EY The Luxury and Cosmetics Financial Factbook 2016

Keep calm and
care about your

consumer
The luxury and cosmetics
financial factbook
2016 edition
Contents 2 Executive summary
Statistics and key facts
Index evolution
8 DCF and valuation parameters

A. Financial parameters
B. Operating aggregates
C. Advertising expenses
D. SOTP and segment analyses
E. Trading multiples
F. Transaction multiples
36 Industry overview
G. Global luxury goods market
H Global cosmetic goods market
I. Points of view from EY global sector and
other industry professionals
80 Methodology
Approach and SOTP analyses
Sample selection
Focus on YOOX Net–A–Porter
83 Glossary
84 Contact us
Page 2 Executive summary
Executive summary
elcome to the sixth edition of EY ann al financial factboo for the l x r and cosmetics
industries. The report combines publicly available data with input from leaders who work
with the world’s leading companies in the sector. It looks at current trends, the evolution
of operating aggregates and e financial parameters.
In 2015, the luxury goods industry experienced 13% growth at current exchange rates,
reaching b ho e er, c rrenc ct ations ere the main contrib tor of this gro th,
with “real” growth reported to be 1%, lower than in 2014. The global cosmetics industry
experienced a higher rate of growth (3.9%), reaching a total market value of €203b in
2015.
an factors contrib te to the state of the mar et. i en the significant impact that the
socioeconomic and political climate can have on a global scale, it would be remiss not
Roberto Bonacina Marco Pier Mazzucchelli to acknowledge this instability early on in our report. While this study aims to provide
Partner, Lead Advisory M&A, Fashion & Luxury Partner, Head of TAS, MED a situational analysis, our conclusion is that the current climate and general instability
Milan, EY S.p.A. Milan, EY S.p.A. across the global financial mar ets, as ell as other intangible elements, are contrib ting
roberto.bonacina@it.ey.com marco.mazzucchelli@it.ey.com to the decline noted across the luxury sector. Recent global political disorder, terrorist
threats and attacks as well as slowdown in economic growth rate in China are relevant
factors that can impact any given industry. In short, uncertainty can have an impact on
the mood of an cons mer, none more so than hen a significant spend is re ired, s ch
as within the luxury sector.
On a brighter note, the luxury consumer has never been so sophisticated and is now
seeking “the complete retail experience,“ ready for a trip to an exotic destination rather
than limiting his or her purchase to the latest “it-bag.“
o sho ld l x r pla ers act to a oid losing their cons mers o ld a ic reaction
s ffice, or do brands need to re ie their entire b siness model
In any case, companies must take time to get to know their consumers better, understand
their desires in order to better engage them, and secure their attention and spend.
The luxury and cosmetics financial factbook 2016

Executive summary Page 3
Executive summary
The competitive landscape is changing. To keep pace, luxury brands must: In retail stores, which offer the opportunity to physically interact with consumers,
companies must aim to offer dedicated services by employing knowledgeable and
• Increase the digital effort — Luxury companies are behind in an increasingly digital
highl alified shop assistants ho can pro ide an exceptional cons mer experience.
world. New technology has changed the way companies do business, providing new
his goes be ond ne openings companies sho ld foc s on impro ing the alit
communication channels, with buying behaviors evolving and the emergence of a new
offered in their existing network across every single customer touch point.
segment, the “millennials.” Immediacy is key, so there is a constant need to innovate
within the digital world, which seems to contrast with the exclusivity known for its The 2016 factbook, based on industry leaders’ feedback, offers both operational and
poleposition at the core of the luxury market. Luxury brands have to manage dual financial aggregates on the l x r and cosmetics ind stries as ell as e al ation
aspects; namely to (i) maintain their heritage and create long-term value while (ii) parameters and multiples. It looks at the industries’ future trends and includes input from
responding to cons mers’ expectations and tr ing to offer ni e prod cts that offer o r sector leaders. e hope o find this report to be insightf l and tho ght pro o ing
instant gratification. t is the latter here l x r companies are ris ing losing gro nd to for wider discussion within your organization.
more dynamic, digitally savvy players.
Do not hesitate to contact us with any comments or suggestions.
• Hold the positioning — Another category of players is threatening the balance of luxury
Thank you,
fashion houses: the affordable luxury segment is gaining market share, continuously
offering new products that are both fashionable and competitively priced. Price
positioning is crucial, never more so than today when consumers appreciate and
respond well to transparency given that digital channels provide them with a constant
o of information regarding prod cts’ characteristics orld ide. op end l x r
companies sho ld therefore emphasi e the alit and rarit of their offerings to
encourage their clients to spend more and reduce the risk of cannibalization by more
Roberto Bonacina Marco Pier Mazzucchelli
nimble competitors.
roberto.bonacina@it.ey.com marco.mazzucchelli@it.ey.com
• Defend the luxury experience — During the luxury journey, a consumer is surrounded
by opportunities that may not always be characterized by material, long-term
p rchases instead, the ma ha e intangible or more ephemeral benefits, s ch as
travel, art, epicurean gastronomy. In such an environment, personal luxury goods
companies must demonstrate that they can offer the same level of experience and
customer satisfaction.

Page 4 Executive summary
Statistics and key facts
Global personal Chinese consumers remain Today, beauty is synonymous with personalized products
luxury market the top consumers by and services that enrich consumer experience and its
grew by 1% in country with one-third of relationship with the brands, in all distribution sectors.
2015 at constant the global
exchange market.
The global The accessories segment accounted
1/3
rate.
cosmetics market for about 30% of the
1%
grew by 3.9% global personal
in 2015. luxury goods
~30%
market
3.9%
The online luxury market in 2015.
has grown tenfold since
The company– 2005 and accounted for
owned retail about 7% of total sales Luxury cosmetics remains the most
channels are in 2015. dynamic sector with 5.7% growth,
~7%
growing twice due mostly to
as fast as the e-commerce sales.
5.7%
wholesale channel
at current
exchange rates rrent ct ations, a
and continue to strong US dollar and the
gain market share depreciated Euro helped the New markets, such as India, South Africa and
Turkey, generated more than
>2/3
due to network market to show double-digit
expansion. positive impact on the two–thirds of the beauty
overall market value. market growth in 2015.
2X Social media has made an online platform a critical part of

every brand’s strategy.
Executive summary Page 5
Executive summary
Index evolution
The analysis reported in the graph below shows that the EY luxury and cosmetics index (represented by the companies included in the EY factbook) has outperformed the
market over the last eight years with a total return of 83%, corresponding to an a erage earl significant ret rn of 8%.
This relati e performance act all ill strates the appetite of in estors for an ind str that is characteri ed b solid financial f ndamentals in terms of sales gro th, ma or
profitabilit , resilient international client base and expos re to gro ing mar ets, attrib ting higher al ations to companies related sec rities, despite the economic
instable environment.
Financial markets this year have been characterized by a high level of instability generated by a series of events: geopolitical events, commodities pricing volatility and the
China stock market volatility have all hampered growth.
The EY index is a representation of the l x r and cosmetics companies anal ed ithin the factboo . specific eight has been attrib ted to each compan incl ded in
the EY index based on its market capitalization and revenues (each of these two parameters weighing for a half). The relative weights have been revised for each
company’s inclusion after its initial public offering (IPO). Finally, the evolution of the EY index has been compared to those of the S&P 500 and STOXX Europe 600
indexes, using 1 January 2008 as a starting date (rebased to 100).
l y and c s e ics inde e l i nc pa ed a indices ase as an a y
As of
CAGR
1
250 31 March
2016 08–16
200
183 8%
150
142 4%
100
94 -1% ase as an a y
50 125
As of
120
1 January
115 2016
0
110
16
8
5
8
5
08
8
09
10
0
11
12
13
3
14
4
15
5
16
l0
l0
l1
l1
l1
l1
l1
l1
r0
r0
r1
r1
r1
r1
r1
r1
t0
t0
t1
t1
t1
t1
t1
t1
107
ar
n
n
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Oc
Oc
Oc
Oc
Oc
Oc
Oc
Oc
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
M
105
102
EY Index S&P 500 Europe 600 100
99
95
90
85
15
15
15
15
15
15
15
16
15
5
15
5
5
r1
t1
l1
ay
v
ar
n
n
c
p
n
b
Ju
Ap
Oc
No
De
Au
Ju
Se
Ja
Fe
Ja
M
M
Source: Capital IQ. EY Index S&P 500 STOXX Europe 600
1. Compound annual growth.

PAGE 6 OPENING
DCF and valuation parameters

LUXURY AND COSMETICS THE EY FINANCIAL FACTBOOK 2014
Opening Page 7
A Financial parameters
B Operating aggregates
DCF and valuation

Advertising expenses
parameters
D SOTP and segment analyses
E Trading multiples
F Transaction multiples

a e DCF and valuation parameters
A Financial parameters Luxury companies reflect moderate but steady growth, with a
limited risk profile
• ranges from afilo to oach , depending on the compan ’s ris profile perception ith an
overall limited variance.
• LTGR presents a larger range (1% to 4.3%) mainly depending on size, maturity stage of the retail network
and prod ct di ersification. he estimated a erage is slightl lo er o erall than last ear’s fig re,
re ecting a pre ailing conser ati e ie among financial mar ets operators abo t f t re gro th.
and yc pany Companies are sorted in

decreasing order based on the Luxury Market capitalization WACC Gearing Beta LTGR
market capitalization in euros companies (in €m)
observed as of 31 March 2016
LVMH
10.5%
(one-month average).
Coach
Michael Kors, Tumi and Hengdeli Richemont
10.0%
are not represented in the graphic Hermès
9.5% Chow Tai Fook at left because LTGR data for them Luxottica
Hugo
Tiffany was not available. Kering
9.0% Boss
Swatch
Ralph Lauren Prada Burberry Brunello
Swatch Cucinelli
WACC
Tod's
Coach
8.5%
Salvatore
Richemont
Ferragamo YOOX Net-A-Porter
Moncler
8.0% Jimmy Choo
Kering
Hermès
Michael Kors n/a
LVMH
i any
7.5%
Luxottica Prada 7,675
afil
7.0%
e y
6.5% Ralph Lauren
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
ai 5,657
LTGR
Hugo Boss
ote b bble si e re ects mar et capitali ation. otted lines represent a erage al es. Salvatore Ferragamo 3,726
Moncler 3,723
Sources: YOOX Net–A–Porter 3,424
• WACC* and LTGR: based on consensus of several brokers reports for each company. Tod’s 2,263
• Market capitalization and beta: EY elaboration based on S&P Capital IQ. Tumi n/a
• earing companies’ financial statements. Brunello Cucinelli
i y 642
Notes:
afil 525
• Market capitalization is based on a one–month average as of 31 March 2016. Hengdeli n/a
• earing is defined as net financial debt E .
Average 8.5% 2.4% 0.92 2.6%
• Beta corresponds to levered beta measured on a weekly basis over a two–year period.
• eta fig res for Y et orter is based on the share of Y .p. ., hich after Median 8.6% 1.4% 0.94 2.6%
the merger with Net-A-Porter changed his name in YOOX Net-A-Porter Group. Maximum 10.0% 29.3% 1.22 4.3%
• ata point denoted as n a represents information not a ailable. Minimum 7.0% (14.3%) 0.68 1.0%
and other terms are defined in the glossar .

DCF and valuation parameters a e
A Financial parameters The cosmetics sample is characterized by stable growth and low
risk, with the exception of Natura
• at ra’s ra il contin es to be significantl higher the the sample’s a erage, dri en b its
geographical coverage.
DCF and valuation

• erage is in enced b the significantl high le el of at ra.
parameters
and yc pany Companies are sorted in
decreasing order based on the Cosmetics Market capitalization WACC Gearing Beta LTGR
16.0%
market capitalization in euros companies (in €m)
15.0% Natura observed as of 31 March 2016
(one-month average).
L'Oréal
14.0%
Estée Lauder
Shiseido is not represented in the
13.0%
graphic at left because LTGR data eie sd
12.0% was not available. Coty
Shiseido n/a
11.0%
Natura
WACC
10.0%
L'Occitane 2,472
9.0%
L'Occitane
Average 9.1% 4.8% 0.86 2.9%
L'Oréal
LVMH Median 7.8% 2.4% 0.86 2.3%
8.0%
Estée Lauder Beiersdorf
Maximum 15.4% 27.2% 0.98 6.6%
7.0%
Minimum 7.0% (12.6%) 0.74 1.8%
Coty
6.0%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
LTGR
ote b bble si e re ects mar et capitali ation. otted lines represent a erage al es.
Sources:
• WACC and LTGR: based on consensus of several broker reports for each company.
• Market capitalization and beta: EY elaboration based on S&P Capital IQ.
• earing companies’ financial statements.
Notes:
• Market capitalization is based on a one–month average as of 31 March 2016.
• earing is defined as net financial debt E .
• Beta corresponds to levered beta measured on a weekly basis over a two-year period.

A Financial parameters EY luxury and cosmetics sample:

summary of financial parameters
WACC Gearing Beta LTGR
Safilo 7.0% Richemont (14.3%) Prada 0.68 Ralph Lauren 1.0%
Coty 7.0% L'Occitane (12.6%) Brunello Cucinelli 0.68 L'Occitane 1.8%
Luxottica 7.3% Swatch (9.1%) Chow Tai Fook 0.70

Jimmy Choo 1.8%
Burberry (8.2%) L'Occitane 0.74
L'Oréal 7.8% afil 2.0%
Ralph Lauren (8.0%) Moncler 0.74
Beiersdorf 7.8%
Coty 2.1%
Michael Kors (7.3%) Hermès 0.77
Estée Lauder 7.8%
Michael Kors 0.77 Estée Lauder 2.2%
Beiersdorf (6.4%)
LVMH 8.0%
Tod's (5.8%) Coty 0.78 L'Oréal 2.3%
Kering 8.1%
Tumi (5.7%) Hugo Boss 0.83 Richemont 2.4%
Jimmy Choo 8.1%
Hermès (4.5%) Beiersdorf 0.84
Swatch 2.5%
Moncler 8.2%
Coach (4.3%) L'Oréal 0.86
Prada 2.5%
Hermès 8.2% YOOX Net-A-Porter (0.3%) Tod's 0.86
Coach 2.5%
Richemont 8.3% L'Oréal 0.2% Coach 0.86
YOOX Net-A-Porter 8.3% Kering 2.5%
Salvatore Ferragamo 0.6% Average 0.91
Tod's 8.5% Moncler 1.4% Estée Lauder 0.91 Tiffany 2.5%
Salvatore Ferragamo Salvatore

Hugo Boss 8.6% Prada 1.9% 0.93 2.6%
Ferragamo
Salvatore Ferragamo 8.6% Estée Lauder 2.4% Hengdeli 0.94 Hugo Boss 2.6%
Average 3.0% Natura 0.94
Ralph Lauren 8.6% Beiersdorf 2.6%
Hugo Boss 3.4% Luxottica 0.94
Brunello Cucinelli 8.6% Luxottica 2.6%
Shiseido 4.3% afil 0.94
Swatch 8.6%
Moncler 2.7%
Luxottica 4.3% Kering 0.95
Average 8.7%
Jimmy Choo Average 2.7%
Brunello Cucinelli 5.1% 0.96
Prada 8.8%
LVMH 5.9% LVMH 0.97 Tod's 2.7%
Burberry 8.8%
Tiffany 6.0% Shiseido 0.98 Burberry 2.7%
L'Occitane 8.9%
Chow Tai Fook 8.8% YOOX Net-A-Porter 0.99 LVMH 2.8%
Tiffany 9.0%
Natura 18.5% Tumi 1.00
Chow Tai Fook 3.0%
Hengdeli 9.1% afil 18.7% Tiffany 1.03
Hermès 3.2%
Chow Tai Fook 9.3% Kering 18.7% Ralph Lauren 1.10
YOOX Net-A-Porter 3.6%
Michael Kors 9.7% Jimmy Choo 19.5% Burberry 1.12
Coach 10.0% Coty 27.2% Swatch 1.16 Brunello Cucinelli 4.3%
Natura 15.4% Hengdeli 29.3% Richemont 1.22 Natura 6.6%
WACC 8.7% Gearing Beta 0.91 LTGR 2.7%

3.0%
Low High Low High Low High Low High
Industry benchmark Industry benchmark Industry benchmark Industry benchmark
Source: Data based on consensus of several brokers reports for each company.
Note: LTGR data was not available for Tumi, Shiseido, Michael Kors and Hengdeli.

B Operating aggregates The sales outlook of luxury companies points to limited growth
opportunities due to underperformance of key markets and a
shift to global pricing
Pricing growth has become a challenge for the luxury peers that have historically achieved ~25% growth
YOOX Net–A–Porter notably outperformed the
through price increases. The popularity of the digital channel has made maintaining price divergence in
average growth levels.
DCF and valuation

different mar ets diffic lt. t re gro th is expected thro gh
parameters
• Introduction of new products at lower price points to drive volumes, addressing the lower end segment
• Improved volumes due to robust tourist–related demand
Sales CAGR, *Kering sales for FY14A–FY18E

exclude numbers for Redcats, Sales CAGR
l yc panies (in €m) FY14A FY15A/E FY16E FY17E FY18E
Sergio Rossi and Groupe Fnac. (FY15A/E–FY18E)
YOOX Net-A-Porter 20.4% LVMH 35,664
Notes:
ncle 11.3% Kering*
• fig res are estimated
Jimmy Choo 10.3% (“E“) or actual (“A“) , depending Richemont
nell cinelli 10.1% on their availability as of the Luxottica 7,652
date of this study. Swatch 7,742
ica 8.1%
• Figures are converted into ai 7,276
ic ael s 8.0% euros, using exchange rates
Ralph Lauren 7,276 7,654
Hermès 7.5% as of 31 March 2016 (Source:
Capital IQ).
Hermès 5,245 5,652
ai 7.2%
• Figures for YOOX Net–A– Michael Kors
e a e 6.6% Porter for FY14 and FY15 are Coach 4,252
Tumi 6.1%
presented on a pro forma basis, i any 3,732
i.e., assuming the merger was Prada 3,552 3,553 3,664
Kering 5.4% effective at the start of FY14.
• Hengdeli is not represented
e y 3,722
5.3%
in the graphic at left because Hugo Boss 2,572
Burberry 5.2%
FY18E data was not available. Hengdeli n/a n/a
Tiffany 5.0% YOOX Net–A–Porter 2,357
Coach 4.9% Salvatore Ferragamo
alp a en 4.8% afil
Swatch 4.7% Tod's
al a e e a a 4.5%
Moncler
Tumi 463 575
Tod's 4.4%
Brunello Cucinelli 356 454 552
Richemont 4.2%
i y 443
afil 3.6% Average 6.6%
Prada 3.0% Median 5.3%
Hugo Boss 2.1% Maximum 20.4%
Minimum 2.1%
Estimated data have not been derived from internal insights.

B Operating aggregates Sales growth expectations for cosmetics players are lower than
Hermès
Moncler
35.5%
33.6%
for the luxury segment but the gap is narrowing
Michael Kors 29.0%
Richemont 26.7%
Tiffany 25.1%
L’Occitane and NaturaPrada are expected to post strong24.7%

growth in the next few years, driven by e-commerce sales
’ ccitane and at ra significantl
and emerging brand expansion
Coach for ’ ccitane, and channel di ersification and international gro th for
24.0%
outperformed the cosmetics sample
Natura. TheSalvatore
cosmetics market is likely to be driven
Ferragamo by:
23.5%
expectations. LVMH 23.2%
• Penetration by existing players with innovative products into new markets
Swatch 23.1%
• Increase of consumer purchasing power
Luxottica 22.9%
• Rise of millennial consumers

Tod's 21.3%
Hugo Boss 21.1%
Average 21.0%
Sales CAGR, Notes:
Burberry Sales 20.9% CAGR
c s e ics c panies • fig res are estimated
(in €m) FY14A FY15A/E FY16E FY17E FY18E
(“E“) or actual (“A“), dependingTumi 20.5% (FY15A/E–FY18E)
L'Occitane 9.7% on their availability as of the
Kering L'Oréal 19.1% 22,532 25,257
Natura date of this study.
9.3% Brunello Cucinelli Estée Lauder 17.3%
• Figures are converted into
Shiseido 6.4%
euros, using exchange Ralph Lauren
rates eie sd 17.1% 7,523
Average 5.9% as of 31 March 2016 (Source:
Jimmy Choo
Shiseido 16.8%
Estée Lauder 5.5%
Capital IQ). Coty 3,762
Chow Tai Fook 10.9%
Natura 2,337
L'Oréal 4.2% afil 9.8%
L'Occitane
Beiersdorf 4.0% YOOX Net-A-Porter
Average9.5% 5.9%
Coty 2.0% Hengdeli Median 7.5% 5.5%
Maximum 9.7%
Minimum 2.0%
Source: Data based on consensus of several brokers reports for each company

B Operating aggregates The luxury sample EBITDA margin indicates margin pressure in
the near term
The slightly lower EBITDA margin presented this year is mainly due to:
EBITDA remains largely below 30%, with few
notable exceptions • ar et olatilit dri en b c rrenc s ings and ct ating to rist o s
DCF and valuation

• Lower growth experienced in some of the key markets, such as mainland China and Hong Kong
parameters
Average EBITDA margin, *Kering margin for FY14A–FY16E
excludes numbers for Redcats, EBITDA Average ratio
l yc panies margin FY14A FY15A/E FY16E FY17E FY18E
(FY16E–FY18E)
Sergio Rossi and Groupe Fnac.
Hermès 35.5% LVMH
Notes:
Moncler 33.6% Kering*
• Figures for YOOX Net–A–
Michael Kors 29.0% Porter for FY14 and FY15
Richemont
Richemont 26.7% are presented on a pro–forma Luxottica
basis, i.e., assuming the merger Swatch
Tiffany 25.1%
was effective at the start of ai
Prada 24.7% FY14. Ralph Lauren
Coach 24.0% • The 2015 EBITDA margin
Hermès
Salvatore Ferragamo 23.5% is computed on the basis of
either actual (“A“) or estimated Michael Kors
LVMH 23.2%
E fig res for sales, Coach
Swatch 23.1% depending on their availability. i any
Luxottica 22.9% As some groups are listed Prada
under different jurisdictions
Tod's 21.3% e y
around the world, they may use
Hugo Boss 21.1% different GAAP, and therefore Hugo Boss
Average 21.0% a direct comparison of EBITDA Hengdeli
Burberry 20.9%
may be less meaningful than YOOX Net–A–Porter
if their results were presented Salvatore Ferragamo
Tumi 20.5%
under the International
afil
Kering 19.1% Accounting Standards.
Tod's
Brunello Cucinelli 17.3%
Moncler
Ralph Lauren 17.1%
Tumi
Jimmy Choo 16.8%
Brunello Cucinelli
Chow Tai Fook 10.9%
i y
afil 9.8% Average 21.4% 20.0% 20.7% 21.0% 21.3% 21.0%
YOOX Net-A-Porter 9.5% Median 21.6% 21.0% 21.0% 21.5% 21.5% 21.3%
Hengdeli 7.5% Maximum 35.1% 35.4% 35.6% 35.7% 35.2% 35.5%
Minimum 6.7% 5.7% 7.1% 7.5% 7.9% 7.5%

B Operating aggregates Cosmetics companies maintain last year’s average EBITDA of

Jimmy Choo 8.5%
18% for the FY16E–FY18E period

Prada 8.3%
Coach 7.2%
Hugo Boss 6.7%
Swatch
Cosmetics companies are expected6.7%
to report expansion in operating margins in the coming years.
L’Oréal and Estée Lauder are showing Tumi 6.5%
o tperforming profitabilit . The key

YOOX drivers of margin growth 6.4%
Net-A-Porter are:
• Increasing disposable income and
Hermès 6.3%improving lifestyle of individuals
Burberry
• Demand for high-end products 6.3%
(presenting higher margins)
Michael Kors 6.3%
Richemont 5.8%
Tiffany 5.6%
Average 5.6%
Average EBITDA margin, Note: the 2015

Salvatore EBITDA margin is
Ferragamo 5.5%
computed onLuxottica
the basis of either EBITDA Average ratio
c s e ics c panies 5.5% FY14A FY15A/E FY16E FY17E FY18E
actual (“A“) or estimated (“E“) margin (FY16E–FY18E)
Brunello Cucinelli 5.5%
L'Oréal 21.9% fig res for sales, depending
Tod's
L'Oréal
Estée Lauder
on their availability. As some 5.3%
20.2% Estée Lauder
groups are listed under different
LVMH 5.1%
Natura 19.4% jurisdictions around the world, eie sd
Moncler 5.0%
Coty 19.0% they may use different GAAP, and Shiseido
Kering
therefore a direct comparison of 4.9%
Average
Coty
18.0% EBITDA may beLauren
less meaningful
Ralph 4.7%
Natura
L'Occitane 18.0% than if their results were presented
afil 3.3%L'Occitane
under International Accounting
Beiersdorf 17.6% Chow Tai Fook 2.0% Average 17.4% 16.7% 17.5% 18.0% 18.6% 18.0%
Standards.
Shiseido 10.3% Hengdeli 0.8% Median 19.0% 17.1% 18.3% 19.1% 19.5% 19.0%
Maximum 21.1% 21.1% 21.5% 21.8% 22.2% 21.9%
Minimum 11.7% 8.8% 9.4% 10.2% 11.2% 10.3%

B Operating aggregates Stable CAPEX sales ratio reflects that high investments are
required to support long–term growth
The stable a erage le el of a to E sales ratio is mainl explained b the re irements of the retail
Jimmy Choo outperforms on the CAPEX ratio.
network (openings, renovations, etc.) for continued growth.
Its CAPEX has been characterized by higher
DCF and valuation

parameters
logistics costs and store renovations, and is
expected to increase heavily as the company
makes additional investments in its retail
network.
Average CAPEX ratio, Note: the 2015 CAPEX ratio is

computed on the basis of either CAPEX Average ratio
l yc panies FY14A FY15A/E FY16E FY17E FY18E
actual (“A“) or estimated (“E“) ratio (FY16E–FY18E)
Jimmy Choo 8.5% fig res for sales, depending
LVMH
on their availability.
Prada 8.3% Kering
Coach 7.2% Richemont
Hugo Boss 6.7% Luxottica
Swatch 6.7% Swatch
Tumi 6.5% ai
YOOX Net-A-Porter 6.4%
Ralph Lauren
Hermès
Hermès
6.3%
Michael Kors
Burberry 6.3%
Coach
Michael Kors 6.3%
i any
Richemont 5.8%
Prada
Tiffany 5.6% e y
Average 5.6% Hugo Boss
Salvatore Ferragamo 5.5% Hengdeli
Luxottica 5.5% YOOX Net–A–Porter
Brunello Cucinelli 5.5% Salvatore Ferragamo
Tod's 5.3% afil
LVMH 5.1%
Tod's
Moncler
Moncler 5.0%
Tumi
Kering 4.9%
Brunello Cucinelli
Ralph Lauren 4.7%
i y n/a
afil 3.3% Average 5.9% 5.9% 6.0% 5.5% 5.1% 5.6%
Chow Tai Fook 2.0% Median 6.1% 5.9% 6.0% 5.7% 5.2% 5.6%
Hengdeli 0.8% Maximum 12.4% 9.6% 9.3% 8.7% 7.0% 8.5%
Minimum (1.6%) 1.1% 0.8% 0.8% 0.9% 0.8%

B Operating aggregates Capital requirements for cosmetics companies are lower than in
the luxury sector
L’Occitane’s ratio o tperforms the sample d e to its retail profile.
Average CAPEX ratio, Note: the 2015 CAPEX ratio is

computed on the basis of either CAPEX Average ratio
c s e ics c panies actual (“A“) or estimated (“E“) FY14A FY15A/E FY16E FY17E FY18E
ratio (FY16E–FY18E)
fig res for sales, depending
L'Occitane 5.5%
on their availability. L'Oréal
Natura 4.5%
Estée Lauder
L'Oréal 4.4% eie sd
Estée Lauder 4.4% Shiseido n/a
Coty 4.1%
Coty
Natura
Average 4.1%
L'Occitane
Beiersdorf 3.0% Average 4.5% 3.9% 4.2% 4.1% 4.3% 4.1%
Shiseido 2.9% Median 4.4% 3.9% 4.4% 4.4% 4.3% 4.4%
Maximum 6.8% 5.5% 5.5% 5.4% 5.7% 5.5%
Minimum 2.0% 2.6% 2.9% 2.8% 3.1% 2.9%

B Operating aggregates EY luxury and cosmetics sample: summary of operating

aggregates
The charts below show the evolution of selected operating aggregates (sales CAGR, EBITDA margin, CAPEX ratio) over the past editions of The luxury and cosmetics
financial factbook. Data reported represents estimates available for future years at the date of each factbook release.
DCF and valuation

parameters
1. Luxury
Average sales CAGR Average EBITDA margin Average CAPEX ratio
12% 10.5% 27% 6.0%

10.4% 25.1% 5.7%
10% 9.3% 25% 24.6% 24.3% 5.6%
8.6% 5.4%
5.5% 5.3%
8% 23% 22.6%
6.6%
21.0%
6% 21% 5.0% 4.9%
4% 19%
4.5%
2% 17%
0% 15% 4.0%
FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16
• n an increasingl challenging mar et, f t re expected gro th is slo ing do n b t still sho s significant gro th le els.
• This slowdown in sales growth directly impacts the EBITDA margin aggregates, which also show a gradual contraction over the considered period.
• he E ratio is stable at to , ill strating a high re irement of in estments, d e to a progressi e shift to the retail business.

B Operating aggregates EY luxury and cosmetics sample: summary of operating

aggregates
The charts below show the evolution of the operating aggregates estimates (sales CAGR, EBITDA margin, CAPEX ratio) over the past editions of The luxury and
cosmetics financial factbook. for cosmetics companies. Data reported represents only estimates available for the next few years at the date of the factbook release.
2. Cosmetics
Average sales CAGR Average EBITDA margin Average CAPEX ratio
12% 20% 5.0%
10% 18.9% 4.5%

8.2% 8.3% 19% 4.4%
18.2% 4.5%
8% 18.0% 18.0% 4.2%
6.1% 6.5% 18% 17.8% 4.1%
5.8% 4.0%
6% 4.0%
17%
4%
3.5%
2% 16%
0% 15% 3.0%
FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16
• The cosmetics sector, on average, has lower sales CAGR and EBITDA margins than the luxury sector, but the difference has been narrowing over the years. While
the EBITDA margin expected for the cosmetics sector remains 3% lower than the luxury sample, the average sales CAGR of cosmetics is almost the same of luxury
companies (6.5% versus 6.6%, respectively).
• Expected sales obser ed in is higher than fig res, b t considerabl lo er than the pea of .
• The EBITDA margin has remained globally stable over the considered period, at a solid level around 18%.
• The CAPEX ratio is lower for luxury companies and mostly stable at 4.2%.

C Advertising expenses Advertising remains a key driver in the industry, with digital
expenses’ share growing fast
• ar eting and ad ertising represent a significant cost component for both global l x r and cosmetics
industries.
DCF and valuation

• igital expenses are gaining share in the ad ertising b dget of companies, as in encers, nstagrammers
parameters
and social networks are replacing traditional channels.
• Communication media is now so diverse that companies can only focus on and allocate budget for some of
the channels; in some cases, companies are dedicating more budget to communicating on new platforms.
elec ed c panies ad e isin e penses as a sales
40% Average 26.8%

33.6%
35%
29.1%
30% 26.4%
25.7%
25% 22.9% 22.9%
20%
Average 6.7%
15% 11.3% 11.3%
10% 6.8% 7.4%
5.6% 6.6% 6.7%
5.1% 5.4%
5% 3.4% 3.8%
0%
Coach
Salvatore
Ferragamo
Prada
Brunello
Cucinelli
Moncler
Luxottica
Hugo Boss
Tiffany
Tumi
LVMH
Beiersdorf
Coty
Estée Lauder
Shiseido
L'Oréal
Natura
afil
Luxury companies Cosmetics companies
Source: Data based on actual or estimated numbers based on availability as of the date of this report.
ote he res lts of are act al if the financial res lts are closed and expected E if the financial ear is not closed et.

D SOTP and segment analyses LVMH SOTP
• anal sis implies a total enterprise al ation of . b in Y E.

• The fashion and leather goods segment is the largest contributor both in terms of sales (35%) and EBIT
(52%).
ales ea d n in ea d n in ea d n in
1.0 7.0 17.2 0.0 106.9

11.7 36.1
1.4 15% 21.9 16% 0%

31%
20% 20%
3.6 0.5 7.6
0.5 9.9
3.5 10%
13% 7% 13% 7% 13%
3.7 51.5
8% 9%
4.8 10%
9%
12.7 13%
13%
52% 48%
35%
(0.3) (0.1) (1.3)
-2% -1%
Fashion Perfumes Watches Wines Selective Eliminations Total Fashion Perfumes Watches Wines Selective Eliminations Total Fashion Perfumes Watches Wines Selective Eliminations Investments Total
and and and and retailing and and and and retailing and and and and retailing
leather cosmetics jewelry spirits leather cosmetics jewelry spirits leather cosmetics jewelry spirits
goods goods goods
Luxury products Luxury products Luxury products

(excluding wines and spirits (excluding wines and spirits (excluding wines and spirits
and selective retailing) and selective retailing) and selective retailing)
o rces based on EY anal sis and on the follo ing bro ers reports an ar , ac arie esearch ecember and atixis ecember .

D SOTP and segment analyses Kering SOTP
• ering anal sis implies a total E of . b in Y E.

• ontrib ting almost the hole of the total E for of sales, cci ro p is the most profitable
DCF and valuation

segment in terms of operating margin.
parameters
0.3 0.0 12.0 0.1 0.0 1.8

3.5 0.1 27.8
1.9 2.1
0% 6%
3% 1% 27.3 8% 1%
29%
8.2
103% 98%
68%
(0.2) (1.7)
-9% -6%
Gucci Group Puma Other brands Eliminations Total Gucci Group Puma Other brands Eliminations Total Gucci Group Puma Other brands Eliminations Total
Luxury Sport and lifestyle Luxury Sport and lifestyle Luxury Sport and lifestyle
o rces based on EY anal sis and on the follo ing bro ers reports arcla s ebr ar , an ar and ac arie esearch ecember .

Page 22 DCF and valuation parameters
D SOTP and segment analyses Kering: further analysis of Gucci Group through SOTP approach
• cci ro p anal sis implies an E of . b in Y E.

• Within the Gucci Group segment, the Gucci brand alone represents 49% of the top line and 60% of EBIT in
FY16E, meaning that the Gucci brand is expected to constitute the largest segment within the Gucci Group
and the most profitable in terms of operating margin.
1.7 8.2 0.2 1.9 3.6 27.3

0.2
8%
3.7 13%
21% 0.4 10%
1.1
5.9 14%
1.4 13% 22%
1.1
22%
4.0 17% 14.1
60%
49% 52%
Gucci brand Bottega Veneta YSL Other brands Gucci Group Gucci brand Bottega Veneta YSL Other brands Gucci Group Gucci brand Bottega Veneta YSL Other brands Gucci Group
o rces based on EY anal sis and on the follo ing bro ers reports arcla s ebr ar , an ar and ac arie esearch ecember .

DCF and valuation parameters Page 23
D SOTP and segment analyses L’Oréal segment analysis
• The L’Oréal Luxe division accounted for 29% of the total sales in FY15A.
• This division is expected to register a sales growth at a CAGR of 4.4% over the 2015A–18E period, when its
DCF and valuation

operating income is anticipated to grow from €1.5m to €1.8m (or at a CAGR of 4.2%) over the same period.
parameters
• The L’Oréal Luxe division will remain one of the biggest divisions within L’Oréal, together with consumer
products.
ales ea d n in ea d n in a in in
30
27.2 5 4.9 22%
27.0 4.9 21% 21% 21%
25.8 4.6 2% 1%
25.3 4% 4% 20%
25 4.4
4% 2% 11%
4% 10% 19% 19%
22.5 8% 1%
8% 3.9 10% 18% 18% 18%
7% CAGR 4 CAGR
4% 7% 9%
2% 4.2%
4.4%
20 10%
7% 29% 35% 36%
30%
29% 29% 35%
34%
3
28% 33%
15
CAGR CAGR
0.9% 2.2%
2
10 45%
46% 46% 53% 53%
54% 54%
48% 47% 56%
1
5
13% 13% 13% 13% 13% 16% 15% 15% 15% 15%
0 0
(16%) (15%) (15%) (15%) (15%)
2014A 2015A 2016E 2017E 2018E
2014A 2015A 2016E 2017E 2018E 2014A 2015A 2016E 2017E 2018E L'Oreal Luxe Total cosmetics
Professional products Consumer products Professional products Consumer products

L'Oreal Luxe Active cosmetics L'Oreal Luxe Active cosmetics
Body shop Eliminations Body shop
Sources: Liberum (15 February 2016) and Kepler Cheuvreux (12 February 2016).
ote he res lts of are act al if the financial res lts are closed and expected E if the financial ear is not closed et.

E Trading multiples Level of multiples is affected by high volatility of financial

markets
• The charts below show the evolution of the trading multiples over the past editions of the factbook.
• After reaching a peak in 2014, trading multiples for luxury companies are decreasing on all major valuation
parameters, consistently with the lower growth expectations and margins showed by the listed company in
this sector.
EV/sales EV/EBITDA Price to earnings
4.0x 18.0x 35.0x

3.7x
3.6x
3.5x 16.0x 15.0x 15.3x 29.4x
3.3x 30.0x 28.2x
3.1x
3.0x 3.0x 14.0x 13.3x 13.3x
3.0x 12.7x 25.0x 25.2x
2.8x 24.1x 24.5x
2.7x 12.0x 11.9x 25.0x
12.0x 11.6x 22.0x
10.7x 21.4x
2.5x 2.3x 20.4x
2.2x 10.3x
20.0x 19.1x
10.0x
2.0x
8.0x 15.0x
1.5x
6.0x
10.0x
1.0x
4.0x
0.5x 5.0x
2.0x
0.0x 0.0x 0.0x

2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast
Note: Year is referred to the Factbook edition. As an example 2016 is Factbook 2016 edition. Therefore “Multiple on last FY Actual” is calculated on 2015 results, while “Multiple on current FY forecast” is calculated on 2016 expected
results.

E Trading multiples Cosmetics multiples level illustrates the strong dynamism of the
industry
• The charts below show the evolution of the trading multiples over the past editions of the factbook.
• Trading multiples for cosmetics companies showed more resilience over time, as the sector’s listed
DCF and valuation

companies are experimenting a stable gro th o er the last fe ears and a constant profitabilit .
parameters
EV/sales EV/EBITDA Price to earnings
3.0x 18.0x 35.0x 33.1x

2.8x 32.2x
2.6x 15.6x
2.5x 2.5x 16.0x 15.0x
14.6x 30.0x 28.9x
2.5x 2.4x 2.4x 14.4x 28.2x 27.7x
2.3x 14.1x 13.8x 26.9x
2.2x 2.2x 14.0x 13.1x 13.4x 25.8x 25.2x
2.1x 24.4x
12.3x 25.0x
2.0x 12.0x 11.3x 22.2x
20.0x
10.0x
1.5x
8.0x 15.0x
1.0x 6.0x
10.0x
4.0x
0.5x
5.0x
2.0x
0.0x 0.0x 0.0x

2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast
Note: Year is referred to the Factbook edition. As an example 2016 is Factbook 2016 edition. Therefore “Multiple on last FY Actual” is calculated on 2015 results, while “Multiple on current FY forecast” is calculated on 2016
expected results.

E Trading multiples EY luxury and cosmetics sample: summary of EV/sales multiples
sales sales sales sales
He s He s He s He s
M ncle M ncle M ncle M ncle
al al al al
s e a de s e a de s e a de s e a de
i y y y
y i i i
ica ic e n ic e n ic e n
ic e n ica ica ica
nell cinelli nell cinelli al a e e a a al a e e a a
al a e e a a al a e e a a eie sd eie sd
eie sd eie sd nell cinelli nell cinelli
ac ac ac ac
i any i any ada ada
e a e 2. i any i any
2. e a e
e in 2. ada 2. e a e e a e
ada 2. e in e y e y
e y e y e in e in
ds 2. ds ds ds
e e 2. ic ael s ic ael s ic ael s
ic ael s a c a c a c
a c i y i y i y
i y e e a a a a
a a a a e e e e
cci ane cci ane cci ane cci ane
ss 1. ss 1. ss ss
iseid 1.3 iseid iseid iseid
alp a en alp a en alp a en alp a en
ai 0.9 ai 0.9 ai ai
afil afil afil afil
en deli en deli en deli en deli
sales sales sales sales
Hi h Hi h Hi h Hi h
Ind s y ench a Ind s y ench a Ind s y ench a Ind s y ench a
Notes:
• he res lts of are act al if the financial res lts are closed and expected E if the financial ear is not closed et.
• Market capitalization is based on a one-month average as of 31 March 2016.

E Trading multiples EY luxury and cosmetics sample: summary of EV/EBITDA

multiples
DCF and valuation

YOOX Net-A-Porter 27.0x YOOX Net-A-Porter 21.0x Hermès 15.8x Hermès 15.1x
parameters
Hermès 18.6x Hermès 17.1x YOOX Net-A-Porter 15.6x YOOX Net-A-Porter 14.0x
Coty 17.5x Coty 16.2x Coty 15.4x Coty 13.8x
Estée Lauder 17.5x Estée Lauder 16.0x al 14.9x al 13.4x
nell cinelli 16.7x al 15.8x Estée Lauder 14.7x Estée Lauder 12.5x
al 16.5x nell cinelli 14.9x Tumi 13.7x Tumi 12.4x
Beiersdorf 15.7x Beiersdorf 14.7x Beiersdorf 13.6x Beiersdorf 12.1x
Shiseido 15.0x Tumi 14.1x nell cinelli 13.4x nell cinelli 10.9x
Tumi 14.1x Shiseido 12.9x Shiseido 11.4x Shiseido 10.0x
Luxottica 13.5x Luxottica 11.7x Luxottica 10.8x Luxottica 9.9x
Coach 12.9x e in 11.6x e in 10.6x e in 9.7x
ncle 12.6x ncle 11.2x al a e e a a 10.2x al a e e a a 9.3x
e in 12.6x e a e 11.1x e a e 10.1x e a e 9.3x
e a e 12.3x al a e e a a 10.8x ncle 10.0x ncle 9.2x
Jimmy Choo 12.2x Coach 10.7x Richemont 9.9x Richemont 9.2x
al a e e a a 11.7x Jimmy Choo 10.5x Coach 9.7x Coach 9.2x
Richemont 10.8x Burberry 10.2x Burberry 9.6x Burberry 9.1x
Tod's 10.6x Richemont 10.1x Jimmy Choo 9.3x Jimmy Choo 8.6x
Natura 10.4x LVMH 9.7x LVMH 9.1x LVMH 8.5x
LVMH 10.2x Tod's 9.5x Tod's 8.8x Tod's 8.4x
Burberry 10.2x Natura 9.2x Prada 8.6x Prada 8.1x
Tiffany 10.0x Tiffany 9.1x Tiffany 8.5x Tiffany 8.0x
Swatch 9.9x Prada 9.0x Natura 8.2x Natura 7.8x
L'Occitane 9.8x L'Occitane 8.9x L'Occitane 8.0x L'Occitane 7.3x
Prada 9.8x Swatch 8.4x Swatch 7.9x Swatch 6.8x
Chow Tai Fook 9.1x Chow Tai Fook 8.4x Chow Tai Fook 7.4x Chow Tai Fook 6.5x
en deli 7.3x ic ael s 6.9x Hugo Boss 6.3x Hugo Boss 6.3x
ic ael s 6.9x Hugo Boss 6.6x ic ael s 6.3x ic ael s 5.6x
Hugo Boss 6.7x alp a en 5.9x afil 6.1x afil 5.6x
afil 6.5x en deli 5.7x alp a en 5.3x alp a en 4.9x
alp a en 6.4x afil 4.7x en deli 5.0x en deli 4.2x
EV/EBITDA (FY15A/E) EV/EBITDA (FY16E) EV/EBITDA (FY17E) EV/EBITDA (FY18E)

12.3x 11.1x 10.1x 9.3x
Low High Low High Low High Low High
Industry benchmark Industry benchmark Industry benchmark Industry benchmark
Notes:
• Market capitalization is based on a one-month average as of 31 March 2016.
• he res lts of are act al if the financial res lts are closed and expected E if the financial ear is not closed et.

E Trading multiples Regression analysis: EV/sales multiple vs. EBITDA margin
• egression anal ses sho strong correlation bet een E sales le els and profitabilit , ill strating the
premi m paid for good profitabilit performance.
• nal ses sho a rob st correlation bet een E E and sales gro th. ales de elopment is another
driver for creating value, especially for the luxury segment.
e essi n analysis sales l iple s a in e essi n analysis l iple s sales
7.0x 25.0x
Hermès
YOOX Net-A-Porter
6.0x
R² = 0.505
R² = 0.5575 20.0x
5.0x Hermès
Brunello Cucinelli
15.0x
EV/EBITDA 2016E
Tumi
4.0x
2016 EV/sales
Coach
L'Oréal Moncler
Salvatore Kering Luxottica
Estée Lauder Salvatore Ferragamo Moncler
Ferragamo
3.0x Coty Tumi
Jimmy Choo
Brunello Cucinelli Luxottica 10.0x Richemont Burberry
Richemont
Tod's LVMH
Beiersdorf Kering Coach Tiffany Chow Tai Fook
Tiffany Swatch
YOOX Net- Burberry
2.0x LVMH Michael Kors Prada Michael Kors
A-Porter Prada
Tod's Hengdeli
Jimmy Choo Hugo Boss
Swatch
Natura Ralph Lauren
Shiseido L'Occitane 5.0x
Hugo Boss Saﬁlo
1.0x
Chow Tai Fook Ralph Lauren
Hengdeli Saﬁlo
-
0% 5% 10% 15% 20% 25% 30% 35% 40% -10% -5% 0% 5% 10% 15% 20% 25%
2016 EBITDA margin (%) Sales CAGR 2016E–2018E
Notes: market capitalization is based on a one–month average as of 31 March 2016.

DCF and valuation
parameters
F Transaction multiples Transaction multiples in the luxury industry remain at a

significant premium to many other sectors
• Transaction multiples illustrate the high attractiveness of the industry over the past few years.
• he also re ect a premi m to rarit , indeed the brands rep ted to be on the mar et are er fe .
• The average sales multiple in recent years ranged between 1.2x and 1.6x, when the average EBITDA
multiple ranged between 10.4x and 15.0x.
• e transaction anno nced in ere the ac isition of ornelian b n estcorp and the ac isition of
oger i ier b ods.
sales
1.8x 16.0x 15.0x

14.6x
1.6x 1.6x 1.6x 14.2x 14.1x
1.6x 1.5x 1.5x 1.5x 14.0x 13.1x 13.4x
12.8x
1.4x
12.0x
1.2x 1.2x 10.7x 10.4x10.2x
1.2x 1.1x
10.0x
1.0x 0.9x
8.0x
0.8x
6.0x
0.6x
4.0x
0.4x
0.2x 2.0x
0.0x 0.0x
2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16
Average Median Average Median
Source: Capital IQ.

F Transaction multiples The M&A deals in the cosmetics industry show a similar trend as
the luxury industry
• he a erage sales m ltiple o er the last fi e ears ranged bet een . x and . x, hen the E m ltiple
ranged between 10.1x and 16.6x.
DCF and valuation

•E E m ltiples in are slightl lo er than and incl de the ac isition of the ea t
parameters
i ision b ot and the ac isition of on b erber s.
sales
2.5x 18.0x
16.6x
2.1x 16.0x 14.9x
2.0x 1.9x 1.9x
14.0x
12.6x
1.6x 1.6x 11.7x
1.5x 12.0x 11.1x 11.0x 10.9x
1.5x 1.4x 10.1x 10.2x
1.2x 10.0x 8.8x
1.1x
1.0x 8.0x
1.0x
6.0x
0.5x 4.0x
2.0x
0.0x 0.0x
2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16
Average Median Average Median
Source: Capital IQ.

F Transaction multiples Analysis of worldwide M&A transactions in the luxury industry

(2012–1H16)
• As shown in the number of completed deals sorted by geography and accounts for almost one-third of total
deals, Italy is the top target country of the luxury industry. Italy and US together represent more than an
half of total deals (59% of total transactions).
• ri ate e it f nds ha e a gro ing interest in the l x r sector, recentl approx. of total
transactions.
• fter a characteri ed b a large n mber of transactions, the deal acti it in the first semester of
2016 has slowed down.
e c ple ed deals e c ple ed deals y ype ye e c ple ed deals s ed y

e ap y e a e e
a n e p c n ies
S. Korea
80 50 50% China 2% Canada
Spain 2% 2%
45 43 47% 45% 3%
70 68
41 41 Germany
62 40 40% 4% Italy
40% 30%
60
35 34% 35%
52 UK
31
50 9%
44 30 30%
No. of deals
27
30%
40 25 25%
21
Switzerland
20 20%
30 9%
17%
15 13 15%
19
20 10
10 9 9 10%
France
10
5 5% 10%
United
0 0 0% States
2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16 29%
Corporate PE PE/total
Sources: Capital IQ, Mergermarket, Factiva.

F Transaction multiples Analysis of worldwide M&A transactions in the cosmetics

industry (2012–1H16)
• As shown in the number of completed deals sorted by geography, and account for almost half of total deals,
US remains the top target country for the cosmetics industry.
DCF and valuation

• he first three co ntries b target geography (US, France and Italy) are the same of those of the luxury
parameters
industry, and they represent 68% of total transactions.
• PE funds are increasingly attracted by the cosmetic market and the personal care sector in general.
e c ple ed deals e c ple ed deals y ype ye e c ple ed deals s ed y

e ap y e a e e
a n e p c n ies
45 35 70% Australia
Spain China
4% Canada
31 Germany 4% 4%
40 39 62% 4%
30 60% 5%
28 United
35 States
35 UK
5% 41%
25 50%
30
S. Korea
26
20 40% 6%
25
21 33%
No. of deals
16
20 15 14 14 30%
17 Italy
21% 20% 8%
15 10
10 20%
8 18%
10 7 7
5 10%
5 3
France
0 0 0% 19%
2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16
Corporate PE PE/total
Sources: Capital IQ, Mergermarket, Factiva.

Industry overview
G Global luxury goods market
H Global cosmetic goods market
Points of view from EY global sector

I and other industry professionals
Industry overview
Page 36 Industry overview
Global luxury goods market
Retail Directly Operated Stores (DOS) Personal luxury goods Chinese consumers represent the
accounted for about 29% of the overall have the second largest share of buyers in the world,
market, while monobrand distribution across largest market share of accounting for about 31% of global
~29%
formats approximately 24.2% in luxury goods purchases.
accounts the luxury goods market.
for about
~31%
Retail DOS
~53%
53%
of overall
distribution.
Monobrand distribution
Retail sales account for The Hong Kong

Japan is the top performing area
34% in 2015 and have and Macau
~24.2%
for the luxury goods market
grown by 2% since 2014, markets posted
(+9% growth at a constant
while wholesale represent a significant
rate , and in , it as the first
66% of the total personal contraction
foreign destination for Chinese
66%
luxury due to
consumers.
goods currency As accessible status
market. ct ations, s mbols, shoes benefit
Wholesale
+9%
government from strong tailwinds
34%
reforms and and have been growing
decreasing faster than
popularity. the overall growth
Retail
leather goods
category in
the recent
past.

DCF
Industry
and overview
valuation parameters Page 37
Executive summary
G
H Global luxury
luxurygoods
goodsmarket Title
Globalfor section
personal luxury goods continue to buoy the market, but
growth is leveling off
• Personal luxury goods have the second largest marketXshare

Sales(approximately 24.2%)
of industry players areinexpected
the luxury
to goods market
grow at afterrate,
a healthy luxury
led cars, which account
by double-digit forgrowth
annual about arate
38.8%
for
Welcome
share to the
in the third edition of EY’s annual
industry. L’Occitane and Natura from FY11A to FY14E.
Financial Factbook for the luxury and cosmetics
DCF and valuation

• Global luxury market value stood at €1 trillion in 2015,Xwith the personal
Increased demand luxury goods
through market growing
innovative productsatwill
13% at current
cater exchangeemerging
to underserved rates; however, at constant
markets.
parameters
sector. he actboo combines financial
exchange rates, the growth has slowed
data, insight from EY’s global team of sector to 1%, slower than the 3% recorded in 2014.
X Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate
• Currency
specialists andctopinions
ations,ofand in partic
external lar a strong
experts. dollar and depreciating
demand e ro,
in established helped the market to show double-digit positive impact on overall market value.
geographies.
• While wholesale remains the dominant distribution channel for personal luxury goods (accounting for about two–thirds of market sales), the company–owned retail
channels are growing twice as fast as the wholesale channel at current exchange rates and continue to gain market share due to network expansion (with 600 new
Titles for charts
stores opened in 2015) and growth in same store sales (13% at the current exchange rate).
Industry overview
Industry overview
ld ide pe s nal l y ds a e end pc n ies 2
280–295
300 CAGR 20%
253 2%–3%
250 218 224 US 78.6

212
192 15%
200 170 167 173
153
and disclaimer
Methodology
150 13% 13% Japan 20.1
11% 10%
10%
100
+1% at
50 7% constant 5% Mainland China 17.9
% growth
rate
€b
0 Titles for charts

3% 3%
0%
-50 Italy 17.3
and specific analyses

-2%
Sample selection
-100
-5%
-150 France 17.1
-200 -8% -10%
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2020E 0 20 40 60 80 100
Market size Growth €b
Source: Data based on consensus of several brokers’ reports for each

company.
Contact us
Glossary
Notes:
ltagamma
Notes:Market ain
capitalizationxis based
r oods orld ideaverage
on a one-month ar etas tof dDecember
all inter
2012. , Altagamma/Bain.
ltagamma
The 2012 ain,
growth corresponds orld idesalesx growth
to the r arrate
etsbetween
onitor, pdate, Altagamma/Bain, October 2015.
FY11A and FY12A/E.

Page
a e DCF and valuation
Industry
parameters
overview
G
H Global luxury
luxurygoods
goodsmarket Luxury
Title forgoods market by geography and channel
section
X Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for
Welcome
y ds
to the
de third
and edition ofyEY’s
na iannual
nali y and y e i n l al pe s nal l y ds a e y c annel and a 2
L’Occitane and Natura from FY11A to FY14E.
Europe Americas
sector. he actboo combines financial Japan Mainland Increased demand
X China Rest of worldthrough innovative products will cater to underserved emerging markets.
data,
15% insight from EY’s global team of sector X Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate
specialists and opinions of external experts.9% demand
9% in established geographies.
10%
5% 5%
5% Retail Wholesale
3%
Titles for charts 34% 66%
2015E growth
0%
0% Online
7%
-2% Off-price Airport Monobrand
Concession stores Off-price 11% stores
-5%
business 27% stores 18%
-5% 1%
18% Online
-10% 4%
-9% Department
stores
-12% Specialty 28%
-15% Retail DOS stores
51% 35%
Region Nationality
e and y na i nali y and y a ea 2 e ail and n and dis i i n c n in ed ain s a e
• As illustrated in the graph above, there is a clear dichotomy between the region of • Retail sales have grown to 34% in 2015 from 32% in 2014, gaining shares from wholesale
consumption and nationality, based on the exchange rate ct ations. sales in and in of the total personal l x r goods mar et. his re ects
Titles
• Mainland China remains the top for charts
consumer by country with one–third of the global market. a trend that companies are converting their franchised locations into company-owned stores
Japanese consumers, who used to account for about 25% of global purchases, had a 10% or joint ventures.
share of the global personal luxury goods purchases in 2015. • Monobrand stores sales (retail DOS and wholesale monobrand stores) accounts for about
• Although luxury consumers in the mature markets, such as the US, Europe and Japan, tend 29% of the overall market, while monobrand distribution across formats (including off-price
to purchase most of the products in their home market, the growth in these regions is stores, online and airport sales) already accounts for about 53% of overall distribution.
becoming increasingly dependent on tourists’ spending. • The airport channel has posted annual growth of 29%, which is attributable to the increase in
luxury spending by tourists across the world and accounts for about 6% of the global market
share in the luxury goods led largely by beauty products sales.
• The online luxury market has grown tenfold since 2005 and accounts for about 7% of total
sales in 2015. The online sales were largely led by the accessories and apparel categories.

company.
Notes:
ltagamma
Notes:Market ain,
capitalization x based
is r oods orld ide
on a one-month ar et
average t December
as of d all 2012.
inter ,’’ Altagamma/Bain.
ltagamma
The 2012 ain,
growth corresponds orld idesalesx growth
to the r arrate
ets onitor,
between pdate,’’ Altagamma/Bain, October 2015.
FY11A and FY12A/E.

DCF
Industry
and overview
valuation parameters Page
a e
Executive summary
G
H Global luxury
luxurygoods
goodsmarket Title forconsumers
Chinese section are the dominant luxury goods buyers,
accounting for about one–third of global purchases, with the
majority of purchases being carried out outside China
Welcome to the third edition of EY’s annual
DCF and valuation

X Increased demand through innovative products will cater to underserved emerging markets.
parameters
data, insight from EY’s global team of sector X Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate
specialists and opinions of external experts. demand in established geographies.
sian pe s nal l y ds a e inese isi s y e i n 2
s a ied pe ance in e sian pe s nal l y ds a e

17% 16%
Titles for charts
20% 14% 35 25%
13%
9% 30 27.2
29.1
21%
22% • Japan was the top performing region at a constant rate (+9%), and in 2015, it as the first
10% 20%
foreign destination for Chinese tourists (whom represent almost 40% of total sales in Japan).
Industry overview
Industry overview
4% 3% 25 20.9
0% 15%
• Mainland China’s luxury market in 2015 witnessed an annual growth of about 17% (and a
Million
20 15.5
-2% 13.5 12.6
15
negative growth of about 2% at constant exchange rates) to reach €18b. While the demand
€b
-10% 11% 10%

-11% 10
-20%
6.0 5.0 5% for watches and menswear witnessed a decline, the demand for jewelry, womens wear and
5
-25% 1% shoes experienced an upward trend.
-30% 0 0%
Japan Mainland Hong Kong
China and
South
Korea
Southeast
Asia
Hong Kong and South
Korea
Japan Southeast Asia • The ong ong and aca mar ets posted a significant contraction due to currency
Macau
Macau ct ations, go ernment reforms and decreasing pop larit . he ong ong mar et
Real terms Constant rate 2015E 2020E CAGR15E–20E witnessed a contraction of 11% in 2015 (–25% at constant rates).
• Hong Kong and Macau remain the top destinations in terms of number of visitors, but Japan
and Korea are the geographic areas where the foreseen growth in tourists is the highest.
and disclaimer
Methodology
sian pe s nal l y ds a e
Titles for charts

2 inese ye s c n in e d ina e as e p l al c s es
25
20.0 • Chinese consumers represent the largest share of buyers in the world, accounting for about
20 18.0 18.0
31% of global luxury goods purchases, followed by American buyers (24%) and European

15.0
Sample selection
15
11.0
buyers (18%).
9.0 9.0
• However, onl one fifth of the p rchases made b
€b
10 8.0
6.0
7.0 hinese to rists are done in ainland
5 China, the majority being made in the European markets. The dominance is further increased
with the development of new outlet sites in China and the fact that Chinese travelers have
0
Japan Mainland South Hong Kong Southeast Asia been enthusiastic visitors of the many outlet malls in Europe.
China Korea and Macau
• Chinese consumers are also focused on purchasing more from South Korea and Japan,
2014 2015E
which are emerging as new prominent shopping destinations for Chinese tourists.
Notes:
ltagamma ain, ltagamma orld ide x r ar et monitor, pdate, Altagamma/Bain,
company.2015.
Contact us
Glossary
October
2) Nomura, “Global
Notes:Market tourism:
capitalization shifting
is based destinations
on a one-month for Chinese
average travellers,”
as of December 2012. Nomura global market research, 7 April
2016.
The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E.

a e
Page DCF and valuation parameters
Industry overview
G
H Global luxury
luxurygoods
goodsmarket Title for section
Accessories segment continues to be the largest, and fastest,
growing market segment
l al pe s nal l y ds a e y a es l al pe s nal l y
p d c ype ds a e y p d c ype ccess ies pe e
Others
Titles for charts
4% • Since 2012, accessories has been the largest category within the personal luxury goods
Accessories 12% market and have grown the fastest since 2009, with a CAGR of 12% through 2015E.
Hard Accessories
luxury 30% • The accessories segment accounted for about 30% of the global personal luxury goods
22% Hard luxury 11% market, with a 3% growth rate (at constant exchange rates) in 2015.
Apparel 7%
• The accessories segment also commands a dominant 40% share of the overall online
personal luxury goods market sales.
Beauty 5% • As accessible stat s s mbols, shoes benefit from strong tail inds and ha e been gro ing
Beauty
faster than the overall leather goods category in the recent past. Shoe sales growth
20% Apparel Others
24%
4%
continues to outpace leather goods, with both men’s and women’s segments showing
0% 5% 10% 15% positive growth trends.
CAGR 09-15E
ice ap e s s pe y e ap ic ice ap e s s pe y p d c ype

a ea e e las n s2 e e las n s2 2 ice di e en ial e ap ic a eas and p d c ype
50% Titles for charts 60% 52%
39% 50% 46%
• Pricing analysis indicates continued convergence towards European prices. Harmonization is
40%
being performed through new product launches; meanwhile, prices on current products are
31%
30%
29% 30%
27%
40%
31% 31%
fre entl nchanged.
29%
22%
20% 20% 19% 30%
23% • In the past, brands have been “price setters.” Today, pricing is not driving growth, and this
20%
20% will generate pressure on the top line and margins in the near future.
11%
10%
10% 5% 5%
• As Japan has become one of the most popular destinations among Chinese travelers,
companies are trying to take advantage by charging higher prices in Japanese retail stores.
0% 0%
US Japan Hong Kong US Japan Hong Kong • Apparel is characteri ed b regional content, a higher fre enc of ne prod cts and less
Apr 15 Nov 15 Mar 16 Apparel Leather Watches and jewelry expos re to gifting and th s re ects a higher price gap than other prod ct categories.
• Price changes all at once could be risky, as they might confuse the customer base and
suddenly change a brand’s relative positioning ers s peers, p tting brand e it at ris .
company.
Notes:
ltagamma
Notes:Market ain,
capitalization x based
is r goods orld ideaverage
on a one-month mar etasstof d , Altagamma/Bain,
December 2012. 21 Dicember 2015.
2) Morgan
The Stanley,
2012 growth “Mind the
corresponds price
to the gap,”
sales Morgan
growth stanleyFY11A
rate between research, 21 March 2016.
and FY12A/E.

Industry overview
Page 42 Industry overview
Global cosmetics goods market
€203b
The global sia acific contin ed Consumers continue to explore
cosmetics goods its lead as the world’s new looks, and companies are
market continued biggest cosmetics offering new formulas and textures
to grow, reaching market and posted to cater to the rising demand.
€203b. 3.4% growth thanks
to an acceleration
in Southeast Asian
The success of Online beauty sales Millennial consumers’ purchasing
markets, which has
lip makeup was registered 20% power is expected to reach
helped to offset the
one of the 2015 growth in 2015 on a US$3.4 trillion by 2018 in the US
slight slowdown in
highlights, with worldwide basis and alone.
economic growth rate
US$3.4
growth at 10% in accounted for 6% of in China.
the mass-market the beauty market.
20%
channel, and 16%
3.4% trillion
in the selective
channel.
10%
growth
growth
Consumer engagement, in-store

excellence and innovation are
16% 6%
the key drivers of success for
beauty cosmetics companies.
market

DCF
Industry
and overview
Executive summary
H Global cosmetic
luxury goods
goods market Title for section
The global cosmetics market is expanding steadily …
•XThe
Sales
market
of industry
continued
players
to grow,
are expected
reachingto€203b.
grow atThe
a healthy
marketrate,
was led
slightly
by double-digit
stronger in annual
2015 with
growth
growth
rateof
for
3.9%
L’Occitane
as compared
and Natura
to 3.6%
frominFY11A
2014 (both
to FY14E.
at constant rates) and in line with the average of 4% observed over
DCF and valuation

Xthe past decade.
Increased demand through innovative products will cater to underserved emerging markets.
parameters
data, insight from EY’s global team of sector •XConsumer engagement,
Introduction in-store
of eco-friendly, excellence
sustainable andand innovation
naturally arebeauty
derived the keyproducts
drivers ofand
success for cosmetics
cosmetics will stimulate
specialists and opinions of external experts. companies.
demand in established geographies.
• he mar et remains s ppl dri en, and cons mers are al a s on the loo o t for alit , performance and
perceived results.
Titles for charts
Industry overview
Industry overview
l al c s e ics ind s y a e , at current rates l al c s e ics a e se en a i n y p d c s and e ap ies 2
250 12% Hygiene Eastern

Other Africa, Middle East
products Europe 3%
11% 1% 6%
203
10%
200 185
178 Latin
171 10%
165 America
158
8% Fragrances 11%
12% Skin care
and disclaimer
150
Methodology
36% Asia-Pacific
% growth
+4% at 36%
6%
constant
€b
100 rate
4% Western
4% Europe
4% 4% Makeup
4% 20%
50 17%
Titles for charts 2%
0 0%
Hair care North America
2010 2011 2012 2013 2014 2015E
23% 24%

Sample selection
Cosmetics market Growth %

company.
Contact us
Glossary
Notes:
ar et ine
Notes:Market ind str profile,
capitalization is basedglobal fragrances,
on a one-month hairascare,
average ma e 2012.
of December p, s in care, personal h giene.
TheL’Oréal
2) annual
2012 growth report 2015.
corresponds to the sales growth rate between FY11A and FY12A/E.

Page
Page 44
44 DCF and valuation parameters
Industry overview
H Global cosmetic
luxury goods
goods market Title
… andfor section
proving resilient in times of economic uncertainty
e a es 3 nline pla s ainin p p la i y

Titles for charts
• New markets, such as India, South Africa and Turkey, generated more than two–thirds of the • Beauty, today, is synonymous with personalized products and services that enrich the
beauty market growth in 2015. consumer experience and its relationship with brands in all distribution sectors.
• sia acific continued its lead as the world’s biggest cosmetics market and posted 4.3% • Online beauty sales registered 20% growth in 2015 on a worldwide basis and accounted for
growth due to an acceleration in Southeast Asian markets, which has helped to offset the 6% of the beauty market.
slight slowdown in economic growth rate in China. • Social media has made the online platform a critical part of every brand’s strategy.
• The industry players are investing more resources in currently underrepresented countries • Luxury cosmetics remains the most dynamic sector with 5.7% growth in 2015, thanks in
to spread their global reach and tap growth opportunities. particular to e–commerce sales.
• The operators are increasingl incl ding prod cts in their portfolios to specificall target
consumers with lower disposable incomes.
2 in a e p ca e y 4 Targeting millennial consumers

Titles for charts
• Makeup is the most vibrant category for the third consecutive year and acted as a growth • There lies a strong opportunity for growth from millennial consumers, as their purchasing
engine driven by the selfie generation.’’ power is expected to reach US$3.4t by 2018 in the US alone.
• The success of lip makeup is one of the 2015 highlights, with growth at 10% in the mass • Further, it is estimated that 75% of the US workforce will comprise millennials by 2020,
market channel, and 16% in the selective channel. making it an attractive group for industry players.
• It is a o rishing mar et as cons mers contin e to explore ne loo s, and companies are • Eighty-six percent of millennials share their brand preferences online, which can help
offering new formulas and textures to cater to the rising demand. companies to reach wider consumer groups.1
• In addition, the push for natural cosmetics has opened new growth opportunities for smaller • A new shopping revolution is underway in how consumers shop at retail stores and online
players in an otherwise highly competitive market. The trend has forced large companies to platforms, as new channels of communication, commerce and service converge due to the
either ac ire or de elop their o n green’’ products. impact of millennial consumers.

company.
Sources: L’Oréal
Notes:Market Annual Report
capitalization is based 2015, Estée Lauder
on a one-month averageAnnual Report 2012.
as of December 2015 and other selected research.
Notes: 1)growth
The 2012 Estée corresponds
Lauder Annual to theReport 2015.rate between FY11A and FY12A/E.
sales growth

Industry overview
Page 46 DCF and valuation
Industry
parameters
overview
I
Points of view from EY global sector Digital tango with China
and other industry professionals
Many luxury “maisons” focused in 2015 on digital 2

Dior
challenges and Asian markets expansion. After the 1
booming era where one store per week was the store
3
opening rate, now it may be time for brands to Bally
0
rethink their business model entirely. Many recognize
the high potential of the e-commerce and mobile 3
Coach
commerce (m-commerce) markets, but few are able 19
Paolo Lobetti Bodoni to compete in them profitabl , and e en fe er are
4
MED RCP Advisory Leader, Advisory able to successfully combine their e-commerce and Louis Vuitton
1
Turin, Ernst & Young Financial Business Advisors S.p.A. retail strategies.
Nowadays, brands are more cautious about opening 4
Zegna
0
new stores, having experienced challenging
relationships with local partners and distributors and 4
Armani
waiting a long time for returns on their investments. 7
Looking at the number of store opening and closings
by some relevant brands (see graphic at right), we 5
Gucci
1
can see that it may be time for them to consider full
expansions only and to contemplate how to balance
Ivan Chan 5
Dunhill
and link stores with the digital space, known as the 1
Partner, Tax online to of ine, or , integration.
Hong Kong, Ernst & Young Tax Services Limited 6
Bottega Veneta
Full physical store expansion by brands is based on 2
the brand awareness paradigm that they need to
have stores to intensify their contact with customers 11
Hugo Boss
and increase brand awareness. Brands are beginning 6
to realize that, in Asia, they face rural regions with

high population growth but where opening stores to Number of stores Closed 2015 Opened 2015
get in touch with customers is simply too capital
Source: EY
intense and less effective. Luckily, these consumers
Lilly L Cheung are highly connected digitally, with a higher
penetration rate of chat and m-commerce platforms
Senior Manager, Tax
than in the European Union (EU).
Shanghai, Ernst & Young Certified Tax Agency Co. Ltd.

DCF
Industry
and overview
I
In particular, in China, customers are used to paying (>$US26,000 in yearly disposable income) and one potential way for luxury brands to secure China
with modern mobile payment methods that only need af ent ho seholds , in earl sales.
a fingerprint and three seconds per transaction. disposable income) of lower tier cities, will be driving The estion is hether l x r ho ses sho ld in est
hese c stomers first enco nter brands on digital the growth potential for luxury brands in the coming in their online presence instead of their of ine
channels, so brands must manage their digital years. presence, or invest in a combination of both to
channels for the brand ambassadors that they are, In the past, luxury brands in China were reluctant to attract future consumer growth and the millennial
foc sing on specific digital mar eting dedicated to try the online channel. However, with the generation in China as well as to pioneer an unrivaled
c stomers on first contact. o reach this enormo s development of cross-border online platforms and customer experience worldwide.
market, marketing and branding strategy need to be
Industry overview
the popularity of traveling to buy foreign goods,
localized. The “digital conversation” with Chinese especially luxury goods, the online marketplace is
consumers is a totally different game than dialogue
with Western consumers. Chinese consumers like
more storytelling and have higher expectations in
terms of delivery lead times and customer care What s acles d l y ands ace in e di i al a e place
alit , as the are acc stomed to sing highl Image - The most important concern for luxury brands is their brand image and exclusivity. Online shopping is, in general, associated with
responsive and sophisticated platforms. shopping in a marketplace for cheap buys, which should be fast and convenient, whereas luxury goods are relatively expensive and not
necessaril ic or con enient to p rchase. rod cts being a ailable online might impact their l x r image.
Grey market/fake/Daigou - Luxury brands do not wish to be associated with fake goods being sold via e-commerce through unauthorized
Digital luxury strategy capturing the Chinese channels. egal action has been an important tool in fighting this t pe of co nterfeiting. aigo is a pop lar a for hinese cons mers to
mass market purchase luxury goods, whereby a Chinese person overseas purchases a commodity (usually luxury goods) for a customer in Mainland China.
There is room for cost negotiation between purchaser and recipient, since prices for luxury goods can be 30% to 40% higher in Mainland China
Commercial trends in the luxury world traditionally than abroad.
follow retail trends, and m-commerce is the new Touch point - There is the potential for brands to lose contact in an online transaction with customers who often experience special luxury
must-have channel in China. treatment in physical shops.
Luxury houses are starting to try out different Governance - Third-parties’ behavior with customers cannot be controlled, especially in the last mile of delivery where a third-party logistic
provider has the touch point with customers.
e-marketplaces, using e-commerce as a platform to
socialize with customers and to provide a new level of IT and supply chain capabilities - Digital, which heavily leverages the marketing, customer service, supply chain and IT functions of a
company, is only partly in place with luxury companies. Luxury brands in China have outsourced much of their supply chain and IT functions.
customer experience.
Pricing E commerce triggers global transparenc on prod ct information and pricing. x r brands, e mar etplaces and agship stores on
Luxury brands’ presence in high-end shopping malls and of ine ha e to consider global pricing alignment, in order to balance a brand’s omni channel strateg . estions remain regarding ho to
seems to be serving more and more simply as a balance the retail price with the internal transfer price between different entities while ensuring shareholder value is enhanced.
billboard. The growth of the targeted customer group Tax - Bonded, logistical cross-border e-commerce zones are popping up in different Chinese provinces to attract foreign investment. Import
duties on luxury goods are constantly changing; therefore, business model innovation is needed where legal and tax play a crucial role.
for luxury brands, i.e., the upper middle class

Industry
parameters
overview
I
The Chinese Government has been an important China increases individual parcel tax rates The Chinese authorities also introduced the new
driver of stimulating and regulating online business In order to le el the pla ing field,’’ the hinese cross-border e-commerce (CBEC) tax policy, which
growth, so it is worthwhile for luxury brands to gain a government increased the individual parcel tax rates took effect on 8 April, 2016. This new CBEC tax
deeper understanding of the recent changes in on nearly all luxury goods, effective 8 April, 2016, as regime only applies to imported goods that are
guidelines that impact consumer behavior, including summarized in the table below: traded through e-commerce platforms properly
the recently launched Circular 18 on cross-border registered with Chinese Customs.
e-commerce duties. Further, the government is A Chinese consumer is liable to pay the normal
setting up cross-border e-commerce platforms, China individual parcel tax change import duties when buying imported goods through
where certain governmental support is provided. This Product categories New rate Old rate Increase CBEC, unless each transaction is less than RMB2,000
can be in the form of easing and hastening customs Gold and silver 15% 10% 5% and the total amount spent is less than RMB20,000 a
clearing. Finally, Chinese customers’ allowed online year. Reduced import taxes apply if transactions are
Sporting goods (excluding 30% 10% 20%
transaction amount has been increased. golfing prod cts , below the thresholds previously mentioned, as
footwear, bags
follows:
China tax changes relating to e-commerce Apparel and textiles, 30% 20% 10%
• No customs duty
electronics, bicycles,
Until recently, most cross-border business- watches (excluding • 30% discount to CT
to-consumer retail goods in China were administered high-end pieces)
under the individual parcel tax regime, which imposes Jewelry and precious 60% 10% 50%
• 30% disco nt to import le el
an “individual parcel tax” on inbound hand-carried jewelry accessories Additionally, imported CBEC goods, except for
personal articles. These articles (e.g., passengers’ igh end atches, golfing 60% 30% 30% certain items, are not subject to China’s import
accompanying baggage and gifts for family and products licensing re irements. osmetic prod cts are one of
friends are mostl imported in reasonable antities Cosmetics, tobacco, 60% 50% 10% the exceptions, and imported cosmetics and skin care
for personal use, not for trading purposes. The tax is alcohol
products sold through CBEC will need to be
also called the “personal postage tax” because it
registered with the China Food and Drug
applies to personal articles brought into China by The new tax regime, if strictly enforced, will put
post or by courier. It is a combined tax, consisting of Administration, following the same procedures as
pressure on the practice of Daigou and potentially those applicable to normal commercial goods
the customs duty (CD), consumption tax (CT) and
discourage Chinese consumers from buying luxury imported under the general trade mode.
import le el al e added tax . he personal
goods overseas. The volume of parallel imports of
postage tax is generally lower than the accumulated
, and rates for similar goods imported for luxury goods into China would likely reduce as well. A
trading purposes (i.e., commercial goods). This parallel import is a non-counterfeit product imported
favorable tax regime encouraged the popularity of from another country without the permission of the
traveling to buy foreign luxury goods and encouraged brand owner.
the practice of Daigou.

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Industry
and overview
a e
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EY digital operating model research findings

How do you build your e-reputation?
Fast-paced e-commerce development and the
ensuing governmental response triggered the need
Appearance on respected websites to increase your credibility 13% 75%
for a better understanding of e-commerce for luxury
brands in China. EY- Operating Model Effectiveness Association with other brands of choice 11% 22%
group interviewed 20 luxury brands in Mainland
China between April and August 2015, investigating Review websites entries 11% 22% 11% 44%
their digital market strategy, operating model and
Industry overview
operational transformation needs. Some highlights of Linking your brand with only certain e-commerce channels 13% 50%
the study are discussed below.

How do you control your e-reputation?
How luxury brands maintain their brand image
Luxury brands use a number of approaches to Joint ventures with online KOLs 11.1% 11.1% 66.7%
protect and maintain their image or “e-reputation.”
According to our survey, best practices include: Promoting positive online conversations 22.2% 33.3%
appearing only on respected websites, limiting the

number of e-commerce channels through which their Initiating online forum discussion 22.2% 22.2%
products are offered, working with key opinion

Censoring online conversations 11.1% 11,1% 44.4%
leaders (KOL) and ensuring positive reviews on
products (see the graphic at right).
Not important Less important Average Somewhat important Very important

Industry
parameters
overview
I
Luxury brands invest for omni‑channel integration In addition, more and more luxury houses that have Though proven success is yet to come, digitalization
When luxury brands were asked how much and in an outlet business are collaborating with multi-brand is in progress.
which activities they were planning to invest for the e-commerce sites to have a presence online.
next three years, there was a clear distinction
between market entry brands with a limited online ic y siness del se en s is s ly in enced y y di i al s a e y
presence versus mature brands that are
Customer segments
well-presented online. The luxury brands with a
relatively low online presence are planning on Revenue streams
spending an average of up to US$4m to US$5m on Cost structure Now

building presence on third-party e-commerce sites
Future
and social media, collaborating with KOLs, and Channels
Now and future
marketing their brand history in order to create Customer relationships
online awareness with (new) Chinese customers (see
Value proposition
graphic below). These strategies aim to introduce
new customers, via e-commerce, to foreign luxury 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
brands, as agship stores are less present in smaller

cities and more rural areas.
Luxury brands that are well-presented online often n es en in sales and a e in and c s e Investment in a holistic operations approach
have an online presence on third-party e-commerce ela i ns ip ana e en ac i i ies p
up to US$4m to US$5m
sites. Some brands plan to invest up to US$40m in
the next three years to build their own online • eneration of traffic to channels • et or sec rit , data storage and mobile tablet
platform; integrate mobile, tablet and PC; and compatibility
integrate their online and of ine in entor • Online marketing • Digitization of sales processes
management and supply chain (see graphic at right).
Luxury brands building their own platform seems to • Content production • Own integrated platform, i.e., e-commerce and
m-commerce
be the future trend, since they do not need
third-party e-commerce sites to build their brand. • KOLs and social media presence • Omni-channel infrastructure
Moreover, if they grow in China, a part of their sales
will go to these third-party e-commerce platforms if • Platforms: e-marketplaces and mobile platforms
they do not have their own.
• Customer relationship management (CRM) to manage
c stomer profiles and relationships

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Organizational changes and impact of brands’ When will you adopt these omni-channel practices?
China digital strategy
Luxury brands see their organization and service 67%
levels changing in the next three years, including Up-to-date

mar eting, s ppl chain logistics, c stomer ser ice 0–12 months
56%
and IT capabilities. Marketing efforts, especially on 12–24 months
social media, will need to increase in order to attract 24–36 months
customers, improve the stickiness in the physical
Industry overview
store and attract more traffic to the ebsite. ppl
chain logistics sho ld be restr ct red pre io sl a
batch of products was sent to the store, and from the 33% 33% 33% 33%
store, it was divided. Now, companies send one item

across China to get it delivered. A customer service 22% 22% 22% 22% 22% 22% 22%
team is needed to deal with returns and engage
customers, who are more diverse, which will likely
mean longer or ing ho rs for online estions. 11% 11% 11% 11% 11%
Sometimes, customer service teams have to answer

estions be ond their control, i.e., on the deli er
alit . inall , capabilities ill need to change so
Return online Check inventory at Order inventory at Ship from stores Pickup online Holistic planning
that there is transparency and communication purchases other stores other stores purchases in store across channels
between in-store and online inventory. Integration

will be needed between online and mobile portals,
the order management system, the warehouse Currently, luxury brands want to have transparency In the coming two to three years, brands desire
management system and the logistics provider between their physical stores in their stock holistic planning across all channels, meaning that
system. availability. In the next year, they would like to ship online prod cts can be bo ght and pic ed p of ine,
inventory between stores and their distribution but also the other way around.
The graph at right shows the omni-channel integrated
centers, where demand planning, inventory
development plan of the average luxury brand.
management and warehousing will be impacted.

Industry
parameters
overview
I
What are the key drivers for integrating the supply chain and logistics of your physical and online stores? f ine retail entities in China are exploring new
approaches to expedite customs clearance and
25% reduce supply chain lead time to meet the new
e-commerce opportunities. The China General
Not important
Administration of Customs (GAC) introduced the
Average
20% stoms Enterprise ertification stem. his rating
Very important
system may provide a possible solution to simplify
customs for brands entering China.
15%
Effective 1 December 2014, importers are graded
into the following four ratings:
Prior grades per GAC Current grades per GAC

10% decree no. 197 decree no. 225
AA Advanced authorized enterprise

5%
A Normal authorized enterprise
0% B General credit enterprise

Cost efficiency Inventory reduction Company structure Tax and legal reasons
and design
C and D Dishonest enterprise
In our study, one of the main reasons luxury brands Currently, most of the e-commerce luxury goods in
provided as to why they should integrate their online hina are s pplied b of ine retail entities located in
and of ine s ppl chains is in entor red ction, hina o ned b l x r brands. oods are first
where the transactions made are delivered from the imported into China as normal “commercial goods”
same pool of inventory either in the physical stores under the general trade mode. Such imports face
or warehouses, based on availability to deliver on obstacles, such as slow clearance, the return of
promised customer service levels (see graphic imported goods that need to be exported again, and
above). The other main reason is the tax and legal the large amount of administrative work that needs
regulations in China. to be prepared along with the importation.

DCF
Industry
and overview
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Generally, entities with a higher rating from customs New trends in customers’ and companies’ The best pla ers e’re obser ing are defining a
are entitled to more beneficial treatments d ring the behavior in China blended strategy for each market, with different
clearance process. approaches for mega cities than for rural areas,
pecificall , an advanced authorized enterprise may Luxury customers’ buying strategies diverge le eraging agships on the m st be seen streets and
en o the follo ing c stoms benefits A-list locations, delivering sophisticated digital
Customers that have access to global pricing save
marketing on Asian platforms (also third-party
1. Lower inspection rate of imported and exported money by buying online, mainly through
platforms) and providing story and content to
goods e-marketplaces. These additional savings can in turn
generate social conversations.
2. implified review of documents for imported and be used to buy luxury goods. Customers are able to
Industry overview
buy more for less. The mindset for 2016 is to move the focus from
exported goods
increasing walk-ins in the shops to engaging
3. Prioritized customs clearance formalities for cons mers in a more exible, digital omni channel
imported and exported goods Company sales’ strategies converge
platform that is a ailable for contin ed
4. Customs inspection and release of imported and Companies that pursued the mass market previously profitabilit .
exported goods before commodit classification, are now trying to upsell their brand, since new digital
customs valuation and country of origin are customers from lower tier cities are likely new to their
determined or other customs formalities are brands. In addition, luxury brands are introducing
completed new lines, which are capturing these new online
5. Customs assignment of coordinators for customers, in order to prevent down selling of their
enterprises original brand. In this context, luxury is no longer
defined as scarce, b t characteri ed as ha ing a long,
In addition, an advanced authorized enterprise is now
ni e and a thentic brand stor of craftsmanship.
treated as an authorized economic operator (AEO) in
China. The government has agreed with several
co ntries regions ingapore, ong ong, o th
Korea) to mutually recognize an AEO. Under such
agreements, Chinese customs and participating
co ntries regions ill provide conveniences for the
goods imported by one AEO enterprise from another
AEO enterprise.

Industry
parameters
overview
I
Points of view from EY global sector Recent transactions in the perfume industry: the price of
scarcity
For decades, the perfume market has proven As depicted in the next page, the fragrances market
extremely attractive for luxury brands and fashion has so far mainly been led by two types of industry
designers, ho identified it as a ic a to earn pla ers . di ersified l x r gro ps and .
incremental revenues while improving brand specialized cosmetics and fragrance manufacturers
awareness. Perfume and cosmetics specialists also that partner with luxury, fashion or other premium
benefited from this incremental o of demand and brands (“haute couture,” fashion, accessories, etc.)
too ad antage of the significant price differential through fragrance deals.
Arnaud Cohen between very high selling prices and their own Brands, such as Guerlain and Lancôme, which have
Partner, TAS (limited) costs. been exclusively involved in the cosmetics sector, and
Paris, Ernst & Young Advisory
These golden years appear to have ended. In order to smaller brands engaged in the haute parfumerie
continue being successful in an increasingly niche market are the few exceptions that prove the
competitive market, the main industry players have rules, as illustrated on the chart on page 55. In all
explored alternative or complementary strategies other instances, the sale of fragrances mainly relies
that are currently driving the industry, including: 1) on a brand created outside of the perfume industry,
the la nch of ne fragrances or an ers for brands which plays a considerable role in increasing product
that are already successful on the market, 2) the attractiveness and is a key differentiator in the
entry into new market segments, such as the “haute market.
parf merie niche, primaril thro gh ac isitions,
Benjamin Msika
and 3) the purchase of rights over existing brands.
Senior Manager, TAS
Following a brief overview of the current state of the
Paris, Ernst & Young Advisory
market, we will explore in more depth the last two
options and ans er the estion mar et participants
are asking themselves: is the price for continued
growth still worth it?
***

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scarcity
Chanel: Chanel Avon: Christian Lacroix, Haiku
LVMH: Guerlain*, Christian Dior, Kenzo, Givenchy Puig: ean a l a ltier, rada, alentino, omme des ar ons, ina
Ricci, Paco Rabanne
L’Oréal: Lancôme*, Yves Saint Laurent, Giorgio Armani, Estée Lauder: Estée Lauder, Ermenegildo Zegna, DKNY,
Ralph Lauren, Cacharel, Diesel, Maison Margiela, Proenza , om ord, omm ilfiger, ichael ors, r d ric
cho ler, i tor olf alle , ilian , lini e
Industry overview
Coty: cci, oberto a alli, ottega eneta, alenciaga, sa p Tope e a e li Inter Parfums Inc.: Abercrombie & Fitch, Boucheron, Coach,
Guess, Stella McCartney, Cerruti, Miu Miu, Alexander operatori
perfumeeconomici?
brands nhill, ochas, ontblanc, imm hoo, an leef rpels,
McQueen, Hugo Boss, Lacoste, Escada, Chloé, Marc Jacobs, Paul Smith, Lanvin, Karl Lagerfeld, S.T. Dupont, Repetto
Calvin Klein, Adidas
Hermès: Hermès AmorePacific: Annick Goutal**, Lolita Lempicka
Clarins: Thierry Mugler, Azzaro Shiseido: Serge Lutens**, Zen
*Involved in cosmetics and fragrance activities only

**Haute parfumerie niche market
Entering the perf me ind str re ires large For man ears not ithstanding the sit ation of This led to “win-win” licensing deals under which the
investments in the form of high marketing costs to some of the larger brand portfolio owners (e.g., owner of the brand (or licensor) granted a license for
build brand awareness. As a result, the link between a health balance generall existed bet een the right to use its brand for certain categories of
fragrances and l x r fashion has become ite the brand owners who did not have the desire, scale, products (generally class three rights, i.e., perfume
natural. It enables luxury houses to leverage their time or skills to enter the perfume market and the and cosmetics) to a fragrance manufacturer (or
existing labels to sell perfumes. It further allows perf me cosmetics man fact rers ho ere read licensee) who would pay a license fee (generally in
manufacturers to capitalize on a strong brand to make the necessary investments in order to the form of a royalty rate applied to its wholesale
identity and a genuine history. develop these brands in the perfume segment, sales).
provided they could access it at a reasonable cost.

Industry
parameters
overview
I
scarcity
The following table provides a non-exhaustive list of the license agreements in force in the fragrance sector today.
Licensor Licensor business Licensee Licensee business Date of effect Royalty rate Status
Abercrombie & Fitch Premium apparel Inter Parfums Inc. Perfume house 2016 na Active
Alexander McQueen* Luxury fashion Coty Cosmetics 2016 na Active
Boucheron Fine jewelry Inter Parfums Inc. Perfume house 2011 na Active
Burberry Luxury fashion Inter Parfums Inc. Perfume house na 14% Expired
Christian Lacroix Luxury fashion Inter Parfums Inc. Perfume house na 5.5% Expired
Coach Luxury fashion Inter Parfums Inc. Perfume house 2016 na Active
Dolce & Gabanna Luxury fashion Procter & Gamble Co. i ersified ons mer goods na 10% Expired
Dunhill Tobacco and luxury goods Inter Parfums Inc. Perfume house 2013 na Active
Ermenegildo Zegna Luxury fashion Estée Lauder Cosmetics 2011 na Active
Escada* Apparel Coty Cosmetics 2016 na Active
Fendi Luxury fur and leather goods Eli Lilly Pharmaceutical and cosmetics na 4.5% na
Giorgio Armani Luxury fashion L’Oréal Cosmetics na 4% Active
Gucci Luxury fashion Procter & Gamble Co. i ersified cons mer goods 2006 9.3% Expired
Gucci* Luxury fashion Coty Cosmetics 2016 na Active
Hugo Boss* Premium apparel Coty Cosmetics 2016 na Active
Karl Lagerfeld Luxury fashion Inter Parfums Inc. Perfume house 2012 na Active
Lacoste* Premium apparel Coty Cosmetics 2016 na Active
Lanvin Luxury fashion Inter Parfums Inc. Perfume house 2007 5.5% Active
Louis Feraud Luxury fashion Ferraud et compagnie Luxury fashion na 3% na
Maison Margiela Luxury fashion L’Oréal Cosmetics 2016 na Active
MiuMiu Luxury fashion Coty Cosmetics 2013 na Active
Paul Smith Apparel Inter Parfums Inc. Perfume house na 5.5% Active
Proenza Schouler Apparel L’Oréal Cosmetics 2015 na Active
Repetto Ballet shoes Inter Parfums Inc. Perfume house 2012 na Active
Roberto Cavalli Luxury fashion Coty Cosmetics 2011 na Active
S. T. Dupont Luxury leather goods Inter Parfums Inc. Perfume house 2014 6% Active
Stella McCartney* Luxury fashion Coty Cosmetics 2016 na Active
icense agreement originall signed ith ea t siness and transferred as part of ot transaction.
The presented royalty rate corresponds to the midpoint of a range for the following license agreements: Celine, Christian Lacroix, Fendi, Lanvin, Paul Smith, Ralph Lauren and S.T. Dupont.

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Industry
and overview
I
scarcity
More often than not, the exact terms and conditions

of the licensing agreements are not publicly available,
{ {
but royalty rates paid by the licensee are typically
expected to range between 2% and 10% in this
industry. Less protection Discount
Royalty rate costs and tax rate
While licensing deals are still very much being
Value of the
developed, some of the main perfume manufacturers trademark
have experienced the limits of this business model1 Revenues generated Royalties on the trademark Cash ows attributable
under the trademark to the trademark
Industry overview
and are now exploring more, and more often,
opportunities to directly buy either the rights over a
trademark category or an entire trademark, brand or
business. Another strategy used by industry players
is to look for haute parfumerie brand targets. While As depicted in the previous chart, under this To nderstand the practical conse ences of this
the benefits of s ch strategies are ite e ident from approach, the al e of the brand is e al to the approach, let’s ta e a simplified example ith the
a b siness and gro th perspecti e, the right estion stream of after-tax royalty savings associated with following parameters:
to ask is whether these transactions are also sound the ownership of the intellectual property (IP) rights • S1 = 100
from a financial perspecti e. discounted at a rate commensurate with the risks of
• g = 2%
To help ans er this estion, it is sef l to go bac to the asset. athematicall , the brand al e rand
is dependent on the following parameters: • RR = 6%
some of the basics of valuation theory and to review
the valuation approach commonly known as the • S1 = sales generated under the brand name in year • DR = 10%
relief-from-royalty method2. In fact, the one • TR = 33.33%
relief-from-royalty method seems particularly suited • g = annual growth rate of sales associated with the Numerically, this leads to rand
to estimating the value associated with the ownership brand .
of the rights to a brand intangible asset in the In other words, a perfume brand generating sales of
• RR = royalty rate
perfume sector. 100, growing at 2% per year (into the long term) and
• DR = discount rate
for which the licensee pays a royalty rate of 6% has a
1
One of the most famous examples of the limits to this business model • TR = tax rate
is arguably the termination of the licensing arrangement between
theoretical, intrinsic value of 50 or 0.5x sales.
Burberry and Inter Parfums at the end of 2012. While Inter Parfums In form laic terms, the al e of an indefinite li ed
recei ed significant compensation from rberr pon termination of brand is computed as:
the licensing agreement, the former lost approximately 50% of its total
sales almost overnight.
2
The basic tenet of the relief-from-royalty method is that without
ownership of the subject intangible asset, the user of that intangible VBrand = ((S1*RR) * (1–TR))/(DR–g)
asset would have to make a stream of payments to the owner of
the asset in ret rn for the rights to se that asset. ac iring the
intangible asset, the user avoids these payments.
Industry
parameters
overview
I
scarcity
Now that we know how the math works, we can also What could cause such a disconnect? 4. Finally, the scarcity of such assets and the will to
nderstand ho the brand al e ct ates ith the In our view, this discrepancy can be linked in large seize growth opportunities in a highly competitive
main parameters. part to the following factors: market
For a royalty rate between 4% and 8% and a discount 1. The sec ring of f t re cash o s for an indefinite While the first three factors could validly impact the
rate between 8% and 12%, the resulting brand value period of time. Indeed, in our previous numerical parameters considered to value a brand under the
is between 0.3x and 0.9x sales. example under the relief-from-royalty method, we relief-from-royalty method or translate into
That is the theory. Let’s now take a look at two recent had assumed that owning the brand was meas rable additional cash o s, the fourth factor
real-world industry transactions: e i alent to a oiding the pa ment of a f t re has no direct financial translation and therefore leads
stream of royalties. In doing so, we omitted to say to the estion each decision ma er in the ind str
• On 9 July 2015, Coty announced its merger with
that this ac isition is also a a to sec re the sho ld as hat price premi m am read to pa for
the P&G beauty business (and its large perfume
ability to continue using the brand and avoid any such scarce assets?
and cosmetics portfolio for a combined e it
value of US$9.6b. While this portfolio is made of uncertainties that may arise at one moment or This race for scarce brands has also resulted in
scores of owned brands and license agreements another (e.g., increased royalty rate upon renewal another strateg that clearl has some benefits b t
hich ma es it diffic lt to anal e , this translates of the license . rther, in general, b ac iring a will not be the ultimate answer to the industry’s
into a 2.1x sales multiple. brand, the perfume manufacturer also secures challenges. This alternate or complementary strategy
the cash o s associated ith pre io sl has consisted of perfume manufacturers looking for
• On 19 March 2015, Inter Parfums announced the
developed IP (existing fragrances) growth opportunities at the high end of the market,
ac isition of the ochas brand for m.
2. The capabilit to define the strateg on e er i.e., the haute parfumerie niche market.
According to the company’s press release, the
brand achieved sales of US$46m at the time of the aspect of the se and de elopment of the brand The haute parfumerie is indeed an interesting way to
ac isition, hich translates into a . x sales hich is nli el nder a license agreement and address the market, as it allows manufacturers to:
multiple. more specificall on the follo ing strategic • Avoid being dependent on third-party distributors
decisions: (large, specialized retailers, such as Sephora) and
In other ords, for these t o transactions, the E
sales multiple was more than four times what we • International development of the brand capture the margin associated with the distribution
computed for a “typical perfume brand.” While the • e la nches inno ations, hich no longer of the perfumes
utmost care should be taken when analyzing these need to be approved by the brand owner • Differentiate themselves from the “pack” of the
transactions’ fig res as an example, the ochas • Price positioning, which does not need to be fashion l x r brands ith a distinct image fine
sales included some royalty revenues that should be approved by the brand owner fragrances specialist) and value proposition
segregated and analyzed separately), we clearly see personali ed ni e fragrances
3. Potential costs synergies [distribution, media
that there is a great disconnect between the intrinsic • Increase the price scale with offers ranging from
buying purchasing power, Selling, General &
brand al e indicated b o r simplified theoretical €100 to €700, as described in the following table,
Administrative expenses (SG&A), etc.]
computation and the reality of recent transaction which summarizes some recent transactions in the
prices paid in the industry. high-end segment of the market
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scarcity
Date Target Buyer Seller Consideration Comments While not enough information is available to compute
the valuation multiples, it should also be noted that
25 Feb 2016 By Kilian Estée Kilian Undisclosed By Kilian is a luxury perfume brand from Paris, created by
Lauder Hennessy Kilian Hennessy. Sold in more than 40 countries through
these transactions generally also “come at a price,”
freestanding stores (e.g., Paris, London, New York, as:
Moscow, Doha and Lugano) and perfumeries, By Kilian
• The market addressed by haute parfumerie
offers perfumes with a price range between €100 and
€300. corresponds to a marginal portion of it.
• There are an increasing number of players in this
24 Jan 2016 L’Artisan Puig Fox Undisclosed Penhaligon’s London is one of the most prestigious British
Parfumeur Paine & fragrance houses and holds two Royal Warrants. The brand
niche, which makes it increasingly competitive as
Industry overview
and Company has its own stores (London, Paris, Hong Kong, Singapore, well.
Penhaligon’s Milan, New York, Beverly Hills, Taipei, etc.) and a global
London presence. Penhaligon’s offers perfumes with a price range
• In certain cases, these brands are too closely
between £65 and £150. associated with their creator and may not last in
L’Artisan Parfumeur Paris is a luxury artisanal brand from the long run.
Paris, working with its own craftspeople to create authentic
and innovative perfumes. L’Artisan Parfumeur operates • They may not allow aggressive expansion or
retail bo ti es in rance aris, ille, arseille and has a di ersification plans.
global presence. L’Artisan Parfumeur offers perfumes with
a price range between €100 and €150.
***
The competition between the perfume industry’s
22 Dec 2015 Serge Shiseido Serge Undisclosed Serge Lutens is a luxury perfume brand from Paris. Serge
main pla ers has certainl intensified as the ind str
Lutens Lutens Lutens fragrances retail in approximately 2,000 stores,
spanning 35 countries with a total net sales of c. €40m. has become more mature and players realize that
Serge Lutens offers perfumes with a price range between there might not be room for everyone. Besides, the
€100 and €600.
race to the “Holy Grail” is not over, and some
12 Jan 2014 Editions de Estée na Undisclosed Editions de Parfums Frédéric Malle offers a collection of transactions might still occur in the near future. As
Parfums Lauder luxury perfumes created by 12 master perfumers from an example, after the exit of the Dolce & Gabanna
Frédéric aro nd the orld. old thro gh fi e stores in aris and e brand from the ot portfolio follo ing the ot
Malle York as well as through Barneys New York in the United
States and Liberty in London, Editions de Parfums Frédéric
transaction, some companies active in the sector
Malle offers perfumes with a price range between €100 seemed to look at it closely. For this transaction, as
and €260. for an other, the estions that ill need to be
11 Jan 2014 Le Labo Estée na Undisclosed Le Labo provides highly selective luxury fragrances. The
answered include: how much of a premium are
Lauder brand distributes its perfumes in minimalistic freestanding investors willing to pay for scarce assets? More
stores in New York, London, Paris, Los Angeles, San importantly, in the luxury world where things change
Francisco, Tokyo and Hong Kong, as well as selected
er ic l , are e betting on the right brand s the
prestige department stores worldwide. Le Labo offers
perfumes with a price range between €140 and €730. price offered commensurate with the risks taken?

Industry
parameters
overview
I
Points of view from EY global sector Millennials and the luxury landscape
Millennials and the luxury landscape Creating a dialogue through social media
Millennials are taking the reins of luxury, and for Condé Nast magazine calls it “the Yelp effect.” Every
them, it’s all about the experience. Born in an era experience with a brand, good or bad, can be easily
bookended by the introduction of the personal catalogued, documented and shared online via social
computer and the smartphone, millennials have media in toda ’s orld. lmost a arter of searches
always had information — and choices — right at their for millennials’ top 20 brands are links to
John Nguyen fingertips. ith of all ho seholds in the user-generated content. Additionally, millennials lean
making more than US$500,000 annually belonging heavily on recommendations from friends and peers.
Senior Manager, Audit to millennials, the generation represents a lucrative Because millenials are accustomed to seeking out
Dallas, Ernst & Young LLP United States
market for luxury brands. The U.S. Chamber of recommendations, l x r brands are finding it critical
Commerce cites that although they’re decades away to maintain positive relationships with them. One way
from peak earning power, millennials currently they’re doing this is through social media.
command approximately US$700b in purchasing More than 2.1 billion people worldwide are on social
power: US$200b of their own and US$500b of media in one form or another. And one-third of
indirect spending thro gh in encing their parents.1 millennials cite social media as their preferred
ecr iting firm erglass ssociates estimates that method of communication with businesses.2 Because
by 2017, the millennial generation is expected to millennials tend to be very active on various forms of
outspend baby boomers. Tapping into millennials’ social media, there are numerous channels and
desire for engagement is forcing brands to innovate opportunities for luxury brands to deliver their
Kelsea E West and create ever more immersive, interactive messages to a willing audience.3 According to Chris
Senior, TAS experiences for consumers. Paradysz, co-CEO of marketing agency PMX Agency,
Dallas, Ernst & Young LLP United States
Here is what some luxury brands are doing to capture Gucci, Chanel and Burberry have seen success with
millennials’ hearts — and wallets. an innovative digital presence attracting millennial
consumers. Chanel’s YouTube channel currently has
more than 550,000 subscribers and features
high-production content, including promotional
videos, fashion shows and beauty tutorials.
2
Tom Pick, “47 Superb Social Media Marketing Stats and Facts,”
1
r stina stafson, illennials redefine l x r and the sta es are InfusionSoft, 21 January 2016.
high,” CNBC News, 18 February 2015, CNBC LL 2016, accessed via 3
Erin Shea, “Future of fashion brands depends on millennial brand
http .cnbc.com . affinit , Luxury Daily, 18 January 2013 , Napean LLC, 2016.

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Chanel aims to produce video content as luxurious as Olivier Rousteing, Balmain’s creative director, has Reinforcing the brand through social responsibility
its products in order to build its digital brand and lure helped rejuvenate the popularity of the label through Millennials are commonly characterized as caring
consumers.4 It seems to be working. The latest video his Instagram account, which documents his partying more about social justice and the environment than
from Chanel’s show in Cuba caused YouTube user ith models as ell as his high profile relationship generations before them. Due to these
lil iss to comment, ood ’ll go bro e again in with the Kardashians.5 Named Balmain’s creative characteristics, l x r brands that sho an affinit
November–December shopping this collection lol as director at the age of 24, Rousteing’s social media for social responsibility could attract more millennial
usual.” User Christopher James had a more presence — and the attention it attracts — has consumers. The Harvard Business Review says that
emotional take: “Oh my god! Thrilling! Inspirational, transformed the compan from a ash , inaccessible 88% of US and UK millennials and Generation Xers
emotional, de ine sic . t’s the first time a fashion brand to the brand that o tfits millennials’ fa orite
Industry overview
believe brands need to do more good.7 Not typically
show makes me cry ... Devine [sic]!” celebrities. Rousteing learned from his friend Kim associated with social responsibility, luxury brands
There’s further evidence that connecting with Kardashian how to tap into the potential of using are beginning to adapt this preference of their
consumers via social media can lead to a better Instagram as a social media marketing tool long millennial customers by implementing green
bottom line. Luxury conglomerate Kering reported an before many other designers. He prides himself on initiatives, focusing on transparency and
11.5% YOY revenue increase for Gucci, which became being a celebrity-loving millennial, and has now sustainability, and showcasing local manufacturing
increasingly active in the digital space during the de eloped an nofficial almain rm of his closest efforts.8 oth and ering ha e implemented
latter half of 2015. The Instagram page for Gucci has celebrity friends, including model Rosie s stainabilit programs to foc s on specific
more than . million follo ers and fre entl posts Huntington-Whiteley, Kanye West, Kylie Jenner and environmental and social issues and challenges in
photographs of the latest product offerings and Rihanna, for whom he personally selected concert their ind str , specificall aro nd man fact ring. n
celebrities wearing Gucci. Luxury conglomerate to r o tfits. Rousteing credits the success in part to 2012, Kering implemented a series of ambitious
also reported increased moment m and his focus and ability to build a brand6 via social media. target goals, which were integrated into the company
success for label Bulgari, which has a strong digital manufacturing plans around responsible gold
presence. And then there’s the story of Balmain. sourcing, water pollution, leather traceability,
chemical se and carbon emissions.
implemented the “LIFE” program, also in 2012, to
embed environmental factors into the company’s
managerial processes.
7
Andrew Winston, “Luxury Brands Can No Longer Ignore Sustainability,”
hbr.org, 8 Feb 2016, 2016 Harvard Business School Publishing, 2016,
accessed ia https hbr.org l x r brands can no longer
ignore-sustainability.
5
Jessica Pressler, “Meet Balmain’s Oliver Rousteing, Fashion’s BFF,” GQ, 3 8
r stina stafson, illennials redefine l x r and the sta es are
4
Hilary Milnes, “How Chanel trounces other industry brands on YouTube,” November 2015, Condé Nast, 2015. high,” CNBC News, 18 February 2015, CNBC LLC, 2016, accessed via
Digiday, 25 August 2015, 2010–2016 Digiday. 6
Ibid. http .cnbc.com .

Industry
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The program is centered on key elements of Luxury brands believe that a millennial who loves These store features were incorporated into the
environmental performance and developing new buying a brand’s mini-me bags, makeup, perfume brand’s omni-channel sales strategy, creating an
environmental management tools. When millennials and accessories now will love buying the same experience in which the consumer could order from
can see that their interests are aligned with that of a brand’s full-sized handbags and shoes in the future. the website or tell a sales associate he or she would
brand, they are more inclined to make a purchase As such, these lower-priced offerings provide brands like another size of an item or experience with
knowing that it originated from causes that matter to an opportunity to form a relationship between the different potential lightings, all from the comfort of
them.9 brand and the millennial consumer, as opposed to a the dressing room. This forward-looking initiative
certain product and the consumer. Brands that have contributed toward a 10% increase in sales of
Introducing the brand through accessible price had success with this strategy have found the balance Minkoff’s Capsule collection to wholesalers this
points between offering items for younger shoppers that season.13
are expensive enough to maintain the brand’s allure Celebrity endorsements, social media, technology
Despite the fact that millennials have not yet reached
without diluting the luxury perception of the brand, and social responsibility initiatives are all important
their full earning capabilities, they are willing to
yet are still attainable given millennial consumers’ mediums through which luxury brands can reach and
spend freely what they can now, with a hopeful future
current price sensitivity.11 appeal to millennial consumers. In order to capture
of even higher spending. A proven successful method
for labels to cater to this spending is to offer a wide millennial market share, successful brands will have
range of products at varying price points. Iconic Providing a personalized experience through to innovate, grow and adapt with the technological
fashion ho ses o is itton and rberr ha e both technology and social media revolutions that are shaping our
seen success in marketing a wide range of products Technology is another key method of reaching economic future.14
ranging in price from US$100 up to thousands of consumers. Creating an interactive, and digital
dollars.10 This pricing strategy can also be seen in experience helps to align millennials desires for
lines of “mini-me” bags by labels, such as Céline, experiences with luxury brand shopping. Fashion
Mulberry, Chanel, Philip Lim, Chloé, Stella McCartney, designer Rebecca Minkoff has succeeded in building
Kate Spade and more. This fall, Hermès will feature a technology into the brand’s identity to attract
mini-me version of its iconic “Kelly” bag. consumers and encourage spending.12 The brand
recently opened a new high-tech store in Manhattan
that includes interactive mirrors and smart dressing
rooms.
9
“Most Millennials Don’t Trust Big Luxury Brands and Brands are Taking
Notice,” The Fashion Law: The Leading Source for Fashion Law and the 11
Lianna Brinded, “Luxury fashion houses are starting to crack the secret
Business of Fashion, 20 January 2016, The Fashion Law, 2016. to attracting millennials,” Business Insider, 26 December 2016, CNBC 13
Ibid.
10
Gabrielle Rein, “Think Tank: Why Millennials Are the Future of Luxury,” LLC 2016. 14
Gabrielle Rein, “Think Tank: Why Millennials Are the Future of Luxury,”
Women’s Wear Daily, 25 April 2016 , Fairchild Publishing, LLC, a 12
Kristina Gustafson, “Rebecca Minkoff rewriting the rules of fashion,” Women’s Wear Daily, 25 April 2016 , Fairchild Publishing, LLC, a
subsidiary of Penske Business Media, LLC, 2016. CNBC News, 12 February 2016, CNBC LLC 2016. subsidiary of Penske Business Media, LLC, 2016.

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Industry
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Points of view from EY global sector Chinese appetite for luxury goods and brands reshapes the luxury
landscape
The Middle Kingdom Interestingly enough, China is far from being the
Accounting for roughly one-third of the total tax-free preferred country for domestic luxury purchases.
p rchases in , hina as the first ax ree Three main factors may explain this paradox:
Shopper Nation” according to Global Blue, a global strengthened anti-corruption laws in Mainland China
leader in tax-free sales.1 his fig re is e en more and Hong Kong, Chinese consumers’ willingness to
impressive when considering that Hong Kong scores live an authentic brand experience by buying luxury
10th in the same ranking. However, Chinese products locally, and last but not least, better prices
Amaury Bonnaire else here d e to in ation in hina, foreign exchange
consumers did not complete the most tax-free
Executive Director, TAS rates and high taxes and custom duties in China
Industry overview
transactions (Russian consumers completed the
Geneva, Ernst & Young SA (about 30% for imported watchmaking and 50% for
most , hich means that hina is first in this ran ing
not because it is the most populous country, but cosmetics).
because Chinese consumers bought expensive As a result, Chinese consumers prefer to make luxury
items first and foremost, atches and e elr hard goods purchases while traveling abroad. When
luxury goods), also according to Global Blue. As a traveling in Europe, more than 81% of Chinese
matter of fact, the Fung Business Intelligence Centre travelers will shop with a budget as high as €3,544.
values the yearly Chinese tax-free spending at Chinese travelers represent a crucial opportunity for
US$200b in 2015 — a value that is expected to more luxury retailers — especially since they typically only
than do ble in the next fi e ears.2 have a few holidays during which to travel. One of
them is the “National Day” holiday week in early
Fabian Denneborg October. In 2015, with a weak yen and during this
Executive Director, TAS so-called “Golden Week,” around 400,000 Chinese
Zurich, Ernst & Young AG tourists spent some US$830m in Japan.3 Being able
to capitalize on those Chinese travelers represents a
crucial issue for the European luxury industry.
1
“Global Blue releases the Globe Shopper Report: China Edition,”
lobal l e ebsite, accessed ia http corporate.globalbl e.com
press centre global bl e releases the globe shopper report china
edition , pril , lobal l e, .
2
“Report: Outbound Chinese Traveler Spending to Hit $422 Billion,” Jing 3
“Tax Free Shopping in 2015: a year in review,” Global Blue website,
Daily, eptember , ing ail , accessed ia http ingdail . accessed ia http corporate.globalbl e.com press centre tax free
com report o tbo nd chinese tra eler spending to hit shopping in a ear in re ie , an ar , lobal l e,
billion . o om . 2016.

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landscape
Persistent uncertainty in Greater China The deceleration in consumption of luxury goods has As for most luxury groups, watch companies are
Greater China used to be seen as the only safe haven
4 been f rther amplified since amid protests currently prioritizing reducing their stock levels in
for European luxury brands following the 2007–08 against Mainland China. Anti-Mainland sentiment has order to improve inventory rotation. They are also
global economic crisis — but it is no longer true. In negatively impacted tourism from China Mainland, taking advantage of lower pressure on real estate
2012, the Chinese Government implemented a new while a strong Hong Kong dollar has faded out the prices to renegotiate rents. Meanwhile, they pursue
anti-gift policy. This measure was a major challenge demand for luxury goods in that city-state.8 online sales implementation as well as store
for luxury companies: since then, the market rationalization throughout Greater China, with a
conditions in Greater China have remained very New normal, new strategies special focus on Hong Kong.12 Moreover, luxury
challenging, and the current situation is not getting groups’ marketing strategies are changing as well:
Unsurprisingly, luxury brands remain highly exposed
any better. some of them, s ch as , ering and ichemont,
to uncertainty in Greater China: for instance, Swatch
are focusing their efforts on promoting the most
Over the last few months, the demand for high-end and Richemont generated 34% and 24% of their 2015
promising recent brands in their portfolios. This
products has been shrinking. In the watch industry, revenue in this area, respectively.9 However, due to
enables them to drastically decrease marketing
the mid-price point declined by almost 20% in the weaker sales than expected, most watch retailers are
expenses by avoiding onerous traditional
second half of 2015.5 Luxury companies are suffering currently facing overstocks. Meanwhile, they
communication campaigns.13
from cutthroat competition, even more exacerbated continue to struggle with high rental costs.
by the availability of midrange brands. Meanwhile, In response to the change in the Chinese economic
China’s middle class is allocating more and more Made in China
environment, luxury companies are currently
savings to house properties as a result of the Chinese adapting their strategies to catch new opportunities. But what if intensifying ad campaigns or reducing
Government’s credit easing policy.6 For example, Swatch decided not to increase its costs is not the solution to invigorate the Chinese
Amid contin ing concerns abo t hinese financial prices to keep the focus on market share and luxury market? More and more investors are betting
mar et efficienc and gross domestic prod ct production utilization.10 Other companies, such as on local products to attract a wealthy Chinese
growth, the Greater China contribution to global Hengdeli, the largest watch retailer in Greater China, clientele. Long dominated by Western stakeholders,
Swiss watch exports has consistently decreased, took the option to extend their portfolios by the Chinese fashion world has recently seen the
falling from 33% in 2010 to 25% in 2014.7 launching new midrange brands.11 uprising of Chinese creators and designers, praising
Furthermore, the underlying trend is not any the several-thousand-years-old Chinese traditions in
different in Hong Kong, which used to be the gateway craftsmanship.
for foreign products in China.
12
Ibid.
13
“Les groupes de luxe changent de stratégies pour faire face à la crise
chinoise,” BQF Le magazine du Monde, 18 September 2015, Le Monde,
4
Greater China refers to Mainland China, Hong Kong, Macau and Taiwan. 8
Ibid. , accessed ia http .lemonde.fr m mode b siness of
5
UBS Research. 9
S&P Capital IQ database. fashion article les gro pes de l xe changent de
6
Deutsche Securities. 10
orningstar E it esearch. strategies po r faire face a la crise chinoise .
7
ac arie esearch. 11
Deutsche Securities. html.

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These young entrepreneurs are convinced that they European luxury groups have shown a strong interest French luxury groups strategically increase their
can get past the lo alit rep tation of made in in Chinese companies. This relation also works the Swiss watch activities
China” products and appeal to the other way around and has not left the Swiss luxury In the second consolidation wave starting in the
proud-to-be-Chinese sentiment of its customers — sector — more precisely the Swiss watchmaking early 2000s, two large French luxury groups
es, made in hina can be ni e, original and of industry — unchanged. entered the stage. With a diverse luxury product
high alit . And it seems to be working: many portfolio ranging from clothes to perfume and
Chinese consumers now want products made for the Asian groups, new driver of the consolidation accessories, and ering expanded their
Chinese by the Chinese, and the success story of waves in the ownership of the Swiss watch brands prod ct offerings b ac iring iss atch
local brands, such as the cosmetic producer manufacturers in the premium segment, including
Industry overview
The Swiss watchmaking industry — with 30 million
Herborist, the designer Mary Ching and the number ag e er and blot b and
watches shipped abroad in 2014 — was not left
one jeweler in market share in Greater China Chow Girard-Perregaux and Ulysse Nardin by Kering.
nto ched in this fight for s premac in the l x r
Tai Fook, is convincing proof. Asian ps in e a da le l y
sector. ltho gh it seems at first glance fairl
However, European brands also want a slice of the fragmented with more than 200 watch brands, the space
gigantic cake that represents Chinese-made luxury Swiss watchmaking industry has undergone a After these two consolidation waves, the four
products, and a number of companies have been multifaceted consolidation process with few sizable luxury players mentioned above (Swatch,
successful in combining European branding with independent players left in the market. Looking a ichemont, and ering ha e reached a
Chinese design and production. Hermès, for instance, little bit closer at the past two decades (see the certain level of saturation. The remaining
founded Shang Xia, a craft designer that focuses on graphic below), three different types of consolidation independent players in the Swiss watchmaking
Chinese savoir faire, in 2007. Hermès owns 90% of a es rationales can be identified market include sizable heritage brands in the
the brand, which has even opened a shop in Paris in premium luxury segment, such as Rolex, Patek
Consolidation and p li s leadin
2013. Philippe, Audemars Piguet, Chopard, and
Swiss watch groups
Also in 2013, Kering bought Qeelin to penetrate the Breitling, as well as smaller brands; many of which
Starting in the mid s, the first consolidation
Chinese luxury market. Qeelin asserts its Chinese are active in the affordable luxury segment. While
wave hit the Swiss watchmaking industry when
identity, not only by using Chinese materials and the sizeable heritage brands are strongly
the two large watch groups Swatch and
craftspeople, but also through its iconic collection positioned with high brand value and critical mass,
ichemont began ac iring l x r atch
“Wulu,” which celebrates China’s cultural heritage. the smaller brands face challenges due to
manufacturers to complement their product
Shanghai Tang, another example of a successful international competition and scale. Demand for
offerings in different price segments and to
association of European brand management with affordable luxury products has increased in
benefit from scale effects. hese ac isition
Chinese design and production, aims at rejuvenating emerging countries in the Middle East and Asia
targets included manufacturers with strong brand
Chinese fashion of the 1920s and 1930s; it is now mainl dri en b the high affinit for
value and brand heritage, such as Breguet and
part of the prestigious brand collection of Richemont, “Swiss-made” watches in the growing middle
Glashütte (Swatch) and A. Lange & Söhne, IWC
alongside artier, ontblanc and an leef rpels. class.
and Jaeger-LeCoultre (Richemont).

Industry
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overview
I
landscape
Strategic investors from these regions, therefore, Wave 1

increasingly look at Swiss watch brands in the Breguet
(CHF120m)
Swatch
affordable l x r segment as potential ac isition Glashütte Original
Union Glashütte
targets. The most prominent representative of this
development is Citychamp Watch & Jewellery Group A. Lange & Söhne
Richemont
Jaeger-LeCoultre
(formerly known as China Haidian), which started to IWC
(CHF3.1b)*
build up a portfolio of Swiss watch brands by
ac iring Eterna, re f ss, otar , odex and Wave 2
Corum. An additional prime representative of this
LVMH
Tag Heuer Hublot Bulgari
(CFH1.2b) (CHF4.8b)
development is the Japanese watch company Citizen,
hich has recentl anno nced the ac isition of the
Kering
iss atch brand r d ri e onstant, Girard-Perregaux Ulysse Nardin
JEANRICHARD**
complementing its existing portfolio of the Swiss
component manufacturers La Joux-Perret and
Prototec as well as the Swiss watch brand Arnold & Wave 3
Citychamp
Dreyfuss & Co.
Son. Eterna Corum Rotary
(CHF26m) (CHF81m) (CHF45m)***
Looking ahead, ac isitions of one of the fo r
European luxury groups seems unlikely due to the Arnold & Son Frédérique
Citizen
fact that each has already built up a comprehensive (CHF64m)**** Constant
portfolio of brands and the sheer size and indicative

valuation of the remaining independent heritage 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
brands. The continuation of the third wave of

consolidation is more likely, where we will see the e e es an ac es l es annes ann pl s e ainin s a e ae e e l e
** Together Sowind Group
entry of additional Asian buyers that aim to leverage *** Together Dreyfuss Group
**** Purchase price for Prothor Holding, which includes the watch brand Arnold & Son as well as component manufacturers La Joux-Perret and Prototec
their distribution power in Asia with the ownership
and sale of affordable luxury watches made in
Switzerland.
Sources: EY research, Mergermarket.

DCF
Industry
and overview
I
Points of view from EY global sector Store costs management: how to improve internal rate of return
and enhance performance
The internet and social media have created a new Store cost breakdown: example
generation of constantly connected consumers, who
are updated on global trends, sensitive to innovation General construction
31%
and willing to share with the world their own shopping
experience. Even the way we think about stores and
what they should be (and generally retail business Wooden Items
management) has changed. Eye-catching signs, 20%
Riccardo Pastore furnishings that enhance products’ value perception
Director, Cost and Cash and stunning showcases remain key success factors,
Industry overview
Optimization, TAS but modern shops should also be able to interact with
Milan, EY S.p.A. social media and with customers’ smartphones, Other
1%
proposing offers and personalized content,
Carpets
presenting innovative experiences and responding to 1%
the needs of both teenagers and older consumers Painting
3%
— all this while remaining a friendly and enjoyable
place to go. Lift and stairs Shelves
4% and furniture
As a conse ence, the o erall cost of a store’s life 12%
cycle has greatly increased. New high-tech systems Demolition and strip out
generate ne expendit res, re ire periodic 5%
maintenance and are subject to rapid obsolescence Electrical works Markup

risks. At the same time, costs for furniture and 5% 7%
renovations (which in the opening of a new store can Stones

External windows and doors 6%
account for more than 60% of the budget) have not 5%
decreased, putting companies on the spot to make a
decision: increase the budget or just say no to certain
changes?
Each cost can be addressed, preserving quality and concept
During the store concept definition phase, companies
are so focused on the impact of communication and
on the return on investment that the store may
postpone ans ering this estion, identif ing onl in
a later stage solutions that adhere to the budget
while still realizing the spirit of the store.

Industry
parameters
overview
I
In this phase, store redesign is a key factor, especially In line with this view, cost reduction strategies may All of these choices, though each of possibly minor
for those retailers that manage a large number of include the following: importance, can sometimes make the difference
shops, as a redesign offers the opportunity to not • Electricity and lighting costs are reduced by between a successful investment plan and a project
only reduce the cost of the investment (CAPEX focusing light beams where the most interesting with low returns.
reduction), but also to improve overall process products are going to be placed. The estion is h sho ld companies p rs e this
efficienc . E en in those areas here it is t picall approach? Any savings generated will free up
• Furniture, display cabinets and counters are no
hard to challenge the stylistic choices, such as the resources that can be used for new advertising
longer purchased as a bundle, but their structure is
selection of materials and finishes, it is possible to campaigns as ell as to finance ne comm nications
analyzed, broken down and optimized component
adopt a process that allows the company to focus on social media and, potentially, to support the
by component ntil achie ing a f nctional, exible
exclusively on what really provides value to its opening of additional stores.
and inexpensive solution.
customers, avoiding wasting resources on non-core
• Large plastic furnishings are broken down into Financial reso rces to s pport a ic store
elements.
smaller pieces to reduce the costs of the molds. modernization and renovation plan can be found by
What does it mean to reconceive the store? It looking at each single store cost component, taking
certainly does not mean dramatically changing the • Suppliers of ooring, tiles, stones and coatings are
into account the store life cycle phase and identifying
store’s aesthetics and the guidelines that drove its sought on a global scale.
minimally invasive solutions.
design, but rather to help make sure that any money • Catalogs and window stickers disappear in favor of
spent has an impact on the customer and, tablets, large screens and online solutions.
conse entl , increases store profitabilit , b
reducing all costs that do not elicit a positive
emotional response from the customer.

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Store concept definition, concept ind striali ation,

initial investment and operational “or running” Maintenance
maintenance, as a whole, depend on how well the
Store investments
store concept has been thought out. But how is it
Saving opportunities
possible to stay true to the concept and initial
creative ideas while adhering to the budget? Though Concept
it’s not possible to no the price per s are meter industrialization
for each store, it’s certainly possible to make a series
of technical and mar et anal ses to fig re o t hich
Industry overview
steps the compan is going to ta e and hat benefits
and issues will result. Concept definition
Once the store concept is defined, it’s time for

ind striali ation, hich raises the estion hat are
Store life cycle
the small changes and choices that allow the retailer
to switch from a “beautiful” (and potentially costly)
Definition of a new Challenging of Cost management Maintenance
prod ct to an efficientl doable prod ct concept at c ncep specifica i ns without design running
Creativity often clashes with the corporate targets, target cost to achieve target cost difica i ns costs management
and during the redesign-to-cost process, the budget
sho ld firstl be allocated to preser e the creati e
and distinctive elements of the concept, while for Technical levers Commercial and process levers
standard and less marketing sensitive items (which
can account for more than 50% of the investment),
simple and linear solutions should be sought, mainly
based on functionality and in line with the overall
look.

Industry
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overview
I
Store cost management does not end with concept Exhibitors, promotional materials, shopping bags, mar eting, p rchasing and technical offices. n fact, it
ind striali ation efficienc opport nities can be manne ins and hangers can be redesigned thro gh is only if each actor involved is available to ”get
achieved through the so-called ”learning economies”: a process easier than the one undertaken for the involved in the game’’ that real business needs and
those processes that allow retailers, while developing stores, but their redesign will likewise be able to market opportunities will be highlighted, boosting a
a project, to learn from previous mistakes, eliminate decrease costs by up to 20%, without renouncing the virtuous circle that encourages co-design with
aste and increase reali ation efficienc . n o r concept of the store and while satisfying marketing trusted partners and a 360-degree analysis of
experience, an efficienc reco er of p to is needs and goals. investments (considering both initial costs as well as
deemed feasible. Rethinking the store concept before In conclusion, a fundamental aspect of making the incidental or recurring ones), respecting marketing
a ne a e of openings reno ations is still possible, redesign-to-cost process happen and be effective is guidelines and taking advantage of all communication
but it’s better to remember that other elements, such the active collaboration between designers, and technical market solutions.
as planning, consolidation of purchasing volumes,
choice of the best partner and cost-controlling
acti ities, can ha e e all significant effects. ea e s Displays and Window Shopping
Structured contractual agreements, adoptable on a and brochures Catalogs point of purchase (POP) stickers bags Packaging
large scale (e.g., builders, dry wall experts,

electricians and main contractors) can help Levers Examples of actions
companies a oid o err ns. efining p rchasing

Delivery
frameworks, both for furnishings and finishes, for Technical
pecifica i n
Redesign to cost (RTC)
requirements
multiple stores from the beginning allows a company
to get better pricing, and selecting national and or
(sum of several activities)

Printing
international partners helps ens re high alit Process
Purchasing
organization audit
Validation
optimization
standards at competitive prices.
Total cost
Database
management
“Store running cost“ is also an important Purchasing Bargaining power Rate benchmark
Pre-printing
consideration. Maintenance, cleaning, anti-theft
systems and IT services can be centrally managed,
Advising
helping provide the same level of service to all and design
Financial Direct costs Hidden costs
customers, reducing costs, by more than 10% in our

experience, and streamlining business processes by
rationalizing the number of counterparts daily
managed.

DCF
Industry
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I
Points of view from EY global sector A new challenge for luxury: retail through online marketplaces
Most luxury goods are sold online but sometimes An online marketplace is a website that sells products
under conditions that are not approved by their that it has bought but also broadcasts offers for
brands. Under European Union (EU) competition other retailers or merchants, i.e., they do not buy
laws, manufacturers and luxury brands are prohibited products for resale but instead sell products on
from banning a distribution channel — in this case the behalf of other merchants. These online marketplace
internet — since the European and national websites often go as far as collecting the payment on
competition authorities consider that it plays a key the retailer’s or merchant’s behalf, and so consumers
Marie-Pierre Bonnet-Desplan role in terms of fair competition and delivering goods cannot clearly identify from whom they are buying
Executive director, Tax at a lower price to consumers. Therefore, driven both the product.
Industry overview
Paris, Ernst & Young Société d’Avocats by distribution practices and competition rules, How is the development and growth of these
luxury brands are essentially hoping to regulate the marketplaces likely to impact distribution in the
practices of retailers that sell their products online. luxury segment?
But these online practices are subject to continuous
Until recently, brands were barely concerned with the
changes as well as the legal rules issued by
websites developed by their retailers initially
competition authorities. The rules recently put in
authorized to sell their products in their physical
place already appear to be outdated.
stores. The websites of the major authorized
Today, there are four different types of online sites retailers, which have a strong reputation and
that offer l x r goods for sale the first three are therefore a strong potential audience (especially the
(i) brands’ own websites, which were initially used as ebsites of leading stores , are generall high alit .
showcases, but are now more often sales oriented; Their internet policy is similar to their in-store policy
(ii) sites of “pure players” retailers, wherein the sale and typically in compliance with a brand’s image and
activity is fully digitalized, without involving any policies. This compliance, however, is not always the
physical point of sale; and (iii) authorized retailers case for the websites of smaller authorized retailers.
ho ha e a ph sical point of sale of ine and ho But until to now, the websites of these smaller
have also developed their own online sites (i.e., retailers had a limited distribution; hence, even if the
click-and-mortar companies). For the “pure players” smaller retailer’s distribution policy was not really of
and “click-and-mortar” types of distribution websites, good alit or consistent ith the polic of the
l x r brands are st beginning to establish specific brand, there was no real danger for the brand since
alitati e criteria for online sales. The fourth online the site was not widely published.
site type — new entrants in the online business that is
developing today and may become its most powerful
participant — are online marketplaces.

Industry
parameters
overview
I
Points of view from EY global sector A new challenge for luxury: retail through online marketplaces
But these rules are changing with the growth of Even if these brands do not exactly belong to the If the court decides that distribution via marketplaces
online marketplaces. By hosting offers among this luxury segment, they fall under this same legal cannot be banned on principle, brands will need to
multitude of small websites, marketplaces provide regime — selective distribution. Cosmetic brand strike a balance: not by prohibiting sales but by
luxury goods with a much wider distribution range. If Caudalie has not been able to obtain an injunction regulating them. Hosting on a platform should be
brands wish to have more control over the sale of from the Court of Appeal of Paris to ban the sales of prohibited only if the platform does not comply with a
their goods, assuring compliance with their image its products through authorized drugstores selling its brand’s alitati e criteria. hat is to sa that onl a
and policies, what should they do? Some brands have products on a marketplace specializing in this area.4 platform that is not suitable given its activity,
tried to ban their authorized dealers from hosting Conversely, the backpack brand Deuter has won its operation, and product environment, will be
their goods on a marketplace. Indeed, EU competition case before a German court.5 The French Authority prohibited from distributing luxury goods. These
g idelines incl de a cla se, ite obsc re, that might has launched an analysis on this subject and alitati e criteria sho ld be defined b l x r
validate such a restriction. conclusions are expected soon. Thus, the situation is brands, and a strategy should be built around them.
But is this position sustainable? Recent legal ite ag e, and l x r brands are dealing ith a Luxury brands may choose to wait or prepare, but
developments suggest not. In Germany and France, legal uncertainty, which is not business as usual. another development looms on the horizon: the
the competition laws explain that opening up the larification could be expected soon at least in geo-restriction of websites*... an even more complex
internet to smaller retailers is an unrealistic way to Europe for a cosmetic brand considered to belong to subject.
foster competition if they cannot reach a wider the luxury sector. The Frankfurt court has put
audience by hosting their offers on a marketplace. for ard a series of fo r estions to the o rt of
Adidas has recently been instructed, in Germany,1 to Justice of the EU, as this subject is governed by
allow its authorized retailers to offer its products on European law.6 Put simply: is it legitimate, vis-à-vis
marketplaces. Following this instruction, Adidas’ European competition rules, to prohibit the members
French subsidiary has also committed to doing the of a selective distribution network from involving a
same.2 Brand competitor Asics has similarly been third party (i.e., marketplace) in the product sales
instructed.3 process?
1
Press release of the Bundeskartellamt, “Adidas abandons ban on sales via
online market places,” 2 July 2014.
2
Press release of the French Competition Authority, 18 November 2015. 4
aris o rt of ppeal, e o a ant c a dalie, ebr ar .
3
Press release of the Bundeskartellamt, “Bundeskartellamt takes a critical 5
Supreme Regional Court of Frankfurt, Deuter Sport Backpack, 22 December
view of restriction online distribution by Asics,” 28 April 2014; decision of 2015.
the Bundeskartellamt, 26 August 2015. 6
Frankfurt Court of Appeal, 19 April 2016. * Websites are prevented from deli ering the goods o t of a specified territor .

DCF
Industry
and overview
I
Points of view from EY global sector The beauty market: where to invest?
The beauty market is proving to be very attractive for

most of its players — beauty companies, retailers,
start-ups and investment funds — with its track record Digital beauty brands
of high single-digit growth (from +6% to +8%) in the
early 2000s and low single-digit growth (around +4%)
after the global financial crisis, despite Digital beauty service
widespread economic tensions.
Blasco De Felice
The a erage profitabilit of the top pla ers in this rich
Beauty top executive Retail beauty brands
Industry overview
and profitable mar et is aro nd E , and the
best performers top , despite ma ing significant
investments in distribution, business drivers and Retail beauty services
o erhead. his profitabilit enables most pla ers to
deploy investments to develop their business in
Beauty markets
research and innovation, advertising and marketing, Open innovation
distribution and retail operations.
The beauty market is also incredibly dynamic, with
Ethnic beauty brands
innovation representing up to one-third of yearly
revenues. For the players in this market, this is a
double-edged sword: the most innovative companies Bio beauty brands
thrive, while the laggards are destined to decline.
In addition to the more mature and competitive
mainstream segments of the beauty market, many E-commerce beauty platform
niche segments are growing at a double-digit pace
and face less fierce competition. hese niches
pecific a e ands
represent a strong investment opportunity for
+4% 18%
beauty companies, retailers, start-ups and
investment funds alike.
Some of the hot opportunities of the beauty market Growth EBITDA
(see graphic) are discussed further below.

Industry
parameters
overview
I
Digital native beauty brands with a big idea But there are many segments that escape even the Many of these smaller companies are located in
Digital native brands have all the trends in their favor: li es of ma on and ephora, lea ing the field open orthern tal , here a specific sa oir faire exists.
the consumer shift toward the internet, the to innovative e-commerce retailers, particularly in Others are located in Latin America, where local
expansion of social networks, the development of the the luxury, pharmacy and professional segments. specificities, economic instabilit and import d ties
vloggers’ community, the explosion of e-commerce, Some e-commerce retailers are specializing in certain make such innovation and subcontracting strategies
and the resistance of traditional brands to changing product categories, such as cosmetics (e.g., indispensable. Other such small companies are in
their business models. For example, NYX Cosmetics, Beautylish) and perfume (e.g., The Perfume Shop), Asia, where the cost of production is generally lower.
hich as recentl ac ired b ’ r al, became a big plus new e-commerce models are appearing, not
brand in the US by simply leveraging a community of unlike what is happening in the fashion industry with Digital beauty services
YouTube creators. Sigma Beauty, another digital e-commerce sites Farfetch and Lyst.
The future is here for digital beauty services.
native, sells its makeup brushes and accessories Consumers access these services via laptops and
thro gh an affiliation program here bea t Innovation labs and subcontractors desktops, at home and in the street, on e-commerce
vloggers receive a commission on every product that Innovation in beauty is absolutely critical, yet not all sites and in brick-and-mortar stores. Users may
is sold after viewing one of their videos. companies can afford to pay an army of researchers discover new products, try a hair color, locate a
or for sophisticated laboratories and all the product beauty professional (e.g., Uala in Italy and Style Seat
Digital platforms, innovative business models development costs. The same is true for in the US — both online platforms to locate and
Of co rse, there are big fish in the digital bea t manufacturing, which is both capital and people reserve a stylist), receive recommendations or simply
market too, namely Amazon and Sephora. Amazon is intensive. make a purchase — all online. Consumers may also try
on track to becoming the online beauty generalist Even the large bea t companies sometimes find it virtual makeup application, which enables them to
retailer, with its amazing offers, competitive prices more convenient to outsource part of their innovation virtually try a brand’s products and colors on their
and outstanding logistics. Meanwhile, Sephora is seeking and manufacturing to achieve speed to face, with a very realistic and dynamic result.
establishing itself as the digital genius among beauty mar et and exibilit . his trend to ard open
retailers, by mastering social networks, in-store innovation” and subcontracting is stimulating the
digital services and e-commerce. development of smaller, more focused and more
exible companies that complement traditional
beauty companies as well as start-ups.

DCF
Industry
and overview
I
Another factor they can leverage is to sell products in Here is a short list of the small beauty pearls that the As the large beauty companies are mostly focused on
shops that are “men friendly,” rather than just in large bea t companies ha e ac ired o er the last ac iring and de eloping brands, the are sta ing
traditional perfumeries, supermarkets and few years: away from other parts of the industry, i.e., services,
department stores. And of course, using the internet • Est e a der recentl ac ired se en bea t retail and s bcontractors, hich lea es significant
as a marketing and commercial vehicle to reach men pearls: Le Labo, Rodin Olio Lusso, Editions de space for other players, such as investment funds,
consumers will also make a major difference. Parfum Frédéric Malle, Glamglow, Dr. Jart, Do The retailers and start-ups, to get in the game.
Right Thing, and Have & Be Co. The beauty market is attractive, growing and
Investment opportunities • ’ r al ac ired eight bea t pearls Essie, multifaceted, and any player with a precise business
Industry overview
The large beauty companies are aggressively Clarisonic, Urban Decay, Décleor, Carita, NYX idea and outstanding execution can succeed and
pursuing investment opportunities through a massive Cosmetics, Niely, and Carol’s Daughter. achieve considerable returns.
ac isition campaign. ost of them are foc sed on • nile er ac ired fi e bea t pearls in the s in care
the “small beauty pearls,” which are brands that have category: Ioma, Ren Skincare, Kate Somerville,
something special in their DNA, their business model Dermologica and Murad.
and or their mar eting model. arge bea t • ig ac ired t o pearls in the fragrances
companies ac ire these pearls at a significant category: Penhaligon’s and L’Artisan Parfumeur.
multiple of their EBITDA, yet they have a business
• ot ac ired a pac age of brands from
plan that leverages their large R&D, marketing and
and the portfolio of the Brazilian company
commercial organizations to achieve spectacular
Hypermarcas, among which several beauty pearls
growth.
are included.


Industry overview
Methodology
Sample selection
Focus on YOOX
JimmyNet–A–Porter
Choo
Methodology
a e Methodology
Approach
here are man criteria b hich to anal e the operating and financial performances of listed companies. he aim of this s r e is not to cond ct a
detailed analysis of the selected companies.
The approach implemented in this sixth edition of The luxury and cosmetics financial factbook essentially relies on three types of information:
• Several standard valuation parameters and operating aggregates
• Industry characteristics (in terms of growth forecasts and drivers)
• An overview of 30 major players of the industry
Even though this data is important and essential to the analysis, it must be stressed that other criteria or parameters could also have been analyzed.
The entirety of the data utilized in this factbook is publicly disclosed information. The
Transaction Advisory Services (TAS) teams of EY who participated in developing this
doc ment ha e not had access to an confidential information.
SOTP analyses
If the information used is found out to be incomplete or incorrect, EY will not be held or the companies that ha e di ersified acti ities , ering, ’ r al , e performed a
responsible for any impact this may have on the results or the analyses presented in this SOTP analysis to isolate the pure luxury segment and to better understand its
document. characteristics as well as its contribution to the companies’ performance.
It must be noted that the information provided in this study is based on the latest available This analysis was not possible for Swatch, Beiersdorf and Shiseido as no accurate data
financial statements of each compan as at arch . ar et data has been was available.
considered as of arch , nless stated other ise or apart from s bse ent pieces
of information incl ded in this s r e . n modification of the anal ed gro p’s financial
performances or an e ol tion of the financial mar ets that occ rred since arch
2016 could lead to partially or completely different conclusions.
lease note that e ha e presented the act al fig res for the companies, hich
have already released their 2015 annual results as of 31 March 2016.

Methodology a e
Sample selection
Sample selection
The sample analyzed is composed of 30 listed companies from the luxury and cosmetics Please note that the sample has been adjusted in this sixth edition. Actually, one
industry, of which 23 are mostly in the luxury business and 7 are in the cosmetics segment. company was added: YOOX Net–A–Porter Group S.p.A., as the two companies YOOX
To select these companies we proceeded as follows: Group and Net–A–Porter have recently merged, creating the leading online luxury fashion
retailer. YNAP was listed on the Milan Stock Exchange in October 2015.
• We firstl identified p re pla ers of the l x r sector r nello cinelli .p. .
(Cucinelli), Burberry Group (Burberry), Coach Inc. (Coach), Chow Tai Fook Jewellery
Group Ltd (Chow Tai Fook), Hengdeli Holdings Limited (Hengdeli), Hermès International
S.C.A. (Hermès), Hugo Boss AG (Hugo Boss), Jimmy Choo PLC (Jimmy Choo), Kering
ering , oet enness o is itton . . , ichael ors oldings td
(Michael Kors), Moncler S.p.A. (Moncler), Prada S.p.A. (Prada), Polo Ralph Lauren Corp.
(Ralph Lauren), Compagnie Financière Richemont S.A. (Richemont), Salvatore
Ferragamo S.p.A. (Salvatore Ferragamo), Swatch Group AG (Swatch), Tiffany & Co.
(Tiffany), Tod’s S.p.A. (Tod’s), and Tumi Holdings Inc. (Tumi).
• We completed this first list ith other pla ers in cosmetics eiersdorf eiersdorf ,
Coty Inc. (Coty), Estée Lauder Companies Inc. (Estée Lauder), L’Occitane International
S.A. (L’Occitane), L’Oréal S.A. (L’Oréal), and Shiseido Co. Ltd (Shiseido).
Methodology
• We also added companies that are in direct relation with luxury companies, such as
xottica ro p .p. . xottica and afilo ro p .p. . afilo .
• Finally, we decided to include a company that is not part of the luxury environment, but
acts as the largest cosmetics company from the emerging markets, Natura Cosméticos
S.A. (Natura), to enlarge the geographical coverage.

a e Methodology
Focus on YOOX Net–A–Porter YOOX Net–A–Porter: overview
We included YNAP in the sample as shares

of the merged entity started trading on the
Milan Stock Exchange on 5 October 2015.
ey ac s ae adin pa e n since c e
• Founded in 1999 by Federico Marchetti, YOOX is an e–commerce company and an 130
internet retailing partner for fashion and luxury brands. The company opened its
120
first online door oox.com in , follo ed b thecorner.com, shoescribe.com
and numerous monobrand online stores. The group delivers to more than 100 110
countries worldwide and as of 3 December 2009, YOOX was listed in the Milan
Stock Exchange. 100
• Net–A–Porter was established in 2000 in the UK by Natalie Massenet. The 90

company is an online luxury retailer, and it operates through three main brands:
net–a–porter.com, theoutnet.com and mrporter.com. In 2015, Net–A–Porter 80
delivered in 170 countries, offering more than 650 of the world’s leading luxury
70
products.
• In 2015, the merger between YOOX Group and Net–A–Porter created the world’s 60
October–15 November–15 December–15 January–16 February–16 March–16
leading online fashion retailer (YNAP Group). The newly formed group has 2.2m
active consumers and 6m orders (FY14 data). YOOX Net-A-Porter Group FTSE MIB
Source: Capital IQ.
• The Y ro p operates in three b sinesses i online agship stores, ii Note: 5 October 2015 = 100.
multi–brand in–season and (iii) multi–brand off–season.
Key financials CAGR
• Total offered shares: 24.3m (out of which 6.2m are newly issued shares), plus FY14A FY15A FY16E FY17E FY18E
(in €m) FY16E–FY18E
3.6m of shares for the greenshoe option. Post IPO shares (excluding greenshoe) Sales
ere . m. he final offer price as . per share for a mar et capitali ation EBITDA
EBITDA margin
of €209m.
EBIT
EBIT margin
YNAP Group e p fi
CAPEX ratio
• The new entity YNAP started trading on 5 October 2015 at €29.95, representing a
market capitalization of €3.6b.
Source: Capital IQ.
ote financial fig res are at ecember.

Glossary
OPENING a e
EXECUTIVE
Executive summary
A Global luxury goods market
SUMMARY
B Global cosmetic goods market
TITLE
Glossary
DCFDCF
C Global luxury goods market
ANDand
RAMETERS
parameters
• Sustainable luxury
VALUATION
Sub title or First paragraph
valuation PA-
• China — can Western luxury tame the
CAGR:desire?
Red Dragon’s compound annual growth rate
We have seen many luxury houses respond to the • Focus on the American
CAPEX: capitalmarket
expenditure
challenges of the new kind of customer by slowly
INDUSTRY
• Focus on the Italian market
Industry overview
developing a digital strategy. This is not just a DCF: disco nted cash o
web presence to manage brand content and deal • Counterfeit issues facing the industry
EBIT: earnings before interest and taxes
OVERVIEW
with online sales. It is an integrated approach that
harnesses social media, and connects mobile
• Focus on marketing and advertising
and tablet applications ith bac office logistics EBITDA:
in the luxury earnings before interest, taxes,
industry
to deliver a viable e-channel. The channel can depreciation
• Focus on licensing inand amortization
the luxury
provide an alternative to retail and wholesale, or industry
EV: enterprise value
AND
complement the more traditional routes to market.
METHODOLOGY
andDISCLAIMER
Methodology
• Focus on digital in the luxury industry
disclaimer
1. Sustaining development: maintaining the FY: financial ear
quality and supply of crucial raw materials, such Focus on Brunello Cucinelli and
as increasingly rare skins and ethically traceable D GAAP: Generally accepted accounting principles
Michael Kors
gems, is a big challenge for some houses. It has GDP: gross domestic product
led to an increase in vertical acquisitions in the
AND
supply chain. For example, crocodile farms in
andSPECIFIC
LTGR: long-term growth rate
SAMPLE
SampleSELECTION
Australia and African ostrich ranches have been
specific analyses
on the acquisition menu of larger luxury groups. M&A: mergers and ac isitions
selection
But the challenge is not just to secure supply.
ANALYSES
The focus is on sustainable development in all SOTP: sum of the parts
its forms. It is important to consider the ethics
WACC: weighted average cost of capital
behind the products and images of luxury; the
Glossary – Contact us
perceived and actual wastage in production YOY: year-on-year
EY
GLOSSARY
processes and packaging; and the carbon
Contact
Glossary
EXPERTS
footprint and water impact of the end product.
us
LUXURY AND COSMETICS
The luxury andTHE
cosmetics financial
EY FINANCIAL factbook 2016
FACTBOOK 2014
a e Contact
Opening
us
Contact us
Executive
p as i n
summary
y ea
Welcome toRoberto
the third edition of EY’s annual Financial Factbook
Bonacina
Partner, Lead Advisory M&A, Fashion & Luxury
Rossanafor the luxury and cosmetics sector. The
Pezone
Manager, Transaction Support,
Factbook
Francesco Gradonecombines
Senior, TAS, Fashion & Luxury
financial data,
Milan,insight
EY S.p.A. from EY’s global team of sector specialists andMilan,
Fashion & Luxury opinions
EY S.p.A.of external experts. Milan, EY S.p.A.
roberto.bonacina@it.ey.com rossana.pezone@it.ey.com francesco.gradone@it.ey.com
+39 335 138 1950 +39 366 578 7631 +39 366 402 1242
n i s e ac
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Executive Director, TAS Partner, TAS Senior Manager, Audit
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Laurent Bludzien
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Full Name
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Senior Manager, Tax Senior Manager, TAS Beauty top executive
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8 DCF and valuation parameters

The luxury and cosmetics financial factbook 2016

The luxury and cosmetics financial factbook 2016

Statistics and key facts

2X Social media has made an online platform a critical part of

l y and c s e ics inde e l i nc pa ed a indices ase as an a y

The luxury and cosmetics financial factbook 2016

DCF and valuation parameters

DCF and valuation

The luxury and cosmetics financial factbook 2016

and yc pany Companies are sorted in

and other terms are defined in the glossar .

The luxury and cosmetics financial factbook 2016

DCF and valuation

The luxury and cosmetics financial factbook 2016

A Financial parameters EY luxury and cosmetics sample:

WACC Gearing Beta LTGR

Safilo 7.0% Richemont (14.3%) Prada 0.68 Ralph Lauren 1.0%

Coty 7.0% L'Occitane (12.6%) Brunello Cucinelli 0.68 L'Occitane 1.8%

Luxottica 7.3% Swatch (9.1%) Chow Tai Fook 0.70

Tod's 8.5% Moncler 1.4% Estée Lauder 0.91 Tiffany 2.5%

Salvatore Ferragamo Salvatore

Natura 15.4% Hengdeli 29.3% Richemont 1.22 Natura 6.6%

WACC 8.7% Gearing Beta 0.91 LTGR 2.7%

The luxury and cosmetics financial factbook 2016

DCF and valuation

Sales CAGR, *Kering sales for FY14A–FY18E

The luxury and cosmetics financial factbook 2016

L’Occitane and NaturaPrada are expected to post strong24.7%

• Rise of millennial consumers

The luxury and cosmetics financial factbook 2016

DCF and valuation

The luxury and cosmetics financial factbook 2016

B Operating aggregates Cosmetics companies maintain last year’s average EBITDA of

18% for the FY16E–FY18E period

o tperforming profitabilit . The key

Average EBITDA margin, Note: the 2015

The luxury and cosmetics financial factbook 2016

DCF and valuation

Average CAPEX ratio, Note: the 2015 CAPEX ratio is

The luxury and cosmetics financial factbook 2016

L’Occitane’s ratio o tperforms the sample d e to its retail profile.

Average CAPEX ratio, Note: the 2015 CAPEX ratio is

The luxury and cosmetics financial factbook 2016

B Operating aggregates EY luxury and cosmetics sample: summary of operating

DCF and valuation

Average sales CAGR Average EBITDA margin Average CAPEX ratio

12% 10.5% 27% 6.0%

The luxury and cosmetics financial factbook 2016

B Operating aggregates EY luxury and cosmetics sample: summary of operating

Average sales CAGR Average EBITDA margin Average CAPEX ratio

12% 20% 5.0%

10% 18.9% 4.5%

The luxury and cosmetics financial factbook 2016

DCF and valuation

elec ed c panies ad e isin e penses as a sales

40% Average 26.8%

The luxury and cosmetics financial factbook 2016

D SOTP and segment analyses LVMH SOTP

• anal sis implies a total enterprise al ation of . b in Y E.

1.0 7.0 17.2 0.0 106.9