Impact of the Recession on the Luxury

Goods Market
According to our most recent survey, the global recession is having an adverse
impact on the sale of luxury goods in Japan, the largest luxury goods market in the
world. This study highlights the impact and steps luxury brands are taking to
combat this trend
Fall 2008
 Impact of the Recession on the Luxury Goods Market
Executive Summary
Impact of Global Recession

 The luxury goods market in Japan

has traditionally been impervious
to recession. However, now, there
are signs indicating a slowdown
• 74% of the Japanese
consumers think that there will
be an economic slowdown
• 51% plan to spend less on
luxury goods in the next 6
months than they did in the
Market Overview previous 6 months
 Japan accounts for 41% of the worldwide luxury
goods market
 In Japan, luxury shopping is considered a social
occasion and the motive behind the purchase is to Strategies Undertaken by Brands to Fight Recession
celebrate an event
 To minimize the impact, luxury
 Louis Vuitton is the most preferred brand, followed brands are
by Burberry and Gucci • Focusing on emerging
markets such as BRIC
• Expanding into alternative
channels such as m-
commerce, e-commerce
• Shifting production to low cost
markets
• Targeting new customer
segments

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 Impact of the Recession on the Luxury Goods Market
Market Facts – Japan
Japan is the leading market for luxury brands in the world; Louis Vuitton
is the most preferred brand
 Market Size
• Over 30 MM consumers of luxury brands, accounting for 25% of the total population
• “The breadth and diversity of luxury brands here is incomparable to anywhere else”
– W. David Marx, Japanese Consumer-Market Analyst, Diamond Agency, 2007
 Drivers
• Preferred mode to demonstrate wealth, as traditional means (e.g. apartments) are small and expensive
• Conformity and ‘fitting in’ culture drive the majority of consumers towards the few popular brands
• New purchases driven mainly by entertainment / celebratory purposes; considered a social event
• Department stores are preferred channel due to personalized customer service (despite higher prices)
 Top Brands
• 94% of Japanese women in their 20s own a Louis Vuitton handbag; 92% own products from Gucci,
more than 58% own a Prada item and over 51% possess a product with a Chanel label on it

Global Luxury Brands Market Share by Country, 2006 Most Preferred Brands in Japan1, 2008 (Percent)

Others
Japan Louis Vuitton 23%
14%
China 41% Burberry 20%
12% Gucci 13%
Prada 7%
Chanel 6%
Europe US
17% D&G 4%
16%
Others 27%

Note: 1 Question - Think about the most recent occasion in which you purchased luxury branded clothing or accessories. What brand of luxury clothing or accessories did you
buy at that occasion?”; Grail Analysis sample size n = 304
Source: Japan External Trade Organization (JETRO); Business Standard, May 2007; JapanInc., August 2008; Grail Research Survey on Luxury Brands, September 2008
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 Impact of the Recession on the Luxury Goods Market
Market Decline in Japan (1/2)
Despite the general belief that the luxury market is recession-proof, a recent Grail Research
survey found signs indicating a slowdown in consumer spending on luxury goods in Japan
Consumers’ Expectations for Luxury Goods Spending –
Perception of Current Economic Environment1
Next 6 Months Compared to Last 6 Months2

80% 60%

60% 45%

40% 30%
74%
51%
44%
20% 15%
22%
5% 5%
0% 0%
Economy will Economy will stay the Economy will Plan to spend more Plan to spend same Plan to spend less
slowdown same improve money amount of money money

“
Housewives and working women in their 30s and 40s who have a lot of disposable income are beginning to hold back on buying luxury
brands, with which they previously rewarded themselves at times, because they are conscious of the current tough economic environment
– Yasuhiko Hashimoto, Section Chief, Ginza Store, 2008

”
As Japan's economy heads toward recession and its stock market hovers around a 5-year-low, shoppers are closing their wallets,
and the impact on European fashion houses has been dramatic – Reuters, October 2008

Note: 1Question - “What is your perception of the current economic environment in the next 6 months?”; 2Question - “How do you expect your purchases of luxury goods will
change in the next 6 months?”); Grail Analysis sample size n = 304
Source: The Nikkei Weekly (Japan), June 2008; Grail Research Survey on Luxury Brands, September 2008
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 Impact of the Recession on the Luxury Goods Market
Market Decline in Japan (2/2)
The global recession and other factors specific to the Japanese market are already affecting
luxury brand sales

 Global recession impact on luxury brands

• LVMH: Witnessed a decline in sales by 6% in H12008
• Salvatore Ferragamo: Slashed prices in 2008 of 42 items by 7%-10% for the
first time since the brand started operations in Japan
• Chanel: Held a month long sale of clothes and other items in July 2008
• Bally1: Slashed prices of some products by up to 20% in July 2008
• Osaka2: Reported a 9% y-o-y drop in revenue of 7 overseas brand shops in
2007
 Other factors contributing to the decline in luxury sales are income stagnation and
an aging population

Note: 1 Bally is a Swiss luxury brand; 2 Osaka is a luxury department store in Japan
Source: The Daily Yomiuri (Tokyo), July 2008; Women’s Wear Daily, July 2008; The Economist, September 2008; JapanInc., August 2008
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 Impact of the Recession on the Luxury Goods Market
Businesses are Adapting to Cope with the Slowdown

 New Channels

 Emerging Market Focus  Low Cost Markets

 New Customer Segments

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 Impact of the Recession on the Luxury Goods Market
Strategy #1: Emerging Market Focus
Luxury brands are moving towards emerging markets to offset the slowdown in sales in
more mature markets
 In 2009, Russia is expected to account for 7% of the global luxury goods
market
• Burberry: Opened a store in Moscow in May 2008, bringing the total to 5
• Giorgio Armani, Bulgari and Prada: Opening stores with the help of local
partners (e.g. Mercury, which owns the TSUM department store) to better Russia
understand the pulse of the local people

 In 2007, the luxury goods market in Brazil China

grew by 17% and is expected to continue to
grow at an annual rate of 20%
India
• Ermenegildo Zegna: Opened its first
flagship store in Sao Paulo in April 2008
Brazil
 The size of the luxury market in India
is expected to reach USD 30 Bn by
2015, up from USD 3.5 Bn in 2007
• Louis Vuitton: Plans to open 25
new outlets and launch a PE fund
(worth approximately USD
600MM) to make investments in
retail chains and brands
 China, currently the 4th largest
luxury goods market, is
expected to become the 2nd
largest market (after Japan) for
luxury goods in 2015, with a
29% market share
• Cartier: Opening 6 new
stores in Q4 2008, bringing
the total to 28
• Burberry: Intends to have
100 stores in the next three
years, up from the current 35

Source: Ermenegildo Zegna Press Release, April 2008; India Business Insight, December 2007; The International Herald Tribune, September 2008; The Economic Times,
September 2007; ‘Luxury Brands in China’, KPMG, 2007
| Copyright © 2008 Grail Research, LLC 7
 Impact of the Recession on the Luxury Goods Market
Strategy #2: New Channels
Recently, luxury brands have experimented with alternative channels to reach customers

m-Commerce e-Commerce

 Luxury brands are incorporating QR codes in their mailers,
ads and stores to encourage purchase
• Quick response (QR) codes are images that shoppers
can scan and download through their camera phone to
obtain more information about products or make
purchases via their mobile phone
• Gucci and Ralph Lauren have been using QR codes in
Japan, with the latter being the first to launch them in the
US in August 2008
 Cartier introduced mobile advertising through GQ and
Glamour mobizines (small version of magazines that can be
easily viewed on mobile devices)
 Luxury brands, which have been late adopters of e-
commerce, are aggressively opening online stores
• In 2008, Cartier announced the start of online shopping
in Japan
• In 2007, Louis Vuitton started online sales by launching
an e-commerce option on its Japanese website
 “I think eventually every company that runs stores will have
e-commerce. Whatever the initial fears or reluctance,
people are embracing it. It doesn't harm the brand in any
way, and it's also very profitable“ - Mark Lee, CEO, Gucci
 20% of Japanese consumers report purchasing more luxury
goods using the Internet in the last year

Note: 1Question - “How have your shopping habits for luxury goods changed over the last year?; Grail Analysis sample size n = 304
Source: Japan External Trade Organization (JETRO); JapanMarketingNews; Grail Research Survey on Luxury Brands, September 2008; Lux Research Japan, July 2008
| Copyright © 2008 Grail Research, LLC 8
 Impact of the Recession on the Luxury Goods Market
Strategy #3: Low Cost Markets
Luxury brands are shifting their manufacturing base to emerging countries to leverage the cost
advantage of these regions

 60% of the world's luxury brands will make their

products in China by 2009 due to low manufacturing
costs and increasing demand for products
• Prada: Started to source and manufacture in Asia,
particularly China, due to unfavorable currency
situation
• Burberry: Shifted production of shirts and some
other items to China
• Louis Vuitton is considering setting up a shoe
factory in Southeast India by the end of 2008.
Shoe factories are currently in France, Spain and
US

“ More structural measures are necessary. European luxury brands will need to start looking at global diversity in
manufacturing and sales and general administration costs.
– Luca Solca, Senior Research Analyst, European Apparel and Specialty Retailing, Sanford Bernstein, 2008

Source: World Luxury Association (WLA); La Tribune, September 2007; Women’s Wear Daily, December 2007
| Copyright © 2008 Grail Research, LLC 9
”
 Impact of the Recession on the Luxury Goods Market
Strategy #4: New Customer Segments
Luxury brands are polarizing, either targeting the ‘new rich’ segments with highly expensive
offerings, or launching more affordable collections to expand their customer base

Shifting Focus from the Middle Class to the ‘New Rich’

 In Japan, luxury brands are shifting focus from the middle class (considered to be
the major consumers of such goods) to the ‘new rich’ segment
• This segment consists of individuals with assets worth Yen 100 MM (~USD
852,100) and engaged in sectors such as information technology, finance and
medical services
• The shift is driven by the belief that the middle class spending crumbles during
recession
 Armani, Bulgari and Gucci opened flagship stores along with restaurants and spas
in Tokyo, with the aim of attracting the wealthy from all over Asia
 Louis Vuitton sends birthday cakes to its wealthy clients and shows them an
exclusive bag (not for sale in shops) made of crocodile skin priced at roughly Yen
6 MM (~USD 58,961)
Opening Stores in Smaller Cities to Target the Growing Affluent Classes
 Louis Vuitton and Gucci have opened stores in smaller Japanese cities, where
individuals are still lured by the logo
 Cartier shifted focus from Tier-1 cities (Beijing, Shanghai) to Tier-21 (Nanjing,
Tianjin) and Tier-32 (Zhumadian, Zunyi) cities in China
Launching Less Expensive Collections
 Polo Ralph Lauren announced plans of launching a lower price product range in
J.C. Penney department stores in the US

Note: 1 Tier 2 cities include capital cities of provinces and cities at provincial level except Beijing, Shanghai, Guangzhou and Shenzhen; 2Tier 3 cities include cities at
prefectures level
Source: The Economist, September 2008; China Daily, October 2008; China Daily, May 2007
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