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Luxury and cosmeticsThe EY Financial Factbook

2013 edition

Luxury and cosmetics: the EY Financial Factbook

1© 2013 EYGM Limited. All rights reserved.

Contents

2–3Executive summary

4Methodology and disclaimer

5Sample selection and specific analyses

6–39

A. Financial parameters

B. Operating aggregates

C. Advertising expenses and net working capital analysis

D. SOTP and segment analyses

E. Trading multiples

F. Focus on transactions

G. Transaction multiples

H. EY Luxury and Cosmetics Index

DCF and valuation parametersLet us first have a detailed look at financial parameters …

40–77

A. Global luxury goods market

B. Global cosmetic goods market

C. Points of view from EY’s global sector specialists and outside experts

D. Focuses on Brunello Cucinelli and Michael Kors

Industry overview… and then study the industry size and drivers

78–80Glossary

Luxury and cosmetics: EY Global Coordinators

2 Luxury and cosmetics: the EY Financial Factbook

Executive summary

Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts.

Looking back over the past 12 months, some luxury groups have started to ask questions about their future focus. Some are feeling the pressure of the gradual slowing of global growth in the luxury market. Growth was 10.4% in 2012, compared with 13.1% in 2011. Is this just a short-term slowdown or an indicator of a longer-term trend? Was China just a bubble that has now burst, and will the slow recovery in the US and European markets mean the end of luxury as we know it?

We don’t think so. The value of the global market for personal luxury goods is at an all-time high of more than €200b. With forecasts predicting an average long-term compounded annual growth rate (CAGR) of 5%–6%, we believe that the luxury industry has a strong future. But, like all industries, it will need to adapt. This Factbook gives some insight into how the industry might develop over the years to come.

Paul Wood Andrea Guerzoni

Like luxury, the value of the cosmetics industry has also reached an all-time high. It stands at an estimated €180b, after a growth of 4.6% in 2012 — which was a similar rate to that seen in previous years. Emerging markets in the Asia Pacific Region are the strongest drivers of this growth. In particular, we believe that Africa and Brazil will be markets for the cosmetics industry to watch in the near future. It will be essential for global players to have a local presence in these geographies.

So, what other challenges will the luxury and cosmetics industries face in the years to come and how can they deal with them?

We believe that three key factors are of prime importance to most of the sector’s CEOs and their teams. And these factors have a common theme: sustainability — and sustainability in its broadest sense.

1. Sustaining the luxury position: growth, profitability and customer loyalty to a brand will not be easy to sustain. The rise of a new generation of connected customers — who have instant access to globally transparent pricing, product comparisons and the opinions of luxury bloggers — means that it will be increasingly challenging to justify and sustain the high pricing differentials that are crucial to a luxury strategy.

This, combined with the deliberate and valid restriction in the supply of some luxury goods in order to maintain their value, will pose more than one dilemma for luxury houses.

With emerging market wealth driving near insatiable demand, the supply of some luxury goods will be restricted to enable them to maintain their value. This will pose logistical and strategic challenges for luxury houses.


We have seen many luxury houses respond to the challenges of the new kind of customer by slowly developing a digital strategy. This is not just a web presence to manage brand content and deal with online sales. It is an integrated approach that harnesses social media, and connects mobile and tablet applications with back-office logistics to deliver a viable e-channel. The channel can provide an alternative to retail and wholesale, or complement the more traditional routes to market.

2. Sustaining development: maintaining the quality and supply of crucial raw materials, such as increasingly rare skins and ethically traceable gems, is a big challenge for some houses. It has led to an increase in vertical acquisitions in the supply chain. For example, crocodile farms in Australia and African ostrich ranches have been on the acquisition menu of larger luxury groups. But the challenge is not just to secure supply. The focus is on sustainable development in all its forms. It is important to consider the ethics behind the products and images of luxury; the perceived and actual wastage in production processes and packaging; and the carbon footprint and water impact of the end product.

3. Sustaining growth in China: In the long term, how will the luxury industry develop and sustain the right kind of relationship with Chinese customers?

Many luxury houses have derived great success from their early investments in China. But some are pulling back, especially on retail expansion into tier 3 cities and shopping malls. Recent reports in the French and Italian media have described over-development and fatigue in China’s demand for luxury goods.

But, you have to dig beneath the surface to understand the political and social challenges that China faces when it comes to luxury. Indeed, China is now seeing, on a much greater scale, a phenomenon that we first observed in Japan a few years ago: the luxury tourist. Such tourists have had a significant impact on retail and wholesale revenues in European and American luxury cities. Some luxury houses are struggling to adapt to these customers’ needs and expectations, and to meet them consistently across all of their outlets.

We believe that China will have a sustainable long-term impact on the global luxury market. But the lessons that houses learn as they adapt to new ways of doing business must also be applied to other BRIC markets that, we predict, will form the next wave of the luxury industry’s continued expansion.

This Factbook follows the same format as previous editions. We present a number of operational and financial aggregates about the industry, along with key valuation parameters and multiples. This content is enriched by opinion from EY’s global sector specialists and outside experts.

We hope that it proves to be insightful, and that the facts and opinions provoke constructive thought and discussion within your organization.


Methodology and disclaimer

MethodologyThere are many criteria to analyze the operating and financial performances of listed companies. The aim of this survey is not to conduct a detailed analysis of the selected companies.

The approach implemented in this third edition of the Luxury and cosmetics: EY Financial Factbook essentially relies on three types of information:

X Several standard valuation parameters and operating aggregates

X Industry characteristics (in terms of growth forecasts and drivers)

X An overview of 23 major actors of the industry

Even though this data is important and essential to the analysis, it must be stressed that other criteria or parameters could also have been analyzed.

ForewordThe entirety of the data utilized in this Factbook is publicly disclosed information. The Transaction Advisory Services teams of EY who participated in drafting this document have not had access to any confidential information.

If the information used turns out to be incomplete or incorrect, EY will not be held responsible for any impact this may have on the results or the analyses presented in this document.

It must be noted that the information provided in this study titled Luxury and cosmetics: The EY Financial Factbook 2013 edition is only relevant as of 31 December 2012, unless stated otherwise or apart from subsequent pieces of information included in this survey. Any modification of the analyzed groups’ financial performances or any evolution of the financial markets that occurred since 31 December 2012 could lead to partially or completely different conclusions.

Please note that we have presented the actual 2012 figures for the companies that have already released their 2012 annual results as of 31 March 2013.


Sample selection and specific analyses

Sample selectionThe sample analyzed is composed of 23 listed companies from the luxury and cosmetics industry, of which 17 are mostly in the luxury business and 6 in the cosmetics segment.

To select these companies, we proceeded as follows:

X We firstly identified “pure players” of the luxury sector: Brunello Cucinelli S.p.A. (Cucinelli), Burberry Group plc (Burberry), Coach Inc. (Coach), Compagnie Financière Richemont S.A. (Richemont), Hermès International S.C.A. (Hermès), Hugo Boss AG (Hugo Boss), Kering S.A. (Kering), LVMH Moet Hennessy Louis Vuitton S.A. (LVMH), Michael Kors Holdings Ltd (Michael Kors), Polo Ralph Lauren Corp. (Ralph Lauren), Prada S.p.A. (Prada), Salvatore Ferragamo S.p.A. (Ferragamo), Swatch Group AG (Swatch), Tiffany & Co. (Tiffany) and Tod’s S.p.A. (Tod’s).

X We completed this first list with other players in cosmetics: Beiersdorf AG (Beiersdorf), Estée Lauder Companies Inc. (Estée Lauder), L’Occitane International S.A. (L’Occitane), L’Oréal S.A. (L’Oréal) and Shiseido Co. Ltd (Shiseido).

X We also added companies that are in direct relation with luxury companies, such as Luxottica Group S.p.A. (Luxottica) and Safilo Group S.p.A. (Safilo).

X Finally, we decided to include an actor, not part of the luxury environment, but acting as the largest cosmetics company from the emerging markets, Natura Cosméticos S.A. (Natura), to expand the geographic coverage.

Please note that the sample has been adjusted in this third edition. We have added two companies Brunello Cucinelli S.p.A. (Cucinelli) and Michael Kors Holdings Ltd (Michael Kors) because they have recently been listed, respectively on the Milan Stock Exchange and the New York Stock Exchange. We present, at the end of the report, specific data on these two companies.

SOTP analysesFor the companies that have diversified activities (LVMH, Kering, L’Oréal), we performed a sum-of-the-parts (SOTP) analysis to isolate the pure luxury segment and to better understand its characteristics, as well as its contribution to the companies’ performance.

This analysis was not possible for Swatch, Beiersdorf and Shiseido as no accurate data was available.


DCF and valuation parameters



Financial parametersA

Trading multiplesE

Advertising expenses and net working capital analysisC

Transaction multiplesG

Operating aggregatesB

Focus on transactionsF

SOTP and segment analysesD

EY Luxury and Cosmetics IndexH


A

Safilo has the highest gearing with a WACC of 11.2% and beta of 0.73.

DCF valuations for luxury companies are based on weighted average cost of capital (WACC) ranging from 8.3% to 11.2%, depending on capital structure and perceived associated risk

Note: bubble size reflects market cap.

Source: data based on consensus of several brokers’ reports for each company.

Note: market capitalization is based on a one-month average as of 31 December 2012.

Luxury companies WACC Gearing Beta LTGR* LVMH 9.0% 6.2% 0.91 2.5%

Richemont 9.5% (10.1%) 1.31 2.9%

Hermès 8.3% (2.5%) 0.56 2.8%

Swatch 9.3% (8.9%) 1.14 2.7%

Kering 8.4% 12.2% 0.91 2.2%

Prada 9.4% (1.6%) 1.19 2.7%

Luxottica 8.5% 11.3% 0.59 2.5%

Coach 10.0% (5.5%) 1.42 2.5%

Ralph Lauren 9.7% (8.1%) 1.15 n.a.

Michael Kors 10.0% (4.1%) 0.68 n.a.

Burberry 9.4% (4.4%) 1.28 2.9%

Tiffany 9.5% 10.0% 1.23 2.5%

Hugo Boss 8.7% 2.8% 1.02 2.0%

Tod’s 9.9% (3.5%) 0.79 2.6%

Salvatore Ferragamo 9.3% 2.0% 0.79 2.8%

Brunello Cucinelli 9.0% 0.1% 0.42 3.3%

Safilo 11.2% 38.5% 0.73 1.8%

Average 9.3% 2.0% 0.95 2.6%

Median 9.4% (1.6%) 0.91 2.6%

Maximum 11.2% 38.5% 1.42 3.3%

Minimum 8.3% (10.1%) 0.42 1.8%

Companies are sorted in decreasing order on the basis of the market capitalization in euros observed as of 31 December 2012 (one-month average).

*Long-term growth rate

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00

WA

CC (%

)

Beta

Swatch

Prada

Ralph Lauren

Richemont

Tiffany

LVMHBrunello Cucinelli

Salvatore Ferragamo

Luxottica

HermèsHugo BossKering

Burberry

CoachTod's

Safilo

Michael Kors

Financial parameters

X Average WACC, beta and growth rate for the luxury sector are 9.3%, 0.95 and 2.6%, respectively.


A

Only Shiseido and Natura have a positive gearing (indebtedness) in our cosmetics sample.

For cosmetics companies, WACC ranges from 6.2% to 10.9%, and betas from 0.62 to 1.09

Natura

Beiersdorf

Estée Lauder

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0.20 0.40 0.60 0.80 1.00 1.20 1.40

WA

CC

(%)

Beta

Shiseido

L'Oréal

L'Occitane

Cosmetics companies WACC Gearing Beta LTGR L’Oréal 9.1% (0.6%) 0.68 2.2%

Estée Lauder 8.6% 0.1% 1.09 2.0%

Beiersdorf 7.9% (12.9%) 0.62 1.8%

Natura 10.9% 2.7% 0.62 4.9%

Shiseido 6.2% 23.8% 0.75 n.a.

L’Occitane 9.5% (6.0%) 0.85 2.3%

Average 8.7% 1.2% 0.77 2.6%

Median 8.8% (0.2%) 0.72 2.2%

Maximum 10.9% 23.8% 1.09 4.9%

Minimum 6.2% (12.9%) 0.62 1.8%

Note: bubble size reflects market cap.


Note: market capitalization is based on a one-month average as of December 2012.

Companies are sorted in decreasing order on the basis of the market capitalization in euros observed as of 31 December 2012 one-month average.


X Natura’s long-term growth rate (LTGR) is estimated to reach the high end of the range with 4.9%, followed by L’Occitane and L’Oréal with the LTGR estimated above 2.0%.


A

0 2 4 6 8 10 12

Safilo

Natura

Michael Kors

Coach

Tod's

Ralph Lauren

Tiffany

L'Occitane

Richemont

Prada

Burberry

Swatch

Salvatore Ferragamo

Average

L’Oréal

LVMH

Brunello Cucinelli

Hugo Boss

Estée Lauder

Luxottica

Kering

Hermès

Beiersdorf

Shiseido

WACC (in %)

High

WACC

Low

9.2%

Industry benchmark

6.2%

7.9%

8.3%

8.4%

8.5%

8.6%

8.7%

9.0%

9.0%

9.1%

9.2%

9.3%

9.3%

9.4%

9.4%

9.5%

9.5%

9.5%

9.7%

9.9%

10.0%

10.0%

10.9%

11.2% Safilo

Shiseido

Kering

Luxottica

Tiffany

LVMH

Hugo Boss

Natura

Salvatore Ferragamo

Average

Estée Lauder

Brunello Cucinelli

L’Oréal

Prada

Hermès

Tod's

Michael Kors

Burberry

Coach

L'Occitane

Ralph Lauren

Swatch

Richemont

Beiersdorf

Gearing (in %)

(12.9)

(10.1)

(8.9)

(8.1)

(6.0)

(5.5)

(4.4)

(4.1)

(3.5)

(2.5)

(1.6)

(0.6)

(4.2)

0.1

0.1

2.0

2.7

2.8

6.2

10.0

11.3

12.2

23.8

38.5

High

Gearing

Low

(4.2%)

Industry benchmark

Coach

Richemont

Burberry

Tiffany

Prada

Ralph Lauren

Swatch

Estée Lauder

Hugo Boss

Kering

LVMH

Average

L'Occitane

Salvatore Ferragamo

Tod's

Shiseido

Safilo

L'Oréal

Michael Kors

Beiersdorf

Natura

Luxottica

Hermès

Brunello Cucinelli

Beta

0.42

0.56

0.59

0.62

0.62

0.68

0.68

0.73

0.75

0.79

0.79

0.85

0.90

0.91

0.91

1.02

1.09

1.14

1.15

1.19

1.23

1.28

1.31

1.42

High

Beta

Low

0.90

Industry benchmark

Natura

Brunello Cucinelli

Burberry

Richemont

Hermès

Salvatore Ferragamo

Prada

Swatch

Tod's

Average

Tiffany

Coach

LVMH

Luxottica

L'Occitane

L’Oréal

Kering

Hugo Boss

Estée Lauder

Beiersdorf

Safilo 1.8%

1.8%

2.0%

2.0%

2.2%

2.2%

2.3%

2.5%

2.5%

2.5%

2.5%

2.6%

2.6%

2.7%

2.7%

2.8%

2.8%

2.9%

2.9%

3.3%

4.9%

High

Growth

Low

2.6%

Industry benchmark

LTGR (in %)


Note: LTGR data was not available for Ralph Lauren, Michael Kors and Shiseido.

EY luxury and cosmetics sample Summary of financial parameters



B

X Top line for the major players of the industry is expected to rise at a CAGR of about 12.3% between FY11A and FY14E. This growth would mainly be driven by:

XWealth creation and middle class opportunities in the emerging markets XFavorable demographics driving the structural growth XStrong balance sheets and cash flow generation XGood management teams with long-term investment strategies

Sales (in €m) FY11A FY12A/E FY13E FY14E CAGR (FY11A–FY14E)

Michael Kors 985 1,516 1,981 2,485 36.1%Prada 2,556 3,297 3,894 4,482 20.6%Brunello Cucinelli 243 279 317 359 13.9%Hermès 2,841 3,484 3,789 4,195 13.9%Salvatore Ferragamo 986 1,153 1,268 1,399 12.3%Coach 3,146 3,604 3,997 4,443 12.2%LVMH 23,659 28,103 30,169 33.057 11.8%Kering* 8,062 9,736 10,351 11,242 11.7%Burberry 2,269 2,402 2,749 3,071 10.6%Hugo Boss 2,059 2,346 2,533 2,777 10.5%Richemont 8,867 10,198 11,061 11,922 10.4%Luxottica 6,223 7,086 7,757 8,279 10.0%Swatch 5,601 6,455 6,847 7,418 9.8%Tiffany 2,756 2,870 3,238 3,521 8.5%Tod's 910 963 1,039 1,124 7.3%Ralph Lauren 5,189 5,327 5,776 6,298 6.7%Safilo 1,102 1,175 1,129 1,198 2.8%Average 12.3%Median 10.6%Max 36.1%Min 2.8%Source: data based on consensus of several brokers’ reports for each company.

Safilo

Ralph Lauren

Tod's

Tiffany

Swatch

Luxottica

Richemont

Hugo Boss

Burberry

Kering

LVMH

Coach

Average

Salvatore Ferragamo

Hermès

Brunello Cucinelli

Prada

Michael Kors

Sales’ CAGR FY11A–FY14E — luxury companies

36.1%

20.6%

13.9%

13.9%

12.3%

12.3%

12.2%

11.8%

11.7%

10.6%

10.5%

10.4%

10.0%

9.8%

8.5%

7.3%

6.7%

2.8%

*Kering sales for FY11A–FY14E exclude numbers for Fnac, Redcats, Conforama and CFAO. Notes: figures for 2012 are estimated or actual depending on their availability as of the date of this study.

Figures are converted into EUR using exchange rates as of 31 December 2012 (Source: Oanda.com).

Sales development and growth for the luxury industry

Consensus of analysts reports reflect that companies will maintain a sustained top-line growth between FY11A and FY14E.

Operating aggregates


B

Shiseido

Beiersdorf

Estée Lauder

L’Oréal

Average

Natura

L'Occitane

Sales’ CAGR FY11A–FY14E — cosmetics companies

2.1%

5.6%

7.5%

7.5%

8.8%

14.2%

16.0%

XSales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. X Increased demand through innovative products will cater to underserved emerging markets. X Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies.

Sales (in €m) FY11A FY12A/E FY13E FY14E CAGR (FY11A–FY14E)

L'Occitane 913 1,084 1,251 1,425 16.0%

Natura 2,064 2,343 2,693 3,073 14.2%

L’Oréal 20,343 22,463 23,914 25,285 7.5%

Estée Lauder 6,665 7,349 7,732 8,279 7.5%

Beiersdorf 5,633 6,040 6,329 6,634 5.6%

Shiseido 6,346 6,303 6,583 6,746 2.1%

Average 8.8%

Median 7.5%

Maximum 16.0%

Minimum 2.1%

Source: data based on consensus of several brokers’ reports for each company. Notes: figures for 2012 are estimated or actual depending on their availability as of the date of this study. Figures are converted into EUR using exchange rates as of 31 December 2012 (Source: Oanda.com).

Sales development and growth for the cosmetics industry

The industry is expected to follow a trend similar, albeit at a slightly lower growth rate, to the one shown by luxury players.



B

Safilo

Brunello Cucinelli

Luxottica

Ralph Lauren

Salvatore Ferragamo

Kering

Hugo Boss

Tiffany

Average

Burberry

LVMH

Tod's

Michael Kors

Richemont

Swatch

Prada

Coach

Hermès

Average EBITDA margin FY11A–FY14E — luxury companies

10.5%

18.0%

19.2%

19.2%

20.0%

22.2%

23.4%

24.2%

24.6%

25.7%

25.7%

26.1%

26.4%

27.1%

28.4%

32.2%

34.2%

35.0%

XMost of the companies are expected to improve their operating margin in the coming years. XThe following are the main drivers of margin growth:

XScale/Operating leverage XFavorable regional and distribution mix XStrong pricing power

EBITDA margin FY11A FY12A/E FY13E FY14E Average ratio (FY11A-FY14E)

Hermès 35.3% 35.6% 34.5% 34.6% 35.0%Coach 34.4% 34.5% 33.9% 33.9% 34.2%Prada 29.5% 31.9% 33.2% 34.0% 32.2%Swatch 27.2% 28.8% 28.7% 29.1% 28.4%Richemont 26.8% 27.0% 27.1% 27.6% 27.1%Michael Kors 21.9% 28.1% 28.0% 27.6% 26.4%Tod's 24.9% 26.0% 26.4% 27.1% 26.1%LVMH 25.6% 25.0% 25.8% 26.4% 25.7%Burberry 25.0% 26.0% 25.6% 26.2% 25.7%Tiffany 24.5% 22.7% 24.4% 25.1% 24.2%Hugo Boss 22.8% 22.4% 23.9% 24.8% 23.4%Kering* 21.3% 21.2% 22.8% 23.4% 22.2%Salvatore Ferragamo 18.8% 19.8% 20.1% 21.4% 20.0%Ralph Lauren 18.4% 19.3% 19.6% 19.7% 19.2%Luxottica 17.6% 18.9% 19.9% 20.4% 19.2%Brunello Cucinelli 16.6% 17.6% 18.4% 19.3% 18.0%Safilo 11.1% 9.8% 9.8% 11.2% 10.5%Average 23.6% 24.4% 24.8% 25.4% 24.6%Median 24.5% 25.0% 25.6% 26.2% 25.7%Maximum 35.3% 35.6% 34.5% 34.6% 35.0%Minimum 11.1% 9.8% 9.8% 11.2% 10.5%

Source: data based on consensus of several brokers’ reports for each company. * Kering margin for FY11–FY14E excludes numbers for Fnac, Redcats, Conforama and CFAO. Note: the 2012 EBITDA margin is computed on the basis of either actual or estimated figures for 2012 sales, depending on their availability. As some groups are listed under different jurisdictions around the world, they may use different GAAP, and therefore a direct comparison of EBITDA may be less meaningful than if their results were presented under the International Accounting Standards.

EBITDA margin trend for luxury companies

On the basis of analysts’ expectations, companies should maintain healthy operating margins between FY11A and FY14E.



B

XAs with luxury companies, most cosmetics companies are expected to sustain/improve their operating margin in the coming years. XThe key drivers of margin growth are:

X Increased demand for high-end cosmetic brands by aspirational shoppers (those that seek out designer names but spend less than $300 per purchase) in mature markets XFavorable exchange rates

EBITDA margin FY11A FY12A/E FY13E FY14E Average ratio (FY11A–FY14E)

Natura 25.5% 23.8% 25.2% 25.1% 24.9%

L'Occitane 21.5% 21.0% 21.6% 21.9% 21.5%

L’Oréal 20.1% 20.2% 20.2% 20.6% 20.3%

Estée Lauder 16.9% 16.5% 18.3% 19.1% 17.7%

Beiersdorf 13.9% 14.3% 15.2% 16.0% 14.9%

Shiseido 11.0% 9.1% 11.5% 11.7% 10.8%

Average 18.2% 17.5% 18.7% 19.1% 18.3%

Median 18.5% 18.4% 19.3% 19.9% 19.0%

Maximum 25.5% 23.8% 25.2% 25.1% 24.9%

Minimum 11.0% 9.1% 11.5% 11.7% 10.8%


Note: the 2012 EBITDA margin is computed on the basis of either actual or estimated figures for 2012 sales, depending on their availability.

Average EBITDA margin FY11A–FY14E — cosmetics companies

24.9%

21.5%

20.3%

18.3%

17.7%

14.9%

10.8% Shiseido

Beiersdorf

Estée Lauder

Average

L’Oréal

L'Occitane

Natura

EBITDA margin trend for cosmetics companies

On the basis of analysts’ expectations, average EBITDA margins for cosmetics companies will range between 18% and 19% during FY11A–FY14E, a lower level compared with margins for luxury companies during the same period.



B

X On the basis of historical and estimated capex figures, capex on sales ratio for luxury industry ranges between 5% and 6%.

X Increasing directly operated stores is a key strategy for leading luxury brands to lift brand recognition, expand customer base and improve efficiency of operations.

X Some brands focus on store extensions/refurbishments rather than new openings. X In-store experience is becoming increasingly important.

Capex ratio FY11A FY12A/E FY13E FY14E Average ratio (FY11A–FY14E)

Prada 10.9% 10.6% 8.4% 7.5% 9.4%

Burberry 8.2% 11.1% 8.3% 7.5% 8.8%Michael Kors 6.8% 7.4% 7.7% 8.0% 7.5%Brunello Cucinelli 6.0% 9.7% 6.8% 5.6% 7.0%Richemont 5.2% 8.8% 6.5% 6.3% 6.7%Hermès 6.5% 7.5% 5.6% 5.5% 6.3%Swatch 5.6% 6.0% 5.9% 6.5% 6.0%LVMH 7.3% 6.1% 5.3% 5.2% 6.0%Tiffany 6.6% 5.8% 5.5% 5.6% 5.9%Hugo Boss 5.3% 7.1% 5.2% 4.8% 5.6%Tod's 6.8% 5.2% 4.9% 4.5% 5.4%Luxottica 5.4% 5.3% 4.6% 4.2% 4.9%Salvatore Ferragamo 4.3% 5.1% 4.5% 4.1% 4.5%Ralph Lauren 4.0% 4.7% 4.6% 3.5% 4.2%Coach 3.6% 3.9% 4.7% 3.5% 3.9%Kering 3.1% 4.5% 3.7% 3.5% 3.7%Safilo 2.2% 2.4% 2.9% 2.7% 2.6%Average 5.7% 6.5% 5.6% 5.2% 5.8%Median 5.6% 6.0% 5.3% 5.2% 5.9%Maximum 10.9% 11.1% 8.4% 8.0% 9.4%Minimum 2.2% 2.4% 2.9% 2.7% 2.6%


Safilo

Kering

Coach

Ralph Lauren

Salvatore Ferragamo

Luxottica

Tod's

Hugo Boss

Average

Tiffany

LVMH

Swatch

Hermès

Richemont

Brunello Cucinelli

Michael Kors

Burberry

Prada

Average Capex Ratio FY11A–FY14E — luxury companies

9.4%

8.8%

7.5%

7.0%

6.7%

6.3%

6.0%

6.0%

5.9%

5.8%

5.6%

5.4%

4.9%

4.5%

4.2%

3.9%

3.7%

2.6%

Note: the 2012 capex ratio is computed on the basis of either actual or estimated figures for 2012 sales, depending on their availability.

Capex ratio for the luxury industry

Analysts are expecting luxury companies to increase their capex in FY13E to support top-line growth.



B

X On the basis of historical and estimated capex figures, capex on sales ratio for cosmetics industry ranges between 4.0% and 5.0%.

X Beiersdorf has the lowest capex ratio ranging between 1.3% and 2.7% over the years analyzed.

Capex ratio FY11A FY12A/E FY13E FY14E Average ratio (FY11A–FY14E)

L’Occitane 7.3% 7.5% 6.2% 4.7% 6.4%

Natura 6.1% 6.8% 5.3% 4.8% 5.8%

Estée Lauder 4.0% 4.3% 4.7% 4.6% 4.4%

L’Oréal 4.2% 4.2% 4.2% 4.2% 4.2%

Shiseido 3.4% 3.3% 4.1% 4.0% 3.7%

Beiersdorf 2.7% 1.3% 1.8% 1.8% 1.9%

Average 4.6% 4.6% 4.4% 4.0% 4.4%

Median 4.1% 4.3% 4.5% 4.4% 4.3%

Maximum 7.3% 7.5% 6.2% 4.8% 6.4%

Minimum 2.7% 1.3% 1.8% 1.8% 1.9%


Note: the 2012 capex ratio is computed on the basis of either actual or estimated figures for 2012 sales, depending on their availability.

1.9%

3.7%

4.2%

4.4%

4.4%

5.8%

6.4%

Beiersdorf

Shiseido

L'Oréal

Average

Estée Lauder

Natura

L'Occitane

Average capex ratio FY11A–FY14E — cosmetics companies

Capex ratio for the cosmetics industry

Analysts are also expecting cosmetics companies to increase their capex to support top-line growth.



B

Shiseido

Safilo

Beiersdorf

Ralph Lauren

Tod's

Estée Lauder

L'Oréal

Tiffany

Swatch

Luxottica

Richemont

Hugo Boss

Burberry

Average

Kering

LVMH

Coach

Salvatore Ferragamo

Hermès

Brunello Cucinelli

Natura

L'Occitane

Prada

Michael Kors

Average sales CAGR FY11A–FY14E

36.1%

20.6%

16.0%

14.2%

13.9%

13.9%

12.3%

12.2%

11.8%

11.7%

11.4%

10.6%

10.5%

10.4%

10.0%

9.8%

8.5%

7.5%

7.5%

7.3%

6.7%

5.6%

2.8%

2.1%

High

Sales CAGR

Low

11.4%

Industry benchmark

Beiersdorf

Safilo

Kering

Shiseido

Coach

L'Oréal

Ralph Lauren

Estée Lauder

Salvatore Ferragamo

Luxottica

Tod's

Average

Hugo Boss

Natura

Tiffany

LVMH

Swatch

Hermès

L'Occitane

Richemont

Brunello Cucinelli

Michael Kors

Burberry

Prada

Average capex ratio FY11A–FY14E

4.2%

4.2%

4.4%

4.5%

4.9%

5.4%

5.4%

5.6%

5.8%

5.9%

6.0%

6.0%

6.3%

6.4%

6.7%

7.0%

7.5%

8.8%

9.4%

3.9%

3.7%

3.7%

2.6%

1.9%

High

Capex ratio

Low

5.4%

Industry benchmark

Safilo

Shiseido

Beiersdorf

Estée Lauder

Brunello Cucinelli

Luxottica

Ralph Lauren

Salvatore Ferragamo

L'Oréal

L'Occitane

Kering

Average

Hugo Boss

Tiffany

Natura

Burberry

LVMH

Tod's

Michael Kors

Richemont

Swatch

Prada

Coach

Hermès

Average EBITDA margin FY11A–FY14E

High

EBITDA margin

Low

22.9%

Industry benchmark

10.5%

10.8%

14.9%

17.7%

18.0%

19.2%

19.2%

20.0%

20.3%

21.5%

22.2%

22.9%

23.4%

24.2%

24.9%

25.7%

25.7%

26.1%

26.4%

27.1%

28.4%

32.2%

34.2%

35.0%


EY luxury and cosmetics sample Summary of operating aggregates



C

Selected companies — advertising expenses as a % of sales FY13E

0%5%

10%

15%

20%

25%

30%

35%

40%

45%

Luxury companies Cosmetics companies

In %

4.9% 5.2% 6.0% 6.5%9.5% 10.3%

24.7% 25.3%

30.6%

41.4%

Prad

a

Her

mès

Hug

o Bo

ss

Salv

ator

e Fe

rrag

amo

Rich

emon

t

LO

ccita

ne

Shis

eido

Esté

e La

uder

LO

réal

Beie

rsdo

rf

X Marketing and advertising represent a significant cost component for global cosmetics manufacturers. X Luxury brands further leverage on digital media for advertising and e-commerce to reach out consumers who are more tech-savvy, prefer instant access to information and have higher tendency to make purchases online.

Source: EY selected research.

Advertising expenses

Advertising expenses will remain a major operating issue, especially for companies focusing on top-line growth.

Advertising expenses and net working capital analysis


C

-20%

0%

20%

40%

60%

80%

100%

KeringLuxotticaMichaelKors

BrunelloCucinelli

Salvatore Ferragamo

Tod'sPradaLVMHCoachBurberrySafiloRalphLauren

Hugo BossHermèsRichemontSwatchTiffany

2011

20142014

2014

2014

20142014

2014

2014 2014

2013

2014

20142014 2014

2014

2012

2014

2011 2011

20112011 2011

2011

2011 2011

2011

2011

2011 2011

20112011

2011 2011Net

wor

king

cap

ital

as

% of

sal

es

X As shown in the graph below, the jewelry and watches business is the most demanding in terms of working capital of all luxury segments.

X Hard luxuries (watches and jewelry) rely heavily on wholesale channels.


Note: net working capital (NWC)=current assets less current liabilities (excluding cash or debt-related elements); LVMH NWC available for FY11A–FY13E, Luxottica NWC available for FY11A and FY12A.

Working capital requirement for jewelry and watches companies is higher than that for other luxury companies



C

2011

2011

2011

2011

2011

2011

20142014

2014

20142014

2014

0%

2%

4%

6%

8%

10%

12%

14%

16%

L’OréalNatura CosmeticosEstée LauderShiseidoBeiersdorfL’Occitane

Net

wor

king

cap

ital

as

% of

sal

es

X Net working capital requirement is very heterogeneous in the cosmetics segment. X Companies’ levels of requirements are expected to remain mainly stable over FY11A–FY14E. However, Natura Cosmeticos’ net working capital is expected to decrease as a percentage of sales for the period FY11A–FY14E.


Note: net working capital (NWC)=current assets less current liabilities (excluding cash or debt-related elements).

Net working capital requirement for cosmetics companies is lower than that for luxury companies



D

X LVMH SOTP analysis implies a total enterprise valuation of €88.9b in FY13E. X The fashion and leather segment is the largest contributor, both in terms of sales (36%) and EBIT (56%).

Source: SOTP evaluated on the basis of EY analysis and the following brokers’ reports: Equita Sim (11 December 2012), Credit Suisse (9 January 2013) and Kepler Capital Markets (23 January 2013).

Sales breakdown FY13E (in €b)

Luxury products(excluding spirits)

10.9

3.8

3.0

3.01.5

(0.2)

8.7 30.6

–1% Total EliminationsSelective

retailingCognac/spiritsWines and

champagneWatches and

jewelryPerfumes

and cosmeticsFashion and

leather

36%

12%

10%

10%

28%

5%

EBIT breakdown FY13E (in €b)

3.80.5

0.4

0.90.5

1.0 6.7

(0.3)–4%

TotalEliminationsSelective retailing

Cognac/spirits

Wines and champagne

Watches and jewelry

Perfumes and Cosmetics

Fashion and Leather

56%

7%

7%5%

13%

15%


Enterprise valuation breakdown FY13E (in €b)


5.5

12.45.2

–4%

TotalHermès stake

EliminationSelective retailing

Cognac/spirits

Wines and champagne

Perfumes and Cosmetics

Fashion and leather

Watches andjewelry

57%

6%

4.014%

10%

6%

8.788.9

50.6

(3.2)

5%

6%5.4

LVMH: sum-of-the-parts (SOTP)SOTP and segment analyses


D

X Kering’s SOTP analysis implies a total enterprise value of €22.2b in FY13E (excluding Fnac and Redcats business). XContributing about 89% to the total EBIT for 65% of sales, the Gucci Group is the most profitable segment in terms of operating margin.

Source: SOTP evaluated on the basis of EY analysis and the following brokers’ reports: HSBC (12 October 2012), JP Morgan (26 October 2012), Kepler Capital Markets (31 January 2013), Natixis (7 February 2013), Deutsche Bank (15 February 2013) and Credit Suisse (18 February 2013).

Note: figures for Fnac, Redcats and CFAO stake have been excluded from the SOTP analysis.

Enterprise value breakdown FY13E (in €b)

Luxuryproducts Sport and lifestyle

20.3

2.8 0.2 22.2

(1.1)

TotalEliminationsVolcomPumaGucci group

91%

13% 1.0%

–5%


Luxuryproducts Sport and lifestyle

5.6

3.30.3 10.3

(0.0)0%

TotalEliminationsVolcomPumaGucci group

65%

6.7

32%

3.0%

8%


Luxuryproducts

1.4

1.7

0.3 0.0 2.0

(0.1)

–6%TotalEliminationsVolcomPumaGucci group

Sport and lifestyle

89%

16%1.0%

Kering: Sum-of-the-partsSOTP and segment analyses


D

X The Gucci Group’s SOTP analysis implies an enterprise value of €20.3b in FY13E. X Within the Gucci Group segment, Gucci brand alone represents 58% of the top line and 69% of EBIT in FY13E, meaning that the Gucci brand is expected to constitute the largest segment within the Gucci Group and the most profitable in terms of operating margin.

Source: SOTP evaluated on the basis of EY analysis and the following brokers’ reports: HSBC (12 October 2012), JP Morgan (26 October 2012), Kepler Capital Markets (31 January 2013), Natixis (7 February 2013), Deutsche Bank (15 February 2013) and Credit Suisse (18 February 2013).


1.2

0.30.1

0.1 1.7

Gucci groupOther brandsYSLBottega venetaGucci brand

69%

19%

5%7%

Enterprise value breakdown FY13E (in €b)

13.2

4.40.8

1.8 20.3


64%

21%

4%10%


3.9

1.10.5

1.2 6.7


58%

16%

8%

19%

Kering: further analysis of the Gucci Group through the SOTP approach

SOTP and segment analyses


D

X The luxury products division accounts for 25% in the total sales in FY12A. X This division is expected to register a CAGR of 10% over the 2011–15E period when its operating income is anticipated to grow from €926m to €1,521m (or at a CAGR of 13%) over the same period.

X It is the second biggest division within L’Oréal.

Source: Analysts research (H2 2012).

Sales breakdown FY11A–FY15E (in €b)

Luxury products

0

5

10

15

20

25

2015e2014e2013e2012a2011a

Professional products Active cosmetics

Consumer productsOther

14%

25% 26%26% 25%

6%6%7% 8%

48%

24%

7%7%

6%7%

22.424.0

25.5 27.8

20.37%6%

48% 48% 48% 49%

13% 13% 13% 12%

CAGR:10%

EBIT breakdown FY11A–FY15E (in €b)

Luxury products

–1

0

1

2

3

4

5

6

2015e2014e2013e2012a2011a

Professional productsActive cosmetics

Consumer products

(17%)

9%

19%

8%8%

8%8%

18% 17% 16% 16%

56%

28%

6%

3.33.7

4.24.4

5.1

6%6%

6%6%

30%31% 32%

30%

56% 55% 55% 56%

(16%) (16%) (15%) (14%)

CAGR:13%

EliminationsOther

EBIT margin FY11A–FY15E (in %)

Luxury products

19%

16%16%

20% 21% 22% 22%

18%17% 17%

0%

5%

10%

15%

20%

25%

2015e2014e2012e2012a2011a

Total

L’Oréal: segment analysisSOTP and segment analyses


E Trading multiples

X The expected evolution of valuation multiples is the result of an improvement in the top-line growth as well as in the operating efficiency of the luxury companies.

X The average top-line growth for luxury companies reached a peak in FY11A (18%). FY12E is also expected to witness high top-line growth (16%), followed by a more normal growth of about 10% in FY13E and FY14E. The trading multiples reflect this progression.


Notes: market capitalization is based on a one-month average as of December 2012. The results of 2012 are actual (“a”) if the financial results are “closed” and expected (“e”) if the financial year is not closed yet.

0

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2014e2013e2012a/e2011a

EV/Sales (FY11A–FY14E)

Average

3.6x

3.1x 3.0x2.7x

2.4x 2.3x2.5x

2.7x

Median

0x

3.0x

6.0x

9.0x

12.0x

15.0x

18.0x

2014e2013e2012a/e2011a

EV/EBITDA (FY11A–FY14E)

Average

15.0x

12.0x10.8x 10.6x

9.3x 8.6x9.6x

12.3x

Median

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

2014e2013e2012a/e2011a

Price to earnings (FY11A–FY14E)

Average

25.2x22.0x

19.2x16.3x

14.9x16.8x

20.1x21.2x

Median

In the luxury sector, valuation trading multiples take into account the expected strong growth and improvement of margins

Level of multiples illustrate the growing attractiveness of the luxury sector.


E Trading multiples

X Sales multiples illustrate continuous improvement in cosmetics companies’ top line from FY11A to FY14E, with 2011 growth reaching an average of 7.9%, followed by an expected average sales growth of 8.8% over the FY11A–FY14E period.


Note: market capitalization is based on a one-month average as of December 2012. The results of 2012 are actual (“a”) if the financial results are “closed” and expected (“e”) if the financial year is not closed yet.

0

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

2014e2013e2012a/e2011a

EV/Sales (FY11A–FY14E)

Average

2.8x2.5x 2.6x

2.3x 2.4x2.1x

2.3x

2.8x

Median

0

3.0x

6.0x

9.0x

12.0x

15.0x

18.0x

2014e2013e2012a/e2011a

EV/EBITDA (FY11A–FY14E)

Average

15.0x14.1x

12.0x10.9x11.4x

12.8x14.3x

15.7x

Median

0

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

2014e2013e2012a/e2011a

Price to earnings (FY11A–FY14E)

Average

32.2x

26.9x

22.2x19.7x 19.4x

22.3x

27.0x29.7x

Median

Cosmetics companies’ valuation trading multiples are expected to follow the same trend as the one expected for luxury companies

Sales multiples illustrate the dynamism of cosmetics over the past years.


E Trading multiples

Source: data based on consensus of several brokers’ reports for each company,


Hermès

Prada

Michael Kors

Natura

Brunello Cucinelli

Coach

L'Occitane

Tod's

Richemont

Average

L'Oréal

Swatch

Burberry

LVMH

Salvatore Ferragamo

Hugo Boss

Estée Lauder

Luxottica

Kering

Tiffany

Beiersdorf

Ralph Lauren

Shiseido

Safilo

EV/Sales (FY12A/E)

0.6x

0.9x

1.8x

2.0x

2.2x

2.2x

2.3x

2.4x

2.4x

2.6x

2.7x

2.7x

2.7x

2.8x

2.9x

2.9x

2.9x

3.1x

3.2x

3.3x

4.0x

4.9x

5.2x

6.7x

High

EV/Sales (FY12A/E)

Low

2.9x

Industry benchmark

Hermès

Prada

Natura

Michael Kors

Coach

Brunello Cucinelli

Tod's

Richemont

L'Oréal

L'Occitane

Swatch

Average

LVMH

Burberry

Estée Lauder

Salvatore Ferragamo

Hugo Boss

Luxottica

Kering

Beiersdorf

Tiffany

Ralph Lauren

Shiseido

Safilo

EV/Sales (FY14E)

0.5x

0.9x

1.5x

1.8x

1.9x

1.9x

2.0x

2.1x

2.1x

2.1x

2.1x

2.3x

2.3x

2.4x

2.4x

2.5x

2.5x

2.5x

2.6x

2.6x

3.0x

3.0x

3.8x

5.6x

High

EV/Sales (FY14E)

Low

2.3x

Industry benchmark

Hermès

Prada

Michael Kors

Natura

Brunello Cucinelli

Coach

L'Occitane

Tod's

Richemont

L'Oréal

Average

Swatch

LVMH

Burberry

Salvatore Ferragamo

Hugo Boss

Estée Lauder

Luxottica

Kering

Beiersdorf

Tiffany

Ralph Lauren

Shiseido

Safilo

EV/Sales (FY13E)

0.6x

0.9x

1.7x

1.9x

2.0x

2.0x

2.1x

2.3x

2.3x

2.3x

2.4x

2.5x

2.6x

2.6x

2.6x

2.7x

2.7x

2.7x

2.9x

2.9x

3.5x

3.8x

4.4x

6.2x

High

EV/Sales (FY13E)

Low

2.6x

Industry benchmark

EY luxury and cosmetics sample Summary of EV/Sales multiples


E Trading multiples



Hermès

Brunello Cucinelli

Michael Kors

Natura

Prada

L'Occitane

Estée Lauder

Beiersdorf

L’Oréal

Salvatore Ferragamo

Average

Luxottica

Tod's

Hugo Boss

Richemont

LVMH

Burberry

Kering

Shiseido

Tiffany

Swatch

Ralph Lauren

Coach

Safilo

EV/EBITDA (FY12A/E)

5.7x

9.3x

9.5x

9.5x

9.5x

10.2x

10.2x

11.3x

10.4x

10.6x

10.8x

10.9x

12.3x

12.6x

12.9x

13.8x

14.4x

14.3x

15.0x

16.3x

16.8x17.5x

18.8x

19.0x

High

EV/EBITDA (FY12A/E)

Low

12.6x

Industry benchmark

Hermès

Brunello Cucinelli

Natura

L’Oréal

Beiersdorf

Prada

Estée Lauder

L'Occitane

Michael Kors

Salvatore Ferragamo

Luxottica

Average

Tod's

Richemont

LVMH

Hugo Boss

Swatch

Burberry

Kering

Ralph Lauren

Coach

Shiseido

Tiffany

Safilo

EV/EBITDA (FY14E)

4.9x

7.0x

7.4x

7.7x

7.8x

8.0x

8.1x

8.2x

8.4x

8.6x

9.1x

9.3x

9.7x

9.8x

9.9x

10.9x

10.9x

11.1x

11.3

11.7x

12.0x

12.1x

13.3x

16.2x

High

EV/EBITDA (FY14E)

Low

9.7x

Industry benchmark

Hermès

Brunello Cucinelli

Natura

Michael Kors

Prada

L’Oréal

Beiersdorf

L'Occitane

Estée Lauder

Salvatore Ferragamo

Average

Luxottica

Tod's

Richemont

LVMH

Hugo Boss

Burberry

Swatch

Kering

Ralph Lauren

Coach

Tiffany

Shiseido

Safilo

EV/EBITDA (FY13E)

5.9x

7.7x

7.9x

8.6x

8.6x

9.0x

9.0x

9.2x

9.5x

9.6x

10.0x

10.3x

10.7x

11.0x

11.5x

12.4x

12.6x

12.9x

12.9x

13.3x

13.5x

13.8x

15.8x

18.0x

High

EV/EBITDA (FY13E)

Low

11.0x

Industry benchmark

EY luxury and cosmetics sample Summary of EV/EBITDA multiples


E Trading multiples


Notes: market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E.

0% 5% 10% 15% 20% 25% 30% 35% 40%0x

1x

2x

3x

4x

5x

6xR2 = 0.5517

2012 EBITDA margin (%)

LuxotticaBeiersdorf

ShiseidoSafilo

Natura

BurberryLVMH

Prada

RichemontTod’s

Ralph Lauren

Coach

L'Oréal

L’Occitane

Estée LauderTiffany

Swatch Hugo Boss

Michael Kors

Brunello Cucinelli

SalvatoreFerragamo

Kering

2012

EV/

Sale

s

Safilo

Beiersdorf

Luxottica

Ralph Lauren

Kering

Tiffany

Hugo BossBurberry

Richemont

SwatchTod'sLVMH

Coach

Estée Lauder

L'Oréal

Brunello CucinelliL'Occitane Natura

Salvatore Ferragamo

Shiseido

Hermès

PradaMichael Kors

0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%0x

1x

2x

3x

4x

5x

6x

7x

8x

2012

EV/

Sale

s


R2 = 0.6169

0% 10% 20% 30% 40% 50% 60%0x

1x

2x

3x

4x

5x

6x

Coach

Prada

Natura

L'OréalSwatch

Estée Lauder

L’Occitane

LuxotticaBeiersdorf

ShiseidoSafilo

LVMHTiffany

Tod’s

Hugo Boss

Richemont

Ralph Lauren

Burberry

Michael Kors

Kering

Salvatore Ferragamo

Brunello Cucinelli

2012

EV/

Sale

s

2012 sales growth (%)

R2 = 0.5538

–10% 0% 10% 20% 30% 40.0% 50.0% 60.0%

1x

2x

3x

4x

5x

6x

7x

8x

Hermès

Prada

Natura

Tod’s

BurberryTiffany

SafiloShiseido

Ralph Lauren

Beiersdorf

L’OccitaneSwatch

Estée Lauder

Luxottica

LVMH

Hugo Boss

Richemont

L'Oréal

Coach

Kering

Michael Kors

Salvatore Ferragamo

Brunello Cucinelli

2012

EV/

Sale

s


R2 = 0.4516

Regression analysis EV/Sales multiple vs. EBITDA margin and 2012 growth

Analysis, excluding Hermès data, shows strong correlation between EV/Sales levels and profitability and growth.

Including Hermès data

Excluding Hermès data


E Trading multiples

0% 5% 10% 15% 20% 25% 30% 35% 40%0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

Coach

Prada

Natura

Tod’s Richemont

Swatch LVMHL'Oréal

Tiffany

BurberryEstée Lauder

L’Occitane

Hugo BossLuxottica

Ralph Lauren

Beiersdorf

Shiseido

Safilo

Michael Kors

Brunello Cucinelli

Kering

Salvatore Ferragamo

2013

EV/

Sale

s


R2 = 0.6142

0% 5% 10% 15% 20% 25% 30% 35% 40%0x

1x

2x

3x

4x

5x

6x

7x

Safilo

Shiseido

Beiersdorf

Ralph Lauren

LuxotticaEstée Lauder

L'Oréal

Hugo Boss

Tiffany

Tod’s Swatch

Natura

L’Occitane

LVMHRichemont

Burberry

Prada

Coach

Hermès

Salvatore FerragamoBrunello Cucinelli

Kering

Michael Kors20

13 E

V/Sa

les


R2 = 0.6206

–4% 1% 6% 11% 16% 21% 26% 31% 36%

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

Coach

Prada

Natura

Tod’s RichemontSwatch

LVMHL'Oréal

Tiffany


L’Occitane

Hugo Boss Luxottica

Ralph Lauren

Beiersdorf

ShiseidoSafilo

Michael Kors

Brunello Cucinelli

Kering

Salvatore Ferragamo

2013

EV/

Sale

s


R2 = 0.585

–4% 1% 6% 11% 16% 21% 26% 31% 36%

1x

2x

3x

4x

5x

6x

7x

Natura

Prada

L’OccitaneBurberry

Coach

Tiffany

Ralph Lauren

Estée Lauder

LVMH

Richemont

Tod’s

Swatch

Hugo Boss

L'Oréal

Beiersdorf

Luxottica

ShiseidoSafilo

Hermès

Michael Kors

Kering

Brunello Cucinelli

Salvatore Ferragamo

2013

EV/

Sale

s


R2 = 0.2751


Analysis, excluding Hermès data, shows strong correlation between EV/Sales levels and profitability and growth.


Notes: market capitalization is based on a one-month average as of December 2012. The 2013 growth corresponds to the expected sales growth rate between FY12A/E and FY13E.




E Trading multiples

0% 5% 10% 15% 20% 25% 30% 35% 40%0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

Coach

Prada

Natura

Tod’s Richemont

Swatch LVMH

L'Oréal

Tiffany


L’Occitane

Hugo BossLuxottica

Ralph Lauren

Beiersdorf

Shiseido

Safilo

Michael Kors

Brunello Cucinelli

Kering

Salvatore Ferragamo

2014

EV/

Sale

s


R2 = 0.6245

0% 5% 10% 15% 20% 25% 30% 35% 40%0x

1x

2x

3x

4x

5x

6x

Coach

Prada

Natura

Tod’s RichemontSwatch

LVMH

L'Oréal

Tiffany


L’Occitane

Hugo BossLuxottica

Ralph Lauren

Beiersdorf

Shiseido

Safilo

Michael Kors

Brunello Cucinelli

Kering

Salvatore Ferragamo

Hermès

2014

EV/

Sale

s


R2 = 0.606

0% 5% 10% 15% 20% 25% 30%0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

Coach

Prada

Natura

L'Oréal

Swatch Estée Lauder

L’Occitane

LuxotticaBeiersdorf

Shiseido Safilo

LVMH

Tiffany

Tod’s

Hugo Boss

Richemont

Ralph Lauren

Burberry

Michael Kors

Kering Salvatore Ferragamo

Brunello Cucinelli

2014

EV/

Sale

s


R2 = 0.4243

0% 5% 10% 15% 20% 25% 30%0x

1x

2x

3x

4x

5x

6x

Coach

Prada

Natura

Tod’s

Richemont

Swatch LVMH

L'Oréal

Tiffany

BurberryEstée Lauder L’Occitane

Hugo BossLuxottica

Ralph Lauren

Beiersdorf

Shiseido

Safilo

Michael Kors

Brunello Cucinelli

KeringSalvatore Ferragamo

Hermès

2014

EV/

Sale

s


R2 = 0.2276


Analysis, excluding Hermès data, shows strong correlation between EV/Sales levels and profitability but limited correlation with growth.


Notes: market capitalization is based on a one-month average as of December 2012. The 2014 growth corresponds to the expected sales growth rate between FY13E and FY14E.




E Trading multiples

0% 5% 10% 15% 20% 25% 30% 35% 40%0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

Coach

Prada

Natura

L'Oréal

Swatch

Estée Lauder

L’Occitane

LuxotticaBeiersdorf

Safilo

LVMH

Tiffany

Tod’s

Hugo Boss

Richemont

Burberry


Brunello Cucinelli

Shiseido

Ralph Lauren

Michael Kors

R2 = 0.5928

CAGR FY11A-FY14E

2013

EV/

Sale

s

0% 5% 10% 15% 20% 25% 30% 35% 40%0x

1x

2x

3x

4x

5x

6x

7x

Coach

Prada

Natura

L'Oréal

Swatch

Estée LauderL’Occitane

LuxotticaBeiersdorf

ShiseidoSafilo

LVMH

Tiffany

Tod’s

Hugo Boss

Richemont

Ralph LaurenBurberry

Michael Kors


Brunello Cucinelli

Hermès

2013

EV/

Sale

s

CAGR FY11A-FY14E

R2 = 0.3713

1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

LTGR (%)

2013

EV/

Sale

s

Coach

Prada

Natura

L'Oréal Swatch

Estée Lauder

L’Occitane

LuxotticaBeiersdorf

Safilo

LVMH

Tiffany

Tod’s

Hugo BossRichemont

Burberry

Kering

Salvatore Ferragamo

Brunello Cucinelli

R2 = 0.3185

1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%0x

1x

2x

3x

4x

5x

6x

7xR2 = 0.1886

LTGR (%)

2013

EV/

Sale

s

Coach

Prada

Natura

L'Oréal

Swatch

Estée Lauder

L’Occitane

LuxotticaBeiersdorf

Safilo

LVMH

Tiffany

Tod’s

Hugo Boss

RichemontBurberry


Brunello Cucinelli

Hermès

Regression analysis EV/Sales 2013E multiple vs. CAGR FY11A–FY14E and LTGR

Analysis, excluding Hermès data, shows strong correlation between EV/Sales levels and profitability but a more limited correlation with LTGR.


Notes: market capitalization is based on a one-month average as of December 2012.




F Focus on transactions

Markets 2009 2010 2011 2012 1Q13 TotalItaly 11 6 14 9 3 43

US 5 6 10 15 5 41

France 3 10 6 8 5 32

Switzerland 6 2 7 10 1 26

UK 3 3 3 3 2 14

India 7 1 2 1 - 11

Germany 4 1 1 2 1 9

Hong Kong 2 3 1 - - 6

Netherlands 1 2 1 2 - 6

China (mainland) - - 4 1 - 5

Top 10 42 34 49 51 17 193

Other markets 3 10 8 10 3 34

Total 45 44 57 61 20 227

Source: Capital IQ, Mergermarket, Factiva.

X The number of deals completed in a specific market is directly related to the degree of specialization in the sector of that market and to the number of brands with a good brand legacy still not part of a big corporate.

X The below table represents the top 10 countries by the number of completed deals. In the table, the set “other markets” comprises Denmark, Sweden, Canada, Japan and South Korea that immediately follow the top 10.

X The number of luxury deals has shown a consistent growth even during a period in which the global number of M&A transactions has suffered a decrease.

Number of completed deals sorted by market.

0

10

20

30

40

50

60

70

1Q132012201120102009

45 44

57 61

20No.

of d

eals

Number of completed deals

Corporate PE

38

7

32

12

44

13

49

12 14

6

0

10

20

30

40

50

60

1Q13a2012a2011a2010a2009a

Number of completed deals by type of buyer

No.

of d

eals

Analysis of worldwide M&A transactions in the luxury industry since January 2009


F Focus on transactions

Source: Capital IQ, Mergermarket, Factiva.

X Quite interestingly, with the exception of Switzerland, the first five positions are very similar to those of the luxury industry.

X In this case, apart from the strength of a market in the cosmetics sector, the number of deals completed also seem related to the number of large conglomerates operating in chemicals/consumer goods, as transactions are more corporate driven than those in the luxury industry.

X The below table represents the top 10 markets by the number of completed deals. In the table, the set “other markets” comprises Brazil, Malaysia, Poland, South Korea and Turkey that immediately follow the top 10.

Markets 2009 2010 2011 2012 1Q13 TotalUS 12 7 9 14 - 42

France 5 1 8 6 - 20

Italy 2 4 1 2 - 9

UK 3 3 3 - - 9

Germany 2 1 3 2 - 8

Spain 2 1 - 3 - 6

China - 2 - 2 - 4

Japan - 1 2 1 - 4

Australia - - 1 1 1 3

Canada 1 1 - 1 - 3

Top 10 27 21 27 32 1 108

Other markets 2 11 4 7 1 25

Total 29 32 31 39 2 133

Number of completed deals sorted by market.

05

1015

202530

3540

45

1Q132012201120102009

2932 31

39

2

No.

of d

eals

Number of completed deals

Corporate PE

23

6

28

4

24

7

33

6

20

0

5

10

15

20

25

30

35

1Q132012201120102009

No.

of d

eals

Number of completed deals by type of buyer

Analysis of worldwide M&A transactions in the cosmetics sector since January 2009


G Transaction multiples

EV/Sales (FY08A–FY12A)

Average

1.4x

0.8x

1.1x

0.8x

1.1x1.3x 1.3x

1.0x

1.8x1.8x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x1.4x1.6x1.8x2.0x

20122011201020092008

MedianSource: Capital IQ.

X Multiples remain high, illustrating fundamental attractiveness of the industry. X The average sales multiple over the last five years ranged between 1.1x and 1.8x, when the average EBITDA multiple ranged between 7.5x and 13.6x and the average price to earnings ratio ranged between 8.5x and 19.7x.

EV/EBITDA (FY08A–FY12A)

Average

10.9x

7.5x

5.2x

8.4x

13.6x

6.9x

11.9x10.6x 10.4x10.3x

0x

2x

4x

6x

8x

10x

12x

14x

16x

20122011201020092008

Median

Price to earnings (FY08A–FY12A)

Average

17.2x

13.5x11.7x

14.6x

8.5x 8.5x

19.7x

16.5x 16.4x14.1x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

20122011201020092008

Median

Transaction multiples in the luxury industry are lower than before the 2008 crisis but remain at a significant premium to many other sectors



Source: Capital IQ.

X M&A deals in 2012 show an increase in companies valuation after a relative drop in 2011. X The average sales multiple over the last five years ranged between 1.3x and 1.7x, when the average EBITDA multiple ranged between 6.9x and 14.0x and the average price to earnings ratio ranged between 15.4x and 26.0x.

Price to earnings (FY08A–FY12A)

Average

15.4x

11.4x

18.8x

14.4x

26.0x 25.6x

16.8x

12.9x

19.2x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

20122011201020092008

Median

19.2x

EV/Sales (FY08A–FY12A)

Average

1.3x1.1x

1.3x

1.0x

1.6x 1.6x1.7x

1.4x1.5x

0.9x

0.0x0.2x

0.4x

0.6x

0.8x

1.0x1.2x

1.4x

1.6x

1.8x

20122011201020092008

Median

EV/EBITDA (FY08A–FY12A)

Average

9.1x

6.8x 6.9x6.5x

14.0x15.5x

9.5x 8.9x10.1x

8.8x

0.0x

2.0x4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20122011201020092008

Median

The M&A deals in cosmetics sector show similar trend in multiples as the luxury industry



Portfolio expansion X The main driver of M&A in the luxury market, portfolio expansion has also retained its importance as a strategy over the last six months. Among the main transactions, the Swatch Group has entered the high-end jewelry market with Harry Winston; PVH has unified all the Calvin Klein brands under its group by buying Warnaco; and Kering has closed one of the first acquisitions involving Chinese brands by buying the jeweler Qeelin. Luxottica has added another eyewear designer to its portfolio, Alain Mikli, while Only the Brave, the holding company of the Italian brand Diesel, has further expanded into high-end

fashion market by buying a majority stake in another upscale brand, Marni, after gaining control over Maison Martin Margiela and Victor & Rolf.

Financial sponsors X Institutional investors have always been very active in this market, but the extremely positive growth seen in the last few years, the interesting exit multiples and the entrance of investors from the emerging markets (in particular from the Far East and the Middle East) have further increased the number of transactions. For example, in March 2013, the Italian PE fund Clessidra bought a majority stake in the Italian jeweler Buccellati, while a month earlier, Apax Partners bought American shoemaker Cole Haan. In the meantime, the French PE fund Neo Capital, right after its exit from Alain Mikli, took control of Italian milliner Valextra. Financial investors have confirmed their strong interest for Italy as one of the main markets of potential luxury targets, also with the buyout of eyewear producer Marcolin by PAI Partners, and with the high-profile exit of Permira from Valentino, through the sale to the Qatar-funded/London-based Mayhoola for investment fund.

Buyer Target Target sector Target country StakeApprox deal value (€m)

Closing date

Portfolio expansionSwatch group Harry Winston Jewelry US Majority 561 26 Mar 2013PVH Warnaco group Clothing/Fashion US Majority 2,825 13 Feb 2013Luxottica group Alain Mikil international Eyewear France Majority 90 23 Jan 2013Only The Brave Marni Clothing/Fashion Italy Majority NA 19 Dec 2012 Kering Qeelin Jewelry China Majority NA 10 Dec 2012 Financial sponsorsClessidra SGR Buccellati Holding Jewelry Italy Majority 80 28 Mar 2013NEO Capital Private Equity Valextra Millinery Italy Majority 30 22 Mar 2013Apax Partners Cole Haan Shoes US Majority 449 01 Feb 2013PAI Partners Marcolin Eyewear Italy Majority 207 05 Dec 2012Mayhoola for Investment Valentino Fashion Group Clothing/Fashion Italy Majority 700 31 Oct 2012

Source: Capital IQ, Mergermarket.

Focus on luxury M&A transactions over the last six months

Transactions in the luxury industry can be analyzed according to four macro typologies: portfolio expansion, financial sponsors, vertical integration and development capital.



Vertical integration X One of the strategies that has been adopted in the luxury market during the last few years is that of vertical integration. Over the last decades, industry players have gained flexibility and cost efficiency through the outsourcing of their production to third parties. Recently, another trend has emerged: to ensure quality and preserve know-how, the major players have shown an increasing interest in integrating (through buyout or financial support) some of their suppliers. Some recent examples are the buyouts of tanneries from Kering and

Hermès (France Croco and Tanneries d’Annonay, respectively), or of Swiss-based Fabbrica Quadranti from Gucci and of the small Turin-based jeweler Marchisio from Richemont in the jewelry and watches market.

Development capital X Historically carried over by institutional investors looking for high potential of growth, this strategy is also starting to appeal large corporations seeking further expansion of their portfolio with lower transaction costs, compared to buyouts of big names in fashion. Targets are relatively new fashion houses still led by young designers that created them, like in the Maxime Simoens — LVMH deal or in the Kering investment in Christopher Kane.

Source: S&P Capital IQ, Mergermarket.

Buyer Target Target sector Target country StakeApprox deal value (€m)

Closing date

Vertical integrationKering France Croco Tannery France Majority NA 25 Mar 2013Gucci Fabbrica Quadranti Watch parts Switzerland Majority NA 21 Mar 2013Richemont Marchisio Jewelry Italy Majority NA 30 Jan 2013Hermès Tannerie d’Annonay Tannery France Majority NA 10 Jan 2013Development capitalLVMH — Louis Vuitton Moet Hennessy

Maxime Simoens Clothing/Fashion France Minority NA 20 Feb 2013

Kering Christopher Kane Clothing/Fashion UK Majority NA 14 Jan 2013

Focus on luxury M&A transactions over the last six months

Transactions in the luxury industry can be analyzed according to four macro typologies: portfolio expansion, financial sponsors, vertical integration and development capital.


H EY Luxury and Cosmetics Index

0

20

40

60

80

100

120

140

160

180

81.6

170.5

As of 31 March 2013

108.4

EY Index S&P 500 Index Stoxx Europe 600

EY Luxury and Cosmetics Index evolution compared to major indices (base 100 as of 1 Jan 2008)

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13Jan-08 Mar-13

EY Luxury and Cosmetics Index Evolution since January 2008

Source: Capital IQ.

Luxury and cosmetics: the EY Financial Factbook40

DCF and Valuation Parameters

40

Industry overview



Global luxury goods market A

Points of view from EY’s global sector specialists and outside expertsC

Global cosmetic goods marketB

Focus on Brunello Cucinelli and Michael KorsD

X Sustainable luxury X China — can Western luxury tame the Red Dragon’s desire?

X Focus on the American market X Focus on the Italian market X Counterfeit issues facing the industry X Focus on marketing and advertising in the luxury industry

X Focus on licensing in the luxury industry X Focus on digital in the luxury industry


A

Worldwide personal luxury goods market trend1

–100

–50

0

50

100

150

200

250

300

2015e2013e2012e2011E2010a2009a2008a200720062005

Market size Growth

147

8.1% 8.2% 6.9%

–1.8%

13.1%11.0% 10.4%

159 170 167 153 173 192 212 220-222 240-250

CAGR:+5–6%

–10%

–5%

0%

5%

10%

15%

20%

25%

–8.4%

4.2%€ bi

llion

Gro

wth

%

Luxury goods demand growth by nationality (2009–2015E)2

–20%

–10%

0%

10%

20%

30%

40%

2015e2014e2013e2012e201120102009

North AmericanJapanese European

OtherChinese

%

Source: Bain & Company and Fondazione Altagamma; and other selected research.

Notes: 1) Altagamma 2012/Worldwide markets Monitor (15 October 2012), Worldwide Luxury Markets Monitor/Spring 2013 Update (16 May 2013) — Bain & Company and Fondazione Altagamma. 2) Global Luxury Goods, Deutsche Bank, January 2013.

X The worldwide personal luxury goods market is estimated to have grown by 10.4% in 2012, including a +5% euro currency impact. However, at constant exchange rates, growth in real terms more than halved from 13.1% recorded in 2011 to 5.0% in 2012. Estimates for 2013 predict a slowdown in growth to 4.2%.

X E-commerce, which contributed 3.3% to total global luxury purchases in 2012E, is attracting increased interest with companies investing in online market to reach out to tech-savvy young consumers.

X Retail continued to be the key growth driver due to increased focus on self-operated retail stores to have better management of branding, inventory and service.

X The industry enjoyed a robust double-digit growth in 2012 fuelled by the emerging market traveler, especially from China, offsetting weaker demand in developed markets.

X During 2012, Greater China experienced significant deceleration in luxury demand due to economic slowdown and a pullback in gift giving (transitional year in political leadership and corruption crackdown).

X However, the negative trends in China are expected to abate in 2013 with return to more normal mid-to-high teen organic growth, in line with wealth creation. Chinese consumers would become the top luxury nationality accounting for one-third of worldwide luxury consumption by 2015.

Worldwide personal luxury goods market grew by double digits for the third consecutive year and crossed the €200b level

Global luxury goods


A

Real GDP growth by selected market (FY11A–FY14E)1

(In %) FY11A FY12E FY13E FY14E Global 3.9 3.2 3.5 4.1US 1.8 2.3 2.0 3.0Euro Area 1.4 (0.4) (0.2) 1.0Japan (0.6) 2.0 1.2 0.7UK 0.9 (0.2) 1.0 1.9CEE* 5.3 1.8 2.4 3.1Brazil 2.7 1.0 3.5 4.0Russia 4.3 3.6 3.7 3.8India 7.9 4.5 5.9 6.4China 9.3 7.8 8.2 8.5

Source: International Monetary Fund, Bain & Company and Fondazione Altagamma; and other selected research.

Notes: 1) International Monetary Fund data. 2) Altagamma 2012/Worldwide markets Monitor (15 October 2012), Worldwide Luxury Markets Monitor/Spring 2013 Update (16 May 2013) — Bain & Company and Fondazione Altagamma.

BRIC economies

0% 5% 10% 15% 20% 25% 30%

Rest of World

Asia Pacific

Japan

Americas

Europe3%

8%

13%

4%

26%

11%6%

10%

1%

5%

Year-over-year growth

20122011

Luxury goods market growth by geography2 (constant exchange rates)

Industry growth resilient despite global uncertaintiesGlobal luxury goods

*Central and Eastern Europe.

X Asia was the major growth engine in 2012 and would drive the bulk of the growth in 2013E with 17% y-o-y vs. Europe (4%), North America (6%), Latin America (10%), Japan (2%) and the Middle East (9%).

X Combination of wealth creation and middle class opportunities in various new geographies support the secular theme of the industry.

X With solid global GDP growth rate expected in 2013–14, the industry is likely to witness strong growth with emerging markets representing 80% of total growth.

1 Emerging countries playing a balancing act

X The global exposure and balanced mix of businesses enabled luxury companies to shrug off the macro uncertainties in recent years.

X Tourism was one of the key growth drivers for European luxury goods in 2012. X There is still plenty of untapped potential in new emerging markets with expected luxury growth of 15%–30% for the next five years.

X The Chinese will likely remain the dominant emerging markets’ clientele as luxury goods and companies are investing further in new growth avenues in South America, the Middle East and Southeast Asia.

X Expansion in tier 2 locations in mature markets provided extra room for dynamism.

2 Global exposure and dynamism


A

Source: Selected research.

“Demand for luxury goods in Asia Pacific is estimated to grow at 17% y-o-y in 2013F. We believe the bulk of growth should still come from Greater China (>60% sales contribution), which is the fastest growing market for personal luxury goods consumption (+24% CAGR in 2010–12E to €27.3b). We expect shopping tourism could continue to be a phenomenon in 2013, underpinned by rising overseas travelling of Mainland Chinese and attractive price differentials vs. Europe and the States, and potentially Japan given the falling Yen.”

“We are assuming a normalisation in FY13 and beyond following three years of strong double digit growth. 3.2% global GDP growth for 2013E and 4% for 2014E supports at least 8% sales growth, according to our 2.7x multiplier and demand by nationality analysis. Emerging markets should represent 80% of total growth. We assume Chinese growth only accelerates in 2013 driven by a gradual pick-up domestically. We believe demand from Japanese and US consumers will be more subdued in 2013 vs. 2012 and that European demand is unlikely to recover.”

“We are entering 2013 with a positive stance on the European luxury sector because: (a) leading macro indicators are somewhat improving in China, (b) sector indicators show encouraging signs of stabilization. This turning point in top-down and bottom-up leading sector indicators make us believe in improving top-line momentum as 2013 progresses. Even though we see top-line growth not really improving much in 1H13, we expect growth momentum to pick up in 2H13, leading to +9% organic sales growth in 2013E.”

Deutsche Bank: normalization in 2013DBS Group Research: Asia to drive growth in 2013 Credit Suisse: positive stance in 2013

Analysts optimistic about 2013 and upbeat for the long term

Global luxury goods

Consumer: Global Luxury Sector, DBS Group Research, January 2013

Global Luxury Goods, Deutsche Bank, January 2013

European Luxury Goods, Credit Suisse, January 2013


A

Source: Bain & Company and Fondazione Altagamma, Deutsche Bank and other selected research.

Notes: 1) Altagamma 2012/Worldwide markets Monitor (15 October 12), Worldwide Luxury Markets Monitor/Spring 2013 Update (16 May 13) — Bain & Company and Fondazione Altagamma.

2) Global Luxury Goods, Deutsche Bank, January 2013.

Luxury goods sales mix by nationality (2009–2014E)2

Sales mix by nationality 2009 2010 2011 2012E 2013E 2014EJapanese 27% 24% 22% 21% 19% 18%North American 21% 20% 21% 21% 20% 20%European 22% 22% 19% 17% 15% 14%Chinese 15% 19% 22% 23% 27% 31%Other 16% 15% 17% 17% 18% 17%Total 100% 100% 100% 100% 100% 100%“Mature customers” 69% 66% 61% 59% 55% 52%“Emerging customers” 31% 34% 39% 41% 45% 48%

Chinese personal luxury goods market (2010–2012E)1

0

2

4

6

8

10

12

14

16

2012e20112010

10.0

12.5

15.0

€ bi

llion

Top three global personal luxury goods market (2012E)1

0

10

20

30

40

50

60

Japan China + Hong Kong

2nd position globally after including

Hong Kong

US

59

22 20€

billi

on

China: key player of the global luxury landscapeGlobal luxury goods

X Chinese should consolidate their position as the top nationality for European luxury goods in 2013.

X In 2012, shopping tourism, motivated by a still large price differential and favorable exchange rates, has driven the luxury demand by Chinese travelers.

X Chinese consumers are demanding more sophisticated and exclusive products. X By 2020, Chinese consumers are expected to constitute ~43% of the total market and their share would be greater than the combined share of Japanese, North Americans and Europeans.

1 Chinese: the top nationality for leading European brands

X Chinese consumers are clearly at the forefront and demanding more sophisticated and exclusive products with better in-store experience and tailored products.

X There is a distinction between the Chinese clientele in tier 1 cities and aspirational consumers in tier 2 and tier 3 cities who are demanding quality products above over-exposed logo brands.

X In 2012, Mainland China became the world’s second-largest luxury market (€22b) after the addition of Hong Kong.

X With only 3.5% of the population involved in luxury spending and with spending per capita only at €30 per day, the growth story is yet to unfold.

X The negative impact of the narrowing price gaps should be partially compensated by the increase of local consumption and the development of e-commerce, very popular with the new generations.

2 Mainland China becoming challenging but holds largest potential


A

Source: Bain & Company and Fondazione Altagamma, company filings and other selected research.

Notes: 1) Altagamma 2012/Worldwide markets Monitor (15 October 2012), Worldwide Luxury Markets Monitor/Spring 2013 Update (16 May 2013) — Bain & Company and Fondazione Altagamma.

Accessories and hard luxury outperforming the market Global luxury goods

X Soft and hard accessories were the champions as as the macro-trend of using accessories extensively boosted the categories.

X Lower average price, higher ability to recognize and strong focus on product offer innovation helped soft accessories to over-perform.

X Strong “men-ization” has been observed on the market in 2011 and 2012 with brands, department stores and online players focusing on men through dedicated concepts/formats.

X Men are increasingly looked as a relevant target customer base for large and small leather goods. Lifestyle brands are heavily investing in men-only concepts, mainly in the US and Asia.

X While year 2011 saw companies offering line extensions to their product range, the year 2012 witnessed several new launches in both men and women categories.

X There is an increased interest in the space with new designer brands entering the category.

X Perfumes volumes were relatively flat in Europe with growth coming from widespread price increases.

X Under cosmetics product category, brands are increasingly targeting emerging markets with continuous innovation in skin-care and launch of multipurpose products.

X Cosmetics specialists opening boutiques in emerging markets (e.g., India) to fill an existing distribution gap.

X There is an ongoing “retailization” to improve customer experience and increase distribution opportunities in emerging markets.

X The year 2012 saw first sign of channel destocking for watches, especially for “mass-pirational” brands.

X Lifestyle brands have entered the high-jewelry segment through dedicated investments in manufacturing and retail format.

X Mature markets demonstrated sound performance in the retail channel, with traditional wholesale struggling.

X Emerging markets continue to be key drivers of growth.

2 Steadily expanding

3

1

Perfumes: innovation and new launches

Hard luxury: increased retailization

Global personal luxury goods market by product type (2012E)1

Apparel26%

Others4%

Perfume and cosmetics20%

Accessories27%

Hard luxury23%

0% 5% 10% 15% 20% 25%

Arts dela table

P&C*

Apparel

Accessories

Hard luxury

Growth rates of global personal luxury goods market by product type1

21%

14%15%

8%

4%5%

10%

12%

YOY growth

20122011

*P&C refers to perfumes and cosmetics.


B

Source: L’Oréal Annual Report 2012 and other selected research.

Notes: 1) L’Oréal estimates of worldwide cosmetics market based on manufacturer net selling prices. Excluding soap, toothpaste, razors and blades. Excluding currency fluctuations.

Global cosmetics industry market growth, YOY 2003–20121

020406080

100120140160180200

2012201120102009200820072006200520042003

129

4.0%3.4%

3.8%

4.9% 5.0%

133 138 145 152 156 158 165 180172

Cosmetics market Growth %

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2.9%

1.0%

4.2%4.6% 4.6%

€ bi

llion

%

Skincare34%

Haircare24%

Make-up16%

Perfumes13%

Toiletries, deodorants11%

Oral cosmetics2%

Global cosmetics market segmentation by product and geography (2012) 1

Asia Pacific34%

Western Europe22%

NorthAmerica

21%

Latin America12%

Eastern Europe7%

Africa and Middle East4%

Worldwide cosmetics market represents a solid and dynamic €180b opportunity ...

Global cosmetics market

X The global cosmetics market (which includes skincare, haircare, perfumes, make-up, toiletries and deodorants and other smaller product categories) grew by an estimated 4.6% during 2012, in line with the historic average and 2011.

X The growth rates recorded across regions and distribution channels show a high degree of variance.

X The market has proved resilient even during tough economic conditions and has expanded steadily.

1 Steadily expanding

X Asia Pacific, with market size of at €61.4b, is the largest consumer for cosmetic products and accounted for 34.1% of the global demand in 2012.

X However, in terms of cosmetics manufacturing, Europe occupies a dominant position with more than a third of global share.

X Skincare confirmed its position as the flagship category of the cosmetics market both in terms of weight — more than a third of the market — and high growth of 45.6%.

2 Asia Pacific: leads the cosmetics demand


B

Source: L’Oréal Annual Report 2012 and other selected research.

Notes: 1) L’Oréal estimates of worldwide cosmetics market are based on manufacturer net selling prices. Excluding soap, toothpaste, razors and blades. Excluding currency fluctuations. New markets refer to: Latin America, Africa and the Middle East, Eastern Europe and Asia Pacific.

… with emerging markets fueling demandGlobal cosmetics market

X Demand for cosmetics has not been impacted by crisis and consumers look for better quality, technology and new ideas.

X The market is driven by innovation with customers looking for quality, performance and perceived results.

X The market has been bolstered by the rise of middle classes all over the world.

X The product offering by cosmetic players has drastically changed in the past five years, responding to consumer tastes and preferences.

X Companies have introduced natural cosmetics and toiletries, replacing chemicals with organic inputs.

X To expand into emerging markets, companies are developing products specific to the demography, such as smaller size products for low-income countries.

X During 2012, the luxury channel was the driving force behind the cosmetics market, with growth of 6.3%.

X Rapid growth in travel retail at about 14.0% also boosted the industry demand. X The increase in passenger traffic, the attractiveness of the counters and the quality of service and customer experience in sales outlets have contributed to the dynamic trend.

X Chinese consumers have been at the forefront of leading travel retail demand.

X New markets* continue to attain increasing importance and represented 77% of the worldwide growth during 2012 primarily due to Asia Pacific.

X To expand in Asia, brands are developing a customized offering attuned to each culture.

X With growth of 10.2% in 2012, Latin America also emerged as another growth avenue for cosmetics players.

3 Structurally dynamic market

42

1

New production innovationLuxury and travel retail: booster

Focus on new geographies


C

49

Are luxury and sustainable development (SD) contradictory, opposing demands? Can luxury thrive in a world where SD will become one of the purchase criteria and new consumer ethics?

We look at this issue analyzing it from three perspectives: active groups which foster SD, luxury buyers and finally, brands and companies that make up this industry.

The sentinels of SD now focus on the luxury sector

Although the luxury sector is relatively small (its aggregate sales are comparable to those of Walmart), it is registering long-term growth despite recessions and economic crises capturing critics’ attention. This started in 2008 when the WWF published the Greener Luxury Report. Another NGO (Corporate Knights) just published their Global 100 Rating in 2012. Indeed the luxury companies are now scrutinized in terms of sustainable development by many NGOs, which focus on specific facets of the problem, depending on what angle they wish to push.

X Some focus on the opaque traceability of most of the gold, diamonds, rubies and other gemstones coming from underdeveloped countries.

X Some others focus on the labor conditions in low-cost countries where some so-called luxury brands have their products made, and eventually assembled, for instance in Italy to be able to get the “made in Italy” label.

X Some others focus on the processes of production themselves (to diminish the use of chemical products, of water in cotton production, resorts, golfs ...).

It seems like luxury houses are being “attacked” on all fronts.

Most recently during the Paris fashion défilé of March 2013, Greenpeace launched action against a major French as well as other brands for “polluting fashion.” The facts are that Greenpeace summoned the luxury brands to answer a questionnaire checking their efforts in terms of sustainable development. Those brands, which by principle do not answer ultimatums, were publicly criticized and declared to have “failed” the examination. In this case, it felt like they were using these famous names as a hunting “trophy.”

Perhaps less extreme but just as impactful for publicly listed brands is that financial analysts are now examining how much effort these brands make in terms of sustainable development: these analysts consider that the high reputation of the luxury brand must remain intact to be able to sustain their high pricing power, and subsequent high margins. From a shareholder’s perspective, sustainable development can pose as a problem if it starts impacting the reputation. Irrespective of the impact being indirect or inconsequential, reputation is interlinked with share price. And share price gets attention.

However, no one really knows what the buyers of luxury products think? A major and innovative research project has been initiated at HEC Paris, world premier business school on luxury management: this survey unveils the luxury public’s own attitudes. These first results are based on a French sample of just under a thousand actual buyers of expensive items in the personal accessories category.

How sustainable is the future of luxury?

Jean-Noël KapfererProfessor at HEC Paris and world-renowned expert in luxury, holds the Pernod-Ricard Chair of Management of Prestige Brands and co-author of the best seller The Luxury Strategy (2012)

Sustainable luxuryPoints of view from EY’s global sector specialists and outside experts


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What striking results were revealed by this research?

X Thirty-three percent of luxury buyers do not care about SD when buying a luxury good. But just as many people (36%) say that they do care and it is a factor that others are unaware of. Taking into account the classical “yes-saying” bias when interviewed about socially desirable behaviors, these results show that today, when buying, the sustainability behavior of a brand is not at all a preoccupation of the luxury buyers. When they enter a luxury store, it is for their highest pleasure. They do not want to have this brief period of happiness destroyed by guilt and negative thoughts. However, life and luxury are never so simple …

X Sixty-nine percent of the sample declared that “Because of its price, it would be a scandal if luxury did not respect SD criteria.” What this means is that sustainability is an implicit expectation. For them, high-quality luxury means high quality on all dimensions, even collective ones, by definition. This is why they do not think about it when they buy — it is an assumed given. However, if they happened

to discover that this expectation was in fact betrayed by information to the contrary, whether factual or otherwise, they would become angry against the brand and, most likely their allegiance and wallet would leave for a competitor. So we can say that today while sustainable development is not a criterion for choosing to buy but could become a criterion for rejecting, or boycotting a brand.

X Fifty-two percent of this national sample of luxury clients thought the luxury sector was late in terms of SD (just 13% thought it was ahead of the game). It is a fact that most luxury brands hardly communicate on these issues, although they have been very active about SD for the last two decades, as their websites indicate. So why this silence? They fear of being accused of “greenwashing” — like replanting a token gesture of trees in the rain forest instead of improving their own supply chain. Only those brands that are the evangelists of the SD cause (such as vegetarian Stella Mc Cartney) advertise on this to turn it into a competitive advantage.

X Thirty-three percent of luxury consumers believe that there is a structural contradiction between luxury and SD (just as many — 34% — however disagree with this pessimistic opinion). The main contradiction is waste: 44% of the respondents declare that luxury means by definition “waste and excess,” whereas SD means austerity and consumption control. Another contradiction lies in the high social inequality revealed by luxury (41%). Certainly, luxury does not create inequality, but by being ostentatious, it provokes latent tensions. This is why the Mayor of Beijing has banned posters advertising luxury items on the streets: they go against the necessary social harmony this high-growth country feels it needs to preserve. Also, it induces people who are not rich to buy items that are out of their reach (60% agree with this statement).

X What could save luxury in a world of SD? What are the arguments of those who think luxury will survive in such a world?

X Fourty-three percent say luxury is about creativity, and this will not be hurt by SD.

X Fourty-four percent say luxury is utmost attention to details, exceptional quality that lasts forever, just the opposite of the planned obsolescence.

X Fifty-eight percent say luxury sustains craftsmanship, the arts and rare know-how which would otherwise disappear, especially in the European countries.

It is a fact that French luxury brands refuse to be manufactured anywhere but in their home country. This is not the case anymore of Italian brands, many of whom have all largely delocalized their production to China and other Asia Pacific, lower-cost locations. As a result, the French model of luxury has a major opportunity to lead in terms of sustainability because this model rests on a full vertical control from the supply chain to the point of sales, through directly operated stores and e-commerce. This is the only way to guarantee the highest total quality and traceability in terms of SD.

Sustainable luxury (contd)


Points of view from EY’s global sector specialists and outside experts


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Beware of implicit requirements

Although today SD is not salient at the time of purchase, what would anger buyers is if they learnt about some facts regarding the implications of SD in making some luxury products. Below are the percentage of respondents who would be extremely angry if they learned that a luxury brand is doing some of the acts described in table 1.

Interestingly, luxury houses such as Hermès and Chanel are already taking into account some of these aspects: for instance, they own crocodile farms to ensure the highest skin quality and a guaranteed supply in an increasingly competitive market but also to

be able to assure a high quality of treatment of the animals. Also, whenever they kill a crocodile, they also release one into the wild. Hermès in particular also created a division called “Petit H” where artists are asked to make unique pieces with the leftovers of the skins, stones and other “scrap” items once the best parts have been cut to make precious bags.

In the hotel industry, many hotels situated in deserts or in remote, poor parts of the world are now 100% sustainable. Yet they charge more than a $1000 per night: this money also contributes to the communities surrounding the hotel.



Table 1: what would be shocking if learned

Killing animals for their fur 54%Killing two crocodiles to make one small bag 53%Expensive luxury brand but actually produced in China 54%Destroying the non-sold products 52%Golf courses and 7-star hotels in countries with no water 48%How much fuel a motor yacht needs per day 48%Using multilayered packaging around a single product 36%Counter-season natural products 33%

What are corporate attitudes vis à vis sustainable development?

Our own in-depth interviews with managers within the luxury industry show two types of attitudes:

X Those who have already experienced a crisis: like when the EEC threatened some well-known, best-selling fragrances to have to change their century-old formula on the ground that they might contain allergens that might harm a small percentage of people. These companies, as well as the whole sector, take the threats very seriously, and engage in two actions: pro-active lobbying at the EEC level and testing alternative formulations just for the worst case scenario. One should not underestimate the risks nor the seriousness of these trends: California, for instance, has decided to ban the sales of foie gras. Since this state is an opinion-leading state, this attitude will no doubt

expand in the US. In Europe, there is a domination of a “northern Europe ethics” which is threatening the culture of the southern countries of Europe. The pressure is mounting for instance to ban bull fights, or corridas, a century-old activity of the culture of Spain and parts of Southern France.

X The second attitude is that of prudence, with arguments about the lack of public demand. After all isn’t the essence of business to sustain demand? What would be the point of complicating the production processes for a benefit which is not perceived, nor demanded by clients. For sure, mass market brands cause much more damage than luxury brands, in terms of sustainable development, because of their high volumes and repeated purchases. The recent tragedy in Bangladesh highlighted the ever present need for some fast-fashion brands to review their manufacturing practices.



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What do we think about this second attitude?

X Existing leading brands see sustainable development as a risk. Their market power and high reputation are based on a world whose parameters are changing. They will have to adapt, which is always painful and costly: but how fast, when and for what return? This is why they procrastinate instead.

X Technological and sociological revolutions are always an opportunity for newcomers. Lexus succeeded in the US, thanks to hybrid engines: one could say that a car that pollutes cannot be a luxury car even if it is a prestigious German brand, and even the mighty Rolls Royce, perhaps the

grandfather of luxury cars, has done extensive R&D from a carbon footprint perspective since coming under the ownership of BMW. The opinion leaders in the US are themselves managing their image and now prefer to be seen driving a Tesla than perhaps a higher consumption Italian sports car. In the wine business, Château Pontet Canet — a renowned Pauillac — has decided to become 100% bio. Because wines from the new world would want to lead rather than follow the ones from the old world. High-quality Chinese brands to be launched will be sustainable from the beginning itself.

The challenges are ahead of us

No one should underestimate the challenges that SD creates. Just take the case of sustainable ingredients for instance:

X Are sustainable ingredients good enough for the quality expectations of the brands themselves? How good is equitable cotton? Does it meet the level of luxury houses’ standards?

X Are the sustainable ingredients noble enough? For example, Moleskine used by brands that say they do not want to use leather: is this still luxury? Or now merely a nice, albeit well done, premium product? Where is the emotion attached to noble and rare materials that make up part of the definition of a luxury universe?

X Are the sustainable ingredients available in sufficient quantities? For instance, most of the gold used by jewelers is not traceable (whereas diamonds and rubies are). Some gold is traceable but it is available in so little quantities that even a single brand could not manage with such a small volume.

To conclude, let’s remember that the future is coming to us at the rate of 24 hours a day. In fact the future starts today. Luxury brands should lead the way, be exemplary on all accounts and not wait till explicit demands are made by the public. Then the demands risk being emotive and unreasonable and it will be too late.

Note: the views represented in this interview are those of Professor Jean-Noël Kapferer alone and do not represent an opinion or recommendation from EY.





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Interview with Sabine Temin, Consultant and Trainer — expert in luxury, retail and intercultural management, hosted by Qinghua Xu-Pionchon — Partner, Head of EMEIA Chinese Business Service, EY Paris

Qinghua Xu-Pionchon: do China and Asian consumers have the same definition of luxury as the West? And if not, could you expand on some of the main differences?

Sabine Temin: if we look at China, the luxury history of this country is still at its infancy. Since the founding of New China in 1949 and up until the 80s, China was largely closed to the West and it is only during the past two decades that China has opened up to doing business with the outside world. It is during this rapid economic growth period that global luxury brands entered the Chinese market, and in the case of many of the large groups, at a rapid pace, establishing flagship boutiques in first then second tier cities and, in some cases, stores in the luxury retail malls in third tier cities. While European luxury houses have had more than 100 years or more of history in their domestic markets, they were almost unknown to the Chinese before 1990. In addition to the speed of exposure to European luxury, luxury goods themselves carry different connotations and implications for the Chinese compared to Western consumers. China is a society of gifting, the value of which denotes the relative respect and importance given to the person or the occasion. For the majority of China’s fast emerging, affluent classes,

international luxury brands are also a way to display and affirm their rising social status and success and serve as a demarcation of newly defined social classes. Because of their strong image further reinforced by their respective “brand ambassadors” or “image spokespersons” in China and with prominent, easily identifiable logos, luxury brands in general have received immediate adoption by the Chinese. This is further reinforced by the fact that almost every international luxury brand as well as Chinese domestic high-end brands have chosen a recognizable Chinese face to be its image representative, often a national celebrity from the cinema, sports or art world. For most houses, the earlier the brand started to invest in the country, the more they were consumed by almost ravenous Chinese buyers, keen to demonstrate their new found status.

However, due to a number of factors including, among others, the rapid maturity of both customer and emerging market and large efforts on behalf of luxury houses to help to “educate” Chinese consumers to the more refined aspects of Western luxury, we are seeing a trend of greater convergence toward a shared, almost international, vision of luxury between Chinese and Western customers. On the surface, this

might be good news but we need to dig deeper to explore some of the underlying differences between the two cultures to understand if this is a reality.

QXP: how do you explain the rapid rise of this luxury-seeking middle class in China, that represents the core target for luxury groups?

ST: China’s social and economic landscapes have changed significantly over the past two decades as cited above, with the Chinese Government’s “open-door” policy accompanied by the unprecedented economic reform, particularly since China’s accession to World Trade Organization (WTO) in 2001. Massive foreign direct investments into China have created tremendous and rapidly won local wealth concentrated in a few. This pace of growth combined with an explosion of large cities has led to an unprecedented rise of the new middle class, many of whom exhibit buying patterns that show a determination to make up for the lost time. As everything changes very fast in China, the emergence of this middle class had a stunning effect on the luxury goods market both in China and also in the luxury capitals around the world from Chinese tourism.

China — can Western luxury tame the Red Dragon’s desire?

A review of Chinese buying patterns in the luxury market



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According to a TIME magazine report in June 2013, Chinese overseas tourists in 2012 reached 83 million vis a vis 10 million in 2000 and they are the biggest spenders compared to any other nation and have spent more than US$102b during overseas travels in 2012, a 40% jump from 2011.

QXP: and what does this mean for the luxury groups?

ST: the 2012 estimates in this document for Chinese consumers of personal luxury goods show that while the rate of growth in demand as a percentage of total market demand has declined since 2011, they still represent, at 23%, the largest single proportion of luxury consumers in the world and this is forecast to grow, to 31% by 2015. China is still predicted to become the world’s leading luxury market by 2020 with French luxury brands forecast as the most popular. There is however much anxiety and speculation in the press at the moment about “the collapse” of the luxury market in China, due to three factors:

1. A political positioning by the new president against the inequity of luxury, highlighting the disparity between the rich and the poor, which is the antithesis of the values of what is still a communist state.

Pragmatically, we’re seeing a clamp down on some cities, notably by the Mayor of Beijing, against luxury goods advertising and an increasing questioning by the masses about the morality of this affluent consumption.

2. Aligned with this, an increase in import duties on foreign luxury goods which is a major factor behind the surge of Chinese tourists into Paris, Milan, London and New York over the last five years, looking to buy the same product 30%–40% less than in mainland China.

3. Some of the French and Italian press are starting to speculate about “luxury fatigue” especially for some of the brands that are marketed aggressively. Whether the last point is correct or simply headline seeking, only time will tell. So while parts of the domestic China market are showing signs of cooling down, the Chinese tourist, looking for a luxury experience in the luxury capitals, is showing no signs of this so called “fatigue.”

QXP: according to the World Tourism Organization, Chinese tourists are expected to reach 100 million by 2020, while they were “only” 10 million in 2000. What are the reasons and impacts of the massive influx of Chinese travelers for luxury brands?

ST: for us, there are two key factors:

X Significant pricing disparity between home and abroad

Luxury stores in mainland China appear to sell much less compared to their sister stores in Europe or Hong Kong (volume and values per meter square) due in part to the 30%–40% pricing disparity cited above between Mainland China and the rest of the world. However, the hundreds of luxury boutiques in China have their own unique proposition: they are one of the best and most effective advertising platforms for those brands and we should explain why. When the Chinese tourist travels abroad, on their shopping safaris, they have usually already done their research by visiting their local store in Mainland China and know what brand and even what model/size/color they want to buy. The smart and digitally connected luxury house that captures and shares globally this invaluable CRM data will be able to offer a personalized service to the Chinese customers when they enter the boutique in Place Vendome or Madison Avenue that could be a real differentiator and help to close the sale and we’re seeing some houses operate a kind of concierge service to facilitate this.

X European destinations represent a quality warranty and confer the “face value” that the Chinese culture seeks.

The second reason is location, which plays a key role in purchasing decisions. Having bought the “It-bag” in Paris, London or Milan, the Chinese consumer is also buying a guarantee both to the authenticity of the goods as well as their own international traveler status, both of which give the purchase a lot of Chinese “face value,” part of the intrinsic value to the consumer when they go back home to share with friends and acquaintances. They even sometimes keep the invoice in the gift box as a proof of a “real” good: the prevalence of counterfeiting in China lends part to this confidence in Western sourced and produced products — “Made in x” means something to Asian buyers.

QXP: this is a real opportunity for the luxury boutiques but the Chinese tourists are now in direct contact with the host country’s local sales teams. How have luxury houses reacted to this change in customer ethnicity, culture and buying behavior?

China — can Western luxury tame the Red Dragon’s desire? (contd)




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ST: it becomes more and more difficult for brands to hire and keep experienced sales staff. Either they are overseas Chinese living locally with no luxury culture or experience that would meet the brand’s high standards. Or they are from the local city (Paris, Milan, New York, etc.) but don’t appreciate the cultural differences and preferences of the new Chinese tourists. It’s a real dilemma.

QXP: to better leverage the opportunity of the Chinese tourists, would it be more appropriate to have two levels of training: one for the local national about Chinese expectations and one for China national sales person about the brand’s identity?

ST: there are some commonalities that would be obligatory for all sellers, such as the importance of a unique experience to clients and the savoir-vivre of sellers as “brand ambassadors.” Nonetheless, our experience has been that specialized training on each of the different Asian cultures (as mainland Chinese, Korean, Taiwanese and Japanese cultures are just as different from each other as say French, Norwegian and Greek for example) is crucial and pays dividends in the long run.

For the “local” sellers:

When Chinese clients arrive, after a long trip, honoring us with their presence, they don’t expect to be so “coolly” received as is sometimes the case in some of the haute couture boutiques in the luxury capitals. They are often greeted by a sales team who are poorly informed about Chinese clients’ habits and in some cases (considered by some as part of the “Parisian experience”) can be actually dissuaded to make the long planned purchase leaving the store frustrated or even upset and, with this experience, switch allegiance to a more China-friendly brand.

Luxury groups are working hard to enhance their customer services to attract and retain Chinese as well as other Asian clients. The objective of intercultural training is to help sellers to anticipate sources of misunderstandings related to cultural differences and better cater to the need of the Chinese shoppers. For instance, knowing that the price could be as much as 30%–40% cheaper in Europe gives opportunities for sellers to up-sell or cross-sell by suggesting more expensive or more exclusive products, that furthermore, they might not find at home. Moreover, it will help to manage the

sales process better by directly responding to the need of those experienced shoppers who are already so focused on what they want. Understanding and learning easy things about non-verbal communication, such as bowing to thank someone or giving and receiving packages with both hands, can also participate to the luxury experience and demonstrate a cultural respect to this precious and new clientele. This doesn’t mean luxury boutiques should fall into the cliché of proposing only red bags with embossed dragons or serving green tea, but the blend of local mixed with the appropriate international savoir-faire is needed.

For the Chinese-speaking vendors:

With the increasing influx of Chinese tourists, Western groups have a harder time hiring and retaining natural Mandarin-speaking vendors, as simply an “Asian face” is not enough. Not only is turnover very high, as these skills are in great demand, but often Chinese staff tell us that they sometimes struggle with a real sense of belonging and loyalty to some of the brands they work for.

Special training would probably also help these employees to learn more about the luxury house: its core businesses and products for sure, but its history, its values

and its DNA. Being immersed in an “haute couture atelier,” visiting the apartment where the founding, iconic designer lived, discovering the brand’s anecdotes, will surely help instill more pride for the brand and create a more positive attitude toward the organization, thus start to develop a more sustainable loyalty as well as develop a more effective salesperson.

QXP: we said earlier that Chinese and Europeans are starting to have common definition of luxury. Can you paint a picture of Chinese luxury buyers?

ST: in fact, it would be unthinkable to draw a single picture of the Chinese luxury buyers: China is the second largest economy and country in terms of population in the world, with more than 1.5 billion people and 56 ethnic groups and sub-cultures. While they are very different, Chinese customers do have some features in common: typically they are both younger and richer than their western counterparts: 80% of the population is under the age of 45, compared to 30% in the US and 19% in Japan. Besides, the average age for a Chinese billionaire is 39,1 15 years less than their US, UK and German counterparts.



1 Source: Hurun report.



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They all recognize luxury goods as symbols of wealth and social status. In China, you are what others see …

If we dig a little deeper, we can distinguish four distinct groups:

The first group is “Bao Fa Hu,” an expression for those who became explosively wealthy almost overnight, and these people usually come from 2nd and 3rd tier cities. They often ignore and are not interested in the history or the brand’s heritage. Without stereotyping, the bigger and the brighter the product and its logo, the better it is perceived. They drive gold-plated cars and buy the most expensive bottle of French and Italian wines, motivated almost solely by the price.

The second group would be “Fu Er Dai” (the second generation of the rich). They have generally studied abroad and thus have a better immersion into international culture. They mix Western brands with home-grown Chinese brands and are aware of the latest trends and iconic products. They have a better education and understanding of luxury brands than the older generations and this should be a target group for the real luxury brands.

The ultra affluent would be the third group: more sophisticated and established than the first two, they are ready to spend large sums on understated brands and bespoke services, perhaps closer to a Western customer and “high luxury,” considering some of the classical high-street brands as outdated or passé. They are moving toward inconspicuous brands with discrete or no logo recognition. Luxury reflects their life style and affirms a certain level of Western individualism. The purchasing habits of these ultra-wealthy require some luxury brands to upgrade their offers with, for example, watches with cutting-edge technologies and sophisticated mechanisms, rather than simply a diamond-encrusted one or exotic and precious skins like snake or ostrich instead of simple canvas bags ... Many high-end brands are flying this client into Paris, Milan, New York or London in private jets, accompanied by a personal assistant working for the brand but who will also look after their other shopping and social needs during their stay. They call the client directly to discuss new products, organize their invitations to fashion shows and build a personal relation as a true brand ambassador.

Finally, Chinese businessmen and government officials account for an important group for luxury groups as gift giving is part of the process of doing business and socializing. Even today, 30% of luxury purchases are dedicated to colleagues, friends, business network and family. However, the arrival of the new President of China is starting to curtail the gift-giving “tradition” as extravert display of luxury goods is beginning to be less well perceived by the authorities. Statistics show already a 30% fall in revenues derived from luxury hotels and restaurants in China so far in 2013.

QXP: can we quickly focus on the last comments as the current Government launched an anti-corruption campaign almost against foreign luxury goods? What will be the impact on luxury brands?

ST: Xi Jinping will be in power for the next 10 years and he is determined to make anti-corruption, anti-gaudiness and reduced disparity between the rich and the poor as some of the hallmarks of his reign. If he is serious and can follow it through, this could profoundly change how Chinese business people view and appreciate luxury: on the

positive side, this may drive a focus toward more bespoke, discrete items with no easy visible reference rather than some of the more global brands with distinct logos in vogue today. The challenge is for luxury houses to continue the education of Chinese consumers and move demand upward to higher priced, super-luxury items, in effect the same strategy employed by many of the French and Italian houses for decades.

QXP: and finally, how do luxury brands respond to internet and social media success in China? Qzone (similar to Facebook), Sina Weibo and Tencent Weibo (similar to Twitter) are among the favorite Chinese social networks with anything between 500 million and 750 million active followers. How can luxury brands take advantage of this trend to better communicate and allure the affluent Chinese netizens?

ST: digital word of mouth:

Social media plays a major role as the Chinese communicate a lot about their personal experiences and give great importance to friends’ recommendations before purchasing products. Chinese people turn to their peers through extremely active





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online forums, where they exchange detailed information photos and feedbacks on specific destinations and experiences and the challenge and headache for any business are that, feedbacks are both positive and negative and are impossible to control. Many houses however are treating some of the prominent bloggers almost as luxury clients, inviting them to events and making a special, if discrete, effort to build a relationship, and with it, a positive influence.

In addition, many luxury brands have established Chinese-language websites to better enhance the brand’s history, present new collections and establish stronger communication between the brand and its customers.

Brand loyalty:

Luxury brands have implemented digital strategies in an effort to reward loyalty from their customers as well as attracting and retaining new ones: to celebrate new openings of boutiques, one luxury brand awarded special gifts to Weibo fans who retweeted messages. Another house pushed

“special offers” every week on specific items when fans click and “like” them on their Weibo page. One of the most prestigious carmakers promoted its new car via a Weibo page providing a pick-up service for passengers to experience the car in person. Interestingly, we’re seeing some of the techniques of prestige and mass companies filtering into some of the luxury and so-called luxury brands’ digital strategies. One to watch for the future …

The “true” experience:

Internet is also a means to have, albeit virtually, a “real” impression and feeling about a brand and its universe, with brand content being under control of the house and, with many of the digital forums being open for feedback, it becomes a large virtual meeting about a new subject or product launch, where everyone gives their own advice or point of view. As China is a collective culture, this is particularly relevant to their way of being.

The next step: “etailing”

Luxury brands are also looking seriously into mobile and smart phones as an effective e-channel as well as tablet applications as another opportunity to allow instant access to the brand and either opening up competitive or supportive purchasing to complement the traditional retail route. E-tailing seems to be the next driver for many luxury brands in China, as selling luxury goods on line can be an easier way to reach a bigger market more quickly, especially considering 1.1 billion Chinese people use a mobile and have access to this digital world.

In conclusion, China is, and in our opinion will remain, both a strategic and growing domestic market for the luxury industry as well as an increasingly large share of Europe and the US markets through its predicted growth in luxury tourism. The role of the boutique in China has both a direct retail role as well as being a showcase for the brand for the Chinese tourist. We are seeing an increase in these tourists using the local

boutique for research and fact-finding before the trip abroad for the luxury experience and to make the final purchase. This begs the question as to which houses can exploit the need for a globally connected CRM, an effective and enticing digital strategy, tailored to the Chinese combined with the right personal experience when visiting the European capitals in order to be a real player in this exciting China phenomenon. This needs a luxury brand to be “truly global” in its organization, culture, logistics and systems and not merely “worldwide.”




Note: the views represented in this interview are those of Sabine Temin alone and do not represent an opinion or recommendation from EY.


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The recent remake and release of the film The Great Gatsby conjures images of what we defined as luxury a century ago. Fancy cars, mansions, art work and jewelry portrayed luxury as an elusive opulence reserved for the wealthy. The idea that luxury items could be copied and delivered in a lower priced version was not only unheard of but also undermined the very notion of extravagance that only the privileged could afford. Further, luxury items could only be purchased at luxury stores or through private dealers. The term luxury became synonymous with affluence and exclusivity. Fifth Avenue in New York and Rodeo Drive in Beverly Hills were widely known not only for their high-end retail stores, but also for the most prestigious and expensive residential addresses.

In the US, we embrace the “American dream,” the idea that everyone has an opportunity to succeed and prosper through hard work and perseverance. Of course, there is often a wide gap between “opportunity” and “reality,” but the dream helps to keep us motivated and to hold out hope.

Over the years, many brands and retailers have helped foster the American dream by promoting the concept of “affordable” or “accessible” luxury. Affordable luxury takes many forms — an off-priced version of a high-end design (the “target” or outlet store version of a designer outfit), the extension of a luxury brand name into lower cost items (the Gucci key chain rather than the shoes and bag) and even the manner in which the luxury item is procured by the consumer (online versus retail store, rent versus buy). This doesn’t even consider the counterfeit challenges facing companies that literally puts traditional luxury items on our streets and sidewalks. As a result, luxury has now diffused into the masses such that agreeing on a common definition of the term has become as challenging as the marketing strategies deployed by the brands themselves.

Does high price equal luxury?

By its very term, affordable luxury is not defined by the price of an item. In fact, Americans are in love with the idea of buying so-called luxury items at a discount either at outlet stores, off-price retailers or through the internet (either new or used).

Once the item is possessed and used, luxury is not measured by how much the consumer paid or where they purchased the item. Instead of making large investments in store rentals, fixtures and art work, internet retailers are creating the “luxury experience” on their websites, packaging and delivery methods.

In fact, it is now possible to “rent the runway” by accessing the website by the same name and choosing a designer dress for any occasion. After the dress is worn, it is simply placed in a postage-paid envelope and returned for dry cleaning and re-rental to a new consumer. The company also rents jewelry, handbags and other accessories so that there is no reason to wear the same outfit twice. It is thus possible for women to have a “virtual closet” of luxury items without owning any of them or even having an actual closet. The appeal to the fashion designer is the ability to capture what would otherwise be an unattainable market of young, budget-conscious consumers with the goal of retaining them when they are eventually capable of purchasing the high-end line.

Dan Kaplan,Partner, EY New York

Focus on the American market

Affordable luxury — an oxymoron or the American dream?



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Internet-based Gilt Groupe offers another dimension to luxury — “flash sales” for its “members.” The site offers a menu of designer fashions and other luxury items for men, women and children that changes daily, but are only open for purchase during a specified time frame. Those who follow the sites’ promotions can enjoy large discounts off retail prices, while participating in an auction type atmosphere in which time and merchandise quantities are the biggest challenges. Even the name “Gilt” is often mistaken for its homonym cousin “guilt” as consumers vie for affordable (and even cheap) luxury items.

Notwithstanding, there is still at least one place where the definition of luxury focuses on sales price — the notion of luxury taxes, a popular revenue raising scheme in the US. Those who advocate this type tax focus on the “non-essential” nature of the goods being taxed and the presumption that the highest burden of the tax will fall on those who can best afford to pay it.

A luxury tax may be modeled after a sales tax or VAT, charged as a percentage on all items of particular classes, except that it mainly affects the wealthy because the wealthy are the most likely to buy luxuries, such as expensive cars and jewelry. This aspect has particular appeal among politicians seeking to shift the tax burden from the poor and middle class. It may also be applied only to purchases over a certain amount; for instance, some US states charge luxury tax on transactions over a specified amount.

When a luxury tax is initially imposed, the majority of people aren’t affected by it and aren’t subject to the tax. However, over time, what is viewed as “luxury” might change, resulting in more and more people being affected by the tax. Despite the animosity that ensues, the government may view the income from the luxury tax as essential and will not restrict or rescind it. Thus, it is possible that goods considered “ordinary” might also incur luxury tax. An example of this can be seen with various commodities, such as at the beginning of the last century, when cars and chocolate were viewed as

luxury goods in certain countries and additional taxes were levied upon these goods. Today few people consider cars or chocolate a Luxury, but the luxury taxes on these goods remain. So, even some of our tax systems add confusion to what constitutes a luxury item.

What about quality?

Although the technical term “luxury goods” is independent of the goods’ quality, they are generally considered to be items at the highest end of the market in terms of quality and price. However, quality itself is no longer a luxury. Consumers expect and demand quality in everything they purchase, whether they are labeled luxury items or commodities. Unfortunately, many manufactures have seen the impact of how quality defects or adverse publicity can not only tarnish a luxury label, but can also drive an entire company out of business.

At the same time, several manufactured products attain the status of “luxury goods” due to their design, quality, durability or performance that are remarkably superior to the comparable substitutes. Thus, virtually

every category of goods available in the market today includes a subset of similar products whose “luxury” is marked by better-quality components and materials, solid construction, stylish appearance, increased durability, better performance, advanced features, and so on.

As such, these luxury goods may retain or improve the basic functionality for which all items of a given category are originally designed. The challenge for manufacturers and retailers, of course, is to successfully differentiate quality in their marketing and promotion while avoiding the pitfall of compromising quality in lower-priced versions of their product lines.

Economic and other threats to the luxury goods market

Through mid-2013, the US economy has experienced slow but steady improvement, as measured by unemployment figures and job creation, housing starts as well as consumer confidence barometers. At the same time, the credit crisis and shocks to the financial markets are still quite visible in the rear view mirror. This has caused many

Focus on the American market (contd)




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companies to aggressively manage costs, particularly employee head count and compensation of high earners. Those in higher income brackets are faced with increases in income tax rates as the Federal Government and individual states seek to close budget gaps while tightening their own belts.

In addition, the costs of many of the “essentials” Americans have come to expect, such as health care and education, have risen faster than the pace of inflation and earnings. Add to this concerns related to financial failures overseas as well as constant threats of terrorist attacks. In short, Americans are receiving somewhat conflicting messages about the state of the economy and their financial and physical security.

Normally these conditions would not bode well for luxury brands. Where people have concerns about the future, the so called “discretionary spending” is the first to go. However, this is where the concept of affordable luxury thrives. Despite tough times, people want to feel good about themselves and this includes how they look and how they are perceived by their friends and neighbors. What once was discretionary, becomes essential, at least to a point.

So, it is perhaps not surprising that a 2013 Harris Poll EquiTrend (EQ) study showed that many luxury brands made gains in brand equity over the past year. The study included more than 1,500 brands across over 155 categories (“mass luxury” at its finest) and found improvements in three key factors: familiarity, quality and purchase consideration. An increase in brand affinity

and thus potentially related sales among higher-end brands is consistent with polls that found a decrease in the number of Americans who plan to save more in the coming year and who had previously intended to reduce household spending. This implies that the appeal of luxury items remains strong even while certain purchases may have been deferred during a challenging economic period.

In terms of physical and cyber security threats, this too works in the favor of the luxury brands. Today’s consumers are perfectly comfortable buying all manner of items online. Even if some still prefer to make their purchases in a store, their buying decisions are often influenced by their online experience. This belies an earlier fear that e-commerce might diminish a brands’ integrity or that customers would be unlikely

to buy expensive items without seeing them first. It appears that the in-store sales ceremony is no longer an intrinsic part of the value proposition as speed and convenience become more and more important to the American consumer.

The future

So long as the American dream remains alive, conspicuous consumption will be a part of our culture. The main difference is that you no longer need to be a Gatsby or a Rockefeller to enjoy today’s luxury brands. While some might argue that this removes some of the luster associated with being a member of an exclusive club, for the more adept luxury brand companies, it provides a tremendous opportunity to capture a growing cross-generational and broad socio-economic market who appreciate the finest things in life.

Focus on the American market (contd)




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Roberto Bonacina/Antonio di Prima,Directors, EY Milan

Despite the “aura” of creativity, innovation, imagination and fantasy of the fashion and luxury industry, the evolution of the sector in the recent past clearly demonstrates that today luxury is a capital-intensive business. Not only because building a good brand name takes time and efforts. But also because globalization and new demand coming from emerging markets is pushing further the request for more investments in products, brand uniqueness, awareness, local distribution, retail network and global marketing.

However at the “origin” of the industry (not too many years ago though), the situation was quite different, and creativity, intuition, forward vision, craftsmanship and entrepreneurship were the true determinants of the success (or failure) of a new brand or a new stylist.

The changed characteristics of the business have driven to a structural change in the ownership of fashion companies and brands. A few data underline this long term shift: in the 90s, most luxury fashion houses were privately owned by a single entrepreneur/stylist or its family. At a global level, in 1995, privately owned companies were representing 70% of total market value.

In addition to that, basically no financial investors were owning major brands.

Today this percentage is notably different: 30%.

Public markets increasingly attracted companies and investors, which was emphasized by the significant development of the emerging economies. Today listed companies account for more than 65% of the market.

Furthermore, also private equity investors and, more recently, alternative investors, like sovereign wealth funds in search of trophy assets, are a remarkable evidence of the last decade: in 2011 their aggregated ownership in luxury companies was about 5% of the total market.

The main driver of this shift from private to public/financial holdings could be mainly attributed to two major factors: an easier and more direct access to wider financial resources needed to fuel expansion and investments (in the retail network, acquisition/retention of stylists, advertising and marketing) and, secondarily, to the need of attracting managerial skills, which often lack in family owned enterprises or that are more difficult to retain.

Together with the shift from private to public ownership, over the last 20 years also the fashion business architecture was heavily reshaped. The presence and relevance of independent fashion brand houses has been reduced in favour of big multinational groups, usually cash rich, looking for acquisition targets with untapped potential for expansion to complement their portfolio of existing brands. From 1995 to 2011 independent mono-brand companies reduced their presence in the market, from 55% to 35%. As a result, more than 65% of the luxury market is estimated to belong to integrated large luxury groups, where brands benefit from synergies and advertising spending capability.

Hence today, deep financial resources and commercial strengths are the new entry barriers to the luxury industry, in order to comply with current key strategic needs:

X Worldwide scaled marketing campaigns, to launch new product/collections to the global audience with adequate budget and testimonials. Today around 50% of European purchases of luxury goods comes from travellers, most of them coming from emerging markets.

Focus on the Italian market

The “ownership issue” for Italian luxury



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As a consequence communication has to be global, with single brands in direct competition against each other and very little opportunities for minor brands and companies to achieve a meaningful “visibility”;

X Embracing a “retailization” strategy by building-up a mono-brand/DOS distribution network to get more in control of sell-outs, have an immediate feedback from customers on main and capsule collections and, most of all, locate the brands in the best key locations around the world.

Certain top brands (two leading French luxury brands in particular), following a strategy based on exclusivity and rarity, are in the process of winding down their wholesale distribution to become wholly retail operations.

However, while brands need retail, also retailers need brands and as a result, brands acquisitions by retailers are becoming also more common (e.g., Onwards, E-land, Li & Fung).

X Presence and knowledge of developing markets: Greater China alone accounts for 13% of the total luxury market and ranks

now 2nd among the national personal luxury goods markets (1st is USA) with unparallel growth rate in the recent past and positive expectations for the near future. Industry leaders already shifted their focus on Extra European regions, with all major listed groups making more than 50% of revenues in non western-European countries.

X Complement the brand portfolio with multi-brands and multi-positioning products, not competing against each other. After having seen many examples of acquisition of large and already well established brands, which however are becoming increasingly scarce and expensive, today large luxury groups, in their quest for growth, have taken an interest in some of the fashion’s rising talents, who, on their part, understand that opening up their capital earlier could allow them to grow faster. The “quasi venture” acquisition of Christopher Kane by the Kering group and the acquisition by LVMH of Maxime Simoens, testify this trend.

In this context, Italy — a country where starting from the 80’s a good number of luxury fashion companies prospered, setting

in many cases the trend of the entire industry — has not demonstrated, with only few exceptions, to be able to proceed on the above mentioned path aggregating several existing successful Italian fashion brands in few players able to compete in the current global and complex environment.

And the “ownership issue” is now particularly urgent, with the following main trends:

X Entrepreneurs who sold their company (or the majority of it) to strategic or financial buyers, thus solving radically the ownership issue, allowing the brand they founded to get access to immediate capital and resources to compete globally and grow internationally.

X Those who, mainly through their own resources and/or with the support of the financial markets (e.g., through IPOs) remained independent and, leveraging on the style, creativity, innovation and true “made in Italy,” scaled up to a size that allows them to compete in the international arena as major global luxury players.

X Alongside and in between those two major categories, there is a number of small, mid-sized companies, often with great,

successful, iconic, independent brands and a long heritage within the industry that, in an hypercompetitive and increasingly sophisticated market, are struggling to find their future path reviewing their strategic options. Wondering whether to stay independent and fund their strategy with their own resources. Or partnering with a financial investor to help them supporting their expansion strategies, opening doors internationally and enhancing the managerial skills in a true medium-term alignment of interests. Or, finally, just sell the company to a strategic buyer, in most cases keeping a top management role as the Bulgari and the more recent Pomellato acquisitions showed.

One thing is certain: all options are open for Italian luxury mid-sized companies; however they cannot avoid to deal with the “ownership issue” which is now becoming urgent if they want to continue on their success story and if Italy would like to retain its remaining jewels at home.

Focus on the Italian market (contd)

The “ownership issue” for Italian luxury



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Interview with Ray Black and Bleuzenn Pech de Pluvinel, hosted by Philippe Van Eeckhout

Philippe Van Eeckhout: let us start with a provocative question, do you think that the anti-counterfeiting fight is a real necessity for the luxury industry?

Ray Black: the answer varies from company to company and I am not sure that there is a black or white response to that question.

The cachet is what matters the most for luxury goods companies, they need to preserve it and develop it.

There is then a risk in ignoring counterfeiting. There are buyers of luxury goods that are happy to wear, for example, a watch of a particular brand who will not feel special if they see many members of the public wearing a counterfeited version of the product. It’s thus imperative for such luxury companies to entertain the fight or their cachet will diminish.

However, we can see that luxury goods companies are more reluctant to invest in the control and the eradication of counterfeited goods whereas they invest huge amounts on their visibility. The real question is then to learn how

important this fight is for luxury goods companies and to what extent they think it’s important to keep counterfeiting under control or to eradicate it.

Bleuzenn Pech de Pluvinel: it’s important to keep in mind that the rise of counterfeited goods on the market during the last years hasn’t prevented the big luxury goods companies from having a double-digit growth every year.

Counterfeit products are certainly attacking brands and their cachet; however, it did not impact the revenues of luxury firms even during the economic crises.

In addition, the size of the anti-counterfeiting fight largely depends on the size and the means of companies. In contrast to more established multinational luxury firms, small luxury firms, such as niche brands, have difficulties fighting counterfeiters including investing in lawyers, and the courts. It’s thus critical for them to have a proper anti-counterfeiting strategy.

PVE: would you agree with the following statement “being counterfeited is for luxury firms a sign of reputation and knowledge of the product by the consumers”?

RB: if the counterfeit industry thinks that it would be profitable to counterfeit a particular product, it means that the industry has recognized that the product has a success and notoriety in its own market place and that prospective consumers of the counterfeited product want to be associated with this market.

BPP: I think that this statement refers to the concept of masstige, launched at the end of the 90s beginning of the 20s, this new strategy combines “mass” and “prestige.” If luxury firms were first very selective, they have with a “masstige” strategy widened their targets in order to address a larger audience.

However, some of these consumers buy both genuine and counterfeited products, starting by buying counterfeited products before they can get access to the genuine goods.

Ray Black is partner in the Intellectual Property practice at SJ Berwin, which he set up following his return from the Far East in 1991, he was previously based in Hong Kong, between 1977 and 1991, during which time he set up and developed the IP practice of his then firm.

Bleuzenn Pech de Pluvinel is manager at EY Advisory France, she leads strategy and transformation projects. She is the author of “La Guerre de la contrefaçon,” Editions Ellipses, 2011.

Philippe Van Eeckhout is President of Contratak S.A.S., a consulting French base company specialized in anti-counterfeiting fight. Before starting Contratak, he was Head of Asia Pacific Anti-counterfeiting Department for LVMH in Hong Kong. He is the co-author of the “Guide anti-contrefaçon” (Ed. Bourrin, 2009).

Focus on the counterfeit issue in the luxury industry

Insights into luxury and counterfeiting



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It’s then a real challenge for luxury goods to properly address this issue.

RB: I totally agree with you Bleuzenn. I can see it through the young generation. They are tempted by counterfeited products, because they aspire to luxury and want to show it. I wonder even, if luxury goods companies consider that the availability and the use of counterfeits goods by younger consumers will attract them toward genuine products when they will be able to afford it.

BPP: I agree, and this is totally in line with the “masstige” strategy through which luxury firms stopped focusing on old wealthy ladies but reinforced their advertising campaigns in order to target a larger audience. Nevertheless, the recent developments of the luxury firms are oriented toward a more selective approach, with a “re-premiumization” of their brands.

PVE: based on the statistics released by EU customs, over 80% of the counterfeited products are coming from Asian countries, mostly from China. Based on your experience, how do you see the evolution of the intellectual property laws in China over the last 30 years?

RB: evolution is the right word; 30 years ago China was not even a member of the WTO!

When I first started practicing in Hong Kong, I believed that the problem was not related as much to the substantive law as to the enforcement of that law. It’s true that many successes have been achieved in the anti-counterfeiting fight, such as the silk market operation in China, but the problem hasn’t been eradicated yet.

Another important evolution relies on the growth of Chinese-owned luxury goods firms. These companies are developing today their domestic markets, and in time they will then attack the international markets, and they will then demand the enforcement of the intellectual property laws in order to protect their own goods. I believe that this will also be the best opportunity for Western luxury goods companies to reclaim the respect for their own rights.

It will take more time, but I am certain that counterfeiting production will decrease in China and will move to other markets.

BPP: I agree with you, and I will use the Japanese example to show you that. During the 70s–80s, the level of counterfeiting

production was very important in Japan. However, this production has ceased when the Japanese started to develop their own brands, and when these brands expanded into Europe! Today, you do not have counterfeited goods in Japan except for those coming from mainly China. I also have faith in Chinese luxury brands that will ask and work for the reinforcement of the IP laws and the respect of these rights!

PVE: in parallel to the reinforcement of the law, what can we say about the strategy of the luxury firms in terms of anti-counterfeiting? Most of the companies tackle the supply rather than the demand, how do you think luxury firms can improve their strategy in order to attack the demand?

RB: I think that counterfeiting should be addressed at the source. You always have to start by taking out the bad apples in the pot. That’s imperative; luxury goods companies must tackle the supply!

However, how can we stop the flow of traffic after it left the production site? How can we stop products coming by post or by air? How can we have better interaction between various customs authorities?

And most importantly, how can we discourage the consumers from wanting these counterfeited products?

These issues represent for the luxury industry a greater challenge than for other industries, such as pharmaceuticals or spare parts. It’s easy to show the hazardous effects of counterfeited drugs but it’s more difficult to prove that buying a counterfeited watch, for example, can be damaging.

Attention can be put on the production of counterfeited products in “slave factories” for example. That level of education is essential! But it should be done collectively. The leaders of luxury firms don’t stand up very often together to condemn these counterfeiters. Government ministers should also be more active in promoting the negative aspects of counterfeiting.

BPP: at the same time, the luxury industry has addressed the market in a very aggressive marketing way in order to attract a larger body of customers. They have created a lot of desire for their products. It’s then very difficult to ask the customers not to buy counterfeited products. That is the dilemma of the luxury industry!

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PVE: in the anti-counterfeiting fight, the luxury firms have focused their investments on protecting their visibility rather than tackling the source of the counterfeiting production. What do you think of this strategy?

RB: one can’t invest all of one’s money along one unique channel since it’s very difficult to guaranty that this strategy would be absolutely successful. Fighting the supply is a real challenge. In order to produce one item, several components need to be assembled and each one is frequently produced at a different site. Countries such as China are very large; it is then very difficult to identify and stop all the production sites involved.

Since it’s not possible to guaranty that the “fight against production at source strategy” would be a success, I think that only a majority of the business investments should address the source.

PVE: authorities tend to focus their communication on the relation between organized crimes and counterfeit products, how far are those linked when it comes to the luxury industry?

BPP: to be short, we can say that there are two different groups. On the one hand, there are the some small production companies, located in Italy, in Morocco or in Thailand for example which first produced genuine products and then decided to shift to counterfeits goods. There aren’t any organized crimes related to them, other than the fact they are violating IP rights.

On the other hand, there are large networks of counterfeits factories and production sites in specific areas in China, Indonesia, Thailand, or Vietnam that are linked to the Chinese mafia. The Chinese diaspora is very powerful and an important channel for the circulation of counterfeit products in countries, such as Canada and the US. At the south of Italy, the Italian and the Chinese mafias are joined to produce counterfeit goods, thus globalization has also helped the globalization of the crime. It is then true that buying counterfeit goods helps financing organized and globalized crime.

PVE: we are living today in a globalized market, however, the intellectual property legislation is customized locally and there isn’t a unified system. What do you think

can be done in order to improve the existing system? Do you think that we still need an IP law to fight counterfeit products?

RB: trademarks and designs are fundamental for the luxury industry, and for that, the substantive law is fine and is evolving like it should. However, more attention should be given to the enforcement of the law. Customs procedures should be improved for example. I don’t understand why European authorities rejected the Anti-Counterfeiting Trade Agreement when it was accepted by other countries, such as Japan. So perhaps not enough is done from the main interest groups to achieve the necessary results.

PVE: sales on the internet have been an important issue since the beginning of the 2000s, what can the luxury industry do in order to control and decrease the sale of counterfeit products over the internet? Is it a lost battle?

RB: I don’t think so, things have changed and some pressure has been put by luxury firms on internet auction houses. Legal actions were also taken by some French firms (and

they should be applauded for this effective work!). However, all these actions are not enough; there are still a lot of websites providing questionable products. It’s an ongoing battle that requires a lot of vigilance! I once suggested that when an auction house wants to present a product for sale, a period of time should be given to the brand owner to say whether or not the product is legitimate.

PVE: the problem is that the expenses of the fight are paid by the IP owner. Internet monitoring and investigation for counterfeit products requires large financial or human resources.

BPP: you can then imagine how difficult it is for small luxury firms to put in place these actions for their products.

Having this in mind, I think that one of the possible answers for luxury firms is to develop their own exclusive online channels which take time to launch. Some consumers buy products online thinking they are genuine when they are in fact counterfeits. Thus, one of the solutions would be to have selective online networks.





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PVE: do you think that we can create an internet domain system, dedicated to the luxury industry, such as “Luxury,” in order to help the customer identify genuine products?

RB: I am not sure how this solution will prevent the availability of alternative products online. But it can be another helpful step toward success.

PVE: going back on fighting the demand for counterfeit products, what can the luxury industry put in place in order to prevent the consumers from buying fake products?

BPP: I see two types of solutions that should be applied in parallel. On one side, awareness work has to be done using various communication channels, by educating the customers not to buy fakes.

On the other side, internal strategies should be put in place. These internal strategies can tackle the engineering production process.

Efforts should also be made in order to make the reverse engineering more difficult. The launching schemes of the product can also be revised, by putting in place a global launch date rather than different launching dates for the countries, in order to reduce the risk of having counterfeits in the uncovered countries. The anti-counterfeiting fight should be set in place at the beginning of the production chain in order to prevent it once the item is produced. The most ambitious luxury firms are including all of their departments (R&D, marketing, production, supply chain, retail, etc.) in their anti-counterfeit fight.

RB: I totally agree with you, multinational companies should seek to totally include their employees, retailers and distributors. They should feel that it’s part of their business to report counterfeiting activities and they will be supported when they do. This of course would require more proactivity from the luxury firm when a report has been received.

But at the end, the big question is whether the existence of counterfeits goods affects the luxury industry in making money.

PVE: indeed, how can you claim damages when you cannot declare loss in your P&L?

RB: one of the better advantages of the courts in the US is that they reward punitive damage and enable large damages awards to be made and recovered. This doesn’t exist in Europe. Should luxury organizations be pushing for such a change in the law, so that damages are more easily and more substantially recoverable?

BPP: I think that it is important to add an important evolution taken recently by luxury firms. The luxury goods companies have stepped back from their firms’ “Masstige strategy” and went back to being more selective. By having more exclusive sales channels, they prevent counterfeit goods because it is harder to access the genuine models.

RB: I believe that counterfeits will always exist. But the question is to know who is going to suffer, and how to reduce the level of pain? Today there is much greater room for luxury firms and organizations to address the problems together. When they do less, the authorities are not pressurized and they might wonder why they need to bother.

BPP: I think that we are going to witness a strong evolution in the counterfeits productions. Like we said before, Asian companies will develop their own market penetration strategies which will lead to decrease of the counterfeit products. New continents will then step into the counterfeits world, such as Africa or South America. The governments and NGOs should be strongly committed in order to set up a proper and unified law enforcement system that will prevent anything similar to the historical and current Asian practices.

Note: the views represented in this interview are those of Philippe Van Eeckhout and Ray Black alone and do not represent an opinion or recommendation of EY.





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In our digital world, with multi-connected 24/7 consumers, advertising provides the oxygen that fans the flames of luxury demand. Luxury houses spend a significant proportion of non-production costs on advertising and do this through partnerships with media buying agencies, creative agencies, digital or social media partners, events agencies, etc. These suppliers are actually not only just suppliers but aim to create a real business partnership working on mid-to long-term horizons to help houses to build their social community, improve their luxury position, continuously build the brand story and universe through a deep understanding of the DNA of each brand.

These relationships are often managed by contracts which could represent significant spend for the advertiser and require specific attention to develop the brand attributes, entice clients and protect the brand’s image and identity.

Getting excellent quality and value for money from spending with third parties is an ongoing challenge for most houses. This is increasingly true in today’s global business environment where entering emerging markets, gaining new customers but also managing costs and conserving cash are often conflicting with the priorities.

Often the largest opportunity to quickly improve services delivery, accelerate the digital switch or manage investment is to optimize the value in existing contracts:

X By having commercially efficient contracts

X By effectively managing those contracts and relationships with agencies throughout their operational life

X By minimizing inefficiencies in the interaction with suppliers

Opportunities exist to improve marketing and advertising contractual arrangements because inefficiencies and waste manifest themselves during the operational life of the contract. The value captured and promises

made during the procurement pre-award phase are often partially lost over time due to:

X Ineffective contract management

X Focus on operational delivery vs. strategic thinking to adapt to global changes at an accelerating rate

X Scope creep, delivery and quality failures

X Outsourcing of part of the services to subcontractors by the business partners and a lack of control over the whole supply chain

X Poor or perverse incentives

X Bad planning, communication and demand management (on both sides of the relationship)

X Not fully understanding the billing process of the business partners (invoices at costs, volume rebates reversal, cash flow position …)

X Miscommunication and rigidity in managing the relationship eroding the spirit of partnership

Christophe Lairy,Partner, EY Paris

Focus on marketing and advertising in the luxury industry

How to manage the relationships with marketing and advertising business partners



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On longer-term arrangements, there is also the risk that the marketing and advertising contracts have not evolved with the organization and now no longer deliver what the business needs. The permanent and rapid changes toward digital communication are the best examples of what most advertisers have experienced.

Understanding the difference between reported expectation of value (cost, quality of services on media buying, digital innovation or consistency of business partner team members) and reality of value actually delivered provides leverage not only for improving the day-to-day relationships but also for cost recovery. Not simply to save money but to keep the agencies honest and focus or divert investment to their maximum benefit for the brand.

Understanding the difference between reported expectation and delivered reality provides leverage to close the value gap. The house could manage these risks by leveraging on one or several of the following actions:

1. Contract terms review

This review enables an assessment of the contract between the advertiser (house) and the agency/the third party through a comparison of the contract to leading practices in the market (financial and qualitative clauses). This will add value through specific recommendations on contractual clauses in order to avoid “traps” often observed and ensure a more transparent relationship for the benefit of all parties. As an example, a check is performed to ensure quality of the clauses related to volume rebates to ensure all rebates will be passed back by the agency to the advertiser, which in many instances is not the case.

2. Process analysis and implementation of leading practices in managing business partners

This step consists in reviewing the day-to-day relationships to ensure the process is efficient, effective and in line with leading practices. Through detailed interviews with both parties (client and agency) and a review of a sample of projects/campaigns, including planning and purchasing processes, in order

to highlight opportunities to optimize quality of services, accelerate innovation and help to ensure strategic insight is maintained.

3. Contract compliance review

The contract compliance review aims to assess the agency’s compliance with the terms of the contract either from a financial point of view (discounts, volume rebates, fees, payment terms, cash flow position, bonus linked to the achievement of objectives, time spent, commissions basis, etc.) or from quality (confidentiality of advertiser’s data, archiving, work with competitors, etc.). This also usually includes an analysis of the agency’s reporting on performance (cost/quality ratio, positioning, etc.). We regularly observed the following non-compliance items, either implicitly or, in some cases, deliberate breaches:

X Absence of regular invitations to tender with other media agencies (sub-contractors) leading to sub-optimal pricing

X Discrepancies between customer and supplier invoicing

X Discrepancies between commissions and fees invoiced to the customer and those defined within the contract

X Rebates and discounts not or partially disclosed by the agency

X Cash flow position unfavorable to the client

X Media buying guidelines not followed by the agency

X Digital technical costs over-invoiced

4. Profitability analysis

Quite recently a few advertisers and agencies have agreed to perform a profitability review by building a profit and loss account by customer. Proposed by both parties to solve long discussions on low profitability declared by agencies and too high costs claimed by advertisers, these reviews enable to start a new relationship on increased transparency through audited profitability but the same cautions as per the cases above should be exercised when structuring and managing these more innovative arrangements.

Focus on marketing and advertising in the luxury industry (contd)




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5. Launch of a request for proposal (RFP)

In addition to regular contract compliance reviews (either on a regular basis, usually every 2–3 years, or at the end of the relationship), most companies decide to launch a “request for proposal” process to select the best-in-class agencies for advertising projects. A specific assistance can be proposed to assist the advertiser through the different steps of the RFP process to increase the transparency during the selection process.

In summary, houses are looking to improving the relationships through closer monitoring, greater transparency and creating a real as well as perceived business partnership.

And in the same spirit of partnership, these reviews need to be performed not with an adversarial perspective toward the business partners, but in a collaborative manner designed to improve the overall relationship. Specifically, while the service provider should be keenly aware of its client’s objectives and concerns related to the business relationship, they also need to seek to:

X Understand and communicate the root causes for exceptions and provide recommendations for improvement that would be beneficial to both advertisers and business partners.

X Verify all findings and exceptions with third-party management prior to the close of fieldwork to provide transparency and reduce the potential of misunderstandings later in the process.

X Determine how the documentation and business processes we encounter during our work impact other challenges the business partners are experiencing in the relationship.

All of the above have resulted in the improvement of relationships. These reviews have demonstrated to advertisers, over the past decade in marketing and advertising inspection projects, the ability of these projects to provide tangible operational improvements, cost savings and recoveries while actually improving the advertiser’s business relationship with its partners. Resulting in a win-win scenario for both.

Focus on marketing and advertising in the luxury industry (contd)




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What licensing means

Brand licensing means “renting” a company’s famous brand (or trademark) to other companies that will pay royalties for using this brand to launch new products.

A brand is a name with a strong awareness. When the customer sees the brand, they immediately link it with the specific brand world.

Companies are ready to pay to borrow this brand power (awareness, content and emotion) because putting a strong brand on the products increases consumers’ demand and retailers’ acceptance (see graph on the left).

From a legal point of view, brand licensing means delegating both the manufacturing and the distribution of products for a limited period of time for some categories or some countries.

Design creation and communication are usually shared between the brand owners and the licensees.

An example of a famous licensed brand is Calvin Klein. Coty prestige — the licensee — has been ready to pay licensing fees to get the right to put Calvin Klein brand on some perfumes.

It is important to remember that Calvin Klein has no technical or sales know-how in the field of perfumes. All this know-how has been brought by Coty Prestige. A key point is therefore the “intellectual property” of the products created through this collaboration: in most licensing contracts, it belongs to the brand-owners.

Luxury against licensing

Today, licensing a luxury brand is seen by many business experts as contradictory.

Luxury means excellence, innovation and quality. The perfect luxury business model implies full control of design, manufacturing and distribution of its products.

At Hermès, the symbol of top luxury, everything is 100% designed, made and distributed in-house: the search for excellence goes as far as to acquire their own crocodile and ostrich farms so as to

make sure they use the best available selected skins. When Hermès diversified into watches, they did it through purchasing a watch factory and converting it to their high-quality standards.

As a matter of fact, the pure luxury business model says: “no license.” Louis Vuitton strictly follows this philosophy. When they announced the future launch of the LV perfume, they said it would be created internally and sold exclusively in the 450 Louis Vuitton stores worldwide.

We should keep in mind however that the few luxury companies that can afford 0% licensing are exceptions rather than the rule.

Licensing is a business extension tool

Licensing is a strategic decision made at the top management level of a company. It aims at business extension: Calvin Klein would grant a new license to increase its revenues and enjoy the advertising media spent by the licensee. Many luxury companies have adopted “hybrid models” standing between the extreme models (100% and 0% licensing) whereby they

Stéphane LacroixFounder and manager of a consulting agency in brand licensing for the luxury, fashion and beauty sectors (www.slacroix-licensing.com)

Author of “Luxe & Licences de marque” (“Luxury & Brand Licensing”) written with Emilie Bénéteau and published by Eyrolles in September 2012

Focus on licensing in the luxury industry

Trends in luxury brand licensing

License contract

Brand awareness

Branded products

Branded products

Brand owners Licensees

Consumers Retailers

Central role of the brand awareness



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keep their core business internally under control and license some of their peripheral non-core activities (see graph on the left).

Background

During the post-World War II years and until the early 90s, brand licensing played a key role for international expansion outside Europe (Japan was a paradise for licensees in these years) and product diversifications (through second ready-to-wear lines and fashion accessories) of many luxury companies.

But, for the last 20 years, the wheel has turned and what was seen before as a magic recipe for business expansion became the poison leading to the corruption of luxury brands. Newly built luxury giants, namely LVMH and Kering (formerly PPR), declared war against licensing …

To act according to their principles, many luxury brands have terminated or bought their licensees. After its acquisition by Mr Bernard Arnault, it was decided that Dior would stop virtually all its licenses around the world, especially in Japan where the

brand disappeared at one time before being successfully relaunched through direct imports and a wholly-owned subsidiary. Now, for the new Chinese Eldorado, Dior would never consider licensing its brand like it did in Japan 50 years ago with Kanebo!

If YSL was not able to make any profit for 10 years after its acquisition by Kering, it is mainly because it was brave enough to terminate all its fashion licenses and decided to integrate all its business and bear all the costs.

Recent licensing trends

In Asia, Ralph Lauren and Burberry have recently terminated all their licensing contracts to take direct control of their business. Most luxury companies have not renewed their “geographic” licenses in recent years.

In April 2013, Burberry started its own perfume division after 20 years of fruitful licensing partnership with French company Interparfums.

Brands such as Lacoste or Calvin Klein had built their international presence until today through many licensing and franchising contracts. These two brands moved in 2012 from a 100% licensing model to hybrid models after the Swiss group Maus, the owner of Devanlay (the ready-to-wear licensee) took over the Lacoste Brand and after the American group PVH, the owner of Calvin Klein brand, took over its biggest US licensee Warnaco, which manufactured underwear and jeans.

All these highly visible examples seem to show a progressive and complete divorce between luxury and licensing.

New licensing opportunities in times of crisis

Nevertheless, with the current economic world crisis, the strong growth experienced so far by all luxury brands in all sectors was broken in 2009 before bouncing back until 2012 and slowing down again in 2013. Luxury is clearly not immune to the economic cycles.

In this context, any source of profitable business is worth considering.

Focus on licensing in the luxury industry (contd)




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This new situation is again changing the rules of the luxury game and licenses are stronger than ever. It doesn’t show yet in the official speeches on luxury because the anti-license ideology is still strong in everybody’s minds but the new environment is calling for new solutions including licensing: the urgency to preserve cash, the need to concentrate on one’s strength and the desire to find synergies with complementary partners, everything contributes to the revival of licensing for luxury brands.

Most licensing contracts signed in the last few years are worldwide contracts in some specific products categories: perfumes, eyewear, watches, children’s wear …

What licensing brings today

For emerging brands, licensing is here to boost the brand awareness:

X Victor & Rolf Flowerbomb and Spicebomb perfumes by L’Oréal and the first Elie Saab perfume by BPI (Shiseido group) have given these brands a media exposure and a distribution that only big groups can provide.

X On the other hand, some new talented couture designers are financially struggling because they still lack the awareness — and the royalties — provided by worldwide licensing agreements in key categories, such as perfumes, watches and eyewear.

For already established luxury brands, licensing brings a specific expertise:

X Chanel has successfully granted a global license since 1999 to the Italian company Luxottica, the world number one eyewear player.

X In 2010, Fendi signed a worldwide license with Simonetta, the Italian children’s wear specialist.

X Ralph Lauren watches were launched in 2009 through a licensing contract signed with a joint-venture company established with Richemont, the watch and jewelry expert.

X Donna Karan — whose core business is women’s ready-to-wear — signed with a London-based joint-venture company with Indian textile partner SKNL to launch a worldwide men’s ready-to-wear.

X The Armani hotel in Dubai opened in 2010 inside the world’s tallest skyscraper (Burj Khalifa) is another example of licensing between a design and fashion genius and an expert in hotel building and management, the Emaar Properties group.

And so on, there are countless numbers of new licensing contracts signed every month by luxury companies as reported in the business press.

Today’s licenses are different from past licenses

Why? Because the mistakes of the past are still in everyone’s memories and should not be repeated: lack of design, poor quality and distribution controls, money-making licenses signed purely for financial reasons and lack of communication between trademark owners and licensees.

Nowadays, licensors in the luxury sectors always keep in mind that licensing is a nice drug that must be consumed in limited quantities. Concentration on a 100% controlled core business remains a key to long-term success whatever the success of the licensing business may be. The brand image consistency comes first.

Advice for brand owners to succeed

In order for licensing to meet luxury demands, we have observed that licensors should:

X Find a licensee who looks like them (=DNA compatible) and share the same luxury values: Montblanc perfumes didn’t perform so well under a previous licensing partner before succeeding wonderfully with Interparfums for the last few years.

X Identify the true specialists in each sector: the US group Movado in watches, the French company CWF in children’s ready-to-wear, the US eyewear expert Marchon — not to mention the dominant Italian groups — are among some of the key players to consider.

X Give it confidence but check every steps of product and business development.





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Licensors should avoid:

X Multiplying the number of licensees: world licensees should be preferred to regional licensees who, in turn, should be preferred to national licensees.

X Asking for excessive high sales targets in times of global uncertainties and quick economic cycles (who is able today to make serious projections beyond two years?).

X Interfering constantly in design details: a licensee is not a sub-contractor!

In other words, diversification through licensing involves the same business and ethical principles as organic diversification i.e., choose and handle your licensees as you would choose and manage your own staff and projects.

It is interesting to note that the LVMH Fragrance Brands division is becoming the in-house “licensee” of some LVMH brands (Kenzo, Givenchy, Fendi, Pucci). Only a diversified luxury group like LVMH can license internally!

Advice for licensees to succeed

Seen from the opposite side, we have found that luxury licensees should:

X Keep some balance in their brand portfolio between their own brands and their brands under license: Luxottica manages its own giant brands Rayban and Oakley besides running many licensed brands (Armani, Burberry, Versace, etc.). Coty took over a few skincare and cosmetic companies (Dr Scheller, OPI, Philosophy and Tjoy) at the end of 2010 to strengthen its own brands portfolio — now accounting for an estimated 30% of total sales — and not depend only on its some 40 brands under license.

X Do their homework to gather accurate information about the desired luxury brand to check compatibility with their own luxury business before deciding to take the brand.

X Maintain good contacts with the licensor’s top management and its shareholders.

Licensees should avoid:

X Accepting “master–slave” relationship in the contractual terms and in the on-going relationship

X Believing that the luxury brand will bring a miracle to a struggling business

X Considering themselves as brand owners

Conclusion: licensing is a powerful tool to develop ROI for both parties

For both parties, we would advise them to:

X Aim for a win-win situation

X Accept to compromise

X Have the courage to stop if the sales results are not here or the relationship cannot work

As a conclusion, we dare say that carefully managed licensing can meet luxury demands to diversify the brand in specific sectors requiring a unique know-how and huge investments, such as perfumes, watches and eyewear. The licensing process takes time and a lot of energy to make the two equal partners (licensor and licensee) meet and work together on a long-term basis.

Although licensing is only a tool at the disposal of luxury player, it will certainly remain strongly here as it will prove vital to the survival and growth of many luxury brands.

At the end of the day, the final judges remain the exclusive luxury customers and mutual success will reward the luxury brands able to meet their customer’s ever-changing desires.

What matters to keep the business growing is the excellence, innovation and quality, in one word the exclusive image that the customer must perceive on the long term when buying and using a luxury brand even if the brand is used in new categories or new countries.




Note: the views represented in this interview are those of Stéphane Lacroix alone and do not represent an opinion or recommendation from EY.


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Digital has been around for about 20 years but particularly over the last 5–6 years the speed of change has become faster and the impact of change wider. The tipping point for digital was 2006 when worldwide internet penetration hit 15%. We then saw a network effect of innovation with almost all of the major digital disruptions we know today hitting main stream (smartphones/iPhone — 2007, tablets/iPad 2010, apps, social networks, etc.). Today, change is constant and new technologies can reach critical mass extremely fast (it took Google 6 years to reach 50 million users starting from 1997, it took Facebook 2 years, starting 2004 and Google+ 88 days starting 2011). The challenge with digital is that we have only just begun ...

Luxury companies used to have a reputation for being hesitant about digital but in the last couple of years they made giant steps in digital technologies’ adoption by observing that an increasing portion of sales is directly generated (consumers buying online) or strongly influenced by online channel (consumers browsing for research and price comparison and then buying offline).

Digital is a powerful medium to build resilient relationships with wealthy shoppers, and long-term relationships, as in any other business, build sales and profits. Digital and physical experience has become closer and what we see is that luxury brands have begun to acknowledge the opportunity that digital touchpoints have in creating differentiated, outstanding experiences. Examples of brands leading in providing a captivating digital experience and most online searched for brands are Burberry, Gucci, Louis Vuitton, Prada, Chanel and Michael Kors.

This proliferation of customer touch points generates one of the major source of value for luxury companies within digital that is around data, Burberry has more than 10m Facebook fans generating huge volumes of data every day from which they can get actionable insights that could improve product innovation, customer experience, marketing, service. Consumer data and the way brands use it will be a key differentiator.

Technology allows consumers to use mobile devices everywhere they are and luxury shoppers access more information from mobile devices than the average user.

Simply, luxury brands have to be where their consumers are, Gucci realized it and this year after the launch of its new mobile site quadrupled its mobile revenues.

More consumers are interested in digital, they don’t differentiate between store and web experience. These consumers set high expectations for luxury brands that should be aware of it and realize that their clients are digital-educated. They expect to be able to purchase something online and to return it from what medium is easier, they step into stores showing sales assistant product images from their tablets. These new empowered customers want to have a greater say in how they experience service. They want products and services to be designed, sold, delivered and serviced in a way that suits them. They want to be active co-creators, not passive consumers. Digital is enabling open dialogue and innovation with customers. Not many brands have prepared themselves to meet these expectations but luxury brands have to and must think about how to best serve those up-and-coming consumers, making sure the brand is prepared for years to come.

Paolo Lobetti Bodoni, Partner, EY Milan

Focus on digital in the luxury industry

Digital in luxury: how it’s working



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New high-income generations come especially from developing countries where demand for luxury is continuously growing. BRIC markets e-commerce luxury sales show no signs of slowing down and some new stars are rising with stronger consumer demand for luxury as the economy begins to improve. South Korea is a good example, emerging as a point of light driven by huge diffusion of smartphones and high-speed internet connection availability. For luxury brands, it is strategic to choose the right business model to go for the next level of growth that can mean also looking for and partnering with best digital players for communication, social and delivery of products and services.

Luxury shoppers from emerging countries are also great travelers and used to visit luxury showrooms all around the world. stores are still very important and digital can augment in-store brand experience and engagement. Only a few luxury brands already recognized it and invested in digital in-store technologies: e.g., Burberry

invested hugely with Retail Theatre technology, enabling in store distribution of brand contents/fashion shows and rolling out of iPads to all mainline stores; Gucci equipped store associates in selected locations with mobile check-out devices; Nordstrom planned to eliminate cash registers in favor of mobile POS systems.

Impact of digital is from front-end to back-end: digital is impacting everything from in-store experience, to marketing (engaging with their target consumers), employee communications, supply chain, customer service, even fashion shows.

From a digital perspective, department stores (e.g., Nordstrom, Neiman Marcus, Saks) are a step beyond global luxury brands providing features of seamless customer experience (free returns, reserve and collect, etc.) and better online user experience. Their original spirit of retailers made them be at the forefront of omni-channel retail experience.

To sum up, digital brings both opportunities and threats to luxury companies: opportunities, like learn more-than-ever-before about customers through data, create cross-channel differentiated experiences, interact with consumers on their terms and threats like loss of control of customer experience, potential for customer complaints/negative reviews everywhere, explosion of channels and devices, employees’ inappropriate comments on social media.

If we look at evolution over last years, considerable development has been done, also in terms of culture and approach of luxury brands toward digital, with increased awareness of potential.

To fully exploit digital potential and transform threats into opportunities, luxury companies will need to:

X Focus accurately on where and how to compete and reframe strategic choices to take advantage of opportunities when needed partnering or acquiring digital missing capabilities.

X Shape organization with clear ownership of digital and develop cross-functional thinking, skills and project teams.

X Build self-aware capabilities that fit together online and retail to deliver unique brand experience. Customers are already looking for it.

X Build a comprehensive digital model from top to bottom, clear front-end marketing strategy and an operational infrastructure working at the same pace in the backend.

X Leverage digital to engage customers in an open dialogue to foster “outside-in” open innovation.

Focus on digital in the luxury industry (contd)

Digital in luxury: how it’s working



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Key financials (in €m) FY11A FY12E FY13E FY14E FY11A–FY14E CAGR

Sales 243 279 317 360 14.0%

EBITDA 40 48 59 71 21.0%

EBITDA margin (in %) 16.6% 17.3% 18.5% 19.8% n.m.

EBIT 35 41 49 59 19.2%

EBIT margin (in %) 14.4% 14.7% 15.6% 16.5% n.m.

Net profit 20 22 31 37 21.8%

Capex ratio (in %) -10 -19 -27 -20 25.5%

Net debt 48 1 12 -2 -133.6%Source: Capital IQ. Note: financial figures are at 31 December. n.m = not meaningful.

Source: Capital IQ. Note: Brunello Cucinelli IPO date = 100.

Key facts:

X Brunello Cucinelli S.p.A is an Italian luxury fashion house, specializing in cashmere.

X Founded in 1978, the company operates in more than 50 countries worldwide through a network of single-brand boutiques, selected multi-brand outlets and top luxury departmental stores.

IPO details:

X Total offered shares: 22.4m (primary shares: 8.0m, secondary shares: 12.4m)

X 2.04m shares under over-allotment option

X Initial price range: €6.75–€7.75

X Final offer price: €7.75

X The IPO was oversubscribed 17 times and raised €173.9m, including the over-allotment option.

X It gave a return of 49.7% on the listing date.

Share trading pattern (post listing)

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27 Apr 12 27 May 12 27 June 12 27 July12 27 Aug 12 27 Sep 12 27 Oct 12 27 Nov 12 27 Dec 12 27 Jan 13 27 Feb 13 27 Mar 13

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Brunello Cucinelli S.p.A. FTSE MIB Index FTSE Italia All-Share Index

Brunello Cucinelli: overview

We included Brunello Cucinelli in the sample as it was listed on the Borsa Italiana on 27 April 2012.

Focus on Brunello Cucinelli and Michael Kors


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Michael Kors Holdings Limited S&P 500 Index NYSE Composite Index

15 Dec 1215 Jan 12 15 Feb 12 15 Mar 1215 Apr 1215 May 1215 June 1215 July 1215 Aug 1215 Sep 12 15 Oct 1215 Nov 12 15 Dec 1215 Jan 1315 Feb 1315 Mar 13

Key financials (in €m) FY11A FY12E FY13E FY14E FY11A–FY14E CAGR

Sales 977 1,661 2,188 2,674 39.9%

EBITDA 216 508 660 818 55.8%

EBITDA margin (in %) 22.2% 30.6% 30.2% 30.6% n.m.

EBIT 188 468 620 755 58.9%

EBIT margin (in %) 19.3% 28.1% 28.3% 28.2% n.m.

Net profit 111 291 386 468 61.8%

Capex ratio (in %) 6.8% 6.1% 6.4% 4.7% n.m.

Net debt –63 –273 –495 –796 133.2%Source: Capital IQ. Note: financial figures are at 31 December. n.m = not meaningful.

Source: Capital IQ. Note: Michael Kors IPO date = 100.

Key facts:

X Michael Kors is a luxury lifestyle brand that provides accessories, footwear and apparel with presence in 185 countries.

X The company operates in three segments: retail, wholesale and licensing. It manages global distribution network through co-owned retail stores, leading department stores, specialty stores and selected licensing partners.

IPO details:

X Total offered shares: 54.28m, all secondary shares

X 7.08m shares under over-allotment option

X Initial price range: $17–$19

X Final offer price: $20.0

X The IPO was 10 times oversubscribed and raised $944m.

X The share price rose 21.0% on its debut on the stock exchange.

Share trading pattern (post listing)

Michael Kors: overview

We included Michael Kors in the sample as it was listed on the New York exchange on 15 December 2011.

Focus on Brunello Cucinelli and Michael Kors


DCF and Valuation Parameters

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Glossary

X CAGR: compound annual growth rate X Capex: capital expenditure X DCF: discounted cash flow X EBIT: earnings before interest and taxes X EBITDA: earnings before interest, taxes, depreciation and amortization

X EEC: european economic community X EV: enterprise value X FY: financial year X GDP: gross domestic product X LTGR: long-term growth rate X M&A: mergers and acquisitions X NGO: non-governmental organization X NWC: net working capital X R&D: research and development X SD: sustainable development X SOTP: sum-of-the-parts X WACC: weighted average cost of capital

X YOY: year-on-year



Daniel KaplanPartner, Advisory — New YorkNYC and Americas [email protected]+ 1212 773 7910

Andrea GuerzoniPartner, Transaction support — [email protected]+ 39 028 066 9707

Flavie LacaultGlobal coordinator — [email protected]+ 39 028 066 9677

Laurent BludzienPartner, Assurance — Geneva [email protected]+ 41 58 286 5677

Paul WoodPartner, Advisory — ParisEMEIA and Global [email protected]+ 331 4693 7722

Michael HasbaniPartner, Advisory — [email protected]+ 971 4 701 0100

Anthony LucasPartner, Advisory — Singapore,Singapore and Asia-Pacific [email protected]+ 65 6309 8628

Luxury and cosmetics: EY Global coordinators

The work was supported by the EY GTH team and the French and Italian TAS teams, supervised by Flavie Lacault and Antonio La Marca.


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Notes

EY | Assurance | Tax | Transactions | Advisory

About EY

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The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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