Outlook for The Retail and Consumer Products sector in Asia - PwC 2013

2013 Outlook for the
Retail and Consumer
Products Sector in Asia
www.pwc.com

2013 Outlook for the Retail and Consumer Products Sector in Asia 1
Impacted by the global economic
conditions, growth in many Asian
markets has slowed down. However,
the region as a whole remains ahead of
North America and Europe. Retail
sales volume in Asia Pacific is
forecasted to grow 6% in 2013 and will
maintain this upward momentum
through to 2016 with an estimated
market worth of US$11.8 trillion,
while that of North America and
Western Europe is US$4.4 trillion and
US$3.1 trillion respectively. Home to
China and India, Asia continues to be
the main driver of retail growth
globally and holds out the best
opportunity for growth and profits for
many international retail and
consumer companies.
The growing critical mass of
consumers in Asia warrants long-term
investments and tailored market
strategies. Indeed, by 2020, the
percentage of the population
considered as middle class is envisaged
to shift from North America and
Europe to the Asia Pacific region. This
shift may happen even earlier, as
China’s leadership has committed in
the recent 18th National Congress of
the Communist Party of China, to
double the country’s 2010 GDP and per
capita income of both urban and rural
households by 2020. The expanding
middle class consumers will be a
substantial force in driving demands
for a wide spectrum of products,
ranging from functional food, personal
care products to the latest smartphone
models. The same phenomenon is also
happening across many Asian
countries including India, Indonesia
and Vietnam.
As the largest market in Asia, China
remains crucial for many retail and
consumer companies. The Chinese
government has reiterated its emphasis
in boosting domestic consumption,
relative to fixed investments and
export, as the key economic driver of
growth. While the pace of growth may
have slowed, the retail industry is
forecasted to grow at 10.5% in 2013
and 10.4% through to 2016. At the
same time, India, with its huge young
population and growing income of the
middle class, will continue to attract
the attention of international and
regional players. This is particular so
with the recent relaxation of the limits
on foreign investments in Delhi to
allow 51% foreign equity in multi-
branded retail operation. India’s retail
growth is forecasted to bounce back
strongly from 1.9% last year to 6% in
2013.
However, Asia’s consumer markets are
not completely liberalised and remain
highly fragmented. Traditional
retailing still dominates and local
players are abound. Apart from the
challenges in navigating through
regulatory hurdles as well as adapting
to cultural differences and consumer
preferences, retail and consumer
companies also have to cope with the
influx of new competitors to the
market, whether online or offline. Over
the years, some international retail
and consumer companies might have
exited from certain markets in the
region, but there are also others
Foreword
Carrie Yu
China & Asia Pacific
Retail and Consumer Leader
PwC
making a comeback, and still more
that have turned around successfully
through transforming the operating
models and product offerings. In an
evolving and dynamic market
environment, the strong survivors are
often those who stand firm on their
corporate mission, backed by solid
infrastructure fundamentals and
equipped with razor sharp focus to
constantly reinvent themselves to
create value to shareholders.
Indeed, we have witnessed numerous
innovations and success stories of
many local and international
companies in the industry. In this
connection, I am personally inspired
by the interviews featured in this
report and hope our readers will find
the same inspiration. We are honoured
to have some of the region’s most
successful companies in generously
sharing their core values and ethics,
business visions and consumer
insights. I am deeply grateful to Mr
Motoya Okada of Aeon, Mr John Lo of
Tencent, Mr A. Mahendran of Godrej
and Mr Nigel Luk of Cartier for sharing
their wisdom. I would also like to take
this opportunity to thank our
colleagues in the region and the
Economist Intelligence Unit for their
invaluable input and assistance.
Sincerely,
January 2013

This report was written in cooperation with the Economist Intelligence Unit’s industry and management research division.
The economic and industry forecasts included are those of the Economist Intelligence Unit. Due to a change in methodology
some historical figures may be significantly different to those published in last year’s report.

4 Executive summary
6 Introduction
Section 1: Retail
10 Food and general retail
11 Hypermarkets, supermarkets and convenience stores
12 — Q&A with Motoya Okada of Aeon
13 Food, beverages and tobacco
14 Private label
15 Fashion and apparel
18 Online retailing
20 — Q&A with John Lo of Tencent
Section 2: Consumer goods
23 Fast-moving consumer goods
25 — Q&A with A. Mahendran of Godrej
28 Luxury brands
31 — Q&A with Nigel Luk of Cartier
33 Durable consumer goods and electronics
37 At a glance: Indonesia, Malaysia, Singapore,
South Korea, Thailand and Vietnam
50 Conclusion
Table of contents

4 PwC
Executive Summary
The outlook for the global economy
remains uncertain, as consumers and
businesses alike wait for clear
directions on a range of economic
risks, from the US deficit to the euro
zone crisis. The European Union (EU)
is forecast to contract in 2012 and to
muster only marginal growth in 2013.
Growth in the US and China is also
slowing. Although governments in
both countries have introduced
stimulus measures, any upturn is
expected to be modest. Asia’s other
economies will slow as well, but will
look healthy by comparison with the
US and EU, with regional growth
(excluding Japan) averaging 5.7% in
2012 and 6.4% in 2013.
Asia will remain the main driver of
global retail sales growth, but
companies will be challenged by
slowing economies and high inflation
and interest rates. Retail sales are still
expected to expand by a respectable
5.8% in 2012#
and 6% in 2013,
although this is down substantially
from 9.6% volume growth in 2010.
Companies are responding by
reworking their product, production
and regional strategies.
All eyes will continue to focus on
Mainland China (China), by far Asia’s
largest retail market. For many, the
fastest growth will come in the less
developed third- and fourth-tier cities,
as disposable incomes there rise
rapidly. The proportion of Chinese
households earning over US$15,000
per year will increase from roughly
11% of the total in 2011 to 41% in
2016, by conservative estimates.
This report discusses the outlook for
six retail and consumer products
sub-sectors in Asia — food and general
retail, fashion and apparel, online
retailing, fast-moving consumer goods
(FMCG), luxury brands, and durable
consumer goods and electronics. It
focuses, in particular, on China, Hong
Kong, India, Japan and Taiwan, and
looks at how the industry is faring in
2012 and is expected to grow through
2016, and the opportunities and
challenges in the years ahead.
The main findings of the report are as
follows:
Major international retailers will
continue to expand in Asia, with
more tailored strategies being
introduced in China. By 2016 China
will overtake the US as the world’s
largest retail sales market, worth some
US$4.2 trillion. India, too, is now
attracting considerable interest, after
its government announced in
September 2012 that it would permit
foreign direct investment of up to 51%
in multi-brand retailing. Retailers,
particularly in China, are beginning to
target customers more carefully. For
example, CR Vanguard is launching a
new high-end chain of boutique
supermarkets, while Carrefour is
stepping up its strategy to cater for
consumers concerned about China’s
frequent food safety problems by
focusing on organic food.
As Asia’s current environment of
high inflation and rising prices
drives customers to seek value,
private food labels have new
opportunities to increase their
share. While the private label business
took decades to develop in Western
countries and came about only after
the retail sector matured, the concept
is rapidly catching on in Asia, where
large populations and growing
incomes mean that the region will
remain the world’s largest food market,
# This figure is expected to be revised downward based on new forecasts for India, which became
available just prior to publication of this report.

Executive Summary
worth US$4.2 trillion in 2012. India’s
big retailers have been very active in
introducing private label products,
which now account for 20-25% of
profits for most. In addition to catering
for the needs of value-conscious
consumers, private label goods can
also fill a void in markets such as India
where many categories of goods are
underdeveloped. To overcome
consumers’ concerns about the quality
and safety of private labels, retailers
are upgrading packaging and
promoting their international backing
where possible.
Asian demand for fashion and
apparel will continue to lead the
world, and international fast
fashion brands are expanding
aggressively to cash in on Asia’s
young demographic and rising
affluence. Asian demand for fashion
and apparel will continue to surpass
that in Western Europe and North
America and the gap will widen in the
coming years. This has attracted the
interest of many foreign brands,
particularly in the area of fast fashion,
which targets young, upwardly mobile
customers. Newcomers to the Asia
market in 2012 included Topshop of
the UK and US retailer Forever 21, who
join Spain’s Inditex, owner of the Zara
brand, Uniqlo of Japan and H&M of
Sweden, all of which have been rapidly
expanding in recent years, notably in
China.
Online retailing continues to grow
rapidly in Asia, prompting
traditional and foreign offline
retailers and even luxury brands to
embrace online sales in the region.
According to industry intelligence
provider eMarketer, from 2013
onwards Asia will lead the world in
global business-to-consumer (B2C)
e-commerce sales, with a 41.4% share
by 2016. Traditional retailers,
including both Asian retail companies
and foreign offline retailers such as
America’s Macy’s department stores,
are now expanding their own online
presence in Asia in partnership with
e-tailers. The online market’s growth
in 2012-16 will be aided by increased
broadband and mobile-phone
penetration, the spread of smartphones
and tablet computers, and
improvements in payments and
logistics infrastructure.
Rising incomes will continue to
drive growth in the FMCG sector but
companies will have to contend with
several challenges, including
increasingly demanding, value-
conscious consumers and cut-throat
competition. Consumer spending is
being hit by high inflation, rising
interest rates and price hikes by FMCG
companies in response to costlier
inputs and commodities. Tough
economic times are intensifying
existing challenges for foreign
companies. For example, in December
2011, Switzerland’s Nestlé and France’s
Danone revisited their China business
models in the face of fierce local
competition. In response to all these
challenges, FMCG companies are
planning their expansions more
judiciously, partnering with local
companies, and better targeting
customer groups. Many are putting
renewed emphasis on expansion in
rural areas and smaller cities. They are
also looking to acquisitions to buy
market share.
Asian consumers now account for
over half of global luxury sales, and
the boom is spurring the growth of
local luxury brands. According to the
World Luxury Association, China is set
to replace Japan as the most important
market for luxury in Asia. Global
brands will continue to increase their
presence and efforts to cater for
Chinese and other Asian travellers
abroad. But local, home-grown luxury
brands will also emerge, catering to
Asian consumers’ rediscovery of their
own long-standing traditions of local
craftsmanship. For example, Chow Tai
Fook Jewellery Group of Hong Kong is
already twice the size of iconic
American jeweller Tiffany & Co in
terms of revenue. As local brands seek
international capital and expertise,
and global luxury brands remain keen
to appeal to local tastes, partnerships
between global and local brands, such
as Richemont’s controlling stake in
Hong Kong-based fashion label
Shanghai Tang, will become more
common.
Growth in demand for consumer
durables and electronics is slowing
but will remain strong. However,
Japanese manufacturers are losing
their decades-long dominance in
Asia in these sectors. Market demand
for electrical appliances and
housewares will increase 5.9% in Asia
in 2012, lower than an earlier forecast
of 6.6%. However, growth will recover
to 6.8% in 2013 and expand
consistently through the forecast
period to 2016. Strong growth is
encouraging competition and Japanese
manufacturers, hurt by the global
economic crisis, a strong yen and
natural disasters in Japan and
Thailand, are rapidly losing their
dominance. As they struggle,
companies such as South Korea’s
Samsung, China’s Haier and Taiwan’s
Hon Hai, have swooped in to capture
market share by expanding quickly and
offering lower prices, a wider range
and adequate technology in an
increasingly commoditised market.

6 PwC
Introduction
The outlook for the global economy
remains uncertain at best. The EU
economy is forecast to contract in 2012
and to manage only marginally
positive growth in 2013. Growth in the
US and China is also slowing. While
policymakers continue to work on
action plans, the circumstances are
such that they are likely to accomplish
little more than to prevent a deeper
economic downturn. Asia’s economies
will slow as well, but will still look
healthy by comparison, with regional
growth (excluding Japan) averaging
5.7% in 2012 and picking up to 6.4% in
2013.
Asia will remain the main growth
driver of retail sales globally. Although
retail sales have slowed from their
9.6% volume growth in 2010 they are
still expected to expand by a
respectable 5.8% in 2012. Next year
that should accelerate to 6%, with the
upturn lasting through the forecast
period to 2016, when the market will
be worth US$11.8 trillion.
All eyes are on prospects for China, by
far Asia’s largest retail market. While
the economy has been slowing, the
Chinese government has made clear
that it will intervene to stimulate
growth if necessary. China’s GDP is
predicted to grow 7.8% in 2012 and at
around 8% through the rest of the
forecast period. Despite high inflation
and prices, China’s retail sales will
grow at a still impressive 10.9% in
2012, higher than an earlier forecast of
9.8%, on the back of companies
widening their reach, the
modernisation of the retail industry
and the influx of new consumers.
China will overtake the US as the
world’s largest retail sales market in
2016, when its retail sales are forecast
to be worth US$4.2 trillion. Growth
will remain high through the rest of
the forecast period. The fastest growth
will come in the less developed
third- and fourth-tier cities, as
disposable incomes there rise rapidly.
The proportion of Chinese households
earning over US$15,000 per year will
increase from roughly 11% of the total
in 2011 to 41% in 2016, by conservative
estimates1
.
In Japan, Asia’s second-biggest market
after China in dollar terms, retail sales
will expand by a modest 1.6% in 2012
and contract slightly for two years
thereafter as Japan’s trade-dependent
economy continues to suffer against a
backdrop of weak external demand
and a strong currency. Domestic
demand is expected to remain weak,
given poor economic growth and an
uncertain employment market. Retail

Figure 1: Real GDP growth (% change)
Region 2009 2010 2011 2012 2013 2014 2015 2016
Asia and Australasia (incl Japan) 1.2 7.1 4.0 4.2 4.2 4.5 4.3 4.3
Economies in transition* -5.6 3.4 3.8 2.5 3.0 3.7 3.7 3.9
Latin America -1.9 6.0 4.3 3.1 3.9 4.2 4.0 4.1
Middle East and North Africa 1.7 5.2 3.4 3.4 3.9 4.7 4.9 5.3
North America -3.4 3.0 1.8 2.1 1.8 2.1 2.2 2.3
Western Europe -4.2 2.2 1.7 -0.2 0.5 1.3 1.4 1.4
World -2.3 4.2 2.7 2.2 2.4 2.9 2.9 3.0
Source: Economist Intelligence Unit
*Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Ukraine
Figure 2: Global retail sales growth by volume (% pa)
Region 2009 2010 2011 2012 2013 2014 2015 2016
Asia and Australasia 5.3 9.6 5.2 5.8 6.0 6.9 6.7 6.8
Economies in transition -4.4 3.9 6.6 3.4 3.6 4.0 4.4 4.5
Latin America 0.1 3.1 5.2 4.9 4.6 5.4 4.7 5.3
Middle East and North Africa 1.6 3.6 2.7 1.0 3.4 3.7 4.0 4.1
North America -5.8 0.8 3.8 1.6 1.5 2.0 1.9 1.8
Western Europe -2.5 0.2 -1.0 -1.3 0.0 0.3 0.7 0.8
World -0.6 4.2 3.6 2.9 3.4 4.1 4.1 4.2
Figure 3: Global retail sales (in US$ trillion)
Region 2009 2010 2011 2012 2013 2014 2015 2016
Western Europe 2.89 2.85 3.05 2.91 2.94 2.97 3.00 3.14
North America 3.25 3.36 3.61 3.74 3.89 4.06 4.23 4.41
Latin America 1.02 1.17 1.29 1.37 1.49 1.63 1.75 1.89
Figures for 2012 onwards are forecasts. Prior years are actuals or estimates.
sales growth will remain negligible
through the forecast period, partly
because unemployment will remain
relatively high and wage growth
subdued at best. Nevertheless,
relatively high incomes and strong
demand for high-end goods will keep
Japan’s retail spending among Asia’s
highest2
.
India’s economy has started to look
sluggish, and GDP growth will slow to
5.8% in 2012, while consumer price
inflation remains a high 9.3%. Given
the uncertain economic outlook and
rising prices, retail sales growth will
slow substantially to 1.9% in 2012,
much lower than an earlier forecast of
5.3%, although demand growth for
more basic items like food and soaps
and cleansers will remain strong. India
is Asia’s third-largest retail market
after China and Japan, although it has
one of Asia’s lowest sales per head
ratios. Retail sales growth will bounce
back to 6% in 2013 as GDP growth
picks up and inflation abates
somewhat, with growth hovering
between 5% and 6% for the remainder
of the forecast period, driven by
income growth, increasing
urbanisation, and a rising number of
attractive stores and foreign brands.
The increase in the number of wealthy
households from an estimated 494,000
with annual earnings over US$50,000
in 2012 to 2.4 million in 2016 will
drive demand for non-essential and
luxury goods3
. Delhi has once again
announced a relaxation of the limits on
foreign investment in its retail sector,
saying it will allow 51% foreign equity
in multi-brand retail operations.
Foreign retailers have expressed keen
interest, but there is still strong
opposition to the move from some
quarters.
Introduction

8 PwC
Introduction
Figure 4: Asia retail sales growth by volume (% pa)
Territory 2009 2010 2011 2012 2013 2014 2015 2016
Australia 3.29 2.15 0.10 0.70 1.10 1.30 1.70 2.00
China 16.82 19.07 10.90 10.90 10.50 11.10 10.20 10.00
Hong Kong 0.01 15.61 18.50 2.70 1.50 3.40 4.50 4.50
India -0.37 8.95 3.10 1.90 6.00 5.60 5.90 6.10
Indonesia 3.47 4.78 5.20 4.60 5.50 6.70 6.60 6.50
Japan -0.93 3.30 -0.60 1.60 -0.10 -0.50 0.30 0.40
Malaysia 0.62 5.83 6.70 4.90 5.70 5.00 4.90 4.80
New Zealand 0.50 2.50 -0.40 -1.20 2.30 2.30 3.20 3.30
Philippines 3.98 5.56 1.80 2.90 4.90 5.00 5.20 5.20
Singapore -0.58 6.70 1.30 1.70 2.70 3.80 4.60 5.30
South Korea -0.31 4.55 1.90 1.00 2.10 2.20 2.80 2.90
Taiwan -1.42 9.10 5.00 0.20 1.80 2.60 3.00 2.70
Thailand -0.54 6.70 1.50 7.80 6.90 5.30 4.80 4.70
Vietnam 3.05 4.73 6.30 8.30 11.10 10.30 8.70 6.40
Figure 5: Retail sales in Asia (in US$ billion)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Taiwan
Japan
India
Hong Kong
China
20162015201420132012201120102009
In Hong Kong, retail sales volumes will
grow 2.7% in 2012 as economic
growth in the territory dips to 1.5% on
the back of a slowing global economy
and China’s reduced growth rate.
Retail sales volume growth will slow to
1.5% in 2013 as unemployment rises.
Nevertheless, relatively strong
economic growth (which is expected to
return to 4.2% in 2014 based on a
recovery in global trade) and rising
local incomes will provide impetus to
retail sales in Hong Kong over the
medium term. Though visitor numbers
from mainland China have increased,
growth in sales of luxury products such
as jewellery, watches and clocks and
valuables has slowed, indicating that
while the uncertain global economic
outlook has not dissuaded tourists
from visiting Hong Kong, it has made
them more cautious about spending.
Given the relatively high cost of
inflation, retailers’ profitability will
depend partly on their ability to pass
on rising costs to customers, hence
ensuring that they are able to develop
premium brands for which higher
prices can be charged4
.
Taiwan’s retail sales will increase by
only 0.2% in 2012, as its export-
oriented economy slows on weakening
global demand. However, as growth in
the wider economy picks up, retail
volume growth is likely to recover to
1.8% in 2013 and to rise to between
2% and 3% for the remainder of the
forecast period. With a population of
just over 23 million, Taiwan is a
smaller market than most in East Asia.
However, at over US$10,000, annual
disposable income per head is
relatively high, and over 50% of
households have an annual income
over US$25,000 (this will rise to a
forecast 65% by 2016). Retail sales will
also be supported by more visitors
from China, as visa and travel
restrictions continue to be eased5
.

The future of global retail lies firmly in Asia, but economic growth in the region is
slowing and inflation and interest rates are high. Companies are responding by
reworking their product, production and regional strategies and looking for
acquisitions, while continuing with their organic expansion. China remains the main
focus for foreign companies across all categories. As international companies try to
make inroads into Asian markets, they will face stiff competition from well-
established local brands. Countries across Asia are quickly expanding access to
broadband and mobile phones. This is helping online retailing in Asia to expand
quickly and traditional retailers are exploring the online channel.
Section 1: Retail

10 PwC
Section 1: Retail
Food and
general retail Key findings
• Major international retailers
continue to expand in Asia,
although sluggish home markets
mean that some are finding
investment resources
constrained.
• Recognising customer preferences
for online shopping, traditional
retailers are making the move
online. According to market
researcher Kantar Worldpanel, by
July 2012 the proportion of
Chinese households making
FMCG purchases online increased
from 16% a year earlier to 22% in
China’s top tier cities.
• Asia’s current environment of
high inflation and rising prices
could trigger greater growth in
private label goods as consumers
seek value for money.
Figure 6: Retail sales of food in Asia and Australasia (in US$ billion)
Figure 7: Food, beverages and tobacco: Market demand growth (% real change pa)
Territory 2009 2010 2011 2012 2013 2014 2015 2016
China 3.9 1.9 2.6 2.2 2.9 2.8 2.5 2.2
Hong Kong -0.5 5.5 6.7 0.9 -0.2 1.2 1.5 1.3
India 6.5 3.3 1.0 4.7 2.7 3.4 4.7 3.9
Japan -0.6 2.8 0.2 1.4 1.0 1.1 0.9 0.7
Taiwan 0.0 3.0 2.2 0.3 0.9 1.6 2.0 1.7
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
20162015201420132012201120102009

Section 1: Retail
As conditions remain grim in their
home countries, major international
retailers will continue to expand in
high-performing emerging markets.
India and China place 3rd and 5th
respectively in AT Kearney’s 2012
Global Retail Development Index,
which ranks the attractiveness of
emerging countries to retailers. In a
November 2011 Economist Intelligence
Unit global survey of retail managers,
two-thirds of the respondents said they
were redirecting their focus to
emerging markets, and three-quarters
expected these markets to take up the
slack from the slowdown in developed
markets. China remains the emerging
market of choice, although its economy
and retail sales growth are slowing6
.
According to PwC’s 15th Annual Global
CEO Survey released in January 2012,
which surveyed 1,258 CEOs in 60
countries, 60% of CEOs of consumer
goods companies believe that
emerging markets will be the main
driver of growth compared with
developed economies.
International retailers are still
expanding quickly across Asia.
Japanese retailer Aeon, which has
some 14,000 outlets across 12 Asian
markets, is now expanding into
Vietnam, Malaysia and China’s smaller
cities as part of its ‘Asia Shift’
expansion strategy7
. France’s Carrefour
plans to open 30 new stores in China in
2012, up from 20-25 per year recently8
and has other plans in addition to
China. India is now attracting
considerable interest after its
government announced in September
2012 it would permit foreign direct
investment of up to 51% in multi-brand
retailing. Despite several restrictive
conditions attached, Wal-Mart (US)
has already announced entry plans,
while others like Tesco (UK), Carrefour
and Metro (Germany) could soon
follow9
.
However, retailers are struggling to
manage their large-scale expansions
into Asia, as dipping sales in their
home markets tighten available
investment resources. Some companies
are now reshaping their strategies as
they enter Asian economies amidst
slowing growth and fierce competition.
Wal-Mart, for example, says it will slow
down the launch of new stores in China
in 2012 to focus on operational
efficiency. It was opening more than 40
stores annually between 2009 and
2011 and is among China’s top
retailers, but it has been
underperforming rivals like Carrefour
in terms of average revenue per store10
.
Meanwhile, Japanese-owned 7-Eleven,
which has over 100 stores in China, is
now experimenting with a franchise
store model, which will allow it to
expand rapidly while limiting
investments11
.
Retailers are also targeting customers
more carefully. For example, China’s
CR Vanguard, which has over 4,000
stores across China, is launching a new
high-end chain of boutique
supermarkets called V+. It will focus
on residential communities, targeting
middle class consumers in 1st and 2nd
tier cities, while CR Vanguard’s other
brands will target busy commercial
areas12
. Meanwhile, to cater for
consumers concerned about China’s
frequent food safety scandals,
Carrefour is stepping up its organic
business. In May 2012, it added 100
new organic products to its list of
“lowest price” goods13
.
Retailers are also moving online,
recognising customer preferences for
online shopping. According to market
researcher Kantar Worldpanel, the
proportion of households in China’s
top-tier cities making FMCG purchases
online increased to 22% as of July
2012 from 16% a year earlier. Shoppers
were drawn by lower prices, the
convenience of delivery and access to
more brands14
. In August 2012,
Wal-Mart received government
approval to increase its ownership of
online supermarket Yihaodian from
around 17% to 51.3%. Yihaodian sells
about 180,000 products, and has a
nationwide B2C online grocery
service15
. In addition to physical
expansion, 7-Eleven also plans to roll
out an online sales platform in China
in 2013.
Hypermarkets, supermarkets and
convenience stores

12 PwC
Section 1: Retail
What are your expectations for growth
in Asian markets?
At the moment, we earn around 80% of our
total retail revenue from the Japanese
market. We have a plan to secure
exponential growth in the Chinese and
ASEAN markets, with the aim to bring
earnings from these markets to the same
level as those in Japan by around 2020.
We’ll need around 13-15% annual growth
in Asian markets to meet this goal. At the
moment, we are still largely focused on
making the necessary up-front
investments.
What do you identify as Aeon’s
competitive edge that would allow it to
experience such high growth in Asia?
One of the biggest changes in Asia is the
rapid growth of the middle class. And the
middle class is the consumer group that we
have always served—for 250 years, since
we started as a trader of Kimono fabrics in
the Edo Period. We have deep experience in
servicing this consumer group, as well as
growing alongside them, as they grow.
Q&A with Motoya Okada, President, Aeon
You have taken some initiatives to cater
for the needs of elderly consumers.
What has been your experience with
these initiatives?
The shopping centre that we opened early
this year in Chiba, Japan is designed
particularly to meet the needs of our senior
customers. Customers enjoy unique
shopping experiences including access to a
comprehensive range of medical clinics and
cultural programmes, as well as financial
services that cater for their lifestyle needs.
The market response has been very good.
The Japanese market is a test ground for
our effort to shift to a senior-oriented
market, one of our strategic growth areas.
From next spring, we’ll be opening more
stores of this kind in Japan with new
formats and services to further meet the
interests of our senior customers.
How are you benefitting from group
synergies?
Our financial services, for instance, allow
us to identify individual (retail) customers.
By combining our credit card and retail
businesses, we have recently completed a
test in Japan to operate a high-level
customer relationship management system
that would allow us to personalise
promotion efforts. The card business also
helps in the running of loyalty
programmes. We seek to become the
number one player in the credit card
business for the new middle class in Asia.
So we believe these synergies will be highly
relevant to the success of our retail business
in Asian markets.
You have been very successful in Japan
with Topvalu, your private label. How do
you plan to take this success abroad?
Until recently, we have been bringing the
Topvalu products that we sell in Japan to
the Chinese market. But of course it makes
more sense to develop and sell products
according to local preferences. We are thus
advancing our localisation effort in China
and other Asian markets, and making
progress towards designing, producing and
selling locally. Localisation efforts by
region within respective countries also will
be important for products such as food as
people’s tastes tend to vary by region.
Can you share your lessons learnt from
last year’s crisis in Japan?
It’s important to be able to gather
information and make decisions quickly,
Established in 1758, Aeon has
grown to become the largest retailer
in Japan in terms of operating
revenue. Aeon Group, which
comprises 200 companies, recently
established a new management
system based on separate
headquarters for Japan, China and
ASEAN and is looking to repeat the
success in other Asian markets.
and to take leadership at such times. But at
times of emergency, what is more crucial is
to have “survival and fighting spirit”—not
for yourself but for the benefit of others. For
instance, we had shopping centre managers
who made quick decisions to turn their
stores into temporary shelters. Only with a
strong sense of responsibility to serve the
public were they able to exercise such
leadership and avoid the worst-case
scenarios.
Was it the case of Aeon’s “customer-
first” principle contributing to risk
management?
Yes, and our steadfast corporate mission to
benefit our customers is not bound by
Japan’s borders. After the recent riots in
China, all our Chinese employees worked
hard to restore the stores as they believed
opening the stores as early as possible
would benefit their customers. Not a single
employee thought about leaving. I was
extremely moved to see the scene in China,
which was exactly what I saw in Tohoku
after the disaster. I think the outcome
would be very different depending on the
organisation. You can physically repair
buildings but you cannot restore the stores
if your employees do not return.
Last but not least, what do you identify
as the ultimate value that Aeon is
bringing to Asia outside Japan?
Making products and services available
that can help to improve people’s quality of
life is important. The paramount issue,
however, is trust—customers need to
believe you will never lie to them. In the
Japanese term, it’s about “establishing
Noren” (curtain-like cloths that are
traditionally hung over the entrance of
Japanese stores). This can be translated as
building a brand but “Noren” in fact carries
more meaning—it’s the trust itself, built
between customers and the retailer.
I’m talking about the old Japanese ethics of
commerce, the origins of Japan’s customer-
oriented services—which include practices
which emerged during the Edo Period, such
as making small units available according
to customers’ needs, and fixing and listing
set prices (versus selling with variable
prices). I would say these are expressions of
democracy and justice. And there isn’t a
customer anywhere in the world who does
not enjoy being treated fairly and with
goodwill—these are universally
appreciated values.

Section 1: Retail
Food, beverages and tobacco
Asia’s large populations and growing
incomes mean that the region will
remain the world’s largest food market,
worth US$4.24 trillion in 2012 and set
to grow to US$6.92 trillion by 2016. In
China, market demand for food,
beverages and tobacco will grow at
2.2% during 2012, given high inflation
and rising food prices. Demand growth
will recover to 2.9% in 2013, and then
range between 2.2% and 2.8% for the
rest of the forecast period. Quality
control is a major problem for the
sector. Despite government efforts,
there is likely to be little progress in
addressing this complex problem
during the forecast period. More
sophisticated first-tier markets will see
a rapid rise in consumption of
imported foreign food products in
2012-16, as consumers try new
cuisines and seek safer food16
.
Japan is the world’s third-largest food
market after the US and China, with
retail food sales estimated at US$523
billion in 2011. However, the market’s
maturity, deflationary pressures in the
sector and strong competition will
keep sales growth weak. Demand in
the food, beverages and tobacco
category will grow at only 1.4% in
2012, given Japan’s troubled economy,
cautious buying sentiment and
concerns about food safety following
last year’s major earthquake and
nuclear crisis. Demand growth will
slow further in 2013, to 1.0%, and will
remain weak through the forecast
period. Japan’s ageing population will
boost the health food (or functional
food) segment in the medium term.
Japan is the world’s second-largest
market for functional food after the
US, and its range of functional foods is
probably the world’s largest and most
innovative17
.
In India, the market demand for food,
beverages and tobacco will rise 4.7% in
2012. Although inflation and prices
remain high they are easing from the
alarming heights seen in 2011.
Demand growth will remain positive
through the forecast period, ranging
between 2.7% and 4.7%. Rising
household incomes, increasing
urbanisation and changing lifestyles
will aid demand for packaged food,
which has been growing strongly. As
India has South Asia’s lowest spending
per head on packaged food, the sector
holds strong growth potential in
2012-16 as incomes increase18
. India’s
wellness products market also offers
considerable potential. According to an
August 2012 report19
, it grew 20% in
2011, to Rs590 billion (US$12.6
billion), but still represents under 4%
of overall consumer expenditure. The
report forecasts this market to grow at
a compound annual growth rate
(CAGR) of 18-20% over the next three
years, reaching Rs950 billion (US$18.7
billion) by 2014, driven by a number of
factors, including increasing health
awareness, interest in preventive care,
increased interest from male customers
and the growing aspirations of
consumers in smaller towns.
In Hong Kong, demand for food,
beverages and tobacco is forecast to
grow by a nominal 0.9% in 2012, lower
than an earlier forecast of 2.8%, partly
due to the high base effect created by
2011’s strong growth of 6.7%, and
partly because of the high prices of
food imports, which dominate the
sector. Demand will contract by 0.2%
in 2013 and grow moderately during
the rest of the forecast period.
Imported food products with strong
quality credentials will see rapid
growth in sales in 2012-16, as
consumer fears regarding the quality
of food imports from mainland China
will increase the pressure on retailers
and restaurants to source more
products from other countries20
.
In Taiwan, market demand for food,
beverages and tobacco will grow at
only 0.3% in 2012, as the island’s
trade-dependent economy slows on
weakening global demand. Growth
will remain sluggish at 0.9% in 2013
and will pick up only moderately to
between 1.6% and 2.0% for the rest of
the forecast period.

14 PwC
Section 1: Retail
Private-label sales continue to chart
slow growth across Asia. According to
London-based L.E.K. Consulting,
private labels have a much lower share
of supermarket sales in Asia than in
developed countries, ranging from less
than 1% in Indonesia to between 1.5%
and 30% in Thailand, Malaysia, South
Korea, Singapore and Taiwan, and
approximately 6% in Hong Kong21
.
Separate data from Euromonitor show
the share of private-label goods in
India at 11% and at 4% in China22
. As
Asia’s current environment of high
inflation and rising prices drives
customers to seek value, private labels
have new opportunities to increase
their share (they are cheaper than
other brands because less is spent on
marketing, distribution and
advertising; retailers push their own
brands with excellent in-store
placements and promotions). To
overcome Asian consumers’ suspicions
about the quality and safety of private
labels, retailers are upgrading their
packaging and promoting their
international backing where possible.
For example, the UK’s Tesco sells its
Tesco private-label products at its 660
Tesco Lotus stores across Thailand and
in other Asian countries23
, while
France’s Carrefour and the US’s
Wal-Mart do the same at their stores
across Asia. Many of Asia’s local
players have also developed successful
own-brands in recent years, including
some of China’s largest retailers.
Retailer Lianhua Supermarket
Holdings, which by end -2011 had
5,233 hypermarkets, supermarkets
and convenience stores in 19 provinces
in China, has also developed its own
private-label business24
.
Private label
Indian retailers have been quick to
latch on to the private-label strategy,
even though the sector was opened to
modern retailers only a few years ago.
In developed countries, private labels
took decades to take off and were
introduced only after the retail sector
was well-developed. Big domestic
retailers including the Future Group,
Bharti Wal-Mart Retail (a joint venture
with Wal-Mart), Aditya Birla Retail,
Reliance Retail, Spencer’s Retail and
Dubai-based Landmark Group’s Spar
Hypermarket, all developed their own
private-label brands about five years
ago, as they began building their retail
networks. The Future Group, India’s
largest retailer, says that since India is
under-branded and under-penetrated
in many categories, it makes sense to
build own-brands while categories are
themselves developing25
.
In-house brands now account for
12-15% of sales and over 20-25% of
profits for most Indian retailers26
.
Retailers have focused on good
packaging, attractive pricing and
strategic in-store placement to attract
consumers. According to market
researcher Nielsen, Indian shoppers
spend over US$100 million on private-
label items per year and this is set to
rise to US$500 million by 201527
.
At the networks of big retailers, these
products now outsell several national
brands in some categories. According
to data from Nielsen for July-
September 2011, at the Future Group’s
Big Bazaar and Bharti Retail’s Easy Day
outlets, these retailers’ own private-
label floor cleaners account for over
50% of all floor cleaner sales, while
their packaged wheat flour, rice, tea,
spices and salty snacks take shares of
between 16% and 42%28
. After an
initial blitz of own-label products,
India’s retailers are now consolidating
their portfolios and aiming to increase
market share. Aditya Birla Retail’s
More chain launched only 15 products
last year, down from 25 in 2009. It
discontinued several brands, and
instead used just one brand across all
products. It also removed high-
investment personal care products
from its portfolio29
.
Asia’s players may even be able to
up-end some conventional wisdom
about the private-label business. For
example, while private labels usually
succeed better in products with low
differentiation, India’s Croma chain of
multi-brand electronics stores sells its
own brand of durables from
refrigerators to hair dryers. The
retailer expects to almost double its
revenues from its own brands to Rs2.5
billion (US$48.4 million) in FY13. The
brand also benefits from the excellent
reputation of its parent, the Tata
Group30
.

Section 1: Retail
Key findings
• The gap in demand for fashion
and apparel between Asia and
the West will widen
substantially, with demand in
Asia growing 3.8% in 2013.
• India will be the star performer,
growing by 9.4% in 2012, with
sales driven by the expanding
population of young people,
rising awareness of
international fashion and an
influx of foreign brands. China
will follow behind with 7.9%
growth.
• Fast fashion brands are
expanding rapidly in Asia but
face stiff local competition.
Fashion and apparel
Asia’s fashion and apparel market
growth will continue to lead global
growth through 2012-16. In 2012,
nominal clothing market demand in
Asia and Australasia, at US$199.49
billion, will continue to surpass
demand in both Western Europe and
North America and that gap will widen
substantially during the forecast
period (see Fig 9). In 2012, demand in
Asia will rise 4.4%. That is lower than
an earlier forecast of 5.1%, partly
because of a higher base created by
2011’s demand growth of 5.3% (higher
than earlier projections of 4.8%) and
partly a result of slower economic
growth in the region.
Demand in China is forecast to grow at
7.9% in 2012, lower than a previously
expected 8.4%, given the slowing
economy, high inflation and high
prices. Still, consumer demand and
Figure 8: Clothing: Market demand growth (% real change pa)
Territory 2009 2010 2011 2012 2013 2014 2015 2016
China 10.5 8.5 7.8 7.9 7.5 8.8 8.4 8.1
Hong Kong -1.4 6.3 8.5 2.8 1.7 2.6 3.0 2.9
India 7.8 6.2 5.1 9.4 7.2 7.7 9.0 1.3
Japan -1.3 2.3 -0.2 1.0 0.6 0.9 0.7 0.7
Taiwan 0.4 3.6 3.0 1.1 1.8 2.6 3.1 3.0
clothing spend will rise throughout
2012-16, driven by growing personal
disposable income and higher interest
in fashion apparel. Online apparel
retailing will become an important
market segment during the forecast
period31
.
In Hong Kong, demand in 2012 will
grow at 2.8%, on the higher base of
8.5% in 2011. Robust demand will
continue during the forecast period,
with sales rising steadily through to
2016. Despite very high rents, foreign
players will continue to enter the local
apparel retailing market, both to tap
increasing local demand and to
capitalise on the rising number
mainland-Chinese tourists shopping in
Hong Kong32
.

16 PwC
Section 1: Retail
Figure 9: Clothing: Market demand (nominal US$ million)
0
50,000
100,000
150,000
200,000
250,000
300,000
Western
Europe
North
America
Asia and
Australasia
20162015201420132012201120102009
Figure 10: Clothing: Market demand (nominal US$ million)
Territory 2009 2010 2011 2012 2013 2014 2015 2016
China 35,370 41,173 48,893 56,444 64,333 74,563 85,480 98,038
Hong Kong 37,913 40,596 45,726 48,732 51,710 55,129 58,852 62,782
India 5,397 6,603 7,376 7,755 9,210 10,879 12,602 13,529
Japan 24,118 25,861 28,079 28,005 26,788 25,468 25,001 24,395
Taiwan 3,274 3,568 3,977 4,035 4,186 4,400 4,669 4,917
In India, demand for apparel in 2012 is
forecast to grow at 9.4%, against an
earlier estimate of 8.7%. Although high
inflation, rising prices and a slowing
economy may persist in the short term,
clothing sales will nevertheless rise
rapidly during the forecast period,
from US$7.38 billion in 2011, to
US$13.52 billion in 2016, driven by a
growing population of young people,
rising awareness of international
fashion, and an influx of foreign
brands. Disposable income will treble
from US$1 billion in 2012 to US$3
billion in 2016. However, the market
will remain extremely competitive, on
proliferation of ready-to-wear apparel
shops and as more foreign companies
enter the Indian market33
.
Taiwan’s clothing market is performing
moderately. Demand growth is forecast
at 1.1% in 2012, lower than an earlier
projection of 3.9%. The global
economic slowdown in 2012 is
expected to drag down the export-
dependent island’s real GDP growth to
1.3% this year. However, demand will
improve during the rest of the forecast
period as GDP growth rebounds,
private consumption expands steadily
and the inflow of Chinese tourists
grows34
.
In Japan, clothing demand will grow
only 1.0% in 2012, lower than an
earlier forecast of 1.5%. Although
reconstruction spending will support
limited economic growth in 2012,
sluggish wage growth will depress
consumer sentiment in 2012 and
through the forecast period. During
2012-16, private consumption is
expected to rise by less than 1% a year
on average. However, clothing sales
will continue to be the most important
category of retail sales (excluding food
and beverages) in 2012-16, despite
negligible growth in yen terms35
.

Section 1: Retail
Fast fashion expands
aggressively
Under pressure from poor performance
in Western markets and rising input
costs, numerous international fast
fashion brands are hoping to cash in on
Asia’s young demographic and rising
affluence. The fast fashion industry
relies on bulk production to bring
affordably-priced fashion to market in
quick cycles. Fast fashion’s ‘cheap chic’
approach plays well with Asia’s young,
upwardly mobile customers who have
fast-changing tastes and a hunger for
brands but an eye on affordability.
The world’s largest fast fashion retailer,
Spain’s Inditex, owner of the Zara
brand, and many of its competitors,
such as Uniqlo of Japan and H&M of
Sweden, have established themselves
in Asia and are expanding aggressively.
Inditex has 5,527 stores around the
world including 300 in China, where
it’s one of the most successful foreign
retailers. It expects to have 425 stores
across 50 Chinese cities by end-201236
.
Japan’s Fast Retailing, which owns
Uniqlo, already has 136 stores in
Greater China and 181 in the rest of
Asia. It now plans to add 1,000 new
stores in each of those markets over the
next 10 years, seeing great potential in
middle class consumers in China,
Taiwan, Hong Kong, the ASEAN
nations and India37
. US fashion brand
Tommy Hilfiger plans to open 500
stores in India over the next five years
through a local joint venture; it already
has 58 franchise stores and over 60
shops-in-shops38
. American retailer
Gap is targeting 20 new stores in Hong
Kong and mainland China by February
2013, raising its store count there to
4539
. New companies are also joining
the rush. Topshop, owned by the
Arcadia group, the UK’s largest
clothing retailer, has one store in Japan
and opened its first China store in May
2012. US retailer Forever 21 also
opened its first stores in Hong Kong
and Beijing in 201240
.
However, these companies will face
formidable competition from local
players, who have the advantage of
Asia’s long-standing strength in
textiles, an understanding of local
tastes, years of local experience,
established distribution networks and
an existing real estate bank. Hong
Kong, for example, has a strong set of
local apparel brands such as Giordano,
Baleno, Bossini, I.T and Esprit. These
companies will expand strongly on the
Chinese mainland and in Southeast
Asia in 2012-16, and in some cases also
in EU markets. Hong Kong’s Li & Fung,
among the world’s biggest supply-chain
management companies, is moving
into apparel retailing and has bought
several Western clothing retailers,
marketers and brands to market to
Chinese customers41
.
China, too, has strong home-grown
apparel brands. For example,
Metersbonwe has over 3,000
branches42
and a presence in the
smallest of Chinese cities. According to
Euromonitor, it is China’s third-largest
apparel brand behind Nike and local
sportswear brand Anta. Metersbonwe
now plans to expand into London,
Paris, New York and Milan43
. Anta had
7,807 Anta stores in China as of June
2012 and says it will continue to
expand, though at a ‘slower’ pace of
100 new stores in 201244
. China’s
Trendy International Group has 300
directly owned stores and hundreds of
franchises for its four brands, including
its largest, Ochirly. JNBY, established
in 1994, runs more than 600
franchised stores across China45
.

18 PwC
Section 1: Retail
Online retailing
Infrastructure growth will aid a swift
rise in Asian online retailing.
According to industry intelligence
provider eMarketer, in 2012 the
Asia-Pacific region will account for
31.1% of B2C e-commerce sales
globally, second only to North
America’s 33.4% and higher than
Western Europe’s 26.2%. From 2013
onwards, Asia will lead the world in
such sales, with a 41.4% share by
2016, when China’s slice of the pie will
rise to 23.4%, from 9.9% in 201248
.
In 2012, the internet penetration rate
in China is forecast to be 42.8 per 100
people49
. According to Chinese
research firm Analysys International,
Key findings
• Asia will lead the world in business-to-consumer e-commerce sales from
2013 onwards, accounting for a 41.4% share of the business by 2016.
• Recognising the strategic importance of online retailing as a new
distribution channel, traditional retailers are expanding their own online
presence in Asia.
• Luxury companies are overcoming their fears that online sales will
compromise their high-end image. Luxury accessory maker Coach (US)
launched its first official online store in China on Taobao Mall in December
2011.
Online retailing will grow rapidly in
Asia during 2012-16, aided by
increased broadband and mobile-
phone penetration, the spread of
smartphones and tablet computers,
and improvements in payments and
logistics infrastructure. Asian
countries are frantically increasing
access to the internet and mobile
phones. In 2011, China added 30
million fixed-broadband subscriptions,
half the total subscriptions added
worldwide, while Singapore and the
Republic of Korea had more mobile-
broadband subscriptions than
inhabitants46
. As of December 2011,
26.2% of Asia’s population had
internet access, accounting for 44.8%
of the world’s internet users47
.

Section 1: Retail
India’s internet penetration is forecast
to be a low 10.6 subscribers per 100
people in 2012, but its 129 million
users will represent the second-highest
online population in Asia57
. Swift
growth in internet access, broadband
services and mobile internet access
could rapidly change India’s online
retail landscape. Meanwhile, online
retailers in India are adopting concepts
such as cash-on-delivery to overcome
obstacles such as low usage of credit
cards. Overall, online retail revenues
in India are projected to increase by
more than five times in the next four
years, from an estimated US$1.6
billion in 2012 to US$8.8 billion in
2016, according to Forrester
Research58
. M-commerce may grow
strongly since mobile-phone usage is
rising quicker than fixed internet
access, while innovative offerings like
mobile wallet payment services are
also increasing. India had 893.84
million mobile subscribers at end-
December 2011, including 292 million
in rural India, and a wireless
penetration of 74.15%. According to
the Internet and Mobile Association of
India, India’s overall e-commerce
market grew 47% to around Rs460
billion (US$9.2 billion) in 201159
. The
government’s recent announcement
that it would further open the retail
sector to foreign investment did not
include e-commerce.
Taiwan’s high internet penetration of
80.4 subscribers per 100 people60
and
high smartphone usage will aid growth
of its e-commerce market, which the
Institute for Information Industry
expects to grow by 20% in 2012, after
growing by an estimated 25% in
201161
. However, given Taiwan’s small
population, online sales growth will
likely slow down as the market
approaches saturation in the latter part
of the forecast period62
. An obvious
growth market for Taiwan’s
e-commerce businesses is mainland
China, but many regulatory
restrictions on the integration of the
two markets remain in place.
China’s B2C e-commerce transactions
grew 73% to RMB81.87 billion
(US$13 billion) in the first quarter of
2012, and are expected to reach
RMB450 billion (US$72 billion) for all
of 201250
. US-based Boston Consulting
Group estimates that e-commerce sales
in China will account for 7.4% of total
retail sales by 201551
.
Hong Kong’s current high internet
penetration of 78 subscribers per 100
people in 201252
, its densely packed
population (which makes delivery of
goods more efficient) and the quick
spread of smartphones make it a
promising prospect for online retail.
According to a survey from online
payments firm Paypal, Hong Kong’s
online shopping value reached US$1.9
billion in 2011 and is expected to touch
US$2.5 billion by 201553
. Offline
retailers will still thrive since Hong
Kong’s shoppers continue to enjoy
physical shopping and searching for
good deals.
Japan offers huge potential for online
and mobile shopping. In 2012 it is
forecast to have 82.8 internet
connections per 100 people54
and a
dynamic mobile-telecommunications
sector. In 2011 roughly 20% of online
retailers’ sales were made on
smartphones and m-commerce will
continue to grow. While the largest
online retailers in Japan are general
shopping sites like Rakuten, a local
firm, and Amazon.jp, the local
subsidiary of US-based Amazon,
specialised online retailers are
increasing in number and growing
quickly. For example locondo.jp sells
shoes and handbags55
. According to
Forrester Research, e-commerce sales
in Japan will grow from US$63.9
billion in 2012 to US$97.6 billion in
201656
.

20 PwC
Section 1: Retail
There is a lot of concern about the
economic slowdown in China. What are
your expectations for growth in the
coming year?
The macroeconomic environment in China
is challenging but we remain optimistic on
the growth of the e-commerce market.
Currently, online shopping sales account
for around 5% of total retail spending in
China, representing much room for growth
compared to other developed markets like
the United States. In fact, the US has been
experiencing a faster rate of growth for its
online retail sales than offline sales during
the past decade. According to iResearch,
the average growth rate of China’s online
shopping market is expected to be around
30% in the next 3-5 years.
The China e-commerce market is
growing exponentially. What is the
biggest challenge for Tencent in keeping
up with this growth? How are you
dealing with this challenge?
Tencent has a diversified business model
which is built upon our huge instant
messaging user base and traffic. We
generate revenue from four major
businesses, namely internet value-added
service (including Community and Open
Q&A with John Lo, CFO & Senior Vice President, Tencent
Platform, Online Games, etc.), Wireless
Value-added Services, Online Advertising
and e-Commerce transactions. The
user-paid revenue model and high
cash-generative nature of our internet
business enabled us to weather the
economic downturn in 2008/09 and
maintain steady growth in both operating
and financial performance. We aim to
further diversify our revenue base and
achieve long-term sustainable growth
through investment in our platforms, R&D
and new initiatives. We are now in the early
stage of developing our e-Commerce
business, which accounted for 8% of our
total revenue in Q2 of 2012.
Our primary goal for e-commerce is to
build a consumer-oriented platform which
delivers quality services and a
differentiated user experience to meet the
changing needs and growing demands of
our customers for rapid delivery,
competitive prices, better product choices
and better after-sales services. These are
also the challenges that e-commerce
companies have to address. We will
continue to leverage our multiple platform
advantages and deep understanding of our
users’ needs to customise a differentiated
online shopping experience for customers.
Tencent’s e-commerce site PaiPai has
numerous categories ranging from
sports to moms and babies to red
packets. Which areas are seeing the
fastest growth?
We are building a new e-commerce platform,
buy.qq.com, to host our B2C and small- and
medium-sized enterprise-to-consumer
(SME2C) marketplaces, lifestyle services (e.g.
hotel booking and ticketing) and offline-to-
online (O2O) services. Paipai will focus on the
consumer-to-consumer marketplace under
the umbrella of buy.qq.com. We see strong
growth in our overall e-commerce business
across all product categories like 3C products
(ComputerCommunicationsConsumer
Electronic), and believe B2C business models
can better address the increasing demands of
online shoppers. Hence, in addition to the
development of Paipai.com, we will focus on
expanding our principal business and B2C
open platforms in order to capture the
growing demands in this area.
What are Tencent’s expectations for
growth in the mobile commerce market
in China?
Mobile commerce is not only a natural
extension from the desktop, it actually
presents more potential in terms of
business models and monetisation. For
example, location-based services offer
Established in 1998, Tencent
provides a comprehensive range
of Internet and wireless value-
added services. Through its various
online platforms, including Instant
Messaging QQ, QQ.com, the QQ
Game Platform, social networking
service Qzone and wireless portal,
Tencent services the largest online
community in China and fulfills the
user’s needs for communication,
information, entertainment and
e-Commerce on the Internet.
users shopping information while mobile
payment facilitates the completion of the
payment procedure on site. We have
partnered with various offline merchants
and retailers to experiment with O2O
marketing opportunities. Recently, we have
also launched “QQ Buy” apps for iPhone
and Android phones to offer e-commerce
services on mobile devices. As 3G
infrastructure becomes more well-
established and smartphone penetration
increases further, we believe there is a huge
growth potential in mobile commerce.
Tencent’s internet platforms have
brought together the largest internet
community in China. What has been the
biggest factor in your success?
Tencent has built a strong social
infrastructure in China which offers a
diversified range of products from QQ IM
(instant messaging) to QQ Mail (email),
social networks Qzone and Pengyou, social
media Tencent Microblog and smartphone-
based social communication platform
Weixin. We believe our success stems from
our focus on user experience. Leveraging
on our huge QQ IM user base (784 million
monthly active user accounts as of Q3 of
2012), we are able to create a strong
community effect for our users. All these
social communications services are closely
integrated with each other with one single
login ID. Users can share their own social
graph and synchronise comments and
photo uploads across these platforms. Users
can also enjoy unified experience across PC
and mobile terminals.
What impact is online communication
(interactive communities such as
QQ.com, and social networking
services) having on consumer buying
decisions in China? Are consumer goods
companies prepared for this?
From a merchant perspective, social
networks are a good platform to access
potential customers and to enable precise
user targeting and CRM (customer
relationship management). At the same
time, users are highly engaged in social
networks and can share virally their
reviews on products and shopping
experiences with their friends. Nowadays,
both online and offline retailers are
increasingly using social networking
services (SNS) to build brand awareness
and user loyalty. Leveraging the success of
our SNS platforms, Tencent is also
partnering with brand advertisers and
merchant partners to broaden access to
target customers for brand building and
user loyalty campaigns.

Section 1: Retail
Traditional retailers move
online
Recognising the strategic importance
of online retailing as a new
distribution channel, traditional
retailers are expanding their own
online presence in Asia. China’s largest
domestic appliance retailer and
leading multi-channel retailer, Suning,
derived around 4% of its 2011
revenues from Suning Yigou, its
e-commerce business63
. Many
traditional retailers across Asia are
now partnering with e-tailers in
symbiotic relationships, increasing
sales without investing in a separate
online business. For example, India’s
naaptol.com was set up in 2008 as a
comparison website, but after 18
months without revenues, it tied up
with suppliers to advertise their
products. It now generates business
worth Rs20 million (US$376,000) a
day, earning commissions of 2-20% of
sales from sellers. Amazon has also
opened in India in its traditional
format — as a portal through which to
buy goods from numerous retailers
— called junglee.com64
.
Foreign offline retailers are also
reconsidering their past disregard for
online Asian sales. In China, Wal-Mart
upped its stake in online grocery store
Yihaodian to a majority holding in
February 201265
. In May 2012, American
retail giant Macy’s announced an
alliance with local e-tailer VIP Stores,
owner of Jiapin.com and Omei.com,
both multi-brand luxury e-tailers. It is
planning a dedicated section on Omei.
com in 2013. Macy’s has been selling
online to mainland Chinese consumers
since June 2011, using fulfilment
services from FiftyOne, a US company
that helps retailers serve clients in
foreign markets without investing in
infrastructure66
. Others, such as
Banana Republic and Marks & Spencer,
will now begin to deliver to Hong Kong
(and some other Asian countries) from
their home markets.
Scores of Japanese and South Korean
retailers, whose brands are extremely
popular in China, already use Chinese-
owned portals to sell directly to
mainland consumers. 360Buy, among
China’s three largest online retailers,
recently launched Minitiao.com, an
e-commerce website for Japanese and
South Korean goods including
cosmetics and apparel brands, as well
as toys and dry goods67
.
Even luxury companies are overcoming
their fears that online sales will
compromise their high-end image.
They have been alerted by the Asian
success of online luxury stores,
including the US Gilt Groupe and
Brands4friends.jp in Japan, Hong
Kong’s Glamour Sales (operating in
China and Japan), and excluzen.com
and 99labels.com in India, which offer
heavily-discounted luxury goods68
.
Luxury accessory-maker Coach (US)
launched its first official online store in
China on Taobao Mall in a one-month
trial in December 201169
, which
recorded 3.5 million visitors but only
limited sales. Coach is now reportedly
planning to launch its own Chinese
e-commerce platform by end-2012. In
March 2012, US-based luxury retailer
Neiman Marcus Group invested US$28
million for a stake in Glamour Sales, its
first international foray, and hopes to
launch an online shopping website by
end-2012 to enter the Chinese luxury
market70
.

22 PwC
Across Asia, economic growth is slowing, while food inflation remains worryingly
high. These trends, coupled with high interest rates on consumer loans, mean that
consumers are allocating their budgets more carefully and looking for value across
categories. But underlying fundamentals—rising incomes and relatively strong
growth—remain in place. Private consumption will continue to rise, feeding
demand for everything from shampoo to luxury watches. As companies of all
stripes continue their headlong expansions, modern retail infrastructure is
improving quickly in many countries.
For consumer goods companies, the good news is tempered by numerous
challenges, from cut-throat competition to the need to serve widely different
categories of customers to the daunting task of managing their enormous
expansions. In response, companies are planning their expansions more
judiciously, partnering with local players, better targeting customer groups, and
exploring online sales and private labels to provide value.
Section 2:
Consumer goods

In China, market demand for soaps and
cleansers will rise by 9.0% in 2013 and
growth will stay high through 2016.
During the forecast period, the fastest
growth in FMCG sales will occur in less
developed third-and fourth-tier cities,
as fast rising disposable incomes give
vast numbers of people money to spend
on consumer goods, rather than just on
necessities. More affluent consumers
will increase consumption of higher-
end products, especially cosmetics and
toiletries, which is good news for
foreign companies, which dominate
this segment71
.
Chinese visitors will also support
consumer goods sales in Hong Kong
during 2012-16. Although local
demand is expected to remain fairly
strong based on steady economic
growth, volume growth in retail sales
may slow because of inflation. High-
end products will continue to prosper,
as will skincare and cosmetics
products, thanks to a rapid increase in
tourist arrivals and rising sales to
mainland Chinese visitors. A record 40
million tourists visited Hong Kong
during the ten months to October
2012, an increase of 15.8% over the
same period last year, with mainland
tourists accounting for 72% of the total
number72
. Tourist demand in Hong
Kong could be negatively affected by a
proposed cut in China’s luxury-goods
taxes that would reduce price
differentials, but the strong reputation
of the territory’s goods should continue
to support sales73
.
FMCG companies will continue to
profit from Asia over the forecast
period, as well-to-do consumers push
up demand. In 2012, major Asian
economies are slowing somewhat
while inflation and prices remain high.
Therefore we now forecast regional
demand for soaps and cleansers to
grow at 6.5% in 2012, still strong, but
lower than an earlier forecast 7%.
These factors will be at play in China,
Hong Kong and Taiwan, which will
grow at 11.8%, 5.1% and 1.6%
respectively in 2012. In 2013, Asian
demand will rise at 5.6% and growth
will remain relatively robust, led by
China and India, for the rest of the
forecast period.
Fast-moving
consumer goods
Key findings
• FMCG sales growth will slow but remain robust across most of the region.
• FMCG demand growth will be fastest in China, with the soaps and cleansers
market expanding by 11.8% in 2012.
• Companies are reinforcing strategies to reach rural and lower-income
consumers, and expanding distribution networks.
• The trend towards local acquisitions aimed at boosting market share
continues, notably in China.

24 PwC
Figure 11: Soaps and cleansers: Market demand growth (% real change pa)
Territory 2009 2010 2011 2012 2013 2014 2015 2016
China 18.4 6.7 11.3 11.8 9.0 9.2 7.4 7.1
Hong Kong 7.0 9.5 13.2 5.1 2.4 4.3 4.7 4.5
India 15.6 11.8 7.1 8.7 9.4 9.8 11.0 11.0
Japan 2.2 4.6 -0.2 1.1 0.8 1.1 1.2 1.1
Taiwan 2.3 5.1 4.1 1.6 2.5 3.7 4.3 3.9
Figure 12: Soaps and cleansers: Market demand (nominal US$ million)
0
40,000
80,000
120,000
160,000
200,000
Western
Europe
North
America
Asia and
Australasia
20162015201420132012201120102009
In Taiwan, sales of soaps and cleansers
are forecast to grow at 2.5% in 2013, a
strong performance considering the
market’s maturity. Growth in these and
other FMCG products will remain good
through 2016, as Taiwan’s trade-
dependent economy improves in
tandem with a global recovery,
supporting incomes and demand
growth76
.
In Japan, demand for soaps and
cleansers will grow by a modest 1.1%
in 2012 against an earlier growth
forecast of 2.4%, since buying
sentiment remains cautious post-
earthquake. Growth will slip to 0.8%
in 2013 and remain moderate through
the rest of the forecast period.
However, high incomes will still
support high-end FMCG products, such
as Japan’s cosmetics and toiletries
segment, the world’s second-largest
market worth around US$50 billion
annually. As in many other sectors in
Japan, demand for consumer goods in
2012-16 will largely be driven by the
introduction of new products, since
Japanese take-up of new products and
services is quick, and can create
fast-fading consumer fads. Japan’s
older, health-conscious demographic
will also drive sales of anti-ageing
products and those using natural
ingredients74
.
Despite a faltering economy, high
inflation and price hikes by FMCG
companies, India’s growing middle
class and its rural consumers are
retaining their strong appetite for
FMCG products. Demand for soaps and
cleansers is forecast to rise 8.7% in
2012, lower than an earlier forecast of
9.9% but still robust. Demand growth
will pick up slightly to 9.4% as
economic growth improves, and will
rise to 11% by the end of the forecast
period as income rise and consumers
look to trade up to better products.
Leading FMCG companies, including
several multinationals, will continue to
benefit from their excellent
countrywide distribution networks,
consumer insights and high brand
loyalty, built over decades. They will
continue to customise products,
package sizes and marketing efforts for
Indian consumers, aiding
consumption. Although India’s
cosmetics and toiletries market is
heavily dominated by a few players,
rapid demand growth will offer
opportunities for new players75
.

The FMCG sector in India has been
growing rapidly. How does Godrej
compare with the industry overall?
The FMCG sector has been doing well in
the last few years with CAGR of 15% across
the industry. Godrej has outperformed with
a CAGR of 22%. Soaps and household
insecticides have done particularly well as
compared with hair colour brands.
Is FMCG growth vulnerable to factors
such as a slowdown in GDP growth and
poor monsoons, such as we are seeing
this year?
For essentials, generally no. But FMCG
impulse buying is affected, for example in
the case of snacks. But impulse buying
itself is only 10% of the market, so it does
not have much impact on growth of FMCG
sales overall.
Q&A with A. Mahendran, Managing Director,
Godrej Consumer Products, India
Is competition in the FMCG sector in
India increasing? Is competitive
intensity high?
Any market which is growing will have
competition. But if you compare with say
China and Brazil, in India competitive
intensity is nominal, it is not hyper. In a
democratic country which is opening up,
and with laisser faire capitalism, there will
always be competition but for us in India it
is not as severe.
Large players seem to dominate the
FMCG industry in India. Or are we
understating the role of the informal
sector and regional players?
Everywhere in the world there are small
players. All the data is captured in India –
the share of the large national brands
across categories is around 60% -70%, and
this is stable. Regional players share the
rest.
Do regional players have any advantage
over large brands in terms of the tax
regime or regulatory environment?
No, it is a level playing field and local
players have no special advantages, except
for some who might not be complying with
regulations. When the uniform taxation
regime under the GST comes into play the
environment will further improve. But
there are some political issues to be
resolved before a uniform GST is
introduced. Smaller players may get some
benefits in terms of, say, excise duty
concession, but then they also have certain
higher costs to bear and they also have to
grow to be viable. Small units need money,
and cannot undercut prices beyond a
certain point if they want to survive.
Will the new policy allowing foreign
direct investment in multi-brand
retailing shake up distribution
channels?
Multinationals have not yet entered into
multi-brand retailing and it is going to be a
long-drawn process, requiring deep
Godrej Consumer Products is a
major player in India’s FMCG
market with products spanning
personal, hair, and household &
fabric care segments.
pockets. The FMCG industry is today worth
Rs2 trillion (US$37.1 billion). Modern
retail chains are growing relatively well but
they account for barely 5% of sales.
Will modern retail dominate in years to
come?
Modern retail will take its own course.
There is a large middle class in India which
is conservative and not quick to change
buying habits. I do not see any urge
amongst consumers to go into modern
retail shops. They still prefer to buy locally
from street corner shops, and they see
value in that. Moreover, the consumer
perception is that the local retailer is
cheaper. He also offers delivery, credit,
exchange and so on. There is also the fact
that only people with cars can drive to a
supermarket and park there to shop.
What will traditional retail do?
There are some 10 million retail stores and
they are growing in number by 15%
annually. At present there are only about
3,000 chain store outlets shared amongst
five or six chains. It is not going to be easy
for big chains to catch up. Moreover some
of the traditional stores will upgrade into
stand-alone self-service stores and these
will compete with large chains. This is
happening across India, even in smaller
towns.
Will e-retailing grow?
This is quite small at the moment and
happening mainly via personal computers,
of which there are only about 30 million
users. But there are some 500 million
mobile phones and a large proportion of
mobile users are accessing the internet on
their phones. So this is going to be the
driver to trigger e-commerce, especially
among younger people in their twenties.
They will drive e-commerce growth in
India.

26 PwC
Asia’s economies look prosperous
compared with developed markets, but
even they are showing signs of fatigue.
GDP growth is still healthy, but the
pace has slowed. In China, for
example, GDP grew 7.4% in the third
quarter of 2012 according to official
estimates: enviable compared to
Western economies, but still China’s
slowest growth since the first quarter
of 200977
. India’s economy is faltering
as well. GDP grew 5.8% in the year to
March 2012, down from 6.9% the
previous year78
. Consumers’ pockets
are being pinched by high inflation,
rising interest rates and price hikes by
FMCG companies aimed at covering
more expensive inputs and
commodities. Still, given Asia’s large
population, burgeoning middle classes
and fast-rising incomes, most FMCG
companies aren’t very worried about
future growth.
in good times to cater to rural and poor
consumers. For example, companies
such as Unilever (UK-Netherlands) and
Procter & Gamble (P&G) (US) have for
decades been successfully selling their
detergents and cosmetics in small
sachets that are affordable to Asian
families.
Companies are also expanding
distribution networks quickly to
increase penetration and reap more
sales. For instance, Unilever’s Indian
subsidiary Hindustan Unilever has
tripled its rural penetration rate in the
last two years82
. In Vietnam, P&G uses
a boat in the Mekong Delta to access
rural shoppers living on the water,
selling low-cost lines like sachets of
laundry softener83
. At the other end,
companies are also piggybacking on
the rise of modern retail infrastructure
such as supermarkets. India’s local
FMCG company Marico posted revenue
growth of over 45% from its rural and
modern trade businesses during
FY1284
.
In December 2011, Korean-Japanese
confectionery maker Lotte said it
would release low-priced products to
help its Southeast Asian expansion. It
hopes to raise sales in that region from
JPY8 billion (US$100.3 million) in
2011 to JPY15 billion (US$173 million)
by 2014. Its main products in Southeast
Asia are priced some 30% higher than
competing US and European products,
but it will now launch cheaper
products to expand its customer base.
Meanwhile, Lotte is also planning to
increase coverage in Southeast Asia by
tripling its sales personnel to 3,000 by
2014. In Vietnam, Indonesia and
Preparing for
slower growth
For example, according to a study by
India’s Economic Times, in the quarter
to March 2012, India’s top ten FMCG
companies outperformed analyst
expectations for both revenue and
profit growth. Performance was driven
more by consumption than by price
hikes. A separate study found that
historically, India’s leading FMCG
companies actually grow much faster
during periods of high inflation, when
they are more likely to grab market
share from the unorganised sector,
enjoying economies of scale from bulk
buying and benefiting from the higher
pricing their strong brands give them79
.
However, storm clouds may be
gathering, since the FMCG sector is
usually late to suffer during a
slowdown, given that demand for its
low-value products is more inelastic
than for other consumer goods
categories. There are already early
warnings, as some fast-expanding
companies in China find growth
beginning to decelerate. According to
research firm Kantar Worldpanel,
value sales in China’s FMCG category
rose by 15% in the quarter to 15th June
2012, lower than the annual rate of
16%80
. In July 2012, Mead Johnson
Nutrition, a US baby formula maker,
signalled slower sales growth in China.
Meanwhile Taiwan’s TingYi, a food and
drinks maker which leads China’s
instant noodle market, said drinks
turnover fell by more than one-fifth
year-on-year in the first quarter of
201281
.
In response, FMCG companies are first
doing more of what they already know,
reinforcing strategies they developed

Thailand, it will increase staff dealing
with small and mid-size stores and hire
personnel that deal in cash, using
motorbikes and small cars to deliver
candy to shops85
.
These strategies are mainly aimed at
growth, but at the same time, will also
help companies weather the current
economic slowdown. But the downturn
also calls for more to be done. In April
2012, Unilever said that despite rising
input costs, it would resist raising
prices in China except as a last resort,
instead applying cost-saving measures
in its factories and working on a
product portfolio with a higher profit
margin. It said it was still confident of
achieving its targeted fivefold growth
in its China business by 2020, to
RMB50 billion (US$7.9 billion), and of
growing 50% faster than the industry
average86
.
Tough economic times are also
intensifying existing challenges for
foreign companies in Asia. For
example, in December 2011, two of the
largest global food companies,
Switzerland’s Nestlé and France’s
Danone, revisited their China business
models in the face of fierce local
competition. Nestlé closed one of its
three ice cream factories in mainland
China and pulled back on retail sales in
Shanghai in order to focus on more
profitable regional markets and on
out-of-home sales, such as restaurants.
According to Euromonitor, while
Nestlé’s share of the RMB30 billion
(US$4.8 billion) national ice cream
market still hovers around 3%, the two
market leaders, Inner Mongolia Yili
and China Mengniu Dairy, have shares
of 17% and 15% respectively. The two
Chinese companies, have also
introduced new flavours and new
upmarket products and packaging.
Nestlé said its Shanghai plant did not
meet internal expectations and that it
might now focus on a few particular
brands and products since it no longer
has to support local production in that
city. Meanwhile, the world’s largest
yoghurt maker, Danone, said it has
“suspended” operations at its Shanghai
yoghurt factory, in line with a new
strategy of focusing more on premium
brands in China87
. Companies are
re-examining not just product and
production strategies but also their
regional plans. Both Nestlé and
Danone chose to cut back in Shanghai,
where competition is intense and the
lack of suitable land is a big problem.
Labour, logistics and inputs are more
expensive than in other regions, and
earlier tax breaks have been
withdrawn88
.
Multinationals may be regrouping, but
they are certainly not giving up on
Asia’s lucrative markets. Indeed, many
are looking to local acquisitions to buy
a quick presence and market share. In
early 2012, Nestlé bought 60% of local
food company Yinlu, and 60% of
candymaker Hsu Fu Chi. In April 2012,
it announced its purchase of Pfizer
Nutrition, American pharma giant
Pfizer’s infant-nutrition business, for a
hefty US$11.85 billion. Emerging
economies contribute 85% of sales for
Pfizer Nutrition. The company’s 7.4%
market share in China’s promising
baby food market could be the key
motivation for Nestlé’s buy; given
China’s one-child policy, mothers
usually prefer the most expensive baby
food89
.

28 PwC
Luxury brands
Amidst the dreariness of global
economic growth figures, Asia’s
increasingly rich and luxury-loving
consumers continue to provide
surprising cheer for the worldwide
luxury market. According to
consultancy firm Bain & Co, luxury
sales worldwide will grow at 7-8% to
€216 billion-€218 billion (US$280
billion-US$283 billion)in 2013, with a
CAGR of 7-9% in 2011-2014. Asia’s
growth of 20-22% driven mainly by
China and South Korea, will be key.
Indeed, 30% of global luxury sales now
occur within emerging markets.
Meanwhile, Chinese consumers from
mainland and Greater China
(including Hong Kong, Macau and
Taiwan) and counting Chinese tourists
worldwide, account for over 20% of
global luxury sales. Add in Japan,
South Korea and Southeast Asia, and
Asian consumers account for over half
of such sales90
.
China will drive global luxury growth
in 2013 and through the forecast
period based on its large population,
falling but still-strong GDP growth and
a rapid rise in affluence, including
increasing purchasing power in
smaller cities. These trends are coupled
Key findings
• China will drive global luxury market growth in 2013 and
beyond based on a rapid rise in affluence, including in the
smaller cities.
• Mainland Chinese tourists will remain critical for luxury
sales in neighbouring Taiwan and Hong Kong, and sales
could suffer if China abolishes or cuts its tax on luxury
goods.
• Homegrown Asian luxury brands are establishing
themselves in the region. Partnerships with global brand
owners are likely to become more common as Asian firms
seek capital and international expertise, and global firms
seek to cater more closely for the tastes of Asian
consumers.

with a strong appetite for status and
luxury products. According to Bain,
luxury sales in mainland China rose
35% in 2011 and are forecast to grow
18-22% in 2012 to €15 billion-
€16 billion (US$19 billion- US$21
billion). Second-, third-and even
fourth-tier Chinese cities will be
important growth drivers over the next
few years91
.
Clearly, China has replaced Japan as
luxury’s most important Asian market.
The World Luxury Association predicts
that China will overtake Japan
officially in 2012, with sales of US$14.6
billion92
. However, during the forecast
period Japan will still remain
important and contribute significantly
to the revenues of many luxury
companies. It contributed 8% of
first-half revenues at the world’s largest
luxury goods group LVMH (France)93
,
17% of jeweller Tiffany & Co94
global
sales in 2011 and 12% of third-quarter
2012 revenue at France’s PPR’s luxury
division95
. In future, luxury companies
will nurture their decades of
investment in Japan and focus on
gaining market share, but they will
channel new investments into high-
potential markets, particularly China.
According to a World Luxury
Association survey, 70% of global
luxury brands in Japan were shifting
their commercial plans to China during
the year to June 201296
.
Chinese customers will also remain
key to growth of the luxury market of
neighbouring Hong Kong and Taiwan.
According to the Chinese Tourism
Academy, Chinese travellers spent
US$69 billion during overseas trips in
2011, up 25% from the previous year,
taking 70 million trips abroad. This is
set to rise to 80 million trips in 201297
.
Chinese spending overseas is heavily
motivated by hefty local taxes on
imported luxury goods at home. In
2011, Hong Kong received 28.1 million
tourists from China, over two-thirds of
its total visitors98
.
In 2011-16, Hong Kong will remain an
important market for luxury branded
goods, particularly jewellery, clothing
and accessories. Sales of expensive
items will continue to benefit from
loose local credit conditions until at
least the end of 2013, while steady
economic growth will drive local
demand back towards luxury goods
and away from utilitarian items. Rising
local demand and incomes will
probably mean that the trend towards
luxury, value-adding boutique outlets
will continue to strengthen. The
absence of sales taxes will keep prices
for luxury goods lower than in most
other countries, supporting demand99
.

30 PwC
In Taiwan, Chinese tourists are as
important as in Hong Kong. Nearly 1.8
million Chinese mainlanders visited
Taiwan in 2011, a 20% year-on-year
increase. Numbers will likely grow as
authorities loosen visa and travel
restrictions. In 2011-16, relatively high
disposable incomes and low inflation
in Taiwan will also help local sales100
.
In both Hong Kong and Taiwan,
categories such as jewellery, watches
and gifts, consumed particularly
strongly by Chinese tourists, will see
rapid sales growth, while products and
outlets that cater effectively to their
tastes will outperform the market101
.
However, if China goes through with
plans to drop or lower its tax on luxury
goods (more than 30% in some cases),
sales in Hong Kong and Taiwan could
suffer.
India will remain a small but high-
potential luxury market over the
forecast period. Its market is
handicapped by high duties on luxury
products and the same problems that
all retailers in India face, i.e. poor
retail infrastructure, expensive real
estate, staff shortages and regulatory
problems. In addition, brand
consciousness among Indian
consumers is not high, though this is
changing with the proliferation of
digital media. Consultants A.T.
Kearney forecast that the Indian luxury
products market will record a CAGR of
20% from 2011-2015 to reach US$5
billion- US$7 billion, but this still
accounts for only 2% of the global
luxury market then102
.
In September 2012, the Indian
government relaxed some conditions
for the entry of foreign investors into
the retail sector. For example, foreign
retailers with over 51% equity in their
Indian operations were required to
mandatorily source 30% of their
products from small and cottage
industries and artisans, which luxury
companies were reluctant to do given
concerns about quality103
. In
September, the government made this
requirement ‘preferable’ rather than
mandatory, and also did away with a
rule that foreign retailers holding
100% of their Indian stores must own
the brands that their stores sell. The
original rule meant that a foreign
retailer that is a franchisee or licensee
for an international brand would not
be able to own 100% of its Indian
operations. Similarly, many large
companies that hold their brands and
trademarks through subsidiaries would
not have qualified. These relaxations
could help the retail market grow
quickly, tapping latent demand. Luxury
companies remain keenly interested in
India’s potential, but given its large
size and regulatory complexity,
companies will likely opt for local
partnerships even after liberalisation.

Many people are concerned about the
current economic climate and the
forecast for next year. How do you see
your markets?
In terms of growth rates, I think everyone
is facing a kind of soft landing nowadays.
But this has a positive side in that it allows
you time to assess the business. Personally,
I am optimistic about the outlook. In an
economic downturn people might not buy
as much or as wildly in China. But sales
overseas—Europe, the Middle East, Korea,
Hong Kong—are actually growing. People
are a little more selective but they are still
buying. If you read Richemont’s half-year
results, we are ahead of our peers. We have
been implementing a very solid strategy in
terms of brand building, and we will
continue to do so. We do not want to rush.
We do not want to open 2,000 shops in
China. We only want to open where we
should be strategically. We have not
changed our expansion plan except to
make some very slight adjustments.
Q&A with Nigel Luk, Regional Managing Director, North Asia
Cartier
Travelers from Mainland China are an
important market for Cartier around the
world. How are you maximising the
potential of this market?
How to cater for mainland tourists has
become a prominent and important issue
for Cartier in the past four to five years. We
decided we need to have a consistent
strategy in terms of image, exposure,
service quality and so on, so that mainland
Chinese customers do not have a different
experience when they go outside China. We
have been training staff in other countries
to understand how mainland tourists shop.
For example, they always come in a group
and even though usually only one or two
are buying they like to ask all of their
friends’ opinions before buying. This might
seem unusual to staff in other countries so
they need to understand that it is perfectly
normal in China. It is also very helpful to
have ambassadors speaking Mandarin. We
began focusing on all of these things six to
seven years ago. We are still learning every
day. But we have a very good ‘university’ in
China, with our nearly 40 boutiques in 23
cities. From our China business we have a
very good understanding of how to treat
mainland Chinese customers and this
knowledge is being transferred to our
colleagues overseas.
What’s the key to convincing Chinese
consumers to buy?
The aspirational effect created by building
the brand in China is very important. Being
expensive is not the key. Value is the key.
The story of the brand is important—the
archives, the history, the culture, the DNA.
We have been building all of these things in
China for 20 years and we continue to
build. Consistency is also key. We are now
growing into the provincial cities but we
are being very careful to maintain a
consistent approach. Northern China
should be the same as the southern part of
China and so on. We want to be the top in
luxury.
How are you using social media? Do you
see it as an opportunity for luxury goods
firms?
Social media are very important for us. It is
very difficult to communicate much about a
brand through print ads, particularly in a
market like China. We have been using
social media for the last six or seven years
in order to help build the brand in second-,
third- and fourth-tier cities. We are also
using it to target undergraduates and
consumers in their mid- to late-twenties in
order to cultivate them as future customers.
We recently launched our Trinity ring in
China and the news was very heavily
spread out through social media. With
social media we can also do geographical
adaptations in order to make our message
even more accessible, which is much more
powerful than a print ad.
What will be Cartier’s biggest challenge
in the coming year in Asia?
Our biggest challenge will definitely be to
keep China on the move, and to keep
Cartier at the top of luxury in China. The
aspirational aspect of the luxury business is
intangible, it is not something money can
buy. Public relations is critically important.
Whatever we do on the PR side—the way
we act, the products we launch, the way we
execute PR events—is very, very important.
Nowadays, brands must make extra efforts
to stand out. Every week there are probably
45 launches from different brands, all
targeting the same people. To give them a
long-lasting impression, detail counts.
Before, if you invested a lot in a big event
you could expect to win a lot of fans. It’s not
like that anymore. The bar has been raised
exponentially compared to 10-15 years ago.
Cartier, a wholly owned subsidiary
of Richemont, designs and
manufactures luxury jewellery
and watches. It was founded in
1847 and today has nearly 300
boutiques worldwide.

32 PwC
Industry partnerships more
likely
According to Credit Suisse Research
Institute’s Global Wealth Databook, in
2011 the Asia-Pacific region accounted
for an estimated 22% of global wealth.
It estimates that over the next five
years emerging markets will remain
the world’s main wealth growth
engines, leapfrogging the developed
world. By 2016, it forecasts wealth in
China to rise by over 90% to US$39
trillion, and wealth in India to more
than double to US$8.9 trillion104
.
That rapid wealth creation will help
keep Asia centre-stage for luxury
companies, continuing 2011’s trend of
Asian demand driving excellent sales
and profit growth. Heavily supported
by Asian growth, brands such as
Cartier, Hermès, Christian Dior,
Jaeger-LeCoultre, Gucci, Van Cleef &
Arpels and Burberry all reported
significant sales increases of up to 30%
for 2011105
. Outperformance in Asian
emerging markets led to Prada’s
best-ever results in 2011, with profit
growth of 72.2%106
. At the world’s
largest luxury goods group LVMH
(France), Asia (including Japan) is now
its leading market, accounting for 37%
of revenues in the first half of 2012107
.
The Asia-Pacific region accounts for
about 45% of sales at both Italian
luxury maker Prada and Swiss group
Richemont108
. Unsurprisingly, LVMH,
PPR, Armani Group, Ferragamo, Coach
and Prada have all announced
substantial expansion plans in Asia,
notably in China109
.
Even as global brands increase their
Asian presence, local, home-grown
luxury brands will grow, catering for
Asian consumers’ rediscovery of their
own long-standing traditions of local
craftsmanship. Numerous home-grown
luxury brands, mostly unknown in the
West, have already established
themselves in Asia, mainly in China.
One of Asia’s best-known brands is
Hong Kong’s Chow Tai Fook Jewellery
Group, a mass-luxury brand focused
almost completely on mainland China,
Hong Kong and Taiwan. The company
is growing at 60% annually and is
twice the size of Tiffany & Co by
revenue. It has over 1,500 points of
sale in Asia, and aims to add 500 more
by 2016110
. In China, strong local
brands have also emerged in categories
like apparel and accessories. These
include fashion brands like NE∙TIGER,
Dorian Ho, Mary Ching and Omnialuo,
and handbag maker Powerland111
.
Having said that, local brands also
have challenges of their own including
an insatiable local demand for western
luxury brands, issues of trust and
quality among local consumers and the
costs of building a luxury brand. As
these local brands seek international
capital and expertise, and global
luxury brands remain keen to capture
new consumers in Asia and worldwide
with products that cater for their
unique tastes, partnerships between
global and local brands are likely to
become more common. An early
example is Shang Xia, a Chinese brand
that Hermès launched in 2010 in
partnership with a leading Chinese
designer. It sells furniture, home
accessories, garments and tea, and
now plans stores in Paris and Beijing112
.
Another is Hong Kong-based fashion
label Shanghai Tang, in which
Richemont acquired a controlling stake
in 1998. Catering to both Chinese and
Western buyers, it has 42 stores
worldwide and will almost double its
China stores to 30 within two years113
.

Durable consumer goods and
electronics
Key findings
• Market demand for electrical appliances and housewares will
pick up to 6.8% in 2013, while demand for household audio and
video equipment will grow to 7.8%. Sales of PCs and mobile
phones will also remain strong.
• China and India will lead the region in all categories with
double-digit growth rates.
• Japanese appliance and electronics companies are struggling to
regain their footing following the yen’s strong rise and natural
disasters both in Japan and Thailand. South Korean and Chinese
companies have captured market share but they in turn are facing
competition from local firms in markets such as India.
Figure 13: Electrical appliances and housewares: Market demand growth (% real change pa)
Territory 2009 2010 2011 2012 2013 2014 2015 2016
China 10.9 13.3 13.2 12.4 14.5 15.8 15.2 15.1
Hong Kong -5.1 10.7 14.4 6.4 7.2 7.3 7.3 6.9
India 8.0 9.9 6.7 10.6 8.9 9.5 10.8 10.7
Japan -1.8 2.4 -1.0 1.0 0.6 0.8 0.8 0.7
Taiwan 1.5 4.2 3.6 3.3 4.0 3.3 3.8 3.6
As Asia’s economies face lower growth,
consumers are more careful about
their spending on non-essential items.
Hence, though still strong
comparatively, demand growth for
consumer durables and electronics is
slowing somewhat. Market demand for
electrical appliances and housewares
will rise by 5.9% in Asia in 2012, lower
than an earlier forecast of 6.6%.
However, demand will recover to 6.8%
growth in 2013 and grow every year
thereafter through the forecast period.
For the same reasons, demand for
household audio and video equipment
in the region in 2012 will rise by 6.4%
against an earlier forecast of 7.4%,
then climb to 7.8% in 2013 and grow
strongly through 2016.
Similarly, the uptake of personal
computers (PCs) and mobile phones in
the region will remain strong, though
somewhat slower than in earlier years.
The estimated stock of personal
computers is forecast to grow at 9.8%
in 2012, and then at between 8.8% and
10% through 2016. Sales of mobile
phones will remain strong as mobile
subscriptions continue to grow at an
estimated 10.9% in 2012 and at rates
of between 5.4% and 8.6% through
2016.

Outlook for The Retail and Consumer Products sector in Asia - PwC 2013

Outlook for The Retail and Consumer Products sector in Asia - PwC 2013

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