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LUXURY GOODS Who buys where: Decrypting cross-border Luxury Demand Flows 8 JULY 2016 at 07:45* We continue to explore the “real nature” of luxury goods in this note, the third instalment of this series (please see LUXURY GOODS: Myths and Reality of Luxury Demand Investment implications going into 2016 as well as LUXURY GOODS: Entry Price Points and the real Nature of Luxury Goods). We focus this time on the nagging question of who actually buys luxury goods products and where they come from, in an effort to complement what we consider to be less-than-ideal industry disclosure, largely limited to geography of sales. We leverage data from digital and physical retail with ContactLab to create a “first” in luxury analysis: a detailed breakdown by nationality of luxury spend in all geographies worldwide. We leverage data from digital and physical retail to dovetail the geography and nationality of luxury sales We record the % of sales in every country, from both domestic and foreign customers. At the same time, we ascertain where exactly in the world each nationality buys luxury goods products. We track the nationality vs. geography of luxury demand over the past three years. This is relevant: in 2015 30% of luxury goods products were bought abroad with huge interchange between Asia and Europe. We identify five clusters: 1) the USA, Japan and Korea have relatively limited interchange with the ROW; 2) Europe France, Italy, Spain, Switzerland and the UK benefit from massive inflows and low outflows; 3) Hong Kong and Macau are like Europe on steroids; 4) EMs are the largest contributors to international luxury sales, while benefitting from very limited inflows; 5) the UAE and the Gulf in general are in a unique position, with both relatively large inflows and outflows. The good news is that international luxury spending seems to be holding up Our analysis suggests that international luxury goods spend is not as bad as feared. Overall, the data in our sample point to a 5% rise in domestic and overseas luxury spend in the first four months of 2016. Chinese overseas spend decreased by 5%, but domestic spend increased by 5% leaving a net positive balance. Hong Kong and Macau were net losers vs. Japan, Korea and Europe. Luca Solca (+44) 203 430 8503 luca.solcaexanebnpparibas Melania Grippo (+39) 02 89 63 1724 melania.grippoexanebnpparibas Guido Lucarelli (+39) 02 89 63 1726 guido.lucarelliexanebnpparibas ContactLab Marco Pozzi (+39) 02 28 31 181 marco.pozzicontactlab Francesca Borgonovo (+39) 02 28 31 181 francesca.borgonovocontactlab * Date and time (London Time) on which the investment recommendation was finalised. It may differ from the date and time of broad dissemination on the website.See Appendix (on p27) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures. Exane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 2 Contents Executive Summary _ 3 Who buys Where : Decrypting cross-border Luxury Demand Flows _ 5 Appendix _ 22 Exane presentation _ 26 ContactLab presentation _ 26 Exane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 3 Executive Summary We continue to explore the “real nature” of luxury goods in this note, the third instalment of this series (please see: LUXURY GOODS: Myths and Reality of Luxury Demand Investment implications going into 2016 as well as LUXURY GOODS: Entry Price Points and the real Nature of Luxury Goods). We focus this time on the nagging question of who actually buys luxury goods products and where they come from, in an effort to complement what we consider to be less-than-ideal industry disclosure, largely limited to geography of sales. We leverage data from digital and physical retail with ContactLab to create a “first” in luxury analysis: a detailed breakdown by nationality of luxury spend in all geographies worldwide. We leverage data from digital and physical retail to dovetail the geography and nationality of luxury sales We record the % of sales in every country, from both domestic and foreign customers. At the same time, we ascertain where exactly in the world each nationality buys luxury goods products. We track the nationality vs. geography of luxury demand over the past three years. This is relevant, as 30% of luxury goods products were bought abroad in 2015 with huge interchange between Asia and Europe. We identify five clusters: 1. The USA, Japan and Korea have relatively limited interchange with the ROW Japanese and USA nationals make more than 90% of their luxury purchases in their respective countries the proportion is 80% when we look at the South Koreans. Foreigners account for only 515% of luxury goods sales in Japan, South Korea and the USA. This is even though luxury goods purchases by Chinese nationals in Japan and Korea have risen in recent years, on the back of favourable FX. The USA accounts for 31% of the global luxury goods market, while Japan is at 8% and South Korea 4%. 2. Europe France, Italy, Spain, Switzerland and the UK benefit from massive inflows and little outflows French, Italian and Spanish consumers buy 85-95% of their luxury goods in their respective countries. But foreigners account for the bulk of luxury sales in those countries, ranging from 7080%. These countries have benefitted materially in recent years from a weakening EUR. France accounts for 7% of the global luxury goods market, Italy is at 7% and Spain c.1%. The UK and Switzerland resemble Southern Europe but are a little less extreme. Swiss and British consumers buy 8085% of their luxury goods in their respective countries, while foreigners account for 5055% of luxury sales in Switzerland and the UK. Switzerland accounts for less than 1% of the global luxury goods market, and the UK 6%. 3. Hong Kong and Macau are like Europe on steroids Hong Kong and Macau are the most extreme in benefiting from inflows. More than 80% of domestic luxury demand stays in Hong Kong & Macau, while foreigners represent 90% of luxury goods sales in Hong Kong & Macau. This despite Hong Kong & Macau suffering a fall in their share of global luxury goods sales made to foreigners worldwide from c.37% in 2013 to c.25% in 2015, as Chinese demand moved elsewhere. Chinese consumers were spending 70% of their luxury goods dollars in Hong Kong in Jan-Apr 2014 vs. 35% in JanuaryApril 2016. Hong Kong & Macau combined account for 3% of the global luxury goods market. Exane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 4 4. EMs are the largest contributors to international luxury sales, while benefitting from very limited inflows Russia is the most extreme: 2/3 of Russian luxury spend goes abroad, while inflows account for just over 5% of luxury sales in the country. China is next: 40% of Chinese luxury goods purchases are made abroad, while China sees virtually zero inflows. Brazil, India, Mexico and Taiwan are in the same ballpark, albeit less extreme: 2/3 of luxury spend stays at home, while inflows account for 515% of luxury goods sales in each country. China accounts for c.7% of the global luxury market, Russia and Brazil for 1% each, while India, Mexico and Taiwan combined represent 4%. 5. The UAE and the Gulf are in a unique position, having both relatively large inflows and outflows Half of luxury goods sales in the UAE and the Gulf are made to overseas consumers. At the same time, UAE and Gulf nationals buy approximately 50% of their luxury goods abroad. Russian and Chinese nationals are the most important luxury goods spenders in the UAE, while Middle Eastern consumers spend a significant amount of their luxury goods dollars in Europe. The UAE and the Gulf represent a combined 3% of global luxury sales. The good news is that international luxury spending seems to be holding up Our analysis suggests that international luxury goods spend is not as bad as feared. Overall, the data in our sample point to a 5% rise in domestic and overseas luxury spend in the first four months of 2016. Chinese overseas spend decreased by 5%, but domestic spend increased by 5% leaving a net positive balance. Hong Kong and Macau were net losers vs. Japan, Korea and Europe. Interestingly, Chinese spend in Europe appears to be rising possibly because our data captures a portion of Daigou spending (i.e., spend in Europe by Chinese students, whose visas dont allow tax refunds, and which are therefore not captured by Global Blue statistics). If this is what we saw in the wake of the November 2015 Paris terrorist attacks, then 2H16 could reasonably expected to be even more positive = this should comfort luxury goods investors. Important Caveat Our analyses are based on a sample of luxury goods companies which may not represent the whole market. Exane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 5 Who buys Where : Decrypting cross-border Luxury Demand Flows We continue to explore the “real nature” of luxury goods in this note, the third instalment of this series (please see: LUXURY GOODS: Myths and Reality of Luxury Demand Investment implications going into 2016 as well as LUXURY GOODS: Entry Price Points and the real Nature of Luxury Goods). We focus this time on the nagging question of who actually buys luxury goods products and where they come from, in an effort to complement what we consider to be less-than-ideal industry disclosure, largely limited to geography of sales. We leverage data from digital and physical retail with ContactLab to create a “first” in luxury analysis: a detailed breakdown by nationality of luxury spend in all geographies worldwide. We leverage data from digital and physical retail to dovetail the geography and nationality of luxury sales We record the % of sales in every country, from both domestic and foreign customers. At the same time, we ascertain where exactly in the world each nationality buys luxury goods products. We track the nationality vs. geography of luxury demand over the past three years. This is relevant, as 30% of luxury goods products were bought abroad in 2015 with huge interchange between Asia and Europe. We identify five clusters: Figure 1: 30% of luxury goods products were bought abroad in 2015 (+3.5% vs 2014) % of Home Country vs Abroad purchases of luxury goods (2015) Source: ContactLab Analysis, World Travel Tourism Council H o m e C o u n t r y P u r c h a s e s c a . 7 0 %A b r o a d P u r c h a s e s c a . 3 0 %Exane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 6 1. The USA, Japan and Korea have relatively limited interchange with the ROW Japanese and USA nationals make more than 90% of their luxury purchases in their respective countries the proportion is 80% when we look at the South Koreans. Foreigners account for only 515% of luxury goods sales in Japan, South Korea and the USA. This is even though luxury goods purchases by Chinese nationals in Japan and Korea have risen in recent years, on the back of favourable FX. The USA accounts for 31% of the global luxury goods market, while Japan is at 8% and South Korea 4%. Figure 2: The USA, Japan and Korea have limited interchange with the ROW % of luxury revenues - 2015 Source: ContactLab analysis Exane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 7 Figure 3: Foreigners account for only 515% of luxury goods sales in Japan, South Korea and the USA Revenues split by country Source: ContactLab analysis Figure 4: Japan inflows are mostly from China. Outflows are mostly to the US and the European heritage countries % of luxury revenues - 2015 Source: ContactLab analysis 0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %1 0 0 % DO M E S T IC CL IE NT S % F ORE IG N CL IE NT SExane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 8 Figure 5: Japanese luxury spending abroad by country Source: ContactLab analysis Figure 6: Inflows into the US are decreasing and fragmented across many Latin and Asian countries, while outflows are focused toward Europe % of luxury revenues - 2015 Source: ContactLab analysis 0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %1 0 0 %2 0 1 3 2 0 1 4 2 0 1 5US HE RIT A GE C OUNT RIE S E U HK /M A CA U OT H E RExane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 9 Figure 7: US luxury spending abroad by country Source: ContactLab analysis Figure 8: Korea is mostly an outgoing traveller country with some limited but growing inflows from China % of luxury revenues - 2015 Source: ContactLab analysis 0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %1 0 0 %2 0 1 3 2 0 1 4 2 0 1 5HE RIT A GE C OUNT RIE S E U M E X I CO P UE RT O RI CO/B A RB A DOS / CA NA DA OT HE RExane BNP Paribas Research & ContactLab Luxury Goods 8 July 2016 page 10 Figure 9: Korean clients luxury purchases abroad by country Source: ContactLab analysis 0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %1 0 0 %2 0 1 3 2 0 1 4 2 0 1 5H E R IT A GE C OU N T R IE S E U US JA P A N HK /M A CA U GU L F OT HE R
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