June 2020

Mainland China/Hong Kong Luxury Goods Market -“Get ready for the next wave”

Understand the Importance and

Uniqueness

Mainland China/Hong Kong Luxury Goods Market Opportunities

2

Luxury industry and its global value chain is impacted severely by world-wide spread of COVID-19 on both demand and supply sides

>10,0005,000-1,0000

Existing infected population as of 10 April, 2020:

Major markets with global rank # of size

Impact on demand by sector

Made in Italy, France, Spain, Germany, UK & Swiss

<5,000

Made in Poland & Romania

Made in Serbia & Slovenia

Made in USA

Made in China

Perfumes & Cosmetics

Fashion & Leather goods

Wines & Spirits Low Medium High

Watches & Jewellery Low Medium High

Low Medium High

Low Medium High

Pandemic distribution across luxury global supply chain

Made in Japan

#1

#2 #3 #4

Source: LVMH 2019 Management Report, Public data3

With rising uncertainties, luxury brands now face various immediate challenges globally on how to respond quickly on business recovery

76 84 88 98116 122 122 120 128

139 150161 159 147

167186

207 212 219245 244 254 260

281

Global Personal Luxury Goods Market Size (Billion Euro)

Luxury brands penetrate mass market

Financial Crisis

-4.4%

6.0%

SARS Outbreak

-1.6%

China dominate global luxury goods market growth

4% 35%Contribution of Chinese consumer to global sales

Reduction of international travel flow from China 20% 80%

The impact of the Covid-19 outbreak on the luxury goods sector is more severe than that of the SARS epidemic because:

• The sector is much more exposed to China

• Restriction on international travel might last for longer period

Frozen travel retail business

Shortage in supply and discontinued production

Uncertain and weakening demand for coming new seasons

High offline operating expense with declining consumer traffic

Impact of COVID-19 is more severe with immediate challenges

Historical trend indicates high vulnerability in downturns

4Source: Bain 2019 Luxury Goods Worldwide Market Study, Public Data; Bain Luxury after COVID-19: Changed for the good, Mar 2020

COVID-19 Outbreak

?

183 to 239 (decline of 15% to 35%)

Hong Kong luxury retail suffer great loss due to the protest in 2019 and recent COVID-19 with steep plunge of inbound travelers

5

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

# of inbound visitors Jewellery, watches and clocks, and valuable giftsClothing, footwear and allied products Medicines and cosmetics Alcoholic drinks and tobacco

Announcement of extradition law

Mass street protest began on June 9

Shut down airport on August 9

Travel ban for Covid-19

(Retail Sales, M HKD) (# of Visitors, Thousand)

Inbound travelers declined sharply due to protest and epidemic

Alcoholic drinks

Watches & Jewellery

Cosmetics & Medicine

Clothing and Footwear

-39%

-26%

-27%

-16%

-69%

-63%

-52%

-73%

19 2H vs. 18 2H 20 Feb vs. Jan

-39% -94%

Sales in all luxury sectors plunged

Source: Hong Kong Tourism Board, HKSAR Census and Statistics Department, Public Data

Tourist

With shrinking demand from travellers, brands might need to rethink their store network strategy to stay profitable with high rental expenses

6

Mainland Others

Brands need to pay attention to network strategy in short run

Mainland visitors originally contributed large proportion of luxury sales in Hong Kong. But now they shift spending to mainland under various incentives:• Lower consumption tax• Prevalent ecommerce• Weakened Chinese yuan

As current no. of luxury brands stores might be too excessive to fulfil local demand,several global and local leading brands announced to close expensive stores to lower cost bases starting form 2019 2H

However, local tax incentive and position as world financial centre will continue to make Hong Kong a worthy place for short to medium term investment.

328,924339,454

359,780

380,503 382,046

2015 2016 2017 2018 2019

However, local consumption needs seem less impacted, as Per Capita GDP still increased slightly in 2019Luxury brands will be more dependent on local population to drive retail sales

There is shift in spending towards local consumption in Hong Kong

High rental prices severely impair the store profitability

78% travellers are

from mainland China in 18-19

312

471

1,251

1,447

1,478

1,714

2,250

2,745

×2.1

×5.8

×8.8

(Annual rental in USD per square foot on Jun. 2019)

Causeway Bay

Upper 5th Avenue

New Bond Street

Avenue des Champs-Elysees

Via Montenapoleone

Ginza

Wangfujing

Orchard Road

Retail rental prices remain the highest in Hong Kong among popular streets for luxury shopping of top metropolis

Source: Hong Kong Tourism Board, HKSAR Census and Statistics Department, statists, Public Data

+0.4%

(Per Capita GDP of HK, HKD)

• Prada

• Louis Vuitton

• Valentino

• Omega

• Tiffany & Co.

• Longines

• Rado

• Chow Tai Fook Jewellery

However, Mainland China, the most prosperous market for most brands, is already on its way to recover with fast pace

China starts to recover while others are still suffering from COVID-19

country to recover from COVID-191st

16.3% PMI BP growth since recovery

PMI Change

50.0%35.7%

52.0%

Jan Feb Mar

Before Covid-19 In Covid-19 Since Recovery

Strong confidence of economy recovery in China

fashion industry manufacturers98.6%have returned to work by end of March

Nearly 50%show positive attitude in economy recovery*

Chinese consumers

% of Chinese consumers’ attitude in economy recovery

Neutral**

Postive**

Negative**

Daily New Cases

1% 6%

55% 45%

44% 49%

0%

20%

40%

60%

80%

100%

21-24 Feb 20-23 Mar

Online and offline channels accelerate market recovery

95.8%opened and took more value-added actions to attract consumers

shopping malls in China

Tissot and Rado extend guarantee period

Millionsare attracted by livestream of CHANEL and Giorgio Armani

of Chinese consumers

Multiple online platforms such as WeChat, Secoo.com and TMALL

OFFLINE:

ONLINE:

Source: National Bureau of Statistics, McKinsey “M&S COVID-19 China Consumer Pulse Survey”, Public Data; “DING-XIANG Doctor”, Public DataRemark: *Totally 1250 Chinese including those from Hubei Province were interviewed

** Positive means 2-3 months influence on economy followed by the same or higher growth than before, Conservative means 6-12 months influence on economy followed by economic stagnation or slower growth, Negative means Long-term influence on economy along with recession

7

Besides 1.4 billion population, China has a younger, wealthier and more digital empowered group of luxury consumers

Young generation and wealth are the main growth drivers

They show different values and attitude

Heavily social and trend dependent

Digital and new tech savvy

Source: BCG 2019 True-Luxury Consumers / ALTAGAMMA, McKinsey China Luxury Report 2019, Morgan Stanley Research, Credit Suisse Global Wealth Databook 2019

Individualised and self-expression

Top luxury brands now have huge dependency on Chinese consumers

32%

35%

37%

37%

44%

42%

10%

17%

16%

17%

11%

17%

LVMH

Kering

Prada

Hermes

Richemont

Burberry

Contribution to global sales by Chinese consumer

Contribute to Mainland China sales by Chinese consumer

8

7.0%China

China also has more share of Top 10% wealth population in the world

6.6%World

China luxury consumers are much younger

World

Millennials

Gen-Z

China

Post 80’s

Post 90’s

Members of top 10%

global wealth as % of total

population in 2019

Digitalisation shifts consumer behaviour in China while new Omni-channel operating model is critical for future success

Embrace irresistible KOL and livestream trend in China

Redefine supply chain network and digitalize value chain

No. of new livestream merchants on TMALL in Feb 2020 is ×8 the amount of Jan 2020

MAKE UP FOR EVER’s 1st week livestream on Tik Tok realised over 30 ROI in Mar 2020

LV pioneered livestream on Red with 15K participants to start with

While beauty products has proven its success, other segments still need to think more on how to find proper platform and KOL strategy to balance brand identify and traffic

Source: Public Data 9

Value chain restructuring / supply chain network reinvention are cast in the spotlights

Aware

Seamless O2O

Experience

Rising demand in lower tier cities now shifts business centre of gravity in China

Customers expect higher delivery service level and seamless Omni-channel experiences

Relocation of business activities involves integrated transformation covering finance, tax, operations, labor, legal etc. Sophisticated planning is critical to the success

Deepen eCommerce and enable O2O customer engagement

Numbers of luxury brands across sectors go live their flagship stores on TMALL and JD.com during Q1 2020 such as Alexanderwang, Cartier, Delvaus, Giorgio Armani, Kenzo, and Prada

In 2019, GMV of luxury goods on TMALL increased by 70%, while overall luxury goods market size in mainland China increased by 30%

70%

30%

TMALL Overall

LV launched new collection via virtual pop-up stores based on WeChat mini-apps this Mar. They can also identify and follow up with more potential buyers

With supportive moves from government, local consumption behaviour during Labour Holiday indicate strong signal of retail market recovery

10

Government initiate shopping festival to unleash consumption power

TAIWAN

HONG KONGMACAU

Shanghai: 67.2%

Guangzhou: 53.1%

Shenzhen: 51.9%

Wuhan: 39.9%Hangzhou: 66.9%

Xi’an: 52.9%

Chengdu: 58.4%

Changsha: 68.7%Xiamen: 58.1%

Shenyang: 62.8%

Beijing: 46.7%

Nanjing: 70.1%

• Local government enforced a combination of measure to encourage consumption during Labour Holidays with joint participation of eCommerce giants, O2O platforms, shopping malls and brands

Higher traffic and consumption during Labour Holiday speed up the recovery of both online and offline retail market

• Average recovery rate in China during Labour Holiday hit 59.3% with 18.6k average daily traffic per shopping mall (× 4.2 times of daily traffic in Feb)

• Shopping malls in Yangtze River Delta experienced the highest traffic rebound

Sales of key retail companies increased by 32.1%compared with Qingming Holidays

Average Shopping Malls Traffic Recovery Rate in Key Cities

Online sales also increase by 36.3% compared with last year

Travel retail channel in both airport and city centre launched promotion to improve sales of duty free products

Sales recovery of department stores in Beijing increased from 34.4% during epidemic to 64.7% during labour holiday under shopping incentives

Holiday effect

Shopping vouchers

Onlinepromotion

• More in-coming domestic travellers

• Social needs for shopping, dinning and entertainment

• Vouchers worth 19 billion RMB were issued in 28 provinces

• City-exclusive live stream for Wuhan, Shanghai, etc.

Source: Ministry of Commerce of the People’s Republic of China, WINNER Tech, Public Data

How to get ready for the next wave of China luxury goods market growth by seizing the right moments as of now

Short term: Optimise existing value chain

Capitalise inventory and Spring/Summer new collection

Optimise Ops & tax & legal efficiency across value chain and partners

2020 Q2

Rationalise Capital Expenditure (CAPEX) and Operating Expense (OPEX) to be highly strategic focused

Digitalise customer engagement and rationalise product / service offerings

2021-2022

Long term: Realise new value proposition

Redesign and implement future Omni-channel model for China2020 Second Half

Mid term: Boost China market recovery

Explore target-group consumer shopping behaviour changes

Optimise eCommerce channels and capability on digital marketing

Revitalise tax-efficient supply chain and in-country distribution

Reimagine value chain transformation to be customer-centric and growth driven

11

Team Contacts

12

Michael ChengMichael.wy.cheng@cn.pwc.comPwC Asia / China & Hong Kong Consumer Markets Leader Partner

Rebecca SilliRebecca.silli@tiangandpartners.comHong Kong Consumer MarketsPartner, Legal Services

Jennifer YeJennifer.ye@cn.pwc.comPwC China Consumer Markets Leader Partner, Risk Assurance

Steven Zhongsteven.x.zhong@cn.pwc.comOperations & Supply ChainPartner, Consulting

Jaelyn KwanJaelyn.kwan@hk.pwc.comDigital & Customer Partner, Consulting

Jane WangJane.wang@cn.pwc.comPwC China Consumer MarketsPartner, Tax

Jenny TsaoJenny.np.tsao@hk.pwc.comPwC Hong Kong Consumer MarketsPartner, Tax

Thank you!

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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