RETAIL EVOLUTION 2018 - February 20th 2018, Milan - Altagamma
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RETAIL EVOLUTION 2018
February 20th 2018, Milan
Luca Solca, Managing Director, Global Luxury Goods
Exane BNP Paribas
20 FEBRUARY 2018
Luca Solca (+41) 22 7186536 luca.solca@exanebnpparibas.com Disclosures & disclaimers are at the end of this publication.
Melania Grippo (+39) 02 89 63 1724 melania.grippo@exanebnpparibas.com The date & time that recommendations were finalised can be
found in Research publications on https://cube.exane.com
Guido Lucarelli (+39) 02 89 63 1726 guido.lucarelli@exanebnpparibas.com
Digital Luxury distribution is at an Inflection Point:
The Last of the Mohicans are on the Bandwagon
“[..] We want to invest heavily in the digital program.”
(Patrizio Bertelli, Prada CEO -12/04/2017)
“What we want to do with this big cash flow is mostly self-
fund our growth activities and development activities in an
industry we are not fully familiar with yet, i.e., digital, but
it certainly requires a big investment in human resources and
consulting and development.” (Patrizio Bertelli, Prada CEO -
12/04/2017)
“We all now understand that consumers tend to buy
through both channels at the same time, so through both
retail physical stores and through e-commerce channels.”
(Patrizio Bertelli, Prada CEO – 08/09/2017)
“Our digital strategy, which is based on 3 pillars: first,
driving online sales through our e-commerce platform as
Mr. Bertelli was telling you before; second, developing a
seamless omnichannel shopping experience; and third,
increasing our investments in digital communications.”
(Chiara Tosato, General Manager and Digital Director, Prada
08/09/2017)
Exane BNP Paribas | RETAIL EVOLUTION 2018 2
Digital Luxury distribution is at an Inflection Point: Luxury brands are embracing digital in China Source: Luxury daily, ecommercechina.agency.com, digiday Exane BNP Paribas | RETAIL EVOLUTION 2018 3
Digital Luxury distribution is at an Inflection Point:
We record a sharp ecommerce acceleration in the USA
Styles available for purchase online (including Pre-Order, US, FW17/18 vs. FW16/17)
as % of as % of
FW16/17 FW17/18 y/y chg (%) Group Delta
total total
Dolce & Gabbana 737 2,235 203% 1,498 25%
Prada 876 1,846 111% 970 16%
Catching
Fendi 764 1,182 55% 418 7% 59%
up
Brunello Cucinelli 292 818 180% 526 9%
Tod's 259 424 64% 165 3%
Hermes 2,863 3,876 35% 1,013 17%
Gucci 2,502 3,477 39% 975 16%
Extending
Burberry 1,778 2,182 23% 404 7% 48%
the lead
Saint Laurent 1,270 1,622 28% 352 6%
Bottega Veneta 817 971 19% 154 3%
Moncler 682 700 3% 18 0%
Valentino 528 568 8% 40 1%
Surfing 2%
Zegna 478 531 11% 53 1%
Balenciaga 390 419 7% 29 0%
Louis Vuitton 1,814 1,333 -27% Bucking -481 -8%
-10%
Ferragamo 1,160 1,040 -10% the trend -120 -2%
TOTAL 17,210 23,224 35% 6,014 100% 100%
Source: Contactlab analysis, Exane BNP Paribas
Digital luxury accounted for 9% of the market in 2017 – It is projected to exceed 25% in 2025E
Exane BNP Paribas | RETAIL EVOLUTION 2018 4
The rise of digital distribution has a number of strategic implications
1. Digital distribution grows faster than the Physical Retail and Wholesale distribution has to
market shrink
2. If you know exactly what you want, you will The store as a “point of physical distribution” is
buy it online yesterday’s story
3. If you don’t know what you want, you may The future store will be a “point of discovery”
go to a store
4. The risk of “discovery” and “purchase” Long term winners need to build a “closed
decoupling rises distribution circuit”
Luxury brands need to clean up their physical
5. The internet works as a major “magnifying
distribution, if they want to retain perceived
lens” of brand management shortcomings
exclusivity and safeguard brand equity long-term
6. Brands and categories with high wholesale Wholesale dependent brands / categories need to
exposure will be under increasing pressure invent a new distribution paradigm
Exane BNP Paribas | RETAIL EVOLUTION 2018 5
Physical Retail and Wholesale distribution has to shrink
ROCE (Incl. Gross Goodwill and Lease adj.) vs Sales / Sq Foot ROCE improvement (Incl. Gross Goodwill) vs TSR
20% Next 900%
R² = 85%
18% R² = 73% 800% HER
ROCE (Incl. Gross Goodwill and lease adjusted)
16% Inditex
700%
Foot Locker
14% 600%
Primark
12% 500%
TSR (2005-2017)
BOSS
10% 400%
BRBY
CFR LVMH
8% 300% LUX
Kingfisher KER
6% GAP 200%
UHR TODS
4% 100%
2% 0%
Abercrombie PRA
0% (100%)
200 300 400 500 600 (15%) (10%) (5%) 0% 5% 10% 15% 20%
Sales / Sq Foot (EUR)
ROCE (inc. Gross Goodwill) improvement (2005-2017)
Source: Exane BNP Paribas estimates, Company reports Source: Exane BNP Paribas estimates, Company reports, Factset
Note: On the latest Annual Report published – Year end differ Note: Prada from 2011
Exane BNP Paribas | RETAIL EVOLUTION 2018 6
In fact, physical retail has already started to shrink
Retail network evolution (# of POS)
2013-2015 2015-2017 2015-2017 %
2013 2015 2017
CAGR CAGR GROWTH
Tory Burch 59 123 149 44% 10% 11%
Michael Kors 248 482 566 39% 8% 34%
Coach 744 712 786 -2% 5% 30%
Lancel 145 91 74 -21% -10% -7%
TOTAL ASPIRATIONAL 1,196 1,408 1,575 9% 6% 68%
Céline 104 161 257 24% 26% 39%
Saint Laurent 100 156 188 25% 10% 13%
Bottega Veneta 220 285 316 14% 5% 13%
Dior 216 200 197 -4% -1% -1%
Hermès 305 315 308 2% -1% -3%
Chanel 331 361 338 4% -3% -9%
TOTAL HIGH-END 1,276 1,478 1,604 8% 4% 51%
Prada 264 375 382 19% 1% 3%
Gucci 420 503 505 9% 0% 1%
Louis Vuitton 475 473 473 0% 0% 0%
Burberry 444 466 461 2% -1% -2%
TOTAL MEGA-BRAND 1,603 1,817 1,821 6% 0% 2%
Balenciaga 91 97 125 3% 14% 11%
Chloé 135 141 168 2% 9% 11%
Fendi 210 221 227 3% 1% 2%
Dunhill 162 122 126 -13% 2% 2%
Miu Miu 125 183 176 21% -2% -3%
Shanghai Tang 41 43 30 2% -16% -5%
Marc Jacobs 215 246 149 7% -22% -40%
TOTAL CHALLENGERS 979 1,053 1,001 4% -3% -21%
TOTAL SOFT-LUXURY 5,054 5,756 6,001 7% 2% 100%
Source: Exane BNP Paribas Proprietary POS Database, RE-Analytics
Note: Excluding Outlets; Not adjusted for multiple locations in shop in shop / department stores
Exane BNP Paribas | RETAIL EVOLUTION 2018 7
The store as a point of physical distribution is yesterday’s story
Online Sales as a % of Total Retail Sales Vacancy Rates in US Shopping Malls
12%
25%
11%
20%
10%
9%
15%
8%
10%
7%
6%
5%
5%
0% 4%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
China US
Source: Reis, Datastream
Source: Euromonitor
Exane BNP Paribas | RETAIL EVOLUTION 2018 8
The future store will be a point of discovery (1)
Monobrand – Retail as DNA
Starbucks Roastery in Shanghai
Exane BNP Paribas | RETAIL EVOLUTION 2018 9
The future store will be a point of discovery (2)
Multi-brand – The Department Store / Shopping Mall as Curator
Harrods
Exane BNP Paribas | RETAIL EVOLUTION 2018 10A “closed distribution loop” becomes vital Showrooming is OK, if you then capture purchases online Exane BNP Paribas | RETAIL EVOLUTION 2018 11
Wise luxury brands will work to build mono-brand
website traffic and sales
Revenue for the Brand
Direct Retail Digital Concession Digital Wholesale
Mono-brand Website e.g. Farfetch e.g. NAP
100 80-85 40-50
Operating cost is really a non-issue in this calculation
1) Luxury brands need to have e-commerce capabilities - there is no Plan B
Hence the investments are already in the BS and the P&L
2) SG&A cost of digital retail are lower than those of physical retail
Hence, if brands can operate direct physical retail
they will be all the more capable of operating direct digital retail
Then, why would luxury brands use concessions or wholesale online ?
1) As a temporary solution - when they have too much fish to fry
2) If they want to achieve rapid online growth [and are late in their direct digital capabilities]
3) In markets where traffic is highly concentrated - e.g. China with Tencent and Alibaba
Source: Exane BNP Paribas
Exane BNP Paribas | RETAIL EVOLUTION 2018 12The jury is out on multi-brand full price digital luxury retail –
e.g. YNAP
Structural First Mover
Competitive Competitive
Advantage Advantage
FUTURE SCENARIO 1 FUTURE SCENARIO 2
Net-à-Porter will continue to grow faster than the Full-price digital luxury retail will be more and more
market and its competitors. NAP's market share of crowded. Luxury brands will build up their mono-
full-price digital luxury retail will therefore continue to brand direct retail operations. Traditional department
go up. In five years Net-à-Porter will be THE stores will scramble to grow in ecommerce. Chinese
dominant player - a sort of Amazon of luxury goods players will rise. New entrants will continue to pour in
online. All brands will have to go to it, and will - Farfetch, Matches, Moda Operandi, Orchard Mile,
depend on it. etc. NAP's market share will decline.
Exane BNP Paribas | RETAIL EVOLUTION 2018 13Luxury brands need to clean up their physical distribution – Wholesale (1/2) Exane BNP Paribas | RETAIL EVOLUTION 2018 14
Luxury brands need to clean up their physical distribution
– Wholesale (2/2)
Company Website Chrono 24 Website
-27%
Exane BNP Paribas | RETAIL EVOLUTION 2018 15Luxury brands need to clean up their physical distribution
– Grey Market
ISA store on Nathan Road – Hong Kong ISA Website
Source: Company website
Exane BNP Paribas | RETAIL EVOLUTION 2018 16Eyewear & Watches - In need of a new distribution paradigm
Strategic options to increase retail control in a multi-brand category environment
Digital Bypass Downstream
Consolidated Digitally Native New Entrants Retail Integration
e.g. Allbirds - Sneakers => M&A
e.g. Luxottica / Lens Crafters
Retail Virtual Integration
Structure e.g. Luxottica / STARS
e.g. Daniel Wellington - Watches
Downstream
Retail Integration
Sell-Out Control
Fragmented => Organic
e.g. Rolex / Product Card
e.g. Swatch / Hour Passion
Low Capital High
Intensity
Source: Exane BNP Paribas
Exane BNP Paribas | RETAIL EVOLUTION 2018 17RTW - Lack of viable retail model weakens long-term "designer
fashion" brand equity prospects
Absence of sustainable retail model prevents tight distribution control
+ Large flagships in prime locations
Loss-making + High dependence on seasonality
Retail Model + High dependence on sizes
= poor space productivity and poor full price sell-through
Poor distribution control weakens percevived brand exclusivity
High engagement with off-price destroys perceived value
Poor High dependence on licenses increases ubiquity perception
Distribution Control High dependence on Wholesale brings low price discipline
Engagement with grey market further weakens point of purchase control
LONG-TERM BRAND EQUITY?
Shrinking customer base reduces discretionary brand resources
Shrinking Traditional department stores are going down
Customer Base Traditional mom & pop retailers are going down
Highest cost per use of all luxury categories invites value competition
Retail driven mass fashion brands - Zara, H&M, etc.
Value
Retail driven mid-price brands - Sandro, Maje, The Kooples, Liu Jo, etc.
Competitors
Digitally native fashion retailers and brands - Boohoo, Everlane, etc.
Source: Exane BNP Paribas
Exane BNP Paribas | RETAIL EVOLUTION 2018 18In conclusion
All major luxury brands are on the bandwagon
Legitimate digital luxury in China is taking off
We are on the verge
of further significant
Digital luxury in the USA is accelerating
acceleration of digital
luxury distribution
Trim their physical retail and above all wholesale exposure
This has a number
Make their stores more relevant and different
of strategic
implications for Build a physical and digital distribution “closed circuit”
luxury goods players Reconsider their wholesale, grey market, and off-price activity
– as it forces them to Ensure tighter price discipline and brand deployment
Players and brands
with high structural
wholesale exposure
see their challenges Higher risk of brand trivialisation
multiply Higher exposure to digitally native new entrants
More pressing need to develop a viable distribution stratagem
Exane BNP Paribas | RETAIL EVOLUTION 2018 19Extensive Research and Coverage of Luxury Goods (1/2)
LUXURY GOODS:
The Counter- LUXURY GOODS: Digital and LUXURY GOODS: The
standardisation of Physical Integration: Luxury Strategic Perspective on
Luxury Retail Retail's Holy Grail Luxury Goods
LUXURY GOODS: Online
LUXURY GOODS:
Offer Dive & Pricing
Year of the Dog in
Landscape FW17/18 Sharp
China? Only in Name
Ecommerce Acceleration
Exane BNP Paribas | RETAIL EVOLUTION 2018 20Extensive Research and Coverage of Luxury Goods (2/2)
LUXURY GOODS: All you ever wanted to
LUXURY GOODS: All you ever know about... (3) The future of luxury
wanted to know about...(1) Luxury goods
goods demand dynamics
LUXURY GOODS: Disrupting the Luxury Goods
LUXURY GOODS: All you ever wanted to know about... (2) Luxury goods competitive dynamics Business Model
Exane BNP Paribas | RETAIL EVOLUTION 2018 21DISCLOSURES Analyst Certification We, Melania Grippo, Guido Lucarelli, Luca Solca, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views expressed in this research report. Non-US Research Analyst Disclosure The research analysts named below were involved in preparing this research report. Research analysts at Exane Ltd and Exane SA are not associated persons of Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). These non-U.S. analysts are not subject to the NASD Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Melania Grippo (Exane SA), Guido Lucarelli (Exane SA), Luca Solca (Exane SA) Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Ltd is authorised and regulated by the Financial Conduct Authority in the United Kingdom, and Exane Inc. is regulated by FINRA and the U.S. Securities and Exchange Commission in the United States. Research Analyst Compensation The research analyst(s) responsible for the preparation of this report receive(s) compensation based upon various factors including overall firm revenues, which may include investment banking activities. Disclosure of the report to the company/ies Companies Disclosures NONE 1 – Sections of this report, with the research summary, target price and rating removed, have been presented to the subject company/ies prior to its distribution, for the sole purpose of verifying the accuracy of factual statements. 2 – Following the presentation of sections of this report to this subject company, some conclusions were amended. Commitment to transparency on potential conflicts of interest: BNP Paribas While BNP Paribas (“BNPP”) holds a material ownership interest in the various Exane entities, Exane and BNPP have entered into an agreement to maintain the independence of Exane's research reports from BNPP. These research reports are published under the brand name “Exane BNP Paribas”. Nevertheless, for the sake of transparency, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document. The latest company-specific disclosures, valuation methodologies and risks to investment case are available on http://cube.exane.com/compliance if they are not in this document. Exane BNP Paribas 22
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