Digital is booming in consumer goods in China Rate of usage of different mobile apps in China (Jun-2016 data) Instant messaging Search News Music Video Payment Shopping Banking Games Literature Ticket booking Email Ordering & Delivery BBS Online course Finance 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: China Internet Network Information Center Figure 5: FMCG online penetration has reached the mid-teens Quotes from meetings in China In offline FMCG, 25 out of 28 categories are declining. Only few of them recover online. EUR 2.3trn to be generated, over the next five years. […] Hypermarkets are very negative. Brick & Mortar logistics are down, even more hypermarkets are shutting down. Local retailers pay with 120 days delay (!). There is no liquidity. […] Ferrero derives c.15-20% of online sales in China; product personalization is key. The range on Digital is different from the range offered in the physical stores. (Leading food company) Internet use is increasing: Carrefour, Walmart are declining. (Consulting company) Source: Exane BNP Paribas proprietary field research in China E xane BNP Paribas Research & Contactlab Luxury Goods 21 FEBRUARY 2017 page 5 Figure 6: Chinese digital growth is causing the demise of physical retail formats like hypermarkets Urban FMCG market value (RMB bn) 2012-15 CAGR 2012-15 market share (RMB bn) 40% 1,068 1,146 1,209 1,251 100% 35% 90% 30% 80% 25% 70% 20% 60% 15% 50% 10% 40% 5% 30% 0% 20% (5%) 10% 0% 2012 2013 2014 2015 Super/Mini Hypermarket Grocery CVS E-Commerce Other Source: Bain, Kantar Worldpanel Note: Notes: Hypermarket refers to stores with more than 6,000 square meters; the hypermarket channel includes only the top 72 named hypermarket retailers, representing 80% of total hypermarket channel (based on 2015 revenues); super/mini refers to stores from 100-6,000 square meters; CVS includes chain and individual convenience stores and is defined by being open for more than 16 hours a day; grocery refers to stores with less than 100 square meters; other includes department stores, free market, wholesales, work unit, directsales, specialty store, overseas shopping and others Figure 7: Big-box retailing in China makes shopping malls and department stores in the USA look like the Garden of Eden China USA Source: Google and Getty images E xane BNP Paribas Research & Contactlab Luxury Goods 21 FEBRUARY 2017 page 6 Western luxury brands in China are still lagging behind Only 21 of the 34 brands we have analysed operate an e-commerce mono-brand website in China.