Lab u 2052 Capstone Case

CASE GOMPETITION

20 13

Fulfilling the Chinese Dream

Thompson Center for Business Case Studies,

HKUST Buslness School

KRISTIAAN HELSEN

ARMAND GHIEUW

Chow Tai Fook:Fulfilling the Chinese Dream

I frequently ask myself how u)e, as a dream deliuerer, can better communicate

with our customers andhelp themfulfiIl their dreams.

Kent Wong, managing director, Chow Tai Fook Jewellery Groupl

By the time his plane touched down at Hong Kong lnternational Airport after an exhausting ftight from

New York, Kent Wong, managing director for Chow Tai Fook Jewellery Group Limited (CTF) was more

determined than ever to press ahead with his company's strategy to have 2,000 points-of-sale (POS) by

March 2014. During his meetings with the Wall Street community, various analysts and fund managers

had expressed skepticism about the future prospects of CTF. A common question they raised was

whether the recent austerity drive announced by China's new Xi Jinping government would dampen

CTF's business.

CTF was the world's largest pure-play jewelry retailer by market capitalization, with reported sales of

USD7.4 billion in fiscal year 20fi.2 Though virtually unknown to westerners, one study showed that within

Mainland China the brand was better known than Rolex, Bvlgari, or Tiffany.3

As the architect of CTF's business in Mainland China and a 37-year veteran in the company, Kent was

convinced that the fundamentals in the Mainland China market were as solid as ever. He also believed

that only by capturing the hearts of the consumers could CTF be the number-one brand in Mainland

China.a To Kent, the immediate challenge was how to take advantage of the changes in Mainland China's

consumer habits in view of rising incomes and urbanization. Also, he was determined to exploit the trend

towards e-tailing, which was set to impact the jewelry industry.

1 Kent Wong, managing director, Chow Tai Fook Jewellery Group Limited, interview by author, Hong Kong, 4 July 2013.

2 Chow Tai Fook Jewellery Group Limited, Annual Results Announcement for the Year Ended 31 March 201 3,

httpl/www.hkexnews.hl</listedco/listconews/SEHI{/2013/0618/1TN20130618160.pdf, accessed 22 July 2013.

s "Beijing Bling," The Economist, 19 November 2011, http://www.economist.com/node/21538787, accessed 22 July 2013.

4 Kent Wong, interview by author, Hong Kong, 4 July 2013.

Armand Ghieuw prepared thls case under the supervision of Professor kistiaan Helsen so/e/y as a basts for c/ass dlscussion. Cases are

writteninfhepasf fense, thisisnotmeanttoimplythatall practices,organizations,people,placesorfactsmentionedinthecasenolonger

occur, exist or apply Cases are not intended to serue as endorsements, sources of primary data, or illustration of effective or ineffective

handling of a business sifuafion.

To order copies or request permrssion to reproduce materials write [email protected] or visit www.bm.ust.hUcbcs.

O 2013 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or othenvise

reproduced, posted, or transmiited without the permission of the Hong Kong University of Science and Technology.

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Ghow Tai FookThe venerable Chow Tai Fook gold and jewelry chain was set up in Mainland China in 1929 by Chow Chi

Yuen. CTF opened its first jewelry store in Macau in 1938. The following year it opened its second store in

Hong Kong's Queen's Road Central.

Young jewelry salesman Cheng Yutung made such an impression on CTF's owner Mr. Chow that he allowedCheng to marry his daughter and take a leading role in the company.s

lnfused with its core values of "sincerity" and "eternity" and a missionary zeal to become the most trustworthy

Asian jewelry brand in the world, CTF developed into a leading jeweler in Greater China. With an estimated

market capitalization of USD19.2 billion, CTF was listed in the Hong Kong Stock Exchange in December 201'1

under stock code 1929, a symbolic number that matched the company's founding year. CTF was controlled

by Cheng Yutung and his descendants who owned a combined 8934% of outstanding shares.6 The Cheng

family also owned a controlling stake of the New World Development group (SEHK:0017), a Hong Kong

conglomerate which had interests in property development, infrastructure, hotels, deparlment stores, public

transport and telecommunications.

CTF's Mainland China Entry

CTF's foray into Mainland China started in 1993 through a joint venture arrangement with a Wuhan company.

With a license to sell gold by the People's Bank of China, CTF opened its first shop in Mainland China in '1998 -

a franchised shop-in-shop within the Guiyou department store in Beijing's Central Business District. The shop

became an overnight success.T

Mainland China since the tg9os had been driuen by needs. Thefirst CTF store wasa breakthrough in jewelry retailing and was unique in its image and product offerings.

Kent Wong, managing director, Chow Tai Fook Jewellery Groups

Kent was instrumental in developing CTF's market in Mainland China. He joined the company in 1977 and was

appointed general manager of the Mainland China business in 1999. ln 2008, having accumulated vast hands-on

operation and management experience along the way, he became the managing director of CTF.

As a result of satisfied customers returning from Hong Kong, CTF's reputation was spread far and wide through

word-of-mouth within Mainland China. lts unique retail displays; professional retail staff, and extensive product

offerings, ranging from gem-set jewelry, gold products, and diamonds to platinum pieces, wowed the local

populace. CTF began the penetration into thirdtier cities in 2000 and fourth-tier cities in 2OO2.s By the year 2002,

5 "The Men Who Rule Hong Kong: Chen Yulung," Time Out Hong Kong, 17 February 2012,

http://www.timeout.com.hUfeature-stories/features/48828/the-men-who-rule-hong-kong-chen-yu-tung,html, accessed 15 June 2013.6 Chow Tai Fook, 2013 Annual Report, p.71.7 Kent Wong, interview by author, Hong Kong, 4 July 2013.a .. ," t0t0.s Cities in China were grouped into four tiers based on their economic development and politicat impoftance. Tier-one cities were Beijing,

Shanghai, Guangzhou, and Shenzhen. Tier-two cities were mainly provincial capitals plus a few other major urban areas. Tier-three

cities had a nominal GDP of RMB22 billion-l20 billion in 2010. Tier-four citles had /ess than RMB22 billion GDP in 2010. Richard Dobbs

et al., "China's E-tail Revolution: Online Shopping as a Catalyst for Growth," McKnsey Global lnstitute, March 2013


HKUST Business School

100 POS in Mainland China and in 2010, CTF opened its 1,000th jewelry POS in Mainland China. As a first

mover, CTF's extensive footprint gave it direct, deep and strategic access to the Mainland China market and

created synergies with CTF's POS in Hong Kong and Macau, both popular destinations for Mainland Chinese

tourists. d

ln 2008, in the wake of the Lehman crisis, the Beijing government launched a CNY4 trillion package to

stimulate the local economy and boost consumer spending. To cope with the rising demand, CTF opened a

combined 379 POS in fiscal years 2010 and2011.10 By March 2013, CTF had established a total of '1,731 POS

spread over 400 cities within Mainland China.1l ln the five-year period from fiscal year 2009 through 2013, the

company's sales revenue had more than tripled in size to USD7.4 billion [see Exhibits 1 and 2]. The company

had become the largest player in Mainland China's highly fragmented USD54 billion-a-year jewelry market with

a market share of about 13%. ln comparison, Cartier, the largest foreign jewelry retailer in Mainland China, had

a 3.3o/o market share. 1 2

Due to its popularity, the CTF brand had become a leading top-of-mind recalljewelry brand, according to the

World Luxury lndex China 2013.13 CTF viewed itself not simply as a luxury brand. lnstead, Kent envisioned

CTF as a brand that was accessible to the mass market with product offerings for a wide range of incomes.

CTF is not positioned as aluxary brand. It has its own DNA and culture.

We are o moss luxury brand with wide product ranges to fulfill our customers'

dreams during their dffirent life stages.

Kent Wong, managing director, Chow Tai Fook Jewellery Groupla

Meanwhile, CTF had carefully crafted its operaiions to further enhance its competitiveness. lt had constructed a

vertically integrated business model that gave it tight control over the entire value chain, from raw material

procurement, design, production, and marketing to sales through its extensive network [see Exhibit 3]. ln the

upstream, CTF was the only Chinese company that partnered with the world's three diamond miners, namely

Alrosa, a Russian diamond mining company; DTC, the diamond trading company of De Beers; and Rio Tinto, a

leading diamond mining company headquartered in London. Through these partnerships, CTF was able to

secure its diamond supply and to pick the best pieces for its customers and franchisees.l5

ro lbid.11 Chow Tai Fook, 2013 Annual Repott, p.16.12 Enid Tsui, "Chow TaiFook Ralses $2bn in HK Listing," FinancialTimes, December 9, 2011.

http://www.ft.com/intl/cms/s/15Sceb6e-2216-11e1-8b93-00144feabdc0,Authorised=false.html? -i-location=http%3A%2F%2Fwww'ft.com%2Fcms%2Fs%2F0%2F155ceb6e-2216-11e1-8b93-00144feabdc0.html&-i-referee#axzz2bonbbIrQ, accessed 13August2013.

13 Bien Perez, "Chinese Consumers' Ias te for Luxury Brands Are Evolving, " Soufh China Morning Post, June 29, 2013' http:

http://www.scmp.com/print/business/companies/anicle/1271393/chinese-consumers-taste-for-luxury-brands-are-evolving,

accessed 30 June 2013.

1a KentWong, interview by author, Hong Kong,4 July 2013

15 Chow Tai Fook, 2013 Annual Repoft, p.29.

4:l€,.=K* rlF

The Mainland Ghina Market

Market Trends

Mainland China was CTF's biggest market and represented almost 53% of its 2013 revenue.l6 Kent was

convinced that the economic slowdown experienced by Mainland China since mid-2012 would have a

shor"tterm impact on retail sales. He expected that the Mainland Chinese government would monitor the

economy to ensure sustainable growth in the future.17 From a mid- and long-term perspective, the Mainland

China market was still a "Land of Dreams," not least because of its bright macroeconomic promises.ls

Even though Mainland China was on course to record its weakest economic growth in the last two decades, it

was still expected to achieve a relatively robust GDP growth rate of 7% in 2013.1s The urbanization rate

increased rapidly from about 40% in 2006 to almost 50% in 2010, which augured well for future consumerism.

Moreover, the urban middle-class population - defined as people with annual disposable income from

CNY16,300 to CNY37,30020 - was expected to jump from about 235 million in 2010 to 330 million by 2025.21

While CTF had over 1,700 POS in more than 400 cities within Mainland China, Kent reckoned there was huge

potential in inland lower-tier cities. These cities experienced higher economic growth and saw an expansion in

their jewelry market. Thus the store roll-out plan in inland cities was one of the key growth drivers of Mainland

China's jewelry market

lnternational luxury brands also recognized the rising importance of lower tier cities, yet they encountered

tremendous challenges in those areas. One recent report on the Mainland China luxury market noted that

although the demand for luxury products was robust in second and thirdtier cities, there was not enough trust

in local stores. Consumers of those cities still preferred to shop in first-tier cities. One reason was a shortage

of professional service talent. Many of ihese cities also lacked strong marketing media channels needed for

brand communication.22

A2013 McKinsey study concluded that e-commerce or e{ailing would become a major driver in spurring

consumption in these same lower-tier cities where there was demand for goods that traditional stores had not

yet managed to deliver. ln fact, in fourthtier cities, the average online shopper was already spending 27% of

his or her disposable income through etailing.23

The Jewelry lndustry

According to a Frost & Sullivan Report2a, as of 2010, the jewelry market in Mainland China was the second

16 toid., p.ts.17 Kent Wong, intenriew by author, Hong Kong, 4 July 2013.

18 Kent Wong, "Fulfilling Customer's Dream," World Retail Congress Asia Pacific, 21 March 2013.

19 Nick Edwards, "Finance Chief Altays Fears over Slide in China Growfh Rate, " South China Mornrng Post, July 31 , 2013.

httpf/www.scmp.com/news/china/article/1281448/finance-minrster-allays-fears-over-slide-chinas-growth+ate, accessed 13 July 2013.

z0 LJSD1 = CNY6.16 as of 7 September 2013.

21 Frost & Sutlivan repoft as cited in CTF 2012 Presentation, Chow Tai Fook Jewellery Group Limited, p.2.

22 Tina Zhou and Steven Yao, "China Luxury Report," Fortune Character Group, November 2012.

2s Richard Dobbs et al., "China's E-tait Revolution: Online Shopping as a Catalystfor Growth," McKnsey Global lnstitute, March 2013.



largest in the world, with a total retail sales value of HKD3O2.2 billion,2s exceeded only by the United States.

Driven by favorable demographics, increasing disposable income, and an overall robust economy, the

Mainland China jewelry market was forecasted to grow much faster than GDP with a compound annual

growth rate (CAGR) of 38.6% from 2010 to 2015. By 2015, the market was expected to reach HKDI '548

billion, making Maintand China the largest jewelry market in the world [see Exhibit 4].26

ln 2010, sales from firsl and secondtier cities accounted for about 66.3% of total sales in Mainland China's

jewelry market. However, as a result of rising affluence, increasing demand for quality products, and lower

operational costs in thirdtier and lowertier cities, many large-scale jewelry retailers were shifting focus to

these lower-tier cities for growth opportunities. As such, jewelry retail sales in first- and second-tier cities

were expected to grow at a slower pace than in third-tier and other lower-tier cities from 2010 to 2015 and

would contribute to 57.3% of the total jewelry market by 2015, according to Frost & Sullivan.2T

Comparatively, in 2010, sales from third-tier and other lower-tier cities accounted for approximately 33'7%

of the total Mainland China jewelry market. over the period from 2010 to 2015, however, their contribution

was expected to increase significantly, representing over 42.7o/o of the total market by 2015 with a CAGR of

45.3% from 2010 to 2015 [see Exhibit 5].28

Taking into consideration only jewelry retailers whose revenues exceeded CNY500 million, the top 10

players in Mainland China had a combined market share of about 57.5% of the totaljewelry market,

according to Frost & Sullivan.2e Within this segment, CTF enjoyed a leading position with a market share of

12.6%,followed by other local brands like Lao Feng Xiang and Chow Tai Seng, which came in at 9% and

7.1%, respectively. Cartier registered 3.1%, while Hong Kong's Luk Fook and Chow Sang Sang scored 3%

and2%, respectively [see Exhibit 6]'30

With more than '1,700 stores in Mainland China as of March 2013, CTF's retail network was one of the

largest [see Exhibit 7]. Major local competitors included Lao Feng Xiang with approximately 2,600 stores3l

and Chow Tai Seng which operated about 2200 stores32 within Mainland China, Hong Kong jewelry

companies like Luk Fook had '1050 stores33 while Chow Sang Sang had 232 stores in the mainland.3a

U.S.-based Tiffany operated 23 stores in Mainland China.3s Cartier had 224 stores at the end of 2012'36

while Graff had six.37

25The Hong Kong dollar trades againsf the IJ.S. dollar at a fixed price of USD| = HKDT'75.

26 Chow Tai Fook Jewellery Group Limited, global offering prospectus, 5 December 2011 ' p 48'

z7 hia., p.lo.zarcid., p.lo.zs nid., p.sg.sotoid., p.sg.s1 httpf/www.chinascopefinancial.com/en/news/post/18181 html, accessed 28 September 2013'

s2http://www.tour2k.com/tag/chow-tai-seng-brand, accessed 28 September 2013.

3s http://www.tukfook.com/en/about-lukfool</corporate-overview/corporate'profile/, accessed 28 September 2013'

3ahtip//www.jewellerynewsasra.com/en/search/search-result/4203/Chow-Sang-Sang-to-open-50-stores-in-China html'

accessed 28 SePtember 2013.

ssTiffany & Co., 'Slore Locations & Events,"

http://internationat.tiffany.com/Locations/Default.aspx?qs=t+China#t+China-pu+-f+-mm+splitLrst'lm+map-la+32.003144610+105

545411 5-z+3-da+-dm+to-ido+false-sld+-lw+-lf+0, accessed 1 6 August 201 3'

s6,'Caftier Closed 70 Sfores in China," SinoCast,23 May 2013, httptlwww.sinocast.com/article.do?aftrcleld=427'

accessed 2 SePtember 2013.

s7 Graff DiamondsLtd., "sfores Wortdwide,'http://www.graffdramonds.comft/worldwide/stores/, accessed 2 Septenber 2013

*14.S..s$/".w4{F

Retail prices for jewelry in Hong Kong were lower than those in Mainland China due to the fact that Hong

Kong had neither value added tax nor consumption tax.38 The price gap was one of the reasons why many

mainland tourists often bought jewelry products while touring Hong Kong.3e The 'lndividual Visit Scheme"

introduced by the Mainland China government in July 2003 led to a strong increase in the number ofMainland Chinese tourists visiting Hong Kong. As Mainland Chinese became affluent with rising per capita

disposable income, it would also drive growth in average retail transaction size.ao

GTF's Mainland China Strategies

Product Offerings

The Chinese consumer's love for gold dated back to the Xia dynasty 4,000 years ago, when it was used as

part of a bride's dowry. This tradition of buying and gifting gold was subsequently expanded to cover not only

weddings but births; birthdays; anniversaries; and some Chinese holidays, such as Chinese New Year.al

Chinese consumers preferred pure 24-karat gold or "Zu Jin" t+ESl because it was more valuable and was

considered to be a better store of value.a2 lt was with this tradition in mind that CTF pioneered the standard of

pure-gold '999.9 Zu Jin" in Hong Kong in 1956, which became the market norm and was adopted by the Hong

Kong Government as an industry standard in 1984. The company subsequently introduced a fixed price policy

in Hong Kong in 1990, which removed the need for customary price haggling and thus allowed CTF to capture

the trust of its customers with its new transparency. These policies were subsequently applied to all POS in

Mainland China.a3

To meet the emotional needs of its customers for independence, love, self-realization, social status, and

happiness, CTF tailored its marketing programs and product lines to celebrate the different milestones in the

lives of its customers.aa

Special events very much influenced sales of jewelry, particularly in Mainland China. For example, the market

potential for bridaljewelry was mind-boggling, especially when one considered that there were 14 million

marriages in 2012.45 Another important gold-buying occasion was baby birlhs. ln 2011 alone, there were 16

million newborns in Mainland China.ao Other key life-cycle events included birthdays, anniversaries, new

business openings, and graduations.

38 Value added tax in China was 17%. China also charged a consumption tax of 5% on gold, silver, platinum and diamond jewelry, 10% on

gem-sefs and 20% on high-end watches.3e KentWong, interuiew by author, Hong Kong,4 Juty 2013.a0 Chow Tai Fook Jewellery Group Limited, globat offering prospectus, 5 December 2011, p.54.a1 Kent Wong, "Changing Trends in the Chinese Jewelry Market,' LBMA/LPPM Preclous Melals Conference, 13 November 2012.42 tbid.as Kent Wong, interuiew by author, Hong Kong, 4 July 2013.aa KentWong, "Fulfilling Cusfomer's Dream," Wortd RetailCongressAsla Pacific,2l March 2013, p.16.45 Frost & Sultivan reporfs as cited in Annuat Resu/fs Presenfafio n 2012, Chow Tai Fook Jewetry Group Limited, p18.46 tbid.



The second half of the year normally contributed to 60% of CTF's annual sales. Festive occasions like

China National Day, Chinese New Year, and Valentine's Day also triggered a significant spike in sales

turnover.4T

Infirst- and second-tier cities, consumers show an increasing interest in modern,

contemporory designs, whereas in third-tier and lower cities, traditional gold

products for special occasions are the preference. In the south and west tastes

dffir again,from the north and east. [See Exhibit 8]Kent Wong, managing director, Chow Tai Fook Jewellery Group Limited a8

As a mass luxury brand, CTF had categorized most of its products into the bread-and-butter mass luxury

segment. At the same time, CTF also targeted the high-end luxury segment, coveted by the likes of Tiffany

and Cartier, and the trendy youth segment at the bottom end of the market [see Exhibit 9]. Unlike most of

its competitors, CTF covered the entire market spectrum with customized product lines. From the mass

luxury items that made up the bulk of CTF's sales, to the high-end luxury jewelry that showed its excellent

design, sourcing and craftsmanship capabilities, to the lines for youth, CTF excelled at providing its

cusiomers with exactly what they were looking for.

CTF's product creation and innovation efforts were spearheaded by a research and development team of

over 150 professionals, including designers and goldsmiths, to support in-house designed collections. CTF

also employed automated "weighing and packing" robots to enhance productivity and save manpower. ln

addition to designing its popular home-grown Bao Bao Family collection, CTF's designers also developed

intricate pieces under such labels as De Beers Forevermark, Disney's Winnie the Pooh, and Hello Kitty for

which CTF had entered into license agreements with the trademark owners.4e

As its customers became more sophisticated, CTF responded by offering a broader range of stylish

gem-set, platinum, and karat gold jewelry to meet the new demand. To enhance its brand equity, CTF also

introduced exclusive, high-end jewelry pieces through auctions, thereby differentiating itself from its more

mundane, local peers.s0 One such auction took place in May 2013 in Hong Kong and showcased the

"Ombre di Milano" Collection, which featured 15 sets of exquisite jewelry for a select audience of affluent

customers.5l

According to Kent, most of his competitors did not offer high-end luxury jewelry because the entry barrier to

this segment was high and required close support from and access to the world's leading raw diamond

suppliers, which worked in CTF's favor because of its special relationships with these diamond suppliers.52

a7 Kent Wong, interview by author, Hong Kong, 4 July 2013.

aB Racheal Lee, "China's Lower-Tier Citres Still Offer Plenty of Potential for Retailers," Campaign Asia-Pacifrc, March 22, 2013

www.campaignasia.com/Afticle/337480,China's+lower-tier+cities+still+offer+plenty+of+potential+for+retailers.aspx,

accessed 15 July 2013.ae KentWong,"Fulfilling Cuslomers Dream,"WorldRetailCongressAsia Pacific,2l March2013,p.23.50 Chow Tai Fook,2013 Annual Report, p. 19.

s1 rcid, p.sz.52 Kent Wong, interview by author, Hong Kong, 4 July 2013.

Distribution

As the centerpiece of its marketing strategy, CTF had never wavered from its goal to have 2,000 POS -mostly concessionaires within leading department stores - by March 2014, in spite of a weaker economy.

Even though same-store sales dipped slightly by about 3% in fiscal year 2013,53 the company opened up

192 new jewelry POS within Mainland China [see Exhibit 10].

Whenever feasible, Kent preferred to appoint franchisees to operate stores in Mainland China's inland

lowertier cities because they tended to have the local knowledge to secure prime locations and understood

the local customs and market. About 30% of all CTF's POS in the mainland were run by individual

franchisees or franchisee groups.5a

Franchisees were carefully selected to ensure that they accepted CTF's culture and values, and complied

with the brand policies and operation policies set by the company. ln considering franchisees'suitability, the

company took into account a number of factors including their background, reputation, credibility, industry

experience and the value of the local knowledge and expertise they were able to bring to the franchise

arrangement.

Both same-store sales growth (SSSG)and POS growth were considered to be the key drivers supporting

CTF's distribution strategy in Greater China. As such, the company was always on the lookout for

opportunities to improve its sales efficiency in selected locations by expanding retail floor space and by

optimizing its product offerings.ss To this end, CTF management leveraged its proprietary lT systems that

gave it realtime access to POS data throughout Greater China and monitored sales and inventory

movements.

Pricing Strategies

To maintain its brand image and premier market position, CTF took its pricing policies very seriously. lt

expected all its stores, including those run by its franchisees, to comply with its uniform retail pricing policy.

Arbitrary discounting was not allowed.

Product segmentation for CTF's range was fairly straightfonrvard. Jewelry falling under the mass luxury

category were in the broad retail price range of HKD2,000 to HKD100,000. ltems falling under the high-end

luxury category were be retailed above HKD'100,000. Jewelry in the youth collection were in general priced

below HKD2,000. The latter were mainly sold via the various CTF e-platforms.56

Marketing and Branding Strategies

CTF's advertising and promotion (A&P) strategy was heavily tilted towards traditional and digital brand and

eventmarketing[SeeExhibitll]. TheremainderoftheA&Pbudgetwasusedforrunningits one-million

strong membership program.

5s Chow Tai Fook, 201 3 Annual Report, p.1 2.

5a Kent Wong, interuiew by author, Hong Kong, 4 July 2013.

55 ChowTai Fook,2013Annual Report, p.8.56 lbid.

Thompson Centerfor Business Case Studies,


['

As an iconic brand with a long history and a loyal customer base, CTF would remain true to its core values

of sincerity and eternity by underlining its message of trust and value-for-money in its media ads. The

company was also reaching out to a younger audience via different digital platforms and with the

introduction of more stylish and contemporary products.sT

ln view of the shifting customer and distribution profiles towards lower-tier cities, CTF was also well

prepared to deploy its national marketing campaigns to respond more rapidly to local conditions and to

better serve the market's diverse needs.58

GTF's Membership Program

ln 2002,CTF introduced a customer loyalty scheme for its clients in Mainland China. By March 2013, the

program had over a million members, majority of whom were women. Nearly 32% of CTF's retail sales in

Mainland China was generated by its members. Mainland Chinese members' repeat purchases rose by

90% year-on-year to HKD4.2 billion in fiscal year 2012.5e

Due to its increasing popularity, the Mainland China membership program was upgraded in April 2013 to

reflect enhanced benefits based on four new membership tiers: Ordinary, Gold, Platinum, and Diamond.

Ordinary Gold and Platinum status required an annual spend of CNY10,000, CNY60,000 and CNY150,000,

respectively. Diamond was the highest tier and required an annual spend of CNY500,000. ln addition to

receiving sales rebates for future purchases, Diamond members were eligible for junkets to the yearly Paris

Fashion Week, helicopter tours, and overseas rare-wine tastings, among other benefits.60

The membership program also enabled CTF to build a valuable customer database whereby the company

was able to track the product and lifestyle preferences of its key customers.ol

GTF's lnternet Strategy

Euen though our Internet sales haue grown three times in size, digital media haue

become more than new sales channels for us and haue euolued into communication

platfurms thatlink online customers to the brand.

Kent Wong, managing director, Chow Tai Fook Jewellery Group Limited62

The lnternet also played a prominent role in CTF's Mainland China strategy. The retailer launched its

e-shop in2011. Besides its company-owned website, CTF also had strong presence on numerous e-tailing

platforms, such as Tmall of Alibaba and JD.com, as well as social media platforms like Weibo [see Exhibits

12 and 131. CTF devised its web strategy with the foresight that e-commerce would blossom. One major

factor behind CTF's lnternet forays was that its younger customers were increasingly lnternet-savvy.63

st tbid.sa bid.5s Chow Tai Fook, 2012 Annual Results Presentation.60 'Nding the Gilded Tigen" The Economist, 12 May 2012.

61 Kent Wong, interuiew by author, Hong Kong, 4 July 2013.

6z lbid.as lbid.

-e#The most prominent businessto-consumer online marketplace operators in Mainland China were Tmall andJD.com. Like their U.S. counterpart Amazon Marketplace, these platforms provided one central websitewhere a huge variety of businesses could sell a large variety of merchandise or services. Tmall, founded byAlibaba, alone had six million registered sellers.6a

By the end of 2012, Mainland China's digital world boasted more than 560 million lnternet users. Of these,422 million had used their mobile phones to access the lnternet. There were 242 million online shoppers,representing 43% of the total number of lnternet users in Mainland China.65

According to a 2011 McKinsey report, Mainland China's luxury e-commerce market was CNY15 billionstrong and was expected to reach CNY20 billion in 2012.66

CTF was ranked number one in digital competence among watch and jewelry brands by L2's Digital lQ

lndex reports released in December 2012 and February 20fi.67 Kent expected CTF's lnternet sales wouldgrow to 5% of its total revenue in five years'time.68 More significantly, he knew that when it came toshopping for luxury products, the in-store experience remained irreplaceable. As such, he had to ensurethat all online marketing activities synergized with his company's overall sales and marketing strategies andultimately drove customer traffic to CTF's physical stores.6e

To increase online traffic, CTF offered special and/or limited-edition products that were attractively priced

below CNY2,000 to suit the pocketbooks of its young audience.T0 The CTF-patented Bao Bao Familycollection [see Exhibit't4], which featured seven auspicious characters, had sold overtwo million pieces

online since its inception in September 2002.71 CTF also implemented brand crossover marketingcampaigns to capture the imagination of its teenage audience. ln line with the launch of the Supermanmovie Man of Steel in Mainland China in June 2013, CTF introduced on its e-platforms a Man of Sfee/"command key" pendant, which was featured in the movie. lt became an instant hit with online shoppers

[see Exhibit 15].72

Short-Term Headwinds

Mainland China's economic growth slowed Io 7 5% in the second quarter of 2013 and was projected to dip

below 7% for the remainder of the year, according to analysts.T3

With his ear close to the ground, Kent had felt the economy's weakening pulse since mid- 2012. At the

same time increasing urbanization, rising disposable incomes, a growing middle class, a robust luxury

64 Richard Dobbs et al., "China's E-tail Revolution: Ontine Shopping as a Catalystfor Grov'tth," McKinsey Global tnstitute, March 2013.65 China lnternet Network Information Centei Slaflsfic al Repoft on lnternet Development in China, January 2013.66 "Luxury Brands tJnderinvested in Digital Marketing in China: L2," Campaign Asia-Pacific, December 20, 2012.

httpt/www.campaignasia.com/Arlicle/326996,1uxury-brands-underinvested-in-digital-marketing-in-china-l2.aspx,

accessed 15 July 2013.67 Chow Tai Fook Jeweltery Group Limited, 2012/2013 Annual Results Presentation.68 Kent Wong, interview by author, Hong Kong, 4 July 2013.6s tbid.70 lbid.71 Chow Tai Fook Jewellery Group Limited, lnterim Resu/fs Presentation 2012/2013.72 Kent Wong, interuiew by author, Hong Kong, 4 Juty 2013.73 'X Jinping Calls for Financlal Risks to Be Curbed," South China Morning Post, Juty 30, 2013.

httpt/www.scmp.com/print/news/china/afticleh293126/xi-jinping-calls-for-financial+isks-be-curbed, accessed30 July2013.



market, and an expanding jewelry market covering third-tier and lower{ier cities all boded well for the

company's future. The growing clout of better-educated, lnternet-sawy millennials in Mainland China's

marketplace was also seen as a welcome opportunity for CTF.

One wildcard on the horizon was the austerity and anti-corruption drive initiated by the new Beijing

government. As the central government clamped down on gift-giving in the first quarter of 2013, several

luxury brands and retailers were beginning to feel the pinch with dropping sales.Ta Kent was hoping that the

impact of the frugality campaign to consumer sentiment would be temporary.

Gonclusion

The China Dream notion was popularized by China's new president Xi Jinping when he took over the reins

of power in 2013. While short on specifics, it referred generally to "better livelihood of the people."75

To Kent, CTF was in an ideal position to render the Chinese dream a reality. While his company had

enjoyed enviable success in the past, it was not a given that the future would bring more of the same. Kent

was fully aware that the shifting demographic environment, consumer preferences, and digital landscape in

Mainland China were challenges that loomed ahead. He foresaw that these challenges would need his

undivided attention.

We belieue that only the brand that can win the hearts of the Mainland Chinese

customers can truly claim the number-one position in Mainland China.

Kent Wong, managing director, Chow Tai Fook Jewellery Group LimitedTo

74 Rachel Butt, 'Profit Alefts Highlight China Retailing Sfrarns, " South China Morning Post, 25 July 2013,

httpt/www.scmp.com/print/business/money/markets-investing/afticle/1290045/profit-alerls-highlight-retailing-strains+etail,

accessed 25 July 2013.75 "What Does X Jinping's China Dream Mean?," BBC, 5 June 2013, hftpt/vtww.bbc.co.uUnews/world-asia-china-22726375,

accessed 12 August 2013.76 Kent Wong, interuiew by author, Hong Kong, 4 July 2013.

l-iF'

EXHIBIT 1:

CHOW TAI FOOK INCOME STATEMENT

For the year ended 31 March

Revenue

Gross profit

Gross profit margin

Operating Profit (EBIT)

EBIT margin

Net Profit

Net profit margin

Profi t attributable to shareholders

Basic earnings per share

Dividend per share

FY2011

35,043

9,928

28.3Y0

4,652

130/o

3,673

10.50/o

3,538

39.5cents

N/A

FY2012

57,571

16,448

29.1o/o

8,440

14.9%

6,571

11.6%

6,341

68.5cents

1 0cents

FY2013 YoYchange

57,434 15%

16,283 -10/o

28.4% -0.7%

' 7,317 -13.30/0

12.7o/o -2.2Yo

5,678 -13.60/0

9.9% -1.7o/o

5,505 -13.20k

55.1cents -19.6%

22cents N/A

HKD million

FY2O11 . FY2O13 GAGR

28%

28.1o/o

25.4o/o

243%

24.7%

18.1%

N/A

Source: Chow Tai Fook Jewellery Group Limited. "2UA2013 Annual Resu/ts Presentation," PowerPoint Presentation,

hftpt/corporate.chowtatfook.com/attachmen|2013061820481017-en.pdf(accessed3 October2013)



EXHIBIT 2:

CHOW TAI FOOK BALANCE SHEET

Current Assets

lnventories

Trade and other receivables

Bank balances and cash

Total assets

Bank borrowings

Gold loans

Total liabilities

Totalequity

27,503

17,101

3,228

5,605

29,049

2,881

3,938

17,376

11,673

45,258

29,694

5,323

9,988

47,414

9,001

5,807

17,841

29,573

42,305

31,706

5,045

5,731

44,810

2,831

8,372

14,524

30,286

39,777

27,315

3,973

8,305

43,219

1,000

4,836

9,358

33,861

-12.1o/o

-8.0%

-25.4Y0

-16.9%

-8.8%

-88.9%

-16.7%

475%

14.5%

Source: Chow Tai Fook Jewellery Group Limited. "201A2U3 Annual Resu/fs Presentation,' PowerPoint Presentation,

hftp!/coryorate.chowtaifook.cordaftachmentl2013061820481017-en pdf (accessed 3 )ctober 2013)

EXHIBIT 3:

VERTICALLY INTEGRATED BUSINESS MODEL OF CHOW TAI FOOK

MidstreamUpstream

4 diamond cutting &polishing factories

Downstream

POS in ihe PRC, HK,Macau, Malaysia,Singapore & Taiwan

Shunde, Shenzhen,Hong Kong

Partnership with Alrosa,DTC and Rio TintoStable diamond supply

"e,South Africa @

Source: KentWong. "20th CLSA /nvestors'Forum," PowerPoint Presentation,23 September 2013,

http!/corporate.chowtaifook.com/attachmen|2013092412312617_en.pdf (accessed 3 October 2013)


HKI.JST Business School

1 800

1600

1400

1200

1 000

800

600

400

200

0

d :ip!.@ir!&'2n$-201 5E CAGR

Gem-set jewelry 2010-2015E CAGR

Total 2010-2015E CAGR

EXHIBIT 4:

RETAIL VALUE OF JEWELRY MARKET IN MAINLAND CHINA WITH BREAKDOWN

BY PRODUCT (rN HKD BILLION)

4AJ;W,::,,,

3S.5$::1t

35%

38.6%

2013E2011E2010 2012E

Source; Frosl & Sullivan report as cited in CTF Global Offeing prospectus, 5 December 2011, p.48.

r Goldproducts I Platinum/karatgoldproducts'.:: Gem-setjewelry

EXHIBIT 5:

RETAIL VALUE OF JEWERLY MARVET IN MAINLAND CHINA WITH

BY C|TY T|ER (rN HKD BrLLroN)

I Tier 1 cities r Tier 2 cities I Tier 3 and lower cities

1800

1600

1400

1200

1000

800

600

400

200

0

2011E 20',t2E

Source; Frost & Sullivan repoft as cited in CTF Global )ffeing prospectus, 5 December 2011, p.49.

BREAKDOWN

'lkn 3:attd hwer 201tr2015E CAGR

Total 2010-2015E CAGR



EXHIBIT 6:

JEWELRY MARKET SHARE BY RETATL VALUE rN MATNLAND CHTNA (2010)

Chow Sang Sang

Kimberlite Diamond

Luk Fook

Cartier

Zhe Jiang Ming

First Asia

Beijing Caishikou

Lao Miao

Chow Tai Seng

Lao Feng Xiang

Chow Tai Fook

Source; Frosf & Sullivan report as cited in CTF Global )ffeing prospectus, 5 December 2011, p.59.

I

EXHIBIT 7:

CHOW TAI FOOK STORES

Chow Tai Fook shop interior

Picture of Beijing Qiannen streef sfore

Source: provided by Chow Tai Fook



EXHIBIT 8:

JEWELRY DESIGN BY CUSTOMER TYPE

1=t & 2nd tierModern, Contemporarydesigns

, ^.14. ./ - :i'il{ ^" :ir

Southern & WesternFloral design, traditionalwedding bangles

'. , 1- -:l\ ,\ \...'\\\. . -., \..

a:- *:i

Eastern & NorthernZodiac signs, safe locks

Young consumersFashionable, trendy,adorable styles

ffi.78lr

b..'!'-.,d'll

,. {:i:.

/--:'-,/

3rd ancl lower tiersSpecial occasions,traditional designs

"r t r-'f*t

?

.r*i.,: tt,*,1 .. a. ,.:, r....,...,..,

Source: provided by Chow Tar Fook

Sophisticated consumersRefined, elegant styles

'...:.:: -1

?.'ir o

r-

. r j(4r%.,

I

EXHIBIT 9:

DIVERSIFIED PRODUCT PORTFOLIO OF CHOW TAI FOOK

Price Range

AII.ilrTI

X nxsroo.ooo

IW

Wlr::rr::ri:t:

'.t:. I r::: I

-q$t1t/ ::9-'"0 Luxury

ffW$w#

w&-&n !-'- IoUIlg Ig;' n 'l ',

"&€Source: Kent Wong. "20th CLSA /nyestors'Fo rum," PowerPoint Presentation, 23 Septenber 2013,

htlpt/corporate.chowtaifook.com/attachmentl2013092412312617_enpdf(accessed3 )ctober2013)

,..j - -,. Mass Luxury,f :;:;i.;, i- .f.1,' *. S' /'' t]ii ."'*=1, {r---}

-.! -9:l ^:* ..i',i:.- rT- .rgf 6!i;..

{l *,

-- v

't

l

1

ll

ll

t

I

a

:

l

:

,l

w Broad productportfolio fromhigh-end,mass luxuryto young linesegments

w Mass luxury isthe largestsegment,which accountsfor over 80% ofour Group'srevenue



EXHIBIT 1():

CHOW TAI FOOK RETAIL NETWORK

Mainland China

Tier I cities

Tier ll cities

Tier.Iil and other cities

Hong Kong, Macau and otherAsian markets*

1,836 POS as at 31 March 2013

A net of 2Og new POS in FY2O13

94.3o/o of POS are located in theMainland of China

Target: Total 2,OOO POS bY the endof FY2014

1,206

188

611

407

81

@

@

#

4,

Total 1'358

# OtherAsian Markets areTaiwan (8 POS), Singapore (1 POS) and Malaysia (1 POS)

Source: Chow Tai Fook Jewellery Group Limited. "2012/2013 Annua/ Resu/ts Presenfation,' PowerPoint Presentation,

hftp!/corporate.chowtaifook.com/attachment/2013061820481017-enpdf(accessed3 )ctober2013)

EXHIBIT 11:

ADVERTISEMENTS

i

I

L

I

l

i

The PerfectOne

Mass luxury wedding ad magazrne spread

- t*EmDto +AFCH;-!. ;;;;

,,,..,,., .i

t'

" -ti ' !rr r{ttadi'. t: i*

"J ffi;P., , l*e{r.rai.l"

, tr* traat., ,.-:

ua*ii !1ia

J -&rrx!*

:!";s'$ . :

a.;.;:|l:

,r$rarstt ,i:t.r a*n6ft :! \r*ffir!,.* i . Ifttw. t'"la|e'r6s Jld.r.*e

.i{rdcrtd Ei-irar!ta!rrtr6!

: c) '...r ,rl | , r*. ,

\ :2, #l#FtmaNrs-s{* lffi

ttqit*q*8rEt!t*R*R**${*r. et 3

;lH*f:lgl n&# sse,rq'!{ *etF adlsii uri*qa${

tlr,eir T-IHal

Mass luxury Chow Tai Fookfashion newspaper July 2013

High end luxury advertisement



EXHIBIT 12:

CHOW TAI FOOK ESHOP PAGES

frEfrpitt:,jfiP'<a'

€{r.- rl!r- 6errc t*t.- *Frs t:ta :.giE

E- {C51t .}ts;P;.

lI \' ('()l)n#11t#iln

b'klh),')'-:

rt:aa

ffi,lT'

Q rt** $ t:**

http I /www. ctf e sh op. co m. cn

http t / ch owta if ook.tm al L com

Etfl€f,n$,Fhtts:/ir Mialal.rlel-r{tl:

Source: Provided by Chow Tai Fook

i

t

EXHIBIT 13:

CHOW TAI FOOK E.PRESENCE IN MAINLAND CHINA

Unmatched e-Presence Growth

lnternet savw and O-to-O integration

%ESocial Media and Cell Phone App

Chow Tai Fook e-Shoir, facebook & cell

e-shop Aceounts on Tmall and 36OBUY

Sina & T€ncent weibo arrdWeChat:ove r SOO,O-Qplq !!B-qr$i''.^-'r1.'i, .rL]* \x&

Top selling jewellery brand on Tmatl, 2Oi>Top 5 searched brands on Baidu ,2OL2Digital lQ lndex: China (NYU Stern), 2OL2

Jewellery segment - No. 1Top 1OO world luxury brands - No. 4

Source: Provided by Chow Tai Fook

{fi'l-



EXHIBIT 14:

BAO BAO FAMILY COLLECTION AND SELECT LICENSED COLLECTIONS SOLD ONLINE

$,g*

F .l8iom

\, "l

I@b14t

exa

- : :}].{,;i

9t*i*s.r0dom

-a':lDi$ia .-.

'ii 5.-- "::

Bao Bao Family Collecfion

--.*"ti

-.-wf-:*/:

I4q{v

!,I

&&#-

fiii,& '&*}: 3*FA , cls a (i:i\r# rr.l!| *tr

&*{* H!i?: *!d,5h 4

Hello Kifty

Source: KentWong.'20th CLSA /nvesfors'Forum,'PowerPoint Presentation,23 September 2013,

hftpt/corporate.chowtaifook.con/attachmen|2013092412312617-en.pdf (accessed3 )ctober2013)

*,ggqg-,fl {P.'

e'nfilk,n ?Disney

&

@' ':.::;

F .2m.OO

+.;rl:'

t?

"*ry peSH_:!: &a*{&

., 1rys

Angry Bird

*

&&el@*q:lq*,*E

t&E

t--- -

d*srsk'\=zg,F

EXHIBIT 15:

EXAMPLES OF ONLINE TO OFFLINE INTERACTION AT CHOW TAI FOOK

Singles'Day

On 11 Nov Singles'Day in China, any online purchases on e-platformswill be awarded coupons for the purchases in physical stores

On 11 Nov "11.11 Singles'Day":

Long for"love"r-t]

i .-. I

l_,Al_iu--- -ur .'-

Tmall & Taobao online saleson 11 Nov reached US$3bn

(RMB19.1bn)

Man of Steel

Any online purchases of "Man of Steel" jewellery poducts will beoffered a QR code as coupon to enjoy discounts on anypurchases of non-gold jewellery products in physical stores

*ffi

Source: Kent Wong. "20th CLSA /nyesfors'Forum," PowerPoint Presentation,23 September 2013,

httpt/corporate.chowtaifook.com/aftachment/2013092412312617_en.pdf(accessed3 )ctober2013)

Long for"Online Sales"

& 3l-L a-

rr-1

ilt:ij",',i:1.,

INTERT{ATTONALCASE GOilIPETITK)il

201 3

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