HK-PRI P1 The information contained in this document belongs to Value Partners S.p.A and to the recipient of the document. The information is strictly linked to the oral comments which were made at its presentation, and may only be used by attendees of that presentation. Unauthorized copying, disclosure or distribution of the material in this document is strictly forbidden and may be unlawful. E-commerce in China Milan, 8 April 2013

HK-PRI P2 2 Within the 1.3 Billion population in China, 40% are internet users and 20% are e-commerce users, which grows at >20% per year Number of internet and e-commerce users in China (mn) E-commerce users Internet users The e-commerce transaction amount was 968 billion Euros in 2012 The average time that a Chinese internet user spends online was 20.5 hours per week in % CAGR, e- commerce users Source: CNNIC

HK-PRI P3 3 China is the second largest e-commerce market in the region Note: e-commerce sales is B2C figure but includes ‘Business” occurred over C2C platforms Source: emarketer Euro, billions

HK-PRI P4 4 Alibaba is a dominant player in China e-commerce market Tmall and Taobao, the two major players in B2C and C2C markets, both belong to Alibaba Group Total market transaction value = 86 billion euros Source: CNNIC, CECRC

HK-PRI P5 5 The consumer e-commerce market is expected to grow at 40% per year and exceed 300 bn Euros by 2016 largely driven by B2C Source: iResearch, emarketer E-commerce B2C and C2C sales, Euro bn CAGR, % 30% 61%

HK-PRI P6 6 Key categories that the Chinese buy online are clothes, shoes and 3C Note: 3Cs include Computer, Communication and Consumer Electronics Source: iResearch

HK-PRI P7 7 Annual spending per Chinese e-commerce user is still lower than counterparts in other areas 390 2,790 1,784 1,074 1,356 14% of 22% of 36% of 29% of Note: e-commerce spending is B2C figure but includes “Business” occurred over C2C platforms Source: emarketer

HK-PRI P8 8 Consumers can be driven in mass to buy online with the right promotional effort Total transaction value of Alipay Out which Tmall: Out which Taobao: is Named to be the “Singles’ Day” (Guang Gun Jie) by the Chinese youth as these four numbers mimic four single men However Tmall and Taobao has made successful marketing campaign and made the Singles’ Day into “Shoppers’ Day” is Named to be the “Singles’ Day” (Guang Gun Jie) by the Chinese youth as these four numbers mimic four single men However Tmall and Taobao has made successful marketing campaign and made the Singles’ Day into “Shoppers’ Day” Transaction amount on Tmall after sales started on 2012/11/11, 00:00 10 minutes 31 million euros 8 hours 617 million euros End of day 1,628 million euros Source: Tmall official blog, Value Partners Analysis

HK-PRI P9 9 Platform, payment and logistics are indispensable elements in e-commerce business PlatformPaymentLogistics Information flowCapital flowGoods flow Launch of independent platform can maintain the flexibility of marketing strategy Replying on third- party platform can save initial cost Launch of independent platform can maintain the flexibility of marketing strategy Replying on third- party platform can save initial cost Third-party payment gateway is widely used in C2C and B2C in China Yet due to the relatively slow growth of online payment, cash upon delivery is prevalent too Third-party payment gateway is widely used in C2C and B2C in China Yet due to the relatively slow growth of online payment, cash upon delivery is prevalent too Apart from the state- owned Chin Postal, logistics in China has been fragmented Some large logistics companies have started their own e- commerce business Apart from the state- owned Chin Postal, logistics in China has been fragmented Some large logistics companies have started their own e- commerce business Source: Value Partners Analysis

HK-PRI P10 10 After harvesting the early investment into vertical integration into payment system, Alibaba is eyeing logistics PlatformPaymentLogistics -96% market share in C2C market -52% market share in B2C market -67% of online payment market -Alibaba started investment in this third-party payment tool in 2004, before e-commerce took off in China -Invested in two logistics companies in RMB100billion was spared in 2011 to develop logistics system “Will not enter logistics!” “Will not enter logistics!” “Taobao ‘Big Logistics’ plan launched!” “Taobao ‘Big Logistics’ plan launched!” Source: CECRC, Alibaba official website

HK-PRI P11 11 Launch flagship stores on large e-commerce platforms Typical operating models of e-commerce for foreign retailers in China 1 1 Run an independent online retail store 2 2 Establish presence through their retail partners 3 3 Uniqlo’s flag ship store on Tmall Zara’s stand-alone web store in China Dsquared2 creates existence via their partner Yoox Source: Tmall, Zara, Yoox, Value Partners Analysis

HK-PRI P12 12 For a foreign player, the challenges mainly lie within the choice of platform and logistics PlatformPaymentLogistics Building your own platform?  High control  Consumer confidence  Require dedicated resource Using third party platform?  Quick to market  Risk of look-a-likes  Low level of customization Getting a third-party payment license is extremely complicated for foreign players  E.g. PayPal is still waiting to get its license approved Building your own logistics?  High control on service level  Expensive and time consuming Using of third party logistics?  Easy to set up  Uncertainty of service level 62% of users list “long delivery time” as most unsatisfying part of online purchase Source: CECRC, Value Partners Analysis

HK-PRI P13 13 Foreign brands take different approaches in opening their online stores building on their physical retail network Time of online shop opening April 2009September 2012 Online platform Flagship store on Tmall and stand- alone online shop with inter- connected backend Stand-alone on- line store Payment Accepts all common payments including cash deposit at China Post branches Fewer methods of payment accepted: Alipay, mainland online banking and international credit cards Logistics Centralised logistics centre Delivered by partner logistics company regional offices Source: Tmall, Uniqlo and Zara websites

HK-PRI P14 14 Interactivity formats such as social media are increasingly important and converging Source: CNNIC Online shopping Instant messaging Micro-blog (eg Twitter) Online Video Forum/ BBS Social networking sites Search engine/ Portal Blog/ personal space Tekst 36 % of the internet users 47 % of the internet users 79 % of the internet users 62 % of the internet users 80 % of the internet users Selected core platforms Interaction touch points Receiving touch points 66% of the internet users 40% of the internet users 30% of the internet users

HK-PRI P15 15 The new e-cosystem is moving from a controlled ‘push’ system to an uncontrolled interactive system made up of a myriad of influencers New interactive e-cosystemControlled brand ecosystem Online forum Brand web presenter Shopping engines / comparison sites Interactive promotions Social media Key opinion forums Friends Opinion websites Press In store activities Celebrity endorsement TV Brand internet site Events Greater range of influencers Interactive environment Low ability to control Highly controlled / controllable brand environment Mostly push communication

HK-PRI P16 16 The mental model of shopping has changed fundamentally and forever Comparison of traditional vs. new mental model Stimulus 1 st Moment of Truth (Shelf) 2 nd Moment of Truth (Experience) 1 st Moment of Truth (Shelf & online) 2 nd Moment of Truth (Experience) Zero Moment of Truth The traditional 3-step mental modelA new mental model Stimulus

HK-PRI P17 17 Convergence of social media with e-commerce is emerging – e.g. Mogujie allowing users to share photos and provides links to online stores Channels by topic: clothes, shoes, bags, etc. Live feed from users Account tool bar Different types of products Link to online store Comments and reviews Other users like the products Social shopping example Smart phone apps Link to account of cover page model Source: Mogujie website, Value Partners Analysis

HK-PRI P18 18 Key success factors for retail brands to establish e- commerce in China Build or partner with the right platform 1 Make payment methods as diverse (and locally adapt) as possible 2 Work with reliable logistics partner(s) 3 Build physical retail presence first and create multi-channel experience 4 Have exclusive to online platform items or promotions 5 Build social media presence in Chinese platforms 6