european luxury goods; hard luxury - markets, players, opportunities

European Luxury Goods: Hard Luxury – Markets, Players and Opportunities

MARCH 2011

SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

A forward-looking primer on the Watches & Jewelry luxury categories and their main players

Watches have grown at c.+3% p.a. for 15 years; luxury has outpaced electronic segment by 700bps on (1) premiumization, (2) shift to EMs (higher HNWI growth), and (3) demographics; luxury watches should grow at +10-16% p.a. in 2010-15E on broader EM middle-class purchases

For watches, premiumization and value-added features have been key marketing mix trends for 10 years; distribution remains wholesale-dependent, leading to EBIT% volatility and potential brand equity damage; however, leading names are investing in channel quality, notably in EMs

Jewelry has grown at +2.5% p.a. for 10 years, with luxury outpacing mass market by 250bps; luxury segment acceleration to +7-10% p.a. expected in '10-'15E (lower than for watches) on (1) wave of aspirational demand in EMs, (2) shift towards branded, (3) commodity price inflation

We expect CFR to continue thriving in the high-end; UHR should "bridge the gap" by capturing lion's share of middle class "wave" in EMs, while also riding on premiumization; difficult even for multi-category groups (LVMH, PPR) to mount a challenge without "game changing" M&A

EUROPEAN LUXURY GOODS: HARD LUXURY – MARKETS, PLAYERS AND OPPORTUNITIES 1

Portfolio Manager's Summary

Hard luxury is a very interesting market. While the global watches market has grown at +4.5% p.a. over the last 25 years (+3% over the last 15 years), luxury watches have outpaced electronic watches by +600-700bps (over both periods).

The luxury segment has benefited from (1) a strong drive toward premiumization; (2) a shift in geographic mix toward higher-growth EMs (exposure to superior HNWI growth); and (3) favorable consumer demographics, e.g. population aging and EM male consumption.

In the last 10 years, premiumization and an increased emphasis on value-added product features have been the two foremost (and complementary) marketing mix shifts for most luxury watch brands. Distribution for the category remains wholesale-dependent, with independent multi-brand retailers dominating the market, causing EBIT% volatility and potential brand equity damage. Leading names (led by Swatch and Richemont) are investing in channel quality and direct distribution, especially in EMs, where they often face a "clean slate."

We anticipate faster demand growth for watches over the next five years — with annualized growth of +7-11% overall and +10-16% for the luxury segment in 2010-15E — further supported by broader EM middle-class participation, notably in China, where middle and affluent classes (MAC) are expected to grow threefold by 2020E.

Jewelry has strong potential for deeper brand penetration. The broader jewelry category is estimated at €136 billion as of 2009. Luxury jewelry represents c.30% of this market. Only c.5% of the market is "branded." Jewelry has grown at a CAGR of +2.5% in the past decade (currency-neutral); the luxury segment has outpaced mass market by +250bps in the last five years, mostly on the back of a high-end demand brought by EM HNWIs. EMs in Asia and MEA have grown their share of overall jewelry to c.35%.

We expect acceleration in jewelry category growth to +3-5% p.a. overall and +7-10% p.a. for the luxury segment in 2010-15E; the luxury segment should be lifted by (1) further expansion in EMs, where we expect a wave of aspirational demand due to deeper penetration into lower income quintiles; (2) a continuing mix shift towards branded jewelry; and (3) commodity price inflation (especially for gold and diamonds).

Both Richemont and Swatch have performed well ahead of market proxies in the last five years — reflecting the strength of their brands and distribution.

Swatch Group enjoys a dominant market position in watches manufacturing via ETA — it produces c.70-80% of all "Swiss made" movements, thus acting as a key component supplier to several of its direct competitors. Its watches portfolio is more balanced, spanning low-priced segments (Swatch, Tissot, Longines), mid-price (Omega), and high-end (Breguet).

Richemont mostly operates in the high end of the W&J market and is the largest jewelry player with Cartier. We would expect Richemont to continue thriving on the back of ongoing premiumization. Nonetheless, we would also expect Swatch to be able to "bridge the gap" by capturing a disproportionate share of new middle class purchases at aspirational price points in EMs, while also riding on premiumization.

It is difficult to imagine that even large multi-category groups like LVMH and PPR could mount a credible challenge to hard luxury leaders, without "game changing" M&A. Bulgari is an important step forward for LVMH in this direction.

Luca Solca [email protected] +41-44-227-7902Andrea Rosso [email protected] +44-207-170-0568Matt Wing [email protected] +44-207-170-0578

March 18, 2011


Table of Contents

Significant Research Conclusions 5 Understanding Watches Demand 15 Marketing Dynamics in Watches — Product Innovation and Pricing 33 Watches Distribution 53 Watches Manufacturing 65 How Jewelry Is Different 83 Swatch — Movements Champion 101 Richemont — High-End Champion 137 M&A Scenarios in the Watches Competitive Landscape 153 LVMH Buys Bulgari 165 Index of Exhibits 167

4 EUROPEAN LUXURY GOODS: HARD LUXURY – MARKETS, PLAYERS AND OPPORTUNITIES

Exhibit 1 Financial Overview

Notes: (1) EPS 2010E refers to reported actual figures for Swatch, LVMH and PPR; (2) PPR EPS figures adjusted for disposal of Castorama in

2009 and 2010 (not in 2008); and (3) LVMH forecasts not accounting for consolidation of Bulgari (acquired Mar-11).

Source: Corporate reports and Bernstein estimates and analysis.

Swatch Richemont LVMH PPR BurberryUHR.VX CFR.VX MC.FP PP.FP BRBY.LN

(CHF) (CHF/€) (€) (€) (£/p)Recent Price (17-Mar-11) 365.90 47.95 103.65 100.00 1,108.00Target Price 485.00 64.00 127.00 135.00 1,200.00

Rating M M M M M52-Week High 434.80 57.75 129.05 128.30 1,235.0052-Week Low 279.70 35.50 78.26 89.37 611.50

TTM Performance 12.0% 16.7% 21.4% 4.6% 59.4%TTM Relative Performance 13.4% 18.1% 22.7% 6.0% 60.8%Market Cap (million) 20,084 28,839 52,232 13,684 5,079

Earnings per ShareFY2008 15.51 1.34 4.26 5.70 32.00FY2009 (2) 14.26 1.07 3.70 4.73 35.10FY2010E (1), (2) 19.83 2.02 6.32 7.36 45.57FY2011E (3) 24.03 2.45 6.03 8.66 59.76FY2012E (3) 27.90 2.74 6.66 9.77 71.46FY2013E (3) 31.45 3.03 7.38 10.90 87.09

P/E RatioFY2008 23.6x 28.0x 24.3x 17.5x 34.6x FY2009 25.7x 35.0x 28.0x 21.2x 31.6x FY2010E 18.5x 18.6x 16.4x 13.6x 24.3x FY2011E 15.2x 15.3x 17.2x 11.5x 18.5x FY2012E 13.1x 13.7x 15.6x 10.2x 15.5x FY2013E 11.6x 12.4x 14.0x 9.2x 12.7x


Significant Research Conclusions

Hard luxury (Watches & Jewelry) is a very interesting market within luxury goods. We define the global watches market by using the proxy of CH (Swiss) watches

exports data due to the relative size of the country's exports. In value terms, Switzerland is the leading exporter of watches, with total exports of c.€9 billion in 2009, followed by Hong Kong and China at €4 billion and €2 billion, respectively. However, the delta from CH is likely even greater as these countries' figures are somewhat inflated by double-counting of re-exported goods. Although China and Hong Kong export much larger volumes of wristwatches than Switzerland, average prices are vastly lower ($2 and $11, respectively, versus $528 for CH), and likely not representative of the market as a whole — see Exhibit 2 and Exhibit 3.

Exhibit 2 In Value Terms, Switzerland Is the Leading

Exporter of Watches (Hong Kong Likely Overstated Given Re-Exporting)

Exhibit 3 China and Hong Kong Export Much Larger Volumes of Watches Than Switzerland But at Materially Lower Average Prices

* Export figures include re-exports of products in transit; Hong Kong is a major re-export market and could be overstated.

Source: FHS and Bernstein analysis.

Note: Bars = exports of finished watches; Price = Average US$ price of wristwatch exports by respective country.


Total CH watch exports encompass "mechanical" (67% of total value in 2009), "electronic" (27%), and "other" (6%) watches. "Wristwatches" account for c.98% of value and c.80% of volume in both the mechanical and electronic categories, with "movements" accounting for the balance.

CH mechanical watches exports can be considered a fair proxy for the luxury watches market, which Altagamma values at €20 billion in 2009. Luxury watches are traditionally the realm of the rich, with about three-quarters of category demand coming from HNWIs (high-net-worth individuals).

While the global watches market has grown at +4.5% p.a. over the last 25 years (+3% over the last 15 years), mechanical/luxury watches have outpaced electronic watches by +600-700bps (over both periods) — see Exhibit 4.

The category has benefited from three key trends: (1) a strong drive toward "premiumization," with average wristwatch prices growing by +7% in the last decade and the CHF3,000+ segment increasing its share of total export value by more than 25 percentage points; (2) a shift in the geographic mix toward higher-growth EMs in Asia-Pacific and MEA, which also have outpaced developed markets in Europe and North America in terms of growth in the number of HNWIs; and (3) favorable shifts in consumer demographics, through a combination of

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Average Price ‐Wristwatches $2 $11 $528

The Watches Market — Swiss Exports Are a Valid Proxy of Global Demand

The Watches Category Has Benefited From Secular, Male-Driven EM Demand Growth in the Last 15 Years


population aging in more developed markets and prevalent male consumption in large EMs (e.g., China).

We anticipate faster demand growth for watches over the next five years — with annualized growth of +7-11% overall and +10-16% for the luxury segment in 2010-15E (see Exhibit 4).

In our view: (1) the key trends driving growth in the past decade are expected to continue, e.g., real GDP growth for key EMs is expected to keep outpacing developed economies by c.200-400bps through 2020E, with growth differentials in the number of HNWIs following a similar path; (2) additionally, we expect broader EM middle class participation in the luxury goods market — e.g., BCG (Boston Consulting Group) foresees a c.3x increase in the size of China's MAC (middle and affluent classes) by 2020E, from 148 million to 415 million.

Exhibit 4 The Global Watches Market Has Grown at an Annualized Rate of +4.5% During the

Last c.25 Years); We Would Anticipate an Acceleration in the Next Five Years

Note: CAGRs for "Other" category not shown; these were/are forecast as follows: 1985-2009: –2%; 1994-2009: –2%; 2010-15E: –2%.

Source: FHS and Bernstein estimates and analysis.

We can break down the luxury watches industry into six broad macro-segments (see Exhibit 5).

Among specialists, we include: (1) high-end players (e.g., Breguet, Piaget, Patek Philippe and Vacheron Constantin); (2) mega-brands playing the middle ground (e.g., Cartier with the highest prices; Rolex with mid-range prices; and TAG Heuer and Omega with lower prices); (3) premium names (e.g., B&M and Longines); and (4) technical new entrants (e.g., Urwerk, MB&F and Lionel Ladoire), positioned at high-end price points, albeit with less-known brands.

Among non-specialists are: (5) luxury goods outsiders (e.g., jewelers Bulgari and Harry Winston; writing instrument specialist Montblanc; and fashion and leather goods companies Hermès, Dior and Chanel) operating in this sector directly; and (6) licensing outsiders (e.g., Armani), purely focused on royalties.

Two complementary marketing mix trends seem to have shaped the luxury watch industry in the past 10 years and through the recession years across price segments: premiumization in terms of pricing and a greater emphasis on value-add features in terms of product.

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Total Mechanical Electronic

We Anticipate Faster Watches Growth in the Next Five Years, Supported by Broader EM Middle-Class Participation

A "Pyramid Overview" of the Luxury Watches Industry

Two Complementary Marketing Mix Forces in Luxury Watches: Premiumization and Emphasis on Value-Add Features


Richemont and Swatch have consistently increased median prices for newly introduced models for both their high-end brands (Piaget and Breguet) and their middle-ground mega brands (Omega and Cartier), while maintaining stable prices for their lower-positioned premium brands (Baume & Mercier and Longines).

Starting from a lower price point, LVMH's TAG Heuer has also increased the median price of its new catalogue additions, while remaining the cheapest of the mega brands. PPR's Gucci Timepieces still seems in a state of transition, as it has stepped back from its license (in 1997), but its product range and price list seem to be geared to the accessible/mid-level market (see Exhibit 5).

Exhibit 5 Different Segments of the Market Have Adjusted Pricing and Product Feature

Priorities Differently in the Last Years of Economic Downturn

Source: Bernstein analysis.

Watches are still largely dependent on wholesale distribution, with independent multi-brand retailers dominating the market (see Exhibit 6). Heavy dependence on the wholesale channels has clear disadvantages for watches brands, notably (1) increased EBIT% volatility (as de- and re-stocking by third-party retailers occurs in a cyclical fashion but watches manufacturing is fixed-cost heavy); and (2) potential damage to brand equity (as, for instance, selling into wholesale customers opens the door to "grey markets," such as unauthorized discount online distribution, which is common when compared to other luxury categories, e.g., leather).

Exhibit 6 Luxury Watches Distribution Is Still Wholesale-Dependent, With Independent

Multi-Brand Retailers Dominating the Market

Source: Factiva, corporate reports and Bernstein estimates and analysis.

Leading watches brands (with Swatch and Richemont at the forefront) are investing to improve the quality of their distribution by (1) building fewer and deeper partnerships with wholesale customers (e.g., Richemont is taking steps to rationalize accounts globally); (2) carrying out smooth partial transitions to mono-brand stores (often involving the same wholesale partners); (3) opting for "big bang" transitions to mono-brand distribution (e.g., Omega in the United States); or

Pricing Product Features

High-end / Niche Technical New Entrants High-end / Niche Technical New EntrantsRaised prices Set high-end prices (e.g. $150k) Adding complexity Focus on technical excellence

by +35%-100% for innovative products with unique models

Mega Brands Luxury Goods Outsiders Mega Brands Luxury Goods OutsidersStable prices (Rolex) or Pronounced price increases Adding complexity, at times Utilizing innovative design and

Premiumization (+100% at Cartier) as 'niche' approach is pursued ultra-technical traits (tourbillon) limited-series exclusivity

Premium Licensing Outsiders Premium Licensing OutsidersStable prices Low absolute Adding complexity Little innovation,

price points maintained focus on royaltiesPremium

Established Outsiders / Entrants Outsiders / EntrantsEstablished

High End

Middle Ground

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Watches Apparel Shoes Leather Goods

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Wholesale Retail

Luxury Watches Distribution Is Still Wholesale-Dependent, Though Leading Brands Are Investing in Channel Quality


(4) expanding same-group multi-brand store concepts (e.g., as Swatch has done since 2001 with its pioneering concept Tourbillon).

EMs in most cases offer watch brands a "clean sheet of paper" context, where channel conflict is less of an issue — and where direct distribution investments meet with strong consumer demand and the opportunity to build brand equity for the long term. For Richemont, EMs account for c.70% of watch-brand boutique openings in the last c.5 years (about one-quarter in Mainland China and c.40% in Greater China). Similarly, Swatch's Omega and high-end brands (Blancpain, Breguet and Glashutte) focused on Asia ex-Japan, Russia and MEA for the bulk of their 2009 DOS (directly operated store) openings.

The chokepoint in Swiss watch manufacturing seems to be the production of basic mechanical movements (or "tractors") — where Swatch maintains a dominant market position through ETA. Swatch produces c.70% of CH mechanical movements — and c.80% of CH quartz movements (see Exhibit 7 and Exhibit 8).

Exhibit 7 Market for Watch Movements — By Value Exhibit 8 Market for Watch Movements — By Volume

Source: FHS, corporate reports and Bernstein estimates and analysis. Source: FHS, corporate reports and Bernstein estimates and analysis.

Developing and producing reliable basic movements is — paradoxically — more difficult than upstream integration in high-end movements, as: (1) reliability depends on decades of cumulated volumes experience; (2) producing basic movements requires very high levels of automation in order to achieve competitive unit costs, which equals very high levels of capital investment, which in turn means that scale is of the essence; (3) Swatch continues to push ahead and invests (hundreds of) millions of CHF in its facilities (CHF600 million in the last five years); and (4) using standard basic movements guarantees that watches can be repaired in the long term, as any watchmaker globally can service a basic ETA movement.

High-end movements manufacturing, in contrast, is much easier as the proportion of manual labor is much higher, and the need for volumes and automated process is unimportant.

It is therefore a common industry practice to use Swatch basic mechanical movements (with different levels of disclosure, ranging from serious brands that freely admit using Swatch's tractors to some brands simply stamping "blanks" with their names).

Swatch's recent decision to limit and qualify the supply of movements to third parties opens new strategic scenarios. We would expect brand consolidation as a likely consequence in this "new world" — especially in the entry and medium-end price points. Competing brands in the "Swiss Made" entry and mid-price point segments seem to be between a rock and a hard place. They can choose: (1) to

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Swiss Watch Manufacturing Is Dominated by Swatch Through ETA's Basic Movements


make their dependence from Swatch more visible (in a sort of "Intel inside" environment); (2) invest large amounts of money, time and resources in making their own movements — if they have scale (which in most cases they don't); (3) rely on more expensive/older concept movements from smaller alternative players; or (4) give up "Swiss Made" and rely on Chinese movements.

Jewelry has strong potential for deeper brand penetration. Jewelry is a broad category, much broader than the size of the branded high-end would suggest. The broader category is estimated at €136 billion in 2009 (including all price points — mass market, aspirational luxury, and high-end — and both branded and non-branded products). Luxury jewelry represents c.30% of this market, while the very high-end (e.g., Cartier, Bulgari, Van Cleef & Arpels, Graff, etc.) accounts for only 5% of the total at €7 billion.

The high-end appears underpenetrated by brands — brands' percentage weight (12%) is much lower than for high-end watches (50%) and perfumes (80%) — see Exhibit 9 and Exhibit 10.

Exhibit 9 Only Circa 5% of Global Jewelry Is

Estimated to Be Branded; The Proportion Is Only Slightly Higher (Circa 12%) in the High-End Segment (Which Accounts for Circa 5% of Total Sales)

Exhibit 10 High-End Jewelry Appears Underpenetrated by Brands — The Percentage Weight of Brands (12%) Is Much Lower Than for High-End Watches (50%) and Perfumes (80%)

Note: Price point split based on 2009 estimates by Verdict; branding split from WWD interview with Richemont Italia's Giacomo Bozzi (as of 2002).

Source: Verdict, Women's Wear Daily (Jewels Evolve from Craft to Brand, 06-Dec-02) and Bernstein estimates and analysis.

Note: All branding splits from WWD interview with Giacomo Bozzi (as of 2002).

Source: Women's Wear Daily (Jewels Evolve from Craft to Brand, 06-Dec-02) and Bernstein estimates and analysis.

Gold and diamonds are key inputs in the global jewelry market, with gold and

diamond jewelry accounting for more than three-quarters of global value in 2008. The category is more skewed toward female consumption (self-purchased and

gifted) than others across price points: 90% for the broader market and c.95% for the high-end jewelry. Moreover, it encompasses a certain amount of "necessary consumption" despite being a discretionary space (e.g., 35% of jewelry spend in the United States goes to bridal merchandise).

Broader jewelry has grown at a CAGR of c.+2.5% in the past decade (currency-neutral). Luxury segment growth has outpaced mass market (by +250bps in 2005-09), and branded high-end outgrown overall luxury (by +200-500bps in 2004-08) — see Exhibit 11.

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Overall Jewelry ‐By Price Point

High‐end Jewelry ‐ By Branding

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The Jewelry Market — A Broad Category With Unique Demand Nuances

Overall, Jewelry Has Grown at +2.5% CAGR in the Last Decade; the Luxury Segment Has Outpaced Mass Market


EMs have grown joint share of overall jewelry spend by c.10% since 2005 (+700bps Asia, +300bps Middle East), with Asia ex-Japan moving from 27% to 34% of total.

We expect acceleration in jewelry category growth to +3-5% p.a. overall and +7-10% p.a. for the luxury segment in 2010-15E (lower than for watches) — see Exhibit 11.

Future growth in luxury jewelry will come from three different converging drivers: (1) continuing geographic expansion into EMs, which is common to watches and other luxury categories; (2) a continuing mix shift from non-branded to branded, which is very category-specific; and (3) commodity price inflation, potentially, as increases in gold and diamond prices tend to be immediately reflected in consumer prices. The commodity price inflation driver could be a factor lifting the growth rate of the broader jewelry market, including the mass-market portion.

After a high-end wave brought by EM millionaires, we would expect a new secular wave of aspirational and accessible demand to support luxury segment demand as (1) these are the price points for which the switch from non-branded to branded will occur at the fastest pace (mostly in more developed markets) and (2) there is deeper penetration into lower income quintiles of key EMs.

The high-end portion of luxury jewelry, nevertheless, should be supported by continuing growth in HNWIs and by aging populations in developed markets.

Exhibit 11 The "Luxury" Segment of the Market Has Outpaced "Mass Market" Price Points in

2005-09 by Circa 250bps and Is Expected to Grow at a Circa 500bps Delta in 2009-15E (Both in Currency-Neutral Terms)

Note: Includes jewelry made of precious metals, diamonds and other precious stones (including mass and luxury, branded and unbranded; ex-costume).

Source: Verdict (including estimates) and Bernstein analysis.

On the supply side, global jewelry is very fragmented, with channel mix varying dramatically across key markets.

On the one hand, there is India — with only 5% of sales generated via organized retail, with the balance from independents. On the other hand, we find the United States — with branded retailers (domestic and foreign), widespread wholesale (e.g., department stores), and sizable discounters (e.g., mass merchants, led by Wal-Mart; telemarketing, e.g., JTV; and online purists, e.g., Blue Nile). We see developed European markets (e.g., Italy) as similar to the United States overall, but with online and mass merchants playing a much less sizable role.

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Jewelry ‐Luxury vs. M

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Luxury Mass

We Expect an Acceleration in Category Growth to 3-5% Due to (1) EMs, (2) Branded, and (3) Commodity Price Inflation

On the Supply Side, Global Jewelry Is Very Fragmented; Channel Mix Varies Greatly Across Geographies


We prefer mega-brands with the ability to span broad price points. We see mega-brands like Cartier and Tiffany best equipped to navigate future luxury jewelry trends. The combination of strong brands capable to attract aspirational consumers and proven retail capabilities should compound the ability to grow above the market average. The trade-off with Cartier is that it is more credible in the high-end while it carries a perception of higher price in aspirational consumers' minds, not necessarily supported by fact.

Branded retail chains at accessible price points (e.g., Pandora) have a chance to grow fast, riding the non-branded transition. They clearly have the upper hand in taking share from traditional independent retailers, on the back of greater scale and leaner costs. However, vertical integration into retail is no guarantee for better EBIT% (as we have seen in other luxury categories), and we note that barriers to entry in this area would be low, unless retailers were able to meaningfully establish their brands in consumers' minds — which is not obvious. Besides, entry or further inroads from discounters (mass merchants and online players) would be a significant strategic threat longer term.

Swatch Group produces and distributes watches and (some) jewelry under brands such as Omega, Swatch and Breguet (Watches & Jewelry division). The company also produces watch movements for its own brands as well as for third-party watchmakers (Production division). In addition, the group encompasses an electronic systems division (SGES), which develops low-complexity/low-power miniaturized products mostly for the telecom, automotive, and medical devices industries.

Swatch's watches portfolio is balanced, spanning a wide variety of price points, though more focused on the low-to-mid segments versus Richemont's. Omega (average price of €2,000-€4,000) is the division's largest brand and should soon be able to pass CHF3 billion in sales. Breguet (average price of more than €10,000) is the most sizable name in the high-end of the portfolio and measures about one-fifth of the aggregate of the Omega, Longines, Tissot and Swatch brands (all priced at less than or equal to €6,000) in revenue terms — see Exhibit 12.

As mentioned, through ETA, the world's largest movement manufacturer, the Swatch Group accounts for 70-80% of total market share in the watch movements market by volume. This dominant position creates a situation where many of its largest rivals must buy their movements from Swatch. From 2011 onwards, the company has expressed its intentions to only sell finished movements, which has prompted other watchmakers such as Richemont, LVMH and Bulgari, to build up their own movement manufacturing facilities.

Swatch stands to gain from a triple "opportunity" going forward. (1) Swatch's high exposure to Asia (44% of sales come from Asia including

Japan, with 28% from Greater China) and extensive ties with key Chinese wholesale and retail player Xinyu Hengdeli (via a 50/50 retail JV as well as direct share ownership) place it at the epicenter of hard luxury's growth engine.

(2) Moreover, Swatch can play with a broader array of price points, as its portfolio spans from Breguet to Flik Flak (see Exhibit 12). This should give the group a better opportunity to capture the massive aspirational and accessible luxury demand wave that we expect to come from China.

(3) The group displays the highest operating leverage versus all companies in our luxury goods coverage. Higher capacity utilization should lead to higher GM% on the back of lower personnel costs and depreciation in percent of sales.

Swatch — Movements Champion With a Watches Portfolio Spanning a Wide Range of Price Points

Swatch Stands to Gain from (1) High Asian Exposure, (2) Broader Array of Price Points, and (3) Operating Leverage


Exhibit 12 Watch Brands — Market Share and Positioning by Price Category

Source: Koncept Analytics, corporate reports and websites, and Bernstein estimates and analysis.

As a result of several rounds of restructuring and M&A over the last two decades, Richemont comprises four reporting divisions: Jewellery Maisons (Cartier, Van Cleef & Arpels), Specialist Watchmakers Maisons (A. Lange & Söhne, Piaget, Vacheron, Jaeger LeCoultre, IWC, B&M and Panerai), Writing Instruments Maisons (e.g., Montblanc), and Other Businesses (encompassing leather goods and apparel brands, e.g., Dunhill, Lancel, Chloe and Shanghai Tang; premium firearms maker Purdey, and, starting in Apr-10, online luxury distributor Net-a-Porter).

As of 2009, the Jewellery and Specialist Watchmakers Maisons jointly represented more than 75% of sales; the Writing Instruments Maisons for more than 10%; and Leather Goods (reported within Other Businesses) for just c.5%.

Watches were the main product category across Maisons, accounting for c.50% of group revenues. Richemont is the largest jewelry player in terms of euro sales among coverage companies; this holds true even when compared to non-coverage comparables, Tiffany and Bulgari.

Richemont mostly operates in the high end of the W&J market (see Exhibit 12). This is no form of insurance — in fact, we do not expect high-end-focused players to fare any better against an adverse macro cycle than those focused on the low-to-middle ground such as Swatch, as group and divisional sales growth correlates tightly with economic activity.

LVMH Bulgari OthersMarket Share 4.5% 1.8% 65.8%

o/w Rolex = 13.3%Segment o/w Patek Philippe = 2.5%

Brands BrandsElitist Luxury Segment> €10k

Breguet A. Lange & SöhnePiaget

Daniel RothGerald Genta

Patek PhilippeF.P. JourneFranck MullerGirard-Perregaux (PPR)

Exclusive Luxury Segment€6k - €10k

Jaquet DrozLéon HatotBlancpainGlashütteOriginal

Vacheron ConstantinRoger Dubuis

ZenithHublot

Audemars PiguetUlysee NardinParmigianiDubey & Schaldenbrad Harry WinstonRichard MilleGreubel Forsey

Luxury Segment€4k to €6k

Jaeger LeCoultreIWCCartierVan Cleef & Arpels

Louis Vuitton RolexChopardCorum

High-priced Segment €2k to €4k

OmegaTiffany & Co.

Officine PaneraiMontblanc

ChaumetTAG HeuerDior

Bulgari TiffanyEbelBreitling

Mid-priced Segment €1k to €2k

Longines RadoUnion Glashütte

Baume & MercierDunhill

MovadoRaymond WeilMaurice LacroixHermés

Low-priced Segment< €1k

TissotcK WatchPierre BalmainCertinaMidoHamiltonSwatchFlik Flak

SectorFestinaCitizenSeikoGucciMondaineEternaVictorinox

Swatch Richemont14.1% 13.8%

Richemont — High-End Champion and Largest Jeweler Under Coverage


In the long term, we see the watches industry consolidating, through M&A and growing upstream investments in manufacturing and R&D. Richemont has the resources to play a key consolidator role in this context.

Watches are one of the most consolidated categories in luxury goods. We estimate that the top four watches groups — Swatch, Richemont, Rolex and Patek Philippe — command a combined c.37% market share. This compares to top-four combined shares of c.37% in leather goods, c.17% in shoes and c.10% in fashion.

Swatch and Richemont have been able to leverage their scale and industry leadership to maintain higher operating profit margins and return on net assets (RONA) metrics versus smaller challengers (e.g., LVMH's Watches & Jewelry segment). Leaders have taken top positions in key EMs too, positioning themselves at the top of Chinese consumer's minds (according to Hurun).

It is difficult to imagine that even large multi-category groups like LVMH and PPR could mount a credible challenge to category leaders, without "game changing" M&A. We have carried a broad "radar sweep" of independent watches brands and have found that most of the independent brands have very limited size. With the exclusion of Patek Philippe and Rolex — and possibly medium-size players such as Audemars Piguet, Chopard and Breitling — opportunities to build scale through bolt-on acquisitions seem limited.

A 60% premium for Bulgari is substantial. If the deal were any larger, we would not deem this a net positive for LVMH.

The deal makes strategic sense, in our view. Bulgari is one of the best known jewelry brands in the world — with plenty of potential to grow on the back of LVMH's global distribution reach and financial muscle. For instance, media buying and retail development would benefit directly from the deal.

Bulgari brings a potential mega-brand to its line-up — albeit stronger in jewelry than in watches. Moreover, the appointment of Francesco Trapani (hailed by Bernard Arnault as "the driving force behind Bulgari's development over the last 20 years") as divisional head is also a positive for the future of the enlarged Watches & Jewelry portfolio.

We establish price targets for companies in our coverage by applying a target relative P/FE multiple (versus MSCI index) to our forecast estimates, assuming a constant market P/FE multiple. We use 2010E, 2011E and 2012E EPS estimates and MSCI P/FE multiples.

We rate Richemont, Swatch, Burberry, LVMH and PPR market-perform, with price targets of CHF64, CHF485, £12.00, €127 and €135, respectively. For Richemont, Swatch, LVMH and Burberry, we target a relative P/FE multiple of 1.8x; for PPR, we use a relative P/FE multiple of 1.4x.

Risks to achieving our operating forecasts could prevent the stocks from achieving our price targets.

In the case of European luxury goods, sales would be negatively impacted by the occurrence of a double-dip slowdown in global economic growth. Though the Asia-Pacific region remains strong, a rebound in other large markets such as the United States has begun to emerge; a loss of momentum on this front could mitigate the overall picture of a global uptick.

On the other hand, faster-than-expected growth in the most hard-hit regions could present upside risk, as positive worldwide GDP growth tends to benefit luxury goods stocks as a whole.

Watches Are Highly Consolidated; LVMH and PPR Would Need "Game Changing" M&A to Challenge Leaders…

…Bulgari Is an Important Step Forward for LVMH in Hard Luxury, for Quite a Price

Valuation Methodology

Risks


Any unforeseen event significantly disrupting travel patterns — terrorism, epidemics, war, etc. — would act as a sharp negative on the stocks and the luxury sector (as we saw very clearly in 2003), plunging luxury stocks' relative PEF below the historical long-term correlation to luxury growth demand.

Moreover, an extension of the EU's "trademark exhaustion" principle (embedded in EU regulation 40/94) to non-EEA developed markets where our coverage companies engage in active price differentiation could still erode luxury margins significantly.

In the last five years, both Richemont and Swatch have performed well ahead of relevant market proxies — reflecting the strength of their brands and distribution.

In absolute growth terms, Richemont has been ahead, benefiting from its stronger and almost exclusive exposure to the high-end. We would expect Richemont to continue thriving on the back of ongoing premiumization and superior HNWI growth rates in EMs. Nonetheless, we would also expect Swatch to be able to "bridge the gap" by capturing a disproportionate share of new middle class purchases at aspirational price points, e.g., through more capillary retail penetration in lower-tiered Chinese cities, while also riding premiumization.

It is difficult to imagine that even large multi-category groups like LVMH and PPR could mount a credible challenge to category leaders, without "game changing" M&A. Bulgari is an important step forward for LVMH in hard luxury, but for quite a price.

We think that the luxury goods investment case, at present, is dominated by broader "scenario" factors. The most important of these is the strength of the macro-economic recovery in the United States and core EUR area, prompting continuing sector rotation and a lower premium for EM exposure.

More recently, the uprisings in the Middle East have opened a whole new set of questions. The broader macroeconomic recovery — and the luxury goods market — could be materially impacted, depending on the outcome of these uprisings and their spreading to other countries and regions: from a worst-case scenario, with adverse developments translating into more political instability, higher energy price inflation, more conflict and lower growth — to a best case, whereby freer and more democratic regimes are initiated, to the benefit of the populations involved and global trade. The outcome at this point hangs in the balance.

Fundamentals at luxury goods groups under coverage remain strong with EM exposure, mega-brands and ever-improving distribution patterns acting as clear attractions in the medium term. After protracted relative underperformance in 1Q:11 to date, the valuation levels are materially more interesting. Our preference is for stocks with lower exposure to Japan — like Swatch — and lower M&A unknowns. We would remain more cautious about Burberry (as it recently rose on M&A speculation and is exposed to Japanese royalties) and LVMH (which could carry M&A/dilution risk, if it was to proceed on Hermès on the back of acquisition premiums like that recently seen for Bulgari).

We rate Richemont, Swatch, Burberry, LVMH, and PPR market-perform with price targets of CHF64, CHF485, £12.00, €127 and €135, respectively.

Investment Conclusion


Understanding Watches Demand

In this chapter, we mostly focus our analysis on CH (Swiss) watches exports data, as tracked by industry body FHS. This can be considered a good proxy for the global market, due to (1) the relative size of the country's exports versus the next largest exporters in value terms, and (2) the variety of price points and watches types included when compared to other data sources.

In value terms, Switzerland is the leading exporter of watches, with total exports of c.€9 billion in 2009. It is followed by Hong Kong and China at €4 billion and €2 billion, respectively. However, the delta from CH is likely even greater as these countries' figures are somewhat inflated by double-counting of re-exported goods (see Exhibit 13). Although China and Hong Kong export much larger wristwatch volumes than Switzerland, average prices are vastly lower ($2 and $11, respectively, versus $528 for CH), and likely not representative of the market as a whole (see Exhibit 14).

Total CH watch exports encompass "mechanical" (67% of total value in 2009), "electronic" (27%), and "other" (6%) watches. "Wristwatches" account for c.98% of value and c.80% of volume in both the mechanical and electronic categories, with "movements" accounting for the balance (see Exhibit 15). CH mechanical watches exports can be considered a fair proxy for the luxury watches market, which Altagamma values at €20 billion in 2009. In fact, growth in these two data series has been nearly equivalent in the last 15 years (see Exhibit 16 to Exhibit 18). Moreover, in 2007-09, sales at "important watch" auctions held worldwide by major houses — e.g., Sotheby's and Christie's — moved directionally in line with CH mechanical exports (see Exhibit 19 and Exhibit 20).

Exhibit 13 In Value Terms, Switzerland Is the Leading

Exporter of Watches (Hong Kong Likely Overstated Given Re-Exporting)

Exhibit 14 China and Hong Kong Export Much Larger Volumes of Watches Than Switzerland But at Materially Lower Average Prices

* Export figures include re-exports of products in transit; Hong Kong is a major re-export market and could be overstated.


Note: Bars = exports of finished watches; Price = Average US$ price of wristwatch exports by respective country.


9

4

21 1

0

1

2

3

4

5

6

7

8

9

10

Switz. Hong Kong* China Germany France

Watch Exports By Ke

y Co

untries

( €billion

, '09)

559

344

22 11 60

100

200

300

400

500

600

China HK Switz. Germany France

Expo

rts of Finishe

d Watches

(Units in M

illions, '09) = Bars

Average Price ‐Wristwatches $2 $11 $528

The Watches Market


Exhibit 15 Total CH Watch Exports — Including Mechanical (About Two-Thirds) and Electronic (Less Than One-Third) Wristwatches and Movements — Are Valued at Circa €9 Billion (CHF13.1 Billion) in 2009; These Have Grown at CAGRs of +5% During Roughly the Last 25 Years and +3% Over the Last 15 Years

Note: Total value sales include: (a) mechanical (wristwatches and movements); (b) electronic (wristwatches and movements); and (c) other.

Source: FHS and Bernstein estimates and analysis. Exhibit 16 Altagamma Estimates the Global Luxury

Watches Industry at €20 Billion in 2009, Resulting from 15-Year CAGR of Circa 7.5%

Exhibit 17 Swiss Mechanical Watches Exports Growth Is a Good Proxy for Luxury Watches Market Growth

Note: Bottom-up estimate of the market by Altagamma/Bain, focused on luxury goods brands and most likely considering mostly mechanical watches.

Source: Altagamma and Bernstein estimates and analysis.

Source: Altagamma, FHS and Bernstein estimates and analysis.

(30%)

(25%)

(20%)

(15%)

(10%)

(5%)

0%

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10%

15%

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25%

0

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16,000

18,000

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1994

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1996

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2001

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2003

2004

2005

2006

2007

2008

2009

Total Swiss Watch Exports,

Value

(YoY

growth, %

)

Total Swiss Watch Exports,

Value

(CHF million)

Total Swiss Watch Exports YoY Growth

7

17 17 1820

2224 24

20‐1%

7%

11% 10% 9%

0%

‐17%‐20%

‐15%

‐10%

‐5%

0%

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15%

0

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40

1994

2002

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2007

2008

2009

Yoy Growth (%

)

Luxury W

atch

Market (€billion

)

'94‐'02:+12%

7.5%6.6%

0%

2%

4%

6%

8%

10%

12%

Global Luxury Watch Market (Altagamma)

CH Exports ‐Mechanical

(FHS)

Luxury W

atches, A

ltagam

ma vs. FHS

15 Year CA

GR, value term

s (%)


Exhibit 18 CH Mechanical Watches Exports Are Valued at Circa €6 Billion (CHF8.9 Billion) in 2009, About Two-Thirds of the Total, and Have Outgrown Total Watch Exports — Expanding at a CAGRs of Circa+8% During Roughly the Last 25 Years and Circa+7% in the Last 15 Years

Note: Mechanical watch exports include both wristwatches and movements.

Source: FHS and Bernstein estimates and analysis. Exhibit 19 In 2007-09, Sales at "Important Watch"

Auctions Held Worldwide by Major Houses Moved Directionally in Line With CH Mechanical Exports — For Example, Sotheby's

Exhibit 20 In 2007-09, Sales at "Important Watch" Auctions Held Worldwide by Major Houses Moved Directionally in Line With CH Mechanical Exports — For Example, Christie's

Note: Auctions held in Hong Kong, Geneva, New York, London and Doha; sales converted at spot US$ rates (as at auction date) and aggregated by half-year period across geographies.

Source: Sotheby's website and Bernstein estimates and analysis.

Note: Auctions held in Hong Kong, Geneva, New York, London, Dubai, Amsterdam and Milan; sales converted at spot US$ rates (as at auction date) and aggregated by half-year period across geographies.

Source: Christie's website and Bernstein estimates and analysis.

The global watches market has benefited from secular, male-driven EM demand growth. The global watches market has grown at an annualized rate of c.+4.5% over the last c.25 years, with mechanical/luxury watches (+8.0%) outpacing electronic watches (c.+2.5%). In the last 15 years, the market has grown faster than 3%, with mechanical watches growth of c.+6.5% and electronic watches growth being roughly flat. Mechanical/luxury watches have outpaced electronic watches by +600-700bps (over both periods) (see Exhibit 21).

(25%)

(20%)

(15%)

(10%)

(5%)

0%

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10%

15%

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25%

0

2,000

4,000

6,000

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12,000

1985

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2009

Mechanical Sw

iss Watch Exports,

Value

(YoY

growth, %

)

Mechanical Sw

iss Watch Exports,

Value

(CHF million)

Mechanical Swiss Watch Exports YoY Growth

0

5

10

15

20

25

1H07 2H07 1H08 2H08 1H09 2H09 1H10

"Impo

rtan

t Watch"

Worldwide Auction

s, since '07,

Sotheb

y's (Sales, US$m)

Sotheby's

0

10

20

30

40

50

60

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80

1H07 2H07 1H08 2H08 1H09 2H09 1H10

"Impo

rtan

t Watch"

Worldwide Auction

s, since '07,

Christie's (Sales, U

S$m)

Christie's

The Category Has Experienced Annualized Growth of +4.5% in the Last 25 Years and More Than +3% in the Last 15 Years…


Exhibit 21 The Global Watches Market Has Grown at an Annualized Rate of +4.5% During Roughly the Last 25 Years, With Mechanical/Luxury Watches (+8%) Outpacing Electronic Watches (+2%); We Would Anticipate an Acceleration During the Next Five Years



A strong drive toward "premiumization" has characterized category development. Average wristwatch prices have grown by +7% in the last decade. Wristwatches priced at more than CHF3,000 have seen their share of total export value increase by more than 25 percentage points in 2000-09 (from 32% to 58% of total wristwatches sales), with their volume share doubling from 2% to 4%. Mechanical share of total exports has experienced similar uplifts, growing to 72% (from 48%) of value and 18% (from 8%) of volume (see Exhibit 22 to Exhibit 27).

Exhibit 22 CH Wristwatch Exports — Higher-End Wristwatches (Priced CHF3,000+) Have

Experienced the Fastest Volume and Value CAGR Among Price Brackets in the Last Decade, More Than 15 Percentage Points Above Lower-End Pieces Priced CHF500 or Below

Note: Value refers to ex-factory levels in CHF million; average prices are implied; 2008 (volume) and 2009 (volume and value) data points not available from FHS; estimated using average monthly year-over-year changes for each price bracket.


5%3%

10%8%

7%

14%

2%

0%

4%

‐2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

'85‐'09 '94‐'09 '10‐'15E

Swiss W

atch Ex

ports ‐

Last 24‐Yr and

15‐yr CAG

Rs,

Next Fou

r‐Yr CAG

R


Value (CHFm) Volume (m pieces) Avg. Price (CHF)Price Point (CHF) 2000 2007 ʹ00‐ʹ07 2000 2007 ʹ00‐ʹ07 2000 2007 ʹ00‐ʹ070‐200 1,231 1,167 ‐1% 22.8 18.6 ‐3% 54 63 2%200‐500 1,036 856 ‐3% 3.1 2.6 ‐3% 329 328 0%500‐3,000 4,023 4,945 3% 3.3 3.6 2% 1,230 1,356 1%3,000 et + 2,986 7,830 15% 0.4 1.0 13% 6,696 7,662 2%Total 9,276 14,798 7% 29.7 25.9 ‐2% 313 571 9%

Value (CHFm) Volume (m pieces) Avg. Price (CHF)2000 2009 00‐ʹ09 2000 2009 00‐ʹ09 2000 2009 00‐ʹ09

0‐200 1,231 961 ‐3% 22.8 15.1 ‐5% 54 64 2%200‐500 1,036 801 ‐3% 3.1 2.5 ‐3% 329 324 0%500‐3,000 4,023 3,481 ‐2% 3.3 2.6 ‐3% 1,230 1,359 1%3,000 et + 2,986 7,252 10% 0.4 0.9 8% 6,696 8,328 2%Total 9,276 12,496 3% 29.7 21.0 ‐4% 313 596 7%

…Benefiting from (1) a Strong "Premiumization" Drive…


Exhibit 23 Wristwatches Priced at More Than CHF3,000 Have Seen Their Share of Total Export Value Increase by More Than 25 Percentage Points in 2000-09 (from 32% to 58%)

Exhibit 24 The Volume Share of Watches Priced at More Than CHF3,000 Has Doubled from 2% to 4% During the Same Period

Note: Value refers to ex-factory levels in CHFm.


Source: FHS and Bernstein estimates and analysis. Exhibit 25 Mechanical Wristwatches' Share of Total

CH Wristwatch Exports Has Experienced Similar Uplifts in 2000-09, Growing Circa 25 Percentage Points from 48% to 72% of the Total

Exhibit 26 Mechanical Share Has Also Increased in Volume Terms — Moving from 8% to 18% in the Last Decade




32%

58%

43%

28%11%

6%13% 8%

0%

20%

40%

60%

80%

100%

2000 2009

CH W

ristwatch Exports,

% Value

, by Price Po

int

3'000 et + 500‐3'000200‐500 0‐200

2% 4%11% 12%11%

12%

77% 72%

0%

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100%

2000 2009

CH W

ristwatch Exports,

% Volum

e, by Price Po

int

3'000 et + 500‐3'000200‐500 0‐200

48%

72%

52%

28%

0%

20%

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80%

100%

2000 2009

CH W

ristwatch Exports,

% Value

, by Type

Mechanical Electronic

8%18%

92%82%

0%

20%

40%

60%

80%

100%

2000 2009

CH W

ristwatch Exports,

% Volum

e, by Type

Mechanical Electronic


Exhibit 27 In Value Terms, the Weight of Mechanical CH Watch Exports Has Increased by More Than 20 Percentage Points Over the Last Decade, Pointing to a Strong Premiumization Trend



A shift in the geographic mix toward higher-growth EMs, notably in Asia-Pacific and the Middle East, has been the main force behind the premiumization trend. Watches are traditionally the realm of the rich, with about three-quarters of category demand coming from HNWIs (high-net-worth individuals) — see Exhibit 30 to Exhibit 32. Over the last decade, key Asian EMs have gained more than 10 percentage points of share in total CH watch export value (see Exhibit 28), as they outpaced developed markets in Europe and North America both in terms of real GDP and in terms of growth in the number of HNWIs (see Exhibit 29, Exhibit 33, and Exhibit 34).

Exhibit 28 CH Watch Exports (Value Terms) to EMs in

Asia/ME Have Significantly Increased (More Than 10 Percentage Points) Over the Last 10 Years, as Developed Markets of Europe and North America Declined

Exhibit 29 This Development Has Gone Hand-in-Hand With a Positive Delta in Real GDP Growth Rates, Which Is Expected to Continue Into the Next Decade


Note: Real GDP growth rates reflect YoY average over stated period.

Source: Global Insight Estimates (Nov-10) and Bernstein estimates and analysis.

43%

67%

47%

27%

10% 6%

0%

20%

40%

60%

80%

100%

2000 2009

% Total CH W

atch (W

ristwatches +

Movem

ents) Exports, Value

Mechanical Electronic Other Watches

38% 34%

19%12%

33%40%

5% 9%4% 4%

2% 3%

0%

20%

40%

60%

80%

100%

2000 2009

Region

s as % Total CH W

atch Exports

(in CH

F value term

s)

Europe N AmericaAsia (incl. Japan) Middle EastLatAm RoW

Real GDP Growth Rate (YoY - %)Geography / Aggregate Historic ('85-09) Forecast ('10-20)

Mature:United States 2.8% 2.8%Japan 1.9% 1.4%Western Europe 2.2% 1.8%

OECD 2.5% 2.4%

Emerging:Greater China 8.6% 8.0%Asia-Pacific Ex-Japan 6.4% 6.8%Eastern Europe 3.6% 4.0%Middle East & North Africa 3.3% 4.4%South America 2.9% 4.7%

Non-OECD 4.5% 6.1%

World 2.9% 3.8%

…(2) a Shift in the Geographic Mix Toward Higher-Growth EMs in Asia-Pacific and MEA…


Exhibit 30 Hard Luxury (Watches and Jewelry) Is the Realm of Richer Consumers…

Source: BCG (Boston Consulting Group) and Bernstein analysis. Exhibit 31 …High-Net Worth Individuals Account for

75% of Hard Luxury, Compared to Circa 40% for Luxury Leather Goods

Exhibit 32 Within the Combined "Watches and Jewelry" Market, Watches Constitute the Bulk (About Three-Quarters) of the Value

Note: "High-net worth individuals" refers to "new money" + "old money" + "beyond money"

Source: BCG (Boston Consulting Group) and Bernstein analysis.

Note: In this instance, "jewelry" refers to high-end jewelry only (€7 billion), excluding the accessible luxury segment (€24 billion); "watches" refers primarily to luxury brands and is mostly comprised of mechanical watches per Exhibit 16.

Source: Altagamma and Bernstein analysis.

0%

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end pe

r Category (%

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35

35

15

Luxury Spend

Aspirational Masses (28%) Rising Middle Class (25%) New Money (37%)Old

Money (6%)

Beyond Money (4%)

Cosmetics & Fragrances

Fashion & Clothing

Home & Furniture

Watches & Jewelry

Accessories

25%

59%

75%

41%

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Jewelry & Watches Leather Goods

% of C

ategory Spen

d by

Income Bracket

Middle Class HNWI

74%

26%

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40%

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100%

2009

Category Detail

(Watches vs. Je

welry)

Watches High‐End Jewelry


We note that, in a period of economic expansion (2001-07), growth in the number of HNWIs and growth in total CH watch exports progressed hand-in-hand across most regions (see Exhibit 33). This relationship seems to have broken down during the severe economic correction of 2007-09: Global CH watch exports experienced negative progression of c.-9.5% p.a., while the total number of HNWIs stayed about flat globally. In fact, the HNWI growth was positive in Asia-Pacific, at +3.5% p.a. The disparity is most likely due to the fact that double-digit declines in CH watch exports could be attributed to third-party retailers' de-stocking, not necessarily reflective of HNWIs' underlying demand in 2007-09 (see Exhibit 34).

Exhibit 33 In a Period of Economic Expansion

(2001-07), Growth in the Number of HNWIs and CH Total Watch Exports Progressed Hand-in-Hand in Most Regions

Exhibit 34 During the Severe Economic Correction of 2007-09, the Link Between the Two Trends Seems to Have Broken Down — As De-Stocking Dragged Down CH Watch Exports, Despite Continued HNWI Growth in EMs

Note: Per Capgemini, HNWIs have at least $1 million in investable assets, excluding primary residence, collectibles, consumables, and consumer durables.

Source: FHS, Capgemini and Bernstein estimates and analysis.

Note: Per Capgemini, HNWIs have at least $1 million in investable assets, excluding primary residence, collectibles, consumables, and consumer durables.

Source: FHS, Capgemini and Bernstein estimates and analysis.

During the expansionary period of 2001-07, HNWI growth in Asia-Pacific and the Middle East outpaced HNWI growth in Europe by 250-600bps and North America by 50-400bps. Asian HNWI total continued outpacing Europe (c.500bps) and North America (c.650bps) even during the recessionary period of 2007-09 (see Exhibit 33 and Exhibit 34).

Superior HNWI growth rates versus developed markets suggest that CH watch/capita penetration for EMs underestimates the importance of these markets for the watches category. In fact, when analyzing CH watches penetration for nine of the top 15 export markets, we find that key EMs, notably China, are significantly more penetrated on an HNWI basis than on a total population basis so that their relative gap versus the most penetrated market is much less pronounced in HNWI terms (see Exhibit 35 to Exhibit 38).

8.6%

6.2% 6.1%5.7%

5.2%

3.2%

9.1%

3.7%

5.7%5.2%

4.7%

3.3%

0%

2%

4%

6%

8%

10%

Middle East

LatAm Asia‐Pac. NorthAmerica

Total Europe

'01‐'07 CA

GR in CH W

atch Exports vs.

Num

ber o

f HNWIs, by Re

gion

(%)

CH Total Watch Exports (CAGR%)No. HNWIs (CAGR%)

‐4.4%

‐17.4%

‐5.3%

‐22.6%

‐9.4% ‐9.1%

0.0%

11.8%

3.5%

‐3.1%

0.0%

‐1.6%

‐30%

‐20%

‐10%

0%

10%

20%

Middle East

LatAm Asia‐Pac. NorthAmerica

Total Europe

'07‐'09 CA

GR in CH W

atch Exports vs.

Num

ber o

f HNWIs, by Re

gion

(%)

CH Total Watch Exports (CAGR%)No. HNWIs (CAGR%)


Exhibit 35 France and Italy Lead Export Markets for CH Watches in Terms of Penetration Over General Population

Exhibit 36 Italy Also Leads CH Watch Export HNWI Penetration; However, Key EMs China and Russia Appear on More Equal Footing vs. Top Developed Markets Under This Metric

Note: China = CH exports to Mainland + one-third exports to Hong Kong, divided by Mainland population (SCB estimate).

Source: FHS, Haver, Global Insight, Capgemini and Bernstein estimates and analysis.

Note: China = CH exports to Mainland + one-third exports to Hong Kong, divided by Mainland HNWI population (SCB estimate).


Exhibit 37 The Spread of CH Watch Export Penetration

Over Total Population Across Key Markets…

Exhibit 38 …Is Greater Than the Spread for CH Watches Penetration Among HNWIs in the Same Markets

Note: China = CH exports to Mainland + one-third exports to Hong Kong, divided by Mainland population (SCB estimate).


Note: China = CH exports to Mainland + one-third exports to Hong Kong, divided by Mainland HNWI population (SCB estimate).


15 15

109

76

5

1 1

0

5

10

15

20France

Italy

Germany

UK

Spain

Japan US

China

(PR)

Russia

CH W

atch Exports / Total Pop

ulation

(CHF / pe

rson

)

2007 2009

5030

29672539

2280

1214 1192918

510 465

0

1000

2000

3000

4000

5000

6000

Italy

China

(PR)

France

Spain

UK

Russia

Germany

US

Japan

CH W

atch Exports / HNWI P

opulation

(CHF / HNWI)

2007 2009

1.00 0.99

0.640.58

0.470.40

0.32

0.07 0.07

0.00

0.25

0.50

0.75

1.00

France

Italy

Germany

UK

Spain

Japan US

China

(PR)

Russia

CH Export / Po

pulation

Pen

etration

(Relative Inde

x vs. Top

Cou

ntry)

Index '07 Index '09

st. dev. = 0.34

1.00

0.590.50

0.45

0.24 0.240.18

0.10 0.09

0.00

0.25

0.50

0.75

1.00

Italy

China

(PR)

France

Spain

UK

Russia

Germany

US

Japan

CH Export / Po

pulation

Pen

etration

(Relative Inde

x vs. Top

Cou

ntry)

Index '07 Index '09

st. dev. = 0.29


Consumer demographics shifts have also supported growth. There are two notable trends.

First is the prevalence of male consumption in increasingly relevant China: Mechanical watches have become a status symbol for successful business people in the country (see Exhibit 39 and Exhibit 40).

Exhibit 39 Global — Only Two Product Categories Are

Skewed Toward Male Consumers — Luxury Watches and Menswear

Exhibit 40 China — In This Market, Luxury Is Materially More Dependent on Men's Demand, With an Estimated 70/30 Mix

Note: Male versus female split calculated excluding €11 billion of "Other" luxury (e.g., Art de la Table); market size of €153 billion includes "Other" category in addition to "silk" and "underwear."

Source: Altagamma (Worldwide Monitor 2004) and Bernstein estimates and analysis.

Note: Male versus female split calculated excluding €0.7 billion of "Other" luxury (e.g., Art de la Table). Market size of €6.6 billion includes "Other" category in addition to "silk" and "underwear."

Source: Altagamma (Worldwide Monitor 2004) and Bernstein estimates and analysis.

Second, a favorable support to watches demand has also probably come from

the population aging, as older consumers tend to have higher available income and the shift from soft to hard luxury in terms of category preferences (see Exhibit 41). For instance, in Japan, elderly citizens aged 60+ have grown almost two times in relative weight in the total population over 20 years, from c.15% in 1988 to c.30% in 2008. As the weight of 60+ consumers almost doubled, hard luxury categories have exhibited relatively more robust growth compared to other categories, as analyzed through import statistics (see Exhibit 42 and Exhibit 43).

Exhibit 41 The World Is Getting Older — Bad News for Luxury? Not Really, as Older People

Have Higher Disposable Income, and Luxury and Disposable Income Seem to Grow in Lockstep; Hard Luxury Seems to Gain in the Category Shift

Notes: (1) 2008 median age of Japan and Italy calculated as the average of 2005 and United Nations estimate for 2010E; (2) luxury growth aggregate figure reflects non-weighted, arithmetic average of respective CAGRs; (3) CAGR reflects 1995 to 2008 retail sales categories; and (4) CAGR reflects 1996 to 2008 retail sales categories.

Source: Bernstein estimates and analysis.

0% 5% 10%

33% 33% 33% 33%

83%

100%

40%

100% 95% 90%

67% 67% 67% 67%

17%

0%

60%

0%

20%

40%

60%

80%

100%

Wom

ensw

ear

Jew

elry

Cos

met

ics

Frag

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Mar

ket

Luxu

ry G

oods

Cat

egor

y, G

ende

r % S

plit

Male (Global) Female (Global)

`

Size (€bn) 20 7 20 17 18 8 8 20 19 153

0% 10% 10%

40% 40%50% 50%

90%100%

70%

100%90% 90%

60% 60%50% 50%

10%0%

30%

0%

20%

40%

60%

80%

100%

Wom

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Jew

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Cos

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Cat

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r % S

plit

Male (China) Female (China)

`

Size (€bn) 0.3 0.3 0.3 0.3 0.3 0.5 0.3 1.7 2.0 6.6

Japan USA France Italy

1990 2008 CAGR 1990 2008 CAGR 1990 2008 CAGR (3) 1990 2008 CAGR (4)

Median Age (1) 37.4 43.9 — 32.8 36.9 — 36.9 39.9 — 37.1 42.5 —

Disp. Personal Income / Capita ¥2,124,279 ¥2,263,880 0.5% $17,042 $35,540 5.3% € 10,713 € 20,613 3.7% € 11,361 € 17,481 2.7%

Luxury Growth (proxy ) (2) (0.2%) 3.3% 2.8% 0.9%

A&F 0.7% 0.7% 2.3% 0.9%

Leather (5.2%) — 4.6% —

Watches (3.1%) 4.7% 3.6% —

Jewelry 1.2% 4.7% 3.6% —

…And (3) Shifts in Consumer Demographics


Exhibit 42 Japan: Elderly Citizens Aged 60+ Have Grown Almost Two Times in Relative Weight in 20 Years, from Circa 15% in 1988 to Circa 30% in 2008

Source: Ministry of Internal Affairs and Communications (Japan) and Bernstein analysis. Exhibit 43 Japan: As the Weight of 60+ Consumers Almost Doubled, Hard Luxury Categories

Have Exhibited Relatively More Robust Growth Compared to Other Categories, as Analyzed Through Import Statistics

Notes: (1) Traffic light coloring denotes growth rates: Green (medium shade in black and white printout) = X > +1%; yellow (lightest) = 1% > X > –1%; and red (darkest) = X < –1%; (2) Women's cotton dresses, not knitted, not including fur skin (Italy + France).

Source: Japan Ministry of Internal Affairs and Communications, Japan Ministry of Finance and Bernstein estimates and analysis.

28% 27% 27% 26% 25% 24% 24% 23% 22% 22% 21% 21% 21% 20% 20% 20% 19% 19% 19% 19% 18%

28% 28% 27% 27% 27% 27% 27% 28% 28% 28% 28% 28% 28% 28% 28% 28% 27% 27% 27% 27% 26%

28% 28% 29% 29% 29% 29% 29% 29% 29% 29% 29% 28% 28% 28% 28% 27% 27% 27% 27% 27% 27%

16% 17% 17% 18% 19% 19% 20% 20% 21% 22% 22% 23% 23% 24% 25% 25% 26% 27% 27% 28% 29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Tota

l Pop

ulat

ion

(% o

f Tot

al)

0-19 20-39 40-59 60+

CAGR Over Period:1990-95 1995-2000 2000-05 2005-08 1990-2008

Population by Age Cohort0-19 (2.5%) (1.9%) (1.5%) (1.1%) (1.8%)

20-39 0.4% 0.5% (0.4%) (1.1%) (0.1%)

40-59 0.5% (0.2%) (0.6%) (0.8%) (0.2%)

60+ 3.7% 2.7% 3.0% 2.6% 3.1%

Japanese Imports of LuxuryWomen's Cotton Dresses (FR, IT) (9.8%) 3.2% (1.9%) 21.5% 0.7%

Handbags (FR, IT) (9.0%) (12.3%) (2.6%) 10.5% (5.2%)

Jewellery (Metals + Stones) (4.5%) 0.2% 9.3% (0.4%) 1.2%

CH Watches (Mechanical) (13.9%) 0.4% 3.1% 0.5% (3.1%)

Perfumes + Eau de Toilette (3.0%) 19.7% 5.7% (1.5%) 5.6%

Relatively stable vs. other categories from 1995 to 2008

Imports fell more steeply in 1992 than most other categories. CAGR from 1993-2008 = +2.8%


Both Richemont and Swatch have performed well ahead of relevant market proxies over the last five years — reflecting the strength of their brands and distribution.

In absolute growth terms, Richemont has been ahead, benefiting from its stronger and almost exclusive exposure to the high-end. Richemont's Specialist Watchmakers, being more focused on the high-end, is therefore contrasted with CH mechanical watch exports. The division (which excludes Cartier) outgrew the market proxy by c.200bps in 2004-09, growing at +9.9% versus +7.8%.

Swatch's Watches & Jewellery division is best compared to total CH watch exports, as its brand portfolio reaches a broader set of aspirational and lower price points versus Richemont. It outperformed the market proxy by more than 300bps in 2004-09, experiencing top-line growth of +6.8% versus +3.3% (see Exhibit 44 to Exhibit 46).

Exhibit 44 Over the Last Five Years, Both Hard Luxury Names That We Cover Have Performed

Well Ahead of Relevant Market Proxy — Swatch by More Than 300bps (Versus Total Exports, Due to Diversity of Price Points); Richemont by Circa 200bps (Versus Mechanical, Due to High-End "Skew")

Note: Richemont Specialist Watchmakers sales translated at Richemont's euro average exchange rates for relevant years; excludes Cartier and

VC&A watches (consolidated within Richemont's Jewelry Maison).

Source: FHS, corporate reports and Bernstein analysis.

4.5%

6.8%

6.4%

9.9%

0%

2%

4%

6%

8%

10%

12%

'01‐'09 04‐'09

Watch

Sales Growth vs.

Exports (M

arket Proxies),

8‐an

d 5‐yr C

AGR (%)

Swatch ‐Watches & Jewelry (CHFm)Richemont ‐ Specialist Watchmakers (CHFm)

2.6%

7.3%7.8%

3.3%

Both Richemont and Swatch Have Performed Well Ahead of Relevant Market Proxies


Exhibit 45 Richemont Is More Focused on the Very High End (Albeit With Some Lower-Priced Alternatives), Making "CH Mechanical Watch Exports" a More Relevant Market Proxy With Which to Compare Sales Progression

Source: Wristwatch Annual 2010, www.Swatch.com and Bernstein analysis.

0

10,000

20,000

30,000

40,000

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90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000

200,000

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Roger Dubuis, A. Lange, Piaget, Vacheron, J-LC all have watches >$200k


Exhibit 46 Swatch Sales Progression Should Be Contrasted With "CH Total Watch Exports" — In Fact, the Group Spans from Breguet to Flik Flak, Reaching a Broader Set of Aspirational and Lower-Price Point Consumers Than Richemont

Source: Wristwatch Annual 2010, www.Swatch.com and Bernstein estimates and analysis.

We would anticipate faster watches demand growth over the next five years. This should come from persisting trends from the previous decade and a significant additional boost from the rise of the Chinese middle class. We expect annualized growth of +7-11% for the overall category and +10-16% for the luxury segment in 2010-15E (see Exhibit 21).

The key trends driving growth in the past decade are expected to continue. Notably, real GDP growth for key EMs is expected to keep outpacing developed economies by c.200-400bps through 2020E (see Exhibit 29), with HNWI growth differentials following a similar path (see Exhibit 33 and Exhibit 34).

Additionally, we expect broader EM middle class participation in the luxury goods market. BCG foresees a c.3x increase in the size of China's MAC (middle and affluent classes) by 2020E, from 148 million to 415 million (see Exhibit 47 and Exhibit 48). BCG's recent survey of more than 7,000 consumers in 28 cities anticipates that three-quarters of the additional MAC consumers will come from cities with fewer than 1 million inhabitants, thus reducing the weight of big-city MACs from c.45% to c.30% by 2020E. Despite lower average income, Chinese smaller-city MAC consumers face significantly lower living costs, hence displaying higher purchasing power, as well as a higher propensity to spend and to trade up (see Exhibit 49 to Exhibit 52).

0

10,000

20,000

30,000

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120,000

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150,000

160,000

170,000

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190,000

200,000

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Breguet 2 Watches >$200k

Swatch's brands reach a broader set of aspirational and lower-price point consumers

vs. Richemont

We Anticipate Faster Watches Demand Growth Over the Next Five Years, With a Boost from a Rising Chinese Middle Class


In other words, China is the prime example of an EM at a "tipping-point" — set to experience the rise of an aspirational clientele over the next decade (see Exhibit 53). As the accessible and aspirational price points of the category become more reachable for a greater number of consumers, we expect demand to become more multi-faceted, with different motivations driving purchase decisions, much as in developed markets. Over the next decade, tapping into these new customers' core and extended motivations and purchase criteria will be crucial for capturing share and driving profits (see Exhibit 54 and Exhibit 55).

Exhibit 47 The Growth of New Luxury Markets Will Bring New Vast Populations of Aspirational

and Accessible Luxury Consumers: We Assume That Only 5% of Chinese Consumers Purchase Luxury Goods Today — Versus 40% in Developed Markets

Notes: (1) We multiply Chinese HH income 3x, based on our discovery in our Blackbook "European Luxury Goods: Long-Term Attractiveness & Structural Demand Drivers," Sep-2010 — DOS penetration sweet spot of GDP/capita of US$15,000 in China, versus US$45,000 in the United States; and (2) Assumes persons/household ratio is neutral in the United States and United Kingdom calculations (i.e., assumed 40% of total population in top two quintiles).

Source: Bernstein estimates and analysis. Exhibit 48 Based on Its Recent Survey of More Than

7,000 Consumers in 28 Chinese Cities, BCG Expects MAC (Middle-Income and Affluent) Consumers to Approximately Triple in 10 Years

Exhibit 49 Three-Quarters of New MAC Consumers Will Come from Cities Labeled Tier 3 or Below (Fewer Than 1 Million Inhabitants), Reducing the Weight of Tier 1 and 2 City MAC Consumers from Circa 45% to Circa 30% by 2020

Source: BCG (Boston Consulting Group, China City Income Database), Bloomberg.

Source: BCG (Boston Consulting Group, China City Income Database), Bernstein analysis.

US UK Japan ChinaLuxury Goods Demand (domestic, € bn, 2009) 39.6 10.1 19.0 6.6Luxury Goods Demand (domestic, € million, 2009) 39,600 10,108 19,000 6,600

Addressed HH Tiers Top 2 Quintiles Top 2 Quintiles Top 2 Quintiles Top 5%Addressed HH Tiers - Pop. (mm persons, 2008) 121.8 24.6 65 26Addressed HH Tiers - Luxury spend / person (€) 325 412 292 252

Addressed HH Tiers - Avg. HH Income (US$, 2008) 125,409 73,084 85,263 19,306Addressed HH Tiers - "Luxury Purchasing Power" Adj. 125,409 73,084 85,263 57,919

148

415

0

50

100

150

200

250

300

350

400

450

2010 2020

Chinese MAC (M

iddle Class & Affluen

t)

Popu

lation

, i.e. w

ith HH Incom

e >C

NY

60,000

(c.$9,00

0), m

persons

10yr Increase : 267m10yr CAGR: +11%

83

28865

127

0

50

100

150

200

250

300

350

400

450

2010 2020

Chinese MAC (M

iddle Class & Affluen

t)

Popu

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, i.e. w

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148

415


Exhibit 50 Big-City MACs in China Enjoy Much Higher Average Incomes, But Smaller-City MACs Face Significantly Lower Cost of Living and Consequently Greater Purchasing Power — For Example, Shanghai (Tier 1) vs. Xuzhou (Tier 3)

Source: BCG (Boston Consulting Group) and Bernstein analysis. Exhibit 51 Moreover, Small-City MACs Display the

Highest Intention to Increase Spending… Exhibit 52 …And to Trade Up

Source: BCG (Boston Consulting Group). Source: BCG (Boston Consulting Group).

Chinese MAC (Middle Class/Affluent) Consumers ‐Illustrative Monthly Living Cost of Family of Three

Shanghai Xuzhou(Tier 1) (Tier 3)

Income / Expense CNY CNY

Total HH income 6,500 5,600Necessities (1) ‐3,860 ‐1,800As % total HH income ‐59% ‐32%Available for Discretionary Spending 2,640 3,800As % total HH income 41% 68%

If paying a mortgage (2) ‐4,000 ‐1,300As % total HH income ‐62% ‐23%Disposable Income (mortgage) ‐1,360 2,500As % total HH income ‐21% 45%

If paying rent (2) ‐2,000 ‐600As % total HH income ‐31% ‐11%Disposable Income (renting) 640 3,200As % total HH income 10% 57%

22%24%

28% 29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Tier 1 Tier 2 Tier 3 Tier 4

"Inten

d to increase sp

ending"

(% respon

dents)

37% 36%

45% 46%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Tier 1 Tier 2 Tier 3 Tier 4

"Inten

d to trade up

" (%

respon

dents)


Exhibit 53 Fine Watch Adoption Progression Moves Through Several Phases, Beginning With Limited High-End Pieces and the Entry of Luxury and Premium Lines and Ending With the Rise of Technically Advanced Products; China Is the Prime Example of an EM at "Tipping-Point" — Set to Experience the Rise of an Aspirational Clientele Over the Next Decade

Source: "Time to Change: Contemporary Challenges for Haute Horlogerie" (Carcano and Ceppi) and Bernstein analysis. Exhibit 54 Watch Customers Range from Collectors Who Highly Value Fine Craftsmanship to

the Newly Enriched Who Place Significant Emphasis of the Value of the Brand's Reputation

Source: "Time to Change: Contemporary Challenges for Haute Horlogerie" (Carcano and Ceppi) and Bernstein analysis. Exhibit 55 Watchmakers Can Tap Into These Customers' Core and Extended Motivations and

Purchase Criteria to Drive Profits

Source: "Time to Change: Contemporary Challenges for Haute Horlogerie" (Carcano and Ceppi) and Bernstein analysis.

Phase 1 2 3 4 5

Fine Watch Adoption Style

Few High End & Haute Items

Entry of Luxury & Premium

Premium Diffusion High Watchmaking Gains Momentum

Watchmaking Masters Era

Description Limited # of wealthy individuals

'Get in' and raise awareness of brand

Status symbol & 'show off' phase

Rise of entry level & aspirational clientele;

wealthy focus on differentiated products

Understand haute horlogerie; conspicuous

consumption

Markets Emerging Markets Emerging Markets EMs + Growing Markets Growing Martkets Mature Martkets

Customer Value Creation Drivers

Métier d-art (Craftsmanship) Aesthetics Brand & Reputation Heritage

Collectors

Watch Lovers

Political & Business Elites

Cosmopolitan Elites

Affluent Young

Newly Enriched

= Most Value Creation = Least Value Creation

Customer Core Extended Enlarged

Collectors ■ Product contents■ Production processes

■ Retail lists■ After-sales service

■ Exclusive events (e.g. at corporate headquarters)

Watch Lovers ■ Limited edition■ Production processes■ Product contents

■ Information■ Sales assistance expertise

■ Being part of the 'world of the brand'

Political & Business Elites ■ Signs, symbols ■ Retail service ■ Branding

Cosmopolitan Elites ■ Special series ■ Assortment ■ International netwroking occasion

Affluent Young ■ Style, fashion ■ Retail environment ■ Young events

Newly Enriched ■ Signs, symbols ■ Branding■ Retail location

■ Celebrities & endorsements


Marketing Dynamics in Watches — Product Innovation and Pricing

For the purposes of this chapter, we break down the luxury watches industry into six broad macro-segments (see Exhibit 56).

We define "established" players as specialist brands that have traditionally operated in the market. This established group contains three segments: (1) players at the high-end of the spectrum (e.g., Breguet, Piaget, Patek Philippe and Vacheron Constantin); (2) mega-brands playing the middle ground (e.g., Cartier with the highest prices in this segment; Rolex with mid-range prices; and names such as TAG Heuer and Omega at lower price points); and (3) premium names (e.g., Baume & Mercier and Longines).

Besides established names, there is fourth segment: Specialist brands also comprise a series of technical new entrants (e.g., Urwerk, MB&F and Lionel Ladoire), positioned at high-end price points, albeit with lesser-known brand names.

We also include two segments for the "outsider" brands, which tend to be specialized in other areas of the luxury goods industry. Some luxury goods outsiders (e.g., jewelers Bulgari and Harry Winston; writing instrument specialist Montblanc; and fashion and leather goods companies Hermès, Dior and Chanel) operate in this sector directly. Others could be called licensing outsiders (e.g., Armani), as they license their brand out to timepieces specialists and purely focus on royalty streams. The former have traditionally positioned themselves at similar price points as established watch mega brands; the latter typically operate in the lower end of the spectrum.

Exhibit 56 The Watches Industry Structure — We Break This Down Into Six Broad

Macro-Segments


Hard luxury groups in our coverage (Richemont and Swatch) own longer "tails" of large- and medium-size watches brands than non-specialist groups under coverage (LVMH, PPR and Burberry). Exhibit 57 provides an overview of the relative size of "Google hits" of these brands. Mega brands in each brand portfolio typically command more Google hits than high-end/niche names and lower-positioned premium names — e.g., Cartier (versus Piaget and Baume & Mercier) at Richemont, and Omega (versus Breguet and Longines) at Swatch.

High-end / Niche Technical New Entrants(e.g. Breguet, Piaget, (e.g. Urwerk, MB&F, Specialists

P. Philippe, V. Constantin) Lionel Ladoire)

Mega Brands Luxury Goods Outsiders(e.g. Rolex, Omega, (e.g. Bulgari, H. Winston,TAG Heuer, Cartier) Montblanc, Hermès, Dior, Chanel)

Premium Licensing Outsiders(e.g. Baume & Mercier, (e.g. Armani, Burberry)

Longines)

Outsiders / Entrants

High End

Middle Ground

Premium

Established

A "Pyramid Overview" of the Luxury Watches Industry


Exhibit 57 Relative "Google Hits" Size of Coverage Companies' Brands: Mega Brands in Each Brand Portfolio Typically Command More Google Hits Than High-End/Niche Names and Lower-Positioned Premium Names — For Example, Cartier (Versus Piaget and Baume & Mercier) at Richemont and Omega (Versus Breguet and Longines) at Swatch

Note: Google search was conducted by typing in the brand name plus watches — e.g., "Rolex watches."

Source: Google and Bernstein estimates and analysis.

Two complementary marketing mix trends seem to have shaped the watches industry in the past 10 years and through the recession years across price segments: "premiumization" in terms of pricing and a greater emphasis on value-add features in terms of product (see Exhibit 58). Both specialists and outsider players seem to have raised median prices of new products substantially through the recession (sometimes by as much as 2x), or at least kept prices stable. In terms of product features, all specialists seem to have focused on complexity (i.e., total number of complications and movement parts), while those luxury goods outsiders that do not license their brand for timepieces have mostly focused on alternative value-add traits (e.g., design or diamond/precious stone emphasis for jewelers).

Exhibit 58 Different Segments of the Market Have Adjusted Pricing and Product Feature

Priorities Differently in the Last Years of Economic Downturn


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Pricing Product Features

High-end / Niche Technical New Entrants High-end / Niche Technical New EntrantsRaised prices Set high-end prices (e.g. $150k) Adding complexity Focus on technical excellence

by +35%-100% for innovative products with unique models

Mega Brands Luxury Goods Outsiders Mega Brands Luxury Goods OutsidersStable prices (Rolex) or Pronounced price increases Adding complexity, at times Utilizing innovative design and

Premiumization (+100% at Cartier) as 'niche' approach is pursued ultra-technical traits (tourbillon) limited-series exclusivity

Premium Licensing Outsiders Premium Licensing OutsidersStable prices Low absolute Adding complexity Little innovation,

price points maintained focus on royaltiesPremium

Established Outsiders / Entrants Outsiders / EntrantsEstablished

High End

Middle Ground


Premiumization has been a key theme in the watches industry over the last decade: Swiss watches constructed of precious metals (a proxy for higher-end products) outgrew base-metal watches by c.350bps in 1998-2009. Despite the recent severe correction in 2009, the Swiss watches industry overall (as gauged from UN Comtrade's Swiss export data to the rest of the world) experienced steady growth over the last decade, expanding at a CAGR of more than 10% in the 1998-2008 period (see Exhibit 59). In the last decade (1998-2009), precious-metal watches experienced annualized growth of +9.7% in value terms compared to +6.2% for base-metal watches. This trend is a reversal of what took place in the previous decade, when base-metal watches grew more than two times faster than precious-metal models (see Exhibit 60).

Exhibit 59 Despite the Recent Severe Correction in 2009, the Swiss Watches Industry (as

Gauged from UN Comtrade's Swiss Export Data to the Rest of the World) Experienced Steady Growth Over the Last Decade, Expanding at a CAGR of More Than 10% in 1998-2008

Note: Value data by UN Comtrade expressed in U.S. dollars for the entire data series.

Source: UN Comtrade (86411 series, using SITC rev. 1; 9101 and 9102 series, using HS92) and Bernstein analysis. Exhibit 60 Swiss Watches Constructed of Precious Metals (a Proxy for Higher-End Products)

Have Outgrown Base-Metal Watches by Circa 350bps During the Last Decade (1998-2009)

Note: Value data by UN Comtrade expressed in U.S. dollars for the entire data series.

Source: UN Comtrade (9101 and 9102 series, using HS92) and Bernstein analysis.

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1966

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2008

2009

Swis

s W

atch

Exp

orts

(U

N C

omtr

ade

8641

1) -

YoY

Gro

wth

(%)

Total Swiss Watch Exports Watches (Precious Metal, 9101) Watches (Base Metal, 9102)

6.9%6.4%

7.3%6.7%

3.5%

9.7%

7.0%7.8%

6.2%

0%

2%

4%

6%

8%

10%

12%

CAGR ('88-'09) CAGR ('88-'98) CAGR ('98-'09)

CAG

R -

%

Overall Watches (Precious Metal, 9101) Watches (Base Metal, 9102)

Premiumization Has Been a Key Theme in the Last Decade


The recent severe market downturn does not seem to have disrupted the general trend towards premiumization, as most key brands maintained or raised median prices for newly introduced models. The following sections provide specifics in the high-end/niche, mega-brands and premium segments.

High-end/niche At the high-end, median prices for newly introduced watch models seem to have increased across the board despite the recession. Selected high-end watch brands have seen the median prices of their 2010 newly introduced models exceed that of 2006's additions. The median price of new catalogue additions in 2010 was c.2x versus 2006 for Patek Philippe (moving from $17,925 to $35,100) and c.+35%-55% higher for Vacheron Constantin, Piaget and Breguet (see Exhibit 61). At the high end, minimum-maximum price ranges of newly introduced watch models can vary dramatically (see Exhibit 62). Volatile price ranges were common for high-end brands in 2010, as they continue to introduce ultra-complicated limited edition models despite the recent recession (see Exhibit 63).

Exhibit 61 Selected High-End Watch Brands Have All Seen the Median Price of Their 2010

Newly Introduced Models Exceed That of 2006's Additions

Source: Wristwatch Annual 2006 and 2010 and Bernstein estimates and analysis. Exhibit 62 At the High End, Minimum-Maximum Price

Ranges of Newly Introduced Watch Models Can Vary Dramatically — For Example, 2006 Catalogue Additions by Three Key Brands in the Segment

Exhibit 63 Similarly Stretched and Volatile Price Ranges Were Common for High-End Brands in 2010, as They Continue to Introduce Ultra-Complicated Limited -Edition Models

Note: Range determined by taking the median value of the bottom three and top three prices for each brand.

Source: Wristwatch Annual 2006 and Bernstein estimates and analysis.



17,925 20,450 21,200 20,700

35,100 31,875 31,500

28,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Patek Philippe Breguet Vacheron Constantin

Piaget

Med

ian

Pric

e ($)

2006 2010

8,750 12,500 10,950 8,000

115,800 97,500

40,700

380,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Breguet Piaget Patek Philippe Vacheron Constantin

Pric

e Ra

nge

in 2

006

($)

2006

9,450 15,200 16,850 14,400

286,650

54,000

237,500

173,000

0

50,000

100,000

150,000

200,000

250,000

300,000

Breguet Piaget Patek Philippe Vacheron Constantin

Pri

ce R

ange

in

2010

($)

2010


Mega-brands In the middle ground, mega brands have taken a more diverse approach. Some mid-range household names (e.g., Rolex) have kept median prices of new models stable. Other brands positioned at higher (e.g., Cartier) and lower (e.g., TAG Heuer and Omega) price points versus Rolex have chosen to raise prices (see Exhibit 64).

In the case of Cartier, premiumization has been pursued systematically in order to further reinforce its watch credentials (also see changes in pricing range for Cartier in 2010 versus 2006 in Exhibit 65 and Exhibit 66).

In the case of TAG and Omega, higher prices for new catalogue additions have likely been an attempt to further distinguish themselves from lower-positioned premium brands. This has been achieved through a more consistent use of case materials and watch complications that would not be normally found in premium-segment models (e.g., Grand Carrera Calibre 17 RS2 at TAG Heuer and Seamaster Professional 1200m Ploprof at Omega).

Exhibit 64 The Evolution of Median Prices of Newly Introduced Models by Higher-Volume Mega

Brands Has Been More Diverse as Different Names Have Pursued Different Priorities

Source: Wristwatch Annual 2006 and 2010 and Bernstein estimates and analysis. Exhibit 65 In 2006, Cartier and Rolex Had a Similar

Price Range for Newly Introduced Products Exhibit 66 But in 2010, Cartier Had Begun to Introduce

Extremely High-Priced Watches With Advanced Complications





13,750

9,675

4,845

1,845

24,000

9,963 9,250

3,900

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5,000

10,000

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30,000

Cartier Rolex Omega TAG Heuer

Med

ian

Pric

e ($

)

2006 2010

3,900 3,750 3,095 995

31,200 30,150

12,195

3,095

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


Pri

ce R

ange

in

2006

($)

2006

7,000 4,400 4,500 2,700

126,000

42,850

18,700

7,900

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Pric

e Ra

nge

in 2

010

($)

2010


Premium For premium brands, the median prices of newly introduced models were not materially changed over the course of the recession — especially when compared to trends in other market segments. For instance, the new catalogue additions' median price at Baume & Mercier moved up less than 4% from $2,395 to $2,490 (in 2010 versus 2006); at Longines, the median moved up by c.10% from $2,250 to $2,500 (see Exhibit 67). Price ranges of new watch models in the premium segment were not very broad to start with (see Exhibit 68). Similar to median prices for these players, pricing ranges for catalogue additions in the premium segment did not change materially during the downturn (see Exhibit 69).

Exhibit 67 The Median Prices of Newly Introduced Models for Players in the Premium Segment

Were Not Materially Different Over the Course of the Recession — Especially When Compared to Trends in Other Market Segments

Source: Wristwatch Annual 2006 and 2010 and Bernstein estimates and analysis. Exhibit 68 Price Ranges of New Watch Models in the

Premium Segment Were Not Very Broad to Start With in 2006

Exhibit 69 Similar to Median Prices for These Players, Pricing Ranges for Catalogue Additions in the Premium Segment Did Not Change Materially During the Downturn

Source: Wristwatch Annual 2006, Wristwatch Annual 2006 and Bernstein estimates and analysis.

Source: Wristwatch Annual 2010, Wristwatch Annual 2006 and Bernstein estimates and analysis.

2,395 2,250

2,490 2,500

0

500

1,000

1,500

2,000

2,500

3,000

Baume & Mercier Longines

Med

ian

Pric

e ($

)

2006 2010

1,595 1,700

3,495

5,850

0

1,000

2,000

3,000

4,000

5,000

6,000


Pric

e Ra

nge

in 2

006

($)

2006

1,990 1,350

3,990

4,500

0

1,000

2,000

3,000

4,000

5,000

6,000


Pric

e Ra

nge

in 2

010

($)

2010


Product features have a strong direct relationship with watch retail prices, although key price determinants vary depending on the market segment — complications are key at the extremes of the pyramid (high-end and premium), while case material is more important for the middle ground.

At the high-end, gold and precious metals (e.g., platinum and palladium) seem to be the norm for watch case construction. Ultra-technical complications therefore become key price differentiators — for example, explaining about two-thirds of pricing decisions at Patek Philippe and Vacheron Constantin (see Exhibit 70 and Exhibit 71). Vacheron's $1.5+ million Tour de L'Ile model, comprising an 834-part movement and an unusually high total number of mechanical complications (16), illustrates this point (see Exhibit 72 to Exhibit 73). Most watches at the opposite end of the spectrum (premium brands) are made of steel, ceramic and base metals. Thus, complications play an important role in determining prices — for example, explaining about one-half of prices at Longines (see Exhibit 74).

Exhibit 70 The Number of Complications Seems to Be a Key Determinant of Retail Price for

Specific Watch Models at the High End — For Example, for Gold-Case Watches at Vacheron Constantin and Patek Philippe, This Relationship Appears to Be Exponential and Watch Complexity Would Seem to Explain About Two-Thirds of Pricing Decisions

Note: (1) Based on a sample of two specialist high-end brands (Vacheron Constantin and Patek Philippe); (2) only includes models with gold

cases (white, yellow, rose); excludes other precious metals (platinum and palladium) and base materials (steel and ceramic), etc.; (3) excludes two outliers, namely Patrimony Traditionelle Calibre 2755 by Vacheron Constantin and 10 Jours Tourbillon by Patek Philippe; (4) hours and minutes only considered as complications when retrograde; sweeping seconds not a complication; and (5) Tourbillons always counted as a separate complication.


R² = 66%

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120

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Ret

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rice

(US$

)

Number of Complications (#)

Emphasis on Mechanical Complications Drives Higher Prices at the Top and Bottom of the "Pyramid"

40 E

UR

OPE

AN

LU

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Exhibit 71 Watch Brands Across Market Segments Utilize Complications as a Means to Add Value to Their Models; Specialist High-End Niche Typically Opts

for the Most Complex and Labor-Intensive Complications (For Example, Tourbillon) to Distinguish the Artisanship of Their Products

Note: Highlighted complications are particularly difficult techniques and usually appear on more complicated watches.

Source: Fondation De La Haute Horlogerie and Bernstein analysis.

Type of Complication Function Notes

Astronomical IndicationsSimple Calendar Displays date (sometimes day & month) Does not account for variance of month length (requires manual correction 5 times / year)Perpetual Calendar Displays date, day, month (usually moon phases) Very advanced - Takes into account # of days in month & leap year cycleMoon Phase Follows progression of moon phases (new, full, etc.) Complements the perpetual calendar; more advanced versions need be corrected once in 122 yearsAstronomical Watches Convey info related to 'heavenly bodies' (e.g. star positions) Information displayed can vary widely, but mostly incorporated on ultra-complicated watchesEquation of Time Shows difference between 'True' Solor time and 'Mean' Classic feature on ultra-complicated watches

Sounding WatchesStriking Sounds indicate the hour and quarter-hour Hammers hit bells or gongs that are tuned to specified pitches ('Petite' and 'Grande' Sonnerie)Repeater Stikes the hour on demand using a pushpiece Related to striking watches, but viewed as more challenging and exclusiveAlarm Makes sound at specified time Alarm usually set using a second crown mechanism

Short Time IntervalsDead / Independent Seconds Measure short intervals (seconds & fractions of seconds) Preceded the chronograph and does not have a return-to-zero functionChronograph Measure short intervals of elapsed time Advanced versions use a column wheel, which can be further distinguished (integrated, separate)Rattrapante (split-second) Add'l seconds hand that measures multiple events at same time Very difficult to make - some chronographs have two or more rattrapante handsChrono w/ Flyback hand Center second hand can be controlled w/o stopping chrono Can stop the second hand, return it to zero and immediately start again by pushing one button.

ProfessionalMultiple Time Zones Shows time in different time zones Range from watches with 2 hour hands to World Time Watches (rotating disc with 24 cities)Diving Watches Designed for professional divers and deap-sea operations Water resistant to great depths, helium release valve, fluorescent markings, extra-strong crystal, etc.Tide Guage Indicates high and low tides Watch sets the tide gauge for a specific latitude - useful to fishermen, etc.

OtherTourbillon Compensates effects of gravity; spring & escapement rotating cage Highly complicated & requires high expertise - can come in form of flying tourbillonPower Reserve Displays how long watch will continue to function w/o winding Enables wearer of a hand-wound or self-winding watch to know when 'power' runs outJumping Hours Jumping Display' using numerals instead of hands Time viewed through an aperture which changes on the hour or minuteRetrograde Hours Hands sweep segment of a circle & spring back to initial position Often combined with jumping indications and visually impressive 'endless choreography'


Exhibit 72 Vacheron Costantin's Limited Edition Tour De L'ile Cost More Than $1.5 Million and Comprises an 834-Part Movement

Exhibit 73 This $1.5+ Million Watch Has 16 Mechanical Complications

Source: Fondation De La Haute Horlogerie, Wristwatch Annual 2010, corporate website and Bernstein analysis.

Source: Fondation De La Haute Horlogerie, Wristwatch Annual 2010, corporate website and Bernstein analysis.

Exhibit 74 In the Premium Segment of the Market, the Number of Complications of Specific

Models Also Seems to Be a Key Determinant of Price — For Example, Having an R-Squared of 50% at Longines; Yet, the Types of Complications Utilized Are Much Less Advanced Than for High-End Brands (For Example, Chronographs vs. Tourbillons and Retrograde Hands)

Note: (1) Based on Longines, an example of specialist premium brand; (2) only includes models with stainless steel cases (no new models in other materials available in 2010).


Tour de L'Ile - Summary of 16 Complications

■ Minute Repeater ■ Day■ Tourbillon ■ Date■ Power Reserve Indication ■ Month■ 2nd Time Zone ■ Leap Year■ Moonphase ■ Equation of Time■ Age of the Moon ■ Sunrise■ Sonnerie Level Indication ■ Sunset■ Perpetual Calendar ■ Celestial Chart

R² = 51%

0

1

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4

5

6

0 1 2 3 4

Ret

ail P

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(US$

)



In the middle ground, for mega brands (e.g., Rolex) and similarly priced outsider brands hailing from other luxury sectors (e.g., Hermès), construction material seems a more important driver of pricing, with a correlation to price c.2x larger than that of complications. On average, gold watches by selected brands in these market segments are c.5x more expensive than steel watches, while platinum/palladium models are c.3x more expensive than gold ones (see Exhibit 75 to Exhibit 77).

Exhibit 75 For Names in the Middle of the Pyramid, Such as Mega Brands (Rolex and Cartier)

and Similarly-Priced Luxury Goods Outsider Brands (Bulgari, Hermès and Chanel), Watch Complications Do Not Seem to Be a Key Price Determinant (R-Squared Less Than 20%)

Note: (1) Based on a sample of two specialist mega brands (Rolex and Cartier) and three outsider luxury goods brands (Bulgari, Hermès and

Chanel); (2) only includes models with gold cases (white, yellow, rose); excludes other precious metals (platinum and palladium) and base materials (steel, ceramic), etc.

Source: Wristwatch Annual 2010 and Bernstein estimates and analysis. Exhibit 76 For These Brands, Watch Cases' Material

Would Seem a Much More Important Driver for Pricing Decisions (R-Squared Greater Than 40%, or Two Times That of Complications)

Exhibit 77 On Average, Gold Watches by These Brands Are Circa 5x More Expensive Than Steel Watches, While Platinum/Palladium Models Are About 3x More Expensive Than Gold Ones

Note: Based on a sample of two specialist mega brands (Rolex and Cartier) and three outsider luxury brands (Bulgari, Hermès and Chanel).


Note: Based on a sample of two specialist mega brands (Rolex and Cartier) and three outsider luxury brands (Bulgari, Hermès and Chanel).


R² = 18%

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R² = 41%

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Wristwatch Case Material

StainlessSteel

Gold Platinum/Palladium

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Gold Platinum/Palladium

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Wristwatch Case Material

In the Middle Ground, Construction Material Seems a More Important Pricing Driver...


Nonetheless, the addition of even a single ultra-complex mechanical feature typically utilized by high-end brands (e.g., tourbillon) can justify an upward reach in pricing by middle-ground players. This has been the case for the Cartier mega-brand through the downturn years (see Exhibit 78 and Exhibit 66), as it adopted a strong premiumization drive to establish its reputation in the space and started launching tourbillon-enhanced models such as the Ballon Bleu Tourbillon (see Exhibit 79).

This contrasts with the approach adopted by other players in the same segment (e.g., Rolex) — which are developing more complex models (e.g., the Yacht Master II) to send a signal of engineering prowess while keeping a consistent pricing policy and opting not to introduce ultra-complex features (e.g., countdown function versus tourbillon) (see Exhibit 78 and Exhibit 80).

Exhibit 78 The Cartier Mega Brand's Premiumization Drive Through the Recent Recession Has

Been Achieved Mostly Due to the Inclusion of Highly Advanced Complications (For Example, Tourbillon) Which Have Pushed Prices of Selected Models Above $100,000 (Note: Table Reflects 2010 Catalogue Additions by the Two Brands)


Rolex Cartier

Model Case Material Price ($) Model Case Material Price ($)

Day-Date II Platinum 51,050 Tortue XL Grande Complication Platinum —Datejust Gold & Diamonds 42,850 Rotonde de Cartier Tourbillon Platinum 240,000Yacht Master II Yellow Gold 33,650 Santos Triple 100 Palladium 126,000Cosmograph Daytona White Gold 30,700 Santos 100 Flying Tourbillon Rose Gold 100,800Cosmograph Daytona Rose Gold 30,700 Tank Americaine Flying Tourbillon Rose Gold 97,600Day-Date II White Gold 30,200 Ballon Bleu Tourbillon Rose Gold 96,500Submariner White Gold 29,850 Santos 100 Skelett Palladium 58,000Datejust Rose Gold 23,300 Ballon Bleu Chronograph Gold & Diamonds 49,200Prince White Gold 15,450 Rotonde de Cartier Chronographe White Gold 37,500Datejust S. Steel, Diamonds 11,575 Tank Americaine XL Chronograph Rose Gold 24,000Submariner S. Steel & Yellow Gold 10,400 Ballon Bleu Chronograph Yellow Gold 22,325GMT Master II S. Steel & Yellow Gold 10,400 Santos 100 LM Rose Gold 21,000Day-Date II S. Steel & Yellow Gold 9,525 Rotonde de Cartier MM Rose Gold 17,850Sea-Dweller DeepSea S. Steel & Titanium 9,250 Santos 100 Carbon Chrono Titanium & Gold 14,350Datejust S. Steel & Rose Gold 8,625 Pasha 42 Chrono S. Steel 11,300Datejust S. Steel & Rose Gold 7,750 Pasha Seatimer Chrono S. Steel 9,950Day-Date II S. Steel & White Gold 7,525 Santos 100 Carbon S. Steel 7,000Date S. Steel 7,000 Ballon Bleu Steel LM Yellow Gold 5,750Turn-O-Graph S. Steel 6,775Milgauss S. Steel 6,200Datejust S. Steel 5,450Datejust S. Steel 5,250Oyster Perpetual S. Steel 4,400Air King S. Steel 4,200

Tourbillon complication

corresponds to material price

increase

...Although the Addition of Even a Single Ultra-Complex Mechanical Feature Can Justify Upward Reach in Pricing


Exhibit 79 Cartier's Ballon Bleu Tourbillon Includes a Subsidiary Second Complication on a Tourbillon Cage

Exhibit 80 Rolex's Yacht Master II Regatta Chronograph Does Not Include Tourbillons, But Does Add Complexity (For Example, Programmable Countdown Function) to the Rolex Range

Source: Wristwatch Annual 2006 and 2010 and Bernstein estimates

and analysis. Source: Corporate website and Bernstein analysis.

During the recent period of economic malaise, outsider luxury brands with less tradition in watches have preferred design enhancements and limited-series exclusivity to traditional measures of value (e.g., complications and precious materials) to put their names on the map. Some luxury brands have focused on models with innovative design elements (e.g., Montblanc and Dior) or extensive use of jewelry as the primary value-add attribute (e.g., Bulgari); others (e.g., Hermès and Zegna) have opted for more standard pieces with limited-series exclusivity.

Writing instruments champion Montblanc, for example, has introduced the Metamorphosis model, with a dual-face "transformation" feature (from classic to chronograph) (see Exhibit 81). Jewelers Bulgari and Harry Winston have launched the Octo Bi-Retro (which uses two retrograde complications for hours and minutes and takes inspiration from previous Gerald Genta models; see Exhibit 82) and the Opus 9 (which shows hours and minutes through two unusual "vertical line" dials; see Exhibit 83), respectively. Jewelers also have started using diamonds and precious stones as dominant watch features, possibly as a signature or tribute to their core brand heritage (e.g., Astrale by Bulgari shown in Exhibit 84, and Opus 9 by Harry Winston shown in Exhibit 83, which comes adorned with two parallel lines of 33 diamonds each).

Fashion and leather goods specialists also have pursued new approaches to the watch space. Dior is responsible for the Christal 8, which uses an Art Deco overlapping-circle design for the dial and comes in two limited editions (see Exhibit 85). Chanel has launched its limited-edition J12 Retrograde Mystérieuse, which celebrates the anniversary of Chanel's J12 watch collection and features open-worked dial, a retractable vertical crown as well as a tourbillon (see Exhibit 86).

Hermès and Zegna — though through more standard luxury timepieces (the Carre H, Arceu Chrono and Cape Cod Tonneau models for Hermès; the Centennial model for Zegna in collaboration with Girard-Perregaux) — have also chosen limited-series for their forays in watches (see Exhibit 87 to Exhibit 89).

"Outsider Brands" Prefer Design Enhancements and Limited-Series Exclusivity


Exhibit 81 Montblanc: Metamorphosis (With Dual Face)

Exhibit 82 Bulgari: Octo Bi-Retro

Source: Corporate website and Bernstein analysis. Source: World Watch Review Website and Bernstein analysis. Exhibit 83 Harry Winston: Opus 9 Exhibit 84 Jewelers Such as Bulgari Have Also Started

to Use Diamonds and Precious Stones as Dominant Watch Features as a Signature (For Example, Bulgari Astrale)

Source: Watchsites.net and Bernstein analysis. Source: Fondation De La Haute Horlogerie and Bernstein analysis. Exhibit 85 Christian Dior: Christal 8 Exhibit 86 Chanel: J12 Retrograde Mystérieuse

Source: Le Parisien and Bernstein analysis. Source: Professionalwatches.com and Bernstein analysis.


Exhibit 87 Zegna: Centennial (Girard-Perregaux Collaboration)

Exhibit 88 Hermès: Carre H

Source: Luxist.com and Bernstein analysis. Source: Perpetuelle.com and Bernstein analysis. Exhibit 89 Hermès Has Crafted More Standard Luxury Timepieces, and Aims to Place an

Emphasis on the Quality of Its Brand by Emphasizing Its Leather Credentials and Parisian/Equestrian Roots (2010 Advertising Campaign)

Source: Magazine De La Haute Horlogerie website, corporate website and Bernstein analysis.


A licensing-focused approach seems a more promising brand-building endeavor by outsiders than the royalty-focused licensing efforts of the past, which is still being pursued by most non-specialist names in the premium segment. Italian designer brands (e.g., Armani), for instance, have continued with their licensing approach — seemingly preferring royalty inflows to long-term brand building (see Exhibit 90). Models developed on behalf of these brands remain fairly uncomplicated and tend to utilize base materials (e.g., ceramic and steel), thereby keeping prices at a relatively accessible level (an example is shown in Exhibit 91).

Exhibit 90 Armani Generates Circa 8% of Its Total

Revenues from Royalties Related to Licensed Products Such as Cosmetics, Fragrances and Watches

Exhibit 91 Emporio Armani: Classic Round Watch (£179)

Source: Verdict, corporate reports and Bernstein analysis. Source: Corporate website and Bernstein analysis.

Clothing, 50%

Licensed Products, 50%

Sale of Goods, 91%

Royalties, 8%

Other, 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Armani Label Sales (Incl. 3rd Party) Total Armani Revenues

Costmetics, Fragrances,

Watches, Eyewear, etc.

A Licensing-Focused Approach Seems Less Promising for Non-Specialists' Long Term Brand Development


Gucci seems to be in between, as it has stepped back from its license — but its product range and price list seem to be geared to the accessible/mid-level market.

Gucci acquired Severin Montres group, its former watches licensees, in November 1997 for $150 million and renamed the division Gucci Timepieces (according to Women's Wear Daily). Watches (4.6% of sales in 2009) remain an area of weakness for the brand. Softer results in this area were mentioned numerous times in quarterly and half yearly reports throughout 2008 and 2009 (see Exhibit 94). Our analysis indicates that Gucci time pieces vary in price from c.$650 to c.$4,600 (as per the company's U.S. e-commerce website; see Exhibit 92 and Exhibit 93).

Exhibit 92 Gucci Timepieces — Website Price Range Exhibit 93 Gucci: G-Frame (Circa $700) and G-Chrono

(Circa $4,000)

Source: Corporate website (U.S.) and Bernstein analysis. Source: Corporate website and Bernstein analysis.

0

500

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2,500

3,000

3,500

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0 1 2 3 4 5 6 7 8 9

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)

G C

hron

o

G C

lass

G-F

ram

e

G T

imel

ess

i-guc

ci

Pan

theo

n

Torn

abuo

ni

Twirl

G Chrono($4,095)

G-Frame($695)

Gucci Watches Stands Somewhere in the Middle — No Longer Licensed But Geared to the Accessible Segment


Exhibit 94 Watches at the Gucci Brand (Particularly Those Sold via the Wholesale Channel) Were a Drag on Top-Line Performance Throughout 2008 and 2009 — Initial Signs in 2010 Seemed to Point to a Recovery

Source: Corporate transcripts and Bernstein estimates and analysis.

Gucci Watches - Commentary from Transcripts

2010

1Q ▲ 'Timepieces boasted very s trong growth, and our recent launches were very well received at the Basel sale las t month'▲ 'Timepieces only account for 3% of Gucci sales as a whole'▲ Strong growth in 1Q10: 'working very hard on adjus ting product assortment and fine tuning price pos itioning… We have also introduced new models las t year. We have also revamped a few models that sold very well. And so, both sales and the gross profit margin have improved this quarter.'

2009

4Q ■ —

3Q ▼ Gucci sales in 3Q down -7% organic and down -6% organic when excluding timepieces

2Q ▼ The revenues of watches and jewelry were down -20% (1H09, F&LG bus iness in luxury)

1Q ▼ Gucci brand sales up 1% organic and up 2% organic when excluding timepieces (2% of total Gucci sales)▼ Timepieces performance of -30% in 1Q09 broadly confirmed in Q&A (includes Bucheron)■ 'Watches in our retail s tores for the Gucci brand are far better than in our wholesale channel'

2008

4Q ▼ 'Apart from timepieces , revenue of Gucci increased by more than 6% in '08'▼ Deterioration in watches & jewelry market in Q4▼ Lower performance in 2nd half from timepieces at Gucci. Excluding timepieces and FX, the margin at Gucci held up very well in '08.

3Q ■ —

2Q ▲ Gucci brand watches posted high s ingle digit growth in retail channel▲ Gucci watches in pure wholesale posted s trong s ingle digit growth in 2Q vs . high double digit decline in 1Q.■ Girard-Perregaux already supplier of movements for Boucheron and gives PPR more expertise in watches .■ GP manufacturing capacity could potentially be used to extend the Gucci watch range (confirmed in Q&A) - 'This new relation will help both companies (GP & Gucci) to grow and to be very successful in this promising market'

1Q ▼ Gucci brand pos ted +2% organic growth in 1Q and c.+4% growth organic excluding Gucci Timepiece s (3% of total brand sales)

▲ = Positive development for Gucci brand watches■ = Neutral▼ = Negative development fo r Gucci brand watches


In contrast, new entrants with high technical expertise have chosen the path of extreme engineering innovation, to leap forward in technical credibility and achieve collectors' appeal with limited editions in the high end.

These players have been unabashed about asking customers for high-end prices as a reward for generating new ideas and bringing novel trends to the industry. Urwerk, for example, has introduced the UR-202, a turbine regulated watch that communicates time through three rotating hands (see Exhibit 95). MB&F's latest creation, the HM4 Thunderbolt, features a three-dimensional horological engine and separate crowns for time setting and winding (see Exhibit 96). Cabestan manufactures the Winch Tourbillon Vertical, made of 1,352 separate components (see Exhibit 97). Lionel Ladoire sells limited-series pieces such as the RGT White Gold (88 pieces), which is set on micro ball bearings and features three revolving discs indicating hours, minutes and seconds (see Exhibit 99). Devon Works's Tread 1, to be priced at more than $15,000, is among the "cheapest" pieces in this category (see Exhibit 98).

Exhibit 95 Urwerk: UR-202 Turbine Regulated Watch

($129,000) Exhibit 96 MB&F: HM4 Thunderbolt (More Than

$150,000)

Source: Wristwatch Annual 2010, corporate website and Bernstein analysis.

Source: endgadget.com, corporate website and Bernstein analysis.

New Entrants With High Technical Expertise Have Chosen the Path of Extreme Engineering Innovation


Exhibit 97 Cabestan: Winch Tourbillon Vertical, Made of 1,352 Separate Components ($275,000-$400,000)

Exhibit 98 Devon Works: Tread 1, to Be Priced More Than $15,000 Is the "Cheapest" of the "Technical Outsiders"

Source: Corporate website, Slashgear.com and Bernstein analysis. Source: Corporate website and Bernstein analysis. Exhibit 99 Lionel Ladoire: RGT White Gold (Limited Series, 88 Piece)

Source: Corporate website and Bernstein analysis.


Watches Distribution

Watches are still largely dependent on wholesale distribution, with independent multi-brand retailers dominating the market (see Exhibit 100 to Exhibit 101). This is due to historical reasons, in keeping with other luxury goods categories.

However, unlike other luxury categories, consumer behavior and purchase criteria play a key role in watches. In fact, consumers tend to value range more than with other product categories — and seem to be intent on shopping the watches category, rather than a specific watch brand — at least in the entry and mid-price points. In this light, watches seem closer to fragrances and eyewear than to leather goods — with a significant portion of consumers deciding what brand to buy at the point of sale.

Exhibit 100 Luxury Goods Distribution Largely Depends on the Product Category, With Hard

Luxury Mostly Dependent on Third-Party Retail and Multi-Brand Retail Largely Absent in Leather Goods...

Source: Factiva, corporate reports and Bernstein estimates and analysis. Exhibit 101 …Not Surprisingly, the Channel Mix Among the Major Luxury Watch Players in Our

Coverage Looks Similar to the Channel Distribution Dynamics of Their Main Product Offerings (Company and Group Level)


95%75%

60%

15%

5%25%

40%

85%

0%10%20%30%40%50%60%70%80%90%

100%

Watches Apparel Shoes Leather Goods

Cha

nnel

Mix

Wholesale Retail

Swatch Watches

15%10%0%

25%

50%

75%

100%

Current 5+ Years

Cha

nnel

- %

of S

ales

Retail Wholesale

Richemont

90%

42%

5%0%

25%

50%

75%

100%

Watches Jewelry Group

Cha

nnel

- %

of S

ales

Retail Wholesale

Specialist Watchmakers: 26% of Sales

Jewellery Maisons: 50% of Sales

Watches Are Still Largely Dependent on Wholesale Distribution


Heavy dependence on the wholesale channel has clear disadvantages for watches brands. We cite two key reasons why.

It magnifies consumer demand changes and creates EBIT% volatility as wholesale customers de-stock and re-stock, as we have seen in the recent slowdown and rebound (see Exhibit 102 and Exhibit 103). This strains watches manufacturers' operations — as they experience violent swings in demand, challenging their ability to maintain capacity utilization steady. This, in turn, translates into high GM% and EBIT% swings — as watches manufacturing is fixed costs heavy: depreciation and workforce being the two most important cost items (see Exhibit 104 to Exhibit 107).

Exhibit 102 Dependence on Wholesale Magnifies Consumer Demand Changes, as Wholesale

Customers De-Stock and Re-Stock, as We Have Seen in the Recent Slowdown and Rebound — Volume of Swiss Mechanical Wrist Watch Exports (000 Units)

Source: FHS and Bernstein analysis. Exhibit 103 Dependence on Wholesale Magnifies Consumer Demand Changes, as Wholesale

Customers De-Stock and Re-Stock as We Have Seen in the Recent Slowdown and Rebound — Value of Swiss Mechanical Wrist Watch Exports (CHF million)


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Heavy Dependence on the Wholesale Channel Has Clear Disadvantages for Brands


Exhibit 104 This, in Turn, Translates Into High GM% Swings for Swatch…

Exhibit 105 …And Richemont

Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis. Exhibit 106 It Also Translates Into High EBIT% Swings

for Swatch… Exhibit 107 …And Richemont

Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

A dependence on wholesale damages brand equity — which becomes particularly apparent during a slowdown, as wholesale customers discount their inventory while they are trying to de-stock. But this materializes more subtly, in terms of brand marketers having a looser grip on where their products are actually sold. Selling into wholesale customers opens the risk of a "grey market" — where non-desirable retailers end up having stock bought from approved wholesale customers.

Online distribution by unauthorized discounters is a case in point. In order to draw a comparison between watches and leather goods, we examined the online availability and prices of key models offered by leading brands in both product categories (see Exhibit 108 and Exhibit 109).

For our analysis of watch brands, we selected three models per brand and sampled brands from across the price-point spectrum (i.e., from Swatch to Breguet) and across brand owners (Swatch, Richemont, LVMH and other independents). For leather goods brands, we selected three models for both Gucci and LV, including the two models recently used in our latest Luxury Price "Pulse Check" (please refer to Luxury Price "Pulse Check" Points to the Positive, published on 05-Oct-10).

50.0%

52.5%

55.0%

57.5%

60.0%

62.5%

65.0%

2004 2005 2006 2007 2008 2009

UHR ‐ GM%

50.0%

52.5%

55.0%

57.5%

60.0%

62.5%

65.0%

2004 2005 2006 2007 2008 2009

CFR ‐ GM%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

2004 2005 2006 2007 2008 2009

UHR ‐ EBIT%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

2004 2005 2006 2007 2008 2009

CFR ‐ EBIT%


Our analysis suggests that online distribution by unauthorized discounter websites is widespread for watches. However, this would seem not to be occurring for the sampled handbag brands.

Exhibit 108 Watches Are Widely Available Online Through Third-Party Retailers at Substantial

Discounts…

Note: All watch models checked were classified as "available in brand new condition and in their original box," although their provenance was not always made clear.

Source: Corporate websites and Bernstein analysis. Exhibit 109 …Whereas Handbags Are Only Available Through Official e-Commerce Channels

Source: Corporate websites and Bernstein analysis.

Brand Group Model

Official e-commerce

channel

Authorized online

distributors (AOD)

RRP (per AOD) Non-AOD

Online price

Saving on RRP

(%) Non-AOD site

Breguet Swatch Tradition No Yes £12,265 25% www.luxurybazaar.comBreguet Swatch Classique Complication No Yes £81,807 20% www.prestigetime.comBreguet Swatch Heritage No Yes £11,995 20% www.iconicwatches.co.uk

Blancpain Swatch Villeret No Yes £4,078 28% www.prestigetime.comBlancpain Swatch Leman No Yes £9,529 30% www.authenticwatches.comBlancpain Swatch Le Brassus No Yes £587,910 10% www.thefinestwatches.com

Rolex n.a. The Explorer No Yes £2,900 12% www.dialawatch.co.uk Rolex n.a. Oyster Perpetual No Yes £2,395 18% www.watches.co.ukRolex n.a. The Submariner No Yes £5,850 n.a. www.finetimepieces.com

Zenith LVMH Captain Central Second No Yes £2,800 Yes £1,960 30% www.prestigetime.comZenith LVMH El Primero Rattrapante No Yes £8,900 Yes £5,709 32% www.steindiamonds.comZenith LVMH Tourbillon Quantieme No Yes £153,000 Yes £97,996 30% www.luxurybazaar.com

Jaeger LeCoultre Richemont Reverso Duo No Yes £8,320 20% www.thewatchsource.co.ukJaeger LeCoultre Richemont Duometre No Yes £17,945 25% www.certifiedwatchstore.comJaeger LeCoultre Richemont Master Grande Tradition No Yes £67,510 34% www.luxurywatch.ch

Omega Swatch Seamaster Planet Ocean No Yes £2,380 Yes £2,020 15% www.swisswatchesdirect.co.ukOmega Swatch Speedmaster Professional No Yes £2,310 Yes £2,079 10% www.precisiontime.co.ukOmega Swatch Constellation Chronometer No Yes £21,600 25% www.prestigetime.com

Tag Heuer LVMH Carrera Chronograph No Yes £2,150 Yes £1,670 22% www.watch33.comTag Heuer LVMH F1 Chronograph No Yes £995 Yes £633 26% www.watchesonnet.comTag Heuer LVMH Link Calibre No Yes £2,650 Yes £2,095 21% www.swisswatchesdirect.co.uk

Longines Swatch La Grande Classique Yes (US only) Yes £570 Yes £485 15% www.thewatchsource.co.ukLongines Swatch DolceVita Yes (US only) Yes £690 Yes £607 12% www.precisiontime.co.ukLongines Swatch Master Collection Yes (US only) Yes £3,820 Yes £2,990 22% www.deliciousgiftware.co.uk

Baume & Mercier Richemont Hampton Classic No Yes £1,475 Yes £1,239 16% www.thewatchsource.co.ukBaume & Mercier Richemont Riviera No Yes £1,550 Yes £1,240 20% www.dialawatch.co.uk Baume & Mercier Richemont William Baume No Yes £7,895 Yes £4,769 44% www.authenticwatches.com

Tissot Swatch T-Classic Yes (US only) Yes £295 Yes £242 18%Tissot Swatch T-Trend Yes (US only) Yes £195 Yes £172 12% www.bablas.co.ukTissot Swatch T-Sport Chronograph Yes (US only) Yes £895 Yes £850 5%

Swatch / Flik Flak Swatch Irony Chronograph Yes Yes £135 Yes £129 5% www.b2bwatches.co.ukSwatch / Flik Flak Swatch Skin Classic Yes Yes £71 Yes £58 18% www.watchesshop.comSwatch / Flik Flak Swatch Once Again Yes Yes £30 Yes £27 8% www.watchshop.com

Brand Group Model

Official e-commerce

channel SiteOnline

price (£)Authorized online distributors (AOD)

Non-authorized dealers online

Louis Vuitton LVMH Speedy 30 Yes www.louisvuitton.com £430 No NoLouis Vuitton LVMH Tivoli GM Yes www.louisvuitton.com £855 No NoLouis Vuitton LVMH Alma Yes www.louisvuitton.com £655 No No

Gucci PPR Joy Medium Boston Yes www.gucci.com £385 No NoGucci PPR Interlocking medium hobo Yes www.gucci.com £645 No NoGucci PPR G night' evening bag Yes www.gucci.com £875 No No


Leading watches brands are investing to improve the quality of their distribution. This is proceeding along a number of directions, depending on current business context, market constraints, and risk of channel conflict.

Fewer and deeper partnerships with wholesale customers. There seems to be a concerted effort to select higher-quality wholesale "partners," that can guarantee a combination of material business volumes, quality of brand execution, channel discipline and reliability. Richemont, for example, has recently stated its intention to rationalize the number of wholesale accounts and to exercise greater control over them (see Exhibit 110).

Exhibit 110 Richemont Outlook Commentary on Wholesale Network

Source: Thomson, corporate transcripts and Bernstein analysis.

Tighter wholesale partnerships can involve a smooth (partial) transition to mono-brand distribution. As brands concentrate a larger business on fewer wholesale partners, they often demand a commitment from them to establish mono-brand stores for the brand. This has the advantage of avoiding channel conflict, but is a far cry from downstream retail integration.

For example, Patek Philippe's Asian distribution strategy seems a precursor to this trend (see Exhibit 111). It has maintained an import relationship (across several Asian markets) with Melchers for c.20 years, and recently the partner has helped Patek Philippe set up and manage two mono-brand boutiques in Mainland China. As Patek Philippe continues to consolidate its worldwide POS (point of sale) — from a total of c.600 POS in 2007 to 550 in 2008, and heading towards its target of c.500 (according to Asiaone.com's Philippe Stern interview, Sept-08) — the brand seems set to employ a similar approach alongside wholesale partners elsewhere (e.g., its upcoming Zurich opening).

Richemont Interim Results Conference, 12-Nov-10

"Despite closing the wholesale doors last year, the wholesalebusiness grew, and grew strongly. We will exercise greatercontrol over the wholesale network. We will have lesspartners, but we want more successful partners because therewill be more partnership and greater business for them."

"...It is not our goal to be 100% vertically integrated at theretail level. But we need to exert control over our wholesalepartners a little more."

Gary Saage, Richemont CFO

Watches Brands Are Investing to Improve Distribution Quality


Exhibit 111 Patek Philippe's Asian Distribution Strategy Seems a Precursor of a Trend — Tighter Wholesale (or Indeed Import) Partnerships Involving a Smooth (Partial) Transition to Mono-Brand Distribution

Source: FHS, Asiaone.com (Plush), corporate website and Bernstein analysis.

In some cases, brands opt for a "big bang" transition to direct mono-brand distribution. We understand that this is typically the case when brands are set to invest heavily in a specific market, while starting from a modest wholesale business platform. This seems to fit the example of Omega in the United States, where the brand recently announced plans to open more than 20 additional directly owned mono-brand boutiques by the end of 2011 (see Exhibit 112 and Exhibit 113).

Exhibit 112 Omega Plans Rapid U.S. DOS Expansion in

the Next Year Exhibit 113 Omega Rationale for U.S. DOS Expansion

Source: Corporate press release and Bernstein estimates and analysis. Source: Corporate press release and Bernstein analysis.

Same-group multi-brand store concepts are another interesting development for brands to transition to greater retail exposure. Tourbillon is a case in point: Since 2001, Swatch has pioneered the multi-brand boutique concept via Tourbillon, which brings together some of its key portfolio brands under one roof (see Exhibit 114 to Exhibit 116). To date, neither Richemont nor LVMH have adopted similar retail formats, and multi-brand mostly remains the preserve of wholesalers.

Patek Philippe ‐ Asian Distributors (Melchers, Libertas) as DOS JV Partners

□ Patek Phillipe acts as a direct agent in several markets ‐ e.g. Italy, Scandinavia, LatAm□ In Asia, the brandʹs timepieces are instead often imported by third‐party distributors― Key relationships: Melchers Group (several countries); Libertas (HK/Macau)

□ Increasingly, these partners are also aiding Patek Philippe in opening mono‐brand boutiques― The partner first helps secure prime locations and then takes charge of managing the stores― This ʹmodelʹ has been used in Singapore and, more recently, for high‐profile openings in China

Melchers Group

□ Melchers Group handles distribution of Patek Philippe timepieces in a number of Asian countries□ Distribution occurs via Geneva Master Time, a Sing.‐based subsidiary set up in 1987― Covers: Singapore, Malaysia, Thailand, Indonesia, and the Philippines― Melchers has also maintained commercial activities in China for c.140 years

□ Melchers has helped Patek Philippe open 2 boutiques in Mainland China over the last 5 yrs― In 2005, it secured a prime location on Shanghaiʹs Bund (at no.18, a historic building)― In 2008, it procured two‐floor retail premises in a private square in Beijingʹs center― Management of these boutiques is under the direct control of the Melchers Group

1

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101520253035

Jun-10 Dec-10 Jun-11 Dec-11

Omega: US Directly Operated Stores Omega Press Conference, 19-Nov-10

"This is a big, big move in terms of investment….We realizedthe only way to get a foothold [in the US] was to do itourselves. A third party won't commit financially oremotionally."

Stephen Urquart, President, Omega


Exhibit 114 Tourbillon Boutiques: Profile Exhibit 115 Swatch Brands Available at Tourbillon Boutiques


Note: Leon Hatot exclusively available at Tourbillon.

Source: Corporate website and Bernstein analysis. Exhibit 116 Tourbillon Boutique Store-Front (e.g., Shanghai)

Source: Corporate website.

EMs in most cases offer watch brands a "clean sheet of paper" context, where channel conflict is less of an issue — and where direct distribution investments meet with strong consumer demand and the opportunity to build brand equity for the long term. Unsurprisingly, we are seeing important DOS (directly operated store) forays. For Richemont, EMs account for c.70% of the group's watch-brand boutique openings that occurred in about the last five years (including renovations and relocations) — about one-quarter of total openings have taken place in Mainland China and c.40% in Greater China (see Exhibit 117). Similarly, Swatch's Omega and higher-end brands (Blancpain, Breguet and Glashutte) focused on Asia ex-Japan, Russia, and the Middle East for the bulk of their 2009 direct store openings (see Exhibit 118).

Owner Swatch Group

Founded 2001

Description

Locations Switzerland 6 storesEurope (excl CH) 7 storesUSA 4 storesChina 3 stores

Stores are directly-operated by Swatch andbring together the most prestigious brands ofthe Group under one roof in twentylocations worldwide.

EMs Offer Watches Brands a "Clean Slate" Context


Exhibit 117 Richemont — EMs Account for Circa 70% of the Group's Watch-Brand Boutique Openings in Roughly the Last Five Years (Including Renovations and Relocations) — About One-Quarter of Total Openings Has Taken Place in Mainland China and Circa 40% in Greater China

Note: Includes openings, renovations and relocations; last 4.5 fiscal years (FY06-09 + 1H:10).

Source: Corporate reports and presentations and Bernstein estimates and analysis. Exhibit 118 Swatch — Omega and Other Higher-End Portfolio Brands (Blancpain, Breguet and

Glashutte) Focused on Asia Ex-Japan, Russia, and the Middle East for the Bulk of Their 2009 Direct Store Openings

Source: Corporate reports and Bernstein analysis.

We carried out an analysis of watch distribution in Mainland China across a wide sample of Swatch and Richemont portfolio watch brands. This seems particularly relevant due to the country's prominence among EMs in terms of store openings by key brands in the last few years. We used brand websites' store locator tools and recorded all available locations — distinguishing between boutiques (i.e., retail) and authorized third-party (i.e., wholesale) points of sale. Finally, we laid out the results of our POS count along a watch pricing pyramid to detect significant differences among brands' distributive strategies.

Richemont ‐ DOS Openings, Renovations and RelocationsEmerging (EM) Developed

Since 2006 Gr. China Other Asia ME Russia/EE LatAm Africa US Japan W. Europe EMs Developed Total

Baume&M 1 0 2 0 0 0 1 0 1 3 2 5Panerai 6 0 2 0 0 0 2 1 3 8 6 14

Montblanc 15 4 3 4 1 0 6 3 10 27 19 46IWC 11 5 4 2 0 0 2 0 2 22 4 26

Jaeger LC 8 5 6 3 1 0 1 0 1 23 2 25Cartier 17 7 7 2 0 1 4 4 13 34 21 55

Van Cleef 8 5 5 2 0 0 4 4 8 20 16 36Vacheron C 19 1 2 0 0 0 0 0 1 22 1 23

Piaget 15 6 7 1 0 0 4 1 0 29 5 34A.Lange&S 4 0 0 1 0 0 0 1 3 5 4 9R. Dubuis 0 1 0 1 0 0 0 0 0 2 0 2

Watchesʹ Tot. 104 34 38 16 2 1 24 14 42 195 80 275% Total 38% 12% 14% 6% 1% 0% 9% 5% 15% 71% 29% 100%

Penetrating a "Clean Sheet" Market: The Case of Mainland China


Our city-level analysis suggests that in China: (1) the total absolute number of POS decreases as we move up the pricing ladder, and (2) directly operated stores are used most heavily by "middle-ground" players (i.e., high-priced premium, such as Omega, and luxury names priced at c.€5,000, such as Cartier), with the important exception of Swatch in the accessible range (at less than €1,000). See Exhibit 119.

We note that Richemont's Roger Dubuis and A.Lange&Sonhe elite brands are only available at seven and three total Chinese POS, respectively. Similarly, independent Patek Philippe is only available via two POS (both retail boutiques managed by a partner). At the opposite end of the spectrum, Swatch's Rado and Longines brands are distributed via 285 and 347 total POS in the country, respectively. Interestingly, both extremes of the pricing pyramid do not display a high absolute number of directly operated stores — Roger Dubuis and A.Lange&Sonhe each operate one flagship boutique in Shanghai; Longines operates five DOS, only across the three major cities of Beijing, Shanghai, and Shenyang (all with more than 4 million inhabitants and greater than $10,000 p.c. income).

Conversely, the absolute number of directly operated doors for "middle-ground" players — such as Swatch's Omega and Richemont's Cartier — seems much higher, despite a lower total POS count than less expensive brands. Omega operates 77 DOS in China, while Cartier has 34 — this represents c.40% of total POS for both. These players' mega-brand nature and, indeed, the extent of their retail footprint make their approach to the Chinese market most similar to that of leading leather goods names, such as LV (34 DOS as of Dec-10) and Gucci (30).

A notable exception to this continuum would seem to be the Swatch brand, which operates a total of 64 boutiques in China despite residing at the lower extreme of the luxury watch spectrum.

As mentioned, the retail presence of "middle-ground" watch names, such as Omega and Cartier, can be compared with that of leather goods mega-brands LV and Gucci. Omega has a higher absolute number of retail doors than Cartier, LV and Gucci, but our analysis shows that the number (and the names) of cities covered by its network are relatively similar. Omega's network only captures six more cities than LV's, despite comprising about 2x doors. Therefore, the difference in the absolute number of doors would seem more related to average store size deltas and deeper penetration in major cities (e.g., greater than three times LV's number of doors in both Beijing and Shanghai) than to a radically different level of retail reach on the national territory (see Exhibit 120 and Exhibit 121).

However, Omega manages to achieve much more capillary distribution (versus LV and versus Cartier) when authorized third-party retailers are taken into account. The brand is present in 73 Chinese cities versus 40 for Cartier and versus 27 for LV (which only distributes via own retail) — see Exhibit 122.

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Exhibit 119 Watches Distribution in Mainland China: Our City-Level Analysis Suggests That (1) the Total Absolute Number of POS Decreases as We Move Up the Pricing Ladder and (2) Directly Operated Stores Are Used Most Heavily by "Middle-Ground" Players (That Is, High-Priced Premium [For Example, Omega] and Luxury Names Priced at Circa €5,000 [For Example, Cartier), With the Important Exception of Swatch in the Accessible Range (at Less Than €1,000)

Note: (1) Richemont: Excludes non-specialist watch brands (Dunhill, Van Cleef and Montblanc) and Baume & Mercier; (2) Swatch: Excludes Flik Flak, Tissot, Hamilton, Mido, Certina and Pierre Balmain; (3) Tourbillon boutiques (three in total) treated as wholesale POS for both Swatch and Richemont for comparability (technically, this is retail for Swatch; i.e., Leon Hatot could be 100% multi-brand retail).

Source: Corporate websites and Bernstein estimates and analysis.

<€1k €1k‐€2k €2k‐€4k €4k‐€6k €6k‐€10k >€10kLow‐Prcd Mid‐Priced High‐Prcd Luxury Exclusive Luxury Elite Luxury

Panerai IWC Cartier Jaeger LC Vacheron C Piaget A.Lange&S R.DubuisBoutique (Retail) 3 5 34 4 14 12 1 1Third‐party (WS) 17 41 48 51 12 35 6 2Total POS 20 46 82 55 26 47 7 3

Boutique (Retail) 15% 11% 41% 7% 54% 26% 14% 33%Third‐party (WS) 85% 89% 59% 93% 46% 74% 86% 67%Total POS 100% 100% 100% 100% 100% 100% 100% 100%

Swatch Rado Longines Omega Glashutte Blancpain Leon Hatot Jaquet Droz BreguetBoutique (Retail) 64 11 5 77 12 1 0 0 1Third‐party (WS) 0 274 342 126 15 35 2 10 26Total POS 64 285 347 203 27 36 2 10 27

Boutique (Retail) 100% 4% 1% 38% 44% 3% 0% 0% 4%Third‐party (WS) 0% 96% 99% 62% 56% 97% 100% 100% 96%Total POS 100% 100% 100% 100% 100% 100% 100% 100% 100%

Richemont

Swatch


Exhibit 120 Omega Has a Higher Absolute Number of Retail Doors Than Cartier, LV and Gucci, But Our Analysis Shows That the Number (and the Names) of Cities Covered by Its Network Are Relatively Similar

Note: (1) LV and Gucci retail POS footprints updated as at Dec-10; (2) shaded numbers in the Omega column indicate cities where only it

(among these four brands) currently has a retail POS.


Leather Goods WatchesRegion City Province LV Gucci Cartier Omega

North East 5 3 5 10Harbin Heilongjiang 1 1 1 2Daqing Heilongjiang 1

Changchun Jilin 1 1 1Anshan Liaoning 1Dalian Liaoning 1 1 1 2

Shenyang Liaoning 2 1 2 3North 6 6 9 13

Hohhot Inner Mongolia 1 Beijing Beijing 3 4 7 10Tianjin Tianjin 1 1 1 2

Shijiazhuang Hebei 1 Taiyuan Shanxi 1 1 1

East 13 13 11 29Jinan Shandong 1 1

Qingdao Shandong 1 1 2 1Changzhou Jiangsu 1 Nanjing Jiangsu 1 1 1Suzhou Jiangsu 1 1 1 3Wuxi Jiangsu 1 1 1 1

Shanghai Shanghai 3 4 4 10Hefei Anhui 1

Hangzhou Zhejiang 2 1 1 4Ningbo Zhejiang 1 1 2Wenzhou Zhejiang 1 1 2Fuzhou Fujian 1 1 1Xiamen Fujian 1 1 2

South 6 4 5 12Zhengzhou Henan 1 Wuhan Hubei 1 1 1 2

Changsha Hunan 1 1 1 2Nanning Guangxi 2

Guangzhou Guangdong 1 1 2Shenzhen Guangdong 2 1 2 4Sanya Hainan 1

South West 2 3 3 10Chongqing Chongqing 1 2Guiyang Guizhou 1 Chengdu Sichuan 1 1 1 4Kunming Yunnan 1 1 1 4

North West 2 1 1 3Xian Shaanxi 1 1 2

Urumqi Xinjiang 1 1 1

Total Retail POS 34 30 34 77Total Retail Cities 27 24 22 33


Exhibit 121 China's Macro-Regions Account for a Similar Percentage of DOS for LV/Gucci (Leather) and Omega/Cartier (Watches) — East Plus South Account for Circa 50-55% Across Brands

Exhibit 122 However, Much More Capillary Presence Is Achieved by Omega When Authorized Third-Party Retailers Are Taken Into Account, Both vs. LV and vs. Cartier

Source: Corporate websites and Bernstein estimates and analysis. Source: Corporate websites and Bernstein estimates and analysis.

Swatch and Richemont are at the forefront of a transition to higher quality watch distribution.

Richemont (similarly to independent high-end peer Patek Philippe) has formally started taking steps towards rationalizing the total number of its global wholesale accounts, aiming at improved brand execution and channel discipline. The group has stepped up investment in directly operated retail doors for its watches brands, mostly focusing on high-growth EMs.

Swatch has been the only major player to successfully launch a multi-brand retail concept (Tourbillon, in 2001). It has also been heavily involved in DOS development — both in EMs, notably in China through its 50/50 retail development JV with leading retailer Xinyu Hengdeli (in which it also maintains a minority equity stake), and in developed markets, notably with Omega's planned "big-bang" of U.S. boutique openings for 2011.

Leather Goods WatchesLV Gucci Cartier Omega

North East 15% 10% 15% 13%North 18% 20% 26% 17%East 38% 43% 32% 38%South 18% 13% 15% 16%

South West 6% 10% 9% 13%North West 6% 3% 3% 4%

56% 57% 47% 53%

73

40

68

3233

22

0

10

20

30

40

50

60

70

80

Omega (UHR) Cartier (CFR)

Mainland Ch

ina Re

tail / WS

Presen

ce ‐Cities, #

Presence ‐ Retail or WSPresence ‐WSPresence ‐ Retail

Swatch and Richemont Are at the Forefront of the Transition Toward Higher-Quality Distribution


Watches Manufacturing

After a near-death experience during the "quartz revolution" of the mid-1970s and early 1980s, the Swiss (CH) watch industry has experienced solid growth for 25 years (see Exhibit 123 to Exhibit 125). EM-driven demand is pushing it to new highs, as growth prospects for the next five to 10 years look bright, in our view.

The quartz revolution brought a collapse in the Swiss watch manufacturing industry, as FTEs (full-time employees equivalent) declined by two-thirds (from 90,000 in 1970 to 30,000 in 1984), as shown in Exhibit 128 and Exhibit 129. The revival of mechanical watches and premiumization has brought c.5% CAGR in CH watches exports by value in the past 25 years (see Exhibit 126 and Exhibit 127).

Productivity in the meantime has experienced a c.3x increase from 1985 (see Exhibit 130), as FTEs and the number of companies have leveled off at c.40,000 and c.600, respectively, in the past 10 years. Going forward, we expect CH watches growth to stay above historical average levels, and proceed at 10-16% in the next five to 10 years — driven by expanding EM markets demand (see Exhibit 131).

Exhibit 123 Following a Tenuous Period in the 1970s Amid the "Quartz Revolution," the Swiss

Watch Industry Has Rebounded; Total CH Watch Exports — Including Mechanical (About Two-Thirds) and Electronic (Less Than One-Third) Wristwatches and Movements Have Grown at CAGRs of +5% in the Last 25 Years and +3% Over the Last 15 Years


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1960

1965

1970

1975

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

CH W

atch Exports (V

alue

, CHFm

)

CH Watch Exports ‐ Value

'70‐'85 volumes declined by ‐52% in total

'70‐'85 volumes declined by ‐52% in total

0

10

20

30

40

50

60

1960

1965

1970

1975

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009CH

Watch Exports (V

olum

e, units m

il.)

CH Watch Exports ‐ Volume

CH Watch Manufacturing Collapsed in the Early 1980s But Has Seen Solid Growth in the Last 25 Years


Exhibit 124 CH Watch Exports — Mechanical Watches Experienced a Material Decline (Value) Amid the "Quartz Revolution"

Exhibit 125 CH Watch Exports — Electronic Watch Exports (Value) Rapidly Expanded as the Category Developed

Source: FHS, www.hec.unil.ch and Bernstein estimates and analysis. Source: FHS, www.hec.unil.ch and Bernstein estimates and analysis. Exhibit 126 Wristwatches Priced at More Than

CHF3,000 Have Seen Their Share of Total Export Value Increase by More Than 25 Percentage Points in 2000-09 (From 32% to 58%)

Exhibit 127 The Volume Share of Watches Priced at More Than CHF3,000 Has Doubled from 2% to 4% During the Same Period




‐6%

8%

(8)%

(4)%

0%

4%

8%

12%

16%

20%

24%

28%

'75‐'85 '85‐'95

Mechanical Watches &

Movem

ents,

(Value

, CAGR %)

Total decline of c.‐45%

26%

6%

(8)%

(4)%

0%

4%

8%

12%

16%

20%

24%

28%

'75‐'85 '85‐'95

Electron

ic W

atches &

Movem

ents,

(Value

, CAGR %)

32%

58%

43%

28%11%

6%13% 8%

0%

20%

40%

60%

80%

100%

2000 2009

CH W

ristwatch Exports,

% Value

, by Price Po

int

3,000 et + 500‐3,000200‐500 0‐200

2% 4%11% 12%11%

12%

77% 72%

0%

20%

40%

60%

80%

100%

2000 2009

CH W

ristwatch Exports,

% Volum

e, by Price Po

int

3,000 et + 500‐3,000200‐500 0‐200


Exhibit 128 Since the Mid-1980s, the CH Watch Industry's Employment Figures Have Been Relatively Stable

Exhibit 129 Similarly, Following the Dramatic Decline in the 1970s, the Number of Watchmaking Companies Has Leveled

Note: Employees include suppliers and craftsmen across all aspects of the CH watch value chain.


Source: FHS and Bernstein estimates and analysis. Exhibit 130 Though FTE Growth Has Been Moderate, Productivity as Measured by

Export Value/FTE Has Experienced a Massive Increase

Source: FHS, www.hec.unil.ch and Bernstein estimates and analysis.

90,000

40,538 42,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1970 2003 2010

CH W

atch Ind

ustry Em

ployee

s

1,600

587 600

50

55

60

65

70

75

80

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1970 2003 2010

Avg. Size

No. of C

ompanies

No. of Companies Avg. Size

31

132

251

361

0

50

100

150

200

250

300

350

400

1970 1984 2003 2010

Prod

uctivity (C

HF 00

0s / FTE)


Exhibit 131 We Would Anticipate the Global Watches Market to Accelerate Its Growth Over the Next Five Years Driven by Expanding EM Markets Demand



Swiss watch manufacturing has materially consolidated. The chokepoint seems to be the manufacturing of basic mechanical movements (or "tractors") — where Swatch maintains a dominant market position through ETA. Swatch produces c.70% of CH mechanical movements — and c.80% of CH quartz movements (see Exhibit 132 to Exhibit 134).

The Valjoux 7750 — manufactured by ETA — was introduced in 1974 and has become commonplace in "modestly priced" chronographs for Swatch in-house and third-party brands (see Exhibit 135). Exhibit 136 to Exhibit 141 provide a brief overview of the degree of consolidation on the supply side. In fact, the vast majority of employees are located in a small region in CH (Jura Mountains), while a large portion work for ETA and a handful of other large players.

Exhibit 132 Swatch Is the Dominant Producer of CH

Mechanical Movements (For Example, Those Incorporated Into Luxury Watches)

Exhibit 133 Including Both In-House and Third-Party Sales, Swatch Constitutes About 70% of CH Mechanical Movements (Volume)

Note: The total movement pool includes both movements integrated into watches as well as finished movements that are exported.

Source: Europa Star and Bernstein estimates and analysis.

Note: The total movement pool includes both movements integrated into watches as well as finished movements that are exported.


5%3%

10%8%

7%

14%

2%

0%

4%

‐2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

'85‐'09 '94‐'09 '10‐'15E

Swiss W

atch Exports ‐

Last 24‐yr &

15‐yr CAGRs, N

4Yr C

AGR


3.5

1

0.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Swatch Group Other Rolex

Mechanical Movem

ents Produ

ced p.a.

(units, m

illion)

69%

12%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CH Movement Market ('09)

% of C

H M

echanical

Movem

ent M

arket ('0

9, Volum

e)

Swatch Group Rolex Other

CH Watch Manufacturing Has Materially Consolidated, With Swatch Maintaining a Dominant Position in Basic Movements


Exhibit 134 Swatch Controls an Even Greater Portion (Circa 80%) of the Quartz Movement Market (In-House Plus Third-Party Using Swatch Movements)

Exhibit 135 The Valjoux 7750 (ETA) Was Introduced in 1974 and Has Become Commonplace in "Modestly Priced" Chronographs for Swatch In-House and Third-Party Brands

Note: Movement pool includes estimated values for complete electronic watches plus separate movements; assumes Swatch Brand watches account for c.33% of total CH quartz/electronic market (including finished watches and electronic movements); also assumes that about two-thirds of the non-Swatch brand market uses Swatch Group Movements.

Source: Dow Jones Newswires, Factiva, FHS and Bernstein estimates and analysis.

Source: breitlingsource.com, timezone.com.

Exhibit 136 The Swiss Watch Industry Is Primarily Located in the Western Cantons

Source: Federal Statistical Office of Switzerland and Bernstein analysis.

80%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CH Electronic Watch Market% of C

H Electronic Watch M

arket (vol.)

Swatch Brand + 3rd Party (Swatch Movement) Other

The "W atch Valley" - W atchmaking Cantons

Other Cantons w atch industry has presence


Exhibit 137 Swiss Watchmaking Is Geographically Concentrated…

Exhibit 138 …With Circa 95% of All Employees Located in the Jura Mountains ("Watch Valley")

Source: FHS, Convention Patronale Census 2007 and Bernstein analysis.


Exhibit 139 Since 1999 the Concentration of Employees

in the Jura Mountain Region Has Increased by Circa 400bps

Exhibit 140 We Estimate That About One-Third of Total Swiss Watchmaking Employees Either Work for the Swatch Group or for the Roughly 10 of the Other Largest Manufactures in CH


Note: CP census indicated nine manufactures with more than 500 employees. We assume Swatch Group is the largest (c.9,000, estimated by aggregating all production subsidiaries) and estimate Rolex (1,700), Patek (1,300), Cartier (1,200) and the remaining five (@ 800 employees).


Watchmaking And Micro‐Engineering 2007 Census

Region CantonsNo. of

Employees No. of FirmsEmployees /

FirmJura Mountains Neuchâtel 13,181 199 66Jura Mountains Bern 10,206 155 66Jura Mountains Geneva 8,343 72 116Jura Mountains Solothurn 3,921 31 126Jura Mountains Jura 4,829 95 51Jura Mountains Vaud 4,505 33 137Jura Mountains Bâle‐Campagne 887 6 148South CH Ticino 1,403 0 n.a.South CH Valais 584 0 n.a.Northeast CH Schaffhausen 481 0 n.a.East Cenrtral CH Fribourg 302 0 n.a.

Other 193 0 n.a.Total 48,835 591 83

94% 100%

6%

0%

20%

40%

60%

80%

100%

Employees Firms

% of W

atchmaking Em

ployee

s / Firm

s in CH by Re

gion

Jura Mountains Other

90% 94%

10% 6%

50%

60%

70%

80%

90%

100%

1999 2007

% of C

H W

atchmaking Em

ployee

s by

Region

Jura Mountains Other

c.2,000 FTE

65%

19%

17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%% of Total Swiss Watchmaking

Employee

s

Other Small CH Manuf. Swatch Other Large CH Manuf.


Exhibit 141 Swatch Has the Most Extensive Network of Production Facilities in Switzerland, Across Various Manufacturing Districts

Note: Swatch maintains a smaller number of production facilities outside of Switzerland.


Developing and producing reliable basic movements (or "tractors") is particularly difficult: (1) Reliability depends on decades of cumulated volumes experience; (2) producing basic movements requires very high levels of automation in order to achieve competitive unit costs, which equals very high levels of capital investment, which in turn means that scale is of the essence; (3) Swatch continues to push ahead and invests (hundreds of) millions of CHF in its production facilities every year; and (4) using standard basic movements guarantees that watches can be repaired in the long term, as any watch maker around the world can service a basic ETA movement.

Integrating upstream in high-end movements manufacturing is — paradoxically — much easier, as the proportion of manual labor is much higher, and the need for volumes and automated process is unimportant (Exhibit 148 details selected examples of the trend towards vertical integration over the past decade).

Significant investment at Swatch Group has enabled the company to maintain its top position in production. Yet this has not come cheap: In the past five years alone, Swatch Group has spent c.CHF600 million in capex on its production division (c.8% of production net sales p.a.) — see Exhibit 142 and Exhibit 143.

As part of Cartier's push to produce its own movements, it set about building a massive facility around the year 2000. Hundreds of millions of CHF are estimated to have been invested; however, now the brand has a highly productive and flexible manufacturing platform, allowing it to be very reactive to changes in consumer demands (see Exhibit 144).

Basel

Geneve

Bern

ETA (Les Bioux): Movements

ETA (Fontainemelon): ComponentsETA (Saint-Imier): Components

ETA (Moutier): Components

ETA (Bettlach): Movements

ETA (Grenchen): Movements

ETA (Sion): Movements

ETA (Mendrisio): Movements

Francois Golay(Le Brassus):

Wheels

Valdar (Le Brassus): Assembling & Finishing

Valdar (L’Orient): Micromechanical Products

Fredic Piguet(Le Sentier):

High-End Movements Nivarox (Villeret and Fontaines in

Spring 2009): Balance Springs, Gold Diamond-Polished Appliques for Dials

Rubattel & Weyemann (La Chaux-de-Fonds): Dials

Mom Le Prelet and Indexor (La Chaux-de-Fonds): Index Component

Universo (La Chaux-de-Fonds): Dials

Favre et Perret (Le Cret-du-Locle): Watch

Cases

Manufacture Ruedin (Bassecourt): Watch Cases

Swatch Group Assembly (Saint-Imier): Assembling

Swatch Group Assembly (Genestrerio): Assembling

Movements

Components

Assembly

Other

Comadur (Col-des-Roches): Ceramic and Sapphire Crystal

Basel

Geneve

Bern

ETA (Les Bioux): Movements

ETA (Fontainemelon): ComponentsETA (Saint-Imier): Components

ETA (Moutier): Components

ETA (Bettlach): Movements

ETA (Grenchen): Movements

ETA (Sion): Movements

ETA (Mendrisio): Movements

Francois Golay(Le Brassus):

Wheels

Valdar (Le Brassus): Assembling & Finishing

Valdar (L’Orient): Micromechanical Products

Fredic Piguet(Le Sentier):

High-End Movements Nivarox (Villeret and Fontaines in

Spring 2009): Balance Springs, Gold Diamond-Polished Appliques for Dials

Rubattel & Weyemann (La Chaux-de-Fonds): Dials

Mom Le Prelet and Indexor (La Chaux-de-Fonds): Index Component

Universo (La Chaux-de-Fonds): Dials

Favre et Perret (Le Cret-du-Locle): Watch

Cases

Manufacture Ruedin (Bassecourt): Watch Cases

Swatch Group Assembly (Saint-Imier): Assembling

Swatch Group Assembly (Genestrerio): Assembling

Movements

Components

Assembly

Other

Comadur (Col-des-Roches): Ceramic and Sapphire Crystal

Producing Reliable Basic Movements Is More Difficult Than Integrating Upstream in High-End Movements


Exhibit 142 Swatch's CH-Based Production Assets Combined With Strict "Swiss Made" Requirements Create a Competitive Advantage — Significant Time and Costs Are Required to Be a Successful Stage C and D Player

Note: The "Swiss Made" label requires that (1) assembly work on the movement, (2) final test timing of the movement and (3) assembly of the watch itself be carried out in Switzerland. Moreover, the label also requires at least 50% of the components of the movement be manufactured in Switzerland.

Source: FHS, interviews and Bernstein analysis. Exhibit 143 To Maintain Its Leading Position in Watch

Production, Swatch Group Spends Circa 8% of the Division's Sales on Further Investment (Cumulative Circa CHF600 Million in the Last Five Years)

Exhibit 144 Cartier's Integrated Production Facility Required Significant Investment (in the 2000s), Yet Provides the Company With a Highly Productive and Flexible Manufacturing Platform

Source: Corporate reports and Bernstein analysis. Source: Europa Star, The Swiss Watch Planet in Movement - Part 2 and Bernstein estimates and analysis.

Cartier's foray into own-manufacturing encompasses a variety of higher-end

price points — the company is not trying to compete at the very low end. In fact, if competitors wanted to compete at the lower end anew, potential ROIC would likely not be particularly attractive. Using the Asian movement market as an example (given the high volumes of low-priced movements generated in the region), we observe that low-cost movements are a scale game, which yields only minimal profits (see Exhibit 145 and Exhibit 146). A key component to the profitability of the Swatch brand is not only its relatively low production cost given high levels of industrialization, but also its ability to charge a relative premium to other electronic products (see Exhibit 147).

Processes

Stage A B C D E

Switzerland ('Swiss Made')

Switzerland or Overseas('Swiss Made': 50% of total component value)

Overseas

Parts Production Movements

Assembly and Inspection

Watch Assembly and

Inspection

Dials, Hands, Cases, Straps

Production

Retailers

Raw Material Suppliers

Watch Assembly

8.2% 8.2% 8.5% 8.7%

7.1%

2.7%3.6%

4.0%

2.2% 2.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009

UHR Divisional Cape

x as %

of D

ivision Sales

Production Watches & Jewelry

Over past 5 years, UHR has spent c.CHF 600m on production capex Cartier Flagship Facility (near La Chaux‐de‐Fonds)

No. of Employees > 1,000

Operational Capacity est. > 200k

Investment / Cost Hundreds of Millions

Functions Design, construction, assembly, enamelling,

case / bracelet production, restoration, etc.

Key Feature Reactivity to demand; synced production lines

“To move from one model to another is, for us, comparable to an F1 car at a pit stop"

‐ Jean‐Kley Tulli, Director of Manufacture


Exhibit 145 Low Cost Movements Are a Scale Game — For Example, Order Flow for Cheap Movements in the Asian Market Is Massive and Only Yields Minimal Profits

Exhibit 146 Even at Relatively Higher Price Points in the CH Mechanical Market, Movement Manufacture Is a Semi-Industrialized Process

Note: Based on estimated values as of 2005.

Source: Europa Star, Market Focus China: What the Swatch Group Produces in China and Bernstein estimates and analysis.

Source: Europa Star — Market Focus China: What the Swatch Group Produces in China and Bernstein estimates and analysis.

Exhibit 147 High Volumes and "Swiss Made" Positioning Help Drive Swatch Brand Profitability

— An Industrialized Production Scheme With Low Costs Is Necessary

Note: Based on estimated values as of 2005.

Source: Europa Star — Market Focus China: What the Swatch Group Produces in China and Bernstein estimates and analysis.

900

100

0100200300400500600700800900

1,0001,100

Asian Market for Movements ('05)

Millions of Movem

ents, #

Other Swatch

"[In‐house movements are] a semi‐industrialized process. That means you have to have the critical mass that will really pay off, otherwise don't even try. If you try to make a watch between $1,000 and $5,000 using an in‐house movement, you are an idiot." ‐ Thomas Morf, CEO, Carl F. Bucherer

“The problem is that the movement has to be irreproachable in terms of functions and finishing. There are customers that prefer an in‐house movement, but they approach this with a lot of suspicion, because people are not ready to have a bad experience. Generally, they wait a while to be sure the market accepts and validates the quality of a new home made movement.” ‐ Laurent Piccioto, Chronopassion (Paris)

3187

57

0

10

20

30

40

50

60

70

80

Private Label (Asia) Swatch in China

Retail Price and Co

mpo

nents (CHF)

Movement Cost Other Costs / Mark‐up

Retail = CHF 10

Retail = CHF 75


Exhibit 148 Over the Last Decade, Vertical Integration Has Been Particularly Common at the High-End Price Segments

Note: Highlighted rows indicated acquisitions.

Source: FHS, Factiva, corporate reports and Bernstein estimates and analysis.

It is a common industry practice to use Swatch basic mechanical movements — this practice takes different shades of transparency. We have at least three stages: (1) A number of serious brands freely admit that they use Swatch movements for the entry price points in their lines, as it would not be economic for them to develop their own — e.g., Baume Mercier, Panerai (see Exhibit 149), TAG Heuer (see Exhibit 150), Cartier (see Exhibit 151); (2) others rely on adapting the Swatch movements to call them their own — the extent of these adaptations vary from significant to minor; and (3) it is understood (see for example Europa Star articles on this topic — as well as press interviews by Mr. Hayek), that some brands buy Swatch movement blanks, simply stamp them with their name and call them their own.

Year Company Group Notes

2010 Tanzarella Swatch Acquired ‐ assembler of watch movements (c.240 employees)2009 Mom Le Prelet Swatch Expansion project initiated to increase capacity for high quality dials2009 ETA Swatch Modernized production surfaces to smooth production transition from ebauches to movements2009 Rouages Richemont Acquired ‐ wheels and pinions2009 Hublot LVMH Opened manufacturing plant2008 Francois Golay Swatch Acquired ‐ watch wheels and profile‐turning of complicated pieces2008 Moebius H. & Sohn Swatch Acquired ‐ lubricants and coatings2008 Burri Swatch Acquired ‐ components division2008 Piaget Richemont Manufacturing facility extension by 10%2008 Chopard Private Purchase of new sites in Meyrin and Fleurier2007 Indexor Swatch Acquired ‐ dial indexes2007 Roger Dubuis Richemont Acquired ‐ component manufacturing; enabled Cartier to produce limited edition ‘Poinçon de Genève’2007 Donze‐Baume Richemont Acquired ‐ watch cases and bracelets2007 Francois‐Paul Journe Private Vertical integration by acquiring 50% of Elinor (precious metal cases)2007 Bucherer Private Acquired Techniques Horlogeres Appliquees (THA), a manuf. In Sainte‐Croix2007 Audemars Piguet Private Investment in new facility2007 Finger Bulgari Acquired ‐ sophisticated watch cases2007 Leschot Bulgari Purchased IP and machineries from private company, Leschot2007 Vaucher Manufacture Fleurier Hermes Acquired ‐ 21% stake in maker of premium & prestige watch movements2006 Le Prelet Swatch Acquired ‐ dial producer2006 Nivaros‐FAR Swatch Investment in new facility in Fontaines (3,000 m2 of space)2006 Fabrique d'Horlogerie Minerva Richemont Acquired ‐ companents and watches2006 Maurice Lacroix Private Investment in a movement production unit in Montfaucon2006 Hermes Hermes Leather watchband production unit added to Biel facility2006 Rolex Private Completed expansion and renovation of HQ in Les Acacias (Admin and final watch assembly)2005 Cadran Design Bulgari Acquired ‐ dial maker for high‐end watches2005 Prestige d'Or Bulgari Acquired ‐ steel and precious metal watch straps2005 Rolex Private Built production plan in Plan‐les‐Ouates, Switzerland2002 Rubattel & Weyermann Swatch Acquired ‐ dial producer2001 HGT Petitjean Richemont Acquired ‐ specialist in mechanical movements assembly2001 Patek Philippe Private Acquired Ergas Sarl ‐ high precision micromechanical component manuf.2001 Patek Philippe Private Acquired Calame & Cie ‐ watch case maker2001 Boninchi Rolex Acquired ‐ components2000 Universo Swatch Acquired ‐ watch hands2000 Cartier Richemont Set out on creating flagship manufacturing facility near La Chaux‐de‐Fonds2000 Franck Muller Private Acquired ‐ Linder and Oignons Juracie ‐ both components manufacturers2000 Daniel Roth e Gérald Genta Bulgari Acquired ‐ production of high and Swiss watches (Manufacture de Haute Horlogerie SA)2000 Rolex Private Built production plan in Chene‐Bourg, Switzerland (dial production and gem setting)2000 Beyeler & Cie Rolex Acquired ‐ manufacturer of watch bracelets and casings1999 Favre & Perret Swatch Acquired ‐ watch cases 1999 Hermes Hermes Built the Biel production facility for watch assembly1998 Gay Freres Rolex Acquired ‐ manufacturer of bracelets and gold chains

It Is Common Industry Practice to Use Swatch "Tractors," With Transparency Levels Varying Across Third-Party Brands


Exhibit 149 Some Companies Are Pursuing a Hybrid Strategy — Within the Last Five Years, Panerai Has Introduced Complicated In-House Movements for Its High-End Timepieces While Utilizing an ETA Base Caliber for Its Lower-End Models; Most Recently, It Has Introduced a "Simpler" In-House Caliber for Its Higher-Volume Luminor 1950 Series

Note: P.9000 Calibres introduced in 2009 for higher volume models in the Luminor 1950 range.

Source: Wristwatch Annual 2009 and 2010, Europa Star, Market Focus China: What the Swatch Group Produces in China, corporate website and Bernstein analysis.

Exhibit 150 Brand: TAG Heuer — Aquaracer 500M

Calibre 5, $2,450; Movement: TAG Heuer Caliber 5 (Base ETA 2824-2)

Exhibit 151 Brand: Cartier — Santos 100 Carbon Chrono, $14,350; Movement: Cartier 8630 MC (Base ETA Valjoux 7753)

Source: Wristwatch Annual 2010, Google Images and Bernstein analysis.

Source: Wristwatch Annual 2010, Google Images and Bernstein analysis.

Companies that have gone alone have often decided to use other established alternatives, without risking in-house development from scratch.

Bulgari, for example, has bought the intellectual property, production tools and machines for its Calibre 168 tractor in 2007. Zenith resuscitated its "El Primero" automatic chronograph movement in a novel like twist of events, just because one of its watchmakers — Charles Vermot — decided to store (rather than scrap) its production line. Production of "El Primero" was re-started in 1984. In 2000 LVMH decided to stop third party sales (to Rolex) of "El Primero" and keep it as an exclusive to Zenith and TAG Heuer time pieces. TAG Heuer also used a Seiko design for its Chronograph 1887 movement. Despite using established alternatives to cut development costs, increasing volume capacity has required in all cases material investments.

Model Movement Price ($)

Radiomir Tourbillon GMT P.2005 (In‐House) 122,700Luminor 1950 8 Days GMT Rattrapante P.2006/3 (In‐House) 43,000Luminor 1950 8 Days Chrono Monopulsante GMT P.2004 (In‐House) 21,100Luminor 1950 10 Days GMT P.2003 (In‐House) 17,300Luminor 1950 8 Days GMT P.2002 (In‐House) 14,700

Luminor 1950 3 Days GMT Automatic P.9001 (In‐House) 9,950Luminor 1950 Submersible 3 Days P.9000 (In‐House) 9,600Luminor Chrono Daylight Panerai Caliber OP XIII, ETA Valjoux 7753 (Base) 9,300Luminor 1950 3 Days GMT Power Reserve P.9002 (In‐House) 8,900Luminor Chronograph Panerai Calibre OP XII, ETA Valjoux 7753 (Base) 8,600Luminor 1950 3 Days P.9000 (In‐House) 7,400Luminor Marina Automatic Panerai Caliber OP III, ETA Valjoux 7750 (Base) 6,300Radiomir Black Seal Automatic Panerai Caliber OP III, ETA Valjoux 7750 (Base) 6,200

"Panerai has to be exclusive and be very authentic, and you cannot be authentic in the high‐end segment if you don’t build movements with your own characteristics. That’s what I wanted and that’s what we are achieving." ‐ Angelo Bonati, President, Panerai

In‐House Movements for top price segment ‐ technically advanced w/ tourbillon, 10 day power reserve, etc.

ETA Valjoux (3rd Party) and recently developed simplier in‐house calibres

Companies That "Go at It Alone" Often Use Established Alternatives, Without Risking In-House Development


Recent decisions by Swatch to limit and qualify movements supply to third parties open a new strategic scenario.

Swatch has announced that it will discontinue the offer of movement blanks from 2011, and will reserve the right to refuse selling movements and components to third parties, conditional on an investigation from the CH Competition Commission (COMCO), which was announced in Sep-09. No further news has yet been released, though at the time of the announcement Swatch Group felt "confident that the results of this investigation will again be positive for ETA."

Exhibit 152 Swatch Has Steadily Reduced the

Percentage of Movements (Value) That It Sells to Third Parties; Moreover, Swatch Has Stated It Intends to Halt External Sales of "Blanks" in 2011

Exhibit 153 Swatch's Actions Could Potentially Help Stabilize Margins Going Forward and Make Order Cancelations and Swings in Capacity Utilization Less Volatile

Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

The decision from Swatch opens an opportunity for competitors offering ETA clones and alternatives (see Exhibit 152 to Exhibit 154). Sellita seems the only one with material volume capabilities at c.1 million/year. Its core focus, nevertheless, seems to be ETA movements for which patents have expired — hence suffering a potential technologic and functional delay. Soprod, Technotime, Fleurier and La Joux-Perret seem either too small or too high-end to credibly act as an alternative. Exhibit 155 to Exhibit 159 provide an overview of some of these players and their efforts to enhance productivity to meet the potential demands of third-party watch brands.

Exhibit 154 Industrial Production Companies Have Become More Prominent Over the Past 10

Years and Could Potentially Offer a Partial Alternative to ETA-Type Movements, Particularly at the Mid-to-Lower End Range


55% 59% 59% 60% 63% 64% 59% 66%

45% 41% 41% 40% 37% 36% 41% 34%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 1H10

Swatch Produ

ction Division Sales:

Internal Group

vs. 3rd Party

Internal 3rd Party

2.8%

0.6%

5.5%4.8%

6.8%

2.8%4.2%3.8%

11.0%

14.5%

16.1%

6.6%6.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

LTM 1H10

Swatch Group

Produ

ction EBIT %

Name Capacity (Movements) Notes

Sellita 1 million Largest producer of basic ETA‐type movements

Soprod 300k LT Goal Some ETA compatible movements

Technotime — Quartz and automatic movements

La Joux‐Perret c.70k High‐end movement capabilities

Dubois‐Depraz — Already has large client base, high‐end

Chopard — Expanded in‐house ops, could sell externally

Swatch's Recent Decision to Limit Movements Supply Opens New Strategic Scenarios


Exhibit 155 Alternatives to ETA Supply Concerns — Sellita

Exhibit 156 Alternatives to ETA Supply Concerns — Soprod

Source: Wristwatch Annual 2010, Capital IQ and Bernstein estimates and analysis.


Exhibit 157 Alternatives to ETA Supply Concerns —

Technotime Exhibit 158 Alternatives to ETA Supply Concerns —

Fleurier Ebauches



Sellita

Founded: 1950Location: La Chaux‐de‐Fonds, CH

Core Competency: Reassembler & EmbellisherClients: 350Productivity: c.1 mil. automatic movements p.a.

Description: Assembles components to make a functioning movement and can modify ETA movements to custom specifications

Recent Developments:

In reaction to ETA ébauches announcement, began developing new line of movements based on popular ETA calibers (patents expired) and built new factory

Soprod

Founded: 1966Location: Reussilles, CH

Core Competency: ReassemblerProductivity: 300,000 (long‐term goal)

Description: Reassembles mechanical movements and manufactures display & function modules (e.g. power reserve display, calendar) to add to base calibers


Festina acquired company in '08; Soprod will continue to supply 3rd party brands

Technotime

Founded: 2001Location: La Chaux‐de‐Fonds, CH

Core Competency: Mechanical & Quartz movementsAlso manufacture modules

Description: Manufactures a wide variety of quartz movements and modules as well as mechanical ('Swiss made') movements, including column‐wheel chrono and tourbillon


Partly assemble parts in China, though invested in Swiss facilities so mechanical movements would have 'Swiss made' qualification

Chopard (Manufacture co. ‐ Fleurier Ebauches)

Founded: 2008 (Fleurier Ebauches SA)Location: Fleurier, CH

Core Competency: Movements (Industrial Level)

Description: Chopard is already well‐versed in production of very high‐end in‐house movements; Fleurier is an attempt to produce its own ébauches on an industrial level: aim for 15,000 movements p.a.


Recently completed 5,100 m2 facility with series of high‐capacity production machines and room for 60 employees. Still in process of developing more advanced capabilities


Exhibit 159 The MTR 312 Represents the Type of Automated Machinery Chopard's Fleurier Ébauches Currently Employs in Its New Production Facility, Which Aims to Further Industrialize the Process of Manufacturing Ébauches

Source: www.precitrame.com, Europa Star and Bernstein estimates and analysis.

Chinese movements manufacturers exist, but they still operate at lower quality levels and are not really an alternative for CH brands — even as some of them have very important volume capacity. Entry-price-point players like Fossil — a leader in designer brand watches licenses — have recently resorted to Chinese suppliers. But we would expect skipping the "Swiss Made" recognition would be out of the question for higher priced brands and products.

We note that some Chinese manufacturers are moving up-market with mechanical movements — though anecdotal evidence points to lower quality levels versus CH manufactures (see Exhibit 160). In fact, we believe luxury competition from Asia still has a ways to go despite selected players (e.g., Shanghai) attempting to span a broad price offering (see Exhibit 161).

Exhibit 160 Some Chinese Manufacturers Are Moving

Up-Market With Mechanical Movements — Though Anecdotal Evidence Points to Lower Quality Levels vs. CH Manufacturers

Exhibit 161 Luxury Competition from Asia Still Has a Ways to Go Despite Selected Players (For Example, Shanghai) Attempting to Span a Broad Price Offering

Note: "Chinese mechanical" refers to foreign watch brands using Chinese mechanical movements from companies such as Shanghai and Sea-Gull.



Precitrame Machines SA (Jura Region in CH)MTR 312 Description:

‐ Up to 31 simultaneous axes and 36 tools. The reference transfer machine throughout the watchmaking industry.

‐ The 2nd generation PRECITRAME MTR312 is a CNC rotary transfer machine designed for the manufacture of small and medium‐sized precision mechanical components.

‐ It is used for volume production of several million components and has a production capacity of around 10,000 parts/day.

2,253

500

199 150

0

500

1,000

1,500

2,000

2,500

CH Mechanical

Chinese Mechanical (high range)

CH Electronic Chinese Mechanical (low range)

Mechanical Watch Price / Unit (CHF)

75 ‐ 150225 ‐ 375

0

500

1,000

1,500

2,000

2,500

3,000

Core Range (Automatic)

Chronographs Complications

Price Range (CHF)

2,250 ‐ 22,530


While the competitive outcome in this "new world" is still open, we would expect brand consolidation as a likely consequence — especially in the entry and medium-end price points. Competing brands in the "Swiss Made" entry and mid-price point segments seem to be between a rock and a hard place. They can either choose: (1) to make their dependence from Swatch more visible (in a sort of "Intel inside" environment); (2) invest large amounts of money, time and resources in making their own movements — if they have scale (which in most cases they don't); (3) rely on more expensive/older concept movements from smaller alternative players; (4) give up "Swiss Made" and rely on Chinese movements. The stage seems set for Swatch to secure a more solid competitive position in the face of a strong aspirational consumer wave in Asia.


Appendix: Watches Jobs Exhibit 162 Watches Jobs and Typical Qualification Required by Stage of Manufacturing

Source: Haute Horlogerie, industry interviews and Bernstein analysis.

Stage Nature Job Titles Description Typical Qualification Required

All Stages Management Production Manager

Overseas production quality and quantity, controls costs and maximizes productivity

Watchmaking CFC

All Stages Development Engineer Plans and implements industrial manufacturing process

Bachelor of science degree of an engineering nature, 3 years

All Stages Development Movement designer

Develops new calibres according to specifications and manufacturing requirements.

Bachelor’s degree in engineering, 3 years, and master in watchmaking design degree, 2 years

All Stages Assembly Complication Watchmaker

Creates and occasionally assembles, mounts and, repairs movements equipped with complications

Watchmaking CFC, 3 or 4 years

All Stages Aftersales Workshop / Line Manager

Overseas the production team or the after‐sales services staff.

Education in engineering

R&D Development Designer (/ Stylist / Artist)

Designs and creates of models Bachelor of arts degree in industrial and product design, 3 years

R&D Development Prototype Maker Creates prototype, implements any adjustments necessary for mass production

Design engineer CFC in microtechnique

Raw Material Supplies Other Parts Gemologist Buys precious stones and checks their quality, takes inventory during the manufacturing phase.

Lapidary CFC , 3 years, followed by additional gemology training, between 2 and 10 months

Parts Production Components Micromechanic Programs and monitors the machining of raw metal into watch components

Micromechanic CFC , 3 or 4 years

Parts Production Components CNC Operator/ Machinist

Monitors and controls CNC machines that cut metal in order to produce watch components.

Mechanic practitioner CFC, 3 years, apprenticeship experience

Parts Production Components Chamferer Shapes rough movement components to specifications

Watchmaking CFC (Swiss Federal Certificate of Capacity), 3 or 4 years

Parts Production Other Parts Engine‐turner Decorates pieces using a lathe equipped with chisels that is operated entirely by hand.

Parts ProductionMovements Assembly and Inspection

Components Engraver Engraves components of a movement or case

Engraver CFC (Swiss Federal Certificate of Capacity), 4 years

Dials, Hands, Cases Straps Production Other Parts External‐Parts Creator

Overseas the creation of the watch case and its accompanying bracelet/strap from design to production

Dials, Hands, Cases Straps Production Other Parts Dial‐maker Places the various elements (numerals, minute‐circle, brand name, etc.) on to the dial

Qualification in dial‐making, 2 years

Dials, Hands, Cases Straps Production Other Parts Enameller Reproduces images, patterns or miniatures on the dial with enamel

Dials, Hands, Cases Straps Production Other Parts Jeweler Designs and enhances precious stones sitting on metal. Often works with limited editions.

Dials, Hands, Cases Straps Production Other Parts Jeweler Technical Coordinator

Outlines needs in terms of components and the necessary tools for jeweler repair

Business employee CFC , 3‐year in‐house apprenticeship with lessons taken in parallel

Dials, Hands, Cases Straps Production Other Parts Leather‐Strap Maker

Designs and works with leather to create straps

Dials, Hands, Cases Straps Production Other Parts Metal‐Bracelet Maker

Designs and creates metal straps Micromechanic CFC and Jeweler CFC

Dials, Hands, Cases Straps Production Other Parts Gem‐Setter Sets precious or semi‐precious stones onto a watch

Gem‐setter CFC in jeweler, 4 years

Dials, Hands, Cases Straps Production Other Parts Watch‐Glass Maker

Cuts and polishes glass for watches

Dials, Hands, Cases Straps Production Other Parts Watch‐Hand Maker

Develops manufacturing processes for watch hands

Movements Assembly and InspectionWatch Assembly and Inspection

Assembly Timer Complete Watchmaking and Adjustment Watchmaking CFC , 3 or 4 years

Movements Assembly and InspectionWatch Assembly and Inspection

Assembly Watch Assembler Assembles movements Watchmaking CFC , 3 or 4 years

Watch Assembly and Inspection Assembly Quality Assurance Technician

Ensures compliance with regulations and monitors the certification process for new products.

CFC in a technical field, 3 years

Watch Assembly and Inspection Assembly Polisher Final polish of a watch Polisher CFC, 2 years

Retailers Aftersales After‐sales Watchmaker

Diagnoses, disassembles, repairs, cleans and inspects pieces

Watchmaking CFC , 3 or 4 years


Exhibit 163 Swiss Watchmakers Require Levels of Qualification That Necessitate Meaningful Lead-Time

Source: Industry interviews and Bernstein analysis.

CFC (Swiss FederalCapacity Certificate)

Lower Secondary School

Apprenticeship Programme (2 Yrs)

Pre‐University Studies (3/4 Yrs)

TechnicianApprenticeship

Programme (3/4 Yrs)

University (3/4 Yrs)

Engineer

Continuing Developmentse.g. Complicated

Watches

Watchmaker


How Jewelry Is Different

Jewelry has strong potential for deeper brand penetration. Jewelry is a broad category, much broader than the size of the branded high-end would suggest. The broader jewelry category is estimated at €136 billion as of 2009 (including all price points — mass market, aspirational luxury, and high-end — and both branded and non-branded products). Luxury jewelry represents c.30% of this market, while the very high-end (e.g., Cartier, Bulgari, Van Cleef & Arpels, Graff, etc.) accounts for only 5% of the total at €7 billion (see Exhibit 164 and Exhibit 165).

We note that high-end jewelry appears underpenetrated by brands. The percentage weight of brands (12%) is much lower than for high-end watches (50%) and perfumes (80%), as shown in Exhibit 166.

In 2009, emerging markets accounted for about one-half of global jewelry expenditure across price points, with about one-third generated in Asia ex-Japan and c.14% in Middle East/Africa (see Exhibit 167). In terms of the key precious metal input, gold, we observe that India, Greater China, the Middle East, and Russia jointly account for c.65% of overall gold demand for the jewelry industry — in volume and value terms (see Exhibit 168). For diamonds, the Americas represented (as of 2007) the largest end market, accounting for about one-half of global diamond sales, followed by Japan and Europe (see Exhibit 169).

Exhibit 164 We Estimate the Global Jewelry Market at €136 Billion as of 2009, Subdivided Into a

Circa €105 Billion Mass Market and a Circa €31 Billion Luxury Segment; High-End Luxury Jewelry Likely Represents Less Than One-Third of Luxury Sales, Worth Circa €7 Billion

Note: Assumed total and luxury/mass market split in line with Verdict (as of 2009); high-end estimate from Altagamma.

Source: Verdict, A&M Mindpower, Altagamma, Women's Wear Daily and Bernstein estimates and analysis.

136105 105

3124

7

0102030405060708090

100110120130140150

Global Global, by Price Point

Global, by Price Point (Detail)

Globa

l Jew

elry M

arket

(2009, €billion

)

Luxury

MassMarket

MassMarket

Accessible

High End

The Jewelry Market


Exhibit 165 Only Circa 5% of Global Jewelry Is Estimated to Be Branded; The Proportion Is Only Slightly Higher (Circa 12%) in the High-End Segment (Which Accounts for Circa 5% of Total Sales)

Exhibit 166 High-End Jewelry Appears Underpenetrated by Brands — The Percentage Weight of Brands (12%) Is Much Lower Than for High-End Watches (50%) and Perfumes (80%)

Note: Price point split based on 2009 estimates by Verdict; branding split from WWD interview with Richemont Italia's Giacomo Bozzi (as of 2002).

Source: Verdict, Women's Wear Daily ("Jewels Evolve from Craft to Brand," 06-Dec-02) and Bernstein estimates and analysis.

Note: All branding splits from WWD interview with Giacomo Bozzi (as of 2002). .

Source: Women's Wear Daily ("Jewels Evolve from Craft to Brand," 06-Dec-02) and Bernstein estimates and analysis.

Exhibit 167 EMs Account for About One-Half of Global Jewelry Expenditure Across Price

Points, With About One-Third Generated in Asia Ex-Japan and Circa 14% in Middle East/Africa

Source: Verdict and Bernstein estimates and analysis.

5%

77%

12%

95%

18%

88%

5%

0%

20%

40%

60%

80%

100%

Overall Jewelry ‐ By Branding

Overall Jewelry ‐By Price Point


Branded Branded

Unbranded UnbrandedMassMarket

Accs. Luxury

High End

12%

50%

80%

88%

50%

20%

0%

20%

40%

60%

80%

100%


High‐end Watches ‐ By Branding

High‐end Perfumes ‐ By Branding

Branded

Branded

Unbranded

Unbranded

Branded

Unbranded

34%

31%

17%

14%

5%

0%

20%

40%

60%

80%

100%

2009

Total Jew

elry Expen

diture

by Region (%

)

Japan

ME & Africa

Europe

Americas

Asia (ex‐Japan)


Exhibit 168 India, Greater China, the Middle East, and Russia Jointly Account for Circa 65% of Overall Gold Demand for the Jewelry Industry — In Volume and Value Terms

Exhibit 169 The Americas Represented (as of 2007) the Largest End Market for Diamonds, Accounting for About One-Half of Global Diamond Sales, Followed by Japan and Europe

Source: GFMS, WGC (World Gold Council) and Bernstein analysis. Source: A&M Mindpower and Bernstein analysis.

Gold and diamonds are key inputs in the global jewelry market. In fact, gold and diamond jewelry accounted for more than three-quarters of global value-terms sales in 2008, while other precious metals — e.g., silver, platinum and palladium — and gemstones accounted for less than one-quarter (see Exhibit 170). In the United States, the mix would seem similar, with gold and diamond jewelry accounting for c.60% of total (see Exhibit 171).

Exhibit 170 Gold and Diamond Jewelry Accounted for

More Than Three-Quarters of Global Value-Terms Sales in 2008; Other Precious Metals — e.g., Silver, Platinum and Palladium — and Gemstones for Less Than One-Quarter

Exhibit 171 In the United States, the Mix Would Seem Similar, With Gold and Diamond Jewelry Accounting for Circa 60% of Total

Source: A&M Mindpower and Bernstein analysis.

Note: Based on segmentation of U.S. jewelry market; excl. watches.

Source: A&M Mindpower and Bernstein estimates and analysis.

23% 24%

21% 21%

18% 17%3% 3%

9% 9%2% 2%2% 2%22% 22%

0%

20%

40%

60%

80%

100%

Volume Value

Geo

graphic Mix of Gold Dem

and

for Jew

elry (2

009, % Total)

India Gr. China ME + TurkeyRussia USA ItalyUK RoW*

c.65%

50%

16%

13% 7% 6% 8%

0%

20%

40%

60%

80%

100%

% Sales

Geo

graphic Mix of

Diamon

d Sales (2

007, % Total)

Americas JapanEurope + Russia Middle EastAsia Pacific Other

77%

23%

0%

20%

40%

60%

80%

100%

% Global Jewelry Sales (Value)

Gold & Diamonds Other PMG (incl. Silver, Platinum, Palladium)

Gold & Diamonds

Other PMG& Gemstones

48%

11%

9%

31%

0%

20%

40%

60%

80%

100%

US ‐ % Total Jewelry Market

% of Total

Diamonds (Jewelry & Loose)Gold JewelryColored Gemstone JewelryOther


Within the jewelry market, there are several demographic nuances that stand out. First, the category is more skewed toward female consumption (self-purchased and gifted) than others across price points: 90% for the broader market and c.95% for the high-end (see Exhibit 172). Second, jewelry encompasses a certain amount of "necessary consumption" despite being a discretionary space; for example, in the United States, 35% of jewelry spend depends on bridal merchandise (see Exhibit 173).

Exhibit 172 Women Are the Key Consumers in the

Global Jewelry Market — Representing 90% of Demand (Self and Gifted)

Exhibit 173 U.S. Market Details on "Occasion of Use" Provide a Glimpse of the Percentage Weight of Bridal Merchandise in Overall Jewelry — This Represents More Than One-Third of Total Sales

Note: Purchases include "self-purchases" and gifted jewelry.


Note: (1) Based on segmentation of U.S. jewelry market; (2) bridal merchandise includes: engagement, bridal & anniversary rings; (3) fashion jewelry includes: bracelets, rings, earrings, pins, gold chains, etc.


In the luxury segment, after a high-end wave caused by EM millionaires, we would expect a new secular wave of aspirational and accessible demand. Luxury jewelry is the realm of richer consumers: High-net-worth individuals account for 75% of luxury purchases, compared to c.40% for luxury leather goods (see Exhibit 174 and Exhibit 175). A wave of aspirational/accessible demand could unfold for two reasons: (1) These are the price points where the transition from non-branded to branded is happening at the fastest pace — particularly relevant in developed markets; and (2) there could be deeper penetration into lower-income quintiles of key EMs (please see our report, "European Luxury Goods: Drill Down of Long-Term Demand Drivers - Part 8: A New Wave of Luxury Democratization?," published 10-Aug-10).

The high-end luxury segment, nevertheless, should be supported by continuing growth in high-net-worth individuals and by aging populations. In fact, we expect that a category shift to hard luxury should go hand in hand with the growth of an older customer base across mature markets (please see our report, "European Luxury Goods: Drill Down of Long-Term Demand Drivers - Part 1: The Impact of Ageing Populations," published 22-Jan-10).

90%

10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Global ‐ % Jewelry Purchased Annually

% of Total

Women Men

35%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US ‐ % Total Jewelry Market

% of Total

Bridal Merchandise Other (Fashion Jewelry, Silver Flatware, etc.)

A "Wave" of Aspirational Demand to Support the Luxury Segment Going Forward


Exhibit 174 Luxury Jewelry Is the Realm of Richer Consumers…

Source: BCG (Boston Consulting Group) and Bernstein analysis. Exhibit 175 …As High-Net-Worth Individuals Account for 75% of Luxury Jewelry, Compared to

Circa 40% for Luxury Leather Goods

Note: "High-net worth individuals" refers to "new money" + "old money" + "beyond money."

Source: BCG (Boston Consulting Group) and Bernstein analysis.

Broader jewelry has grown at a CAGR of c.2.5% in the past decade (currency-neutral — see Exhibit 176). Luxury segment growth has outpaced mass market, and branded high-end has outgrown overall luxury. Luxury jewelry outpaced mass-market jewelry by c.+250bps in 2005-09; high-end jewelry grew at a +200-500bps delta versus luxury overall in 2004-08. EMs have grown joint share of overall jewelry spend by c.10% since 2005 (+700bps Asia, +300bps Middle East). Asia ex-Japan has moved from 27% to 34% of total (see Exhibit 184 later in the chapter).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Sp

end pe

r Category (%

)

60

20

10

55

30

25

30

10

5

25

20

30

10

15

20

10

30

20

20

10

5

35

35

15

Luxury Spend

Aspirational Masses (28%) Rising Middle Class (25%) New Money (37%)Old

Money (6%)

Beyond Money (4%)

Cosmetics & Fragrances

Fashion & Clothing

Home & Furniture

Watches & Jewelry

Accessories

25%

59%

75%

41%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jewelry & Watches Leather Goods

% of C

ategory Spen

d by

Income Bracket

Middle Class HNWI

We Expect Acceleration in Category Growth to 3-5% Due to (1) EMs, (2) Branded, and (3) Commodity Price Inflation


Exhibit 176 The Broader Jewelry Market Has Grown at a (Currency-Neutral Terms) CAGR of +2.6% in the 2000-09 Period and We Would Expect It to Grow by a CAGR of +3-5% Over the Next Five Years

Note: Includes jewelry made of precious metals, diamonds and other precious stones (including mass market and luxury, branded and unbranded, ex-costume).

Source: Verdict, A&M Mindpower, Oanda and Bernstein estimates and analysis.

We expect acceleration in jewelry category growth to +3-5% p.a. overall and +7-10% p.a. for the luxury segment in 2010-15E (lower than for watches). Future growth in luxury jewelry will come from three different converging drivers (see Exhibit 176). Specifically:

(1) Continuing geographic expansion into EMs, which is common to other luxury categories, as we have seen in our recently published research (please refer to our Blackbooks, European Luxury Goods: Long-Term Attractiveness & Structural Demand Drivers, published 09-Sep-10 and, European Luxury Goods: The Anatomy of Overseas Luxury Markets, published 19-Jul-10).

(2) A continuing mix shift from non-branded to branded, which is very category-specific, with high-end jewelry expenditure still c.90% non-branded, while the situation is virtually reversed in other categories (non-branded at 50% for watches and 20% for perfumes — see Exhibit 165 and Exhibit 166).

(3) Commodity price inflation, potentially, as increases in gold and diamond prices tend to be immediately reflected into retail prices (see commodity prices and CPI/retail price trends in Exhibit 177 and Exhibit 178). This could be a factor lifting the growth rate of the broader jewelry market, including the mass-market portion.

We note in Exhibit 179 that higher input costs can support value progression despite falling volumes, even for a decade, as exemplified by trends in the demand for gold by jewelry. Nonetheless, sustained price increases could potentially trigger partial substitution effects with cheaper materials (or relatively cheaper based on historic premiums) — e.g., palladium. In fact, rising commodity prices have triggered (1) renewed focus on input costs among jewelry manufacturers and (2) a degree of substitution of gold, platinum and diamonds with palladium and titanium, where possible (see Exhibit 180).

145 147 146

126 125131

140 137130

136

163

0.7%

2.9%

(2.5%)

6.1% 5.1%

7.8%

3.9%

(1.4%)

1.2%

‐4%

‐2%

0%

2%

4%

6%

8%

10%

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2015e

YoY Growth ‐%

Total Jew

elry Expen

diture (€b

n)

Global Jewelry Sales (€bn) % FX‐Neutral Growth

CAGR range:+3‐5%

181


Exhibit 177 Commodity Input Prices (Key Precious Metals) Rebounded from 2008 Lows, Especially Gold and Silver — Palladium Is Cheaper by Default and Has Risen Less in the Last Two Years

Exhibit 178 Consumer Prices for Jewelry in the EU27 and China Have Experienced Robust YoY Growth as Input Prices Rose

Source: Bloomberg, FactSet and Bernstein analysis. Source: Haver, China National Bureau of Statistics, Eurostat and Bernstein analysis.

Exhibit 179 The Growth Rates We Describe in Value Terms Should Be Qualified — Higher Input

Costs Can Support Value Progression Despite Falling Volumes, Even for a Decade, as Exemplified by Trends in the Demand for Gold by Jewelry

Source: GFMS, WGC (World Gold Council) and Bernstein analysis.

0

100

200

300

400

500

6001/31

/200

28/30

/200

23/31

/200

310

/31/20

035/31

/200

412

/31/20

047/29

/200

52/28

/200

69/29

/200

64/30

/200

711

/30/20

076/30

/200

81/30

/200

98/31

/200

93/31

/201

0

Inde

x of Spo

t Co

mmod

ity

Price (Jan

‐02 = 10

0)

Gold Platinum Palladium Silver

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

25%

30%

Jan‐05

May

‐05

Sep‐05

Jan‐06

May

‐06

Sep‐06

Jan‐07

May

‐07

Sep‐07

Jan‐08

May

‐08

Sep‐08

Jan‐09

May

‐09

Sep‐09

Jan‐10

May

‐10

Mon

thly YoY

Change (%)

EU27: Jewelry, Clocks & Watches CPI

China: Gold/Silver Jewelry Retail Prices

(1.0%)2.3%

(6.1%)

(11.6%)

(6.7%)

5.4%

3.6%

(15.6%)

5.1%

(9.1%)

(20.1%)

(6.2%)

2.5%

(8.8%)

1.0%

9.5%

18.7%

12.5% 14.7%

20.9%

13.8%

(9.8%)

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Global G

old Dem

and for Jewelry

(Value

and

Volum

e Growth, YoY

%)

Volume (YoY %) Value (YoY %)


Exhibit 180 Rising Commodity Prices Have Triggered (1) Renewed Focus on Input Costs Among Jewelry Manufacturers and (2) a Degree of Substitution of Gold, Platinum and Diamonds With Palladium and Titanium, Where Possible

Source: A&M Mindpower, GMFS and Bernstein analysis.

The "luxury" segment of the market has outpaced "mass market" price points in 2005-09 by c.250bps, and we expected to grow at a c.500bps delta in 2009-15E (both in currency-neutral terms), as shown in Exhibit 181.

Exhibit 181 The "Luxury" Segment of the Market Has Outpaced "Mass Market" Price Points in

2005-09 by Circa 250bps and Is Expected to Grow at a Circa 500bps Delta in 2009-15E (Both in Currency-Neutral Terms)

Note: Includes jewelry made of precious metals, diamonds and other precious stones (including mass and luxury, branded and unbranded; ex-costume).


The more narrowly defined high-end segment (estimated 5% of total jewelry sales, at €7 billion in 2009) has grown at a CAGR (euro terms) of c.+3% in the 2005-09 period. We observe that year-over-year growth in high-end jewelry seems to magnify swings in overall global luxury demand, as it outpaced the overall sector (also in euro terms) in the 2004-08 period (+200-500bps delta versus luxury overall) but underperformed in the 2009 trough year (see Exhibit 182 and Exhibit 183).

15.0%

(2.5)%

(6.5)% (7.0)%(10)%

(5)%

0%

5%

10%

15%

20%

Palladium Silver Platinum Gold

Volum

e Growth in

Global Dem

and for

Precious M

etals ‐Jew

elry Produ

ction,

CAGR 20

04‐08

5.0%

6.8%

8.9%

2.2% 1.7%

3.7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

'05‐'09 '09‐'15e (@ 3%) '09‐'15e (@ 5%)

Jewelry ‐Luxury vs. M

ass

(currency‐ne

utral CAGR %)

Luxury Mass


Exhibit 182 The More Narrowly Defined High-End Segment (Estimated 5% of Total Jewelry Sales, at €7 billion in 2009) Has Grown at a CAGR (Euro Terms) of Circa +3% in the 2005-09 Period

Note: Not currency-neutral; includes impact of basket currency versus euro reporting per Altagamma.

Source: Altagamma (including 2010 estimate) and Bernstein analysis. Exhibit 183 YoY Growth in High-End Jewelry Seems to Magnify Swings in Overall Global Luxury

Demand: It Outpaced the Overall Sector in the 2004-08 Period But Underperformed in the 2009 Trough Year

Note: Not currency-neutral, includes impact of basket currency versus euro reporting per Altagamma.

Source: Altagamma (including 2010 estimate) and Bernstein analysis.

Also, as noted, continuing geographic expansion into EMs should be a key driver of growth for the broader jewelry category over roughly the next five years. This is expected to further lift Asia ex-Japan's weight in the global mix to 37% (a c.+200bps gain) by 2015E (see Exhibit 184).

5.05.5

6.2 7.07.7 7.7

7.0

9.0

(4.0%)

9.0% 12.7% 13.0%

9.0%

0.0%

(11.0%)

16.0%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

0

2

4

6

8

10

2003 2004 2005 2006 2007 2008 2009 2010

High‐End Jewelry, %

YoY

Growth

High‐End Jewelry, G

lobal (€bn

)

Jewelry (€bn) Jewelry (YoY % Growth)

(4%)

9%

13% 13%

9%

0%

(11%)

16%

(3%)

5% 8% 8%

7%

(2%)

(8%)

10%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

2003 2004 2005 2006 2007 2008 2009 2010

Jewelry vs. All Luxury ‐

YoY Growth (%

)

Jewelry Total Luxury


Exhibit 184 EMs in Asia-Pacific and the Middle East Have Grown Their Joint Share of Overall Jewelry Spend by Circa 10% Since 2005 (+7% Asia, +3% MEA); We Expect Asia to Continue Capturing Share Over the Next Five Years


On the supply side, global jewelry is very fragmented, with channel mix varying dramatically across key markets.

On the one hand, there is India — with only 5% of sales generated via organized retail, with the balance from independents. Nonetheless, credible branded retailers are beginning to rise from India and other EMs — Gitanjali along with Brazil's H.Stern are notable examples (these two EM players are profiled in Exhibit 192 and Exhibit 193 later in this chapter).

On the other hand, we find the United States — with branded retailers (domestic and foreign), widespread wholesale (e.g., department stores), and sizable discounters (e.g., mass merchants, led by Wal-Mart; telemarketing, e.g., JTV; and online purists, e.g., Blue Nile — profiled in Exhibit 191 later in this chapter).

We see developed European markets (e.g., Italy) as similar to the United States overall, but with online and mass merchants playing a much less sizable role. Exhibit 185 broadly outlines the channel mix, using India, Europe/Italy and the United States as examples.

Zooming in on the United States in particular, we note that specialists account for about one-half of total jewelry sales while general merchandisers make up around one-quarter (see Exhibit 186). The online channel was estimated to account for c.7.5% of total US jewelry sales in 2007 (growing at c.+20% year-over-year on 2006) — a relatively large foray for the channel as a whole when compared to other markets (see Exhibit 187).

In terms of major players in the U.S. market, Wal-Mart is the largest; it commands a market share of 4.6% (2006), ahead of specialist retailers Sterling (Signet at 4.2% share), Zale and Tiffany's (see Exhibit 188). There is some degree of concentration, as the top two players (Wal-Mart and Signet) jointly captured c.9% of U.S. jewelry sales (in 2006), with the c.90% balance including several large specialists (see Exhibit 189). This reality contrasts with India, where 96% of distribution is carried out by family shops in a heavily fragmented marketplace (see Exhibit 190).

27% 29% 30% 32% 34% 34% 37%

34% 34% 33% 32% 31% 31% 28%

20% 19% 18% 17% 17% 17% 15%

11% 12% 13% 13% 14% 14% 14%

7% 7% 6% 5% 5% 4% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010e 2015e

Jewelry (Luxury + Mass)

Expe

nditure by

Region (%)

Asia (ex‐Japan) Americas Europe ME & Africa Japan

On the Supply Side, Global Jewelry Is Very Fragmented; Channel Mix Varies Greatly Across Geographies


Exhibit 185 Jewelry Channel Mix Overview: Independent Retail Is Most Prominent in India; the United States Is at the Opposite Extreme With Extensive Inroads by Discounters, Such as Generalists, Television Channels and Online Purists

Note: Players distributing via mix of own retail/third-party wholesale allocated to either green or orange category (please refer to the online

version), depending on percentage weight (e.g., Damiani 25%/75%).

Source: Verdict, A&M Mindpower, Altagamma, corporate reports and websites, and Bernstein estimates and analysis. Exhibit 186 In the United States, Specialists Account

for About One-Half of Total Jewelry Sales; General Merchandisers Make Up About One-Quarter

Exhibit 187 Online Was Estimated to Account for Circa 7.5% of Total US Jewelry Sales in 2007 (Growing at Circa +20% YoY on 2006)


Note: Blue Nile online share = c.7%, i.e. $0.32 billion sales of $4.8 billion online market.


Gitanjali BulgariCartier Tiffanyʹs

Boucheron Cartier, Van CleefBuccellati Signet, Kay, JaredPandora Zale

Macyʹs (dept. store)Mostly independent Neiman Marcusfamily businesses Damiani

Strolili OroWal‐Mart

QVC, CostcoJC Penny, Sears, Target

Budding online and Blue Nilediscount offer JTV, Shop NBC, HSN

IndiaItaly

(in‐between proxy) US

= Branded Retailers (e.g., Graff, Bulgari, Cartier)= Independents, Wholesale (e.g., Macyʹs), Multi‐brand Retail= Discounters (e.g., Wal‐Mart, Costco), Online (e.g., Blue Nile)

= Modernization Trend

22% 23% 18%

37%

48%

7%

25% 20%

0%

10%

20%

30%

40%

50%

60%

Specialty Apparel/Accessories Retailers

General Merch.

Others

US ‐Jew

ellery Outlets by Store Co

unt

and Value

(20

08, %

Total)

% Stores % Sales

6.0% 7.4%

94.0% 92.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% 2006 Total % 2007 Total

Channe

l Mix of US Jewelry Sales

(200

6‐07

, % Total)

Online Offline


Exhibit 188 Wal-Mart Is the Largest Player in U.S. Jewelry (4.6% Share in 2006), Ahead of Specialist Retailers Sterling (Signet at 4.2% Share), Zale and Tiffany's

Exhibit 189 Top Two Players Jointly Captured Circa 9% of U.S. Jewelry Sales (in 2006), With the Circa 90% Balance Including Several Large Specialists — This Points to a Degree of Concentration

Note: (1) Excludes bankrupt names (Friedman's and Whitehall); (2) Sterling Jewelers Inc. includes specialist banners: Signet, Jared, Kay.


Source: A&M Mindpower and Bernstein analysis. Exhibit 190 But Organized Retail Is Not Always the Norm — For Example, in India, 96% of

Distribution Is Carried Out by Family Shops in a Heavily Fragmented Marketplace

Source: A&M Mindpower, Verdict and Bernstein analysis.

Retailer Name Category

Wal Mart Discount

Sterling Specialist Jeweler

Zale Specialist JewelerQVC Non‐StoreTiffany Specialist JewelerJC Penny Mass MerchantSears Mass MerchantHelzberg Specialist JewelerFred Meyer Specialist JewelerJTV Non‐Store (Specialist)Costco Wholesale ClubMacyʹs (East) Dept StoreTarget DiscountNeiman Marcus Dept StoreShop NBC Non‐StoreHSN Non‐StoreRoss‐Simons Multi‐channel (Specialist)Tourneau Specialist JewelerCartier Specialist Jeweler

91.2%

4.2% 4.6%

0%

20%

40%

60%

80%

100%

2006 % U.S. Share

Other PlayersSignet (Sterling, #2)Wal‐Mart (#1)

96%

4%

0%

20%

40%

60%

80%

100%

% Sales

India ‐O

utlet C

ategory

(% Share, 2

005)

Family Shops Organized

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95

Exhibit 191 Profile of Blue Nile — A Prominent Example of an Online Purist Operating as a Specialist Jeweler

Source: Factiva, Volunteerbrazil.com, corporate website and Bernstein analysis.

Blue NileLocal (US$) EUR (€) Ownership Details

('000) 3-Jan-10 3-Jan-10 Free Float 97%Category Hard Luxury 09 Net Sales 302,134 217,231 Institutional 3%Focus Jewelry % growth 2.3% 2.3%Region Americas 09 EBITDA 21,940 15,775Country United States % margin 7.3% 7.3%Exchange Nasdaq GS 09 EBIT 19,347 13,910Ticker NILE % margin 6.4% 6.4%

Key Description and History Website Snapshot: Diamond Search ToolCompany Overview■ Founded in 1999, as an online retailer of diamonds and fine jewelry■ Offers its products under the brand name Blue Nile on its websites― Website domains: bluenile.com, bluenile.ca, bluenile.co.uk

■ Website claims to provide "guidance, education" on its product range■ Customers' first purchase is often an engagement ring

Timeline■ 1999: Founded by Mark C. Vadon in Mar-99 in Seattle, WA as Internet Diamonds, Inc.■ 1999: Changed its name to Blue Nile in Nov-99■ 2004: IPO on 19-May-04. 4.04m shares at $20.50 (3.74m + 54% of 0.56m greenshoe) ■ 2008: Expanded website capabilities to >40 countries and territories■ 2009: Available purchase currencies increased from 2 to 24■ 2009: New version of website launched - enhanced graphics and shopping tools■ 2010: Launced iPhone and iPad app

Blue Nile - Rel. SP Perf. vs. S&P500 (since 20-May-04) Key Financials

(USD '000) 2005 2006 2007 2008 2009 CAGRJan-06 Dec-06 Dec-07 Jan-09 Jan-10

Total Revenue 203,169 251,587 319,264 295,329 302,134 10.4%Growth 23.8% 26.9% (7.5%) 2.3%

Gross Profit 45,042 50,853 65,204 59,996 65,344 9.7%Gross Margin 22.2% 20.2% 20.4% 20.3% 21.6%

EBIT 18,049 16,557 22,412 15,991 19,347 1.8%EBIT Margin 8.9% 6.6% 7.0% 5.4% 6.4%

Net Income 13,153 13,064 17,459 11,630 12,800 (0.7%)Net Income % 6.5% 5.2% 5.5% 3.9% 4.2%

6080

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Exhibit 192 Profile of Gitanjali (India)


GitanjaliLocal (INR) € EUR Ownership Details

(millions) 31-Mar-10 31-Mar-10 Free Float 41%Category Hard Luxury 09 Net Sales 65,297 976Focus Jewelry % growth 14.7% 14.7% M. Choksi 45%Region Asia Pacific 09 EBITDA 3,810 57 (Chairman)Country India % margin 5.8% 5.8%Exchange BSE 09 EBIT 3,603 54Ticker 532715 % margin 5.5% 5.5%

Key Description Company Description and HistoryCompany Overview International Expansion■ Based in Mumbai and founded in 1966 ■ Expanded in the U.S. via acquisitions - Samuels ('06, 100 stores) & Rogers ('07, 50 stores)■ Began retail division in 1986; also operates as manufacturer & wholesaler ■ JV with Dubai-based Damas (allowed to distribute products in ME via 50 stores)■ Gitanjali owns >20 jewelry brands (50% branded jewelry market in India) ■ Operates c.100 stores under Verite banner in Japan (via holding in HK-based Digico)■ Key brands acquired from De Beers in '08 (Nakshatra , Gili ) ■ Intends to double store base in China to 100 stores over the next 3 years

Vertical Integration Key Brands■ On the De Beers list of 79 Diamond Trading Company sightholders ■ Nakshatra - Aspirational diamond brand (c.$50m annual sales)■ In '07 purchased 70% stake in diamond distributor/processor (Tri-Star) ■ Gili - High-end and marketed to older an older, female demographic (c.$75m annual sales)■ Maintains 3 rough diamond processing facilities ■ Asmi - Contemporary diamond brand■ Operates 6 jewelry factories (large export business for jewelry / diamonds) ■ D-damas - Product sold via JV with Damas Group■ Own 2 diamond cutting factories in China (opex = 30-40% lower vs. India) ■ Vivaaahi - Gold and diamond jewelry

Gitanjali - Rel. SP Perf. vs. MSCI India Index (since 2006 IPO) Key Theme: Rapid Topline and Profit Growth

(INR millions) 2005 2006 2007 2008 2009 CAGRMar-06 Mar-07 Mar-08 Mar-09 Mar-10

Total Revenue 24,033 34,697 48,358 50,907 65,297 28.4%Growth 3.2% 44.4% 39.4% 5.3% 28.3%

Gross Profit 1,488 2,950 6,628 8,463 9,940 60.8%Gross Margin 6.2% 8.5% 13.7% 16.6% 15.2%

EBIT 1,048 1,721 2,447 2,850 3,603 36.2%EBIT Margin 4.4% 5.0% 5.1% 5.6% 5.5%

Net Income 514 918 1,607 1,506 2,002 40.5%Net Income % 2.1% 2.6% 3.3% 3.0% 3.1%

020406080

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Exhibit 193 Profile of H.Stern (Brazil)


H Stern

Category Hard Luxury Revenues BRL127 million (per Capital IQ)Focus Jewelry Ownership Privately heldRegion Latin America Main Entity H.Stern Comercio e Industria, SACountry Brazil Key Subsidiary H.Stern Jewelry Inc.

Key Description Store Footprint: BrazilProduct & Brand Overview■ Products include: bracelets, earrings, necklaces, pendants, rings, other accessories― Also diversified into watches more recently― Core heritage: peculiarly colored gemstones (i.e. not typical rubies, emeralds)■ Ipanema HQ claimed to be largest space built for jewelry manufacturing in the world■ Employs c.3,000 staff, with 600 craftsmen, 50 of whom have been at H.Stern for >20 yrs■ Often featured in Elle, Marie Claire, Vogue, Harper's Bazaar, W and In Style magazines■ In the last two decades, launched collections inspired by arts, architecture, music■ Other operations include a home décor store and a restaurant, both in RdJ― Also operates Eca Restaurant in downtown RdJ, opened in 2001

Distribution■ Presence throughout LatAm; also in the US, Europe, and the Middle East■ Stores include both store-in-stores at dept /multi-brand stores & owned flagships― In-store boutiques at 3rd party stores with branded displays so as to safeguard brand― Own flagships: 5th Av. In New York; Theatiner St., Munich; soon in Cannes, Fr; Mexico■ c.120 total stores listed on own website, covering 15 countries & selected cruise ships― 46 stores in Brazil (including 15 in Sao Paolo, 11 in Rio de Janeiro)■ Additionally, third-party retail partner POS in c.30 countries

Company History

■ 1945: Founded as a minor gem trading operation by German émigré, Hans Stern■ 1949: First H.Stern store opens in Rio de Janeiro― Aimed at attracting tourist interest since early years, with openings at RdJ airport & Petropolis■ 1959: Organizes first jewelry fashion show ever held in Brazil■ 1964: International expansion begins on the other side of the Atlantic■ 1983: Ipanema HQ set up; now one of the most famous sights in RdJ (10,000 visitors/month)■ 1980s: Collection signed by actress Catherine Deneuve achieves great success■ 1995: Roberto Stern, Hans's eldest son, takes creative control of the firm (with his brothers)■ 2003: Participates in the Basel Jewelry and Watch Fair, in Switz., for the first time


We prefer mega-brands with the ability to span broad price points. We see mega-brands like Cartier and Tiffany best equipped to navigate future luxury jewelry trends. The combination of strong brands capable to attract aspirational consumers and proven retail capabilities should compound the ability to grow above market average. The trade-off with Cartier is that it is more credible in the high-end while it carries a perception of higher price in aspirational consumers' minds, not necessarily supported by fact.

Within our direct coverage, Richemont (with the Cartier and Van Cleef & Arpels brands) generates by far the highest percentage of total revenues from jewelry, and also is the largest jewelry player in terms of euro sales. Richemont's large presence holds true even when compared to two key non-coverage comparables, Tiffany and Bulgari (see Exhibit 194 to Exhibit 196). In the past, M&A of high-end jewelry brands has occurred, though acquisitions by LVMH (Chaumet, De Beers 50/50 JV) and PPR (Boucheron) did not close the size gap to Richemont's Jewelry Maison (see Exhibit 197).

Exhibit 194 Within Our Direct Coverage, Richemont

Generates by Far the Highest Percentage of Total Revenues from Jewelry

Exhibit 195 In Terms of Euro Sales, Richemont Is Also the Largest Jewelry Player in Our Coverage, Even When Compared to Other Key Non-Coverage Comps, Namely Bulgari and Tiffany's

Source: Corporate reports and presentations and Bernstein estimates and analysis.

Source: Corporate reports and presentations and Bernstein analysis.

Exhibit 196 Key Jewelry Brands at Coverage Companies (and Key Comps Bulgari and Tiffany's)

Notes: Bold italicized brands are jewelry specialists for the most part and/or have jewelry as their core heritage.

*De Beers Jewellers is LVMH's 50/50 JV with De Beers Group (set up in 2001), operating 40 retail stores across five continents.


52%

5% 3% 2% 0%

90%

43%

48%

95% 97% 98% 100%

10%

57%

0%

20%

40%

60%

80%

100%

CFR Gucci Group

UHR MC BRBY TIF BUL

2009

Reven

ue Mix (% Total)

% Jewelry % Non‐Jewelry

2,692

173 102280

0

1,729

398

0

500

1,000

1,500

2,000

2,500

3,000

CFR Gucci Group

UHR MC BRBY TIF BUL

Est.20

09 Jew

elry Sales (€m

)

Jewelry (€m)

Coverage Key CompsRichemont Gucci Grp. Swatch LVMH Burberry Tiffanyʹs Bulgari

Cartier Boucheron Flik Flak Chaumet ‐ Tiffanyʹs BulgariVan Cleef Gucci Swatch De Beers*

Bott. Ven. OmegaYSL Breguet

We Prefer Mega-Brands With the Ability to Span Price Points


Exhibit 197 Selected Jewelry M&A Transactions

Source: Capital IQ, FactSet, corporate reports and Bernstein estimates and analysis.

Branded retail chains at accessible price points have a chance to grow fast, riding the non-branded transition. They clearly have the upper hand in taking share from traditional independent retailers, on the back of greater scale and leaner costs. In fact, we find branded retailers maintaining a higher GM% and EBIT% versus selected wholesale and value players. Vertical integration into retail is no guarantee for better EBIT%, though, as we have seen in other luxury categories (see Exhibit 198).

We nevertheless see that barriers to entry in this area would be low, unless retailers were able to meaningfully establish their brands in consumers' minds — which is not obvious. Besides, entry or further inroads from discounters (mass merchants and online players) would be a significant strategic threat longer term.

Exhibit 198 Branded Retailers Operate With the Highest GM% — As Expected — With Value

Players at the Opposite Extreme; Vertical Integration Into Retail Is No Guarantee for Better EBIT%, Though, as We Have Seen in Other Luxury Categories

Notes: (1) Jewelry only. (2) Online.

Source: Capital IQ, corporate reports and Bernstein analysis.

Year Acquired Target Acquirer Notes

1999 Van Cleef & Arpels Richemont ■ High-end Jewelry■ Acq. 60% in '99■ Acq. remainder in '01

1999 Chaumet LVMH ■ Design & manufacture of jewelry & watches

2000 Boucheron PPR ■ Manufactures & markets jewelry, watches

2000 Harry Winston Tiffany & Co. ■ Retailing & mining diamonds / jewelry■ Acquired c.15% of shares

2002 Crova Bulgari ■ Producer of fine jewelry

2004 LLD Diamonds Bulgari ■ JV w/ largest producer of cut diamonds

2008 Nakshatra Gitanjali ■ Aspirational diamond brand■ Acquired from De Beers

2008 Gili Gitanjali ■ Target older, wealthier demographic■ Acquired from De Beers

2008 LB Diamonds & Jewelry Bulgari ■ Cutting, polishing, marketing of diamonds■ Acquired remaining 50% stake

2009 Diamlink Gitanjali ■ NY-based diamond trader■ Deals diamonds and diamond studded jewelry

Example of: BRANDED RETAILERS WHOLESALERS VALUE PLAYERSPlayer: Bulgari Tiffany Pandora Damiani Blue NilePeriod: 2009 2008 2009 2008 2009 2008 09-10 08-09 2009 2008Currency: EUR USD DKK EUR USD

Sales million 915 1,061 2,709 2,848 3,461 1,658 145 149 302 295GM % 59.8% 64.2% 56.5% 57.8% 69.0% 61.0% 41.0% 48.8% 21.6% 20.3%EBIT % 1.9% 10.5% 16.3% 17.3% 38.2% 41.3% -13.2% -2.1% 6.4% 5.4%

Jewelry Sales % 43% c.90% 100% 100% 100%Retail 100% (1) c.99% 100% 24% 100% (2)Wholesale 0% 1% 0% 76% 0%


Swatch — Movements Champion

The Swatch Group was originally formed from a merger between ASUAG and SSIH to form SHM (now known as The Swatch Group) in 1982. In this merger, the brands Omega, Longines, Rado, Tissot, Certina, Hamilton, Mido and Swatch were united. From these origins to the present day, The Swatch Group has complemented organic growth with acquisitions to expand its Watches & Jewelry brands and production capabilities (see Exhibit 200).

Important acquisitions of high-end watch brands such as Blancpain and Breguet occurred in the early 1990s, while Jaquet Droz and Glashutte were added later in the decade. In order to distribute many of its brands in high-growth markets such as Asia, Swatch has strategically formed alliances with major retailers in various regions. For example, in 2007 the company increased its participation stake in Chinese watch retailer Xinyu Hengdeli.

A large part of the production expansion occurred after 1999, as the company acquired companies such as Universo and Indexor to improve its ability to produce high-end components and movements. Given the recent growth of this segment of the market, these acquisitions have enabled Swatch to handle the increased captive and third-party demand for high-end movements.

Exhibit 199 Swatch Group Activities


Watches & Jewelry

Prestige and Luxury RangeBreguet, Blancpain, Glashütte Original, Jaquet Droz,

Léon Hatot, Omega, Tiffany & Co.

High RangeLongines, Rado, Union Glashütte

Middle RangeTissot, ck watch & jewelry, Balmain, Hamilton,

Certina, Mido

Basic RangeSwatch, Flik Flak

Private LabelEndura

Third party retailersMonobrandDOS

Multi-brand DOS

(Boutique Tourbillon)

Franchise Other watches and jewellery brands

Electronic Systems

Watch, Telecom, Automotive, Industrial and Medial Device customers

CHF 624(35.8%)

Production

CHF 1,118(64.2%)

Net Sales CHF 526m CHF 4,547m CHF 624m

Watches & Jewelry

Prestige and Luxury RangeBreguet, Blancpain, Glashütte Original, Jaquet Droz,

Léon Hatot, Omega, Tiffany & Co.

High RangeLongines, Rado, Union Glashütte

Middle RangeTissot, ck watch & jewelry, Balmain, Hamilton,

Certina, Mido

Basic RangeSwatch, Flik Flak

Private LabelEndura

Third party retailersMonobrandDOS

Multi-brand DOS

(Boutique Tourbillon)

Franchise Other watches and jewellery brands

Electronic Systems

Watch, Telecom, Automotive, Industrial and Medial Device customers

CHF 624(35.8%)

Production

CHF 1,118(64.2%)

Net Sales CHF 526m CHF 4,547m CHF 624mCHF5,225m

CHF1,051(68.3%)

CHF488(31.7%)

CHF 488mCHF 436mNet Sales

(2010)

Introducing Swatch Group


Exhibit 200 Swatch Selected Acquisition, Investment and Disposal History


The Swatch Group's main focus is the production and distribution of watches and jewelry under brands such as Omega, Swatch, Breguet, etc. via the wholesale and — to a lesser extent — retail channels. The company also produces watch movements for its own brands as well as for third-party watchmakers. In addition, the company has an electronic systems division, which develops low-complexity/low-power miniaturized products for the telecom, automotive, medical device and watch industries (see Exhibit 199).

N e w B r a n d s / R e ta i l A l l ia n c e sP r o d u c t io n

1992, Blancpain1999, Breguet1999, JaquetDroz2000, Glashutte

2008, Strategic Alliance with Tiffany

2000, Universo(watch hands)

2002, Rubattel& Weyermann(Dial Producer)

2006, Le Prelet (Dial Producer)2006, Zifferblatt Manufaktur (Dial Producer)2007, Indexor (Dial Indexes)2008, Burri –Component Division

1999, Favre& Perret(watch case)

2000, Construction of Spring Balance Factory

E le c t r o n ic S y s t e m s / O th e r

2007, Increased participation in largest Chinese watch retailer:Xinyu

2008, strategic stake in UAE-based Rivoli(retailer)

2004, Invested in a new Japanese HQ Building (Asian Expansion)2008, SokymatAutomotive (Disposal)

2008, Michel Prazisionstechnik(Disposal)

19922000

2006Present

19992004

20082007

20022005

20032001

1982

1982, Combination of ASUAG and SSIH to form SHM1984, Hayek & investors took over SHMSHM: Omega, Longines, Rado, Tissot, Certina, Hamilton, Mido, Swatch

O r ig in a l B r a n d s

1984

N e w B r a n d s / R e ta i l A l l ia n c e sP r o d u c t io n

1992, Blancpain1999, Breguet1999, JaquetDroz2000, Glashutte

2008, Strategic Alliance with Tiffany

2000, Universo(watch hands)

2002, Rubattel& Weyermann(Dial Producer)

2006, Le Prelet (Dial Producer)2006, Zifferblatt Manufaktur (Dial Producer)2007, Indexor (Dial Indexes)2008, Burri –Component Division

1999, Favre& Perret(watch case)

2000, Construction of Spring Balance Factory

E le c t r o n ic S y s t e m s / O th e r

2007, Increased participation in largest Chinese watch retailer:Xinyu

2008, strategic stake in UAE-based Rivoli(retailer)

2004, Invested in a new Japanese HQ Building (Asian Expansion)2008, SokymatAutomotive (Disposal)

2008, Michel Prazisionstechnik(Disposal)

19922000

2006Present

19992004

20082007

20022005

20032001

1982

1982, Combination of ASUAG and SSIH to form SHM1984, Hayek & investors took over SHMSHM: Omega, Longines, Rado, Tissot, Certina, Hamilton, Mido, Swatch

O r ig in a l B r a n d s

1984


Swatch experienced strong sales growth leading up to 2001, at which point sales declined through 2003. The company rebounded following this slowdown and once again reached double-digit growth in 2006 and 2007. However, 2008 saw a dramatic drop-off in growth as the global economic environment stifled demand for Swiss watches (see Exhibit 201).

Among the three divisions, Watches & Jewelry has experienced relatively higher growth, growing at a CAGR of 5.2% in 2000-08. In contrast, Electronic Systems division grew the slowest at a CAGR of 1.9% over the same period (see Exhibit 202).

Exhibit 201 Historical Total Group Swatch Net Sales (Including Eliminations)

Source: Corporate reports and Bernstein analysis. Exhibit 202 Historical Net Sales by Division (Before Eliminations)

Note: Division sales as of 1998 annual report — the year the company was renamed Swatch Group.


The Watches & Jewelry division contributes the greatest proportion of EBIT and has historically maintained the highest margins (at 18.2% in 2008). Although its margins have traditionally been in the single digits, the Production division over the past few years has improved margins, reaching 16.1% in 2008 — prior to 2005, the average margin for this division was 3.8%. Following the severe drop in telecom demand in 2000-01, the Electronic Systems division has steadily recovered a portion of its previous margin levels, reaching 19.8% margins in 2008, in line with the Watches & Jewelry division (see Exhibit 203).

-5%

0%

5%

10%

15%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sale

s G

row

th

Net

Sal

es (C

HF

mill

ion)

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net

Sal

es (C

HF

mill

ion)

Watches and Jewelry Production Electronic Systems


Exhibit 203 Historical Profitability by Division (Since 1997)


The Watches & Jewelry division also displays the highest return on net assets and has maintained this level of return over the past few years. Only recently has the Production division approached the Watches & Jewelry division on this metric, as it lagged far behind as recently as 2004. The Electronic Systems division has not improved on this metric since 2004 and exhibited a return on net assets in line with the overall group in 2008 (see Exhibit 204 to Exhibit 207).

Exhibit 204 Return on Net Assets: Watches & Jewelry Division


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

CHF 0

CHF 100

CHF 200

CHF 300

CHF 400

CHF 500

CHF 600

CHF 700

CHF 800

CHF 900

CHF 1,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

EBIT

%

EBIT

(CH

F m

illio

n)

Operating Profit Margin

Watches & Jewelry Production Electronic Systems

Increased Volume Demand

Telecomunnications Slowdown

040506

07

0804

0506 07

08

0.7 1 1.5 2

NO

PAT

/ Sal

es (%

)

Sales / Net Asset (times)

GroupWatches & Jewelry

20%

15%

10%

5%

ISO RONA

30%


Exhibit 205 Return on Net Assets: Production Division

Source: Corporate reports and Bernstein analysis. Exhibit 206 Return on Net Assets: Electronics Systems Division


The Swatch Group generates a healthy cash flow, particularly the Watches & Jewelry division, which produced c.80% of the total group cash flow in 2008. At the beginning of the recent recession, decreases in cash flow attributable to unfavorable swings in working capital were of particular note. Although 2007 began to show accelerated cash declines from this situation, the declines in cash flow due to working capital in 2008 were markedly worse, creating a cash outflow of CHF528 million (see Exhibit 207).

0405

06

07

080405

06 07

08

0.7 1 1.5 2

NO

PAT

/ Sal

es (%

)


GroupProduction

20%

15%

10%

5%

ISO RONA

30%

0405

06

0708

04

0506 07

08

0.7 1 1.5 2

NO

PAT

/ Sal

es (%

)


Group Electronic Systems

20%

15%

10%

5%

ISO RONA

30%


Exhibit 207 The Majority of the Total FCF Is Generated by the Watches & Jewelry Division; FCF Generation Was Hampered at the Beginning of the Recent Recession Due to Unfavorable Working Capital Swings

Note: (1) Cash flow attributable to working capital and taxes allocated based on percentage of Sales and percentage of EBIT, respectively;

(2) Total cash flow excludes cash impact of asset disposals, changes in fair value of marketable securities, and selected other items.


(CHF in millions)

Watches and Jewelry: 2005 2006 2007 2008 % of 2008 Total:

Operating Profit CHF 626 CHF 738 CHF 920 CHF 828 68.9%

Depreciation & Amortization 37 44 54 64Decrease in CF Due to Working Capital (44) (100) (224) (360)Corporate Income Tax (136) (206) (189) (115)

Cash Flow From Operations 483 476 560 417

Capital Expenditures (87) (133) (179) (101)Free Cash Flow 396 343 381 316 80.0%Free Cash Flow Conversion 63% 46% 41% 38%

Production:





Electronic Systems:





TOTAL Group (Includes Effects of Corporate Below):

Operating Profit CHF 735 CHF 973 CHF 1,236 CHF 1,202 100.0%




Corporate:Operating Profit (18) (18) (18) (11) -0.9%Depreciation & Amortization 16 6 6 6Capital Expenditures (5) (8) (16) (19)


Swatch's watches portfolio is balanced, spanning a wide variety of price points, though more focused on the low-to-mid segments versus Richemont's (see Exhibit 208). Sales from high-end brands such as Breguet and Jacquet Droz only account for an estimated 20-25% of total watches & jewelry sales at Swatch, while we estimate Richemont generates c.85% of sales from its high-end brands.

The relative size of key Swatch Group brands, recently disclosed by management at the FY10 earnings call, helps us gauge this point quantitatively. Omega (average price of €2,000-€4,000) is the division's largest brand and should soon be able to pass the CHF3 billion turnover mark. Longines (average price of €1,000-€2,000) is expected to pass the CHF1 billion mark in 2011E. Tissot and Swatch, further down the pyramid (both priced at less than €1,000, on average), are also close to reaching CHF1 billion in sales each. However, Breguet (average price of more than €10,000) is the most sizable name in the high-end of the portfolio and measures c.CHF1 billion in revenues — which is about one-fifth of the aggregate of the aforementioned brands priced at less than or equal to €6,000.

Exhibit 208 Swatch Generates a Greater Proportion of Its Sales From Mid-To-Low-Priced Brands

Source: Koncept Analytics, corporate reports and Bernstein analysis.

Swatch's overall price segment positioning — skewed to entry price points and medium price points — should be a positive, as we expect entry price points to enjoy material expansion in their consumer base, especially in EMs such as China.










ZenithHublot






OmegaTiffany & Co.












Watches & Jewelry Division


Macroeconomic factors have a clear impact on the profitability of the Watches & Jewelry division. The division is highly exposed to changes in such factors as GDP growth, Swiss watch exports and luxury market growth (see Exhibit 209 to Exhibit 215).

Exhibit 209 Luxury Market Growth Correlates Strongly With World GDP Growth

Source: OECD, Altagamma, Global Insight and Bernstein estimates and analysis. Exhibit 210 Group EBIT Margin vs. GDP Growth Exhibit 211 Watches & Jewelry EBIT Margin vs.

GDP Growth

Source: OECD and Bernstein analysis. Source: OECD and Bernstein analysis.

1998

19992000

20012002

2003

20042005

20062007

2008

R² = 83% y = 4.161x - 2.938

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0

Und

erly

ing

Luxu

ry M

arke

t Gro

wth

(yoy

%)

OECD GDP Growth (Real, yoy %)

Support of Emerging Markets?

Long term regression of Luxury Market Growth to OECD GDP Growth

2009

R² = 2.8%

10%

15%

20%

25%

30%

0% 1% 2% 3% 4%

Gro

up E

BIT

mar

gin

OECD GDP Growth, YoY

R² = 45.4%

15%

20%

25%

0% 1% 2% 3% 4%

Wat

ches

& J

ewel

ry E

BIT

m

argi

n



Exhibit 212 Group EBIT Margin vs. Swiss Watch Export Growth

Exhibit 213 Watches & Jewelry EBIT Margin vs. Swiss Watch Export Growth

Source: OECD and Bernstein analysis. Source: OECD and Bernstein analysis. Exhibit 214 Group EBIT Margin vs. Luxury Market

Growth Exhibit 215 Watches & Jewelry EBIT Margin vs. Luxury

Market Growth

Source: OECD, Altagamma and Bernstein analysis. Source: OECD, Altagamma and Bernstein analysis.

Swatch has pursued a range of retail distribution strategies for each of its brands, opening exclusive boutique destinations for its prestigious brands as well as undertaking significant retail expansion via unique and innovative formats for its Swatch brand. The company has taken different approaches to product distribution depending on the specific brand. It not only diversifies the store format (e.g., boutique versus kiosk versus airport, etc.), but it also looks to strategically franchise certain operations depending on both the market and the capital requirements.

With regards to the future of its retail strategy, Swatch plans to increase its retail exposure from c.10% to 15% in the next few years, while remaining strong in the wholesale channel (see Exhibit 216 and Exhibit 217).

R² = 47.2%

10%

14%

18%

22%

26%

-10% -5% 0% 5% 10% 15% 20%

Gro

up E

BIT

mar

gin

Swiss watch exports value growth, YoY

R² = 61.3%

17%

18%

19%

20%

21%

-10% -5% 0% 5% 10% 15% 20%

Wat

ches

& J

ewel

ry E

BIT

m

argi

n

Swiss watch export growth, YoY

R² = 37.4%

14%15%16%17%18%19%20%21%22%23%

-5% 0% 5% 10% 15%

Gro

up E

BIT

mar

gin

Luxury market growth, YoY

R² = 78.9%

17%

18%

19%

20%

21%

-5% 0% 5% 10% 15%

Wat

ches

& J

ewel

ry E

BIT

m

argi

n



Exhibit 216 Swatch Is More Exposed to the Watch Retail Channel than Richemont…

Source: Corporate reports and Bernstein estimates and analysis. Exhibit 217 …Though the Mix Varies Among the Swatch Brands Most Exposed to the Retail

Channel

Source: Corporate reports and transcripts and Bernstein analysis.

The Swatch and Omega brands constitute the majority of the company's retail footprint — as of Apr-09, Swatch brand had more than 4x as many monobrand stores globally compared to Omega (see Exhibit 218 to Exhibit 220). The majority of both brands' stores are concentrated in Europe and Asia, with China playing a material role in each case. In contrast, higher-end brands in Swatch's portfolio have a more limited number of monobrand boutiques in selected "premier" locations, while also taking advantage of another distribution channel — Swatch's own multi-brand retailer, Tourbillon.

Swatch Watches

15%10%0%

25%

50%

75%

100%

Current 5+ Years

Cha

nnel

- %

of S

ales

Retail Wholesale

Richemont

90%

42%

5%0%

25%

50%

75%

100%

Watches Jewelry Group

Cha

nnel

- %

of S

ales

Retail Wholesale

Specialist Watchmakers: 26% of Sales

Jewellery Maisons: 50% of Sales

10% 10%

35%

90% 90%

65%

0%

25%

50%

75%

100%

Overall Group Omega Swatch

Retail Wholesale


Exhibit 218 Retail Footprint by Brand (as of Apr-09): The Swatch and Omega Brands Are Primarily Concentrated in Europe and Asia — With Approximately 15% of All Swatch Stores Based in Italy and China Playing a Material Role in Each Case


Omega Swatch Breguet Blancpain Glashutte Jaquet Droz Leon Hatot

Boutique Tourbillon Total Flagship "Store" Shop-in-shop Kiosk Boutique Tourbillon Boutique Tourbillon Artelier Tourbillon Boutique Tourbillon Boutique Tourbillon

Asia Pacific 48 180 3 9 5 n.a. 3

% of Total (By Brand) 64% 23% 25% 41% 71% — 43%

China (inc. Macau) 12 2 52 5 42 4 1 2 2 2 3 2 2 2

Hong Kong 8 20 13 6 1 2

Taiwan 7 20 2 18 1 1

Japan 3 14 14 1 1 1 2

South Korea 1 22 1 21 1

Singapore 1 10 8 2 1 1 1 1 1 1 1

Malaysia 2 - 1

Vietnam 1 2 2

Thailand 2 9 9 1

Philippines 2 3 3

Indonesia 2 10 10

India 5 12 6 6 1

Australia 1 2 2

Mongolia 2 2

Other 2 2 2

Subtotal 48 3 180 5 114 51 10 3 3 9 3 5 3 3 3 3

Europe 23 342 6 8 1 4

% of Total (By Brand) 31% 45% 50% 36% 14% — 57%

Italy 1 2 117 3 114 2 2 2 2 2

France 3 46 1 43 2 2 3 3

Germany 3 1 17 4 13 1 1 1 1 1 1 1

Spain 1 1 27 27 1 1 1 1 1 1

UK 5 13 5 6 2 1

Switzerland 5 5 16 15 1 1 5 2 5 5 5 1 5

Greece 1 1 8 8 1 1 1 1 1

Russia 3 24 8 16 1 1 1

Belgium 1 1

Austria 1 13 12 1 1 1 1 1 1 1

Netherlands 1 5 4 1 1 1 1 1 1

Other 1 55 44 11

Subtotal 23 12 342 6 12 8 12 1 12 13 4 12

Middle East - 87 1 4 1 -

% of Total (By Brand) 0% 11% 8% 18% 14% — 0%

UAE 7 7 1 3 1

Israel 8 8

Saudi Arabia 55 55

Kuwait 3 3 1

Lebanon 3 3

Other 11 11

Subtotal - 87 1 4 1 - -

Americas 4 159 2 1 - -

% of Total (By Brand) 5% 21% 17% 5% 0% — 0%

United States 2 42 42 2 1

Canada 6 4 2

Brazil 25 23 1 1

Mexico 1 34 34

Panama 1 1 1

Other 51 1 27 10 13

Subtotal 4 159 2 1 - - -

RoW 20

TOTAL 75 768 12 22 7 — 7


Exhibit 219 The Omega Brand Has Leveraged Both the DOS and the Franchise Model to Grow Its Retail Footprint Over Time

Exhibit 220 Swatch's Overall Retail Footprint Is Large and Has Grown More Rapidly in Recent History

Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

76 90120

140

2430

44

50

100

120

164

190

0

50

100

150

200

2005 2006 2007 2008

Stor

es

Omega Monobrand Retail Store Footprint

Franchised DOS

595 620

750

850

0

250

500

750

1,000

2005 2006 2007 2008

Stor

es

Swatch Monobrand Retail Store Footprint


Compared to other watch manufactures, Swatch's Production division provides the company with a unique competitive advantage. Specifically, its dominant position — on a value and volume basis — in the production of basic watch movements creates a situation where many of its largest rivals must buy their movements from Swatch. Through ETA, the world's largest movement manufacturer, the Swatch Group accounts for 70-80% of total market share in the watch movement market (by volume). Its major customers (besides Swatch itself) include watchmakers such as Rolex, Bulgari, LVMH (TAG Heuer) and Frank Muller, and movement manufacturers such as Sellita.

Typically, Swatch sells movements in their unfinished form (ebauche), which consists of a set of loose parts consisting of the main plate, the bridges, the train, the winding and setting mechanism and the regulator. However, Swatch has recently announced that it will gradually eliminate its supply of unfinished movements to third parties. From 2011 onwards, the company has expressed its intentions to sell only finished movements, which include assembled movements with parts such as the balance, hairspring, escape wheel, anchor lever, etc. This has prompted other watchmakers, such as Richemont, LVMH and Bulgari, to expand their own movement manufacturing facilities.

On a value basis, Swatch currently controls 55% of the total market, of which 36% is attributable to in-house Swatch brands and the other 19% is sold to third parties. We assumed that Swatch had the same market share (55%) for each of the respective sub-markets (third-party and in-house), in order to arrive at the percentage of total market for other third-party manufacturers (16%) and other in-house movements (29%) — see Exhibit 221. Using the same methodology, we arrive at the breakdown of the watch movement market by volume (see Exhibit 222). Due to Swatch's large production of mid-/low-priced watch movements, the company had a higher market share at 75% of the total market.

Exhibit 221 Market for Watch Movements — By Value Exhibit 222 Market for Watch Movements — By Volume

Source: FHS, corporate reports and Bernstein estimates and analysis. Source: FHS, corporate reports and Bernstein estimates and analysis.

Swatch has some factories outside of Switzerland; however, the majority of its production facilities is located within the country — particularly in the western region (see Exhibit 223). ETA is Swatch's largest production company, producing components and movements. Additionally, Swatch has individual production companies that are focused on producing specialized pieces such as wheels (Francois Golay) or watch cases (Favre et Perret).

29%

36%

19%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Value

% o

f Tot

al M

arke

t

In-house movement

Swatch third party


market


Swatch in-house

19%

56%

19%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Volume

% o

f Tot

al M

arke

t

In-house movement

market

Swatch third


market


Swatch internal

Production Division


Exhibit 223 The Majority of Swatch's Production Facilities Are Located in Switzerland, Especially in the Western Region

Note: Swatch maintains a smaller number of production facilities outside of Switzerland.


Basel

Geneve

Bern

ETA(Les Bioux):

Movem

ents

ETA(Fontainem

elon): Components

ETA(Saint-Im

ier): Components

ETA(M

outier): Components

ETA(Bettlach): M

ovements

ETA(G

renchen): Movem

ents

ETA(Sion):

Movem

ents

ETA(M

endrisio): Movem

ents

Francois Golay

(Le Brassus): W

heels

Valdar(Le Brassus): Assem

bling & Finishing

Valdar(L’Orient):

Microm

echanical Products

FredicPiguet

(Le Sentier): High-End

Movem

entsNivarox

(Villeretand Fontainesin

Spring 2009): Balance Springs, Gold

Diamond-Polished Appliques

for Dials

Rubattel& Weyem

ann(La

Chaux-de-Fonds): Dials

Mom

Le Preletand Indexor(La C

haux-de-Fonds): Index Component

Universo(La Chaux-de-

Fonds): Dials

Favreet Perret(Le

Cret-du-Locle): Watch

Cases

Manufacture Ruedin

(Bassecourt): Watch Cases

Swatch G

roup Assembly

(Saint-Imier): Assem

bling

Swatch G

roup Assembly

(Genestrerio): Assem

bling

Movem

ents

Components

Assembly

Other

Comadur(Col-des-R

oches): Ceram

ic and Sapphire Crystal Basel

Geneve

Bern

ETA(Les Bioux):

Movem

ents

ETA(Fontainem

elon): Components

ETA(Saint-Im

ier): Components

ETA(M

outier): Components

ETA(Bettlach): M

ovements

ETA(G

renchen): Movem

ents

ETA(Sion):

Movem

ents

ETA(M

endrisio): Movem

ents

Francois Golay

(Le Brassus): W

heels

Valdar(Le Brassus): Assem

bling & Finishing

Valdar(L’Orient):

Microm

echanical Products

FredicPiguet

(Le Sentier): High-End

Movem

entsNivarox

(Villeretand Fontainesin

Spring 2009): Balance Springs, Gold

Diamond-Polished Appliques

for Dials

Rubattel& Weyem

ann(La

Chaux-de-Fonds): Dials

Mom

Le Preletand Indexor(La C

haux-de-Fonds): Index Component

Universo(La Chaux-de-

Fonds): Dials

Favreet Perret(Le

Cret-du-Locle): Watch

Cases

Manufacture Ruedin

(Bassecourt): Watch Cases

Swatch G

roup Assembly

(Saint-Imier): Assem

bling

Swatch G

roup Assembly

(Genestrerio): Assem

bling

Movem

ents

Components

Assembly

Other

Comadur(Col-des-R

oches): Ceram

ic and Sapphire Crystal


Similar to the case with the Watches & Jewelry division, macroeconomic factors such as GDP and luxury market growth are highly correlated with the profitability of the Production division (see Exhibit 224 to Exhibit 230).

Exhibit 224 Production EBIT Margin vs. GDP Growth Exhibit 225 Production EBIT Margin vs. Swiss Watch

Export Growth

Source: OECD and Bernstein analysis. Source: FHS and Bernstein analysis. Exhibit 226 Production EBIT Margin vs. Luxury Market Growth

Source: OECD, Altagamma and Bernstein analysis. Exhibit 227 Production EBIT Margin vs. Swiss Watch

Export Growth (High-End Luxury: More Than CHF3,000)

Exhibit 228 Production EBIT Margin vs. Swiss Watch Export Growth (Exclusive Luxury: CHF500-3,000)

Source: FHS and Bernstein analysis. Source: FHS and Bernstein analysis.

R² = 0.8%

0%

5%

10%

15%

20%

25%

30%

0% 1% 2% 3% 4%

Prod

uctio

n EB

IT m

argi

n


R² = 24.7%

0%2%4%6%8%

10%12%14%16%18%

-10% 0% 10% 20%

Prod

uctio

n EB

IT m

argi

n


R² = 12.0%

0%2%4%6%8%

10%12%14%16%18%

-5% 0% 5% 10% 15%

Prod

uctio

n EB

IT m

argi

n


R² = 33.1%

0%2%4%6%8%

10%12%14%16%18%

-10% 0% 10% 20% 30%

Prod

uctio

n EB

IT m

argi

n

Swiss watch export growth, YoY (High-End Luxury: CHF >3,000)

R² = 13.4%

0%2%4%6%8%

10%12%14%16%18%

-10% -5% 0% 5% 10%

Prod

uctio

n EB

IT m

argi

n

Swiss watch export growth, YoY (Exclusive Luxury: CHF 500-3,000)


Exhibit 229 Production EBIT Margin vs. Swiss Watch Export Growth (Affordable Luxury: CHF200-500)

Exhibit 230 Production EBIT Margin vs. Swiss Watch Export Growth (Mass Market: CHF0-200)

Source: FHS and Bernstein analysis. Source: FHS and Bernstein analysis.

A noticeable trend as of late has been the Production division's increasing margins, as volume demand increased for mechanical watches and for movements. When compared to 2000, the EBIT margin in 2008 is 10.7% higher — an improvement evident starting in 2006 (see Exhibit 231).

Exhibit 231 Since 2006, Swatch Has Been Able to Significantly Boost Production Division

Margins as Demand for Mechanical Watches and Movements Increased


A negative trend with regards to inventory is the increases in both semi-finished goods and finished goods (see Exhibit 232 and Exhibit 233). The rise in the former indicates that there are unfinished movements and watches lying around the factories — though it is unclear precisely how many of these unfinished products are due to component shortages in high demand, or a more troublesome scenario in which there is no incentive to quickly push the products out the door due to falling demand. The rise in finished goods seems to support the latter notion — the company is holding onto inventory market due to demand factors.

R² = 5.6%

0%2%4%6%8%

10%12%14%16%18%

-20% -10% 0% 10% 20%

Prod

uctio

n EB

IT m

argi

n

Swiss watch export growth, YoY (Accessible Luxury: CHF 200-500)

R² = 38.7%

0%2%4%6%8%

10%12%14%16%18%

-20% -10% 0% 10%

Prod

uctio

n EB

IT m

argi

n

Swiss watch export growth, YoY (Mass Market: CHF 0-200)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

1,000

2,000

3,000

4,000

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008EB

IT M

argi

n

Expo

rt V

olum

e (0

00's

)

Swiss Watch Volume (Mechanical Wrist Watches) Swiss Watch Volume (Mechanical Movements) EBIT Margin - Production


Exhibit 232 The Company has Experienced a Rise in Levels of Semi-Finished Goods (Including Components)…

Note: In 2008 annual report, the company modified historical disclosure and began to include Components in Semi-Finished Goods — We estimated historical levels of Semi-Finished Goods assuming 2007 percentage mix between the original line item: Raw Materials & Components.

Source: Corporate reports and Bernstein estimates and analysis. Exhibit 233 …As Well as a Large Increase in Finished Goods by the End of 2008


12%

0%

18%

37%

8%

-10%

0%

10%

20%

30%

40%

50%

60%

0

300

600

900

1,200

2003 2004 2005 2006 2007 2008

Ann

ual G

row

th

Adj

uste

d S

emi-F

inis

hed

Goo

ds (

CHF

m

m)

Inventory Analysis: Adjusted Semi-Finished Goods

8% 18%5%

11%

52%

-10%

0%

10%

20%

30%

40%

50%

60%

0

300

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1,200

2003 2004 2005 2006 2007 2008

Ann

ual G

row

th

Fini

shed

Goo

ds (

CH

F m

m)

Inventory Analysis: Finished Goods


The Electronic Systems division was initially part of the Production division approximately 10-15 years ago, where it was responsible for producing quartz movements, miniaturized batteries and miniaturized circuits for Swatch brands (no third party/100% captive). As the division's technology developed, other industries began to demand the miniaturized low-complexity and low-power products. Eventually, the division was separated and is now primarily serving customers in the telecom, automotive, medical device and watch industries (see Exhibit 234).

Exhibit 234 SGES Is Composed of Seven Separate Companies That Cater Mainly to Industries

Other Than Watch Manufacturing


The Electronic Systems division's sales growth is not highly correlated with luxury market growth or Swiss watch export growth. This result is not surprising given the division's customer base. In fact, the division has a higher correlation to mobile handset growth and automotive growth (see Exhibit 235 to Exhibit 243).

Exhibit 235 Electronics EBIT Margin vs. GDP Growth Exhibit 236 Electronics EBIT Margin vs. Swiss Watch

Export Growth

Source: OECD and Bernstein analysis. Source: OECD and Bernstein analysis.

Swatch Group Electronic Systems (SGES)

Companies Base of Production Product(s) Market / IndustryEM Microelectronic Marin - CH Circuits for Battery-operated and Field-

powered ApplicationsIndustrial Electronics, Automotive, Telecom, Computer Peripherals

Lasag Thun - CH Industrial Lasers for Precision Cutting, Drillling, etc.

Watch, Electronics, Medical Devices, Automotive, Aerospace

Renata Itingen - CH Micro Batteries for Electronic Applications Watch, Medical Devices

Microcomponents Grenchen - CH Vehicle Instrumentation (analogue car clock) Automotive

Micro Crystal Grenchen - CH Low Power Crystals and Small Oscillators Watch, Telecom, Medical Devices, Automotive, Industrial Devices

Oscilloquartz Neuchatel - CH Quartz Oscillators Telecom - Fix Line and Mobile

Swiss Timing Corgemont - CH Sports Time-Keeping Athletic Events (i.e. 2008 Beijing Olympics)

R² = 6.4%

10%

15%

20%

25%

30%

0% 1% 2% 3% 4%

Elec

tron

ics

EBIT

mar

gin


R² = 12.9%

0%

5%

10%

15%

20%

25%

-10% 0% 10% 20%

Elec

tron

ics

EBIT

mar

gin


Swatch Group Electronic Systems (SGES)


Exhibit 237 Electronics EBIT Margin vs. Luxury Market Growth

Source: OECD, Altagamma and Bernstein analysis Exhibit 238 Global Handset Volume Growth vs.

SGES Sales Growth Exhibit 239 Western Europe Handset Volume Growth

vs. SGES Sales Growth

Source: Strategy Analytics and Bernstein analysis. Source: Strategy Analytics and Bernstein analysis. Exhibit 240 SGES Sales Growth Has Followed a Similar Pattern as Global Handset Volume

Growth (Further Detail)

Source: Strategy Analytics and Bernstein analysis.

R² = 6.4%

10%

12%

14%

16%

18%

20%

22%

-5% 0% 5% 10% 15%

Elec

tron

ics

EBIT

mar

gin

Luxury Market Growth, YoY

R² = 22%

-20%-15%-10%-5%0%5%

10%15%20%25%30%

-20% 0% 20% 40% 60% 80%

SGES

Sal

es G

row

th

Global Mobile Handset Volume Growth (YoY)

R² = 29%

-20%

-10%

0%

10%

20%

-10% 0% 10% 20% 30% 40%

SGES

Sal

es G

row

th

Western Europe Mobile Handset Volume Growth (YoY)

-20%

-10%

0%

10%

20%

30%

-20%

0%

20%

40%

60%

80%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

SGES

Sal

es G

row

th

Glo

bal H

ands

et S

ales

Gro

wth

Global Handset Sales (millions of units) SGES Sales


Exhibit 241 SGES Sales Growth Has Been More Volatile Than Total Passenger Car Volume Growth, Though the General Pattern Is Relatively Similar

Source: Global Insight and Bernstein analysis. Exhibit 242 Global Passenger Car Volume Growth vs. SGES Sales Growth (2000-08)

Source: Global Insight and Bernstein analysis. Exhibit 243 Global Light Commercial Vehicle (LCV) Volume Growth vs. SGES Sales Growth

(2000-08)

Source: Global Insight and Bernstein analysis.

-30.0%

-15.0%

0.0%

15.0%

30.0%

-10%

-5%

0%

5%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008

SGES

Sal

es G

row

th

Glo

bal C

ar V

ol. G

row

th

Car Volume (Global) Growth SGES Sales Growth

R² = 17%

-20%

-10%

0%

10%

20%

30%

-3% -2% -1% 0% 1% 2% 3% 4% 5% 6%

SGES

Sal

es G

row

th

Global Car Volume Growth (YoY)

R² = 43%

-20%

-10%

0%

10%

20%

30%

-12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

SGES

Sal

es G

row

th

Global LCV Volume Growth (YoY)


Swatch stands to gain from high exposure to Asia: 44% of its sales come from all Asia (including Japan), with 28% from Greater China. This compares with 46% in Asia (22% in Greater China) for Richemont, 35% in Asia for LVMH, 43% in Asia for Gucci Group (see Exhibit 244 and Exhibit 246). Asian luxury demand is growing faster than everywhere else in the world, particularly in Greater China, as we highlight in Exhibit 245.

Exhibit 244 Hard Luxury Players, Swatch and Richemont, Have the Highest Exposure to Asia

Source: Corporate reports and Bernstein analysis. Exhibit 245 Swiss Watch Export Growth in Asia Has

Continued to Outpace Other Countries in 2010

Exhibit 246 Among the Hard Luxury Players, Greater China Constitutes a Larger Proportion of Sales for Swatch

Source: FHS and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

We expect 2009-11E retail store growth of c.20% for hard luxury names (versus low-single digit percentage store expansion in global ex-China) and c.15% for soft luxury (versus c.5-10% in global ex-China) — see Exhibit 247 to Exhibit 248.

We note that hard luxury as a category remains much more skewed toward the wholesale channel — which represents c.90% for Swatch's W&J division and c.60% for Richemont as a whole versus 10-30% for leading soft luxury brands (see Exhibit 249). Nonetheless, the delta detected between China and the rest of the world in terms of retail expansion can be seen as a valid gauge of the direction and relative pace of wholesale space trends across geographies.

We also note that, in the case of Swatch, we choose to use Xinyu Hengdeli, its JV-partner and main distributor in the Greater China region, as a proxy. Hengdeli

33% 37% 38% 39% 45%

35%43%

30%46%

44%

26%18%

27%

14% 8%6%2%

5%1% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LVMH PPR Luxury BRBY CFR UHR

% o

f FY0

9 R

even

ues

Europe Asia Americas ROW

Soft Luxury Hard Luxury

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Jan

10

Feb

10

Mar

10

Apr

10

May

10

Jun

10

Jul 1

0

Aug

10

Swis

s W

atch

es E

xpor

ts b

y Re

gion

, V

alue

CHF

, YoY

%

America EUMiddle East Other Asian countries

63%48%

37%52%

0%10%20%30%40%50%60%70%80%90%

100%

Swatch Richemont

Sale

s in

Asi

a -%

Mix

Greater China Other Asia (Incl. Japan)

Swatch Stands to Gain from High Exposure to Asia and Extensive Ties to Xinyu Hengdeli in Greater China


grows retail surface for Swatch's brands through openings of both monobrand stores and allocation of dedicated floor space in directly operated multi-brand concepts, such as Xinyu Prime Time (see Exhibit 247, Exhibit 248 and Exhibit 256).

Exhibit 247 We Expect 2009-11E Retail Store Growth of Circa 20% for Hard Luxury Names (vs.

Low-Single-Digit Percentage Store Expansion in Global Ex-China) and Circa 15% for Soft Luxury (vs. Circa 5-10% in Global Ex-China)

Note: (1) * Richemont "watches & jewelry" and excludes "fashion & leather" brands (Dunhill, Chloe, Lancel, Shanghai Tang) and writing instruments (Montblanc); (2) * All Mainland China locations assumed to be Internal, as per company definition in 1H:09 interim and FY09 full-year presentation materials; (3) ** Xinyu Hengdeli used as a proxy for Swatch Group's store growth in Mainland China, as ownership, distribution and 50/50 retail development JV ties exist; (4) Burberry's 50 Mainland China stores acquired in Jul-10; 2010E growth rate based on notional re-stated 2009A total including China, excluding Spain; (5) Gucci has disclosed 1H:10A Mainland China store count of 35 (versus 36 China total estimated for 2010; (6) LV disclosed 30 Mainland China stores as of Sept-09 investor call; assumed unchanged as of Dec-09 year end; guided to less than double-digit store increases going forward, at least five in 2010 (three new cities, two in Shanghai).

Source: Corporate reports and transcripts and Bernstein estimates and analysis. Exhibit 248 We Expect 2009-11E Retail Store Growth of Circa 20% for Hard Luxury Names (vs.

Low Single Digit Percentage Store Expansion in Global Ex-China) and Circa 15% for Soft Luxury (vs. Circa 5-10% in Global Ex-China)

Note: (1) * Richemont "watches & jewelry" and excludes "fashion & leather" brands (Dunhill, Chloe, Lancel, Shanghai Tang) and writing

instruments (Montblanc); (2) * All Mainland China locations assumed to be Internal, as per company definition in 1H:09 interim and FY09 full-year presentation materials; (3) ** Xinyu Hengdeli used as a proxy for Swatch Group's store growth in Mainland China, as ownership, distribution and 50/50 retail development JV ties exist; (4) Burberry's 50 Mainland China stores acquired in Jul-10; 2010E growth rate based on notional re-stated 2009A total including China, excluding Spain; (5) Gucci has disclosed 1H:10A Mainland China store count of 35 (versus 36 China total estimated for 2010); (6) LV disclosed 30 Mainland China stores as of Sept-09 investor call; assumed unchanged as of Dec-09 year end; guided to less than double-digit store increases going forward, at least five in 2010 (three new cities, two in Shanghai).

Source: Corporate reports and transcripts and Bernstein estimates and analysis.

'10E '11ETotal China Non-China Growth Total China Non-China Growth Mainland China - Store #

Brand Store g % Store g % Store g %Multiple (x) Store g % Store g % Store g %Multiple (x) '09A '10E '11E

Richemont W&J * 7% 21% 2% 11.7x 7% 20% 1% 15.4x 81 98 118 Xinyu Hengdeli ** - 19% - n.m. - 19% - n.m. 224 266 316

Burberry (4) 9% 20% 7% 2.7x 9% 18% 7% 2.6x 50 60 71Gucci (5) 7% 20% 6% 3.6x 5% 11% 4% 2.7x 30 36 40Louis Vuitton (6) 6% 17% 5% 3.5x 6% 14% 5% 2.7x 30 35 40

21%19% 19%

15% 15%

2%

7%5% 5%

0%

5%

10%

15%

20%

25%

Richemont W&J* Xinyu Hengdeli **

Burberry (4) Gucci (5) Louis Vuitton (6)

Reta

il Sp

ace

-Est

imat

ed S

tore

Gro

wth

2-

Yr C

AG

R ('0

9-11

E, %

)

Mainland China Global Ex-China

n.m.


Exhibit 249 Hard Luxury Remains Much More Skewed Toward the Wholesale Channel — This Channel Represents Circa 90% for Swatch's W&J Division and Circa 60% for Richemont as a Whole vs. 10-30% for Leading Soft Luxury Brands

* Burberry mix less retail-skewed than current; as per FY09 annual report, pre-conversion of Spanish wholesale and pre-acquisition of Chinese

franchisee.

Source: Factiva, corporate reports and Bernstein estimates and analysis.

When it comes to watch distribution in China, Xinyu Hengdeli is a key player. In fact, it is the largest watch retailer and distributor of internationally renowned brands in Mainland China (see Exhibit 251 and Exhibit 252). Xinyu Hengdeli's recent years have been marked by increasingly closer ties with the Swatch Group, both in terms of equity ownership and in terms of retail development via their 50:50 JV. LVMH has also grown closer to the leading Chinese distributor over the past few years (see Exhibit 250 and Exhibit 257).

Xinyu Hengdeli operates both retail and wholesale divisions. In retail, it has a footprint of 270 retail outlets (of which 224 are located in Mainland China), and operates these locations from the multi- and monobrand platforms (see Exhibit 253). Within Mainland China, the company distributes c.50 watch brands through its retail network, including some of the leading international names (see Exhibit 254). In wholesale, Xinyu Hengdeli acts as a distributor and has more than 300 wholesale customers in more than 40 cities across China, distributing 20 watch brands in total (18 on an exclusive basis) — see Exhibit 255. Since 2004, the company has progressively moved away from the wholesale portion of its business. The retail/wholesale mix in 2004 versus 2009 was 36%/64% and 78%/22%, respectively (see Exhibit 256).

Xinyu Hengdeli's multi-brand retail outlets cater to a range of customers: Temptation (mid-high fashionable), Hengdeli/Prime Time (mid-high full range) and Elegant (highest). Aspirational demand in Mainland China is still the order of the day. We observe that more than 75% of Xinyu Hengdeli's retail outlets in Mainland China are Hengdeli/Prime Time — the company cites the reason being relatively lower demand for high-end watches versus the Hong Kong market (see Exhibit 258 and Exhibit 259).

90%

60%

34% 30% 8%

10%

40%

58% 70% 92%

8%

0%

20%

40%

60%

80%

100%

Swatch (W&J) Richemont (Group)

Burberry (Group)*

Gucci (Brand) LV (Brand)

Est.

Cha

nnel

Mix

(%)

Wholesale Retail Licenses


Exhibit 250 Xinyu Hengdeli's Recent Years Have Been Marked by Increasingly Closer Ties With the Swatch Group, Both in Terms of Equity Ownership and in Terms of Retail Development via Their 50:50 JV; LVMH Has Also Grown Closer to the Leading Chinese Distributor Over the Past Few Years

Shading Legend: Blue (lighter shade in black and white printout) = Swatch news flow; red (darker one) = LVMH news flow.

Source: Factiva, Capital IQ, corporate reports and websites and Bernstein analysis.

Pre-IPO

■ 2002-05: Reorganization of group companies (Shanghai Xinyu, Beijing Hengdeli, Shanghai Watch Shop) ― Beijing Hengdeli established in 1957 (Zhang family invested since 1997); Shanghai Xinyu in 1999― 2003: Established initial joint venture with Swatch, SMH Swiss Watch Trading (Shanghai)

■ 2005: After completing reorganization, IPO completed on 26-Sept-05 on HKSE

2006

■ In Jun-06, Issued 148.5 million new shares, partly to finance the Elegant acquisition― Swatch subscribed 12.5m shares; participation in Xinyu Hengdeli increased from 6.27% to 7.25%

■ Acquired Elegant International for HK$360m ($47.4m) from ― To increase retail footprint in Hong Kong (4 high-end boutiques in HK at this time)

■ In Oct-06, LVMH announced it had accumulated a 7.24% stake through open market purchases― Aimed at further enhancing the co-operative relationship with Xinyu Hengdeli

2007

■ Signed cooperation memorandum of understanding with Swatch Group― Establishing 50:50 retail JV, based in Shanghai, PRC― JV mostly operates boutiques of watches, jewelry, and other related accessories of Swatch Group― In 2007, opened 1 Omega flagship (Huaihai Rd, Shanghai); 2 Swatch boutiques (Harbin, Qingdao)

■ Swatch participation in Xinyu Hengdeli increased from 7.25% to 8.09% (Dec-07)

■ Aquired 90% stake in OMAS for €2m, an Italian writing instruments brand, from LVMH

2009

■ Acquired 80% stake in Taiwan Jing Guang Timepiece for HK$48m, buying out Lee family (retailers)― To enhance footprint in Taiwan and overall Greater China― Operated 31 retail outlets covering Taipei, Taichung, Kaohsiug, Hsinchu, and Chiayi

■ Renewed strategic cooperation agreement with LVMH's Watches & Jewelry Division― Both parties undertook to strengthen cooperation in the Greater China region

■ Granted exclusive distribution rights for Mido brand in Mainland China by Swatch Group

■ Swatch participation in Xinyu Hengdeli increased again, from 8.11% to 8.92% (during '09)


Exhibit 251 Hengdeli's Top-Line Growth Has Averaged Circa 23% Since 2002

Exhibit 252 Moreover, Hengdeli's EBIT Has Expanded from HK$50 Million in 2002 to HK$660 Million in 2009

Source: Capital IQ and Bernstein analysis. Source: Capital IQ and Bernstein analysis. Exhibit 253 Xinyu Hengdeli's Retail Footprint of 270 Stores in Greater China (224 Mainland

China) Stretches Across the Country via Multi- and Monobrand Stores

Note: Xinyu branded retail chains are multi-brand shops.


-20%

0%

20%

40%

60%

80%

100%

0

1,000

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3,000

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2002

2003

2004

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2007

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2009

LTM

-1H

Sale

s G

row

th Y

oy -

%

Sale

s (H

KD

mill

ions

)

Sales % Growth

0%

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0

100

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700

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900

2002

2003

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2005

2006

2007

2008

2009

LTM

-1H

EBIT

Mar

gin

-%

EBIT

(HK

D m

illio

ns)

EBIT % Margin

- 270 Retail Locations- c.50 Brand Names- Monobrand Boutiques- Xinyu Elegant- Xinyu Prime Time- Xinyu Temptation


Exhibit 254 Xinyu Hengdeli Distributes About 50 Watch Brands Through Its Retail Network in China (Ex-Hong Kong)

Exhibit 255 The Company Also Has More Than 300 Wholesale Customers in More Than 40 Cities Across China and Distributes 20 Watch Brands (18 on an Exclusive Basis)

Source: Corporate website and Bernstein analysis. Source: Corporate website and Bernstein analysis. Exhibit 256 Xinyu Hengdeli Has Rapidly Expanded Its

Retail Operations Relative to Wholesale Since 2004

Exhibit 257 Swatch and LVMH Both Have Circa 10% Equity Stakes in Hengdeli

Source: Corporate website and Bernstein analysis. Source: FactSet and Bernstein analysis.

SwatchCertina Glashutte LonginesCalvin Klein Jaquet Droz OmegaHamilton Breguet RadoTissot

LVMHChristian Dior OMAS ZenithFendi TAG Heuer

RichemontAlfred Dunhill Jaeger-LeCoultre VacheronBaume & Mercier Cartier IWC

RolexRolex Tudor

IndependentAudemars Piguet EDOX GucciCarl F. Bucherer Enicar OrisCarven Maurice Lacroix Raymond WeilClaude Bernard Ball TitoniCyma

SwatchCertina HamiltonCalvin Klein Tissot

LVMHChristian Dior OMAS ZenithFendi TAG Heuer

RichemontAlfred Dunhill Jaeger-LeCoultreBaume & Mercier

IndependentAudemars Piguet Claude Bernard EnicarCarl F. Bucherer Cyma Maurice LacroixCarven EDOX

36%47%

57%69% 70%

78%

64%53%

43%31% 30%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009

Xiny

u H

engd

eli S

ales

Mix

(R

etai

l / W

hole

sale

)

Retail Wholesale

38%

11% 10%

7% 5% 5% 4%

1% 1% 1%

18%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Zhan

g Yu

ping

Fide

lity

Swat

ch G

roup

LVM

H

Pine

Brid

ge

Atla

ntis

Nor

ges B

ank

FIL

Inve

stm

ents

Atla

ntis

(HK)

Che

n Sh

eng

Oth

er

Hen

gdel

i (H

K 3

389)

-%

Ow

ners

hip


Exhibit 258 Xinyu Hengdeli's Outlets Cater to a Range of Customers: Temptation (Mid-High Fashionable), Hengdeli/Prime Time (Mid-High Full Range), Elegant (Highest)

Exhibit 259 More Than 75% of Xinyu Hengdeli's Retail Outlets in Mainland China Are Hengdeli/ Prime Time, Positioned at the Mid-to-High Range — The Company Cites Relatively Lower Demand for High-End Watches vs. Hong Kong

Source: Corporate website and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

Swatch can play with a broader array of price points (see Exhibit 260 and Exhibit 261).

Swatch brands span from Breguet to Flik Flak. This should give Swatch a better opportunity to capture a massive aspirational and accessible luxury demand wave that we expect to come from China (as outlined in our Blackbook, European Luxury Goods: Long-Term Attractiveness & Structural Demand Drivers, published in Sept-10).

An analysis of distribution in Mainland China, mostly focusing on the retail network of major player Xinyu Hengdeli, confirms that stores with a material aspirational price point offer or at least span a wide range of price points, as opposed to high-end-only stores, make up the bulk (about three-quarters) of the footprint (see Exhibit 259). The company cites relatively "lower demand for high-end watches vis-à-vis the Hong Kong market."

Highest

BrandPositioning

'Trend Setting'(e.g. Fendi)

'Full Range'(e.g. Omega)

'Exclusive'(e.g. Jaeger-LeCoultre)

Middle

Lowest 8%

69%

18%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009

Mai

nlan

d C

hina

(Ret

ail M

ix)

Temptation Prime Time Single-Brand Boutiques Elegant

Single-Brand

Temptation

Prime Time

Elegant

Swatch Can Play With a Broader Array of Price Points


Exhibit 260 Swatch Brands Span from Breguet to Flik Flak — This Should Give Swatch a Better Opportunity to Capture a Massive Aspirational and Accessible Luxury Demand Wave That We Expect to Come from China

Source: Wristwatch Annual 2010, www.Swatch.com and Bernstein estimates and analysis.

0

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Breg

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Blan

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Rad

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ch / F

lik F

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Pric

e ($

)

Breguet 2 Watches >$200k

Swatch's brands reach a broader set of aspirational and lower-price point consumers

vs. Richemont


Exhibit 261 Richemont Does Have Lower-Priced Alternatives, Though Are More Focused on the Very High End

Source: Wristwatch Annual 2010, www.Swatch.com and Bernstein analysis.

Swatch displays strong upstream integration in manufacturing. This should be a positive in the medium term — all the more so with the new "Made in Switzerland" regime coming online and dictating a higher portion of value added has to be created in Switzerland.

Swatch, in fact, is the dominant player in mid-priced mechanical movements manufacturing with more than 50% share. However, it stands approximately on equal ground with Richemont when it comes to watches market share at c.15%, and materially behind Richemont in the high-end segment.

0

10,000

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30,000

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90,000

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160,000

170,000

180,000

190,000

200,000

Gre

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)

Greubel Forsey >$300k

Roger Dubuis, A. Lange, Piaget, Vacheron, J-LC all have watches >$200k

Financial Impact of Swatch's Upstream Integration in Watches Manufacturing


With regards to margins, both hard luxury players are expected to be disproportionately affected by demand slowdowns, as these headwinds are compounded by channel de-stocking and direct engagement in manufacturing (as was the case in the recent downturn). Swatch is even more upstream-integrated than rival Richemont, as its manufacturing activity serves third-party mechanical watches brands too — 23.4% of Swatch's EBIT (as of 2008) comes from the Production division, which sells 35.8% of its output to third parties.

Upstream integration squeezes Swatch GM% during demand contractions, as its COGS tend to behave as fixed — rather than variable — costs. Unsurprisingly, the Production division's profitability is highest as the industry booms and capacity utilization is highest.

Top-line headwinds also have a marked impact on inventory levels, net working capital, and hence cash flow measures.

Exhibit 262 illustrates changes in inventory balances at Swatch at the beginning of the recent recession. Inventory increases pushed up net working capital. In 2007 and 2008, Swatch experienced year-over-year growth in inventory of +21.1% and +20.5%, respectively. Furthermore, inventory days jumped from 359 in 2007 to 439 in 2008 — indicating how much more time is required to clear inventory at the onset of demand headwinds.

Exhibit 263 shows a similar analysis of Richemont's working capital details, pointing to a similar inventory build-up. Growth in inventory was +19.9% in 2007 and +27.5% in 1H:08 versus 1H:07.

Exhibit 262 Increasing Inventories at the Beginning of the Recent Recession Were to Blame for

Increases in Net Working Capital at Swatch and Subsequent Effect on Cash Flow

Note: (1) Other Current Assets includes: Current Income Tax Assets, Other Current Receivables (VAT & Other), Prepayments and Accrued Income; (2) Other Current Liabilities includes: Current Income Tax Liabilities, Provisions, and Other Payables (VAT Due & Other).


Swatch - Working Capital Analysis

(CHF millions) 2003 2004 2005 2006 2007 2008

Non-Cash Current Assets:Inventory CHF 1,481 CHF 1,615 CHF 1,724 CHF 1,877 CHF 2,273 CHF 2,738Trade Receivables 662 646 707 750 875 733Other Current Assets 341 338 348 348 389 290

Total Non-Cash Current Assets 2,484 2,599 2,779 2,975 3,537 3,761

Non-Debt Current Liabilities:Trade Payables 189 209 240 245 303 246Other Current Liabilities 438 499 595 652 850 603

Total Non-Debt Current Liabilities 627 708 835 897 1,153 849

Net Working Capital 1,857 1,891 1,944 2,078 2,384 2,912(Decline) in Cash Flow (34) (53) (134) (306) (528)

Year over Year Growth:Inventory 9.0% 6.7% 8.9% 21.1% 20.5%Trade Receivables -2.4% 9.4% 6.1% 16.7% -16.2%Other Current Assets -0.9% 3.0% 0.0% 11.8% -25.4%

Trade Payables 10.6% 14.8% 2.1% 23.7% -18.8%Other Current Liabilities 13.9% 19.2% 9.6% 30.4% -29.1%

Ratios:Inventory Days 371 371 359 359 439Trade Receivable Days 60 58 55 53 52

Trade Payable Days 48 50 48 47 48

Inventory tied up cash given its high

growth rate and large absolute value at the outset of the

recent demand slowdown


Exhibit 263 An Analysis of Richemont's Working Capital Details Points to a Similar Inventory Build-Up in 2007 and 1H:08

Note: YoY growth for 1H:08 reflects growth over 1H:07 balance.


Swatch should benefit from high operating leverage. Higher capacity utilization should give Swatch a double positive whammy, as its

business hinges on movements manufacturing — both for its own watches division and for third parties (see Exhibit 264). Higher capacity utilization will give Swatch higher GM% on the back of lower personnel costs and depreciation in percent of sales. Historically, Swatch has been able to realize operating leverage on wages & salaries, though to a lesser extent on SG&A (see Exhibit 265 and Exhibit 266). We reckon that Swatch has the highest operating leverage versus all companies in our luxury goods coverage (see Exhibit 267).

Richemont - Working Capital Analysis(CHF millions) 2003 2004 2005 2006 2007 1H 2008

Non-Cash Current Assets:Inventory CHF 1,402 CHF 1,522 CHF 1,623 CHF 1,732 CHF 2,076 CHF 2,404Trade Receivables 399 402 475 510 500 729Other Receivables 454 118 127 148 141 205

Total Non-Cash Current Assets 2,255 2,042 2,225 2,390 2,717 3,338

Non-Debt Current Liabilities:Trade Payables 151 197 225 273 295 509Accrued Expenses 170 173 181 192 216 277Other 460 221 275 307 371 176

Total Non-Debt Current Liabilities 321 370 406 465 511 786

Net Working Capital 1,934 1,672 1,819 1,925 2,206 2,552(Decline) in Cash Flow 262 (147) (106) (281) (346)

Year over Year Growth:Inventory 8.6% 6.6% 6.7% 19.9% 27.5%Trade Receivables 0.8% 18.2% 7.4% -2.0% 10.3%Other Receivables -74.0% 7.6% 16.5% -4.7% 7.2%

Trade Payables 30.5% 14.2% 21.3% 8.1% 10.9%Accrued Expenses 1.8% 4.6% 6.1% 12.5% 20.4%Other -52.0% 24.4% 11.6% 20.8% 100.0%

Ratios:Inventory Days 377 361 349 366Trade Receivable Days 40 37 37 35

Trade Payable Days 45 48 52 55

Swatch Should Benefit from High Operating Leverage


Exhibit 264 Swatch Has Exhibited Operating Leverage of More Than 2x Since 2003 — Luxury Players Seem to Have a Higher Degree of Operating Leverage vs. Mass Fashion Competitors

Note: Averages and medians exclude negative values.

Source: Corporate reports and Bernstein analysis. Exhibit 265 Swatch Has Not Managed to Capture

Material SG&A Leverage Over the Past Five Years

Exhibit 266 Though the Company Has Been Able to Realize Operating Leverage on Wages and Salaries (Circa 25% Sales)

*Assumes SG&A contributes 100% of other costs besides raw materials and personnel expenses as disclosed by company; other operating expenses are marketing, sales & admin, and maintenance & rents.


Note: We classify Swatch's wages & salaries as COGS.


Degree of Operating Leverage (% Change in EBIT / % Change in Sales)

UHR CFR LVMH PPR Luxury ITX HMB2003 2.3x -1.9x -1.5x -29.3x -0.3x 2.0x2004 2.1x 10.2x 0.0x 6.2x 2.0x 1.4x2005 1.8x 1.8x 1.4x 2.8x 1.0x 1.7x2006 2.6x 2.0x 2.1x 2.9x 1.1x 1.4x2007 1.6x 2.1x 1.6x 2.5x 1.4x 1.4x2008 -5.0x -5.2x 0.4x 0.5x -0.2x 0.7x2009 2.6x 3.5x 11.4x -16.7x 1.2x 0.5x

Average 2.2x 3.9x 2.8x 3.0x 1.3x 1.3xMedian 2.2x 2.1x 1.5x 2.8x 1.2x 1.4x

2005

2006

2007

2008

2009

R² = 91%

(20)%

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

25%

(20)% (15)% (10)% (5)% 0% 5% 10% 15% 20% 25%

SG

&A* G

row

th (y

oy, %

)

Sales Growth (yoy, %)

2005

2006

2007

2008

2009

R² = 83%

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

(15)% (10)% (5)% 0% 5% 10% 15% 20%

Wag

es &

Sal

arie

s G

row

th (y

oy, %

)

Sales Growth (yoy, %)


Exhibit 267 EBIT Sensitivity to Volume Growth at +5% Price Growth

Note: (1) "Base Level" off of which EBIT change is calculated assumes 0% volume growth and +5% price growth; (2) at each level of assumed

volume growth, a +5% price growth is assumed.


Costs as a percentage of total sales were on the decline from 2003 to 2007 as capacity utilization increased, though since 2007 the trend has reversed (see Exhibit 268). Looking at the specific costs in the P&L, we note that material purchases had been rising rapidly (almost doubling from 2003 to 2008), but fell materially in 2009 (see Exhibit 269). In terms of personnel expense, during the recession these costs were kept in check and actually declined from 2008 to 2009 (see Exhibit 270). Strong cost discipline combined with a sustained rebound in demand throughout 2010 should provide an opportunity for Swatch to follow a V-shaped EBIT rebound (please see our report, "European Luxury Goods: Taking Stock of a V-Shaped EBIT Rebound," published 11-Feb-10) — see Exhibit 271.

Exhibit 268 At Swatch, Costs as a Percentage of Total Sales Have Been Increasing Since 2007


0

100

200

300

400

500

600

700

0% 5% 10% 15% 20% 25%

EBIT

Cha

nge

(bps

)

UHR CFR LVMH (Total Group) PPR Luxury

UHR

CFR

LVMH

PPR

84% 84% 83% 80%

78% 79%

82%

70%

72%

74%

76%

78%

80%

82%

84%

86%

88%

2003 2004 2005 2006 2007 2008 2009

Cos

ts a

s a

% o

f Tot

al S

wat

ch S

ales


Exhibit 269 Material Purchases Rose as a Percentage of Total Swatch Costs, But in 2009 They Fell Materially

Exhibit 270 During the Recession, Personnel Expenses Were Kept in Check and Actually Declined from 2008 to 2009


Note: Personnel expenses include wages & salaries plus other personnel expenses (former constitutes the majority).

Source: Corporate reports and Bernstein analysis. Exhibit 271 Strong Swiss Watch Export Growth Across Watch Price Points in 2010 Provide an

Opportunity for Swatch to Follow a V-Shaped EBIT Rebound


Digging further into Swatch's cost structure we observe that in 2009, the largest proportion of Swatch's costs (37%) were personnel expenses (itself consisting primarily of wages and salaries) — see Exhibit 272. Nonetheless, raw material and other operating expenses (e.g., marketing, admin, rent, etc.) have both made up c.25-35% of total swatch costs in recent history.

Gold and platinum both constitute a large part of the cost of a precious metal watch (this of course also highly depends on the movement and the corresponding complexity) — see Exhibit 273. We note that gold price volatility could in theory move the dial on Swatch's EPS given the c.CHF400 spent on the commodity each year (see Exhibit 274). However, gold price movements do not appear to have been a material force behind GM% contraction historically (see Exhibit 275).

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2003 2004 2005 2006 2007 2008 2009

As

a %

of T

otal

UH

R C

osts

Mat

eria

l Pur

chas

es (C

HF

m)

Material Purchases As a % of Total Costs

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2003 2004 2005 2006 2007 2008 2009

As

a %

of T

otal

UH

R C

osts

Pers

onne

l Exp

ense

(CH

F m

)

Personnel Expense As a % of Total Costs

-60%

-40%

-20%

0%

20%

40%

60%

80%

Feb

08M

ar 0

8Ap

r 08

May

08

Jun

08Ju

l 08

Aug

08Se

p 08

Oct

08

Nov

08

Dec

08

Jan

09Fe

b 09

Mar

09

Apr 0

9M

ay 0

9Ju

n 09

Jul 0

9Au

g 09

Sep

09O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0Ap

r 10

May

10

Jun

10Ju

l 10

Aug

10Se

p 10

Oct

10

Nov

10

Dec

10

Jan

11

Valu

e G

row

th, Y

oY %

0-200 200-500 500-3000 3000+ Total


Exhibit 272 In 2009, the Largest Proportion of Swatch's Costs Were Personnel Expenses — Other Operating Expenses* and Material Purchases Also Represent Significant Costs

Note: (1)* "Other operating expenses" includes: marketing, sales & admin, maintenance & rents; (2) excludes other operating income items.

Source: Corporate reports and Bernstein analysis. Exhibit 273 For Precious Metal Watches (Illustrative Example), Movements and Raw Materials

Constitute the Bulk of Costs

Note: All prices net of VAT; assumes similar quality movement in each watch for illustrative purposes.

Source: Industry interviews, corporate websites and Bernstein estimates and analysis.

38% 35% 35% 34% 33% 31% 37%

32% 33% 32% 34% 33% 34% 33%

24% 25% 27% 27% 30% 30% 25%

6% 6% 5% 5% 4% 4% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009

% o

f Tot

al S

wat

ch C

osts

Personnel Expense Other Operating Expenses Material Purchases D&A + Impairment Charges

€ % € % € %Steel Retail Price Gold Retail Price Platinum Retail Price

Retail Price 5,768 100% 12,000 100% 13,434 100%Retailer Margin 2,884 50% 7,200 60% 8,060 60%Wholesale Price 2,884 50% 4,800 40% 5,373 40%Brand EBIT 721 13% 1,200 10% 1,343 10%Brand SG&A 952 17% 1,584 13% 1,773 13%Movement 1,200 21% 1,200 10% 1,200 9%Case (Work) 121 2% 121 1% 152 1%Case (Raw Materials) 0.07 0% 805 7% 1,014 8%

Assumptions

Retailer Mark-up 2.0x 2.5x 2.5xEBIT Margin (% of Wholesale) 25% 25% 25%SG&A (% of Wholesale) 33% 33% 33%Movement (% of Wholesale) 25% 25% 25%Case Weight (% of Wristwatch) 25% 25% 25%

Price of Raw Material ($/oz.) $0.13 $1,345 $1,695Exchange Rate (EUR/USD) $1.38 $1.38 $1.38Avg. Wristwatch Weight (oz.) 3.3 3.3 3.3


Exhibit 274 Theoretical Impact of Gold Price Volatility on Swatch EPS

Exhibit 275 However, Over the Last Five Years, Gold Spot Price Appreciation Has Not Necessarily Meant GM% Contraction

Source: Corporate reports, Bloomberg L.P. and Bernstein estimates and analysis.

Note: Gross margin not disclosed by Swatch; we assume in this analysis that COGS equal raw material purchases + personnel expenses.


Price of Gold

Market Data -10% Recent +10%$ / oz 1,183.9 1,315.4 1,446.9USD / CHF 0.973 0.973 0.973CHF / oz 1,152.2 1,280.2 1,408.2

SwatchGold Consumption p.a. 10 tons 10 tons 10 tonsCost of Gold p.a. (CHF m) CHF 336 CHF 373 CHF 411

Incremental EPS Impact CHF 0.7 n.a. -CHF 0.7

% of Avg. Raw Material Purchases ('08,'09)

% of Avg. Sales ('08, '09) 6.2% 6.9% 7.6%

28.0% 30.8%25.2%2004

2005 2006

20072008

2009

-300 bps

-200 bps

-100 bps

0 bps

100 bps

200 bps

300 bps

400 bps

500 bps

0% 5% 10% 15% 20% 25% 30% 35% 40%

GM

% E

xpan

sion

/ Co

ntra

ctio

n (b

ps)

Gold Spot ($/oz) Growth (yoy, %)


Richemont — High-End Champion

Richemont was created by the spin-off of international assets owned by Rembrandt Group Limited, a South African group, in 1988. The international activities of Rembrandt Group, which included interests in tobacco, financial services, luxury goods businesses, along with investment in Rothmans International, would form Richemont.

In 1993, the Richemont group was re-organized: The tobacco businesses and luxury goods operations were separated into Rothmans International and Vendôme Luxury Group, respectively. Subsequently, Richemont entered into the electronic media business through its 50% holding of NetHold, and direct retailing through NAR Group. The group structure as of March 1996 is shown in Exhibit 276.

Exhibit 276 Richemont Group Structure, March 1996

Source: Corporate reports.

Since 1996, the group has disposed of its interests in electronic media, direct retailing and tobacco, and has made further acquisitions — notably, Vacheron Constantin in FY97; Panerai and Lancel in FY98; Van Cleef & Arpels in FY00; and Jaeger-LeCoultre, IWC and A. Lange & Söhne in FY01. In 2010, it completed the acquisition of online luxury distributor Net-a-Porter (reported as part of "Other").

The current structure of the group was formed in FY04 with Jewellery Maisons, Specialist Watchmakers, Writing Instrument Maisons, Leather and Accessories Maisons, and Other Businesses becoming the separate reporting divisions of Richemont group. The latter two have recently been re-aggregated into a single reporting division. Exhibit 277 shows the current brand portfolio by division.

Exhibit 277 Brands by Division, 2010

Source: Corporate reports.

Richemont SA

Compagnie Financiére Richemont AG

Rothmans International NetHold NAR Group Vendome

Luxury Group

66.7% 50.0% 50.0% 69.9%

(Tobacco) (Electronic Media) (Direct Retailing) (Luxury Goods)• Cartier• Alfred Dunhill• Montblanc• Piaget• Seeger

• Home Fashion and Gift Catalogues

• Apparel Catalogues• Sears Joint Venture

• Hackett• James Purdey• Sulka• Karl Lagerfeld• Baume &

Mercier

Richemont SA

Compagnie Financiére Richemont AG

Rothmans International NetHold NAR Group Vendome

Luxury Group

66.7% 50.0% 50.0% 69.9%

(Tobacco) (Electronic Media) (Direct Retailing) (Luxury Goods)• Cartier• Alfred Dunhill• Montblanc• Piaget• Seeger

• Home Fashion and Gift Catalogues

• Apparel Catalogues• Sears Joint Venture

• Hackett• James Purdey• Sulka• Karl Lagerfeld• Baume &

Mercier

Jewellery Maisons Specialist Watchmakers Writing Instrument Maisons Leather and Accessories Maisons and Other BusinessesCartier A. Lange & Söhne Montblanc Dunhill

Van Cleef & Arpels Piaget Montegrappa LancelVacheron Constantin Chloé

Jaeger LeCoultre PurdeyIWC Shanghai Tang

Officine PaneraiBaume & Mercier

Introducing Richemont


M&A activities by Richemont clouded the performance during the early periods of trading (FY95 to FY01), but the consolidated group structure has been more stable in recent years, with the exceptions of the Hackett and Old England disposals (relatively immaterial) and the acquisition of Net-a-Porter in Apr-10 (also relatively small, at an estimated €135 million revenues in 2009) — see Exhibit 278. The group consistently expanded operating margins to historical peak levels (c.24%) in the period between the trough in FY03 and FY08.

Exhibit 278 Richemont Group Operating Results — FY95-FY08


Revenue growth has come from Europe and the Americas with an average growth rate of +9.7% and +9.0% over FY99 and FY08. In recent years, growth has come from Asia, with a CAGR of +8.9% in FY01-FY08 (see Exhibit 279).

Exhibit 279 Revenues by Geography — Richemont Group, 1998-2008


0

1

2

3

4

5

6

7

8

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

Rev

enue

s an

d O

pera

ting

Prof

its, €

bn

0%

5%

10%

15%

20%

25%

30%

Ope

ratin

g M

argi

n, %

Revenues Operating profits Operating margin

(3) Rothmans taken out of consolidation scope post merger with BAT

(3)

(1) Acquisition of Vacheron Constantin

(2) Acquisition of Panerai and Lancel

(1) (2)

(4) Acquisition of Van Cleef & Arpels

(4)

(5) Acquisition of Jaeger-LeCoultre, IWC and A.Lange & Sohne

(5)

(6) Disposal of Hackett

(7) Disposal of Old England

(6)

(7)

-

1,000

2,000

3,000

4,000

5,000

6,000

FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

Rev

enue

s, €

m

CAGR

5.6%

9.0%

FY99-089.6%

Total

9.7%

-0.5%

FY01-08

4.6%

na

8.9%

6.2%

5.3%

Japan

Americas

Asia Pacifc (ex. Japan)

Europe


Exhibit 280 outlines notable M&A activities for the 1996-2006 decade. The group strengthened its presence in watches substantially with the acquisitions of Jaeger Le-Coultre, IWC and A Lange & Söhne in Dec-00.

Exhibit 280 Overview of Significant M&A Activities


With sales of €5.3 billion and operating profit of €1.2 billion in FY08 (2007), and an almost exclusive focus in top-end jewelry and watches, Richemont is the largest high-end "hard luxury" player. Jewellery Maisons and Specialist Watchmakers contribute to the majority of group's revenues and operating profits, and as well as growth (see Exhibit 281 for the FY03-FY07 period, as an example).

As of FY10 (2009), Jewellery Maisons (Cartier, Van Cleef and Arpels, etc.) and Specialist Watchmakers (Lange & Söhne, Piaget, Vacheron Constantin, Jeager Le Coutre, IWC, etc.) represented more than three-quarters of sales; Writing Instruments (Montblanc) for more than 10%; and Leather Goods (reported within Other) for just 5%.

Exhibit 281 Divisional Revenues and Operating Profits — FY03 and FY07


The analysis of trading results by division is complicated by the presence of multiple product categories in each division and brand — with the exception of Specialist Watchmakers. For example, Cartier, a Jewellery Maison, spans watches, jewelry, leather goods and accessories. Looking at sales by product category, the biggest contributors are jewelry and watches, accounting for c.25% and c.50% of group revenues respectively in FY07 (see Exhibit 282).

Date CompanyPre-Transaction Sales

(SFr million) ConsiderationJun-96 Burrus Tobacco (100%) 525Mar-97 Merger of Canal+ and Nethold. Richemont owns 15% of the enlarged Canal+1997 Acquisition of Panerai1997 Acquisition of LancelMar-98 Buyout of Vendome's minority interests (30%) €1,036m May-99 Acquisition of Van Cleef & Arpels (60%) SFr 460mJun-99 Merger of Rothmans and BAT. Richemont owns 23.3% of the enlarged BATJul-00 Manufacture Jaeger-LeCoultre SA (40%) SFr 280mAug-00 Acquisition of 49% stake in Hanover Direct Inc., a direct retailing business US$70mDec-00 Acquisition of Jaeger Le-Coultre (60%), IWC (100%) and A Lange & Sohne (90%) 349.4 SFr 2,800mApr-01 Acquisition of a further 20% stake in Van Cleef & ArpelsJan-03 Acquisition of the remaining 20% stake in Van Cleef & ArpelsMay-03 Disposal of interest in Hanover Direct Inc. US$40mJun-05 Disposal of Hackett Limited US$13.5mApr-06 Disposal of Old England

CAGRContribution to Growth Operating Profits CAGR

Contribution to Growth

€ Million FY03A FY07A FY03-FY07 FY03-FY07 FY03A FY07A FY03-FY07 FY03-FY07Jewellery Maisons 50% 1,994 2,435 5.1% 38% 73% 421 667 12.2% 37%Specialist Watchmakers 25% 808 1,203 10.5% 34% 30% 80 274 36.0% 30%Writing Instrument Maisons 12% 394 585 10.4% 16% 12% 68 110 12.8% 6%Leather and Accessories 6% 302 307 0.4% 0% -1% (107) (11) nm 15%Other Businesses 6% 153 297 18.0% 12% 2% (25) 20 nm 7%Corporate and Other -16% (178) (144) nm 5%Group 100% 3,651 4,827 7.2% 100% 100% 259 916 37.1% 100%

% of FY07

revenue

% of FY07 Operating

ProfitRevenues


Exhibit 282 Product Mix by Division — FY07


Jewellery Maisons has produced consistently higher operating profit and margins at c.27%, followed by Specialist Watchmakers and Writing Instruments (see Exhibit 283). Other divisions are yet to be material profit contributors.

Exhibit 283 Operating Profit and Margin by Division. FY02-FY08


We constructed a pseudo BCG matrix by plotting revenue growth for the last five periods before the onset of the recession in 2008 versus relative market share, which is calculated by dividing Richemont product category sales by the largest player in the respective industries, or second largest if Richemont is the industry leader in that category (see Exhibit 284).

Richemont (€2.2 billion sales in FY07) and Swatch (c.€2.4 billion sales in 2006) are clear leaders in the watches product category. Richemont's watches are focused in the high-end of the spectrum (with sales growing at a CAGR of 8% in the then latest five periods), making it the star product category of the group.

Jewelry is another high-growth category for Richemont, growing at c.8% CAGR over the last five years. Richemont sales in this area lag in scale behind industry leader Tiffany & Co, which is nevertheless positioned on lower average price points. Writing instruments seem to be another "star" of the group (with high

Watches

Jewellery

Writing Instruments

Leather GoodsClothing & Other

Jewellery Maisons Specialist Watchmakers

Writing Instrument Maisons

Leather and Accessories Maisons

Other Businesses

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Prod

uct M

ix b

y D

ivis

ion,

%

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

-200

0

200

400

600

800

1,000

1,200

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2,000

FY02

FY03

FY04

FY05

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FY07

FY08

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY03

FY04

FY05

FY06

FY07

FY08

FY03

FY04

FY05

FY06

FY07

FY08

Ope

ratin

g m

argi

n (li

nes,

%)

Ope

ratin

g Pr

ofits

(col

umns

, €m

)

Jewellery Maisons Specialist Watchmakers Writing Instrument Maisons

Leather & Accessories Maisons

Other Businesses


sales growth of over 8% p.a. in the last few years before the downturn), supported by aggressive distribution development by Montblanc. This product area seems materially less important for the group in terms of size, and destined to remain behind watches and jewelry in medium-term growth.

Despite the high growth at c.14% p.a. due to product expansions by Richemont's brands, leather goods and clothing still lack critical mass and should be seen as an ancillary (in BCG parlance, they would be described as "question marks" and "dogs," respectively). These categories are far from reaching critical mass. As scale means profitability in leather goods and fashion, we do not expect this division to be a meaningful profit contributor to the group going forward, while efforts are under way to bring them to breakeven point.

Exhibit 284 BCG Matrix — Richemont by Product Category


Richemont had also improved return of net assets across all divisions during the last three reporting periods prior to the recent recession. Jewellery Maisons, being the largest division in the group, led with a RONA c.34% in FY07 (see Exhibit 285). Specialist Watchmakers and Writing Instrument Maisons also generated attractive RONA at c.28%. Leather and Accessories Maisons had been loss-making and were therefore excluded from this analysis.

Exhibit 285 Return on Net Assets by Division


JewelleryWriting InstrumentsWatches

Leather GoodsKey: Revenue = €1bn

6 5 4 3 2 1 0.5 0.05

Clothing and Other

0%

4%

8%

12%

16%

Relative Market Share (Log)

Rev

enue

Gro

wth

CA

GR

, FY0

3-07

Group revemue growth

07

05

06

05

0607

06

07

05 05

06

07

06

07

25%

20%

15%

10%

1.81.71.61.51 1.9 2 2.5 33Sales / Net Asset (times)

NO

PAT

/ Sal

es (%

)

20%

15%10%

ISO RONA

30%

Jewellery Maisons

Specialist Watches

Group


Other Businesses


For the purpose of analyzing divisional cash generation, we have assumed constant working capital, as divisional data are not disclosed in the annual accounts. Jewellery Maisons and Specialist Watchmakers generate/account for c.90% of total net cash with a net cash conversion ratio of more than 75% (see Exhibit 286).

Exhibit 286 Cash Generation by Division, FY05-FY07

Note: Cash flow from each division excludes working capital movements.


Considering Richemont's relative scale and SG&A cost position, we would consider that tight SG&A cost control has been an area of excellence and an important contributor to NOPAT growth (see Exhibit 287). Luxury players are predominantly fixed-cost businesses. As sales increase, the vast portion of SG&A costs can be leveraged; that is, SG&A costs become less significant as a percentage of sales, providing room for operating margin expansion. With luxury sales of €5.2 billion in FY10 (2009) — in the same ballpark as Swatch and PPR's Gucci Group — Richemont is far cry from LVMH's scale.

Exhibit 287 SG&A as a Percentage of Revenue by Luxury Company


Divisions Operating profit Operating Cash (ignores WC) Net Cash (ignores WC) Net Cash Conversion2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007€ m € m € m € m € m € m € m € m € m € m € m € m

Jewellery Maisons 456 616 667 428 559 608 378 463 504 83% 75% 76%Specialist Watchmakers 145 227 274 143 211 253 105 175 204 73% 77% 75%Writing Instrument Maisons 58 83 110 67 87 110 52 69 77 90% 83% 70%Leather and Accessories Maisons (41) (38) (11) (26) (22) 2 (37) (33) (18) nm nm nmOther Businesses 2 22 20 9 26 27 (1) 9 7 nm 42% 33%Corporate (59) (169) (144) 52 76 100 8 20 66 nm nm nmGroup 561 741 916 674 938 1,100 506 704 840 90% 95% 92%

Richemont

Swatch

LVMH

PPR - LuxuryEscada

Bulgari

Burberry Hugo BossHermes TiffanyCoach

R2 = 60%R2 = 65%

0%

10%

20%

30%

40%

50%

60%

70%

100 1,000 10,000 100,000FY07 Revenue -Log Scale - €m

SG&

A a

s %

of R

even

ue

Major PlayersMedium Sized Players


Richemont mostly operates in the high end of the W&J market. Watches are the main product category at Richemont, accounting for c.50% of the group revenue. Richemont distributes watches through seven specialist brands as well as through brands in other divisions, for example Cartier and Montblanc. The specialist watchmakers are A. Lange & Söhne, Piaget, Vacheron Constantin, Jaeger Le Coultre, IWC, Baume & Mercier and Officine Panerai.

Our analysis of brands by recommended retail prices shows that one of Richemont's brands — Piaget — leads the pack, ahead of Swatch brands and other independent brands. The average list price of the 135 Piaget watches that we researched was c.£57,000 compared to c.£25,000 for the runner-up, Breguet. For limited-edition watches, Patek Philippe retailed by far the most expensive items: The average price of the eight Patek Philippe watches we included in our data set was little short of £900,000 versus c.£300,000 for A. Lange & Söhne (see Exhibit 288 and Exhibit 289).

Exhibit 288 Average List/Recommended Retail Prices by Brand

Source: thewatchsource.co.uk, armstrongrockwell.com, swissluxury.com, philippeswatches.com, corporate reports and Bernstein estimates and analysis.

Exhibit 289 Average List/Recommended Retail Prices — Limited Edition

Source: thewatchsource.co.uk, armstrongrockwell.com, swissluxury.com, philippeswatches.com, corporate reports and Bernstein estimates and

analysis.

135

119 53 23 64

256 254 43 250 8 236 162 13 66 19 409 8 39 5 191 -

10

20

30

40

50

60

70

Pia

get

Bre

guet

Pat

ek P

hilip

pe

Rog

er D

ubui

s

A. L

ange

& S

ohne

Rol

ex

Uly

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Nar

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hero

n C

onst

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Car

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Gla

shut

te

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th

Jaeg

er-L

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Offi

cine

Pan

erai

IWC

Bre

itlin

g

Om

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Wem

pe

Ray

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Bau

me

& M

erci

er

TAG

Heu

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Ave

rage

Lis

t Pric

e, £

000s

# of watches in data

Red: Richemont

Green: Swatch

Blue: LVMH

18 26 1 7 1 26 19

1

8

-

100

200

300

400

500

600

700

800

900

1,000

Pat

ek P

hilip

pe

A. L

ange

&S

ohne

Bre

guet

Jaeg

er-

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Wem

pe

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ubui

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Uly

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Nar

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ist P

rice

- Lim

ited

Editi

ons,

£00

0s

# of watches in data

Red: Richemont

Green: Swatch

Watches & Jewelry (Specialist Watchmakers & Jewellery Maisons)


The watch industry is relatively fragmented, with Richemont and Swatch being the key players (see Exhibit 290). We would expect further industry consolidation going forward as large players seek to strengthen their positions, both in terms of brand portfolio and in terms of R&D and high-end manufacturing capacity.

Exhibit 290 Watch Market Positioning by Price Category by Brand

Source: Koncept Analytics, corporate reports and Bernstein estimates and analysis.

We do not expect high-end-focused players to fare better during an adverse macro cycle than others focused on the low-to-middle ground. Richemont group revenue growth (adjusted for acquisitions during FY01), correlates tightly to OECD GDP growth (see Exhibit 291). This is in line with what happens at competitors Swatch and LVMH (see Exhibit 292 and Exhibit 293). The cyclicality is also reflected in the group operating profit line (see Exhibit 294). A similar susceptibility to the macro environment is also apparent in watches, which account for more than 50% of Richemont's revenues (see Exhibit 296 and Exhibit 297).

Richemont Swatch LVMH Bulgari OthersMarket Share 13.8% 14.1% 4.5% 1.8% 65.8%

Of which Rolex = 13.3%SegmentElitist Luxury Segment> €10k

A. Lange & SöhnePiaget

Breguet Daniel RothGerald Genta

Patek PhilippeF.P. JourneFranck MullerGirard-Perregaux


Vacheron Constantin Jaquet DrozLéon HatotBlancpainGlashütteOriginal

ZenithHublot

Audemars PiguetUlysee NardinRoger DubuisParmigianiDubey & Schaldenbrad Harry WinstonRichard MilleGreubel Forsey






Omega ChaumetTAG HeuerDior




Longines Rado






Exhibit 291 Richemont — Adjusted Revenue Growth vs. OECD GDP Growth

Source: Global Insight, corporate reports and Bernstein estimates and analysis.

Exhibit 292 LVMH — Revenue Growth vs. OECD GDP

Growth Exhibit 293 Swatch — Adjusted Revenue Growth vs.

OECD GDP Growth



Richemont - Group

FY07

FY06

FY05

FY04FY03

FY02

FY01FY00R2 = 66.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

OECD - GDP YoY Growth %

Adj

uste

d R

even

ue G

row

th

1999

2000

2001

2002

2003

20042005 2006

2007

R² = 45.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0% 1% 2% 3% 4% 5%

LVM

H G

roup

Org

anic

Rev

enue

Gro

wth


LVMH Group Swatch Group

2007

2006

2005

2004

20032002

2001

2000

1999

1998

R2 = 58.9%

-5%

0%

5%

10%

15%

20%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%


Rev

enue

gro

wth


Exhibit 294 Richemont Group — Operating Profit Growth vs. OECD GDP Growth

Source: Global Insight, corporate reports and Bernstein estimates and analysis. Exhibit 295 Specialist Watchmakers — Revenue

Growth vs. OECD GDP Growth Exhibit 296 Richemont Watches — Adjusted Revenue

Growth vs. OECD GDP Growth



Richemont - Group

FY07

FY06

FY05

FY04

FY03

FY02

FY01FY00

y = 33.0227 x - 0.6312 R2 = 0.5222

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%


Ope

ratin

g Pr

ofit

Gro

wth

Richemont - Specialist Watchmakers

FY03

FY04

FY05

FY06

FY07

y = 1540.3%x - 29.2%R2 = 52.6%

-25%-20%-15%-10%-5%0%5%

10%15%20%25%30%

0% 1% 2% 3% 4%OECD GDP YoY Growth %

YoY

Rev

enue

Gro

wth

, %

Richemont - Watches

FY01

FY02 FY03FY04

FY05

FY06

FY07

y = 1054.6%x - 18.2%R2 = 59.2%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%


Adj

uste

d R

even

ues

grow

th


The cyclicality can also be found in Jewellery Maisons (Cartier and Van Cleef & Arpels) and the jewelry category (see Exhibit 297 and Exhibit 298). Similar correlations can be found in Swatch, Richemont's main competitor in watches, and LVMH's growing W&J business (see Exhibit 299 and Exhibit 300).

Exhibit 297 Jewellery Maisons — Revenue Growth vs.

GDP Growth in OECD Exhibit 298 Richemont Jewelry — Revenue Growth vs.

OECD GDP Growth



Exhibit 299 Swatch Watches and Jewelry — Revenue

Growth vs. OECD GDP Growth Exhibit 300 LVMH Watches and Jewelry — Revenue

Growth vs. OECD GDP Growth



Richemont - Jewellery Maisons

FY07

FY06

FY05

FY04FY03

y = 1869.3%x - 43.3%R2 = 68.8%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0% 1% 2% 3% 4%OECD - GDP YoY Growth %

YoY

Rev

enue

Gro

wth

, %

Richemont - Jewellery

FY01

FY02

FY03 FY04

FY05

FY06

FY07

y = 1208.0%x - 19.3%R2 = 54.8%

-15%-10%

-5%0%5%

10%15%20%25%30%35%40%

0% 1% 2% 3% 4%


Jew

elle

ry -

YoY

Rev

enue

Gro

wth

, %

Swatch - W&J

2007

2006

20052004

200320022001

20001999

1998

y = 781.7%x - 11.5%R2 = 64.8%

-5%

0%

5%

10%

15%

20%

25%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%


Rev

enue

gro

wth

LVMH - W&J

2007

2006

2001

2002

20032004

2005

y = 12.7459 x - 0.2304 R2 = 0.4977

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%


Rev

enue

gro

wth


Operating profit performance in watches and jewelry is very susceptible to macro slowdowns, given the strong correlation found (see Exhibit 301 to Exhibit 303).

Exhibit 301 Specialist Watchmakers — Operating

Profit Growth vs. OECD GDP Growth Exhibit 302 Operating Margin Comparison:

Specialist Watchmakers vs. Swatch W&J and LVMH W&J — FY02 to FY07



Exhibit 303 Jewellery Maisons — Operating Profit Growth vs. GDP Growth in OECD


In the long term, we see the watches industry consolidating, through M&A and growing upstream investments in manufacturing and R&D. Richemont has the resources to play a key role in this context.

Richemont's biggest competitor, Swatch, has been leading the run-up in capital expenditures in the watches and jewelry area. Richemont has been following suit and seems to have even stronger financial muscle to lead in this area (see Exhibit 304 and Exhibit 305). LVMH would seem the only non-specialist player that could over time build a meaningful presence in this area by M&A (shown by the recent acquisitions of Hublot and Bulgari), leveraging the material operating cash flow of its other luxury businesses.

Richemont - Specialist Watchmakers

FY07

FY06FY05

FY04

FY03

R2 = 75.8%

-150%

-100%

-50%

0%

50%

100%

150%

0% 1% 2% 3% 4%

OECD GDP YoY Growth %

Ope

ratin

g Pr

ofit

Gro

wth

, %

Specialist Watchmakers

LVMH - W&J

Swatch - W&J

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

FY02 FY03 FY04 FY05 FY06 FY07

Ope

ratin

g M

argi

n, %

Richemont - Jewellery Maisons

FY03 FY04

FY05FY06

FY07

R2 = 68.5%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

0% 1% 2% 3% 4%OECD - GDP YoY Growth %

Ope

ratin

g Pr

ofit

Gro

wth

, %


Exhibit 304 Capital Expenditure in Watches and Jewelry

Exhibit 305 Operating Cash Flow by Group

Note: 2007 = FY08 (ending Mar-08) for Richemont.


Note: 2007 = FY08 (ending Mar-08) for Richemont.


Before the onset of the recent recession, manufacturing facility expansion and M&A had been key themes in the watches industry (see Exhibit 306 and Exhibit 307).

Exhibit 306 News Search Shows Expansion in Manufacturing Capacity and Downward

Integration…

Source: FHS and Bernstein estimates and analysis. Exhibit 307 …And M&A of Brands (Before the Onset of the Recent Recession)


0

50

100

150

200

250

2003 2004 2005 2006 2007

Cap

ital E

xpen

ditu

re in

Wat

ches

and

Jew

elle

ry, €

m

Swatch Richemont - W&JLVMH - W&J Linear (Richemont - W&J)

-

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006 2007

Gro

up O

pera

ting

Cas

h Fl

ow, €

m

Swatch Richemont LVMH Linear (Richemont)

Date Brand Group Description

Jan-08 Swatch Swatch Formed strategic alliance with TiffanyApr-07 Franck Muller Private Acquisition of Martin Braun, a small luxury watchmakerMar-07 Richemont Richemont Formed joint venture with Ralph Lauren

Date Company Group Description

Apr-08 Cartier Richemont New workshop in MeyrinFeb-08 Jaeger-LeCoultre Richemont Manufaucturing facility extension by 56% over 2 yearsJan-08 Harry Winston Harry Winston Diamond Acquisition of a facility in Plan-les-OuatesJan-08 Piaget Richemont Manufaucturing facility extension by 10%Jan-08 Chopard Private Purchase of new sites in Meyrin and FleurierNov-07 François-Paul Journe Private Vertical integration by acquiring 50% of Elinor, a French manufacturer of precious metal casesAug-07 Bucherer Private Acquisition of Techniques Horlogères Appliquées (THA) SA, a manufacturer based in Sainte-CroixJun-07 Audemars Piguet Private Investment into new facilityNov-06 Nivaros-FAR Swatch Investment in new facility in Fontaines with 3,000 m2 of space and doubling workforce from 160 to 300 in 4 years.Nov-06 DYB Swatch Investment in new buildingNov-06 Maurice Lacroix Private Investment in a movement production unit in MontfauconNov-05 Hermes Hermes Acquired 25% stake in Vaucher Manufacture Fleurier with CHF25mOct-05 Prestige d'Or Bulgari Acquired a 51% stake in Prestige d'Or, a producer of steel and precious metals watch strapsOct-01 HGT Petitjean Richemont Richemont acquired HGT Petitjean, a specialist in mechanical movements assemblyJun-01 Patek Philippe Private Patek Philippe took over Ergas Sarl, active in high precision micromechanical component manufacturingMay-01 Patek Philippe Private Patek Philippe took over Calame & Cie, a watch case makerNov-00 Franck Muller Private Acquired Linder and Oignons Juracie, two component manufacturersJul-00 Swatch Swatch Acquired Universo, a watch hands maker

Date Brand Group Description

Apr-08 Hublot LVMH Acquisition of Hublot (Sales c. CHF150m)Nov-06 Richemont Richemont Acquired a 20% stake in Grebuel Forsey, a complicated watchmaker with avg retail price of c.CHF400kJan-04 Ebel Movada Movado group acquired Ebel (sales c.US$65m) from LVMHJan-01 Festina Festina Lotus Group Acquired Candino, a medium priced brand

Dec-00 Richemont RichemontAcquired Les Manufactures Horlogeres SA, which consists of Jaeger Le-Coultre, IWC and A Lange & Sohne, for CHF2.8bn

Jul-00 Bulgari Bulgari Acquired Gerald Genta and Daniel Roth, two luxury watch brands, for CHF37.6mJul-00 Richemont Richemont Acquired a 40% stake in Jaeger-LeCoultre SA for CHF280mJun-00 Gucci Gucci Acquired Boucheron, a French luxury brand of perfume, jewellery and watchesJun-97 Richemont Richemont Acquisition of Panerai

Date Company Group Description

Nov-07 Richemont Richemont Acquisition of Swiss watch case and bracelet manufacturer Donzé-Baume SAMar-01 Bertolucci Private Bertolucci, a watch manufacturing company, is taken over by Swiss investors


The Writing Instruments Maisons division consists of two brands, Montblanc and Montegrappa, which have been traditionally known as manufacturers of luxury writing instruments. Montblanc was founded in 1906, and Montegrappa (acquired by Richemont in 2000) was founded in Italy in 1912. More recently, these brands have expanded into the watches, accessories and jewelry categories; these are the areas driving the vast majority of growth at Montblanc, for instance. The division accounts for more than 10% of the group's revenue and operating profits (see Exhibit 308 and Exhibit 309).

Exhibit 308 Revenue as a Percentage of Group —

FY02 to FY08 Exhibit 309 Operating Profit as Percentage of Group —

FY02 to FY08


Product category expansion and distribution development have fuelled operating margin expansion in recent periods, leaving operating margin at c.19% in FY08 (see Exhibit 310). Operating margins in Writing Instrument Maisons have reached historical peaks at c.20%. As product lifecycle matures, we expect further operating margin expansion to be limited in the medium term.

Exhibit 310 Operating Margins — FY02 to FY08


12%12%12%

12%12%11%10%

0

100

200

300

400

500

600

700

FY02 FY03 FY04 FY05 FY06 FY07 FY08

Writ

ing

Inst

rum

ent M

aiso

ns

Rev

enue

s, €

m

As % of Group

11%12%11%

10%19%26%14%

0

20

40

60

80

100

120

140

FY02 FY03 FY04 FY05 FY06 FY07 FY08Writ

ing

Inst

rum

ent M

aiso

ns O

pera

ting

Prof

its, €

m

As % of Group


0%2%4%6%8%

10%12%14%16%18%20%

FY02 FY03 FY04 FY05 FY06 FY07 FY08

Ope

ratin

g M

argi

n, %

Writing Instruments Maisons


The two brands in this former division (now reported as part of the Other Businesses segment), Dunhill and Lancel, were loss-making despite experiencing mid-single-digit top-line growth, even before the onset of the recent recession (see Exhibit 311 and Exhibit 312).

Exhibit 311 Revenue as a Percentage of Group —

FY03 to FY08 Exhibit 312 Revenue as a Percentage of Group —

FY03 to FY08


Richemont's leather and accessories brands are below par in terms of operating margin performance (see Exhibit 313), lagging in both scale and brand power. Despite improving margins pre-recession, we hardly expect this area to become a meaningful contributor to Richemont business in the future (see Exhibit 314). We anticipate SG&A costs will continue to absorb large portions of profits in these relative small brands.

Exhibit 313 Operating Margin by Luxury Brand — FY02

to FY08 Exhibit 314 Operating Profit Forecasts: Leather and

Accessories Maisons — FY05 to FY08

Note: 2007 = FY08 (ended Mar-08) for Richemont.



6%6%

7%

7%8%

8%

230

240

250

260

270

280

290

300

310

320


Leat

her &

Acc

esso

ries

Mai

sons

R

even

ues,

€m

As % of Group

0%-1%-5%-7%-14%

-41%

-120

-100

-80

-60

-40

-20

0


Leat

her &

Acc

esso

ries

Mai

sons

O

pera

ting

Prof

its, €

m

As % of Group

Richmont - L&AM

LVMH - F&LG

Gucci

YSL

Bottega Veneta

-80%

-60%

-40%

-20%

0%

20%

40%

60%

2001 2002 2003 2004 2005 2006 2007

Ope

ratin

g M

argi

n, %

FY05 FY06 FY07 FY08ERevenues 283 307 309 324 Estimated Gross Profits 164 178 182 194 Estimated SG&A Costs (202) (189) (185) (194) Operating Profits/ (Losses) (38) (11) (3) 0

As % of RevenuesEstimated Gross Profits 58% 58% 59% 60%Estimated SG&A Costs -71% -62% -60% -60%Operating Profits -13% -4% -1% 0%

Other Businesses: Leather and Accessories


Richemont also owns Purdey, a sporting shotguns and rifles manufacturer and distributor based in London, and other fashion brands, including Chloé, Shanghai Tang and Azzedine Alaia. These businesses bear an immaterial profit impact.

The reporting division also includes online luxury distributor Net-a-Porter. In Apr-10, Richemont acquired the 67% stake it did not already own in this business. Revenues in calendar 2009 were estimated at €135 million (see Exhibit 315).

Exhibit 315 Net-a-Porter Is Regarded as a High-Profile Success Story Among Pure-Play Internet

Ventures in the Luxury Goods; as of Apr-10, It Is Part of Richemont Group

Source: Factiva, Times Online, The Telegraph, Capital IQ, corporate reports and websites and Bernstein analysis.

Net-à-Porter.com

Description

■ Online retailer (exclusively to women) for designers' collections, clothing, handbags, shoes & accessories■ Its webpages (views: 2.5 million women/month) feature a magazine with editorial content, updated weekly■ Positions itself as a luxury brand too (e.g., by offering high-standard packaging and customer care)■ 2 main online portals: International and United States― International : ships from London to Europe, Africa, Middle East, Asia, Oceania; billing in € or £― U.S. : product shipped from New York to U.S., Canada, LatAm markets; billing in US$

■ Offers 8% commission (excl. shipping, taxes, returns) for purchases made by visitors of "affiliated websites"― Websites can apply to become an "affiliated website" for free

Key Figures

■ FY09 sales (year ended Jan-10) of £120 mil. (vs. £37 mil. in FY06, implying c.50% sales CAGR in last 3 years )■ Total headcount of c.850 across its London and New York offices in 2009 (vs. c.300 in FY06)■ Reported +234% rise in PBT in FY08 (to Jan-09) from £10.1 mil. to £81.5 mil., largely defying the recession

■ Websites record an avarage of 18,500 unique visitors/day■ Net-a-Porter has an average order value of £500, according to The Telegraph

Timeline

■ 2000: Launched in June 2000 by Natalie Massenet and based in London, U.K. as Net-a-Porter Ltd. ― N. Massanet is a former Tatler journalist; she set up the business with initial investment of £850,000

■ 2010: Acquired by Compagnie Financiere Richemont in Apr-2010― Equity valued at £350 million by the offer― CFR offered to acquire remaining 67% stake in the business; owned c.33% stake prior to transaction― Net-a-Porter founder stayed on as Executive Chair, making a £15 mil. re-investment into the business― Internet retailer to operate as an independent entity alongside other CFR maisons― Sellers included: Massanet (18% stake), the Busquets family (30%) and employees (16%)

Other Businesses: Apparel, Purdey and Net-a-Porter


M&A Scenarios in the Watches Competitive Landscape

Watches are one of the most consolidated categories in luxury goods. We estimate that the top four watches groups — Swatch, Richemont, Rolex and Patek Philippe — command a combined c.37% market share. This compares to c.37% in leather goods, c.17% in shoes and c.10% in fashion (see Exhibit 316). The category is also notoriously consolidated upstream, with Swatch producing c.75% of all watch movements (by volume), which is equal to c.55% of the value share.

Exhibit 316 Watches and Leather Goods Are More Consolidated Than Categories

Such as Shoes and Fashion

Notes: (1) Top four players' share based on Altagamma 2008 market categories: Leather Goods (LVMH, Gucci, Hermes and Prada); Watches (Swatch,

Richemont, Rolex and Patek Philippe); Shoes (Prada, Tod's, Gucci and Ferregamo); and Fashion (Calvin Klein, Ralph Lauren, Armani and Versace).

(2) Sales for each player reflects total group sales attributable to category (e.g., LVMH = Leather goods from Louis Vuitton, Fendi, etc.) (3) Market shares for Fashion players calculated based on a "retail equivalent" basis, multiplying retail, wholesale and royalty revenues by 1.0x,

2.5x and 22.5x, respectively. Within Fashion, we assumed one-third of Calvin Klein as "luxury" and 90% as apparel; for Ralph Lauren we assumed 75% apparel and one-third luxury.

Source: Factiva, Altagamma, Verdict, corporate reports and presentations, and Bernstein estimates and analysis.

Scale provides significant competitive advantage to leaders — more so than in the case of soft luxury. Benefits from scale include: (1) better ability to absorb manufacturing and R&D investments; (2) more efficient capacity utilization; (3) lower physical distribution costs; (4) stronger media-buying muscle; (5) greater clout with multi-brand distributors/retailers — higher margins; and (6) more efficient after sales operations. Richemont and Swatch have been able to leverage their scale and industry leadership to maintain higher operating profit margins and return on net assets (RONA) metrics versus smaller challengers (e.g., LVMH's Watches & Jewelry segment).

Exhibit 317 provides a general sketch of the watches value chain. It highlights how segments such as R&D, manufacturing, wholesale and after-sales are particularly relevant for hard luxury.

37% 37%

20%

10%

0%

10%

20%

30%

40%

50%

Watches Leather Goods Shoes Fashion

Top

4 Sh

are

of R

espe

ctiv

e Lu

xury

Cat

egor

y -%

Watches: One of the Most Consolidated Luxury Categories

Scale Provides Leaders With Significant Competitive Advantage, More So Than in Soft Luxury Categories


Exhibit 317 Scale and Multi-Brand Presence Can Help Boost Specific Aspects of the Watch Value Chain — R&D, Manufacturing, Wholesale and After-Sales Are Areas That Are Particularly Relevant for Hard Luxury


Richemont and Swatch lead the industry, with watches sales of €2.6 billion (2008) and CHF4.5 billion (2008; €2.9 billion), respectively. Their focus is at the opposite ends of the price spectrum (see Exhibit 318), although both span almost the whole length of the price pyramid. Rolex and Patek Philippe follow in rank at No. 3 and No. 4, respectively. The hard luxury business of LVMH is in No. 5, with a relative scale of c.0.3x versus the leader (see Exhibit 319).

Exhibit 318 Watch Brands — Positioning by Price Category

Source: Koncept Analytics, corporate reports and websites, and Bernstein estimates and analysis.

R&D Sourcing Manufacturing Logistics Marketing Wholesale Retail After-Sales

Raw material research

Supplier negotiations Technology investment

Warehousing Media buying Distributor negotiations

Landlord negotiations

Local presence - response time

Movement development

Capacityutilization

Transportation Salesforce optimization

DOS services

LegendMost relevant

for hard luxuryEqually relevant for hard

and soft luxury










ZenithHublot






OmegaTiffany & Co.













Exhibit 319 Relative Size of Watch Divisions — Swatch, Richemont and LVMH

Note: Richemont reflects sales of all watches sold by group (e.g., Cartier + Specialist Watchmakers + Others); 2009 is an estimate as of Jul-10.


Industry leadership and scale put Richemont and Swatch ahead of smaller competitors on operating profit and RONA (see Exhibit 320 and Exhibit 321). LVMH's Watches & Jewelry operating margin has historically lagged those of Richemont and Swatch, despite its leading position in the broader luxury goods market. While this lag has recently been reduced, it still extends to between 500 bps and 1,000 bps.

Exhibit 320 LVMH's Watches & Jewelry Operating Margin Has Historically Lagged Richemont's

and Swatch's; While This Lag Has Recently Reduced, It Still Extends to Between 500 bps and 1,000 bps

Note: Margin for Richemont reflects Specialist Watchmakers segment and not the entire Watches product category.


1.0x 1.0x 1.0x 1.0x 1.0x 1.0x 1.0x 1.0x 1.0x0.92x

0.87x 0.84x 0.90x

0.97x0.96x 0.94x 0.90x 0.87x

0.28x 0.28x 0.27x 0.26x 0.28x0.31x 0.31x 0.31x

0.28x

0.0x

0.1x

0.2x

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

2001 2002 2003 2004 2005 2006 2007 2008 2009

Rela

tive

Size

(Sw

atch

= 1.

0x)

Sw atch - W&J Richemont - Watches LVMH - W&J

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

25%

30%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

EBIT

Mar

gin

-%

Richemont - Specialist Watchmakers Swatch - W&J LVMH - W&J


Exhibit 321 Return on Net Assets at LVMH's Watches & Jewelry Division Lags Richemont's (Specialist Watchmakers) and Swatch's (Watches and Jewelry) by Circa 15% and 20%, Respectively

Note: Margin for Richemont reflects Specialist Watchmakers segment and not the entire Watches product category.


Leaders have taken top positions in key emerging markets too. We note that both Richemont and Swatch have positioned themselves at the top of Chinese consumer's minds — as indicated by the trend in the Hurun survey. In fact, as a result of the multi-brand nature of their portfolios, these two companies hold six of the top eight watch brands in the 2009 survey (see Exhibit 322).

Exhibit 322 In Key Growth Markets Such as China, LVMH W&J Brands Appear to Trail

Richemont and Swatch in Top-of-Mind

Note: Yellow (lighter shade when printed in black and white) = Richemont; blue (darker) = Swatch.

Source: Hurun and Bernstein analysis.

040506

07

0809

05

06

0708

09

0.5 0.7 1 1.5 2

04

0506

07

0809

NO

PAT

/ Sal

es (%

)


Swatch

20%

15%

10%

5%

ISO RONA

30%

Richemont

LVMH

17%

6%

10%

Hurun's Best of Best 2006 to 2010 Survey in China

Brands2010

Partial2009 Rank

2008 Rank

2007 Rank

2006 Rank

Patek Philippe 1 1 1 1 2Vacheron Constantine — 2 2 2 1Blancpain — 3 3 — —Breguet — 4 4 4 3Audemars Piguet — 5 9 7 5IWC — 6 7 6 4Jaeger-Le Coultre — 7 5 5 —Glashutte — 8 — — —Franck Muller — 9 8 8 —Juvenia — — 6 — —Bulgari — — — 3 —


It is difficult to imagine that even large multi-category groups like LVMH and PPR could mount a credible challenge to category leaders, without "game changing" M&A.

We have carried a broad "radar sweep" of independent watches brands (primarily via the Swiss Watch Export Statistics portal — FHS), and have found that most of the independent brands have very limited size. With the exclusion of Patek Philippe and Rolex — and possibly medium-size players such as Audemars Piguet, Chopard and Breitling — opportunities to build scale through bolt-on acquisitions seem limited. See Exhibit 324 to Exhibit 326.

Moreover, as we have recently pointed out in our Blackbook, European Luxury Goods: What M&A? published in May-10, adding value in luxury through M&A is all but easy. Watches seems no exception: Even a leading player like Richemont has struggled and is struggling with its latest addition, Roger Dubuis (see Exhibit 330 for further acquisition details). Moreover, the two hard luxury champions, Richemont and Swatch, have not participated in major watch-related M&A in recent history (see Exhibit 329).

As watch brand-specific sales figures for the majority of names is undisclosed, we created a high-level model that would help us hone in on the general size of a particular brand. Specifically, we utilized sales data points for which we had the most confidence and regressed these figures against the number of Google hits. We found that the brands with the highest level of sales had a correspondingly high level of hits (R-squared of 80%). Using this analytical exercise, combined with various sources of public disclosure, we were able to broadly place companies in size buckets and into their respective groups (A through D). The regression is shown in Exhibit 323, and in Exhibit 327 and Exhibit 328 we categorize the company sizes based on the number of Google hits.

Exhibit 323 We Have Observed a Satisfying Relationship Between Brand Sales and Google Hits

— We Have Used This High-Level Relationship to Estimate the Relative Size of Independent Watches Brands for Which No Public Data Are Available

Note: Google search was conducted by typing in brand name watches — e.g., "Rolex watches."

Source: Bloomberg L.P., Koncept Analytics, Factiva, Google, corporate reports and Bernstein estimates and analysis.

BreguetBlancpainJaquet Droz

Léon Hatot

Omega

Longines

RadoPierre Balmain

Swatch

Flik Flak MovadoHermes

Rolex

y = 531.90x - 183.62R² = 0.80

0

500

1,000

1,500

2,000

2,500

3,000

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

2008

E S

ales

(€m

)

Google Hits (millions)

LVMH and PPR Likely Could Not Challenge Leaders Without "Game Changing" M&A


Exhibit 324 Richemont and Swatch Brands (Group A) Along With Large Private Brands Such as Rolex and Patek Philippe (Group B) Are the Dominant Forces in the Watches Market — Aspiring Challengers Such as LVMH (Group C) Do Have Some Scale, Though Most Companies in This Subset Are Relatively Small in Comparison to Group A and B

Note: We determined relative company size based on implied regression value and independent judgment in selected cases.

Source: FHS website, Bloomberg L.P., Koncept Analytics, Factiva, Google, corporate reports, and Bernstein estimates and analysis. Exhibit 325 In Aggregate (of Groups A, B and C), the Swatch and Richemont Watch Portfolios

Generate Circa 50% of Google Hits — With Patek Philippe and Rolex Generating Circa 10%

Note: Percentages in title refer to sample of Group A, Group B and Group C from Exhibit 324.

Source: Google, corporate reports and Bernstein estimates and analysis.

A Richemont and Swatch BrandsRichemont SwatchA. Lange & Sohne Piaget Balmain Leon HatotBaume et Mercier Ralph Lauren (JV) Blancpain LonginesCartier Roger Dubuis Breguet MidoDunhill Vacheron Constantin ck Watch OmegaGreubel Forsey Van Cleef & Arpels Certina RadoIWC Flik Flak SwatchJaeger LeCoultre Glashutte Tiffany WatchesMontblanc Hamilton TissotPanerai Jaquet-Droz Union Glashutte

B Large Private Brands C Aspiring Challengers

Rolex Breitling LVMH: PPR:Patek Philippe Chopard TAG Heuer Girard-PerregauxAudemars Piguet Ulysse Nardin Hublot Gucci Watches

Zenith YSL WatchesLV WatchesDior WatchesChaumet Watches

Other:Bulgari (Bulgari, Daniel Roth)Chanel Watches Armani WatchesHermes Watches Versace Watches

Richemont

Sw atch

LVMH

Hermes

Rolex

Patek Philippe

BulgariPPR

ArmaniVersace

Chanel

-4

-2

0

2

4

6

8

10

12

14

16

18

20

22

0 5 10 15 20 25 30

Bran

ds in

Por

tfolio

Google Hits (Sum of Brands, mn)

Signif icant Google hits for: Yves Saint Laurent

Watches

Signif icant Google hits for: Louis Vuitton Watches


Exhibit 326 Group D — Small and Medium-Size Independent Watch Players

Notes: (1) We determined relative company size based on implied regression value and independent judgment in selected cases; (2) brands primarily identified per FHS industry website.

Source: FHS website, Bloomberg, Koncept Analytics, Factiva, Google, corporate reports and Bernstein estimates and analysis.

D Small / Medium Independents

121Time Charmex Endura Leschot RotaryAdriatica Charriol Epos Louis Chevrolet Roventa HenexAerowatch ChronArte Eterna Louis Erard RSWAlain Sauser Chronoswiss F.P.Journe Louis Moinet Saint Honore ParisAlfex Cimier Festina Maurice de Mauriac SarcarAndersen Claude Meylan Formex Maurice Lacroix Schwarz EtienneAntima Clerc Fortis MB&F SeculusAntoine Preziuso Concord Franck Muller Mellerio dits Meller Swiss Alarm ClockAquanautic Consul Frederique Constant Milleret Swiss TimerArmin Strom Corum Furrer-Jacot Milus SwizaArsa Cuervo y Sobrinos Gc Movado TechnoMarineAzzaro, Cyma Gerard Genta Noa TitoniBadollet Cyril Ratel Gianmaria Buccellati Nubeo TraserBedat D'Aguet Glycine Oris TudorBerney-Blondeau Damas Graff Pamp Universal GeneveBertolucci Damiani Grenacher Parmigiani Fleurier VictorinoxBoegli Davosa Grovana Paul Picot Vincent BerardBorel De Grisogono H. Moser Perrelet VulcainBoucheron Delance H3 Tactical Phillippe Du Bois WalthamBovet Fleurier Delaneau Hebe Watch Raymond Weil WengerBulova Delbana Hoga Reuge West End Watch CoBunz Delma Jean d'Eve Revue Thommen Zeno-Watch BaselCandino DeWitt Jeanrichard Richard Mille ZituraCarl F. Bucherer Doxa Jovial Roamer ZodiacCarven Ebel Justex RobergeCatena Eberhard Juvenia RodaniaCatorex Ellicott Le Castel RodolpheCattin Emile Chouriet Le Marquand Romain Gauthier


Exhibit 327 We Have Categorized Watch Brands Into Relative Sizes Based on a Combination of Google Hits and Public Disclosures — A Cutoff of Circa 1 Million Google Hits Distinguished a "Large" Brand from a "Medium' Brand," Though We Placed Several Names With More Than 1 Million Hits Into the "Medium" Category Based on Our Best Estimates

Notes: (1) Companies in italics have been moved into separate categories due to high hit rate as a result of common word in brand name; (2) Google search was conducted by typing in brand name watches — e.g., "Rolex watches."

Source: FHS website, corporate reports, Bloomberg L.P., Koncept Analytics, Factiva, Google and Bernstein estimates and analysis.

Brand Google Hits SizeNotable Parent Brand Google Hits Size

Notable Parent

Large Medium

TAG Heuer 9,940,000 Large LVMH Louis Vuitton Watches 8,570,000 Medium LVMHVan Cleef & Arpels 7,040,000 Large Richemont Chronoswiss 7,190,000 MediumBreitling 5,970,000 Large Ralph Lauren (JV) 4,660,000 Medium RichemontPatek Philippe 4,560,000 Large Yves Saint Laurent 4,200,000 Medium PPRRolex 4,560,000 Large Calvin Klein 3,510,000 Medium SwatchAudemars Piguet 4,500,000 Large Versace 3,200,000 Medium VersaceFranck Muller 3,700,000 Large Gucci 2,320,000 Medium PPRVacheron Constantin 3,130,000 Large Richemont Maurice Lacroix 1,910,000 MediumRaymond Weil 2,980,000 Large Bulova 1,470,000 MediumTiffany Watches 2,950,000 Large Swatch Daniel Roth 1,390,000 Medium BulgariOmega 2,930,000 Large Swatch Victorinox 1,390,000 MediumJaeger LeCoultre 2,860,000 Large Richemont Dior 1,340,000 Medium LVMHCartier 2,600,000 Large Richemont Montblanc 1,270,000 Medium RichemontTissot 2,430,000 Large Swatch Glashutte 1,270,000 Medium SwatchIWC 2,400,000 Large Richemont Movado 1,090,000 MediumGirard-Perregaux 2,210,000 Large PPR Corum 1,060,000 MediumChanel 2,200,000 Large Chanel Roger Dubuis 1,050,000 Medium RichemontBreguet 2,040,000 Large Swatch Longines 1,040,000 Medium SwatchArmani 1,730,000 Large Armani Hermes 1,030,000 Medium HermesUlysse Nardin 1,610,000 Large Richard Mille 1,000,000 MediumPanerai 1,480,000 Large Richemont Noa 957,000 MediumChopard 1,380,000 Large Oris 941,000 MediumBaume et Mercier 1,200,000 Large Richemont Hublot 907,000 Medium LVMHA. Lange & Sohne 1,150,000 Large Richemont Zenith 907,000 Medium LVMHBulgari 1,110,000 Large Bulgari Wenger 907,000 MediumBlancpain 1,050,000 Large Swatch Piaget 881,000 Medium RichemontSwatch 838,000 Large Swatch Eterna 881,000 Medium

Rado 868,000 Medium SwatchEbel 845,000 MediumParmigiani Fleurier 828,000 MediumGc 805,000 MediumEpos 774,000 MediumConcord 761,000 MediumDamas 760,000 MediumSarcar 752,000 MediumMido 745,000 Medium SwatchSwiss Timer 644,000 MediumGerard Genta 608,000 MediumWest End Watch Co 592,000 MediumCertina 579,000 Medium SwatchLouis Moinet 579,000 MediumTechnoMarine 558,000 Medium

Categories - Est. Sales Buckets:Very Small = < €50mSmall = €50 to €100mMedium = €100 to €150mLarge = > €150m


Exhibit 328 We Considered Brands "Small" and "Very Small" If the Number of Google Hits Was Less Than 530,000 or Less Than 100,000, Respectively

Note: Google search was conducted by typing in brand name watches — e.g., "Rolex watches."

Source: FHS website, Bloomberg L.P., Koncept Analytics, Factiva, Google, corporate reports and Bernstein estimates and analysis.

Brand Google Hits SizeNotable Parent Brand Google Hits Size

Notable Parent

Small Small (continued)

Hamilton 5,370,000 Small Swatch Charmex 163,000 SmallJean d'Eve 526,000 Small Rodania 162,000 SmallBedat 525,000 Small Formex 156,000 SmallEberhard 525,000 Small Alfex 155,000 SmallHoga 519,000 Small Saint Honore Paris 153,000 SmallHebe Watch 518,000 Small Nubeo 150,000 SmallTudor 509,000 Small Romain Gauthier 144,000 SmallJovial 508,000 Small Aquanautic 142,000 SmallJaquet-Droz 505,000 Small Swatch Milleret 141,000 SmallFrederique Constant 505,000 Small RSW 128,000 SmallRotary 502,000 Small Grenacher 127,000 SmallVincent Berard 492,000 Small Louis Chevrolet 122,000 SmallZodiac 477,000 Small Union Glashutte 121,000 Small SwatchPaul Picot 465,000 Small Badollet 121,000 SmallJeanrichard 453,000 Small Carven 120,000 SmallTitoni 430,000 Small Schwarz Etienne 120,000 SmallBorel 428,000 Small MB&F 114,000 SmallDoxa 422,000 Small Adriatica 111,000 SmallBalmain 420,000 Small Swatch Cuervo y Sobrinos 108,000 SmallMaurice de Mauriac 420,000 Small Revue Thommen 107,000 SmallFestina 390,000 Small Candino 104,000 SmallDeWitt 383,000 Small Zeno-Watch Basel 103,000 SmallDunhill 378,000 Small Richemont Arsa 102,000 SmallSwiss Alarm Clock 377,000 Small Graff 102,000 SmallGlycine 373,000 SmallPerrelet 361,000 Small Very SmallWaltham 350,000 SmallEmile Chouriet 342,000 Small Catorex 97,700 Very SmallBoucheron 331,000 Small Delma 97,200 Very SmallChaumet 326,000 Small LVMH Juvenia 94,600 Very SmallTraser 317,000 Small Greubel Forsey 86,500 Very Small RichemontBertolucci 312,000 Small Delance 85,400 Very SmallPhillippe Du Bois 301,000 Small Le Castel 82,800 Very SmallH. Moser 268,000 Small H3 Tactical 82,200 Very SmallCharriol 257,000 Small Aerowatch 81,800 Very SmallAzzaro, 251,000 Small Grovana 79,000 Very SmallCyma 249,000 Small Alain Sauser 76,500 Very SmallCarl F. Bucherer 244,000 Small Cimier 69,700 Very SmallLouis Erard 243,000 Small Davosa 62,300 Very SmallRoamer 235,000 Small 121Time 58,700 Very SmallClerc 230,000 Small Pamp 54,100 Very SmallAndersen 226,000 Small Reuge 51,200 Very SmallVulcain 226,000 Small Cattin 48,200 Very SmallDe Grisogono 223,000 Small Antoine Preziuso 46,000 Very SmallRodolphe 223,000 Small Bovet Fleurier 45,200 Very SmallUniversal Geneve 218,000 Small Cyril Ratel 45,200 Very SmallEndura 216,000 Small Roberge 44,500 Very SmallMilus 213,000 Small Armin Strom 39,600 Very SmallCatena 206,000 Small Justex 38,800 Very SmallFortis 201,000 Small Gianmaria Buccellati 37,300 Very SmallFlik Flak 198,000 Small Swatch Le Marquand 36,300 Very SmallF.P.Journe 195,000 Small Leon Hatot 35,300 Very Small SwatchEllicott 189,000 Small Delbana 34,800 Very SmallDamiani 175,000 Small Seculus 31,500 Very SmallBunz 173,000 Small Roventa Henex 29,200 Very SmallDelaneau 173,000 Small Zitura 27,500 Very SmallConsul 165,000 Small Leschot 25,700 Very Small

Berney-Blondeau 23,700 Very SmallBoegli 23,100 Very SmallFurrer-Jacot 21,000 Very SmallSwiza 18,700 Very SmallClaude Meylan 18,000 Very SmallAntima 15,400 Very SmallMellerio dits Meller 14,600 Very SmallChronArte 10,100 Very SmallD'Aguet 4,960 Very Small

Categories - Est. Sales Buckets:Very Small = < €50mSmall = €50 to €100mMedium = €100 to €150mLarge = > €150m


Exhibit 329 The Two Hard Luxury Champions, Richemont and Swatch, Have Not Participated in Major Watch-Related M&A in Recent History — For These Players, M&A Has Been Primarily Utilized in Recent Years to Bolster Production Capabilities

Source: Capital IQ and Bernstein analysis.

Swatch

Year TargetBrands /

Production Description

1992 Blancpain Brand High-end Watches

Breguet Brand High-end WatchesJaquet Droz Brand High-end Watches

Favre & Perret Production Watch Cases

Glashutte BrandUniverso Production Watch Hands

2002 Rubattel & Weyermann Production Dial Producer

2006 Le Prelet Production Dial Producer

Tiffany (Alliance ) BrandIndexor Production Dial Indexes

Burri Production Components DivisionMoebius H. & Sohn Production Lubricants, Coatings

Francois Gloay Production Wheels, Components

Richemont

Year TargetBrands /


2000 Jaeger-LeCoultre Brand High-end Watches

2001 Van Cleef & Arpels Brand Remaining (40%)

Fabrique d'Horlogerie Minerva Production Components & WatchesGreubel Forsey Brand High-end Watches (20% Stake)

2007 Donze-Baume Production Watches Cases & Bracelets

2008 Roger Dubuis Brand High-end Watches

2009 Rouages Production Wheels & Pinions

LVMH

Year TargetBrands /


Tag Heuer Brand High-end WatchesZenith Brand High-end Watches

Chaumet Brand High-end Watches

2008 Hublot Brand High-end Watches

1999

2006

1999

2000

2007

2008


Exhibit 330 Roger Dubuis Continues to Generate Losses Following Its Acquisition by Richemont in Aug-08

Source: Corporate reports and presentations and Bernstein analysis.

Brand: Roger DubuisFounded: 1995HQ: GenevaProduct: Watches

Brand Description

■ High-end positioning (€10,000 entry price point)■ Bold and significant design content■ Complicated movements & know-how and high-end components■ All watches produced in limited series - have Poincon de Geneve (Geneva Seal)■ 6 Boutiques (Geneva, Singapore, Hong Kong (2), Shanghai, Kiev)

Brand Strategy

■ Extending the brand globally (utilize the Richemont distribution platform)■ Further develop network of boutiques■ Control wholesale distribution (less than 200 doors)■ Key forcus on growth markets such as: Greater China, M.East, South America■ Supply high-end escapements to the wider group

Richemont Acquisition / Integration Details

■ Sep-2007: Richemont acquired the component production facility of Roger Dubuis■ Aug-2008: Richemont acquired 60% controlling interest in Roger Dubuis■ Apr-2009: Richemont acquired Asian distribution rights

■ Acquisition generated €93 million in goodwill■ From Aug-08 to Mar-09, Roger Dubuis contributed €8m in revenues and €18m in losses■ As of fiscal year end Mar-10, Roger Dubuis still generates 'significant' losses— Losses partly attributable to post acquisition restructuring


LVMH Buys Bulgari

The LVMH Board of Directors unanimously approved the project of contributing to LVMH the Bulgari family's majority stake in Bulgari SpA, on the evening of Sunday 06-Mar-11. LVMH has also confirmed it would submit a subsequent public tender offer on the shares held by minority shareholders on Monday 07-Mar-11.

LVMH has agreed to a stock transaction to acquire majority control in Bulgari SpA and will launch a cash public tender offer for the company's minorities. LVMH will issue 16.5 million of its own shares in exchange for the 152.5 million Bulgari SpA shares currently held by the Bulgari family, which translates into a 50.4% controlling stake in the Rome-based jewelry heavyweight. LVMH is following the transaction with a public tender offer at a price of €12.25 for shares held by minority holders, to be paid in cash — see Exhibit 331 to Exhibit 334. The deal is expected to close in May/Jun-11, subject to antitrust reviews.

Exhibit 331 Bulgari: Share Outstanding —

Pre-Transaction Exhibit 332 LVMH: Share Outstanding —

Post-Transaction

Source: Bloomberg L.P., corporate reports and Bernstein analysis. Source: Bloomberg L.P., corporate reports and Bernstein analysis. Exhibit 333 LVMH/Bulgari — Overall Transaction Structure

Source: Bloomberg L.P., corporate reports and press releases, and Bernstein analysis and estimates. Exhibit 334 LVMH/Bulgari — Implied EV-to-LTM Multiples

Source: Bloomberg L.P., Capital IQ, corporate reports and press releases, and Bernstein analysis and estimates.

Bulgari - Shares Outstanding No. Shares % TotalFloat (m shares) 143.700 47.5%Non-Float (m shares) 158.646 52.5%o/w Bulgari Family (m shares) 152.500 50.4%o/w Others (m shares) 6.146 2.0%Total outstanding (m shares) 302.346 100.0%

LVMH - Shares Outstanding No. Shares % TotalFloat (m shares) 257.060 52.5%Non-Float (m shares) 232.573 47.5%o/w Bulgari Family (m shares) 16.500 3.4%Total outstanding (m shares) 489.633 100.0%

Exchanged 4-Mar-11 Eq. ValueLVMH/Bulgari (m shares) (€/share) (€m)

Majority control: All-stock transactionSold by Bulgari family 152.5 7.59 1,157Issued by LVMH 16.5 111.5 1,840Premium (implied) - - 59%

Tender OfferBulgari Minorities 149.8 7.59 1,137Tender Offer for Bulgari Min. 149.8 12.25 1,836Premium (implied) - - 61%

Total Equity ValueBulgari Implied Eq. Value 3,675Bulgari Net Debt (Sept-10) 241Bulgari Implied EV 3,916

Bulgari Income Statement (€ mil.) EV / LTMFY09 9M09 9M10 LTM Multiples

Revenues 927 630 711 1,008 4xEBIT (Excl. Restr.) 14 -6 40 60 65xEBITDA 81 41 92 131 30x

The Premium is Substantial…


Both the announced shares exchange for majority control and the tender offer imply a hefty c.60% premium to Bulgari's Friday, 04-Mar-11 close. Bulgari shares closed at €7.59 in Friday's session, while LVMH stocks finished at €111.5. This would imply an equity value for LVMH's 16.5 million share issue of €1.8 billion, c.60% above the €1.2 billion worth of the Bulgari exchange stake. Similarly, the €12.25 tender offer price is c.60% above the Friday, 04-Mar-11 close. The transaction values Bulgari's equity at €3.7 billion.

The Bulgari family will thus become LVMH's second-largest family shareholder (at c.3%) and be entitled to appoint two representatives to the group's Board. Family members and sellers, Paolo (Chair) and Nicola (Vice-Chairman) Bulgari, will remain on the Bulgari SpA board in their current roles. Their holdings in LVMH, resulting from the stock transaction, will be subject to an 18-month "lock-up" period. Moreover, in 2H:11, Francesco Trapani, Bulgari CEO at present, will replace Philippe Pascal as divisional head of LVMH's Watches & Jewelry. Mr. Pascal will remain with the group and be given new responsibilities.

A 60% premium for Bulgari is substantial. If the deal were any larger, we would not deem this a net positive for LVMH (according to the logic that we develop in our Blackbook, European Luxury Goods: What M&A? published in May-10).

Yet given the size of the transaction, this deal should be only mildly dilutive for LVMH and the resulting marginal loss of control to the Bulgari family (c.3% position post-deal with right to appoint two seats on the Board) would seem balanced and "worthwhile." The fact that about one-half of the consideration is being paid for in paper is also encouraging, as it indicates that LVMH could have the opportunity to do more, given its FCF.

The deal makes strategic sense, in our view. Bulgari is one of the best known jewelry brands in the world — with plenty of potential to grow on the back of LVMH's global distribution reach and financial muscle. For instance, media buying and retail development would benefit directly from the deal.

Also, Watches & Jewelry is one of the weakest product areas at LVMH. High-profile additions to its brand portfolio (Bulgari) and management pool (Mr. Trapani) should be beneficial. LVMH's Watches & Jewelry is trailing larger and better-known competitors, mostly controlled by Swatch, Richemont, or large independents (e.g., Rolex and Patek Philippe). Bulgari brings a potential mega-brand to its line-up — albeit stronger in jewelry than in watches. Moreover, the appointment of Mr. Trapani (hailed by Bernard Arnault as "the driving force behind Bulgari's development over the last 20 years") as divisional head is also a positive for the future of the enlarged Watches & Jewelry portfolio.

…But the Price Achieves a Strategic Coup for LVMH


Index of Exhibits

1 Financial Overview 22 In Value Terms, Switzerland Is the Leading Exporter of Watches

(Hong Kong Likely Overstated Given Re-Exporting) 53 China and Hong Kong Export Much Larger Volumes of Watches

Than Switzerland But at Materially Lower Average Prices 54 The Global Watches Market Has Grown at an Annualized Rate of

+4.5% During the Last c.25 Years); We Would Anticipate an Acceleration in the Next Five Years 6

5 Different Segments of the Market Have Adjusted Pricing and Product Feature Priorities Differently in the Last Years of Economic Downturn 7

6 Luxury Watches Distribution Is Still Wholesale-Dependent, With Independent Multi-Brand Retailers Dominating the Market 7

7 Market for Watch Movements — By Value 88 Market for Watch Movements — By Volume 89 Only Circa 5% of Global Jewelry Is Estimated to Be Branded; The

Proportion Is Only Slightly Higher (Circa 12%) in the High-End Segment (Which Accounts for Circa 5% of Total Sales) 9

10 High-End Jewelry Appears Underpenetrated by Brands — The Percentage Weight of Brands (12%) Is Much Lower Than for High-End Watches (50%) and Perfumes (80%) 9

11 The "Luxury" Segment of the Market Has Outpaced "Mass Market" Price Points in 2005-09 by Circa 250bps and Is Expected to Grow at a Circa 500bps Delta in 2009-15E (Both in Currency-Neutral Terms) 10

12 Watch Brands — Market Share and Positioning by Price Category 1213 In Value Terms, Switzerland Is the Leading Exporter of Watches

(Hong Kong Likely Overstated Given Re-Exporting) 1714 China and Hong Kong Export Much Larger Volumes of Watches

Than Switzerland But at Materially Lower Average Prices 1715 Total CH Watch Exports — Including Mechanical (About Two-

Thirds) and Electronic (Less Than One-Third) Wristwatches and Movements — Are Valued at Circa €9 Billion (CHF13.1 Billion) in 2009; These Have Grown at CAGRs of +5% During Roughly the Last 25 Years and +3% Over the Last 15 Years 18

16 Altagamma Estimates the Global Luxury Watches Industry at €20 Billion in 2009, Resulting from 15-Year CAGR of Circa 7.5% 18

17 Swiss Mechanical Watches Exports Growth Is a Good Proxy for Luxury Watches Market Growth 18

18 CH Mechanical Watches Exports Are Valued at Circa €6 Billion (CHF8.9 Billion) in 2009, About Two-Thirds of the Total, and Have Outgrown Total Watch Exports — Expanding at a CAGRs of Circa+8% During Roughly the Last 25 Years and Circa+7% in the Last 15 Years 19


19 In 2007-09, Sales at "Important Watch" Auctions Held Worldwide by Major Houses Moved Directionally in Line With CH Mechanical Exports — For Example, Sotheby's 19

20 In 2007-09, Sales at "Important Watch" Auctions Held Worldwide by Major Houses Moved Directionally in Line With CH Mechanical Exports — For Example, Christie's 19

21 The Global Watches Market Has Grown at an Annualized Rate of +4.5% During Roughly the Last 25 Years, With Mechanical/Luxury Watches (+8%) Outpacing Electronic Watches (+2%); We Would Anticipate an Acceleration During the Next Five Years 20

22 CH Wristwatch Exports — Higher-End Wristwatches (Priced CHF3,000+) Have Experienced the Fastest Volume and Value CAGR Among Price Brackets in the Last Decade, More Than 15 Percentage Points Above Lower-End Pieces Priced CHF500 or Below 20

23 Wristwatches Priced at More Than CHF3,000 Have Seen Their Share of Total Export Value Increase by More Than 25 Percentage Points in 2000-09 (from 32% to 58%) 21

24 The Volume Share of Watches Priced at More Than CHF3,000 Has Doubled from 2% to 4% During the Same Period 21

25 Mechanical Wristwatches' Share of Total CH Wristwatch Exports Has Experienced Similar Uplifts in 2000-09, Growing Circa 25 Percentage Points from 48% to 72% of the Total 21

26 Mechanical Share Has Also Increased in Volume Terms — Moving from 8% to 18% in the Last Decade 21

27 In Value Terms, the Weight of Mechanical CH Watch Exports Has Increased by More Than 20 Percentage Points Over the Last Decade, Pointing to a Strong Premiumization Trend 22

28 CH Watch Exports (Value Terms) to EMs in Asia/ME Have Significantly Increased (More Than 10 Percentage Points) Over the Last 10 Years, as Developed Markets of Europe and North America Declined 22

29 This Development Has Gone Hand-in-Hand With a Positive Delta in Real GDP Growth Rates, Which Is Expected to Continue Into the Next Decade 22

30 Hard Luxury (Watches and Jewelry) Is the Realm of Richer Consumers… 23

31 …High-Net Worth Individuals Account for 75% of Hard Luxury, Compared to Circa 40% for Luxury Leather Goods 23

32 Within the Combined "Watches and Jewelry" Market, Watches Constitute the Bulk (About Three-Quarters) of the Value 23

33 In a Period of Economic Expansion (2001-07), Growth in the Number of HNWIs and CH Total Watch Exports Progressed Hand-in-Hand in Most Regions 24

34 During the Severe Economic Correction of 2007-09, the Link Between the Two Trends Seems to Have Broken Down — As De-Stocking Dragged Down CH Watch Exports, Despite Continued HNWI Growth in EMs 24

35 France and Italy Lead Export Markets for CH Watches in Terms of Penetration Over General Population 25


36 Italy Also Leads CH Watch Export HNWI Penetration; However, Key EMs China and Russia Appear on More Equal Footing vs. Top Developed Markets Under This Metric 25

37 The Spread of CH Watch Export Penetration Over Total Population Across Key Markets… 25

38 …Is Greater Than the Spread for CH Watches Penetration Among HNWIs in the Same Markets 25

39 Global — Only Two Product Categories Are Skewed Toward Male Consumers — Luxury Watches and Menswear 26

40 China — In This Market, Luxury Is Materially More Dependent on Men's Demand, With an Estimated 70/30 Mix 26

41 The World Is Getting Older — Bad News for Luxury? Not Really, as Older People Have Higher Disposable Income, and Luxury and Disposable Income Seem to Grow in Lockstep; Hard Luxury Seems to Gain in the Category Shift 26

42 Japan: Elderly Citizens Aged 60+ Have Grown Almost Two Times in Relative Weight in 20 Years, from Circa 15% in 1988 to Circa 30% in 2008 27

43 Japan: As the Weight of 60+ Consumers Almost Doubled, Hard Luxury Categories Have Exhibited Relatively More Robust Growth Compared to Other Categories, as Analyzed Through Import Statistics 27

44 Over the Last Five Years, Both Hard Luxury Names That We Cover Have Performed Well Ahead of Relevant Market Proxy — Swatch by More Than 300bps (Versus Total Exports, Due to Diversity of Price Points); Richemont by Circa 200bps (Versus Mechanical, Due to High-End "Skew") 28

45 Richemont Is More Focused on the Very High End (Albeit With Some Lower-Priced Alternatives), Making "CH Mechanical Watch Exports" a More Relevant Market Proxy With Which to Compare Sales Progression 29

46 Swatch Sales Progression Should Be Contrasted With "CH Total Watch Exports" — In Fact, the Group Spans from Breguet to Flik Flak, Reaching a Broader Set of Aspirational and Lower-Price Point Consumers Than Richemont 30

47 The Growth of New Luxury Markets Will Bring New Vast Populations of Aspirational and Accessible Luxury Consumers: We Assume That Only 5% of Chinese Consumers Purchase Luxury Goods Today — Versus 40% in Developed Markets 31

48 Based on Its Recent Survey of More Than 7,000 Consumers in 28 Chinese Cities, BCG Expects MAC (Middle-Income and Affluent) Consumers to Approximately Triple in 10 Years 31

49 Three-Quarters of New MAC Consumers Will Come from Cities Labeled Tier 3 or Below (Fewer Than 1 Million Inhabitants), Reducing the Weight of Tier 1 and 2 City MAC Consumers from Circa 45% to Circa 30% by 2020 31

50 Big-City MACs in China Enjoy Much Higher Average Incomes, But Smaller-City MACs Face Significantly Lower Cost of Living and Consequently Greater Purchasing Power — For Example, Shanghai (Tier 1) vs. Xuzhou (Tier 3) 32

51 Moreover, Small-City MACs Display the Highest Intention to Increase Spending… 32

52 …And to Trade Up 32


53 Fine Watch Adoption Progression Moves Through Several Phases, Beginning With Limited High-End Pieces and the Entry of Luxury and Premium Lines and Ending With the Rise of Technically Advanced Products; China Is the Prime Example of an EM at "Tipping-Point" — Set to Experience the Rise of an Aspirational Clientele Over the Next Decade 33

54 Watch Customers Range from Collectors Who Highly Value Fine Craftsmanship to the Newly Enriched Who Place Significant Emphasis of the Value of the Brand's Reputation 33

55 Watchmakers Can Tap Into These Customers' Core and Extended Motivations and Purchase Criteria to Drive Profits 33

56 The Watches Industry Structure — We Break This Down Into Six Broad Macro-Segments 35

57 Relative "Google Hits" Size of Coverage Companies' Brands: Mega Brands in Each Brand Portfolio Typically Command More Google Hits Than High-End/Niche Names and Lower-Positioned Premium Names — For Example, Cartier (Versus Piaget and Baume & Mercier) at Richemont and Omega (Versus Breguet and Longines) at Swatch 36

58 Different Segments of the Market Have Adjusted Pricing and Product Feature Priorities Differently in the Last Years of Economic Downturn 36

59 Despite the Recent Severe Correction in 2009, the Swiss Watches Industry (as Gauged from UN Comtrade's Swiss Export Data to the Rest of the World) Experienced Steady Growth Over the Last Decade, Expanding at a CAGR of More Than 10% in 1998-2008 37

60 Swiss Watches Constructed of Precious Metals (a Proxy for Higher-End Products) Have Outgrown Base-Metal Watches by Circa 350bps During the Last Decade (1998-2009) 37

61 Selected High-End Watch Brands Have All Seen the Median Price of Their 2010 Newly Introduced Models Exceed That of 2006's Additions 38

62 At the High End, Minimum-Maximum Price Ranges of Newly Introduced Watch Models Can Vary Dramatically — For Example, 2006 Catalogue Additions by Three Key Brands in the Segment 38

63 Similarly Stretched and Volatile Price Ranges Were Common for High-End Brands in 2010, as They Continue to Introduce Ultra-Complicated Limited -Edition Models 38

64 The Evolution of Median Prices of Newly Introduced Models by Higher-Volume Mega Brands Has Been More Diverse as Different Names Have Pursued Different Priorities 39

65 In 2006, Cartier and Rolex Had a Similar Price Range for Newly Introduced Products 39

66 But in 2010, Cartier Had Begun to Introduce Extremely High-Priced Watches With Advanced Complications 39

67 The Median Prices of Newly Introduced Models for Players in the Premium Segment Were Not Materially Different Over the Course of the Recession — Especially When Compared to Trends in Other Market Segments 40

68 Price Ranges of New Watch Models in the Premium Segment Were Not Very Broad to Start With in 2006 40


69 Similar to Median Prices for These Players, Pricing Ranges for Catalogue Additions in the Premium Segment Did Not Change Materially During the Downturn 40

70 The Number of Complications Seems to Be a Key Determinant of Retail Price for Specific Watch Models at the High End — For Example, for Gold-Case Watches at Vacheron Constantin and Patek Philippe, This Relationship Appears to Be Exponential and Watch Complexity Would Seem to Explain About Two-Thirds of Pricing Decisions 41

71 Watch Brands Across Market Segments Utilize Complications as a Means to Add Value to Their Models; Specialist High-End Niche Typically Opts for the Most Complex and Labor-Intensive Complications (For Example, Tourbillon) to Distinguish the Artisanship of Their Products 42

72 Vacheron Costantin's Limited Edition Tour De L'ile Cost More Than $1.5 Million and Comprises an 834-Part Movement 43

73 This $1.5+ Million Watch Has 16 Mechanical Complications 4374 In the Premium Segment of the Market, the Number of

Complications of Specific Models Also Seems to Be a Key Determinant of Price — For Example, Having an R-Squared of 50% at Longines; Yet, the Types of Complications Utilized Are Much Less Advanced Than for High-End Brands (For Example, Chronographs vs. Tourbillons and Retrograde Hands) 43

75 For Names in the Middle of the Pyramid, Such as Mega Brands (Rolex and Cartier) and Similarly-Priced Luxury Goods Outsider Brands (Bulgari, Hermès and Chanel), Watch Complications Do Not Seem to Be a Key Price Determinant (R-Squared Less Than 20%) 44

76 For These Brands, Watch Cases' Material Would Seem a Much More Important Driver for Pricing Decisions (R-Squared Greater Than 40%, or Two Times That of Complications) 44

77 On Average, Gold Watches by These Brands Are Circa 5x More Expensive Than Steel Watches, While Platinum/Palladium Models Are About 3x More Expensive Than Gold Ones 44

78 The Cartier Mega Brand's Premiumization Drive Through the Recent Recession Has Been Achieved Mostly Due to the Inclusion of Highly Advanced Complications (For Example, Tourbillon) Which Have Pushed Prices of Selected Models Above $100,000 (Note: Table Reflects 2010 Catalogue Additions by the Two Brands) 45

79 Cartier's Ballon Bleu Tourbillon Includes a Subsidiary Second Complication on a Tourbillon Cage 46

80 Rolex's Yacht Master II Regatta Chronograph Does Not Include Tourbillons, But Does Add Complexity (For Example, Programmable Countdown Function) to the Rolex Range 46

81 Montblanc: Metamorphosis (With Dual Face) 4782 Bulgari: Octo Bi-Retro 4783 Harry Winston: Opus 9 4784 Jewelers Such as Bulgari Have Also Started to Use Diamonds and

Precious Stones as Dominant Watch Features as a Signature (For Example, Bulgari Astrale) 47

85 Christian Dior: Christal 8 4786 Chanel: J12 Retrograde Mystérieuse 47


87 Zegna: Centennial (Girard-Perregaux Collaboration) 4888 Hermès: Carre H 4889 Hermès Has Crafted More Standard Luxury Timepieces, and Aims

to Place an Emphasis on the Quality of Its Brand by Emphasizing Its Leather Credentials and Parisian/Equestrian Roots (2010 Advertising Campaign) 48

90 Armani Generates Circa 8% of Its Total Revenues from Royalties Related to Licensed Products Such as Cosmetics, Fragrances and Watches 49

91 Emporio Armani: Classic Round Watch (£179) 4992 Gucci Timepieces — Website Price Range 5093 Gucci: G-Frame (Circa $700) and G-Chrono (Circa $4,000) 5094 Watches at the Gucci Brand (Particularly Those Sold via the

Wholesale Channel) Were a Drag on Top-Line Performance Throughout 2008 and 2009 — Initial Signs in 2010 Seemed to Point to a Recovery 51

95 Urwerk: UR-202 Turbine Regulated Watch ($129,000) 5296 MB&F: HM4 Thunderbolt (More Than $150,000) 5297 Cabestan: Winch Tourbillon Vertical, Made of 1,352 Separate

Components ($275,000-$400,000) 5398 Devon Works: Tread 1, to Be Priced More Than $15,000 Is the

"Cheapest" of the "Technical Outsiders" 5399 Lionel Ladoire: RGT White Gold (Limited Series, 88 Piece) 53100 Luxury Goods Distribution Largely Depends on the Product

Category, With Hard Luxury Mostly Dependent on Third-Party Retail and Multi-Brand Retail Largely Absent in Leather Goods... 55

101 …Not Surprisingly, the Channel Mix Among the Major Luxury Watch Players in Our Coverage Looks Similar to the Channel Distribution Dynamics of Their Main Product Offerings (Company and Group Level) 55

102 Dependence on Wholesale Magnifies Consumer Demand Changes, as Wholesale Customers De-Stock and Re-Stock, as We Have Seen in the Recent Slowdown and Rebound — Volume of Swiss Mechanical Wrist Watch Exports (000 Units) 56

103 Dependence on Wholesale Magnifies Consumer Demand Changes, as Wholesale Customers De-Stock and Re-Stock as We Have Seen in the Recent Slowdown and Rebound — Value of Swiss Mechanical Wrist Watch Exports (CHF million) 56

104 This, in Turn, Translates Into High GM% Swings for Swatch… 57105 …And Richemont 57106 It Also Translates Into High EBIT% Swings for Swatch… 57107 …And Richemont 57108 Watches Are Widely Available Online Through Third-Party

Retailers at Substantial Discounts… 58109 …Whereas Handbags Are Only Available Through Official e-

Commerce Channels 58110 Richemont Outlook Commentary on Wholesale Network 59111 Patek Philippe's Asian Distribution Strategy Seems a Precursor of a

Trend — Tighter Wholesale (or Indeed Import) Partnerships Involving a Smooth (Partial) Transition to Mono-Brand Distribution 60


112 Omega Plans Rapid U.S. DOS Expansion in the Next Year 60113 Omega Rationale for U.S. DOS Expansion 60114 Tourbillon Boutiques: Profile 61115 Swatch Brands Available at Tourbillon Boutiques 61116 Tourbillon Boutique Store-Front (e.g., Shanghai) 61117 Richemont — EMs Account for Circa 70% of the Group's Watch-

Brand Boutique Openings in Roughly the Last Five Years (Including Renovations and Relocations) — About One-Quarter of Total Openings Has Taken Place in Mainland China and Circa 40% in Greater China 62

118 Swatch — Omega and Other Higher-End Portfolio Brands (Blancpain, Breguet and Glashutte) Focused on Asia Ex-Japan, Russia, and the Middle East for the Bulk of Their 2009 Direct Store Openings 62

119 Watches Distribution in Mainland China: Our City-Level Analysis Suggests That (1) the Total Absolute Number of POS Decreases as We Move Up the Pricing Ladder and (2) Directly Operated Stores Are Used Most Heavily by "Middle-Ground" Players (That Is, High-Priced Premium [For Example, Omega] and Luxury Names Priced at Circa €5,000 [For Example, Cartier), With the Important Exception of Swatch in the Accessible Range (at Less Than €1,000) 64

120 Omega Has a Higher Absolute Number of Retail Doors Than Cartier, LV and Gucci, But Our Analysis Shows That the Number (and the Names) of Cities Covered by Its Network Are Relatively Similar 65

121 China's Macro-Regions Account for a Similar Percentage of DOS for LV/Gucci (Leather) and Omega/Cartier (Watches) — East Plus South Account for Circa 50-55% Across Brands 66

122 However, Much More Capillary Presence Is Achieved by Omega When Authorized Third-Party Retailers Are Taken Into Account, Both vs. LV and vs. Cartier 66

123 Following a Tenuous Period in the 1970s Amid the "Quartz Revolution," the Swiss Watch Industry Has Rebounded; Total CH Watch Exports — Including Mechanical (About Two-Thirds) and Electronic (Less Than One-Third) Wristwatches and Movements Have Grown at CAGRs of +5% in the Last 25 Years and +3% Over the Last 15 Years 69

124 CH Watch Exports — Mechanical Watches Experienced a Material Decline (Value) Amid the "Quartz Revolution" 70

125 CH Watch Exports — Electronic Watch Exports (Value) Rapidly Expanded as the Category Developed 70

126 Wristwatches Priced at More Than CHF3,000 Have Seen Their Share of Total Export Value Increase by More Than 25 Percentage Points in 2000-09 (From 32% to 58%) 70

127 The Volume Share of Watches Priced at More Than CHF3,000 Has Doubled from 2% to 4% During the Same Period 70

128 Since the Mid-1980s, the CH Watch Industry's Employment Figures Have Been Relatively Stable 71

129 Similarly, Following the Dramatic Decline in the 1970s, the Number of Watchmaking Companies Has Leveled 71


130 Though FTE Growth Has Been Moderate, Productivity as Measured by Export Value/FTE Has Experienced a Massive Increase 71

131 We Would Anticipate the Global Watches Market to Accelerate Its Growth Over the Next Five Years Driven by Expanding EM Markets Demand 72

132 Swatch Is the Dominant Producer of CH Mechanical Movements (For Example, Those Incorporated Into Luxury Watches) 72

133 Including Both In-House and Third-Party Sales, Swatch Constitutes About 70% of CH Mechanical Movements (Volume) 72

134 Swatch Controls an Even Greater Portion (Circa 80%) of the Quartz Movement Market (In-House Plus Third-Party Using Swatch Movements) 73

135 The Valjoux 7750 (ETA) Was Introduced in 1974 and Has Become Commonplace in "Modestly Priced" Chronographs for Swatch In-House and Third-Party Brands 73

136 The Swiss Watch Industry Is Primarily Located in the Western Cantons 73

137 Swiss Watchmaking Is Geographically Concentrated… 74138 …With Circa 95% of All Employees Located in the Jura Mountains

("Watch Valley") 74139 Since 1999 the Concentration of Employees in the Jura Mountain

Region Has Increased by Circa 400bps 74140 We Estimate That About One-Third of Total Swiss Watchmaking

Employees Either Work for the Swatch Group or for the Roughly 10 of the Other Largest Manufactures in CH 74

141 Swatch Has the Most Extensive Network of Production Facilities in Switzerland, Across Various Manufacturing Districts 75

142 Swatch's CH-Based Production Assets Combined With Strict "Swiss Made" Requirements Create a Competitive Advantage — Significant Time and Costs Are Required to Be a Successful Stage C and D Player 76

143 To Maintain Its Leading Position in Watch Production, Swatch Group Spends Circa 8% of the Division's Sales on Further Investment (Cumulative Circa CHF600 Million in the Last Five Years) 76

144 Cartier's Integrated Production Facility Required Significant Investment (in the 2000s), Yet Provides the Company With a Highly Productive and Flexible Manufacturing Platform 76

145 Low Cost Movements Are a Scale Game — For Example, Order Flow for Cheap Movements in the Asian Market Is Massive and Only Yields Minimal Profits 77

146 Even at Relatively Higher Price Points in the CH Mechanical Market, Movement Manufacture Is a Semi-Industrialized Process 77

147 High Volumes and "Swiss Made" Positioning Help Drive Swatch Brand Profitability — An Industrialized Production Scheme With Low Costs Is Necessary 77

148 Over the Last Decade, Vertical Integration Has Been Particularly Common at the High-End Price Segments 78


149 Some Companies Are Pursuing a Hybrid Strategy — Within the Last Five Years, Panerai Has Introduced Complicated In-House Movements for Its High-End Timepieces While Utilizing an ETA Base Caliber for Its Lower-End Models; Most Recently, It Has Introduced a "Simpler" In-House Caliber for Its Higher-Volume Luminor 1950 Series 79

150 Brand: TAG Heuer — Aquaracer 500M Calibre 5, $2,450; Movement: TAG Heuer Caliber 5 (Base ETA 2824-2) 79

151 Brand: Cartier — Santos 100 Carbon Chrono, $14,350; Movement: Cartier 8630 MC (Base ETA Valjoux 7753) 79

152 Swatch Has Steadily Reduced the Percentage of Movements (Value) That It Sells to Third Parties; Moreover, Swatch Has Stated It Intends to Halt External Sales of "Blanks" in 2011 80

153 Swatch's Actions Could Potentially Help Stabilize Margins Going Forward and Make Order Cancelations and Swings in Capacity Utilization Less Volatile 80

154 Industrial Production Companies Have Become More Prominent Over the Past 10 Years and Could Potentially Offer a Partial Alternative to ETA-Type Movements, Particularly at the Mid-to-Lower End Range 80

155 Alternatives to ETA Supply Concerns — Sellita 81156 Alternatives to ETA Supply Concerns — Soprod 81157 Alternatives to ETA Supply Concerns — Technotime 81158 Alternatives to ETA Supply Concerns — Fleurier Ebauches 81159 The MTR 312 Represents the Type of Automated Machinery

Chopard's Fleurier Ébauches Currently Employs in Its New Production Facility, Which Aims to Further Industrialize the Process of Manufacturing Ébauches 82

160 Some Chinese Manufacturers Are Moving Up-Market With Mechanical Movements — Though Anecdotal Evidence Points to Lower Quality Levels vs. CH Manufacturers 82

161 Luxury Competition from Asia Still Has a Ways to Go Despite Selected Players (For Example, Shanghai) Attempting to Span a Broad Price Offering 82

162 Watches Jobs and Typical Qualification Required by Stage of Manufacturing 84

163 Swiss Watchmakers Require Levels of Qualification That Necessitate Meaningful Lead-Time 85

164 We Estimate the Global Jewelry Market at €136 Billion as of 2009, Subdivided Into a Circa €105 Billion Mass Market and a Circa €31 Billion Luxury Segment; High-End Luxury Jewelry Likely Represents Less Than One-Third of Luxury Sales, Worth Circa €7 Billion 87

165 Only Circa 5% of Global Jewelry Is Estimated to Be Branded; The Proportion Is Only Slightly Higher (Circa 12%) in the High-End Segment (Which Accounts for Circa 5% of Total Sales) 88

166 High-End Jewelry Appears Underpenetrated by Brands — The Percentage Weight of Brands (12%) Is Much Lower Than for High-End Watches (50%) and Perfumes (80%) 88

167 EMs Account for About One-Half of Global Jewelry Expenditure Across Price Points, With About One-Third Generated in Asia Ex-Japan and Circa 14% in Middle East/Africa 88


168 India, Greater China, the Middle East, and Russia Jointly Account for Circa 65% of Overall Gold Demand for the Jewelry Industry — In Volume and Value Terms 89

169 The Americas Represented (as of 2007) the Largest End Market for Diamonds, Accounting for About One-Half of Global Diamond Sales, Followed by Japan and Europe 89

170 Gold and Diamond Jewelry Accounted for More Than Three-Quarters of Global Value-Terms Sales in 2008; Other Precious Metals — e.g., Silver, Platinum and Palladium — and Gemstones for Less Than One-Quarter 89

171 In the United States, the Mix Would Seem Similar, With Gold and Diamond Jewelry Accounting for Circa 60% of Total 89

172 Women Are the Key Consumers in the Global Jewelry Market — Representing 90% of Demand (Self and Gifted) 90

173 U.S. Market Details on "Occasion of Use" Provide a Glimpse of the Percentage Weight of Bridal Merchandise in Overall Jewelry — This Represents More Than One-Third of Total Sales 90

174 Luxury Jewelry Is the Realm of Richer Consumers… 91175 …As High-Net-Worth Individuals Account for 75% of Luxury

Jewelry, Compared to Circa 40% for Luxury Leather Goods 91176 The Broader Jewelry Market Has Grown at a (Currency-Neutral

Terms) CAGR of +2.6% in the 2000-09 Period and We Would Expect It to Grow by a CAGR of +3-5% Over the Next Five Years 92

177 Commodity Input Prices (Key Precious Metals) Rebounded from 2008 Lows, Especially Gold and Silver — Palladium Is Cheaper by Default and Has Risen Less in the Last Two Years 93

178 Consumer Prices for Jewelry in the EU27 and China Have Experienced Robust YoY Growth as Input Prices Rose 93

179 The Growth Rates We Describe in Value Terms Should Be Qualified — Higher Input Costs Can Support Value Progression Despite Falling Volumes, Even for a Decade, as Exemplified by Trends in the Demand for Gold by Jewelry 93

180 Rising Commodity Prices Have Triggered (1) Renewed Focus on Input Costs Among Jewelry Manufacturers and (2) a Degree of Substitution of Gold, Platinum and Diamonds With Palladium and Titanium, Where Possible 94

181 The "Luxury" Segment of the Market Has Outpaced "Mass Market" Price Points in 2005-09 by Circa 250bps and Is Expected to Grow at a Circa 500bps Delta in 2009-15E (Both in Currency-Neutral Terms) 94

182 The More Narrowly Defined High-End Segment (Estimated 5% of Total Jewelry Sales, at €7 billion in 2009) Has Grown at a CAGR (Euro Terms) of Circa +3% in the 2005-09 Period 95

183 YoY Growth in High-End Jewelry Seems to Magnify Swings in Overall Global Luxury Demand: It Outpaced the Overall Sector in the 2004-08 Period But Underperformed in the 2009 Trough Year 95

184 EMs in Asia-Pacific and the Middle East Have Grown Their Joint Share of Overall Jewelry Spend by Circa 10% Since 2005 (+7% Asia, +3% MEA); We Expect Asia to Continue Capturing Share Over the Next Five Years 96


185 Jewelry Channel Mix Overview: Independent Retail Is Most Prominent in India; the United States Is at the Opposite Extreme With Extensive Inroads by Discounters, Such as Generalists, Television Channels and Online Purists 97

186 In the United States, Specialists Account for About One-Half of Total Jewelry Sales; General Merchandisers Make Up About One-Quarter 97

187 Online Was Estimated to Account for Circa 7.5% of Total US Jewelry Sales in 2007 (Growing at Circa +20% YoY on 2006) 97

188 Wal-Mart Is the Largest Player in U.S. Jewelry (4.6% Share in 2006), Ahead of Specialist Retailers Sterling (Signet at 4.2% Share), Zale and Tiffany's 98

189 Top Two Players Jointly Captured Circa 9% of U.S. Jewelry Sales (in 2006), With the Circa 90% Balance Including Several Large Specialists — This Points to a Degree of Concentration 98

190 But Organized Retail Is Not Always the Norm — For Example, in India, 96% of Distribution Is Carried Out by Family Shops in a Heavily Fragmented Marketplace 98

191 Profile of Blue Nile — A Prominent Example of an Online Purist Operating as a Specialist Jeweler 99

192 Profile of Gitanjali (India) 100193 Profile of H.Stern (Brazil) 101194 Within Our Direct Coverage, Richemont Generates by Far the

Highest Percentage of Total Revenues from Jewelry 102195 In Terms of Euro Sales, Richemont Is Also the Largest Jewelry

Player in Our Coverage, Even When Compared to Other Key Non-Coverage Comps, Namely Bulgari and Tiffany's 102

196 Key Jewelry Brands at Coverage Companies (and Key Comps Bulgari and Tiffany's) 102

197 Selected Jewelry M&A Transactions 103198 Branded Retailers Operate With the Highest GM% — As Expected

— With Value Players at the Opposite Extreme; Vertical Integration Into Retail Is No Guarantee for Better EBIT%, Though, as We Have Seen in Other Luxury Categories 103

199 Swatch Group Activities 105200 Swatch Selected Acquisition, Investment and Disposal History 106201 Historical Total Group Swatch Net Sales (Including Eliminations) 107202 Historical Net Sales by Division (Before Eliminations) 107203 Historical Profitability by Division (Since 1997) 108204 Return on Net Assets: Watches & Jewelry Division 108205 Return on Net Assets: Production Division 109206 Return on Net Assets: Electronics Systems Division 109207 The Majority of the Total FCF Is Generated by the Watches &

Jewelry Division; FCF Generation Was Hampered at the Beginning of the Recent Recession Due to Unfavorable Working Capital Swings 110

208 Swatch Generates a Greater Proportion of Its Sales From Mid-To-Low-Priced Brands 111

209 Luxury Market Growth Correlates Strongly With World GDP Growth 112

210 Group EBIT Margin vs. GDP Growth 112


211 Watches & Jewelry EBIT Margin vs. GDP Growth 112212 Group EBIT Margin vs. Swiss Watch Export Growth 113213 Watches & Jewelry EBIT Margin vs. Swiss Watch Export Growth 113214 Group EBIT Margin vs. Luxury Market Growth 113215 Watches & Jewelry EBIT Margin vs. Luxury Market Growth 113216 Swatch Is More Exposed to the Watch Retail Channel than

Richemont… 114217 …Though the Mix Varies Among the Swatch Brands Most Exposed

to the Retail Channel 114218 Retail Footprint by Brand (as of Apr-09): The Swatch and Omega

Brands Are Primarily Concentrated in Europe and Asia — With Approximately 15% of All Swatch Stores Based in Italy and China Playing a Material Role in Each Case 115

219 The Omega Brand Has Leveraged Both the DOS and the Franchise Model to Grow Its Retail Footprint Over Time 116

220 Swatch's Overall Retail Footprint Is Large and Has Grown More Rapidly in Recent History 116

221 Market for Watch Movements — By Value 117222 Market for Watch Movements — By Volume 117223 The Majority of Swatch's Production Facilities Are Located in

Switzerland, Especially in the Western Region 118224 Production EBIT Margin vs. GDP Growth 119225 Production EBIT Margin vs. Swiss Watch Export Growth 119226 Production EBIT Margin vs. Luxury Market Growth 119227 Production EBIT Margin vs. Swiss Watch Export Growth (High-

End Luxury: More Than CHF3,000) 119228 Production EBIT Margin vs. Swiss Watch Export Growth

(Exclusive Luxury: CHF500-3,000) 119229 Production EBIT Margin vs. Swiss Watch Export Growth

(Affordable Luxury: CHF200-500) 120230 Production EBIT Margin vs. Swiss Watch Export Growth (Mass

Market: CHF0-200) 120231 Since 2006, Swatch Has Been Able to Significantly Boost

Production Division Margins as Demand for Mechanical Watches and Movements Increased 120

232 The Company has Experienced a Rise in Levels of Semi-Finished Goods (Including Components)… 121

233 …As Well as a Large Increase in Finished Goods by the End of 2008 121

234 SGES Is Composed of Seven Separate Companies That Cater Mainly to Industries Other Than Watch Manufacturing 122

235 Electronics EBIT Margin vs. GDP Growth 122236 Electronics EBIT Margin vs. Swiss Watch Export Growth 122237 Electronics EBIT Margin vs. Luxury Market Growth 123238 Global Handset Volume Growth vs. SGES Sales Growth 123239 Western Europe Handset Volume Growth vs. SGES Sales Growth 123240 SGES Sales Growth Has Followed a Similar Pattern as Global

Handset Volume Growth (Further Detail) 123


241 SGES Sales Growth Has Been More Volatile Than Total Passenger Car Volume Growth, Though the General Pattern Is Relatively Similar 124

242 Global Passenger Car Volume Growth vs. SGES Sales Growth (2000-08) 124

243 Global Light Commercial Vehicle (LCV) Volume Growth vs. SGES Sales Growth (2000-08) 124

244 Hard Luxury Players, Swatch and Richemont, Have the Highest Exposure to Asia 125

245 Swiss Watch Export Growth in Asia Has Continued to Outpace Other Countries in 2010 125

246 Among the Hard Luxury Players, Greater China Constitutes a Larger Proportion of Sales for Swatch 125

247 We Expect 2009-11E Retail Store Growth of Circa 20% for Hard Luxury Names (vs. Low-Single-Digit Percentage Store Expansion in Global Ex-China) and Circa 15% for Soft Luxury (vs. Circa 5-10% in Global Ex-China) 126

248 We Expect 2009-11E Retail Store Growth of Circa 20% for Hard Luxury Names (vs. Low Single Digit Percentage Store Expansion in Global Ex-China) and Circa 15% for Soft Luxury (vs. Circa 5-10% in Global Ex-China) 126

249 Hard Luxury Remains Much More Skewed Toward the Wholesale Channel — This Channel Represents Circa 90% for Swatch's W&J Division and Circa 60% for Richemont as a Whole vs. 10-30% for Leading Soft Luxury Brands 127

250 Xinyu Hengdeli's Recent Years Have Been Marked by Increasingly Closer Ties With the Swatch Group, Both in Terms of Equity Ownership and in Terms of Retail Development via Their 50:50 JV; LVMH Has Also Grown Closer to the Leading Chinese Distributor Over the Past Few Years 128

251 Hengdeli's Top-Line Growth Has Averaged Circa 23% Since 2002 129252 Moreover, Hengdeli's EBIT Has Expanded from HK$50 Million in

2002 to HK$660 Million in 2009 129253 Xinyu Hengdeli's Retail Footprint of 270 Stores in Greater China

(224 Mainland China) Stretches Across the Country via Multi- and Monobrand Stores 129

254 Xinyu Hengdeli Distributes About 50 Watch Brands Through Its Retail Network in China (Ex-Hong Kong) 130

255 The Company Also Has More Than 300 Wholesale Customers in More Than 40 Cities Across China and Distributes 20 Watch Brands (18 on an Exclusive Basis) 130

256 Xinyu Hengdeli Has Rapidly Expanded Its Retail Operations Relative to Wholesale Since 2004 130

257 Swatch and LVMH Both Have Circa 10% Equity Stakes in Hengdeli 130

258 Xinyu Hengdeli's Outlets Cater to a Range of Customers: Temptation (Mid-High Fashionable), Hengdeli/Prime Time (Mid-High Full Range), Elegant (Highest) 131

259 More Than 75% of Xinyu Hengdeli's Retail Outlets in Mainland China Are Hengdeli/ Prime Time, Positioned at the Mid-to-High Range — The Company Cites Relatively Lower Demand for High-End Watches vs. Hong Kong 131


260 Swatch Brands Span from Breguet to Flik Flak — This Should Give Swatch a Better Opportunity to Capture a Massive Aspirational and Accessible Luxury Demand Wave That We Expect to Come from China 132

261 Richemont Does Have Lower-Priced Alternatives, Though Are More Focused on the Very High End 133

262 Increasing Inventories at the Beginning of the Recent Recession Were to Blame for Increases in Net Working Capital at Swatch and Subsequent Effect on Cash Flow 134

263 An Analysis of Richemont's Working Capital Details Points to a Similar Inventory Build-Up in 2007 and 1H:08 135

264 Swatch Has Exhibited Operating Leverage of More Than 2x Since 2003 — Luxury Players Seem to Have a Higher Degree of Operating Leverage vs. Mass Fashion Competitors 136

265 Swatch Has Not Managed to Capture Material SG&A Leverage Over the Past Five Years 136

266 Though the Company Has Been Able to Realize Operating Leverage on Wages and Salaries (Circa 25% Sales) 136

267 EBIT Sensitivity to Volume Growth at +5% Price Growth 137268 At Swatch, Costs as a Percentage of Total Sales Have Been

Increasing Since 2007 137269 Material Purchases Rose as a Percentage of Total Swatch Costs, But

in 2009 They Fell Materially 138270 During the Recession, Personnel Expenses Were Kept in Check and

Actually Declined from 2008 to 2009 138271 Strong Swiss Watch Export Growth Across Watch Price Points in

2010 Provide an Opportunity for Swatch to Follow a V-Shaped EBIT Rebound 138

272 In 2009, the Largest Proportion of Swatch's Costs Were Personnel Expenses — Other Operating Expenses* and Material Purchases Also Represent Significant Costs 139

273 For Precious Metal Watches (Illustrative Example), Movements and Raw Materials Constitute the Bulk of Costs 139

274 Theoretical Impact of Gold Price Volatility on Swatch EPS 140275 However, Over the Last Five Years, Gold Spot Price Appreciation

Has Not Necessarily Meant GM% Contraction 140276 Richemont Group Structure, March 1996 143277 Brands by Division, 2010 143278 Richemont Group Operating Results — FY95-FY08 144279 Revenues by Geography — Richemont Group, 1998-2008 144280 Overview of Significant M&A Activities 145281 Divisional Revenues and Operating Profits — FY03 and FY07 145282 Product Mix by Division — FY07 146283 Operating Profit and Margin by Division. FY02-FY08 146284 BCG Matrix — Richemont by Product Category 147285 Return on Net Assets by Division 147286 Cash Generation by Division, FY05-FY07 148287 SG&A as a Percentage of Revenue by Luxury Company 148288 Average List/Recommended Retail Prices by Brand 149289 Average List/Recommended Retail Prices — Limited Edition 149


290 Watch Market Positioning by Price Category by Brand 150291 Richemont — Adjusted Revenue Growth vs. OECD GDP Growth 151292 LVMH — Revenue Growth vs. OECD GDP Growth 151293 Swatch — Adjusted Revenue Growth vs. OECD GDP Growth 151294 Richemont Group — Operating Profit Growth vs. OECD GDP

Growth 152295 Specialist Watchmakers — Revenue Growth vs. OECD GDP

Growth 152296 Richemont Watches — Adjusted Revenue Growth vs. OECD GDP

Growth 152297 Jewellery Maisons — Revenue Growth vs. GDP Growth in OECD 153298 Richemont Jewelry — Revenue Growth vs. OECD GDP Growth 153299 Swatch Watches and Jewelry — Revenue Growth vs. OECD GDP

Growth 153300 LVMH Watches and Jewelry — Revenue Growth vs. OECD GDP

Growth 153301 Specialist Watchmakers — Operating Profit Growth vs. OECD

GDP Growth 154302 Operating Margin Comparison: Specialist Watchmakers vs. Swatch

W&J and LVMH W&J — FY02 to FY07 154303 Jewellery Maisons — Operating Profit Growth vs. GDP Growth in

OECD 154304 Capital Expenditure in Watches and Jewelry 155305 Operating Cash Flow by Group 155306 News Search Shows Expansion in Manufacturing Capacity and

Downward Integration… 155307 …And M&A of Brands (Before the Onset of the Recent Recession) 155308 Revenue as a Percentage of Group — FY02 to FY08 156309 Operating Profit as Percentage of Group — FY02 to FY08 156310 Operating Margins — FY02 to FY08 156311 Revenue as a Percentage of Group — FY03 to FY08 157312 Revenue as a Percentage of Group — FY03 to FY08 157313 Operating Margin by Luxury Brand — FY02 to FY08 157314 Operating Profit Forecasts: Leather and Accessories Maisons —

FY05 to FY08 157315 Net-a-Porter Is Regarded as a High-Profile Success Story Among

Pure-Play Internet Ventures in the Luxury Goods; as of Apr-10, It Is Part of Richemont Group 158

316 Watches and Leather Goods Are More Consolidated Than Categories Such as Shoes and Fashion 161

317 Scale and Multi-Brand Presence Can Help Boost Specific Aspects of the Watch Value Chain — R&D, Manufacturing, Wholesale and After-Sales Are Areas That Are Particularly Relevant for Hard Luxury 162

318 Watch Brands — Positioning by Price Category 162319 Relative Size of Watch Divisions — Swatch, Richemont and

LVMH 163


320 LVMH's Watches & Jewelry Operating Margin Has Historically Lagged Richemont's and Swatch's; While This Lag Has Recently Reduced, It Still Extends to Between 500 bps and 1,000 bps 163

321 Return on Net Assets at LVMH's Watches & Jewelry Division Lags Richemont's (Specialist Watchmakers) and Swatch's (Watches and Jewelry) by Circa 15% and 20%, Respectively 164

322 In Key Growth Markets Such as China, LVMH W&J Brands Appear to Trail Richemont and Swatch in Top-of-Mind 164

323 We Have Observed a Satisfying Relationship Between Brand Sales and Google Hits — We Have Used This High-Level Relationship to Estimate the Relative Size of Independent Watches Brands for Which No Public Data Are Available 165

324 Richemont and Swatch Brands (Group A) Along With Large Private Brands Such as Rolex and Patek Philippe (Group B) Are the Dominant Forces in the Watches Market — Aspiring Challengers Such as LVMH (Group C) Do Have Some Scale, Though Most Companies in This Subset Are Relatively Small in Comparison to Group A and B 166

325 In Aggregate (of Groups A, B and C), the Swatch and Richemont Watch Portfolios Generate Circa 50% of Google Hits — With Patek Philippe and Rolex Generating Circa 10% 166

326 Group D — Small and Medium-Size Independent Watch Players 167327 We Have Categorized Watch Brands Into Relative Sizes Based on a

Combination of Google Hits and Public Disclosures — A Cutoff of Circa 1 Million Google Hits Distinguished a "Large" Brand from a "Medium' Brand," Though We Placed Several Names With More Than 1 Million Hits Into the "Medium" Category Based on Our Best Estimates 168

328 We Considered Brands "Small" and "Very Small" If the Number of Google Hits Was Less Than 530,000 or Less Than 100,000, Respectively 169

329 The Two Hard Luxury Champions, Richemont and Swatch, Have Not Participated in Major Watch-Related M&A in Recent History — For These Players, M&A Has Been Primarily Utilized in Recent Years to Bolster Production Capabilities 170

330 Roger Dubuis Continues to Generate Losses Following Its Acquisition by Richemont in Aug-08 171

331 Bulgari: Share Outstanding — Pre-Transaction 173332 LVMH: Share Outstanding — Post-Transaction 173333 LVMH/Bulgari — Overall Transaction Structure 173334 LVMH/Bulgari — Implied EV-to-LTM Multiples 173


Disclosure Appendix

VALUATION METHODOLOGY We establish price targets for companies in our coverage by applying a target relative P/FE multiple (versus MSCI index) to our forecast estimates, assuming a constant market P/FE multiple. We use 2010E, 2011E and 2012E EPS estimates and MSCI P/FE multiples.

We rate Richemont, Swatch, Burberry, LVMH and PPR market-perform, with price targets of CHF64, CHF485, £12.00, €127 and €135, respectively. For Richemont, Swatch, LVMH and Burberry, we target a relative P/FE multiple of 1.8x; for PPR, we use a relative P/FE multiple of 1.4x.

RISKS Risks to achieving our operating forecasts could prevent the stocks from achieving our price targets.

In the case of European luxury goods, sales would be negatively impacted by the occurrence of a double-dip slowdown in global economic growth. Though the Asia-Pacific region remains strong, a rebound in other large markets such as the United States has begun to emerge; a loss of momentum on this front could mitigate the overall picture of a global uptick.

On the other hand, faster-than-expected growth in the most hard-hit regions could present upside risk, as positive worldwide GDP growth tends to benefit luxury goods stocks as a whole.

Any unforeseen event significantly disrupting travel patterns — terrorism, epidemics, war, etc. — would act as a sharp negative on the stocks and the luxury sector (as we saw very clearly in 2003), plunging luxury stocks' relative PEF below the historical long-term correlation to luxury growth demand.

Moreover, an extension of the EU's "trademark exhaustion" principle (embedded in EU regulation 40/94) to non-EEA developed markets where our coverage companies engage in active price differentiation could still erode luxury margins significantly.

SRO REQUIRED DISCLOSURES • References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit

of AllianceBernstein Hong Kong Limited, collectively.

• Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues.

• Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

• As of 03/11/2011, Bernstein's ratings were distributed as follows: Outperform - 43.3% (1.1% banking clients) ; Market-Perform - 48.9% (1.4% banking clients); Underperform - 7.8% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.

• Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies PP.FP / PPR SA.

• In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from MC.FP / LVMH Moet Hennessy Louis Vuitton SA, BRBY.LN / Burberry Group PLC.

12-Month Rating History as of 03/17/2011

Ticker Rating Changes BRBY.LN M (RC) 08/27/09 CFR.VX M (RC) 06/23/10 O (RC) 01/13/10 MC.FP M (RC) 03/09/10 PP.FP M (RC) 09/30/10 O (IC) 05/26/06 UHR.VX M (RC) 01/21/11 O (RC) 09/30/10 M (IC) 04/24/09 Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

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