Foreward

This research project was conducted as a part of a Georgetown University Executive MBA program. We would like to dedicate this work to our extraordinary learning journey and our fearless leader, Professor Dong. He has provided remarkable guidance, and more importantly, inspired us to think differently.

Sincerely,

Alison Elk, Robert Goodman, Dan Meyers, Nathan Ruiz, Damola St.Daniels, Deanna Siller, and Oneza Sohel

OUR FEARLESS ADVISOR

ARTHUR DONG

PROFESSOR

OUR TEAM

DEANNA SILLER ONEZA SOHEL

DAN MEYERS NATHAN RUIZ

DAMOLA ST.DANIELS

ROBERT GOODMAN ALISON ELK

Alison Elk, International Program Manager, United States NavyMs. Elk successfully manages a portfolio of Standard Missile Navy programs in excess of $50M. She has built a strong reputation for consistently delivering outstanding results in which she most recently was instrumental in securing $640M for a new program for Japan.

A goal-driven leader with a proven work ethic, Ms. Elk has completed over 20 trips to Asia in the past four years while earning her graduate degrees. It was her global business acumen, team leadership, and executive stakeholder management that secured the Department of Defense approval for the first international ballistic missile interceptor maintenance facility. Ms. Elk is highly equipped to resolve problems with great efficiency across multiple domains. She attributes her professional success to making smart, empathetic decisions while resolving conflict, and evolving her emotional agility. Ms. Elk believes that success in any market can be achieved through leadership, skill alignment, and teamwork.

In addition to her professional accomplishments, Ms. Elk is a board member advisor on the Tewaaraton Foundation. This non-profit organization annually recognizes the most outstanding men’s and women’s NCAA lacrosse players; honors the Native American historical and contemporary contributions to the game; and provides scholarships to Native American students who play lacrosse.

Robert Goodman, Director of Business Intelligence & Analytics, Georgetown UniversityMr. Goodman leads service delivery of Business Intelligence & Analytics solutions across Georgetown University’s enterprise. His team contributed to technology modernization efforts which were awarded CIO 100 by CIO Magazine in 2014 and Elite 100 Winners by InformationWeek in 2015. Working across multiple campuses and thousands of end-users, his team supports projects related to data governance, data quality, enterprise application integration, analytics, and reporting capabilities. At present, he is working on a finance/HR-centric BI project using the Workday ERP system and IBM Cognos.

Mr. Goodman consults regularly with KPMG and Bain & Co. on matters of business intelligence and enterprise application integration. He is also a frequent speaker at industry-related events. Most recently, he led a conference workshop in Austin, TX, where he discussed the “People Dilemma of Analytics.” Prior to Georgetown, Mr. Goodman worked as a Microsoft® Gold Certified partner and led a large global delivery practice.

Mr. Goodman is known for his unflappable demeanor and ability to relate to his team, both of which allow him to effectively lead his teams through the many challenges of change management and find creative solutions to complex issues.

Mr. Goodman holds an advanced degree in business administration, is an experienced IT and Project Management Professional (PMP)®, and has been formally trained as a computer and data scientist.

Dan Meyers, Vice President, DCI Group LLCDan Meyers is a communications, crisis, and public affairs consultant with experience managing local, federal, and global public affairs challenges. Dan consults for clients ranging from small and mid-cap enterprises to Fortune 100 companies. His strengths are strategy and integrated management. Dan’s experiences include overseeing every aspect of large- scale projects and campaigns from strategy, polling, and message development to day-to-day execution.

Dan has experience in developing winning solutions that involve grassroots outreach, national coalition building, third party engagement, and government relations strategies. He has managed federal and state legislative, regulatory, and ballot efforts including one of the largest statewide gaming ballot initiatives in 2012 and a successful local ballot initiative in 2009. Recently, Dan led the brand redevelopment of his public affairs firm’s online presence in 2015.

Dan’s political expertise hails from the most local levels to presidential politics. He was one of NYC Mayor Rudy Giuliani’s presidential campaign’s first employees, serving in various capacities including special assistant to campaign manager, Mike DuHaime and a personal aide to the Mayor and his wife. Dan worked at the Republican National Committee during the 2006 midterms and served President George W. Bush in foreign and domestic venues as a communications advance representative.

He is a member of the Board of Trustees for the Miss America Organization and President of the Board of Directors of Project Right Side.

Nathan Ruiz, Senior Consultant, IntelliwareMr. Ruiz is a strategic ambassador with a wide range of work experience, including industrial and physical security, inter-agency cooperation, counterintelligence, counterterrorism, and foreign liaison. Mr. Ruiz is at his finest when bringing leaders together to collaborate and work through highly complex, sensitive issues.

In his transition to the private sector, Mr. Ruiz built a relationship management program as part of a strategic relaunch of the FBI’s partnership with Fortune 500 companies. He helped grow the current membership from 297 to 387 companies, and he regularly interfaces with chief security officers from Fortune 100 companies such as Boeing, Disney, United, and Microsoft. Mr. Ruiz planned and facilitated four strategic off-site meetings with key leaders, laying the foundation for the new program’s governance and implementation. His ongoing relationship cultivation with executive leadership in business provides critical voice of the customer data, driving government decisions.

A 10-year veteran of the U.S. Air Force, he served as a Federal Agent with the Air Force Office of Special Investigations (AFOSI), leading the high-profile office at the U.S. Embassy in Paris, where he increased national-level liaison efforts with French law enforcement, intelligence, and military forces. Mr. Ruiz was hand-selected as head of the elite security protection detail assigned to the Chief of Staff, USAF and has deployment experience in the Middle East, Southwest Asia and Africa. He lived and worked abroad for 10 years and has deep expertise forming and leading teams on all seven continents.

Damola St.Daniels, Managing Director, DBSMr. St.Daniels currently heads several departments within the bureau of consular affairs, consular systems and technology on behalf of Vistronix, Inc. at the U.S. Department of State. As a leader in the federal government space, he oversees diverse technology projects and advises federal government agencies on IT security practices. His broad and deep knowledge of IT coupled with his prowess in problem solving ensures that critical applications, systems, and infrastructure are constantly maintained at optimum levels. Federal government agencies and private companies alike rely on Mr. St.Daniels for his leadership and expertise concerning all things IT from application development, testing, vendor management, IT strategy, disaster planning and recovery, penetration testing, and database management to independent verification and validation (IV&V).

Mr. St.Daniels cultivates key partnerships that help drive current development and implementation agendas. His entrepreneurial spirit and direct attention to detail deliver impressive results such as 99% application and product defect free rate and 100% performance to SLA standards. Mr. St.Daniels was privileged to serve active duty in the U.S. Navy as a project manager for a sea-deployed strike fighter attack squadron (VFA-146). He was responsible for ensuring 12 FA-18C fighter aircraft were mission ready alone with the avionics and maintenance divisions. His strategic planning and tactical execution directly contributed to his squadron’s receipt of multiple LTJG Bruce Carrier awards for maintenance excellence as well as many campaign medals.

Deanna Siller, Partner, GenslerMs. Siller is a partner at Gensler, one of the world’s leading architecture and interior design firms. One of Gensler’s top global brand design leaders, Ms. Siller brings strategic insights that result in innovative and unique user experiences that foster the human connection. She immerses herself in her clients’ business in order to unleash the hidden potential of a place, an idea, or an experience. As an expert storyteller, she helps companies develop differentiated, compelling, and cohesive brand strategies. As a member of the management committee, she works closely with Gensler’s board in the development of hospitality, retail, sports, and brand practice areas.

Ms. Siller is a sought after speaker. Whether speaking at L’Oreal’s Inspiration Day, SATE conference for Themed Entertainment Association, as guest lecture at the University of Pennsylvania, or a panelist at ULI’s Washington Real Estate Trends Conference, she brings a unique point of view that challenges the status quo.

Her work has earned numerous awards from the American Institute of Graphic Arts, International Interior Design Association, American Institute of Architects, Society of Environmental Graphic Design, and Washington Building Congress.

Ms. Siller served as chairman of the board at Dance Place and believes in using her expertise to impact her local community. She is a USGBC LEED Accredited Professional and a member of the Society of Environmental Graphic Design.

Oneza Sohel, RAN Optimization Manager, AT&TMs. Sohel is a proven leader domestically and internationally, across different verticals, and impacting different business processes. She is known for her problem solving skills and vision that demonstrate her ability to lead strategy from concept to implementation. She brings 13 years of experience in global business development, operational excellence, delivering strategic solutions, and team building.

She is highly skilled in leading global organizations through the optimization of business operations to take full advantage of technology innovation, streamlining procedures to provide cost efficient processes and technological innovations.

Currently, in her role with AT&T Mobility, Ms. Sohel handles the day-to-day pressures of keeping the network running, with key partners and collaborators. Her ability to keep calm under high-profile events like the presidential inauguration and Pope’s visit and her ability to influence people from senior levels to a new hire has made her a success.

From supporting mobile world congress in Barcelona to designing the China mobile network, Ms. Sohel has been collaborating with telecom experts across the world and leveraging the best practices in order to enhance productivity, identify opportunities, and provide recommended solutions for continuous improvement.

TABLE OF CONTENTS

TEAM HYPOTHESIS WHAT IS LUXURY THE POWER OF LUXURY US COMPARISON AND ANALYSIS FINDINGS AND KEY ANALYSIS INDUSTRY EXPERT INSIGHTS CHINESE CULTURE GLOBAL LUXURY MARKET CHINESE LUXURY MARKET EVOLUTION OF THE ASIAN

LUXURY CONSUMER MARKET SEGMENT OVERVIEWS

WINE & SPIRITS LUXURY AUTOS HOSPITALITY COSEMETICS

FINAL THOUGHTS

PRESENTATION EXECUTIVE SUMMARY HYPOTHESIS OVERVIEW WHY STUDY THE CHINESE

LUXURY MARKET? GLOBAL LUXURY MARKET EVOLUTION OF THE ASIAN

LUXURY CONSUMER MARKET SEGMENT OVERVIEWS

WINE & SPIRITS LUXURY AUTOS HOSPITALITY COSEMETICS

SUMMARY OF FIELD RESEARCH FINDINGS AND KEY ANALYSIS US COMPARISON AND ANALYSIS CONCLUSIONS ADDENDA

PAPER

OUR HYPOTHESIS The continued growth of the Chinese economy and China’s voracious appetite for luxury goods

will provide the impetus for further growth in luxury good consumption.

SCARCITY

DESIRE

AUTHENTIC

TELLS A STORY

SUPERIOR CRAFTMANSHIP

WHAT IS LUXURY?

ALL THINGS PEOPLE

WANT… AND NOTHING

THEY NEED.

WORLDWIDE LUXURY MARKETS COLLECTIVELY SURPASSING ONE TRILLION IN 2015

POWER & INFLUENCE

The luxury industry surpassed €1 trillion in retail sales value in 2015 and delivered healthy growth of 5% year over year (at constant exchange rates), driven primarily by luxury cars (8%), luxury hospitality (7%) and Þne arts (6%).

MARKET GROWTH

Global currency fluctuations and continued purchases by “borderless consumers,” the personal luxury goods market—the “core of the core” of luxury – grew more than €250 billion in 2015. That represents 13% growth over 2014 at current exchange rates, while real growth (at constant exchange rates) has eased to only 1% to 2%. The slowdown conÞrms a shift to a “new normal” of lower sales growth in the personal luxury goods market.

NEW NORMAL

CURRENCY SWINGS REGIONAL PERFORMANCE

Europe posted sound growth, primarily fueled by Chinese and US tourists attracted by a weak euro. The old continent has become “the world’s largest in-season outlet.”

EURO MARKET Boosted by a strong US dollar, the Americas emerged as the biggest global region for personal luxury goods purchases. However, in real terms, the US market did not deliver. The “super-dollar” was too expensive for many global tourists and, although local consumption grew, it was barely sufÞcient to offset the decline in tourism revenue.

OLD GLORY

Chinese tax-free purchases in Europe increased by 64% while tax-free purchases by American tourists in Europe grew by 67%, primarily in the high end of the luxury spectrum.

FIGURES

•  Mainland Chinese tourists buying power impacted.

•  Luxury goods market is less impacted by currency fluctuations.

•  Lower-end luxury consumers consider other destinations with more favorable currency exchange rates.

CURRENCY DEPRECIATION

ANTI-CORRUPTION MOVEMENT

LUXURY ONLINE SALES

GLOBE-TROTTERS

•  The government’s anti-corruption drive has greatly affected gift giving in China

•  A survey by Hurun shows that gift giving among China’s wealthiest individuals fell by 5% yoy in 2014*

•  According to Bain’s report, cross-border and overseas websites are taking about 12% of all Chinese luxury goods spending

•  Luxury globe-trotters have fueled the performance of airport retail, which posted a 29% growth rate in current exchange rates (18% in constant exchange rates) and now accounts for 6% of the global luxury market.

01 02 03 04 SHIFTS IN THE CHINESE LUXURY MARKET

NEW GEOGRAPHIC MARKETS

     

With rapidly rising incomes, widely available luxury products, and shifting attitudes toward the display of wealth, more Chinese consumers than ever feel comfortable buying luxury goods.

Rapid urbanization and growing wealth beyond China’s largest cities are creating a number of geographic markets with sizable pools of luxury-goods consumers who are able to afford luxury goods in less expensive areas of the world.

SHIFTING ATTITUDES

GREATER SOPHISTICATION

Instead of buying luxury goods at department stores, shopping malls, or arranging a deal with a daigou merchant, Chinese shoppers are making purchases through websites like JD, Tmall, Net-A Porter.com, ShopBop, and Harrods.

With the surge in the number of luxury stores, fashion magazines, and websites and the use of social media, Chinese consumers are now familiar with nearly twice as many brands as they were in 2008.

ONLINE SHOPPING

RESULT OF LUXURY SHIFTS

Source:McKinsey

DEPRECIATION OF THE EURO

Source: Bain & Co.

CHINESE CONSUMERS: ONE-THIRD OF THE GLOBAL MARKET

Source: Bain & Co.

LUXURY GOODS SPENDING

Source: Bain & Co.

ASIA   UNITED  STATES  

mature luxury market

.  

$2,400 avg. spend

per shopping trip

24%  global luxury share

CHINA AND UNITED STATES: LUXURY COMPARISON

emerging luxury market

$7,200 avg. spend

per shopping trip

31%  global luxury share

frequent ritual

occasional indulgence

80% luxury

shopping abroad

30% luxury

shopping abroad

AMERICAS EMERGED AS THE BIGGEST GLOBAL REGION FOR PERSONAL LUXURY GOODS PURCHASES

23.1

7.9

4.8 4.1 3.8 3.8

2.7 2.0

1.0 0.7 0.1

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

Personal luxury goods: growth contribution, by market, in absolute value, 2009-2-14E (€billions)  

3X €15.0B

CHINA LUXURY GOODS SALES

2014

€64.9B US LUXURY

GOODS SALES 2014

Sources: Euromonitor International and Bain & Co.

CHINESE LUXURY MARKET SHIFTS

1.  THE NEW NORMAL

2.  SLOWING GROWTH YET CHINA REMAINS A STRATEGIC GROWTH TARGET

3.  NEW COMPETITION: LOCAL BRANDS

4.  LARGERST GROWTH FROM MATURE MARKETS

5.  SHOPPING TOURISM

KEY INSIGHTS AND CONCLUSIONS

•  Global luxury market •  Global trends in luxury shopping •  Luxury consumer: buying behaviors •  Chinese and US comparison

RESEARCH

HOW WE GOT THERE: OUR APPROACH

•  Chinese luxury market: Hong Kong and Macau

IMMERSE

•  5 luxury segments •  9 industry experts

DISCOVER •  Key Findings •  Conclusions

STRATEGIZE

INDUSTRY EXPERT INSIGHTS

“Only 7% of Chinese have passports.

Imagine the spending power as this grows.”

Bill Weidner Chairman and CEO

Global Gaming Asset Management

“The luxury consumer is still buying; however, they are buying

differently.”

Chris Exline CEO, Asia PaciÞc Home Essentials

“The world is the luxury consumers

shopping experience.”

Kevin Roche Senior Vice President, Global Design

DFS Group Ltd.

“Think about it in terms of desire.

Never compete on price. Compete

on desire.”

Mark del Rosso Executive Vice President

Audi

“Economic downturn, price competition from

e-commerce, and oversea purchase are

the main challenges for luxury market.”

Mr. JianHua Qian CEO

JZ motors

“While there is normal fluctuation in the

luxury market, the recent market growth is not sustainable. There

is a new normal.”

Edward Cheung CEO Greater China

Cushman & WakeÞeld

“We offer the highest view. This is luxury too… not just

goods.”

Pierre Perusset General Manager

Ritz Carlton, Hong Kong

“Asia-Pacific region is projected to contain

60% of the world’s 4.3 billion middle class. 1.4

of the 4.3 billion are contributed to China.”

Fabrice Weber President APAC

Estée Lauder

“Once the only portal for foreign businesses in China, Hong Kong must now evolve and adapt to political and economic reforms.”

Andrew Shaw Chief Economic/Political Section

Consulate General of the United States

Chinese culture

CULTURAL

CONTEXT

In the 18th Century China had the richest land and was the most urbanized country in the world. Political reforms closed boarders and isolationism took hold.

SHEER SIZE

Given history, Chinese are skeptical of the future compared to the US. They save a staggering 40%-50% compared to 3%-5% in the US.

CULTURE OF SAVING

1978 Chinese Economic Reforms introduced market principles. This decentralized agriculture, opened up FDI, loosened price controls and brought 600 million out of poverty.

ECONOMIC REFORMS

LUXURY MARKET

CHINESE GLOBAL LUXURY

MARKET

LUXURY GOODS POWER ON

-8

-6

-4

-2

0

2

4

6

8

10

12

14

0

50

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Global  Luxury  Sales  (US  $  Billion)  and  Growth  2008  -­‐2018  

$  Billion   %  Y-­‐O-­‐Y  Value  Growth  

Source: Euromonitor International

PERFORMANCE BY COUNTRY 8.

2%  

3.4%

 

2.9%

  4.3%

 

0.1%

 

5.4%

 

11.1

%  

9.4%

 

6.6%

 

10.3

%  

8.5%

 

11.5

%  

7.3%

 

10.5

%  

20.7

%  

11.8

%  

7.4%

 

7.3%

 8.6%

 

13.9

%  

6.5%

 

8.6%

 

10.6

%  

14.3

%  

10.8

%  

7.5%

 

8.1%

 

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Top 100 China/Hong Kong France Italy Spain Switzerland United Kingdom United States Other Countries Axis Title

FY13 luxury goods sales growth FY13 net profit margin FY13 return on assets FY11-13 net sales CAGR

Source: Bain & Co.

LUXURY MARKET

€850 b 7%

growth

10% LUXURY

CARS

9% LUXURY

HOSPITALITY

Source: Bain & Co.

7% 2013

NEW NORMAL

SLOWER STEADY GROWTH

5% 2014

Source: Bain & Company

218 223

250-265

2013 2014 E 2017 F at constant rate of exchange

Market forecast for personal luxury goods ( € billions)

+2% (+5% at constant exchange rates)

+4%-6% at constant

exchange rates

CAGR, 204E-2017F

(%)

CHINA   UNITED  STATES  

.  

By 2031 $33.66 trillion

GDP By 2031

$35.26 trillion GDP

ROLE REVERSAL: CHINA AS THE LARGEST ECONOMY

Source: Bain & Co.

Deanna to design

TOP TEN LUXURY GOODS COMPANIES

Luxury goods sales rank FY13 Company Name Country of Origin

FY13 luxury goods sales

(US $mil)

FY13 total revenue

(US $mil)

FY13 luxury goods sales

growth* FY13 net

profit margin** FY13 return on assets*

FY11-13 luxury goods sales CAGR* ***

1 LVMH Moët Hennessy - Louis Vuitton SA France 21,761 387,171 0.0% 13.5% 7.1% 8.7%

2 Compagnie Financlere Richemont SA Switzerland 13,429 14,275 4.2% 19.4% 13.0% 8.9%

3 The Estée Lauder Companies Inc. United States 10,969 10,969 7.7% 11.0% 15.4% 6.3%

4 Chow Tai Fook Jewellery Group Limited Hong Kong 9,979 9,979 34.8% 9.6% 12.1% 17.0%

5 Luxottica Group SpA Italy 9,713 9,713 3.2% 7.5% 6.8% 8.4%

6 The Swatch Group Ltd. Switzerland 8,822 9,128 8.8% 22.8% 16.6% 9.9%

7 Kerling SA France 8,594 12,948 4.2% 0.4% 0.2% 14.7%

8 L'Oréal Luxe France 7,791 7,791 5.3% 14.7% 19.6% 10.5%

9 Ralph Lauren Corporation United States 7,459 7,450 7.3% 10.4% 12.7% 4.2%

10 PVH Corp. United States 6,200 8,186 42.0% 1.8% 1.2% 22.7%

Top 10   104,707 129,157 8.4% 11.7% 8.0% 10.2%

Top 100   214,231 247,624 8.2% 10.3% 8.6% 9.8%

Economic Concentration of Top 10   48.9% 29.5%        

29% OF LUXURY PURCHASES

17%

20%

25%

29%

2011 2012 2013 2014

30% to 2%

THE EMPTY SUITCASE

WORLD’S LARGEST SIPPERS OF BORDEAUX AND COGNAC

LANCOME GUCCI AUDI

ROLEX TIFFANY

FAVORITE BRANDS

2/3

WORLD’S BIGGEST SHOPPERS OVERSEAS EXPENSIVE TASTES

DOUBLE TOURISTS

TRIPLE SPENDING

BY 2

020

30%

7%

2%

2011 2012 2013

OF CHINESE LUXURY

SPENDING OUTSIDE OF MAINLAND

CHINA’S LUXURY SPENDING SUPER POWERS

CHINA’S GROWTH SLOWS . 01

BRANDS SLOW EXPANSION 02

FROM HONG KONG TO JAPAN 03

TOP GIVE GROWTH MARKETS 04

LUXURY MARKET: 2016 FORECAST

Source: Euromonitor International

Shift in Asian consumption power from Hong Kong to Japan, as growing numbers of Chinese shoppers head to Japan.

US will be the biggest market, followed by Japan, South Korea, France and the UK.

Economic growth slows, consumers cautious about spending  

Leading global brands such as LVMH, Gucci and Prada have

expanded rapidly but will slow their expansion plans..

BUYING ABROAD WHY ARE TWO-THIRDS OF THE LUXURY PRODUCTS BOUGHT ABROAD?

PRICE DISCREPANCY

INCREASE OF PERSONAL WEALTH

LIMITED PRODUCT SELECTION

IMPORTANCE OF THE COUNTRY OF ORIGIN

GIFT TRADITION

AUTHENTICITY OF THE PRODUCTS

GREATER EASE OF OBTAINING A VISA

OF THE ASIAN CONSUMER

EVOLUTION

ATTITUDES, LIFESTYLES AND BRAND PREFERENCE DIFFER

SEGMENT THE AFICIONADO THE EPICUREAN THE BLING KING THE BRAND SKEPTIC THE ASPIRANT

GENDER M:52% F:48% M: 54% F:40% M: 54% F:40% M: 51% F:49% M: 61% F:39%

DEMOGRAPHY

AVG Age : 32.3 MMI: ¥23,367 LUXURY SPEND: ¥32,981 SINGLE: 22% MARRIED: 78%

AVG Age : 32.6 MMI: ¥193,891 LUXURY SPEND: ¥28,631 SINGLE: 20% MARRIED: 80%

AVG Age : 32.4 MMI: ¥181,855 LUXURY SPEND: ¥23,367 SINGLE: 20% MARRIED: 80%

AVG Age : 33 MMI: ¥161,127 LUXURY SPEND: ¥19,066 SINGLE: 20% MARRIED: 80%

AVG Age : 31.9 MMI: ¥155,288 LUXURY SPEND: ¥16,525 SINGLE: 23% MARRIED: 77%

SOCIAL #1 99% POST ON WECHAT #2 98% POST ON

WECHAT #3 96% POST ON WECHAT #5 94% POST ON

WECHAT #4 95% POST ON WECHAT

LUXURY ECOMMERCE #1 18% HAVE BOUGHT LUXURY ONLINE

#3 15% HAVE BOUGHT LUXURY ONLINE

#2 17% HAVE BOUGHT LUXURY ONLINE

#2 17% HAVE BOUGHT LUXURY ONLINE

#3 15% HAVE BOUGHT LUXURY ONLINE

OS TRAVEL LOCAL #3 55% HAVE BOUGHT LUXURY IN HK, M, OR TW

#4 53% HAVE BOUGHT LUXURY IN HK, M, OR TW

#1 66% HAVE BOUGHT LUXURY IN HK, M, OR TW

#2 56% HAVE BOUGHT LUXURY IN HK, M, OR TW

#5 17% HAVE BOUGHT LUXURY IN HK, M, OR TW

OS TRAVEL LOCAL #1 40% HAVE BOUGHT LUXURY OS OTHERS

#2 31% HAVE BOUGHT LUXURY OS OTHERS

#3 26% HAVE BOUGHT LUXURY OS OTHERS

#4 23% HAVE BOUGHT LUXURY OS OTHERS

#5 6% HAVE BOUGHT LUXURY OS OTHERS

SCREEN MEDIA TIME #3 70% SCREEN-TIME CONSUMPTION #2 73% SCREEN-TIME

CONSUMPTION #1 76% SCREEN-TIME CONSUMPTION #3 70% SCREEN-TIME

CONSUMPTION #4 65% SCREEN-TIME CONSUMPTION

DIGITAL MEDIA TIME #1 50%DIGITAL0MEDIA CONSUMPTION TIME #1 50%DIGITAL0MEDIA

CONSUMPTION TIME #2 48%DIGITAL0MEDIA CONSUMPTION TIME #3 47%DIGITAL0MEDIA

CONSUMPTION TIME #4 45%DIGITAL0MEDIA CONSUMPTION TIME

FASHION ACUMEN #1 FASHION ACUMEN, INTEREST #2 FASHION

ACUMEN, INTEREST #3 FASHION ACUMEN, INTEREST #5 FASHION

ACUMEN, INTEREST #4 FASHION ACUMEN, INTEREST

LUXURY ATTITUDE

•  HIGH KNOWLEDGE & SOPHISTICATION

•  HAVE DEVELOPED OWN STYLE &TASTE

•  ARE TREND-SETTERS & OPIN ION SHAPERS

•  OBSESSED WITH LUXURY

•  NOT BRAND-LOYAL

•  FAD-LED & WANT TO TRY SOMETHING •  ARE SOCIAL SHARERS

•  LOW KNOWLEDGE BUT STRONG DESIRE TO IMPRESS

•  PERCEIVE LUXURY AS A SYMBOL OF STATUS & ARE CONSPICUOUS

•  PERCEIVED LUXURY AS OVERRATED

•  WHEN THEY DO PURCHASE LUXURY, IT IS BECAUSE IT IS A REFLECTION OF QUALITY & CRAFTMANSHIP

•  THE EMERGING SEGMENT

•  LOVE LUXURY BUT HAVE VERY LITTLE KNOWLEDGE

•  ARE STRONGLY INFLUENCED BY ADS, KOHL'S, & WOM

Source: Jing Daily | The Business of Luxury in China

TOP SPENDERS IN LUXURY AND FASHION-FORWARD IN OUTLOOK

THE AFICIONADO

SECOND HIGHEST PURCHASING POWER AND FASHION-CENTRIC LIFESTYLE

THE EPICUREAN

LIVING A FLAMBOYANT AND CONSUMPTION-DRIVEN LIFESTYLE

THE BLING KING

LOWER LEVEL LUXURY SPENDERS THAT PLACE LITTLE VALUE ON BRANDS

THE BRAND SKEPTICS

LOWEST PURCHASING POWER BUT HIGH FASHION FOCUS & DESIRE

THE ASPIRANT

WINE & SPIRITS LUXURY AUTOS COSMETICS HOSPITALITY

LUXURY SEGMENTS STUDIED

Asia’s wine cellar. Champagne craze.

WINE & SPIRITS

Slowing growth.

SLOWING GROWTH

2012 2013 2014 2015

3% 4% 6% 9%

Source:    Euromonitor  InternaOonal  

The Occupy movement in 2014 and 2015 led to signiÞcant unrest in the Central district of Hong Kong.

Anti-corruption practices impacted wine and spirits due to lavish gift giving which was common throughout upper tiers of Chinese society.

TWO PRIMARY VARIABLES

1 2

SLOWDOWN

PREFERENCES & PALATES

WINE & SPIRITS

Red wine dominates the market at a staggering 37% of sales. Popular due to its appealing

taste to Asian consumers palate. Also, popular choice for gifting.

RED WINE

White wine accounts for about 7% of sales. Acidic taste does not

pair well with Asian cuisine. White wine has seen more growth than red in 2015 due to increased

consumer sophistication.

WHITE WINE

Champagne is the fastest growing, rising 5% in 2015. Considered

“aspirational” and associated with luxury and living “the high life.”

Opened only at special occasions, it has not experienced the same

slowdown as red and white wines.

CHAMPAGNE

Source:    Euromonitor  InternaOonal  

WINE & SPIRITS

Led Þne wines, champagne and spirits in 2014 with Dom Perignon,

Veuve Clicquot, Hennessy XO, and Glenmorangie.

LOUIS VUITTON MOET HENNESSY LEADS

Developing consumer tastes and education have led to exploration and looking beyond brands and

bottle labels.

EDUCATED CONSUMERS

Cognac is enjoyed at business dinners. Cognac makers have been

hit hard by the stock market instability and luxury crackdown.

LUXURY COGNAC HIT HARD

Brands advertise in luxury lifestyle magazines and department stores/wine retailers. Travel retail plays key

role especially duty free.

MAGAZINES, DEPT STORES STILL ADVERTISING KEY

COMPETITIVE LANDSCAPE

Source: Euromonitor International

DISTRIBUTION

97%

2.1% ONLINE

NO IMPORT DUTY: Hong Kong as

primary sales

COUNTERFEIT IMPACT

RETAILERS  

Source:    Euromonitor  Interna0onal  

BOTTOMS UP

64%

36%

FINE WINE

LUXURY SPIRITS

2015 SALES  Source: Euromonitor International

23.19%

0.55%

0.30%

40.05%

11.24%

0.07%

0.01%

21.78%

2.80%

Champagne

FortiÞed Wine

Non-Grape Wine

Still Light Grape Wine

Brandy & Cognac

Rum

Tequila/Mezcal

Whiskies

White Spirits

WINE & SPIRITS 2015 MARKET COMPOSITION

Source:    Euromonitor  InternaOonal  

WINE & SPIRITS GROWTH WINNERS

FINE WINE 12.4%

SPIRITS 3.2%

CHAMPAGNE 18.9%

WHITE WINE

8.9% WHISKIES

7.8% 2015-2020  Source: Euromonitor International

THREATS TO THE FUTURE

Consumer education and sophistication changes preferences. As their wine and spirit knowledge grows, they seek more unique choices, diverse selections, and variable flavors. This is especially true for young consumers in Hong Kong.

WINE & SPIRITS FUTURE

TASTE INTERACTIVE EXPERIENCE

LIFESTYLE

Leading brands are expected to market their products by promoting

a luxurious lifestyle including events and platforms to expand knowledge and aid discovery of

new wines and spirits.

WHAT’S NEXT

Demand for luxury cars in Hong Kong. Market Overview.

LUXURY AUTOS

Disruptors.

Customers desire: EXOTIC-NESS

ELEGANCE POWER

COMFORT PERFORMANCE

LUXURY HISTORY

STATUS SYMBOL

DEMAND FOR LUXURY AUTOS

PASSENGER VEHICLES  

PREMIUM CARS  

26%

Market growth per year for 10 years

1.25 million

2012 PREMIUM CAR SALES

2nd LAREGEST IN THE WORLD

36%

Expected grow at a compound annual rate of 16 percent between now and 2020.

80% of Chinese premium car owners have annual disposable household income of more than RMB 200,0004.

NEW GENERATION OF LUXURY CAR CONSUMERS

1 2

LUXURY CARS

McKinsey’s consumer research  

300 cities in China will have consumers with sufÞcient household income to buy premium vehicles by 2020.

By 2020, there will be 23 million affluent urban households in China Ð 7% of the population. 3 4

LUXURY CARS NEW GENERATION OF LUXURY CAR CONSUMERS

McKinsey’s consumer research  

STRONG GROWTH WILL BE DRIVEN BY AN EXTRAORDINARY BOOM IN AFFLUENT AND NEW MAINSTREAM MIDDLE CLASS FAMILIES IN CHINA

Number of urban households by annual disposable income bracket, million households  

Affluent (more than USD 34,000)  

New Mainstream (USD 16,000-34,000)  

7

37

23

171

82

33

14

19

13

10

9

10

12

12

7

14

25

24

2012 2020 Other premium car markets

PREMIUM CAR SALES

SHARE OF MAJOR BRANDS IN CHINA 2013

China 31%

Germany 10% United

States 10%

Other 43%

China 20%

Germany 10%

United States

10%

Other 52%

China 15%

Germany 10%

United States

10%

Other 45%

492k units

391k units

218k units

GLOBAL SALES

1.57M units

1.96M units

1.46M units

LUXURY AUTOS DISRUPTOR: TESLA

0

200

400

600

800

1000

1200

1400

1600

1800

2009 2010 2011 2012 2013 2014 2015

Electric vehicle registrations in Hong Kong

TESLA’S HONG KONG BOOM MIGHT BE SHORT-LIVED

3% New vehicle

registrations

2,279 Evs on

the road 70%

TESLAS

Business or Pleasure. Service and Amenities.

HOSPITALITY

BENCHMARK LIVING.

HOSPITALITY Luxury hospitality is the history, reputation,

location, views, brand value, star employees, infrastructure, furnishings, crystal ware, silverware,

and the Þnest Þttings. In reality, the luxury world of hospitality is all this and more.

HOSPITALITY

Luxury hotels typically have a lower guest-to-staff ratio which leads to personalized service.

SERVICE

Spas, swimming pools, gyms with trainers, golf courses, poolside

drink service, dry-cleaning services, and shoe shines are major distinguishing factors.

AMENITIES

Guests are pampered, from plush lobbies, furniture, bedding to higher quality F&B and concierge service.

INDULGENCE

Award-winning and high-quality meals showcasing local cultures and

ingredients giving guests an opportunity to pamper their palate.

RESTAURANTS

GROWING TRAVEL FUELS LUXURY HOTELS

0.00  

2,000.00  

4,000.00  

6,000.00  

8,000.00  

10,000.00  

12,000.00  

14,000.00  

16,000.00  

18,000.00  

20,000.00  Outbound  Trips  

Source: Euromonitor

Hotel brands would need to focus their efforts on affluent and independent Chinese travelers especially Chinese female travelers.

One of the trends in hospitality is “more bang for your buck”. Chinese expect to get good service included due to the premium price.

1 2

LUXURY LIVING SAVY CHINESE CONSUMER

Attract AÞcionados to Aspirants with location,

ecommerce Ð social media reviews, and specialized

services for each consumer segment.

MAINTAINING APPEAL

Its eminent for Chinese consumer to maintain their socioeconomic stature and

the only differentiating factor is the purchase of

luxury brands.

LUXURY DEMANDS

Perception is everything for Chinese consumer.

PERCEPTION

SOURCE: PIERRE PERUSSET, GM, RITZ CARLTON HONG KONG

HOSPITALITY INSIGHT

DESIGN AROUND

THE LUXURY BRANDS

Godiva high tea BlancPain watches Caviar bar Luxury towels and sheets Rolls Royce for airport transfer Chateau Petrus wine

THE POWER OF LUXURY COBRANDING

15%  

10%  

10%  

9%  

7%  4%  4%  

3%  3%  

2%  

33%  

Holiday  Inn  

Sangri-­‐La  

Sheraton    

Hilton  

MarrioV  

HyaV  

InternaOonal  

Sofitel  

Kempinski  

Macro  Polo  

HOTELS ARE PROVIDING UNIQUE EXPERIENCES

Percentage of Chinese travelers staying at top 4 and 5 star hotel

Chinese hotel industry competes with travel destinations like Venice, Hawaii and Cambodia. These top 3 travel destination have unparalleled

history, culture and views. China travel has a probability of being over crowded. Luxury hotels

risk a less than 70% occupancy rate.

SUSTAINABLITY

Once A New Market. Evolving Opportunity.

COSMETICS

BEAUTY.

Multinational companies turned their focus to China with the rise in income and developed two-part strategies.

For decades, Chinese viewed cosmetics as “counter-revolutionary.” The void in the segment after economic reforms meant an open playing Þeld.

A SORTED HISTORY

1 2

COSMETICS

SEGMENT SNAPSHOT •  Global beauty industry worth over US$55 billion •  Luxury beauty and personal care grew 4% to HK$2.6B in 2015 •  Growth is slowing •  Distribution channels disruption

COSMETIC GROWTH

DECLINING

2011 2012 2013 2014

5% 6% 6% 8% 3%

2015 Source:    Euromonitor  InternaOonal  

THE MEANS TO THE CONSUMER

DISTRIBUTION

Tier one Chinese cities, like others worldwide, rent space

to premium brands to, in essence, create stores

within stores.

DEPARTMENT STORES

In smaller cities in China, mid-sized beauty product chain stores have brand-

speciÞc beauty assistants to assist customers in

their experience.

BEAUTY CHAINS

Throughout rural China and smaller cities, brand

assistants are non-existent and local retailers typically

sell lesser-known, Asian product lines.

LOCAL RETAIL

TRAVEL CHANGES

43  

72  

3  

5  

2  

6  

60  

51  

20  

19  

7  

7  

Hong Kong/Taiwan/Macao

Mainland China

Europe

Japan/Korea

South East Asia

Other overseas countries

PURCHASE LOCATIONS 2012   2009  

TOP COSMETIC BRANDS

CHANEL. •  French •  9.5% Share •  Diverse Product Line •  Entered China in 1998

ESTEE LAUDER •  American •  3.7% Share •  Focused on co-Branding •  Entered China in 2002

L ‘OREAL PARIS •  French •  3.5% Share •  Refocused on skincare •  Entered China in 1997

COSMETIC BRANDS

COSMETICS AND SKINCARE TOMORROW

TRENDS

Reduced tariffs on luxury imports will boost Mainland domestic consumption. A

40% discrepancy is disappearing.

LOWER TARIFFS

Shopping destinations other than Hong Kong are

becoming more attractive to the Chinese consumer due to the strength of the Hong

Kong dollar.

HKD AND TRAVEL

Internet retailing (ecommerce) and

mcommerce have changed the landscape of distribution.

International platforms are on the rise.

INTERNET RETAIL

PERSONAL NATURAL

EXPERIENCE REGIONAL

Estée Lauder and other leading companies are tailoring their brands to be more personal,

natural, and create an experience in order to remain dominant.

FINAL THOUGHTS

IMAGINE LUXURY IN 2030 TODAY ONLY 7% OF CHINESE HAVE PASSPORTS. IMAGINE LUXURY TOURISM WITH 20%, 50% OR 70% TRAVELERS. AS APPETITES INCREASE FOR LUXURY, CONSUMERS DEMAND LUXURY EVERYTHING. HIGH-TOUCH AND HIGH-TECH: FROM MOBIL TO PERSONAL SHOPPERS. ONLINE SALES WILL OUT-PACE IN-STORE SALES. LESS SEGMENTATION; MORE CO-CREATION, CO-BRANDING, CO-HABITATION, CO-EVERYTHING LUXURY RENTAL AND SHARING LUXURY AUTO: MOTORING DRIVERLESS FOR MAINSTREAM

CHINESE LUXURY: THE NEW NORMAL

TEAM DONG

THANK YOU

CAPSTONE PAPER RESEARCH AND KEY FINDINGS

Executive Summary

Our team embarked on a journey of exploring and comparing the luxury markets in Asia and the United States. We specifically focused our attention on Hong Kong and Macau. Our research involved testing a hypothesis that examined the dip in consumption abroad and if this was a new normal for the industry or if it would rebound.

Throughout the process we explored the history and political evolution of opening up China and attempted to understand the mindset of these new con-sumers. Once we soundly understood the lens in which we felt Chinese luxury consumers approached the market we analyzed the evolution of these consum-ers. What is their varying desires, wants, and needs? We posed questions of how were leading industry players are adapting to meet them in the areas of wine and spirits, cosmetics, hospitality, and automotive sectors. After spending nearly a week in Hong Kong and Macau, meeting with execu-tives and comparing academic research we reached the conclusion that there is, in fact, a new normal in China. The slowdown is likely permanent compared to the staggering, explosive growth in the last decade. Business is responding well to this reality but also looking forward to the growth of China’s middle class – an ongoing phenomenon.

We conclude our research with several themes we heard form nearly every interview in one form or another. These themes help tell the story and explain why this “new normal” has come to be. They include significant currency fluctuation, which is causing Mainland Chinese to both travel elsewhere and view Hong Kong as too expensive for luxury travel and expense. What was once the premier destination for Chinese upper class is now being replaced by direct travel to places like Paris or London. Another theme is a shift in culture away from corrupt practices that were once commonplace. With a keener eye on gift giving and overspending, there are now reins in place on lavish spending causing all four of our segments to react accordingly. Lastly, there is a boon in the future of vacation travelers. As the middle class grows and more Mainland Chinese obtain passports, they will travel outside of China, far beyond Hong Kong and Macau. While abroad they will make their luxury purchases else-where and enjoy this new, shopping experience.

Throughout our journey we discovered and developed insights previously unknown, shared and laughed in the company of each other and amazing business leaders, and our advisor, Professor Arthur Dong. We hope you enjoy our findings as much as we did discovering them.

Hypothesis

The continued growth of the Chinese economy and China’s voracious appetite for luxury goods will provide the impetus for further growth in luxury good consumption both in China and other parts of Asia.

Our research explores the following questions:

• What is the market size of luxury goods in Hong Kong, China?• What trends and drivers are shaping the Asian luxury goods market?• What business factors are transforming the luxury goods shopping experience?• What are luxury good consumer preferences, motivators and demands?• Which brands are exploring alternative sales channels and innovative partnerships?• How dynamic is the growth of luxury goods Internet sales?• What is driving growth? What is slowing growth?

Throughout our journey we discovered and developed insights previously unknown, shared and laughed in the company of each other and amazing business leaders, and our advisor, Professor Arthur Dong. We hope you enjoy our findings as much as we did discovering them.

Overview

According to Bain & Company, Inc.’s Luxury Goods Worldwide Market Study, the overall luxury industry comprises nine segments: luxury cars, private jets, yachts, luxury hospitality, luxury cruises, luxury wines and spirits, fine food, designer furniture, and personal luxury goods. Factoring all segments, the overall luxury market exceeded €850 billion in 2014, showing healthy growth of 7% overall, driven primarily by luxury cars (10%) and luxury hospitality (9%).

Bain’s research found that international travel and tourism is fueling an appetite for 360-degree luxury experiences, such as high-end transportation, that includes highly customized “super cars” and yachts, as well as luxury hotels and cruises.Personal luxury goods, the “core of the core” of luxury, continue to buoy the market. The overall global market is on target to reach €223 billion in 2014, triple its size 20 years ago. Yet that growth is slowing: in 2013, luxury goods grew 7%, and in 2014, growth slowed to 5% at constant exchange rates (2% at current rates). That slower pace is, however, more sustainable, and it reflects the “new normal” for luxury goods, particularly as the global economy continues its sluggish recovery from the financial crisis of 2008. Demand from Chinese consumers, mature consumers in the US, and Japanese shoppers returning to luxury goods have all helped shore up growth.

Luxury spending doesn’t always take place at home. Touristic spending now drives the luxury-goods industry in most markets, which means that who the buyers are matters more than where they buy. Chinese consumers, for the last three to five years, represent the top and fastest-growing nationality for luxury, spending abroad more than three times what they spend locally.

Wealth creation within Asia has led to a super-cycle of demand for luxury goods. However in 2014, luxury goods recorded the smallest growth in five years. The softening growth was largely attributed to the strong growth rates occurring in previous years, the anti-graft campaign and flagging economic growth in Mainland China. Consequently, Mainland Chinese tourist flows in Hong Kong, were significantly reduced in 2014 and 2015, after having registered a record high in tourist numbers in 2013.

With the present slow down in the China economy as well as other parts of Asia, will the growth in luxury goods sales in Asia likely to persist? Is the slower growth pace more sustainable and reflective of a new normal for luxury goods? What impact does this slowdown have on other markets, business, people, and generations? And how does the luxury market in Hong Kong and Macau compare to the United States?

History & Background

In order to better understand how the luxury market evolved in China and specifically Hong Kong and Macau, we discovered the importance of understanding the Chinese cultural history. This involved studying the past and opening up of China from a strangle-hold communist government’s grip.

Interview with Mr. Bill Weidner

On January 29, 2016 we interviewed Mr. William (Bill) Weidner. Bill Weidner is the Chairman and CEO of Global Gaming Asset Management, LLC and Principal of Weidner Holdings and its subsidiaries Weidner Resorts China and Taiwan. GGAM, which is a joint venture between Cantor Fitzgerald and former members of the Las Vegas Sands management team, was formed to advise, in-vest in, acquire and manage hospitality and gaming assets globally. GGAM recently built one of four integrated resorts in the Philip-pines Entertainment City Manila project with Bloomberry Resort called Solaire. Weidner Resorts specializes in developing boutique hotels and integrated 5-star residential resorts around the world in cooperation with Discovery Land Co. of Scottsdale, Arizona.

Mr. Weidner served as the President and Chief Operating Officer of Las Vegas Sands (LVS) from 1995 to 2009. While at LVS, Mr. Weidner lead the LVS team in developing and managing the 64-acre Sands Hotel site into the world’s largest integrated resort. He led the LVS team in opening the 4,000 room Venetian Las Vegas in 1999 and the 3,000 room Palazzo in 2007. He spearheaded LVS’ international expansion in Macau by opening the Sands Macau in 2004, winning the right to develop the first western-style casino in China. Following the opening of the Sands Macau, Mr. Weidner led the LVS team to open the 3,000 suite Venetian Macau in 2007 and the Four Seasons Macau in 2008 and also won the right to open Singapore’s first integrated casino resort (opened in April 2010) which is now generating over $1.7 billion of EBITDA annually.

Mr. Weidner started by encouraging us to “step out of the US mindset” and really try and understand how the Chinese got to the point where luxury goods and the market was even attainable. He talked about the perspective of what the size of the Chinese economy was in the 16th century, the evolution of the rest of the world surpassing them, the consequential isolationism and resent-ment, and the resurgence.

Prior to the nineteenth century, China had one of the worlds most advanced and largest economies. Adam Smith, in the eighteenth century wrote of China having had one the richest (meaning fertile), best cultivated, industrious, prosperous, and urbanized countries in the world. Unfortunately, for China, the economy stagnated and declines in absolute terms for much of the nineteenth and twenti-eth centuries – with a brief recovery in 1930. The primary economic reforms began after Deng Xiaoping and his reformist allies managed to displace the Gang of Four Maoist faction in China. By the time Deng took power, there was widespread support among the elite for economic reforms. As the de facto leader, Deng’s policies faced opposition from party conservatives but were extremely successful in increasing the country’s wealth. The economic reforms in 1978, known as “The Chinese Economic Reform” began to introduce market principles into China in two

phases. The first included the decentralization or decollectivization of agriculture, the opening up of China to foreign direct invest-ment (FDI), and permission for Chinese entrepreneur’s to start their won companies and businesses. Large industries like manufac-turing still remained state-owned and operated. The second phase, in the late 1980’s and 1990’s involved relinquishing some of that state-owned industry through privatization or contract outsourcing. The Chinese government also lifted price controls and loosened protectionist policies and regulations.

As a result of these reforms, the private sector in China began to boom, accounting for as much of 70% of China’s GDP by 2005. As a whole, from when these reforms started to take place in the late 1970’s to date, China experienced unprecedented growth and an economy that was growing at nearly 10% annually. In actual terms, the reforms in the 1980’s and 1990’s brought nearly 600 million people out of poverty and into a growing middle class. This new group of consumers shook industries of all sorts around the globe. But how do these consumers think and act?

A Culture of Savings

Suddenly exposed to nominal wealth and a better life, given their past, the Chinese consumers are still skeptical of the future. They come to the table with a mindset of the government being able to change the environment very rapidly and much of their life will be out of their control. This top-down controlled environment is very different that that of what consumers in the United States are accustom to. The United States middle class worries less about the future and thinks about social security, for example, as a safety net. As a result, the Chinese typically save a staggering 40-50% of their earnings compared to 3-5% in the United States.

No one can say for sure how much the Chinese people save. Data based on national income is incomplete and does not accord with international standards. The most credible estimate places China’s household saving rate for 2007 at nearly 26%. This is extraordi-narily high, although in line with rates in Japan, South Korea and Italy in previous decades.

Common explanations of why Chinese save have been less than satisfying. Most popular are invocations of “culture” — just as we’ve seen elsewhere in Asia. More often than not, Chinese leaders trace the nation’s thriftiness back to Confucian values. Com-pared to Americans who became accustomed to overspending, observed the official China Daily, the Chinese people have developed a “tradition of savings since ancient times.” Zhou Xiaochuan, governor of China’s central bank, recently defended his country’s high saving rate as in large part the product of Confucianism, which values thrift, self-discipline, moderation, and an aversion to extrava-gance.

There is something rather forced about these claims. In the 1960s, Chairman Mao Zedong denounced Confucius as a “stinking corpse.” Only in the last 20 years has the Chinese Community Party conveniently rediscovered the sage’s age-old influence on popular behavior. Ironically, the inspiration came primarily from abroad, from Confucian revivalists in Singapore and Taiwan and from West-erners who write about the development of “Confucian capitalism” in Japan and the rest of East Asia.Cultural explanations are all the more dubious when we consider the following: Not so long ago, the Chinese people were terrible savers. Under Maoism from 1952 to 1978, household saving rates did not exceed 2% or 3% and often sunk to less than 1%. If Chi-nese saved at impressive rates thereafter, surely other factors rank higher than Confucianism.

Another explanation favored by American economists and journalists is that Chinese save excessively in the absence of adequate welfare programs. It is an argument sustained by constant repetition, and little evidence. This analysis comes complete with its own policy recommendation. In the words of the influential economist Stephen Roach, China should build an institutionalized safety net necessary to temper the “fear-driven precautionary saving that inhibits the development of a more dynamic consumer culture.”

Uncertainty, it is true, may motivate people to save, but so do many other factors. Globally, the correlation between high saving and inadequate social benefits is a weak one. Scores of poor nations provide little in the way of social welfare, yet their saving rates are minuscule. Among advanced economies, high-saving nations in continental Europe all provide comprehensive welfare benefits. Americans, who aside from the elderly lack sturdy safety nets, conversely saved little in recent decades.

There are, however, better explanations. In China, household saving rates have risen in tandem with rapid economic growth. We have observed this pattern in Asia’s other success stories, as well as in Western Europe after World War II. Following Mao’s death and the advent of Deng Xiaoping in 1978, the party-state fundamentally transformed the Communist economy into one based on global trade, foreign investment, and the partial embrace of market principles. The Chinese economy leaped into high growth, the GDP surging 10% annually from 1980 to the present. As elsewhere, household savings rose as consumption lagged behind increases in incomes.

Second, Chinese save more because of poor access to credit. Saving tends to be inversely related to borrowing. American journal-ists glory in the story of Chinese conspicuous consumption and the spread of credit cards. Most of these “credit cards” are, in fact, debit cards tied to bank accounts. A small fraction of the cards offer revolving credit. The heavily regulated banks have been miserly in extending consumer credit, and they generally require stiff down payments before lending money to homebuyers.

This is in sharp contrast to the United States, but not so different from several Asian and European countries where consumer and housing credit is subject to significant regulation. In a fast growing economy like China’s, people want to buy cars and other durables, but in lieu of easy credit they need to save in order to consume.

Curiously, few observers consider the possibility that the Chinese party-state might have had a hand in directly encouraging popular saving. Indeed, China represents one of the most compelling cases of the efficacy of aggressive savings promotion.

Under Maoist rule, Chinese households saved almost nothing. They had little money, it is true, but they also lacked safe, convenient banking facilities. In the three years following the Communist Revolution of 1949, the regime eliminated all public and private banks, transferring their assets to the central People’s Bank of China. The dissolved banks included the Republic of China’s fledgling postal savings bank, established in 1919. Although families under Maoism may have saved by hoarding goods and a little cash, they had little incentive to save in lieu of accessible institutions for small savings.

All this changed in the wake of the regime’s decision to reform and open the Chinese economy in 1978. Leaders recognized the pressing need to mobilize domestic savings to remedy capital shortages. One year later the state established the Agricultural Bank

of China, the Bank of China, and the People’s Construction Bank of China. The creation of the Industrial and Commercial Bank of China in 1983 completed the formation of what today constitute the four big state-owned commercial banks.The year 1986 ushered in the next phase, the relentless pursuit of small savers nationwide. The Agricultural Bank and the Industrial and Commercial Bank set up nearly 30,000 new branches that year. The Agricultural Bank alone doubled the number of its branches, reaching villagers who likely had never before had a savings account.

Institutions bear heavily on savings behavior. In 1986, savings deposits increased at a faster clip than at any time since the founding of the People’s Republic of China. It was not simply that branches opened and customers streamed in. Bank employees ran nation-ally coordinated campaigns to persuade the locals to entrust their savings to the new institutions. Including its joint savings projects with the authorities, associations, and cooperatives, in 1991 the Industrial and Commercial Bank claimed one million staff members engaged in “savings mobilization.”

Joining the big banks in 1986 was the new—or rather improved—Chinese postal savings system. For all the recent insistence on Chi-nese exceptionalism, officials methodically emulated the savings-promotion policies of Japan and other thriving Asian economies.

Once the regime committed itself to reviving postal savings, Chinese bureaucrats visited Japan’s Postal Savings Bureau and Central Council for Savings Promotion. Cooperative relationships between savings officials of the two nations developed. During the 1990s, Japan’s Ministry of Posts and Telecommunications assisted the Chinese in computerizing the postal savings system. Officials from the People’s Bank of China, moreover, actively participated in the Bank of Japan’s meetings for Asian central bankers, reporting on Chinese programs to boost savings deposits.

Postal savings became immensely popular among Chinese for much the same reasons we have seen elsewhere. In many rural and remote areas of China, it is one of the few institutions that serve small savers. The number of branches mushroomed from less than 2,500 in 1986 to 37,000 in 2009. Its popularity also rested on more than two decades of promotional campaigns by postal employees and the local authorities.

As a share of total deposits, postal savings appears small compared to deposits the four big state-owned commercial banks—only 8.1% in 2002. But of course we’re talking about the world’s largest country. The number of households with postal accounts that year came to a mind-boggling 104 million.

Chinese leaders today speak less openly about their efforts to promote saving. Instead, officials increasingly pledge to stimulate con-sumption as a vital prop of the Chinese economy. As in Singapore, the party-state recognizes that its continued legitimacy depends on improvements in the people’s material lives. In view of decreased demand from sluggish Western economies, the planners are also aware that domestic consumers may need to buy more if the Chinese economy is to continue high growth.

However, the Communist Party’s pronouncements on consumption have their tactical side. They aim to reassure American observers, many of whom take any pledge as evidence that China will soon embrace an American-style consumer society.

Unquestionably consumption is rising in China, yet the Asian giant will likely remain a high-saving society for many years to come. The consumption levels enjoyed by Westerners, Japanese, Koreans, and Singaporeans are well beyond the reach of hundreds of mil-lions of Chinese. Consumption as a share of GDP stands at 35–36%, half that of the United States. Contrary to many media stories, China’s high growth relies overwhelmingly on investment, exports, and government consumption — and relatively little on domestic consumption.

Finally, the regime has a powerful stake in promoting household saving for the foreseeable future. Chinese authorities learned a great deal from the Japanese and Singaporean models, in which the state manages and invests large pools of small savings. The Chinese government similarly captures the people’s savings at low cost from the state-owned banks and postal savings system. This capital finances companies and infrastructure at home. It also flows into the Singaporean-style sovereign wealth fund that China invests stra-tegically in such things as U.S. Treasury securities and the exploitation of African minerals.

China, the newest savings superpower, now enjoys influence in international relations it could scarcely imagine three decades ago. When then-Treasury Secretary Henry Paulson blamed the China’s “superabundant savings” for causing a global credit bubble, the Chinese turned the tables just as the Japanese had done 20 years earlier. The United States, declared Premier Wen Jiabao, should be held most accountable for the global economic crisis. America had pursued an “unsustainable model of development characterized by prolonged low savings and high consumption,” the “blind pursuit of profit,” and “the failure of financial supervision.”

Make no mistake about it. Chinese leaders have few plans to jettison the policies of savings promotion that have served them so well.

Why Study the Chinese Luxury Market?

Much of luxury’s allure comes from the opportunity to share in the rich cultural heritage associated with a brand. This concept is rapidly catching on with Chinese luxury consumers, and many leading brands are promoting their history and craftsmanship. But the picture isn’t totally straightforward: one-third of luxury consumers in China said they would prefer to buy products that were designed specifically for the country and incorporated Chinese imagery. - McKinsey and Co

Chinese consumers now represent about one-third of the global market, up from only 1% in 2000; Japanese consumers, who ac-counted for a quarter of the market in 2000, now make up 10% of global purchases.

According to The Guardian the global luxury goods market exceeds €1tn. The Guardian attributed strong sales of luxury cars and fine art as luxury segments that have helped push the global luxury goods market higher than €1tn (£700bn) for the first time, ac-cording to a new report, despite slowing demand for personal luxuries such as jewelry and handbags.

The Guardian further notes that the personal luxury market has been hit by weaker demand in China and Hong Kong, said the an-nual report from consultancy Bain & Co. Chinese consumers account for 31% of global luxury sales, followed by US consumers at 24% and Europeans at 18%.

Chinese consumers are still spending, but they are now heading to Europe and Japan – attracted by the weak euro and yen – rather than their traditional shopping destinations of Hong Kong and Macau. About 80% of Chinese luxury goods shopping is done abroad. The findings echo recent comments from British luxury fashion house Burberry, which has blamed a sharp sales slowdown on weaker demand among shoppers in China.

The fastest growth was for sales of luxury cars, up 8% year on year, and fine art, up 6% - with postwar and contemporary work par-ticularly strong.

In China, household disposable income has been growing consistently over recent years, and is expected to continue in coming years. McKinsey & Company predicts the number of “upper middle-class” Chinese (those with an annual income between 106,000 and 229,000 yuan) will increase tremendously in the coming decade - 54% of China’s urban consumers will be regarded as “upper middle-class” by 2022, up from 14% in 2012. According to Hurun Wealthy Report 2014, there were 1.09 million millionaires and 67,000 super-rich individuals in China in 2013, an increase of 3.8% yoy and 3.7% yoy, respectively from 2012. The growth rates were much slower than that in 2010 and 2011, due largely to the relatively slow recovery of the world economy and slower economic growth in China.

Shifts in Attitudes

The luxury market in China seemed to be recession proof, as the luxury goods markets defied the global recession in 2009 as sales of luxury goods in the mainland rose by 16 percent, to about 64 billion renminbi—down from the 20% growth of previous years but far better than the performance of many other major luxury markets. To get a better idea of the dynamics, McKinsey surveyed more than 1,500 luxury consumers in 17 Chinese cities in spring 2010. According to Yuval Atsmon and Cathy Wu of McKinsey, three factors in particular, accounted for the Chinese demand for luxury goods, namely shifting attitudes, greater sophistication, and new geographic markets.

McKinsey research notes that given rapidly rising incomes, widely available luxury products (and information about them), and shift-ing attitudes toward the display of wealth, more Chinese consumers than ever feel comfortable buying luxury goods. As a result, China’s love for them is moving down the economic ladder, creating opportunities and challenges for marketers accustomed to serv-ing only the very rich. While wealthy consumers (with incomes above 300,000 renminbi, or about $46,000) will continue to account for a majority of luxury consumption, McKinsey research shows that the 13 million households in China’s upper middle class (in-comes between 100,000 and 200,000 renminbi) offer the biggest new growth opportunity. They already account for about 12 percent of the market, and their numbers are growing rapidly: McKinsey expects to see 76 million households in this income range by 2015, accounting for 22 percent of luxury-goods purchases.

According to McKinsey, interest in luxury goods is moving beyond handbags, jewelry, fashion, and the like. A growing number of Chinese luxury consumers are also splurging on spas and other wellness activities. Consumption is growing faster for such luxury services than for luxury goods: 20% of these consumers said they were spending more on experiences, only 13% on products.

Greater Sophistication

McKinsey’s research further elucidates the Chinese are increasingly exposed to luxury goods through the Internet, overseas travel, and first-hand experience. As a result, they have become more discerning.

With the surge in the number of luxury stores, fashion magazines, and websites and the use of social media, Chinese consumers are now familiar with nearly twice as many brands as they were in 2008. Half of the consumers McKinsey surveyed in 2010, for instance, could name more than three ready-to-wear brands, compared with only 23% two years before. As Chinese consumers become more familiar with luxury goods, they are becoming savvier about the relationship between quality and price. In 2010, only about half of consumers equated the most expensive products with the best ones, down from 66% in 2008.

Price transparency contributes to this dynamic. More than half of luxury consumers check product details and prices online, com-pared with 13% of all urban dwellers. Since two out of three luxury consumers have made at least one trip overseas, they have access to external benchmarks for comparing prices back home. In 2008, only two of five people in China realized that in the mainland, prices were at least 20% higher than they were in places such as Hong Kong. By 2010, 66% did.

Luxury-goods companies have long waged a battle against counterfeit goods in China. However: McKinsey’s research shows that consumers increasingly want the real thing. The percentage of those who said they would buy fake jewelry, for example, dropped to 12%, from 31%, in 2008. Some luxury buyers told us they felt sure that their friends would spot a counterfeit. A woman who used her first salary check to reward herself with a luxury handbag said, “it would be meaningless if it was fake.” What’s more, an interna-tionally well-known brand has become one of the most important factors in making a purchase.

New Geographic Markets

McKinsey states that rapid urbanization and growing wealth beyond China’s largest cities are creating a number of geographic mar-kets with sizable pools of luxury-goods consumers. More small cities will become large enough to justify the presence of stores cater-ing to them; McKinsey expects luxury sales in urban areas such as Qingdao and Wuxi, for instance, to triple over the next five years. By 2015, consumption in such cities will approach today’s levels in Hangzhou and Nanjing—now two of China’s most developed luxury-goods markets—and luxury consumption could pass 500 million renminbi in more than 60 cities, compared with 30 today. But the luxury-goods market will remain concentrated in the top 36, which will account for 74% of the market’s growth and 76% of total luxury sales by 2015.

McKinsey observes - most of the world’s luxury-goods companies are already in China or contemplating increased investment there. They must tackle several big issues before making their next moves. First, delivering exceptional service in stores is critical; two out of three consumers are disappointed with the indifferent attitudes of salespeople.

Overseas Shopping

According to Bain, daigou, or overseas personal shoppers who buy and send luxury goods to customers in China, has grown to an es-timated market value of RMB 55-75 billion in 2014, concentrated in cosmetics, followed by leather goods, watches and jewelry. This is nearly 50% of the store sales in China.

Seventy pecent of luxury brands bought by Chinese is now bought abroad or through daigou agencies; in terms of travel destina-tions, Korea and Japan have been the big winners in 2014.

According to technode, Japan was a particularly popular destination, as sales of luxury items are up an estimated 251% since 2014. South Korea was second with an increase of 33%, followed by Europe with an increase of 31%. In contrast, sales in Hong Kong and Macau decreased by about 25%. The sharp increase in luxury items purchased by Chinese shoppers in Japan is attributed to a more open visa policy, which also explains the increasing number of Chinese tourists who visit Japan.

Chinese consumers have strong preferences for shopping luxury goods overseas. China’s outbound tourists amounted to 116 million yuan in 2014, up 18.2% yoy according to the Chinese Tourism Academy. Touristic spending has become a strong driver of luxury spending Bain & Company estimates that Chinese visitors spent as much as 209 million yuan on luxury goods overseas in 2014.

E-Commerce / Web Strategies

According to Bain’s report, cross-border and overseas websites are taking about 12% of all Chinese luxury goods spending. Tech-node reveals that Instead of buying luxury goods at department stores, shopping malls, or arranging a deal with a daigou merchant, Chinese shoppers are making purchases through websites like JD, Tmall, Net-A-Porter.com, ShopBop (acquired by Amazon in 2006), and Harrods.

The Chinese government has also been helping to move luxury brand purchases online. For example, in January 2015, limits on cross-country online payments increased from $10,000 USD to $50,000 USD. The expansion of free trade zones in China also offers tax benefits to companies that conduct cross-border e-commerce.

Furthermore, McKinsey discloses that while the in-store experience is by far the most important factor driving purchasing decisions, the Internet has rapidly become the second-most-important consumer touch point for luxury categories such as fashion. Market-ers will need increasingly sophisticated Web strategies; for example, they can work with social-media agencies to monitor and shape online conversations among consumers or to identify influential bloggers and help educate them about brands.

Global Luxury Market

In the 1950s and 1960s, the world economy was transformed by the emergence of the American consumer. Now China is poised to become the next consumption superpower, having overtaken Japan as the second-biggest consumer economy. With roughly $3.3 tril-lion in private consumption, China has about 8% of the world total, and it has only just begun.

According to Global Powers of Luxury Goods 2015, a report by Deloitte, a UK consulting firm, the economic climate for makers of luxury goods is positive, but there are risks. On the positive side, the economies of the U.S., Europe, and Japan appear to be recover-ing. On the negative side, economic growth in three of the four BRIC economies has stalled, the exception being India which the IMF predicts will grow at 7.3% in 2016. Although currency market volatility also contributes to the challenges, luxury goods compa-nies should be pleased that, after years of stagnation, the global economy is generally on the rise.

Luxury Goods Industry

The global luxury goods industry, which includes drinks, fashion, cosmetics, fragrances, watches, jewelry, luggage and handbags, has been growing for several years. Luxury goods are considered to be goods at the highest end of the market in terms of quality and price, and meet consumer demand by delivering on design, quality materials, superior craftsmanship and pricing. Luxury goods trans-form everyday objects into status symbols. As a rule, the industry rises and falls with the gross domestic product (GDP), climbing in times of economic stability and falling in unfavorable economic climates. The United States has long been the largest market for luxury goods.

Over the past 20 years the number of luxury-goods consumers worldwide has more than trebled to 330m, according to Bain & Company, a global management consultancy based in Toronto. Spending on luxury consumer goods has risen by double the rate of growth in global GDP. Most new buyers are not the super-rich, or even the very rich, but the prosperous, with incomes of up to €150,000 ($188,000).

In 2014, the 13th edition of the Bain Luxury Study, a global market report, analyzed recent developments in the global luxury-goods industry. It sees slower, steadier growth for luxury goods for the immediate future. The overall luxury industry comprises nine seg-ments in total, one of which is personal luxury goods.

For 2015, the overall luxury market exceeded €850 billion, showed healthy growth of 5% overall, and was driven primarily by luxury cars (8%) and luxury hospitality (7%).

Bain research found that international travel and tourism was fueling an appetite for 360-degree luxury experiences, such as high-end transportation that includes highly customized “super cars” and yachts, as well as luxury hotels and cruises. Not to be outdone, personal luxury goods — luxury’s “core of the core” — continue to sustain the market, which in 2014 was three times the size it was 20 years ago.

Yet growth is slowing. In 2013, luxury goods grew by 7% and in 2014 by 5% at constant exchange rates (2% at current rates). The slower pace is more sustainable, reflecting a “new normal” for luxury goods. Helping to bolster growth is demand from Chinese consumers, mature consumers in the US, and Japanese shoppers returning to luxury goods.

Not all luxury spending takes place at home. Tourist spending drives the luxury-goods industry in most markets. Chinese shoppers are the fastest-growing luxury consumer, spending more than three times abroad than they spend locally. With such cross-pollination of luxury spending, it makes little sense to think only in terms of location. This new mindset has considerable consequences for luxury brands, requiring new thinking from a global perspective.

Bain’s study predicts the following trends:

• Americas — The Americas were the undisputed growth engine in 2014, delivering a 6% increase at constant exchange rates. Brazil posted disappointing results due to local currency devaluation, but Mexico and Canada maintained positive performance.

• Europe — Growth across the continent was up 2%, despite persistent economic challenges, socio-political tensions in Eastern Europe, and less dynamic tourism.

• Japan — Japan regained a growth leadership position in 2014, increasing by 10% at constant exchange rates that made it the best-performing market in real terms.

• China — Luxury spending in China fell for the first time: –1% growth this year at constant exchange rates (–2% at current rates), due to greater controls on luxury spending and changing consumption patterns. Concurrently, less established and younger brands have commended themselves to the growing upper-middle-class “wannabe” consumer segment, which is expected to double by 2017.

LVMH (Louis Vuitton Moet Hennessy), the most valuable luxury brand in the world, is valued at about US$25.87 billion. For the 2014 fiscal year, LVMH Group’s total revenue was about €30.64 billion. Three of the top 10 companies are luxury companies with in multiple luxury brands; two are cosmetics and fragrance companies; two are jewelry and watch companies; two are apparel compa-nies; and one, Luxottica, is an accessories company. LVMH, Richemont and Estée Lauder maintained their positions as the top three luxury companies. Of the top ten companies, six have headquarters in the United States and France (three each), Switzerland has two, and Italy and Hong Kong each have one.

How will 2016 shape up for the global luxury goods industry? According to Euromonitor International (EMI), rising instabil-ity in emerging market economies poses the biggest threat. However, the prospect of slightly stronger growth in Western Europe and North America could offer some respite for global brands. Even so, 2016 is set to be another challenging year. Over the past decade, LVMH, Gucci and Prada have expanded rapidly into China, but as the country’s economic growth slows, consumers will

be cautious about spending, forcing leading global brands to slow their expansion plans. EMI predicts there will be a further shift in Asian consumption power from Hong Kong to Japan, as growing numbers of Chinese shoppers will head to Japan.

EMI also believes developed countries will comprise the top five growth markets in 2016. For luxury goods, the US will be the big-gest market, followed by Japan, South Korea, France and the UK. China will be visibly absent from the top five, highlighting a change in revenue influence from emerging to developed economies.

According to EMI, India will be the ‘star of Asia’’ and the only major market in the world to register double-digit year-on-year growth in US dollar terms. It predicts that US sales of luxury goods in India will grow by around 15% in 2016, powered by a con-tracting market. Lastly EMI predicts, Russia and Hong Kong will be the weakest of the leading global markets. Both have a strong luxury goods tradition but face the strongest economic headwinds.

Chinese Luxury Market

Expensive TasteHow much China spends is one thing, how it spends it is another. As one of the world’s most sophisticated consumer markets, China’s market is heavily skewed to-wards expensive goods. Sanford C. Bernstein, an investment research firm, calls the Chinese “increasingly aspirational and conspicuous consumers” who consistently trade up to swankier labels, even when buying staples.

Nowhere is this more obvious than in the market for luxury goods. Globally, the Chinese are the biggest buyers of expensive items, accounting for 29% of luxury purchases in 2013. Tellingly, two-thirds of Chinese spending on luxury goods takes place outside the mainland, a fifth of it in Europe. In London, Harrods has seen sales to Chinese shoppers — its largest foreign contingent — increase by 50% a year since 2011. Favorite brands for Chinese shoppers include Lancôme, Gucci, Audi, Rolex and Tiffany. The Chinese are also the world’s largest sippers of Bordeaux wine and co-gnac, though sales have fallen in the wake of government campaigns against giftgiving. At Berry Bros & Rudd’s bonded wine warehouse in Basingstoke, in southern England, where four-and-a half million bottles of expensive wine are stored, more than one million of them are owned by oenophiles from greater China.

Although a government crackdown on corruption has affected mainland sales (some luxury firms have delayed or reduced opening new boutiques in China last year), Coach, Prada and Bottega Veneta have continued to expand. Apple has too, boasting more stores in Shanghai now than in San Francisco, and launches new iPhones in Beijing and California simultaneously.

Urbanization

In China, a massive push to urbanize is under way, which will produce millions of wealthier consumers eager for retail therapy. McKinsey, a consultancy, forecasts that consumption by urban Chinese households will increase from ¥10 trillion in 2012 to nearly ¥27 trillion in 2022.

The new middle-class living in cities in the interior are keen to try new products, especially those they have seen on foreign television shows.

Golden Decade

According to a CBRE report entitled “The Changing Retail Landscape,” Hong Kong’s implementation of the “individual visit scheme” in 2003 led to a “Golden Decade” for retail sales. Taking advantage of lower taxes, a favorable currency situation, wider selection, a good market reputation, ease of access, and language convenience, Mainland Chinese tourists flocked to Hong Kong, many to buy luxu-ry goods. During this “Golden Decade,” tourist arrivals soared by 292%, prompt-ing retail sales growth of 185% and overall retail rent increases of 213%.Thanks to several factors, including China’s anti-corruption campaign, slowing economic growth, anti-mainland hostility, and travel and tax policy changes, this “Golden Decade” has come to an end, with sales of jewelry and watches down14% in 2014 and 15% in the first seven months of 2015.What’s more, a host of other retail destinations including Japan, South Ko-rea, and Europe compete vigorously with Hong Kong thanks to currency fluctuations, easier access through direct flights, and strong marketing efforts to attract Chinese tourists.

The Empty Suitcase

Unlike the growing middle-class of previous generations, Chinese shoppers have a global outlook. When middle classes rose to prominence in America and Japan, the Internet did not exist. People could not search online for European fashions or check dis-counts on Amazon. The arrival of cheap air travel has also made the Chinese more discerning shoppers. Mr. Stocker argues that these factors have “compressed the discovery process”, which in Japan took 30 years, to less than ten.

Even though the Chinese are already the world’s biggest shoppers overseas, a report released on January 20th by CLSA predicts a doubling of Chinese tourists by 2020 (to 200 million) and that their spending will treble over that time. For many Chinese, buying overseas saves money, since mark-ups and taxes keep prices high in China. Many ordinary Chinese travel not just to Hong Kong, the most convenient spot, but to Jeju Island in South Korea, where they can visit without a visa and shop duty-free, stocking up on cos-metics and other items that are more expensive at home. While every shopper likes a good deal, counterfeiting is not a serious

concern for consumers in the west, but it is in Mainland China. The variety and freshness of the products available overseas also appeals to Chinese shoppers.

The “New Normal”

After years of robust growth, the market for Asia’s luxury goods is slowing, no doubt to a more sustainable rate — although the growth in China’s middle class and super-rich offers significant long-term opportunities for luxury-goods manufacturers. Faced with slowing economic growth, evolving consumer tastes, high import tariffs, President Xi’s aggressive anti-corruption campaign, China’s luxury market has entered a “new normal.” For luxury brands, the days of “low-hanging fruit” are gone, but companies will sound strategies will continue to win over shoppers in a competitive market that offers consumers no shortage of choice.

China’s significance in dictating the fortunes of luxury firms is undeniable. Some retailers who have expanded aggressively in recent years to capture this market are now looking increasingly fragile as it cools. Over the last ten years China has grown into one of the world’s largest markets for luxury goods but the recent slowdown has been a reality check for many of those same companies. Global consultancy Bain estimates that growth in personal luxury sales in greater China (including Hong Kong, Taiwan and Macau) fell from 30% in 2011 to 7% in 2012 and to around 2% in 2013.

Nevertheless, despite its slowing economy, China’s appetite for luxury remains strong. The Fortune Character Institute put luxury spending by Chinese shoppers at US$102 billion in 2013, accounting for nearly one-half of its global market estimates. Even as growth declines for Chinese luxury, demand remains extremely high when compared to European, North American or Japanese lux-ury markets. While some firms report market weakness, others are seeing the Chinese market continue to deliver double-digit growth. Weiming Cao, Herme’s president for Greater China, estimates that the economy will continue to grow at 5-6% per year and that the development of domestic consumption has just begun while the income growth of the middle class will become even stronger.

Retail sales were also battered in Hong Kong as a result of lower consumer spending, mostly from Mainland Chinese tourists. In December, sales were down 8.5% in value over the year to HK$43.7 billion ($5.62 billion), the biggest percentage drop since January 2015. By volume, sales fell by 6.1%. As luxury shopping in the Hong Kong market loses its appeal to wealthy Chinese mainlanders due to more accessible travel elsewhere, local hostility toward the mainland tourist influx, and higher prices than in other destinations, companies need to rethink their investments in the former British colony. The speed of the Hong Kong market’s decline has luxury brands looking for more global, far-reaching opportunities.

Also affecting the Chinese luxury market is the cross-border pricing discrepancies. On average, prices in Mainland China are 37% higher compared to euro zone prices. Data compiled by HSBC show that, in France and Italy, a Hermes plain silk twill tie costs €160 ($177.69) but ¥1600 in China ($243.37), a 36.9% premium. The same item costs $180 in the United States, ¥25,920 ($219.74) in Japan, and HK$1,650 ($211.79) in Hong Kong.

New Markets for Chinese Consumers

With the increasing demand for luxury products by Chinese shoppers, more than half of the luxury products purchased by them are bought abroad for the following reasons:

1. The price discrepancy 2. The increase of personal wealth3. The limited product selection4. The importance of the country of origin5. The gift tradition6. The authenticity of the products7. The greater ease of obtaining a visa

Europe, Japan, and the UK continue to attract Chinese shoppers for luxury goods, particularly as Chinese tourists are venturing further afield than Hong Kong. Although the traditional European and Asian luxury markets are seeing rising numbers, they have experienced growing pains, too, as they have had to adjust, often rapidly, to a new consumer base.

Evolution of the Asian Luxury Consumer

Globally, the Chinese are the biggest buyers of expensive items, accounting for 29% of luxury purchases in 2013.

For many Chinese luxury consumers, purchasing luxury goods is not an occasional indulgence but a frequent ritual. According to a recent global survey, 68% of Hong Kong consumers have ‘luxury logo lust’ (they prefer ‘logo-ed’ luxury items) in contrast to the global average of 47%. Traditionally, for Hong Kongers, buying and owning something from a luxury brand was a symbol of sta-tus and wealth, but this is beginning to change as more consumers, both residents and visitors from mainland China, have increased exposure to the concept of luxury. Increasingly, what entices Hong Kongers is the extra boost to self-confidence that comes with owning a widely admired and appreciated luxury item that represents their identity. For such consumers, instead of being a tool to broadcast wealth and status, luxury is becoming a vehicle for personal enjoyment and validation.

As China’s luxury market matures, Chinese consumers are becoming increasingly diverse in tastes, attitudes, lifestyles, spending habits, brand preferences, and consumption of media. Generally, Chinese luxury consumers can be categorized into three groups. First are the nouveau riche (ultra-rich), who acquired their wealth over the past decades. These consumers and their families are purchasing luxury goods within Mainland China and are not sensitive to price differences. A majority of this group resides in first to third-tier cities. Second is the gifting group, consumers who generally buy luxury goods in Mainland China for gifting (mainly for business or government-related purposes). They are not sensitive to price differences because their corporations will cover costs. The third group,

and by far the biggest, consists of Chinese middle-class consumers who are brand-conscious. These consumers are price sensitive. They often work and reside in first or second-tier cities.

In “China’s New Luxury Consumers: A Frontier Worth Planning For,” a recent report by Carat and Jing Daily, five key Chinese luxury consumer segments. All respondents are in the top 15th percentile income range.

1. The Aficionado 2. The Epicurean 3. The Bling King 4. The Brand Skeptic 5. The Aspirant Annual Spending on Luxury by Segment

The rise of the middle class from lower tiers will see one key segment emerge. It is estimated that by 2020, Aspirants will account for 19% of luxury consumers. The Chinese luxury consumer is by no means a homogenous cohort. Each segment has unique prefer-ences and behaviors.

The AficionadoAFICIONADOS ARE TOP SPENDERS IN LUXURY AND FASHION-FORWARD IN OUT-LOOK

With high knowledge of luxury brands and an individual sense of taste and style, this segment rep-resents China’s trendsetters. This is the wealthiest segment and enjoys not only luxury shopping but lifestyle activities as well. Aficionados are the most sophisticated luxury fashion consumers. Well-versed in the cultural heritage of brands, they shape rather than rely on advertising and trends. This segment is known for an ability to curate “looks” according to unique personal styles. They are active as authorities and opinion shapers on social media channels. In leather goods, their preferred brands are Prada, Burberry, and Chanel; in apparel, they like Escada, YSL, and Hermès. Aficionados are the wealthiest segment: 65% are under 35, 70% earn over ¥120k per annum, and 33% earn above ¥240k each year. Not surprisingly, aficionados are the most e-savvy and long haul jet-setting consumers.

The EpicureanSECOND HIGHEST PURCHASING POWER AND FASHION-CENTRIC LIFESTYLE

Obsessed with luxury, the Epicurean segment is led by fads and searches for the latest trends on so-cial media. As a segment, the epicureans value luxury and are willing to spend to own them. Although they are responsive to advertising and celebrity endorsement, they lack brand loyalty. Epicureans love to switch between brands and try new things. They opt for products that have a standout factor and want to have impact amongst their peers. With a love for publicizing their purchases on social media, they flaunt their penchant for conspicuous consumption. In leather goods, their preferred brands are Furla, Gucci, and Dunhill, and in clothing, you’ll find them wearing the latest threads from Burberry, Givenchy, and Loewe. Like Aficionados, they are a young set, 65% under 35 years old, but not quite as wealthy; 70% earn above ¥120K and 30% earn above ¥240K each year.

Epicureans lead an eclectic lifestyle. They like to keep up-to-date with the latest trends and they engage online, where they will share their latest finds. Epicureans are social creatures and are just as likely to be found in a private room at KTV or making sure that they keep fit, look great, and build connections at the same time by fitting a game of tennis into their busy schedules.

The Bling KingLIVING A FLAMBOYANT AND CONSUMPTION-DRIVEN LIFESTYLE

With low knowledge of luxury goods yet a high desire to impress, this segment is all about conspicuous consumption and sees luxury as a status symbol. As indicated by their segment title, Bling Kings are the show-offs of the luxury world. They purchase luxury to demonstrate status and prefer fashion to utility. They value big brand names and rarely care about quality or heritage. Often with limited luxury knowledge, Bling Kings believe that price is a reflection of quality. Their preferred brands in clothing and accessories are Versace, Miu Miu, Tory Burch, Max Mara, and Hugo Boss. With a 52% to 47% gender split and 64% under 35, this is the third wealthiest segment: 72% earn above ¥120k and 28% earn above ¥240k each year.

Bling Kings are as showy in their lifestyle choices and leisure time as they are in their shopping. They love showing off the latest gadgets, whether diving or racing cars. This group loves a live experience and you can be certain to find them with the best seats and boxes.

The Brand SkepticSKEPTICS ARE LOWER-LEVEL LUXURY SPENDERS THAT PLACE LITTLE VALUE ON BRANDS

Unlike the Bling King, the Brand Skeptic sees luxury as overrated, yet values quality and craftsmanship. This segment is much less susceptible to advertising and strongly considers price when making a purchase. The Skeptics are an older and more detached de-mographic. With an ambivalent attitude to luxury, they believe that luxury is overrated but can be a guarantee of quality. Pragmatic in their views, they are both quality-and price-conscious. With a preference for craftsmanship over flashy design features, this is an audience that is much harder to influence through advertising. Purchasing decisions are considered and based on the level of quality, craftsmanship, and price. Favored brands include Loewe, Longchamp and Hugo Boss, with Jil Sander and Tod’s featuring heavily in their wardrobes. With only 40% of this audience under 35, they are the second least wealthy segment, 55% earning above ¥120k and only 25% earning over ¥240k each year. The gender ratio amongst Skeptics is an almost equally balanced 51/49 split.

Brand Skeptics live a more conservative and relaxed lifestyle. Where our audience of Bling Kings lead lives on the go, dominated by sports and live events, the Skeptics are more likely to be found at home. Living a relaxed lifestyle, they enjoy reading the latest fiction or non-fiction or spending time in their gardens. For Skeptics, a fitness routine is walking the dog.

The AspirantLOWEST PURCHASING POWER BUT HIGH FASHION FOCUS & DESIRE

The emerging segment of the group, aspirants love luxury and, although they have little knowledge of brands, they are eager for information. This group is willing to explore and is highly influenced by word-of-mouth, social media, and key opinion leaders (KOLs) such as fashion bloggers. Aspirants are the next wave of China’s luxury consumer. Still forming their preferences, the segment currently has very little knowledge about luxury. They are influenced by rather than influence others, seeking information from ads, celebrities, and key opinion leaders (KOLs). Brands are a symbol of social status in their peer groups. Predominantly young, aged be-tween 18 and 29, aspirants have relatively low incomes. Price is an important driver, especially in the lower tiered cities. Big brand names dominate in choices with Louis Vuitton, Ralph Lauren, Tory Burch, and Hugo Boss having the highest recognition factor. Among Aspirates, men dominate with a 61% weighting to women’s 39%. However, only 58% earn above ¥120k and just 18% earn above ¥240k each year.

There is little difference in demographics and age, but significant differences in at-titudes, lifestyles, and brand preferences.

The Chinese luxury consumer, a rising cohort, these tech-savvy, urban travelers are emerging from increasingly diverse and disparate demographics and regions. Despite the government’s anti-austerity measures, increased consumer purchases abroad due to price dis-parity, a global downturn contributing to China’s slowing local luxury market (down 2% last year), and recent volatility driving an ebb in consumer confidence as recently plummeting Chinese stock saw the market move from bull to bear, the long-term outlook is far from bleak.

At the upper end of the consumer spectrum, Chinese millionaires topped the world’s fastest growth rate, increasing from three to four million in 2014. And, at the lower end, the growth phenomenon is echoed, with the emergence of the middle class expected to drive future category growth. By 2022, it is expected that more than 75% of China’s urban consumers will fall within this group, earning between 60,000 to 229,000 RMB. Building future-proof luxury brands presents a complex challenge. To succeed, luxury brands will need to be equipped to leverage convergence and create compelling experiences that foster meaningful relationships with consumer segments throughout their lifecycle while delivering tailored strategies that cement loyalty and smooth the dialogue critical to ongoing relationships.

MARKET SEGMENT OVERVIEWS

Wine & Spirits

Background Ever since the Hong Kong government’s decision to abolish the import duty on wine in 2008, the city has cemented a repu-tation as Asia’s wine cellar. Fine wine, champagne, and spirits have grown in current value terms to reach HK$832 million in 2015. Retail sales of wine and spirits in Hong Kong grew by 3% in 2015, which was a continuation of the slowdown that started in 2012. Growth in 2014 reached 4%, which was slower than the 6% rate in 2013. Despite the overall slowdown, Chinese consumers are growing increasingly educated in fine alcohol and seek unusual flavors to satisfy their increasingly adventurous palates. Many are even taking classes to receive certifications as “wine connoisseurs.”

Within wine and spirits, still red wine dominates the market at a staggering 37% of retail value. The popularity of red wine is largely attributed to its appealing taste to the Asian consumers palate. In addition to taste, the dark, red color is considered auspicious in East Asia and makes a popular choice for gifting and special occasions. White wine only accounts for about 7% of retail value sales, largely because of its acidic taste. Champagne has recorded the fastest recorded retail growth in the market, rising 5% in 2015. Sparkling wines like champagne are considered “aspirational” drinks in Hong Kong and are associated with luxury and living “the high life.” Given that champagne is typically opened only at special occasions or in entertainment venues like nightclubs, it has not experienced the same slowdown that still red wine and white wine or other spirits have.

Competitive Landscape Before examining the dip in what was massive growth, it is insightful to assess the competitive landscape and key players. In Hong Kong and Macau, LVMH Moët Hennessy Louis Vuitton SA led fine wines, champagne and spirits in 2014 with a 14% market share. These companies maintain prominent and popular brands in their respective portfolio, such as Dom Pérignon, Veuve Clicquot,

Hennessy XO, and Glenmorangie. These brands are so well known to Chinese consumers that their names are considered synony-mous with the type of wine or spirit. Consumers also tend to purchase these renowned brands as gifts or as go-to brands when ordering in social settings or on special occasions. Euromonitor reports that luxury cognac makers, such as Pernod Ricard Hong Kong Ltd and Remy Cointreau, have been especially hit by the stock market instability and luxury crackdown in China, as bottles of premium cognac are primarily opened at business din-ners. While luxury cognac manufacturers have previously depended upon Asia, particularly Hong Kong, for growth, the continuing decline is likely to have them turn their focus to building more promising and stable markets such as Europe and North America.

Developing consumer tastes and growing education in fine wines and spirits have led consumers to start looking beyond brands and bottle labels. Young and affluent consumers in Hong Kong seek unique tasting wines that suit their palates rather than just recogniz-ing brand names. Hence, marketing for fine wines and spirits is changing. Instead of relying on brand prestige, marketers are looking for greater interactivity and consumer exposure, which can trigger word-of-mouth recommendations, as consumers are now more interested in looking for fine wines and spirits that match their lifestyles and tastes.

The Slowdown in Consumption

The slowdown of wine and spirit sales is largely attributed two variables: the continuing effects of the government’s anti-corruption campaign, and the events in 2014 and 2015 invoking social unrest in Hong Kong. The crackdown by the government on anti-corrup-tion practices impacted wine and spirits because of the optics of lavish gift giving that previously ran rampant throughout upper tiers of Chinese society. While wine and spirits are still often symbols of prominence in gift giving, the high-end, luxury brands are being far less consumed than before. The Occupy movement in 2014 and 2015 led to significant unrest in the Central district of Hong Kong. This is an area where many bars and restaurants are located. The unrest led many consumers to choose purchasing wines for personal consumption at home instead of within high-traffic entertainment venues.

Wine and Spirits Future

Euromonitor predicts that fine wines, champagne, and spirits will increase by a value CAGR of 2% at constant 2015 prices over the forecast period to reach HK$907 million in sales by 2020. Growth, which will be in line with the equivalent review period CAGR, will be affected by a number of factors, such as the anti-corruption drive in China, the volatile Chinese stock market, and diversifying consumer tastes beyond luxury alcohol.

While still seeing modest growth currently, there are several threats to the future of the wine and spirits market. Potential threats to growth of fine wines, champagne, and spirits include the entry of new affordable wines and spirits and growing popularity of existing brands. Exploration of lesser-known alcoholic drinks is still relatively new and consumers had always previously depended upon still red wine, which is familiar and appealing to them. However, as their wine and spirit knowledge grows, they seek more unique choices, diverse selections, and variable flavors, especially for young consumers in Hong Kong. Luxury, or brand names in general, may mean

mean less to them. This eagerness to experiment may lead them to diverge into exploring more niche brands or alternative flavors of the non-luxury segment.

Industry analysts and experts predict that fine champagne is expected to record the fastest growth over the forecast period with a value 4% CAGR at constant 2015 prices. It is also one of the few product categories where growth in its luxury segment is expected to be faster than its non-luxury equivalent. This growth will be due to champagne’s popularity in social settings, especially on special or celebratory occasions, and its favorable image among younger consumer segments. Major players and brands are responding to the new normal in wine and spirits by carrying out interactive promotional activity. Taste and personal experience will continue to be key buying factors for Chinese luxury consumers, particularly among drinkers in Hong Kong that want to educate themselves on identifying and appreciating wine and spirits. Leading brands are expected to market their products by promoting a luxurious lifestyle to consumers, while also participating in helping consumers to elevate their understand-ing of fine wines and luxury spirits. Initiatives are expected to include events and platforms that help to expand knowledge and aid discovery of new wines and spirits.

Cosmetics

History & Background

Like other segments we studied, as disposable income increased, Chinese consumers increased their demand for more sophisticated products in the area of beauty and skincare. Before examining the cosmetics and skincare segment today, it is worth understanding the evolution of the Chinese cosmetics and skincare consumer.

For decades, for many Chinese, cosmetics were seen as “counter-revolutionary” and were non-existent. This void in the segment as a whole was an opportunity for companies to educate consumers around the time of the political and economic reforms. Companies, foreign and domestic, were faced with a two-step phase to gain customers. First, educate them on what the beauty products and rou-tines were and second, why are they important to the Chinese consumer. This open playing field for cosmetics companies allowed companies not just to attract the common female customer but also to speak to men in a new way. According to Insead, Chinese men were more open to skincare than European or American counterparts. China alone accounted for 70% of worldwide sales of the Men Expert line of L’Oreal Paris. Chinese women, unlike their European and American counterparts, were far less interested in color products but instead on skincare. As a result, only 10-15% of beauty products sold in China are makeup.

Distribution In China

At the time multinational companies entered the market, cosmetics and skincare products were almost only distributed in department stores. Similar to department stores worldwide, brands or companies will rent floor space and at times pay sales-based commission to the department store. They are, in essence, creating a store within a store. Even today this department store distribution network remains one of the top performing models for firms like L’Oreal Paris, Estée Lauder, and Lancome.

The second distribution channel used, typically in tier two and tier three cities, consisted of agreements with beauty store chains like Watsons and Manning. These companies employed their own beauty assistants who could sell any brand, but had smaller space dedi-cated to large brands like L’Oreal Paris, Olay, and Vichy. According to Insead, the positioning shift of Sephora (owned by LVMH), allowed these tiered distribution network participants to also carry more upscale brands that includes Estée Lauder. The third distri-bution channel was merely the countless small, local cosmetics and skincare stores that lacked any support or participation of brand-specific beauty assistants. All key players, and the multinationals in particular, are wrestling with a shakeup of these three distribution channels with the rise of ecommerce, mcommerce, and the Internet. More than a half billion Chinese have access to the Internet and traditional media like TV or newspapers are losing appeal among younger consumers. These new, younger consumers are spending a great deal of time on social media like Weibo (a Chinese function of Twitter and Facebook). This new form of Internet-based retailing is on the rise.

Market Size & Scope

The global beauty industry (cosmetics and skincare products) is estimated to be worth over US$55B, with the China consuming a significant portion behind the United States. The Chinese market is projected to enjoy a stable growth rate in the coming years as consumers purchasing power grows and more brands expand into the physical (brick and mortar stores) and digital space (Tmall, Jumei, JD.com). With respect to luxury cosmetics and skincare products, Chinese customers are encouraged to purchase these items, over drugstore brands, as they are popular gifts (for the middle and wealth classes) in a culture where gift giving is very important.

Throughout the 1990s and 2000s, Chinese customers were irresistibly drawn to Western brands. These were product names that they trusted and aspired to obtain for their own skincare routines. In fact, a significant number of Asian and Chinese brands even adopt-ed French-sounding names like Franic, Kose, Laneige, and Momonde.

Within Asia, Hong Kong and Macau increased in consumer choice of destination for cosmetics and skincare purchases. From 2009 to 2012, according to KPMG, there was a rise from 43% to 60% of their surveyed luxury consumers in Hong Kong and Macau and a decrease from 72% to 51% in Mainland China respectively. The rise in Hong Kong, Macau, Europe, Japan, and Korea combined with the decrease from Mainland China tells a story of the increasing spending power of Mainland Chinese travelers and their grow-ing middleclass.

Competitive LandscapeMultinational companies still dominate the Chinese consumption of cosmetics and skincare products. Below is a brief description of the three leading players in China, Chanel, Estée Lauder, and L’Oreal Paris.

Chanel is a prestigious French company that was established in 1909 by Coco Chanel. The brand is world famous for its couture fashion, but perhaps even more so for its perfumes. Channel’s products are popular among Chinese women of all ages, despite their lofty price tags. More than any other brand, customers are proud to display these products, whether it’s a bottle of No 5 on their vanity or a tube of red lipstick in their purse, these items emanates elegance.

Estée Lauder Company is an iconic American brand of popular cosmetic and skincare products in 1946. The company has grown its portfolio of products to include dozens of popular cosmetic, fragrance and skincare brands such as Clinique, MAC, Lab Series, La Mer, Jo Malone and Tom Ford. Estée Lauder’s spends millions on their digital marketing campaigns in China. The company has a dominant presence on both Google and the Chinese search engines such as Baidu to promote its classic products and Chinese spe-cific skincare lines.

L’Oreal Paris owns a popular brand in China known as Lancôme. The company was established in 1935. Lancôme opened its’ first store in Hangzhou 1997, and soon spread across Mainland China. As of 2014, there are over 169 stores in more than 80 cities in China. Lancôme’s e-commerce footprint has successfully leveraged the very popular Tmall venue to reach millions of current and would be customers. Lancôme was also ranked 20th in China’s top 20 cosmetics brands according to China Internet Watch.

Trends and Looking Forward

There are several trends facing the cosmetics and skincare segment. Throughout China there has been an increase in more conve-nient and cheaper options for buying these product lines and companies are developing strategies around this phenomenon.

Hong Kong is likely going to experience an impact on Mainland China reducing the tariffs on luxury imports. While Hong Kong, a well-known tax-free shopping destination for Chinese tourists, the lower Mainland tariff will allow international brands to price their products more competitively and on par with other markets. The near 40% discrepancy that once was will be no more.

E-commerce and mcommerce must be accounted for in the disruption of the distribution channels in China. Beauty specific sites, such as Tmall, are being set up to reach Chinese consumers nationwide. This, coupled with the strength of the Hong Kong dollar and desire to travel elsewhere outside of China, has increased the need for companies like L’Oreal Paris and Estée Lauder to strategi-cally response.

To enjoy long-term profitability in China, there is a need for luxury brands to understand the retail landscape and the role of e-commerce platforms. Popularity on Chinese search engines generates greater brand image and brand awareness. Specifically, favor-able ranking on Baidu (Chinese search engine), are important for brands to increase sales as world-of-mouth plays a big role. Given China’s place as the second largest online retail market in the world, Chinese customers are known to be astute Internet browsers. Companies are developing ways to reach customers using social media and sites like WeChat and Weibo to determine what items they will purchase.

Automotive

Before embarking on a treatise examining the luxury automotive segment we thought it necessary to give a real life example that juxtaposes the current landscape in the luxury automotive market in China and Hong Kong. We interviewed Mr. JianHua Qian the CEO of JZ motors in Shanghai, China to give us an overview of the luxury car market in Hong Kong and China.

Chinese Auto Market Overview in 2016

• 2015 sales were lower than expected. It is estimated that 2016 auto market will be even 5% lower. • Autos with 1.6L engines and small SUV s are becoming a booming sector. Government announced new purchase tax discount

policy in 2015/10, which largely stimulated the sales. Consumers who purchased 1.6L vehicles will receive 50% tax discount.• Competition from e-commerce dwarfs the overall margin of auto industry, posted huge challenges for retailors.• Customers are also become more environmentally conscious. Nowadays they prefer greener cars that meet the standard of

PM2.5.• Overall, SUV accounts for the majority market share.• Chinese auto manufacturer are seeking sales overseas, especially in Brazil, Russia, India, Africa, and Russia.• Low oil price helps decrease the daily usage cost

Luxury Auto Market 2016/01 Sales by BrandLuxury segments grew by 15%, in comparison to 2015/01, selling 2,288,588 cars in the first month.

Audi: • 2015: 570,899• 2016/01: 54,402• Growth: 6.2%

BMW: • 2015: 463,736• 2016/01: 43,441• Growth: 8.4%

Mercedes-Benz: • 2015: 373,459• 2016/01: 42,000• Growth: 55%

Volvo:• 2015: 81,588• 2016/01: 7,228• Growth: 22.9%

Land Rover: • 2015: 92,474• 2016/01: 11,200• Growth: 7.7%

Lexus: • 2015: 86,912• 2016/01: 8,773• Growth: 14%

Cadillac: • 2015: 79,779• 2016/01: 8,337• Growth: 16%Infiniti: • 2015: 40,188• 2016/01: 3,583• Growth: 36%

Hong Kong Market

• Different from Mainland China• No manufacturer, mainly imports• Expensive to both purchase and maintain• They don’t have 4S retailer, separation between retailer and car maintenance • Small place, huge population• New car

• Low import tax, free trade zone Hong Kong• Hong kong retailer receive new editions faster than their mainland counterparts• Car edition is the same as European/ U.S type

• Three major selling groups accounts for 70% market share• “Da Chang Hang”• “Sen Na Mei”• “Ying Zhi Jie” (have the largest retailer network)

• Higher additional fees including car registration, insurance, parking, tax, and oil. (Oil price is 3 times of mainland)• Government do not encourage car purchase, except environmental –friendly type

Demand for Luxury Cars in Hong Kong and China

Hong Kong is littered with luxury vehicles. From common luxury brands such as Mercedes Benz, BMW, Porsche, Lexus, Jaguar and etc. to exotic supercars like Lamborghini, Ferrari and Bentley.

According to McKinsey, the market for premium cars in China has increased at an impressive rate of 36% a year in the last decade, faster than the 26% annual growth in the overall Chinese passenger vehicle market during the same period. Sales of premium cars in China reached 1.25 million vehicles in 2012, making it the second biggest market in the world after the United States. The premium car market in China represented 9% of all passenger car sales in 2012, surpassing Japan (4%) and South Korea (6%).

McKinsey predicts that China’s premium car market will grow at an annual rate of 12% through 2020, compared with 8% for the overall passenger car market and that sales of premium cars in China will reach three million by 2020, equaling those of Western Europe, and surpassing the 2.3 million sales expected in the US market. In fact, China may overtake the United States as the largest premium car market as early as 2016, when sales could reach 2.25 million units.

Shifts in Consumers’ Preferences

The older generation of premium car owners purchased vehicles mainly to reflect their social status, but the increasingly sophisticated new generation of buyers is expressing other reasons for buying premium autos. This is one of several important findings from a

2012 McKinsey survey of 1,200 Chinese premium car consumers in 12 of the country’s biggest cities that examined brand sentiment, key buying factors, and touch points along the consumer decision journey.

The survey sheds light on consumers’ evolving needs in the premium car market, including the increasing importance to them of value-added services. Multinationals dominate China’s premium car market, with German automakers (e.g. Audi, BMW, Mercedes, and the Volkswagen Group premium cars) accounting for 80% of market share; other European, Japanese, and US brands make up the remainder. However, competition is heating up, putting pressure on profit margins.

New Generation of Consumers

McKinsey’s consumer research has shown that 80% of Chinese premium car owners have annual disposable household income of more than RMB 200,0004. Unsurprisingly, the incomes of premium car owners surveyed by McKinsey exceeded this threshold level: the weighted average of annual household disposable income of all surveyed families was RMB 450,000. McKinsey analysts expect this affluent segment to grow at a compound annual rate of 16% between now and 2020, offering underlying support for the premi-um car market. By 2020, McKinsey forecasts that there will be 23 million affluent urban households in China – 7% of the population and roughly equal to the total number of households in Great Britain today. In particular, their analysis shows that 300 cities in China will have consumers with sufficient household income to buy premium vehicles by 2020.

According to McKinsey, premium car buyers in China are optimistic about their future. A quarter of those surveyed said they have a high degree of confidence in their career and business prospects and therefore spend more lavishly. For example, their willingness to pay for premium cars was 30% higher than car buyers with similar household disposable income.

McKinsey research also illustrates the emergence of an “entry-level” group of potential premium car consumers. This segment, which they call “new mainstream” households (with annual disposable incomes of RMB 100,000 to 200,000), has confidence that its incomes will continue to grow, opening the way for them to at least consider purchasing a premium car. The new mainstream households care more about style, brand, and exterior than more affluent consumers, who tend to value functional factors such as powertrain technology and vehicle performance.

Motivations of Luxury Car Consumers

1. The first generation of premium buyers sought status and the ability to show off. But there are more reasons in play now. Ac-cording to a McKinsey survey, 30% cited “reflection of social status” as the top reason to upgrade to a premium car, while 27% cited “self-indulgence.” More nuanced responses include: the “car as my ‘business card’ for credibility,” “attracted by sophisticated func-tions and innovative designs,” “the car as a source of fun in life,” and “demanding excellent service.” These responses all obtained 20 to 25% agreement among the premium car consumers that we surveyed. In fact, over 60% of survey respondents regarded “buying a car” as much a priority as “buying an apartment” and “paying for children’s education.”

2. Most Chinese families replace their cars every six to eight years. In McKinsey’s research, they found that premium owners and those intending to buy premium cars said they would replace their cars two to three years faster than the average. Only about 30 percent of the premium segment was first–time buyers, the survey found, compared with 70% in the overall passenger car market. A quarter of families that owned a premium vehicle later bought an additional car for various reasons, including providing a car for the spouse, family usage, or suitability for different business circles, but only 20% traded down to mass-branded cars.

3. Women are playing an increasingly important role in the premium car market in China. In McKinsey’s survey, they found that when choosing a vehicle model, women value exterior styling, safety features, and comfort, over the attributes favored by their male counterparts, such as powertrain technology, socially recognized premium brands, and bigger models.

4. Given the unsettled macroeconomic environment across the globe, there is increasing concern in the auto industry about the volatility of demand for premium cars in China and what that means for continued market growth. McKinsey assessed what they call “premium sentiment”, which focuses on three critical drivers: confidence in the growth of the Chinese economy and expected house-hold income growth; willingness to pay for premium cars; and the influence of societal attitudes on displays of wealth. Their analysis found that despite some uncertainty about the direction of the economy, and shifting social attitudes about public displays of wealth, 80 to 85% of Chinese consumers surveyed are confident in future growth and will continue to buy premium cars.

Buying Factors

McKinsey analysts note, luxury car consumers in China and Hong Kong rate safety as their number-one concern, perhaps in re-sponse to the media attention that has been devoted in recent years to a spate of traffic accidents associated with premium cars. This may also be due to increased consumer awareness of active and passive safety systems. Other key factors cited by respondents include brand, reputation, powertrain technology, and exterior. Quality and handling were not differentiating factors for Chinese premium car buyers as much as they were for German buyers who participated in McKinsey’s 2010 survey. McKinsey analysts caution - Automakers need to be careful when interpreting this finding. Chinese consumers may believe “quality is a given” because of the premium they pay for the vehicles. High expectations for quality and craftsmanship usually surface only after they’ve purchased their vehicle and have had a chance to drive it. When Chinese premium auto owners discover defects in their vehicles, they sometimes react emotionally. In another comparison of Chinese and German consumers, McKinsey analysts noted a linear relationship between affordability and powertrain technology in the Chinese market. This implies that affluent car own-ers in China are more attracted to powerful, high-tech cars with advanced powertrain systems. In both markets, consumers place a high value on car exteriors.

Segmentation Strategy

McKinsey research states that China’s increasingly sophisticated premium car market will require automakers to adopt a segment-based approach to serving their customers. For example, value-added services such as car financing and used-car sales are less

appreciated in China than in more developed car markets. The McKinsey survey showed only 14% of premium car consumers favor financing options. However, McKinsey’s segmentation showed that attitudinal-based segments such as “performance/high-tech” and “joy seeker”, and needs-based segments such as “social climber” and “young and individualistic” are more open to car financ-ing. These four segments combined account for half of premium car owners and potential buyers. Moreover, only 12% of owners in their survey expressed interest in driving pre-owned premium cars. This finding suggests an opportunity for automakers to source and refurbish higher quality used cars, and implement measures to resolve customer concerns regarding quality and maintenance. It may also suggest that most used car buyers do not belong to one of the core segments of today’s premium car buyers. Instead, auto-makers should identify consumers that are seeking affordability and value.

Influences

McKinsey surveys found that both Chinese and German premium car consumers highly value word of mouth across different stages of the decision journey. In addition, Chinese buyers are strongly influenced by Internet search results, special events, and product displays at stores when actively evaluating two to three models, while German consumers are more influenced by sales people.

In China, “circles of influence” play an important role in building word of mouth awareness of particular brands and models of premium cars. Positioned at the center of these circles are family members who are primarily concerned with basic features such as safety and size. Friends influence 40% of premium car buyers by helping them establish a shortlist of compelling models and by pro-viding feedback and suggestions gained through their personal experience. Business colleagues and clients play an equally important role through the application of peer pressure. And finally, premium car buyers often carefully observe the purchasing behavior of their bosses, who often put an implicit “ceiling” on the brand and price range they are willing to consider.

Brands Favored in China and Hong Kong

According to Jing Daily German players like Audi, BMW, and Mercedes-Benz have largely cornered the market, boasting market share of around 75%, leaving little wiggle room for the likes of Buick, Ford, and Cadillac. Yet these marques have shown a strong willingness to jettison old ways of thinking to boost their brands in a crucial market. However, these brands learned early that cars built for the American consumer don’t necessarily mesh with the Chinese consumer.

In light of this, new cars tailor-made for China have been rolled out in recent years— with the 2014 Buick Lacrosse being one of the first such cases of a car developed with the Chinese market very much in mind, with design features such as “sumptuous back seats for executives with drivers, feng shui principles and swooping designs based on Chinese art.” Soon, we’ll see the revived Lincoln Con-tinental (featuring a back-seat laptop table, electric sockets, and a champagne cooler) and China-built, plug-in hybrid Cadillac CT6, each of which represents over a billion dollars in development costs, hit the streets in China. Meanwhile, Ford has tailored its Mus-tang for China with a smaller engine in order to sidestep punitive tariffs for engines over four liters.

Example: Tesla – Disruptor in Hong Kong

In the article, In Hong Kong’s luxury car market, a Tesla is cheap, Josh Horwitz of Quartz, an online news outlet, describes the rise of the Tesla brand as a challenger to the big three German luxury brands (Audi, BMW, Mercedes- Benz) in Hong Kong. Josh notes that Tesla has been getting help from the government. He expounds- in an effort to curb pollution, Hong Kong heavily taxes newly registered vehicles—in many cases by more than 100% of the vehicle’s sticker price. Such taxes have been waived entirely for electric vehicles for the past 18 years. Earlier electric vehicles (EVs) that came to Hong Kong suffered sluggish sales for the same reasons they flopped elsewhere: a lack of charging infrastructure and generally low battery life.

Consumer registrations of EVs have boomed accordingly over the past two years in Hong Kong. This year alone could see more than 2,000 new plug-in cars on the road.

Josh Horwitz further explains - Hong Kong’s compact size might also help drive EV sales. The Model S can travel over 400 kilome-ters (about 250 miles) on a single charge. That limitation might worry some drivers in larger countries, but Hong Kong has only 2,100 kilometers of total road, so “range anxiety” is less of an issue.

The government has provided an additional boost for Tesla (and other EV makers) with its rapid installation of public charging facili-ties. In 2012, the government pledged to bring total charging facilities to 1,000 by the end of June. The number has since increased to 1,200—about two EV cars per public charging stall. That’s far more stalls per vehicle than other markets like London, which has 1,300 charging spots (paywall) for about 20 times as many EVs.

Mr. Horwitz concludes by cautioning that Tesla’s Hong Kong boom might be short-lived. With a population of just over 7 million, there’s only so much demand for cars. Also, the tax incentives that helped spark EV sales are set to expire in 2017, and some officials favor redacting them in order to reduce road congestion. EV sales stalled in Norway when its incentives were rolled back, and the same could happen in Hong Kong.

Hospitality

The hospitality industry is seeing an uptrend due to the booming travel and leisure tourism industry, which is one of the key factors fueling the demand for luxury hotels globally. Increasing consumer awareness and changing lifestyle are factors contributing to the growing popularity of luxury hotels globally. The table on the right shows the highest-ranking destinations with the compounded an-nual growth rate factored from 2009 to 2014. With the increasing standard of living and a rise in branding and promotional activities consumers are choosing luxury hotels for a luxurious experience.

The luxury market aspires to offer spaces that no one else can replicate. Luxury hotels typically have a lower guest-to-staff ratio, which leads to personalized service. Top luxury resorts and hotels are very rigorous with their hiring and training, particularly for associates who interact with guests. Service has become the key differentiator for luxury brands. Desk reception, housekeeping, and other services are always top of the line. The staff is trained to anticipate needs, not just respond to them. Guests are

pampered, from plush lobbies, furniture and bedding to higher quality food, beverage and concierge service. A luxury hotel generally offers a wonderfully comfortable bed with designer soft linens that is made plush by the housekeeping staff, proper temperature con-trolled rooms, designer towels and robes, and blackout shades that make the room nice and dark, even for naps in the middle of the day. Other amenities such as spas, swimming pools, gyms with trainers, golf courses, poolside drink service, dry-cleaning services, and shoeshines are major distinguishing factors. Another differentiator among top-rated hotels is the award winning restaurants onsite. Many feature high-quality meals showcasing local cultures and ingredients giving guests an opportunity to pamper their palate. Many luxury hotels are home to Michelin star restaurants often premiering world-renowned chefs.

Bain’s “Altagamma 2015 Worldwide Markets Monitor” shows the growth rates in 10 different sectors – cruises, yachts, food, private jets, design, wine and spirits, hospitality, automobiles and personal goods. The report states that the luxury sector reached $1 trillion in retail sales in 2015. This is a total overall growth rate of 5% from 2014. Of the luxury sector, the hotel industry saw one of the highest growth rate of 7% from 2014-2015. Hospitality is the third largest sub-market among luxury goods right behind personal luxury good and luxury cars. The report also mentions that locals consume about 50% of luxury goods. The global and regional tour-ists account for the remaining 50% of consumers.

The global luxury hotels market is divided by geography and categorized into North America, Europe, Asia Pacific, and Rest of the World (RoW). Hoteliers are focusing on branding and promotions for better market penetration. The United States has recorded the highest revenues at US$46.6 billion in 2014 equivalent to 27% share and number of rooms available at 303,320 while Hong Kong recorded the highest average (room) revenue per available room (RevPAR) with a value of US$354 in 2014. Currently, luxury hotels in the city generate 13% of their revenues from MICE events (meetings, incentives, conferences, and exhibitions). According to the Travel and Tourism Intelligence Center’s (Travel and Tourism IC) analysis based on 40 countries around the world, the US was the leader in the luxury hotel market in terms of both revenue and number of establishments. The US recorded revenue is more than double its closest competitor, China, which recorded US$20.6 billion in revenue. Guests are spending the most money in America – 34% of spending on luxury goods. Due to a strong dollar, fewer international tourists are spending money in America, but domestic travel has increased.

Growth in the Travel and Tourism sector in Asia-Pacific has proved beneficial for the luxury hotel market. Rising middle class population and eco-nomic growth have supported the increase in tour-ist volume, and expenditure, which is leading to the demand for accommodation. International hoteliers such as InterContinental Hotels, Starwood, Hilton, and Marriott cater to the luxury segment in the region. With Chinese economic growth slowing, there is a fear of decrease in demand from financial institutions but China still has the highest number of households as per Euromonitor international.

Even though China’s economic growth rate is one of the lowest in the past 25 years at 6.8% in 2015, GaveKal, a financial services company, predicts that the crisis would impact only around 20-30 million Chinese households, mainly the upper middle class and very wealthy, with large sums of money invested in the stock market. When comparing China with its fellow BRIC countries and MINT countries, it is evident that household incomes will grow strongly and outperform other countries over the coming decade, as more and more households reach a disposable income level of US$35,000, which Euromonitor International estimates is the threshold for international travel.

With the strong growth in Chinese leisure tourism seen in recent years, it is unlikely that a major decline in outbound travel will occur. China ranks first in travel spending. Hence, the hospitality industry is on a rise due to the increase in leisure tourism. The luxury travel magazine predicts that one of the top 10 trends in hospitality is “more bang for your buck.” This will set the luxury hotels apart from the four stars and lower as luxury hotels tend to focus on services. Chinese expect to get good service included due to the premium price. Hotels, however, are struggling to understand Chinese culture and Chinese female travelers. Hotel brands need to rethink their branding strategies and consider ways to be more relevant as materialism gives way to spiritual quests. Engaging with cultural experts is one way hotels can take their branding a step further, offering valuable insight through the lens of culture and capturing ideas the consumer cannot express. Cultivation of the mind and self-development are becoming key motivators in leisure and domestic life. Even though the top 10 countries in terms of tourists entering China are from Hong Kong, Taiwan, Korea, Japan, America, Russia, Malaysia, Mongolia, Singapore and Philippines the local Chinese traveler still has the highest demand. While the Chinese taste for luxury is maturing and becoming increasingly sophisticated, hotel brands would need to focus their efforts on this growing sector of affluent and independent Chinese travelers.

Bain has outlined some strategies to capture luxury travelers in China. The first is to ensure personal and excellent customer service. Training and retaining amazing employees will help to improve customer service. Another strategy is to create branded content, which can be achieved by writing a blog or developing social media profiles. Lastly, engaging with guests before, during and after their stay via email, mobile apps, or social media will help to keep luxury travelers loyal to your brand.

The government is working towards visa-free access to China, which will also ease Chinese leisure travel. To accommodate for the influx of leisure travels post visa-free access and to accommodate the mainland leisure travelers, multiple luxury resorts and hotels are in the pipeline for tier II and tier III cities in China. The resort island of Hainan alone has a pipeline loaded with 48 luxury resorts bringing another 20,700 rooms to its inventory. One unnamed Shanghai developer told The Economic Observer, “If you build a skyscraper, mall or luxury hotel in a third or fourth-tier city, in return the local government will offer discounts on the price of land or tax concessions. You can also use the profits from selling the related commercial properties to invest in the hotel project and thus also avoid having to pay tax.” With such incentives offered the country is at risk of creating a bubble. One needs to be careful with flooding the market with luxury hotels such that occupancy rate is lower than 70% especially when the competition is Hawaiian and Australian vacations.

Summary of Field Research

We selected a representative sample of field research contacts, with the goal of gathering and evaluating the perspectives of our con-tacts in the Hotel Industry, luxury sales, real estate, cosmetics and political environment. In our pre-trip research, the goal was to gain a good baseline understanding of luxury sales and each of the sub-categories, without pre-scripting all of our interview questions beforehand. Allowing each visit and the information gathered to inform the following interviews enabled our trip report to become a living document, one that evolved and grew more informed with each encounter.

Summary of Meetings

While some common themes emerged throughout the trip, each meeting brought with it a new perspective and understanding of the past, current and future state of the luxury goods market in and around Hong Kong. Our week began with a visit with Home Es-sentials and the Ritz Carlton, DFS, and Cushman Wakefield before visiting neighboring Macau and finishing off the week with visits to Estée Lauder and the United States Consulate, Hong Kong.

Home Essentials

Christopher Exline, Chief Executive of Home Essentials, shared a great deal about leadership in the marketplace. Using detailed ex-amples from his experience, he outlined how engaging in the luxury marketplace during favorable economic times looks drastically differ-ently from operating during an economic downturn. He cautioned against hubris and urged us to consider the motivations and goals of employees in our respective companies. When hard times hit, even the luxury goods market suffers. This requires the company leader-ship to make critical decisions that impact the lives of employees. Specifically, he stated that those who control theirsupply chain. He also stressed that the luxury goods market can be attractive because of the high gross margins; yet, ultimately it is important for companies to be proud of their brand story in a crowded global market. Those who succeed in making shopping a <positive> experience will be most likely to be successful, whether in Hong Kong or other cultural contexts.

Key Findings• Those who control their supply chain the best can avoid being marginalized by others.• Those who succeed in making shopping a positive experience will be most likely to be successful, whether in Hong Kong or

other cultural contexts.• Don’t let success make you over-confident. When hard times hit, even the luxury goods market suffers.

The Ritz Carlton, Hong Kong

The team visited the Ritz Carlton at the International Commerce Centre in Kowloon, Hong Kong. The five-star hotel is a stunning masterpiece by Chinese artist Yuanming He. The award-winning property starts on the 102nd floor and has five dining venues includ-ing a lobby lounge, a buffet restaurant, and al fresco rooftop bar with world-renowned chef ’s preparing meals. The hotel also has a luxurious spa and high-end retail stores on the property.

Upon arrival to the hotel the group was escorted to the 118th floor for a meeting with Pierre Perusset, General Manager of Ritz Carlton, Hong Kong. The conference room had panoramic views of the Victoria Harbor and the entire Hong Kong city area. One could feel the upscale hospitality in the modern décor and the attention to detail (i.e. the designer chairs and throw pillows). After a brief introduction of the team and project, Mr. Perusset provided his insights into the Chinese market. He started the conversation with going into details about the building especially who it was designed by and emphasized on the location and artwork displayed throughout the hotel.

Mr. Perusset mentioned that the hotel occupancy was quite high in 2013 with almost 93% of the travelers in Hong Kong coming from Mainland China but the protest against the mainlanders from Hong Kong residents in 2014 left the relations sour. He believes that the mainlanders have replaced travelling to Hong Kong with Japan and Thailand. He also believes that the Chinese retailers are suffering the most due to the decline in tourism. Mr. Perusset also alluded to the fact that the instability of the Chinese stock market has also left the people unsure about the future and they are being cautious.

The group inquired if the currency played a role in the decline and he agreed. He said that the Japanese Yen has dropped in value by 7% and Russian currency has a similar trend. These in turn made the Hong Kong dollar strong, which would affect the tourist travel-ing to the Hong Kong with a weaker currency.

Mr. Perusset indicated that the Ritz Carlton experienced a reduction of 1.9%. More broadly, he claimed there was a revenue reduction of 30% to 32% for hotels in Macau due to the Chinese government enforcing the anti-corruption law.He believes that the Chinese consumer is enjoys known, trusted brands as a subtle hint that expresses their monetary and educational status. For example, when Louis Vuitton unveils a new designer bag, it is often imminent for Chinese women to own the bag as soon as possible to show off their socioeconomic status.

Due to the nature of the Chinese consumer it’s important that the hotel focuses on the design, view and high service (gold standard service). He said, “perception is everything for Chinese consumer”. The top revenue generators at his hotel are rooms, the Spa, wed-dings, and business and corporate travel. Revenue that management needs to focus on includes:

• Online travel agents,• Social media – ecommerce will get people to come to the hotel,• Specialist in each segment so they can focus on design and gold standard of service.

Over the years Mr. Perusset has learned to design around the luxury brands as his hotel is in the business of selling luxury experience. They have a Godiva afternoon tea, as high tea is a tradition for many consumers visiting the Ritz Hong Kong. Associating the high tea with Godiva (brand name chocolates) shows the Ritz Carlton is focused on brand marketing. The Ritz Carlton also rents out a small space for the Caviar Bar, which generates HK$140,000 per month in rent. The company also has window spaces rented to jewelry retail-ers. According to Mr. Perusset, “Windows space is pure revenue.”

After the interview with Mr. Perusset, the team took a hotel tour. The tour started at the lobby level on 102nd floor. Our guide pointed out the one of a kind painting in the lobby, which was made for the Ritz Carlton Hong Kong. We walked through the three of the five restaurants. The décor, the selection in wine cellar, and the chef ’s presence on the floor gave a designer appeal to the space. Due to the limited space in Hong Kong, the wine cellars served as walls separating spaces as well as display cases for the high-end wine that the Ritz Carlton offers its customers.

Our last stop on the tour was the Ritz Carlton Suite with 3,930 square feet of prime living quarters. The suite had panoramic view of the port through the floor to ceiling glass windows. The suite had all amities including but not lim-ited to jacuzzi, steam room, sauna, and personal butler. All the possible luxu-ries were available to a consumer for USD$17,000 per night. The RitzCarlton prefers to keep the suite empty because the cost of not having the suite for a high-end client is much higher than offering the room at a discount price to another customer. The luxury guarantee that Ritz Carlton is selling was clearly visible in this suite.

Key Findings

• Design around the luxury brands as his hotel is in the business of selling luxury experience.• Windows space is pure revenue.• Renting small space to brand centric restaurants and jewelers is part of the luxury experience.• Mainlanders have replaced traveling to Hong Kong with Japan and Thailand due to the protest in 2014.• Its eminent for Chinese consumer to maintain their socioeconomic stature and the only differentiating factor is the purchase of

the luxury brands.• Anti-corruption law on Mainland China has affected the Ritz Carlton’s occupancy as they cater to business travelers.• Location, location, location – the three most import things for having a successful luxury hotel. The Ritz Carlton is near the inter-

national commerce center with stunning views of the port with the lobby on the 102nd floor and the restaurant of 118th floor.

Cushman Wakefield

Mr. Edward Cheung from Cushman and Wakefield provided valuable insights on the nature of the Hong Kong real estate market and the impacts from the shifts in the Chinese economy. First and foremost, he stressed that the real estate market in Hong Kong was very fluid and sensitive to the economic conditions. Part of this is the fact that commercial leases are usually very short—one, two or three years. This plays into the sensitivity of the market, because the pricing of leases is so fluid. In one example, he discussed how one property was listed at approximately HK$60,000 in 2009, climbed to HK$200,000 by 2015, before dipping to HK$120,000 in 2016. The property is expected to be back at the HK$60,000 rate in the near future.

While highly cyclical, Mr. Cheung believed there would continue to be a strong demand for luxury retail leasing in Hong Kong. He pointed out that the highest selling Prada and Louis Vuitton stores in the world rented space in Hong Kong. Because of the high sales potential, commercial rents have been as high as three to four times the equivalent space in the west end of London. Notably, the increases in the individual visiting program from mainland China has had an impact in increasing luxury goods sales over the past 10-15 years in Hong Kong.

Key Findings• Even with recent dip, the highest selling Prada and Louis Vuitton stores in the world are in Hong Kong.• Real estate market in Hong Kong was very fluid and sensitive to the economic conditions. Part of this is the fact that commercial

leases are usually very short—one, two or three years.• While highly cyclical, there will continue to be a strong demand for luxury retail leasing in Hong Kong.

DFS Group

The DFS Group is the premier global luxury travel retailer that was established in Hong Kong in the 1960s, by American business partners Charles Feeney and Robert Miller. The company provided a tax-free shopping haven for military servicemen and interna-tional travelers looking to score great deals on cars, alcohol and tobacco products. Fast forward to present day, DFS operates as a subsidiary of the Louis Vuitton Moet Hennessy (LVMH) Group. DFS is a multi billion-dollar company with a worldwide network of tax-free stores to include 18 International Airports, 14 urban T-Galleria shopping complexes, and partnership with selected high-end hotels and resorts that reach an impressive 35 million travelers annually. DFS’s core segments are beauty, leather goods, timepieces, and wine/spirits.

Mr. Kevin Rouche, Senior Vice President of Global Design is a veteran architect and a subject-matter-expert in global retail channels, luxury consumer products, and hospitality segments. Mr. Rouche is responsible for the Design Direction and Management for the company’s global expansion and renovation projects (International Airports and T-Gallerias) in Asia, Europe, North America and the Middle East.

Our meeting took place at DFS Headquarters, which was a short commute from our hotel on Thursday afternoon of March 10, 2016.

Key Findings

• The explosive economies of Japan and China have produced a growing middle class of consumers that have shifted the luxury goods market away from conspicuous consumption (Hong Kong) in favor of meaningful and contextually authentic experiences.

• With the Chinese market slowing down, the luxury goods market in Hong Kong will return to a “new normal”. The opportuni-ties to earn easy, fast, money are over as customers are no longer impressed with “brands in boxes”, they want more for their money.

• China’s expanding middle class want to travel and shop in great cities like Kyoto, Angkor Wat, Paris, Venice and Sydney.• Regardless of nationality, consumers want value, uniqueness, access, a high level of quality and design. (Return on emotional

quality, time, and money are constants.) How people go about achieving this desire is driven by their culture and nationality.• DFS will leverage the power of LVMH to recreate luxury relevance beyond Hong Kong and the PRC. For Mr. Rouche, the de-

sign of his projects becomes, and the experience will create how luxury is defined.• Long-term stability for DFS will be centered on integrity their products and how the customer experience is bundled across their

portfolio of properties and new projects. Best Example: The Four Season Resorts define the gold standard for luxury hotels. These properties provides “uniquely relevant local wonders” in which their non-negotiables are quality and service.

• Currency fluctuations are a part of life. Global events can, and often, affect the business but generally do not alter the long-term strategy.

• The design objectives for luxury brands should be based on a simple, clear, go-to-market strategy. The brands that do it well, (Hermes and Nespresso) don’t deviate into tangents, they are incredibly disciplined. They are loyal to a singular vision; they

• protect their brand heritage/equity by being operationally excellent. These brands’ focus, design and strategic assets are clearly identifiable; they only take risks within their specific domain.

The Estée Lauder Companies Inc., Asia-Pacific Region

Estée Lauder is a global leader in prestige skincare, makeup, fragrance, and hair care products. Estée Lauder sells products under the brands Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, Bobbi Brown, Tommy Hilfiger, Kiton, La Mer, Donna Karan, Aveda, Jo Malone, Bumble and Bumble, Darphin, Michael Kors, American Beauty, Flirt!, GoodSkin Labs, Grassroots Re-search Labs, Sean John, Missoni, Tom Ford, Coach, Ojon, Smashbox and Ermenegildo Zegna. Estée Lauder’s impressive portfolio of luxury brands is sold in more than 150 countries. As of May 2015, Estée Lauder had a market cap of $32.1 billion, while delivering $10.95 billion in sales with 42,900 employees worldwide. Established by Estée Lauder and 1946, the company is an iconic American brand with a rich heritage that values creativity, innovation, and entrepreneurship.

While corporate headquarters are located in New York City, its Asia-Pacific headquarters are located in Hong Kong. Mrs. Fiona Mor-gan, the Corporate Communications Director for Estée Lauder’s Asia-Pacific region was our point of contact. We meet with Mrs. Morgan and her colleagues at Estée Lauder on Friday morning on March 11, 2016.Our meeting at Estée Lauder taught us that they utilize what they call a “premium and progressive approach” that consists of three points: service, scarce and limited distribution, and co-branding (ie. Tom Ford) in order to maximize their success in the Asian luxury market. The challenges of the Chinese market, in particular are unique in that China contains two thirds of the world’s middle class, and their population faces 60% urbanization by 2020. In order to strategically control their distribution, Estée Lauder divides the

cities of China into four tiers, prioritizing their distribution efforts accordingly. The deploy beauty assistants to department stores or small beauty-product specific stores in varying sized cities throughout China. With 25 different brands, Estée Lauder places their product suite across two axis: Entry-Premium and Classic-Progressive. Their marketing and brand promotion is tailored to which consumer segment they are targeting for one of their products.Overall, price and value is by far the most important reason for a Chinese consumer purchasing cosmetics outside of China. The concern for quality along with the benefit of tax refunds and favorable currency exchanges lures Mainland Chinese to make their luxury cosmetic purchases in locations like Hong Kong.

In addition, Estée Lauder continues to reiterate the nutritious and health-benefitting nature of their product line in Asia. This re-inforces the fact that 44% of the segment sales in China is on skincare opposed to makeup. According to Estée Lauder, the Asian consumer believes that having a good complexion is more fundamental than the creative or clever application of colorful makeup products.

In the concluding presentation at Estée Lauder, they spoke of the need to focus on developing online trends. The company is being mindful of three rising international, online platforms that include Tmall in China, Adore Beauty in Austrailia, and Luxola in Singa-pore.

Key Findings

• The Asia-Pacific region is projected to contain 60% of the world’s 4.3 billion middle class. 1.4 billion of the 4.3 billion are con-tributed to China.

• Estée Lauder sells their products in 14 Asia-Pacific markets. The Asia-Pacific region represents 20% of Estée Lauder’s’ FY15 net sales.

• Marketing accounts as the company’s singular greatest expense.• Ecommerce represents a great opportunity for Asian consumers as these sites create a powerful marketing tool for Asian con-

sumers to explore Estée Lauder’s portfolio of brands. The issue of counterfeiting is will always be a major concern.• Estée Lauder is committed to investing resources into enhancing their

digital capabilities. This includes platforms like Baidu, WeChat and Weibo.• Estée Lauder is focused on creating market campaigns and products that

are locally relevant to Asian customers. In China, products incorporate super-foods that help reverse skin issues associated with the pollution in major cities.

• New products tailored for emerging Asian markets will ensure the com-pany’s strong financial standing and global reputation.

Macro/Political Environment

Andrew Shaw, Economic/Political Section Chief helped to provide a political perspective at the end of the week. Shaw began with a brief overview of the Hong Kong Special Administrative (SAR) region. He described it as a one-country/two system relationship, with Hong Kong relatively autonomous, with its own independent judiciary press and freedoms of religion. Shaw described Hong Kong as a “gateway” and an “investment portal” in and out of Mainland China. With largely duty free purchasing and 35M tourists annually, Hong Kong has been “the” destination for Mainland Chinese luxury shoppers. Recent increases in freedoms and the num-ber of Chinese mainland citizens granted passports have increased the percentage of mainland tourists visiting other locations, such as Japan. Anti-corruption reforms seem to be here to stay in Mainland China, which has tempered the once-lavish spending of some Chinese government representatives in Hong Kong. This, along with an environment, which is becoming increasingly favorable for business creation in Mainland China, is a challenge for the traditionally dominant Hong Kong. Once the only location for foreign businesses and luxury retailers—along with luxury shoppers—in China, it is now one of several options. As such, Shaw believes that Hong Kong must evolve and more actively court both businesses and luxury shoppers if their desire to continue growth in both seg-ments.

Key Findings

• Hong Kong continues to be a “gateway” and an “investment portal” in and out of Mainland China, although this effect is lessening as Mainland China attracts more direct investment and business.

• Anti-corruption reforms seem to be here to stay in Mainland China, which has tempered the once-lavish spending of some Chinese government representatives in Hong Kong.

• An increasingly favorable market for business creation in Mainland China is a challenge to Hong Kong’s traditional ability to court business tenants.

• Hong Kong must evolve and more actively court businesses and luxury shoppers if they desire to continue growth in both segments.

Findings & Analysis

The New Normal

After our visit to Hong Kong & Macau, we understand that there is a “new normal”. The one-time growth and boom of China after the 1978 reforms will likely never be seen again. Nevertheless, despite its now slowing economy, China’s appetite for luxury remains strong. Even as growth declines for Chinese luxury, demand remains extremely high when compared to European, North American or Japanese luxury markets. The US market has not seen growth as accelerated as China, but will continue to be a luxury goods pow-erhouse – holding 20.5% of the share of the top 100 luxury goods sales.

We expect luxury experiences to continue to play a large role in the sales of global luxury goods. We saw evidence of this during our trip to DFS – as they explained their move into Venice in the Fondaco dei Tedeschi building. Capitalizing on the traveling luxury

consumer is key to their strategy – and they expect Mainland China consumers to continue expand their travel outside of Hong Kong. Bringing authentic, in-country experiences to luxury consumers and providing unique, exclusive products – are keys to success in this segment.

Currency Impact The recent depreciation of the Chinese Yuan verses the Hong Kong dollar from 2006 through 2014 impacted mainland Chinese tourists buying power in Hong Kong. While the luxury goods market is less impacted by currency fluctuations as compared to other segments, the impact is still felt, as lower-end luxury consumers consider other destinations with more favorable currency exchange rates.

Japan, with its currency sharply depreciating against the Chinese Yuan since 2012, has presented itself as an idea tourist location for increasingly mobile Mainland Chinese luxury tourists.

Cultural Change with Corruption

In November 2012, the 18th National Congress of the Communist Party of China appointed Xi Jinping as the general secretary to their party. This is the same time that nine member of Politburo Standing Committee (PSC) retired bringing down the member count to seven. In March 2013, Xi Jingping took the Presidency with Li Keqiang as the premier of the state council. In the past, Chinese politics supported “collective leadership” in which the President shared power with the senior leaders of the PSC party. This often made it hard to come to any consensuses. Since the entire party compiled of new members, it was easier for Xi Jingping to move away from the “collective leadership” model.

Xi Jingping and Li Jingping realized that the biggest threat to Communist party’s survival was the growing corruption. Soon after his election, Xi Jingping launched the “tigers and flies” campaign. He focused on both tigers, high-ranking officials, and flies, lower civil servants equally to enforce the Anti-Corruption law. The campaign found over 100 high-ranking officials guilty of bribery and abu-sive power. Till date the campaign has indicted 100,000 people (3). After he entered office, he announced several bans for bureaucrats and employees of state-owned financial companies. These included the banning of extravagant house, alcohol consumption at mili-tary functions, state-funded banquets for military officials and radio and TV advertisements for luxury goods like watches and jewelry. China has always had the anti-corruption law but it was never enforced until January 2013. This has become Xi Jingping’s legacy.

Enforcement of the anti-corruption law has left the Chinese luxury market on a downward trend. A major aspect of Chinese corrup-tion is the exchange of favors for establishing personal ties; such favors frequently take the form of gifts and banquets. This practice was used to obtain privileged access to government services, flatter immediate supervisors, maintain contracts, and reinforce loyalty. The purge of living extravagantly and giving luxury gifts weakened the sales of high-end items both in China and abroad, hurting profits at luxury-goods makers. The chart on the right shows a clear dip in all retail especially the large enterprises.

Vacation Travelers and Tourism: A Future Beyond Hong Kong and Macau

Wealth creation within Asia created a super-cycle of demand for luxury goods. However, by 2015, luxury brands such as Louis Vuit-ton were looking to close several stores in second-tier Chinese cities as a mitigation to avoid the risk of being over-exposed. The combination of China’s sluggish economy and the People’s Republic of China’s (PRC) anti-corruption campaign have many in the luxury market pondering what the future holds. Our hypothesis is simple: The continued long-term growth of the Chinese economy and China’s voracious appetite for luxury goods will provide the impetus for further growth in the luxury good consumption both in China and other parts of Asia.

Prior to our field research, our initial impression of Hong Kong was characterized as a glamorous landscape that offered opportuni-ties for conspicuous consumption on every city corner. Hong Kong’s market (to include Macau) offered Mainland Chinese consum-ers, with an appetite for luxury, an accessible outlet where they could acquire a variety of high-end items (tax-free) while trying their luck at the private high-roller casino tables. The record-breaking profit ushered in by the influx of customers establishes Hong Kong as the epicenter of the luxury-goods universe. However, some argue that Hong Kong began to lose it luster around 2012. Guillaume Brochard of Qeelin, a Chinese jeweler comments, “‘it was an amazing golden age...from 2007 to 2011 many luxury-goods firms en-joyed double-digit annual growth in China, which became their most important market”; nevertheless, she continues, “the first blows came last year (2012), with an economic slowdown and jitters about the political transition. Now, a crackdown on corrupt gift-giving and populist backlash against ostentation have added to the woes.” This initial decline (2012) in luxury good sales in Hong Kong pro-vides an interesting glimpse into the economic stability of China’s rising middle and upper class’s influence on this global market. It’s important to note that Guillaume Brochard of Qeelin’s observation was not an anomaly. More recently, Jing Daily reports, “The speed with which the Hong Kong luxury market has declined is astonishing. In the first half of 2015, Swiss watch exports to Hong Kong slumped 20 percent, while Burberry sales in the three months up to June 20 dipped by a double-digit percentage. In response to slowing sales, top-tier brands such as Burberry and Gucci are negotiating lower rents in the city, with analysts expecting to see some store closings in the months ahead. Luxury conglomerate (and Gucci owner) Kering is currently negotiating rent decreases in Macau and Mainland China as well, owing the border slowdown to the Greater China market.” Based on the data provided in the chart below, it is easy to understand why many are questioning if luxury goods sales in Asia from 2009 to 2013 will ever return to record-breaking levels, or if the current slower growth pace is more sustainable and reflective of a new normal for luxury goods mar-ket in Asia.

Given these reports, our team decided to investigate these observations to truly understand the real opportunities and risks inherent in luxury goods market. During our time in Hong Kong and Macau, we were fortunate to acquire insight directly from many indus-try experts to include, most notably, the DFS Group Ltd’s Senior Vice President, Mr. Kevin Rouche. It was evident from our meet-ing with Mr. Rouche that the DFS Group not only understands the current evolution of the Hong Kong luxury-goods market, but more importantly, they are executing a bold new strategy that appeals to both affluent Chinese and Western travelers. While many high-end brands have been struggling with sales returning back to pre-peak levels in Hong Kong, the DFS Group has established new partnerships in a bid to corner the $200 billion market opportunity that travel-bound Chinese shoppers are forecasted to provide

to retail sectors globally.

GLOBAL CHINESE SHOPPERS THE $200 BILLION OPPORTUNITY

• Chinese tourist are the biggest global spenders and will continue to grow given the expanding middle class the growing number of passport holders.

• Chinese travelers spend around US$1,678 on retail purchases per overseas trip. The farther away they travel, the likely then spend more.

• Total overseas spending by Chinese tourists will jump 23% to US$229 billion in 2015, and by 2020, FBIC Global Retail & Tech-nology projects US$422 billion.

• The most popular overseas shopping categories are clothing, footwear and accessories (bought by 56% of travelers), fragrance and beauty products (52%) and electronics (32%).

• Total outbound travel is projected to double by 2020, to approximately 234 million annually.”

With the support of their parent company (LVMH), the DFS Group has invested millions of dollars to acquire iconic properties in the heart of some of the greatest cities in the world to include; Paris, Kyoto, Sydney, Venice and Angkor Wat. Mr. Rouche confirmed that the Chinese appetite for the Hong Kong shopping experience had shifted, and with it, so must the business strategies of those who wish to capitalize on this powerful and fast-moving consumer base. Mr. Rouche made a lasting impression when he concluded, “regardless of nationality, consumers want value, uniqueness, access, a high level of quality and design. Return on emotional quality, time and money are constants. How people go about achieving this desire is driven by their culture and nationality.” The major take-away from our research is simple: Luxury brands must realign their business operations around quality products and services that are unique and not easily available. The emergence of the Chinese global luxury shopper in particularly, requires brands be more disci-plined as the rewards for what Mr. Roche refers to as, “toxic, creeping, sameness” no longer exists. Long-term success is achievable if luxury brands can establish partnerships with firms that actively leverage their products to create memorable shopping experiences

U.S. Comparison & Analysis

The United States has had the world’s largest economy for about 140 years, and it roughly accounts for 22% of global GDP. Howev-er, in recent times China has overtaken the US by at least one measure of total economic strength, which is GDP based on purchas-ing power parity (PPP). Either way you examine it, the economies are the two strongest globally in absolute terms.That’s where the similarities end. While comparable in total size, the makeup of each economy is totally different. United States is a sophisticated and highly diversified economy that is based on services, finance, and consumption from the middle class. China has similar aspirations in the future, but right now it is resource-intensive growth engine making the transition from a manufacturing hub to a consumer-driven economy.

Over the course of the next 16 years, the global economic landscape is expected to shift seismically from where it now stands. Though the US is still expected to hold a spot among the exclusive G-8 collection featuring some of the world’s largest economies by the year 2031, a handful of other current members are likely to be less fortunate.

In 2031, China will be the largest economy in the world with a gross domestic product valued at $35.26 trillion, according to the U.K.-based Centre for Economics and Business Research (CEBR). The U.S. will play second fiddle to the Asian behemoth, with GDP clocking in at $33.66 trillion.

The two world powers are expected to swap places in 2029, which gives the U.S. a little more time on top than the economic consul-tancy previously projected. Last year, the CEBR predicted the switch would take place in 2025. It attributed “slower Chinese GDP growth and a weaker currency” to the timing adjustment.

Below are the CEBR’s projections for the world’s largest economies in 16 years, compared with how things stand now:

World’s Largest Economies, 20151. United States2. China3. Japan4. Germany5. United Kingdom6. France7. India8. Italy9. Brazil10. Canada11. South Korea12. Saudi Arabia13. Australia14. Russia15. Spain

World’s Largest Economies, 20311. China 2. United States 3. India4. Japan5. Germany6. United Kingdom7. South Korea8. Brazil9. France10. Canada11. Indonesia12. Mexico13. Italy14. Russia15. Australia

Luxury Market Comparison

When comparing the United States and Asian luxury markets, there are several fundamental differences to be cognizant of. First, the United States is considered a mature luxury market. Many leading brands in every global luxury segment, be it hotels or cosmetics, are in fact companies based in or started in the United States. In contrast, Asia is an emerging luxury market but has a very unique rise in spending power.

Luxury consumers in the United States tend to only occasionally indulge in a luxury shopping experience while new, Asian luxury consumers have cemented a position of making it a ritual. Chinese tourists, on average, spend more than any other foreign consumer group at an average of $7,200 per visit.

Bain projects that Chinese purchases of high-end products like designer handbags, fragrances, and watches will group by 25% annu-ally over the next four years. In addition, that China will replace the United States as the world’s largest luxury brand consumer with 29% of the global share.

United States vs. China at a Glance (2015 data, unless noted)

GDP Per CapitaThe Chinese economy is now worth $17.92 trillion, slightly higher than the $17.81 trillion the IMF estimates for the US. This marks the first time the US has been knocked off its perch as the world’s largest economy since it overtook Britain back in 1872.

Population Comparison

Conclusions

Slowing growth in China will continue The much-discussed slowdown in China is expected to continue over the long term, and the days of consistent, double-digit growth rates are officially over. Growth rates are expected to dip even lower by 2019, as China transitions out of its “catch-up” phase of growth, and becomes a more modern, more sophisticated, and more mature economy.

Perspective remains important That said, China is still one of the largest and most important growth opportunities in the world, and it unequivocally must remain a primary strategic priority. Chinese consumer preferences are evolving quickly in line with its local economy, and operators must adapt their strategies to reflect new demand drivers.

Local chains are ushering in a new competitive era While many international chains are struggling to maintain their hold on key markets, local chains have become serious strategic com-petitors.

More mature markets also offer opportunities While China is important, more mature markets in the region offer some strong growth opportunities as well. Japan and South Korea will each offer some of the largest growth opportunities in absolute terms over the long term.

Convenience, experience, and exclusivity are primary growth drivers in key categories Many of the most impressive growth opportunities across the region are being driven by demand for maximum convenience, added value through higher-quality experiences, and demand for ultra-exclusivity.

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Trip Itinerary

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