Page 1

China Digital Landscape FY15

2

“Bricks-and-mortar retailing is a mature business in the US, where consumers have been shopping in malls for decades

and continue to do so, augmenting their purchases with occasional forays on the web.

Online shopping is dessert in the US, but in China, it is the main course”

Jack Ma

3

632M INTERNET USERS

TODAY:

BY 2017:

850M INTERNET USERS

EACH INTERNET USER IN CHINA SPENDS AN AVERAGE

OF

25.9 hours

PER WEEK ONLINE

LARGE AND GROWING INTERNET POPULATION

ECOMMERCE TRANSACTIONS REACHED

$2 TRILLION MORE THAN 10% TOTAL

RETAIL REVENUES.

Source: CNNIC (JUNE 2014), iResearch

ACCELERATING ECOMMERCE

PENETRATION

MORE TIME SPENT ONLINE THAN EVER

BEFORE

China US0%

50%

100%

76%

56%

19%

33%

Many times a day Several times per day

4

Online shopping on track to reach 10% of total retail transactions in 2014

Source: CNNIC, JUNE 2014, iResearch, Alibaba, CIW

CHINA ONLINE SHOPPING MARKET 2010-2017E

3%

2017E

16%

2016E

15%

2015E

13%

%B RMB

2014E

10%

2013

8%

2012

6%

2011

4%

2010

% of Total Retail Transactions

Total Online Shopping Transactions

CHINA ONLINE SHOPPING MARKET 2010-2017E

Total online shopping transactions reached $101B in Q2 2014, more than 10% of total retail

5

Awareness Choosing Transaction Delivery Aftersales service3.3

3.6

3.9

4.2

China Russia US UK

The internet is a primary influence at each point of the purchase cycle

IMPORTANCE OF THE INTERNET AT EACH DECISION (1-5)

Source: Capgemini, 2014

6

Internet use is more about entertainment than efficiency

Emai

l

Seach

Shopping

Trave

l

Onlin

e Ban

king

Recru

itmen

t

Onlin

e Pay

men

ts

Friends

(SNS)

Sellin

g

Educatio

n

Forum

s

Bloggin

g

Gam

ing

Video

Inst

ant M

essa

ging

News

Musi

c

0

25

50

75

100

USChina

KEY ONLINE ACTIVITIESEmarketer 2012

7

China has become truly mobile first

468 million active users

55% OF CHINESE INTERNET USERS HAVE MADE A PAYMENT BY MOBILE. IN THE US ONLY 19% HAVE.

Fashion brands averaging more than

60% of transactions from Tmall mobile app

8

Brand and product discovery and purchase happening on platforms

8Source: iResearch, July 2014, China Internet Watch

C2C

$188B

6%4%2%

17%3%

96%

1%

B2C

$107B

52%

18%JD.com

+ Tencent

B2C

Suning

Amazon

Other

AlibabaTencent

Tmall Taobao

SHARE OF B2C AND C2C IN CHINA (2013)

9

China US

13%

41%

Limited product selection especially in lower-tier cities

Consumers in China are increasingly concerned about product quality and safety both online and offline

Combined Market Share of Top 20 Retailers, 2014

China US

0.6

2.6

Retail Space per Capita in sqm, 2014

Complicated distribution channel presents challenges for leading brands to gain significant nationwide market share offline in China

Brand image and control is important given fragmented retail channels

Source: Euromonitor Source: Euromonitor

Consumers Brands

Underdeveloped Offline Retail Infrastructure

Highly Fragmented Retail Landscape

Structural issues will accelerate the importance of ecommerce

10

Resulting in online shopping rates that are more than double of global peers

36%

15% 14%11%

6%

% OF INTERNET USERS WHO SHOP ONLINE SEVERAL TIMES PER WEEK

Source: PWC 2012 Global multichannel consumer survey

US

China

19%

44%

16%

33%

19%

1%

19%

6%

17%

2%

10%

14%

Social digital shoppers Digital shopaholics Rational online shoppers Value seekers

Occasional online shoppers Techno-shy shoppers

Ecommerce is more about lifestyle than valueAnd almost 80% of online shoppers see themselves as lifestyle shoppers

THE ONLINE CONSUMER CARES AS MUCH ABOUT QUALITY, EXPERIENCE AND SERVICE AS THEY CARE ABOUT PRICE

Source: Capgemini, 2014

12

The market is dominated by two companies

ECOMMERCE

SOCIAL

VIDEO

PAYMENTS

1 2

3 1,2

1,2 4

1 2

13

With consumer interest focused across two platforms

10%E-commerce

9.4%Search

16% Social

5.3%News

4.6%Games

34%Online Video

21%Other

ONLINE VIDEO DOMINATES IN SHARE OF TIME SPENT, HOWEVER ECOMMERCE AND SOCIAL ARE WHERE BRANDS

ARE INNOVATING

14

Wechat has attracted more than 400+million monthly users

Messaging Payments Social

TO CONSUMERS

Notifications Rich Content Service Commerce

Notifications Rich Content Service Commerce

TO BRANDS

THE WECHAT MODEL HAS NO COMPARISON TO ANY WESTERN MEDIA

15

15

If I just look at digital, what digital has been historically, not just for us, but for the

industry and, frankly, for all of retail, is a really efficient transactional channel, for lack of a better term.

If I look at digital going forward, it is, number one, going to be that because this

industry will move from physical space to digital space. The digital expression of the brand will become one of the primary

ways for customers to engage with the brand.

Art Peck, Gap CEO, 2014

What is being proclaimed as a vision for the US is already a reality in China.

16

Brands are coming to life through rich Wechat content

16

ADIDAS DRIVES ITS BRAND IMAGE THROUGH HTML5 SITE

BURBERRY STREAMS ITS EVENTS LIVE THROUGH WECHAT AND

ENCOURAGES IMMEDIATE PURCHASE

17

Chinese brands are providing an online experience that surpasses that of offline stores

Model shots for key product image

Video intros for every product

Extremely detailed product information

Editorial shots for each product.

18

BRANDS ARE ENABLING CUSTOMER SERVICE THROUGH WECHAT

BANKS, HOTELS, LUXURY BRANDS ARE INTEGRATING THEIR AUTOMATED

SYSTEMS WITH WECHAT

2012 CHINA MERCHANTS

BANK INTEGRATES BALANCE

ENQUIRIES AND STATEMENTS WITH

WECHATSERVICE IS A MIXTURE OF AUTOMATED AND HUMAN

RESPONSES

Wechat is becoming a key customer conversation channel

19

Product related

64%

Delivery10%

Shop process

3%

Promo-tion info.

13%

Return/exchange8%

Complaint0.003%

others2%

On Tmall, presales conversations are essential for conversion

86% OF CONVERSATIONS BY LIVE CHAT

LESS THAN 20% CONVERSATIONS ARE

ABOUT PROBLEM SOLVING

20

Consumers are continuously rating your brand

MOST CONSUMERS WILL RANK YOUR STORE ON – CUSTOMER SERVICE, LOGISITICS, PRODUCT DESCRIPTION

QUALITY.

21

Summary – China is a very different market

1. Brand and product discovery driven by platforms

2. A completely independent digital ecosystem

3. Consumers with heightened expectations from brands

4. Consumer, market and competitors changing at an

accelerated pace

22

Summary – What we can take from China

1. A heightened focus on the digital customer

2. A laboratory for new business models

3. Mobile and Internet of Things leadership

4. Speed and flexibility

5. Producing global assortments means including Chinese tastes

23