CASE GOMPETITION

20 13

Fulfilling the Chinese Dream

Thompson Center for Business Case Studies, HKUST Buslness School

KRISTIAAN HELSEN ARMAND GHIEUW

Chow Tai Fook: Fulfilling the Chinese Dream

I

frequently ask myself how u)e, as a dream deliuerer, can better communicate with our customers andhelp themfulfiIl their dreams.
Kent Wong, managing director, Chow Tai Fook Jewellery Groupl

By the time his plane touched down at Hong Kong lnternational Airport after an exhausting ftight from New York, Kent Wong, managing director for Chow Tai Fook Jewellery Group Limited (CTF) was more

determined than ever to press ahead with his company's strategy to have 2,000 points-of-sale (POS) by March 2014. During his meetings with the Wall Street community, various analysts and fund managers had expressed skepticism about the future prospects of CTF. A common question they raised was whether the recent austerity drive announced by China's new Xi Jinping government would dampen CTF's business.
CTF was the world's largest pure-play jewelry retailer by market capitalization, with reported sales of

USD7.4 billion in fiscal year 20fi.2 Though virtually unknown to westerners, one study showed that within Mainland China the brand was better known than Rolex, Bvlgari, or Tiffany.3 As the architect of CTF's business in Mainland China and a 37-year veteran in the company, Kent was convinced that the fundamentals in the Mainland China market were as solid as ever. He also believed that only by capturing the hearts of the consumers could CTF be the number-one brand in Mainland China.a To Kent, the immediate challenge was how to take advantage of the changes in Mainland China's consumer habits in view of rising incomes and urbanization. Also, he was determined to exploit the trend towards e-tailing, which was set to impact the jewelry industry.

Kent Wong, managing director, Chow Tai Fook Jewellery Group Limited, interview by author, Hong Kong, 4 July 2013. Tai Fook Jewellery Group Limited, Annual Results Announcement for the Year Ended 31 March 201 3,

2 Chow

httpl/www.hkexnews.hl</listedco/listconews/SEHI{/2013/0618/1TN20130618160.pdf,

accessed 22 July 2013. accessed 22 July 2013.

"Beijing Bling," The Economist, 19 November 2011, http://www.economist.com/node/21538787,

4 Kent Wong, interview by author, Hong Kong, 4 July 2013.

Armand Ghieuw prepared thls case under the supervision of Professor kistiaan Helsen so/e/y as a basts for c/ass dlscussion. Cases are writteninfhepasf fense, thisisnotmeanttoimplythatall practices,organizations,people,placesorfactsmentionedinthecasenolonger occur, exist or apply Cases are not intended to serue as endorsements, sources of primary data, or illustration of effective or ineffective
handling of a business sifuafion.
To

order copies or request permrssion to reproduce materials write bmcase@ust.hk or visit www.bm.ust.hUcbcs.

O 2013 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or othenvise reproduced, posted, or transmiited without the permission of the Hong Kong University of Science and Technology.

(r&

"lA.'Aj "o'rgF
Ghow Tai Fook
The venerable Chow Tai Fook gold and jewelry chain was set up in Mainland China in 1929 by Chow Chi Yuen. CTF opened its first jewelry store in Macau in 1938. The following year it opened its second store in Hong Kong's Queen's Road Central.
Young jewelry salesman Cheng Yutung made such an impression on CTF's owner Mr. Chow that he allowed

Cheng to marry his daughter and take a leading role in the company.s lnfused with its core values of "sincerity" and "eternity" and a missionary zeal to become the most trustworthy Asian jewelry brand in the world, CTF developed into a leading jeweler in Greater China. With an estimated market capitalization of USD19.2 billion, CTF was listed in the Hong Kong Stock Exchange in December 201'1 under stock code 1929, a symbolic number that matched the company's founding year. CTF was controlled
by Cheng Yutung and his descendants who owned a combined 8934% of outstanding shares.6 The Cheng family also owned a controlling stake of the New World Development group (SEHK:0017), a Hong Kong conglomerate which had interests in property development, infrastructure, hotels, deparlment stores, public

transport and telecommunications.

CTF's Mainland China Entry

CTF's foray into Mainland China started in 1993 through a joint venture arrangement with a Wuhan company. With a license to sell gold by the People's Bank of China, CTF opened its first shop in Mainland China in '1998 a franchised shop-in-shop within the Guiyou department store in Beijing's Central Business District. The shop became an overnight success.T
I I

i
I I

Mainland China since the tg9os had been driuen by needs. Thefirst CTF store was a breakthrough in jewelry retailing and was unique in its image and product offerings.
Kent Wong, managing director, Chow Tai Fook Jewellery Groups
Kent was instrumental in developing CTF's market in Mainland China. He joined the company in 1977 and was appointed general manager of the Mainland China business in 1999. ln 2008, having accumulated vast hands-on

I i

I I

operation and management experience along the way, he became the managing director of CTF. As a result of satisfied customers returning from Hong Kong, CTF's reputation was spread far and wide through word-of-mouth within Mainland China. lts unique retail displays; professional retail staff, and extensive product

I'

offerings, ranging from gem-set jewelry, gold products, and diamonds to platinum pieces, wowed the local populace. CTF began the penetration into thirdtier cities in 2000 and fourth-tier cities in 2OO2.s By the year 2002,

5 "The Men Who

6 Chow
Tai

Rule Hong Kong: Chen Yulung," Time Out Hong Kong, 17 February 2012,

http://www.timeout.com.hUfeature-stories/features/48828/the-men-who-rule-hong-kong-chen-yu-tung,html,

accessed 15 June 2013.

Fook, 2013 Annual Report, p.71.

7 Kent Wong, interview by author, Hong Kong, 4 July 2013.

"

a ..

t0t0. Cities in China were grouped into four tiers based on their economic development and politicat impoftance. Tier-one cities were Beijing,

Shanghai, Guangzhou, and Shenzhen. Tier-two cities were mainly provincial capitals plus a few other major urban areas. Tier-three
cities had a nominal GDP of RMB22

billion-l20 billion in 2010. Tier-four citles had /ess than RMB22 billion GDP in 2010. Richard Dobbs

et al., "China's E-tail Revolution: Online Shopping as a Catalyst for Growth," McKnsey Global lnstitute, March 2013

Thompson Center for Business Case Studies, HKUST Business School

100 POS in Mainland China and in 2010, CTF opened its 1,000th jewelry POS in Mainland China. As a first mover, CTF's extensive footprint gave it direct, deep and strategic access to the Mainland China market and created synergies with CTF's POS in Hong Kong and Macau, both popular destinations for Mainland Chinese tourists.
d

ln 2008, in the wake of the Lehman crisis, the Beijing government launched a CNY4 trillion package to stimulate the local economy and boost consumer spending. To cope with the rising demand, CTF opened a
'1,731 POS combined 379 POS in fiscal years 2010 and2011.10 By March 2013, CTF had established a total of spread over 400 cities within Mainland China.1l ln the five-year period from fiscal year 2009 through 2013, the company's sales revenue had more than tripled in size to USD7.4 billion [see Exhibits 1 and 2]. The company had become the largest player in Mainland China's highly fragmented USD54 billion-a-year jewelry market with a market share of about 13%. ln comparison, Cartier, the largest foreign jewelry retailer in Mainland China, had

a 3.3o/o market share.

Due to its popularity, the CTF brand had become a leading top-of-mind recalljewelry brand, according to the World Luxury lndex China 2013.13 CTF viewed itself not simply as a luxury brand. lnstead, Kent envisioned CTF as a brand that was accessible to the mass market with product offerings for a wide range of incomes.

aluxary brand. It has its own DNA and culture. with wide product ranges to fulfill our customers' dreams during their dffirent life stages.
CTF is not positioned as
We are o moss luxury brand

Kent Wong, managing director, Chow Tai Fook Jewellery Groupla Meanwhile, CTF had carefully crafted its operaiions to further enhance its competitiveness. lt had constructed a vertically integrated business model that gave it tight control over the entire value chain, from raw material procurement, design, production, and marketing to sales through its extensive network [see Exhibit 3]. ln the upstream, CTF was the only Chinese company that partnered with the world's three diamond miners, namely Alrosa, a Russian diamond mining company; DTC, the diamond trading company of De Beers; and Rio Tinto, a leading diamond mining company headquartered in London. Through these partnerships, CTF was able to secure its diamond supply and to pick the best pieces for its customers and franchisees.l5

ro
11

lbid. Chow Tai Fook, 2013 Annual Repott, p.16. Enid Tsui, "Chow TaiFook Ralses $2bn in HK Listing," FinancialTimes, December 9, 2011. http://www.ft.com/intl/cms/s/15Sceb6e-2216-11e1-8b93-00144feabdc0,Authorised=false.html? -i-location=http%3A%2F%2Fwww'ft.com

12

%2Fcms%2Fs%2F0%2F155ceb6e-2216-11e1-8b93-00144feabdc0.html&-i-referee#axzz2bonbbIrQ, accessed 13August2013. 13 Bien Perez, "Chinese Consumers' Ias te for Luxury Brands Are Evolving, " Soufh China Morning Post, June 29, 2013' http:
http://www.scmp.com/print/business/companies/anicle/1271393/chinese-consumers-taste-for-luxury-brands-are-evolving, accessed 30 June 2013.
1a

KentWong, interview by author, Hong Kong,4 July 2013

Chow Tai Fook, 2013 Annual Repoft, p.29.

15

:l,.=K *
The Mainland Ghina Market
Market Trends
Mainland China was CTF's biggest market and represented almost 53% of its 2013 revenue.l6 Kent was convinced that the economic slowdown experienced by Mainland China since mid-2012 would have a shor"tterm impact on retail sales. He expected that the Mainland Chinese government would monitor the economy to ensure sustainable growth in the future.17 From a mid- and long-term perspective, the Mainland China market was still a "Land of Dreams," not least because of its bright macroeconomic promises.ls Even though Mainland China was on course to record its weakest economic growth in the last two decades, it was still expected to achieve a relatively robust GDP growth rate of 7% in 2013.1s The urbanization rate increased rapidly from about 40% in 2006 to almost 50% in 2010, which augured well for future consumerism. defined as people with annual disposable income from Moreover, the urban middle-class population CNY16,300 to CNY37,30020

rlF

was expected to jump from about 235 million in 2010 to 330 million by 2025.21

While CTF had over 1,700 POS in more than 400 cities within Mainland China, Kent reckoned there was huge potential in inland lower-tier cities. These cities experienced higher economic growth and saw an expansion in their jewelry market. Thus the store roll-out plan in inland cities was one of the key growth drivers of Mainland China's jewelry market lnternational luxury brands also recognized the rising importance of lower tier cities, yet they encountered tremendous challenges in those areas. One recent report on the Mainland China luxury market noted that although the demand for luxury products was robust in second and thirdtier cities, there was not enough trust in local stores. Consumers of those cities still preferred to shop in first-tier cities. One reason was a shortage of professional service talent. Many of ihese cities also lacked strong marketing media channels needed for brand communication.22 A2013 McKinsey study concluded that e-commerce or e{ailing would become a major driver in spurring consumption in these same lower-tier cities where there was demand for goods that traditional stores had not yet managed to deliver. ln fact, in fourthtier cities, the average online shopper was already spending 27% of
his or her disposable income through etailing.23

The Jewelry lndustry

According to a Frost & Sullivan Report2a, as of 2010, the jewelry market in Mainland China was the second

16 17

toid., p.ts.

Kent Wong, intenriew by author, Hong Kong, 4 July 2013.

18 Kent Wong, "Fulfilling Customer's Dream," World Retail Congress Asia Pacific, 21 March 2013. 19 Nick Edwards, "Finance Chief Altays Fears over Slide in China Growfh Rate, " South China Mornrng Post, July 31 , 2013.

httpf/www.scmp.com/news/china/article/1281448/finance-minrster-allays-fears-over-slide-chinas-growth+ate, z0 LJSD1 CNY6.16 as of 7 September 2013. = 21 Frost & Sutlivan repoft as cited in CTF 2012 Presentation, Chow Tai Fook Jewellery Group Limited, p.2.
22 Tina Zhou and Steven Yao, "China Luxury Report," Fortune Character Group, November 2012.

accessed 13 July 2013.

2s Richard Dobbs et al., "China's E-tait Revolution: Online Shopping as a Catalystfor Growth," McKnsey Global lnstitute, March 2013.

Thompson Center for Business Case Studies, HKUST Business School

United States. largest in the world, with a total retail sales value of HKD3O2.2 billion,2s exceeded only by the the Driven by favorable demographics, increasing disposable income, and an overall robust economy, annual a compound with than GDP Mainland China jewelry market was forecasted to grow much faster growth rate (CAGR) of 38.6% from 2010 to 2015. By 2015, the market was expected to reach HKDI '548 billion, making Maintand China the largest jewelry market in the world [see Exhibit 4].26 China's ln 2010, sales from firsl and secondtier cities accounted for about 66.3% of total sales in Mainland products, lower and quality for demand jewelry market. However, as a result of rising affluence, increasing to jewelry focus retailers were shifting operational costs in thirdtier and lowertier cities, many large-scale cities these lower-tier cities for growth opportunities. As such, jewelry retail sales in first- and second-tier and to 2015 2010 from cities were expected to grow at a slower pace than in third-tier and other lower-tier would contribute to 57.3% of the total jewelry market by 2015, according to Frost & Sullivan.2T

33'7% Comparatively, in 2010, sales from third-tier and other lower-tier cities accounted for approximately their contribution of the total Mainland China jewelry market. over the period from 2010 to 2015, however, with a CAGR of 2015 by market total was expected to increase significantly, representing over 42.7o/o of the
45.3% from 2010 to 2015 [see Exhibit 5].28

the top 10 Taking into consideration only jewelry retailers whose revenues exceeded CNY500 million, players in Mainland China had a combined market share of about 57.5% of the totaljewelry market, position with a market share of according to Frost & Sullivan.2e Within this segment, CTF enjoyed a leading in at 9% and 12.6%,followed by other local brands like Lao Feng Xiang and Chow Tai Seng, which came Sang scored 3% 7.1%, respectively. Cartier registered 3.1%, while Hong Kong's Luk Fook and Chow Sang

and2%, respectively [see Exhibit 6]'30

one of the With more than '1,700 stores in Mainland China as of March 2013, CTF's retail network was 2,600 stores3l largest [see Exhibit 7]. Major local competitors included Lao Feng Xiang with approximately Kong jewelry and Chow Tai Seng which operated about 2200 stores32 within Mainland China, Hong mainland.3a in the companies like Luk Fook had '1050 stores33 while Chow Sang Sang had 232 stores at the end of 2012'36 U.S.-based Tiffany operated 23 stores in Mainland China.3s Cartier had 224 stores

while Graff had six.37

26
z7

25The Hong Kong dollar trades againsf the IJ.S. dollar at a fixed price of USD| = HKDT'75. 2011 p 48' Chow Tai Fook Jewellery Group Limited, global offering prospectus, 5 December

'

hia., p.lo.

zarcid.,
zs

p.lo.

nid., p.sg.

sotoid., p.sg.
s1

html, accessed 28 September 2013' httpf/www.chinascopefinancial.com/en/news/post/18181 s2http://www.tour2k.com/tag/chow-tai-seng-brand, accessed 28 September 2013. accessed 28 September 2013' 3s http://www.tukfook.com/en/about-lukfool</corporate-overview/corporate'profile/, html' 3ahtip//www.jewellerynewsasra.com/en/search/search-result/4203/Chow-Sang-Sang-to-open-50-stores-in-China accessed 28 SePtember 2013. ssTiffany & Co., 'Slore Locations & Events," http://internationat.tiffany.com/Locations/Default.aspx?qs=t+China#t+China-pu+-f+-mm+splitLrst'lm+map-la+32.003144610+105 201 3' 545411 5-z+3-da+-dm+to-ido+false-sld+-lw+-lf+0, accessed 1 6 August s6,'Caftier Closed 70 Sfores in China," SinoCast,23 May 2013, httptlwww.sinocast.com/article.do?aftrcleld=427' accessed 2 SePtember 2013.
s7

Graff DiamondsLtd., "sfores Wortdwide,'http://www.graffdramonds.comft/worldwide/stores/,

accessed 2 Septenber 2013

*14 .S..s$/
".w4{F
Retail prices for jewelry in Hong Kong were lower than those in Mainland China due to the fact that Hong Kong had neither value added tax nor consumption tax.38 The price gap was one of the reasons why many mainland tourists often bought jewelry products while touring Hong Kong.3e The 'lndividual Visit Scheme" introduced by the Mainland China government in July 2003 led to a strong increase in the number of Mainland Chinese tourists visiting Hong Kong. As Mainland Chinese became affluent with rising per capita disposable income, it would also drive growth in average retail transaction size.ao

GTF's Mainland China Strategies

Product Offerings
The Chinese consumer's love for gold dated back to the Xia dynasty 4,000 years ago, when it was used as
part of a bride's dowry. This tradition of buying and gifting gold was subsequently expanded to cover not only

weddings but births; birthdays; anniversaries; and some Chinese holidays, such as Chinese New Year.al Chinese consumers preferred pure 24-karat gold or "Zu Jin" t+ESl because it was more valuable and was considered to be a better store of value.a2 lt was with this tradition in mind that CTF pioneered the standard of pure-gold '999.9 Zu Jin" in Hong Kong in 1956, which became the market norm and was adopted by the Hong Kong Government as an industry standard in 1984. The company subsequently introduced a fixed price policy in Hong Kong in 1990, which removed the need for customary price haggling and thus allowed CTF to capture the trust of its customers with its new transparency. These policies were subsequently applied to all POS in Mainland China.a3
To meet the emotional needs of its customers for independence, love, self-realization, social status, and

happiness, CTF tailored its marketing programs and product lines to celebrate the different milestones in the lives of its customers.aa Special events very much influenced sales of jewelry, particularly in Mainland China. For example, the market potential for bridaljewelry was mind-boggling, especially when one considered that there were 14 million marriages in 2012.45 Another important gold-buying occasion was baby birlhs. ln 2011 alone, there were 16 million newborns in Mainland China.ao Other key life-cycle events included birthdays, anniversaries, new business openings, and graduations.

38 Value added tax

in China was 17%. China also charged a consumption tax of 5% on gold, silver, platinum and diamond jewelry, 10% on

gem-sefs and 20% on high-end watches.

3e a0

KentWong, interuiew by author, Hong Kong,4 Juty 2013.

Chow Tai Fook Jewellery Group Limited, globat offering prospectus, 5 December 2011, p.54. a1 Kent Wong, "Changing Trends in the Chinese Jewelry Market,' LBMA/LPPM Preclous Melals Conference, 13 November 2012.
42 tbid. as aa

Kent Wong, interuiew by author, Hong Kong, 4 July 2013.

KentWong, "Fulfilling Cusfomer's Dream," Wortd RetailCongressAsla Pacific,2l March 2013, p.16. 45 Frost & Sultivan reporfs as cited in Annuat Resu/fs Presenfafio n 2012, Chow Tai Fook Jewetry Group Limited, p18.
46

tbid.

Thompson Center for Business Case Studies, HKUST Business School

The second half of the year normally contributed to 60% of CTF's annual sales. Festive occasions like China National Day, Chinese New Year, and Valentine's Day also triggered a significant spike in sales
turnover.4T

Infirst- and second-tier cities, consumers show an increasing interest in modern, contemporory designs, whereas in third-tier and lower cities, traditional gold products for special occasions are the preference. In the south and west tastes dffir again,from the north and east. [See Exhibit 8]
Kent Wong, managing director, Chow Tai Fook Jewellery Group Limited
a8

As a mass luxury brand, CTF had categorized most of its products into the bread-and-butter mass luxury segment. At the same time, CTF also targeted the high-end luxury segment, coveted by the likes of Tiffany and Cartier, and the trendy youth segment at the bottom end of the market [see Exhibit 9]. Unlike most of its competitors, CTF covered the entire market spectrum with customized product lines. From the mass luxury items that made up the bulk of CTF's sales, to the high-end luxury jewelry that showed its excellent design, sourcing and craftsmanship capabilities, to the lines for youth, CTF excelled at providing its cusiomers with exactly what they were looking for. CTF's product creation and innovation efforts were spearheaded by a research and development team of over 150 professionals, including designers and goldsmiths, to support in-house designed collections. CTF also employed automated "weighing and packing" robots to enhance productivity and save manpower. ln addition to designing its popular home-grown Bao Bao Family collection, CTF's designers also developed intricate pieces under such labels as De Beers Forevermark, Disney's Winnie the Pooh, and Hello Kitty for which CTF had entered into license agreements with the trademark owners.4e

As its customers became more sophisticated, CTF responded by offering a broader range of stylish gem-set, platinum, and karat gold jewelry to meet the new demand. To enhance its brand equity, CTF also introduced exclusive, high-end jewelry pieces through auctions, thereby differentiating itself from its more mundane, local peers.s0 One such auction took place in May 2013 in Hong Kong and showcased the "Ombre di Milano" Collection, which featured 15 sets of exquisite jewelry for a select audience of affluent
customers.5l According to Kent, most of his competitors did not offer high-end luxury jewelry because the entry barrier to this segment was high and required close support from and access to the world's leading raw diamond suppliers, which worked in CTF's favor because of its special relationships with these diamond suppliers.52

a7 Kent Wong, interview by author, Hong Kong, 4 July 2013.

aB Racheal Lee, "China's Lower-Tier Citres Still Offer Plenty

of Potential for Retailers," Campaign Asia-Pacifrc, March 22, 2013

www.campaignasia.com/Afticle/337480,China's+lower-tier+cities+still+offer+plenty+of+potential+for+retailers.aspx,

accessed 15 July 2013.

ae

KentWong,"Fulfilling Cuslomers Dream,"WorldRetailCongressAsia Fook,2013 Annual Report, p. 19. p.sz.

Pacific,2l March2013,p.23.

50 Chow Tai s1 rcid,

52

Kent Wong, interview by author, Hong Kong, 4 July 2013.

Distribution
As the centerpiece of its marketing strategy, CTF had never wavered from its goal to have 2,000 POS by March 2014, in spite of a weaker economy. mostly concessionaires within leading department stores Even though same-store sales dipped slightly by about 3% in fiscal year 2013,53 the company opened up 192 new jewelry POS within Mainland China [see Exhibit 10].

Whenever feasible, Kent preferred to appoint franchisees to operate stores in Mainland China's inland lowertier cities because they tended to have the local knowledge to secure prime locations and understood the local customs and market. About 30% of all CTF's POS in the mainland were run by individual franchisees or franchisee groups.5a Franchisees were carefully selected to ensure that they accepted CTF's culture and values, and complied with the brand policies and operation policies set by the company. ln considering franchisees'suitability, the company took into account a number of factors including their background, reputation, credibility, industry experience and the value of the local knowledge and expertise they were able to bring to the franchise arrangement. Both same-store sales growth (SSSG)and POS growth were considered to be the key drivers supporting CTF's distribution strategy in Greater China. As such, the company was always on the lookout for opportunities to improve its sales efficiency in selected locations by expanding retail floor space and by optimizing its product offerings.ss To this end, CTF management leveraged its proprietary lT systems that gave it realtime access to POS data throughout Greater China and monitored sales and inventory movements.

Pricing Strategies
To maintain its brand image and premier market position, CTF took its pricing policies very seriously. lt expected all its stores, including those run by its franchisees, to comply with its uniform retail pricing policy.

Arbitrary discounting was not allowed.

Product segmentation for CTF's range was fairly straightfonrvard. Jewelry falling under the mass luxury category were in the broad retail price range of HKD2,000 to HKD100,000. ltems falling under the high-end luxury category were be retailed above HKD'100,000. Jewelry in the youth collection were in general priced below HKD2,000. The latter were mainly sold via the various CTF e-platforms.56

Marketing and Branding Strategies

CTF's advertising and promotion (A&P) strategy was heavily tilted towards traditional and digital brand and eventmarketing[SeeExhibitll]. TheremainderoftheA&Pbudgetwasusedforrunningits one-million strong membership program.

5s Chow

Tai

Fook,

201 3

Annual Report,

p.1 2.

5a Kent Wong, interuiew by author, Hong Kong, 4 July 2013. 55 ChowTai Fook,2013Annual Report, p.8. 56 lbid.

Thompson Centerfor Business Case Studies, HKUST Business School

['

As an iconic brand with a long history and a loyal customer base, CTF would remain true to its core values of sincerity and eternity by underlining its message of trust and value-for-money in its media ads. The company was also reaching out to a younger audience via different digital platforms and with the
introduction of more stylish and contemporary products.sT ln view of the shifting customer and distribution profiles towards lower-tier cities, CTF was also well prepared to deploy its national marketing campaigns to respond more rapidly to local conditions and to better serve the market's diverse needs.58

GTF's Membership Program

ln 2002,CTF introduced a customer loyalty scheme for its clients in Mainland China. By March 2013, the
program had over a million members, majority of whom were women. Nearly 32% of CTF's retail sales in Mainland China was generated by its members. Mainland Chinese members' repeat purchases rose by 90% year-on-year to HKD4.2 billion in fiscal year 2012.5e Due to its increasing popularity, the Mainland China membership program was upgraded in April 2013 to reflect enhanced benefits based on four new membership tiers: Ordinary, Gold, Platinum, and Diamond. Ordinary Gold and Platinum status required an annual spend of CNY10,000, CNY60,000 and CNY150,000, respectively. Diamond was the highest tier and required an annual spend of CNY500,000. ln addition to receiving sales rebates for future purchases, Diamond members were eligible for junkets to the yearly Paris Fashion Week, helicopter tours, and overseas rare-wine tastings, among other benefits.60

The membership program also enabled CTF to build a valuable customer database whereby the company was able to track the product and lifestyle preferences of its key customers.ol

GTF's lnternet Strategy

Euen though our Internet sales haue grown three times in size, digital media haue become more than new sales channels for us and haue euolued into communication platfurms thatlink online customers to the brand. Kent Wong, managing director, Chow Tai Fook Jewellery Group Limited62

The lnternet also played a prominent role in CTF's Mainland China strategy. The retailer launched its e-shop in2011. Besides its company-owned website, CTF also had strong presence on numerous e-tailing platforms, such as Tmall of Alibaba and JD.com, as well as social media platforms like Weibo [see Exhibits 12 and 131. CTF devised its web strategy with the foresight that e-commerce would blossom. One major factor behind CTF's lnternet forays was that its younger customers were increasingly lnternet-savvy.63

st

tbid.

sa bid. 5s Chow Tai Fook, 2012 Annual Results Presentation.

60 'Nding the Gilded Tigen" The Economist, 12 May 2012.

61 Kent Wong, interuiew by author, Hong Kong, 4 July 2013. 6z lbid. as lbid.

-e#
The most prominent businessto-consumer online marketplace operators in Mainland China were Tmall and JD.com. Like their U.S. counterpart Amazon Marketplace, these platforms provided one central website where a huge variety of businesses could sell a large variety of merchandise or services. Tmall, founded by Alibaba, alone had six million registered sellers.6a
By the end of 2012, Mainland China's digital world boasted more than 560 million lnternet users. Of these,

422 million had used their mobile phones to access the lnternet. There were 242 million online shoppers, representing 43% of the total number of lnternet users in Mainland China.65
According to a 2011 McKinsey report, Mainland China's luxury e-commerce market was CNY15 billion strong and was expected to reach CNY20 billion in 2012.66 CTF was ranked number one in digital competence among watch and jewelry brands by L2's Digital lQ lndex reports released in December 2012 and February 20fi.67 Kent expected CTF's lnternet sales would grow to 5% of its total revenue in five years'time.68 More significantly, he knew that when it came to shopping for luxury products, the in-store experience remained irreplaceable. As such, he had to ensure that all online marketing activities synergized with his company's overall sales and marketing strategies and ultimately drove customer traffic to CTF's physical stores.6e
To increase online traffic, CTF offered special and/or limited-edition products that were attractively priced

below CNY2,000 to suit the pocketbooks of its young audience.T0 The CTF-patented Bao Bao Family collection [see Exhibit't4], which featured seven auspicious characters, had sold overtwo million pieces online since its inception in September 2002.71 CTF also implemented brand crossover marketing campaigns to capture the imagination of its teenage audience. ln line with the launch of the Superman movie Man of Steel in Mainland China in June 2013, CTF introduced on its e-platforms a Man of Sfee/ "command key" pendant, which was featured in the movie. lt became an instant hit with online shoppers

[see Exhibit 15].72

Short-Term Headwinds
Mainland China's economic growth slowed Io 7 5% in the second quarter of 2013 and was projected to dip below 7% for the remainder of the year, according to analysts.T3

With his ear close to the ground, Kent had felt the economy's weakening pulse since mid- 2012. At the same time increasing urbanization, rising disposable incomes, a growing middle class, a robust luxury

64 Richard Dobbs et al., "China's E-tail Revolution: Ontine Shopping as a Catalystfor Grov'tth," McKinsey Global tnstitute, March 2013. 65 China lnternet Network Information Centei Slaflsfic al Repoft on lnternet Development in China, January 2013. 66 "Luxury Brands tJnderinvested in Digital Marketing in China: L2," Campaign Asia-Pacific, December 20, 2012.
httpt/www.campaignasia.com/Arlicle/326996,1uxury-brands-underinvested-in-digital-marketing-in-china-l2.aspx,

accessed 15 July 2013. 67 Chow Tai Fook Jeweltery Group Limited, 2012/2013 Annual Results Presentation.
68 Kent Wong, interview by author, Hong Kong, 4 July 2013.

6s tbid.
70 lbid. 71 Chow Tai Fook Jewellery Group Limited, lnterim Resu/fs Presentation 2012/2013.

72 Kent Wong, interuiew by author, Hong Kong, 4 Juty 2013.

73

'X Jinping

Calls for Financlal Risks to Be Curbed," South China Morning Post, Juty 30, 2013.

httpt/www.scmp.com/print/news/china/afticleh293126/xi-jinping-calls-for-financial+isks-be-curbed,

accessed30 July2013.

Thompson Center for Business Case Studies, HKUST Business School

market, and an expanding jewelry market covering third-tier and lower{ier cities all boded well for the company's future. The growing clout of better-educated, lnternet-sawy millennials in Mainland China's marketplace was also seen as a welcome opportunity for CTF. One wildcard on the horizon was the austerity and anti-corruption drive initiated by the new Beijing government. As the central government clamped down on gift-giving in the first quarter of 2013, several luxury brands and retailers were beginning to feel the pinch with dropping sales.Ta Kent was hoping that the impact of the frugality campaign to consumer sentiment would be temporary.

Gonclusion
The China Dream notion was popularized by China's new president Xi Jinping when he took over the reins of power in 2013. While short on specifics, it referred generally to "better livelihood of the people."75
To Kent, CTF was in an ideal position to render the Chinese dream a reality. While his company had enjoyed enviable success in the past, it was not a given that the future would bring more of the same. Kent

was fully aware that the shifting demographic environment, consumer preferences, and digital landscape in Mainland China were challenges that loomed ahead. He foresaw that these challenges would need his undivided attention.
We belieue that only the brand that can

win the hearts of the Mainland Chinese

customers can truly claim the number-one position in Mainland China. Kent Wong, managing director, Chow Tai Fook Jewellery Group LimitedTo

74 Rachel Butt, 'Profit Alefts Highlight China Retailing Sfrarns, " South China Morning Post, 25 July 2013,
httpt/www.scmp.com/print/business/money/markets-investing/afticle/1290045/profit-alerls-highlight-retailing-strains+etail, accessed 25 July 2013. 75 "What Does X Jinping's China Dream Mean?," BBC, 5 June 2013, hftpt/vtww.bbc.co.uUnews/world-asia-china-22726375,

accessed 12 August 2013. 76 Kent Wong, interuiew by author, Hong Kong, 4 July 2013.

l-iF'

EXHIBIT 1:
CHOW TAI FOOK INCOME STATEMENT

HKD million For the year ended 31 March Revenue Gross profit Gross profit margin Operating Profit (EBIT) EBIT margin Net Profit Net profit margin
Profi t attributable to shareholders

FY2011

FY2012
57,571 16,448
29.1o/o

FY2013

YoYchange

FY2O11

. FY2O13 GAGR
28%
28.1o/o

35,043 9,928
28.3Y0

4,652
130/o

8,440
14.9% 6,571 11.6% 6,341

3,673
10.50/o

3,538 39.5cents N/A

57,434 15% 16,283 -10/o 28.4% -0.7% ' 7,317 -13.30/0 12.7o/o -2.2Yo 5,678 -13.60/0 -1.7o/o 9.9% 5,505 -13.20k
55.1cents
-19.6% N/A

25.4o/o

243%

24.7% 18.1% N/A

Basic earnings per share Dividend per share

68.5cents
1

0cents

22cents

Source: Chow Tai Fook Jewellery Group Limited. "2UA2013 Annual Resu/ts Presentation," PowerPoint Presentation,

hftpt/corporate.chowtatfook.com/attachmen|2013061820481017-en.pdf(accessed3

October2013)

Thompson Center for Business Case Studies, HKUST Business School

EXHIBIT 2:
CHOW TAI FOOK BALANCE SHEET

Current Assets lnventories Trade and other receivables Bank balances and cash Total assets Bank borrowings Gold loans Total liabilities

27,503
17,101

45,258 29,694

42,305 31,706 5,045 5,731 44,810 2,831

39,777

-12.1o/o

27,315
3,973 8,305 43,219 1,000 4,836 9,358
33,861

-8.0%
-25.4Y0

3,228
5,605

5,323
9,988 47,414
9,001

-16.9% -8.8% -88.9%

-16.7%

29,049
2,881 3,938 17,376 11,673

5,807 17,841

8,372
14,524 30,286

475%
14.5%

Totalequity

29,573

Source: Chow Tai Fook Jewellery Group Limited. "201A2U3 Annual Resu/fs Presentation,' PowerPoint Presentation,

hftp!/coryorate.chowtaifook.cordaftachmentl2013061820481017-en pdf (accessed 3 )ctober 2013)

EXHIBIT 3:
VERTICALLY INTEGRATED BUSINESS MODEL OF CHOW TAI FOOK

Upstream

Midstream

Downstream

4 diamond cutting
polishing factories

&

POS in ihe PRC, HK, Macau, Malaysia, Singapore & Taiwan

Shunde, Shenzhen, Hong Kong

Partnership with Alrosa, DTC and Rio Tinto Stable diamond supply

"e,

South Africa

Source: KentWong. "20th CLSA /nvestors'Forum," PowerPoint Presentation,23 September 2013,

http!/corporate.chowtaifook.com/attachmen|2013092412312617_en.pdf (accessed 3 October 2013)

Thompson Center for Business Case Studies, HKI.JST Business School

EXHIBIT 4:
RETAIL VALUE OF JEWELRY MARKET IN MAINLAND CHINA WITH BREAKDOWN BY PRODUCT (rN HKD BILLION)

r
1

Goldproducts

Platinum/karatgoldproducts'.:: Gem-setjewelry

800

1600
4AJ;W,::,,,

1400

:ip!.@ir!&'2n$-201 5E CAGR

3S.5$::1t

1200

Gem-set jewelry 2010-2015E CAGR

35% 38.6%

Total 2010-2015E CAGR

1

000 800

600

400

200

2010

2011E

2012E

2013E

Source; Frosl & Sullivan report as cited in CTF Global Offeing prospectus, 5 December 2011, p.48.

EXHIBIT 5:
RETAIL VALUE OF JEWERLY MARVET IN MAINLAND CHINA WITH BREAKDOWN BY C|TY T|ER (rN HKD BrLLroN)

I
1800 1600

Tier 1

cities r

Tier 2

cities I

Tier 3 and lower cities

1400

1200 1000

'lkn 3:attd hwer 201tr2015E CAGR

Total 2010-2015E CAGR

800

600

400

200
0

2011E

20',t2E

Source; Frost & Sullivan repoft as cited in CTF Global

)ffeing

prospectus, 5 December 2011, p.49.

Thompson Center for Business Case Studies, HKUST Business School

EXHIBIT 6:
JEWELRY MARKET SHARE BY RETATL VALUE rN MATNLAND CHTNA (2010)

Chow Sang Sang

Kimberlite Diamond
Luk Fook Cartier Zhe Jiang Ming First Asia Beijing Caishikou Lao Miao Chow Tai Seng Lao Feng Xiang Chow Tai Fook

Source; Frosf & Sullivan report as cited in CTF Global

)ffeing

prospectus, 5 December 2011, p.59.

I
EXHIBIT 7:
CHOW TAI FOOK STORES

Picture of Beijing Qiannen streef sfore

Chow Tai Fook shop interior

Source: provided by Chow Tai Fook

Thompson Center for Business Case Studies, HKUST Business School

EXHIBIT 8:
JEWELRY DESIGN BY CUSTOMER TYPE

& 2nd tier Modern, Contemporary designs , ^.14 :i'il{ . ./ ^

1=t

Southern & Western

Floral design, traditional wedding bangles

Young consumers
Fashionable, trendy, adorable styles

"

:ir

\.'\\\ .

'.

, 1-

,\ \.. ... -., *:i \

a:-

-:l

ffi. 78
lr

3rd ancl lower tiers Special occasions, traditional designs

Eastern & Northern Zodiac signs, safe locks

:: -1 ?.'ir o
'...:.

Sophisticated consumers
Refined, elegant styles
,.

{:i:.

"r

t f*t
.r*i.,: tt,*,1 .. a. ,.:,
r....,...,..,

r-'
?

b.. '!'-.,d'
ll

/--:'-,/

Source: provided by Chow Tar Fook

r-

r%
.
EXHIBIT 9:
DIVERSIFIED PRODUCT PORTFOLIO OF CHOW TAI FOOK

r j(4
.,

Price Range

I .ilr T
I

X nxsroo.ooo
IW

ffW$w#
,f

-q$t1t/
-,.

::9-'"0

Luxury

w Broad product

portfolio from
't
l
1

Wl
r::rr::ri:t: '.t:. I

'

:;:;i.;, i*. S' /'' t]ii

-.! ',i:.i;..

,..j -

Mass Luxury
.f.1,

l
l
ll

r:::

."'*=1, {r---} ..i -9:l .rgf rT- ^:* 6! v *,

high-end, mass luxury to young line segments

w

t
I
a

{l

--

Mass luxury is the largest

segment, which accounts for over 80% of our Group's revenue

w&-&
n !-'g;' n 'l IoUIlg
',
I

:
,l

"&
Source: Kent Wong. "20th CLSA /nyestors'Fo rum," PowerPoint Presentation, 23 Septenber 2013,

htlpt/corporate.chowtaifook.com/attachmentl2013092412312617_enpdf(accessed3

)ctober2013)

Thompson Center for Business Case Studies, HKUST Business School

EXHIBIT 1():
CHOW TAI FOOK RETAIL NETWORK

@ 1,836 POS as at 31 March 2013 @ A net of 2Og new POS in FY2O13

# 94.3o/o of POS are located in the

Mainland of China

4, Target: Total 2,OOO POS bY the end

of FY2014

Mainland China
Tier I cities Tier

1,206
188
611

ll cities

Tier.Iil and other cities Hong Kong, Macau and otherAsian markets*

407
81

Total
# OtherAsian
Markets areTaiwan (8 POS), Singapore (1 POS) and Malaysia (1 POS)

1'358

PowerPoint Presentation, Source: Chow Tai Fook Jewellery Group Limited. "2012/2013 Annua/ Resu/ts Presenfation,'

hftp!/corporate.chowtaifook.com/attachment/2013061820481017-enpdf(accessed3

)ctober2013)

EXHIBIT 11:
ADVERTISEMENTS

i
I
L

The PerfectOne

Mass luxury wedding ad magazrne spread

t*EmDto +AFCH;-!.
" '. -ti t: ' !rr i* r{ttadi

;;;;

"J
., ".,

ffi;P
, l*e{r.rai.l , traat tr* ua*ii !1ia ,.-: J -&rrx!*
:

:!";s'$ .
a.;.;:| l:

,,,..,,., .i
t'

,r$rarstt t.r a*n6ft r*ffir!,.* fttw. a|e'r6s d.r.*e

:! \ i .I t'"l Jl

,i:

\
.i{rdcrtd irar!ta!rrtr6! Ei-

;lH*f:lgl
tlr,eir

aNrs-s{* lffi ttqit*q*8rEt! t*R*R**${*r. et 3 n&# sse,rq'!{ *e tF adlsii uri*qa${

T-IHal

c) '...r ,rl | , r*. :2, #l#Ftm

Mass luxury Chow Tai Fookfashion newspaper July 2013

High end luxury advertisement

Thompson Center for Business Case Studies, HKUST Business School

EXHIBIT 12:
CHOW TAI FOOK ESHOP PAGES

frEfrpitt:,

jfiP'<a'
t*t.*Frs

{r.-

rl!r-

6errc

t:ta

:.giE

- {C51t .}ts;P;.

lI \' ('()l)n
#11t#iln
T'
Q

b
'klh),

,l

')'-:

rt:aa

rt**

$ t:**

ffi

http /www. ctfe sh op.

co m.

cn

htts:/ir Mialal.rlel-r{tl:

Etflf,n$,F

http

t/ ch owta if ook.tm al

com

Source: Provided by Chow Tai Fook

EXHIBIT 13:
CHOW TAI FOOK E.PRESENCE IN MAINLAND CHINA

Unmatched e-Presence Growth

t

lnternet savw and O-to-O integration

%E
Source: Provided by Chow Tai Fook

Social Media and Cell Phone App Chow Tai Fook e-Shoir, facebook & cell e-shop Aceounts on Tmall and 36OBUY Sina & Tncent weibo arrdWeChat: {fi ove r SOO,O-Qplq !!B-qr$i''.^-'r1.'i, .rL

]*

\x&

'l-

Top selling jewellery brand on Tmatl,

2Oi>

Top 5 searched brands on Baidu ,2OL2 Digital lQ lndex: China (NYU Stern), 2OL2 Jewellery segment - No. 1 Top 1OO world luxury brands - No. 4

Thompson Center for Business Case Studies, HKUST Business School

EXHIBIT 14:
BAO BAO FAMILY COLLECTION AND SELECT LICENSED COLLECTIONS SOLD ONLINE

*,ggqg-,fl
Bao Bao Family Collecfion

{P.'
\,

? e'nfilk,n
Disney

@
'
F

&

$,g*
-

I @b 14t
exa
:}].{,;i :

"l

':.::;
.2m.OO

F .l8iom

s.r0dom

9t*i*

;rl:'

+.

':lD i$i a'ii .-.

5.--

-a

"::

I 4q{

v
I

!,

--.*"ti
t
?

"*
ry peSH_:!: &a*{& ., 1rys
Angry Bird

&
&el@*q:lq*,*E t&E

&
*{* H!i?: *!d,5h 4

!|

*tr
-.-wf-:

FA

*/:

'& *}: 3* cls a (i:i \r# rr.l

,

fiii ,&

&
&#-

Hello Kifty

Source: KentWong.'20th CLSA /nvesfors'Forum,'PowerPoint Presentation,23 September 2013,

hftpt/corporate.chowtaifook.con/attachmen|2013092412312617-en.pdf (accessed3 )ctober2013)

t---

d*srsk '\=zg,F
EXHIBIT 15:
EXAMPLES OF ONLINE TO OFFLINE INTERACTION AT CHOW TAI FOOK

Singles'Day On 11 Nov Singles'Day in China, any online purchases on e-platforms will be awarded coupons for the purchases in physical stores
On 11 Nov "11.11 Singles'Day":
Long for Long for

"love"

r-t]
i .-.

"Online Sales"
ilt:ij
",',i:1.,

rr-1

l_,Al_i
---

u .'-ur

&

Tmall & Taobao online sales on 11 Nov reached US$3bn

(RMB19.1bn)

l-

L a-

Man of Steel

Any online purchases of "Man of Steel" jewellery poducts will be offered a QR code as coupon to enjoy discounts on any purchases of non-gold jewellery products in physical stores

*ffi
Source: Kent Wong. "20th CLSA /nyesfors'Forum," PowerPoint Presentation,23 September 2013,

httpt/corporate.chowtaifook.com/aftachment/2013092412312617_en.pdf(accessed3 )ctober2013)

INTERT{ATTONAL

CASE GOilIPETITK)il

201 3