NAFA NEWS LETTER DECEMBER 2013

NOR TH A MERICAN F UR AUC TIONS

NAFA NEWS

december 2013

An indepth look at china

65 Skyway Ave. Toronto, ON M9W 6C7 Canada | tel: +1.416.675.9320 | fax: +1.416.675.6865 | www.nafa.ca

C H I NA SPECIA L

BY PAUL PHILIPSE, MANAGER DATA & ANALYSIS/MARKETING REPRESENTATIVE, EUROPE

E CON OM Y Over the course of the last year, there have been many media reports that the Chinese economy may be cooling down. It is important to put this in perspective because the Chinese economy has been growing in leaps and bounds over the last ten years and a ‘cooling down’ in China isn’t the same as the ‘cooling down’ that we have experienced in North America. Over the course of the last few years, the Chinese economy has experienced over ten percent growth each and every year. This year, the economy may not grow ten percent but it is still predicted to grow and, at a far faster pace than any of the economies in North America and Europe.

For the third quarter of this year, an economic growth of 7.5 percent was predicted. The real growth rate was an impressive 7.8 percent. This is a positive and encouraging sign that economic growth in China is still very healthy.

For the most part, the growing Chinese middle class is driving this expansion. In other words, there will be more people with more money to spend, as long as the economy continues on this prosperous path.

BAN KI N G & C U R R E N C Y China’s banking policy is undergoing some revisions – in the past, banks took orders from the government. But, this policy is slowly changing under the supervision of Chinese Premier Li Keqiang (the number two position of the Chinese government after General Secretary and President Xi Jinping). On at least one occasion, Premier Li Keqiang strictly ordered that the government stop supplying funds to the banking system, which in turn, caused a liquidity shortage. Banks were forced to borrow money from other banks and, as a result, interest rates increased and Chinese stocks dropped.

On the other hand, China has plans to permit more private banks to enter into the financing arena, in an effort to help small companies with loans. The demand for credit from small and medium sized companies is large. This is considered one way to stimulate the economy in a healthy way, as the smaller and medium sized companies are 60% of China’s GDP and account for 75% of the nation’s jobs.

The ongoing development of China's financial system will play a critical role in the country’s effort to narrow the gap between the rich and poor. Reforming the financial system will help spread China’s new wealth more evenly. If the reforms result in additional funds going to private companies, the economy could generate significantly higher returns for the same level of investment. This could spark a rise in the country’s GDP. Such a shift is likely to stimulate mass job creation in the strongest areas of China's economy and increase tax revenues to finance social programs.

GOVE RN M E N T R E F O R M S In mid-November, the Chinese government announced extensive economic and social reforms. One such reform is the softening of China’s controversial one-child-policy, prompted by concerns over China’s aging population.

Other reforms include: • Permitting the Chinese to have more freedom to settle where they like. This will end the push-to-the-city policy; • Introducing a single social security system, integrating a number of different systems together; • Closing the labour-camps and introducing special environmental taxes.

All announced reforms are major changes for China. The focus on the economy will help strengthen and increase domestic consumption and move the economy from an export-driven one to one that is more consumer-driven. All of this bodes well for western companies because, as we all know, the Chinese LOVE western (luxury) products. page 2

Cons um e r B e h av i o r A naly sis An encouraging sign for companies marketing luxury items is the fact that consumers are becoming more educated about different brands and are now recognizing brand logos. This increase in brand awareness is leading to an increase in a willingness to pay higher prices for those luxury goods. Perceived value, satisfaction and brand trust are all starting to play an important role in consumer choices. Consumers with a higher degree of brand loyalty are less likely to be worried about price and more likely to place a higher value on the brand.

Chinese consumers are also beginning to prefer famous brands during luxury shopping. Luxury products are often regarded as an emblem of wealth and status in China. Leading brands with recognized logos are likely to be more successful in the Chinese marketplace than lesser known name brands. Leading brands such as Gucci, Louis Vuitton and Prada often achieve better performance as a result.

Another interesting factor that plays into luxury goods consumption is the fact that Asian consumers are much younger than their western counterparts. In Japan, for example, teenagers and people between the ages of 20-30 are a key consumer group. The average age of Chinese consumers is decreasing and is expected to decrease even further in the coming years. The younger generation is considered more likely to pursue a higher living standard. The average Chinese millionaire is now only 39 years old, which is 15 years younger than the average in the West. Prosperous Chinese are also less shy about showing their wealth than people in other countries. On the contrary, many believe they must show off to be taken seriously.

gi f t i n g Gifting is part of Chinese culture, which is good news for those marketing luxury goods. The Chinese are also known to purchase luxury goods to keep up with others and compare their wealth with others.

Whereas the market for luxury goods in other countries is typically dominated by women, in China, this isn’t the case. Men contribute to the purchase of luxury goods just as much as women. Men are also more willing to pay a large premium over the list price for desired items; many believe, for some reason, that the more something costs, the better the quality.

Historical progression of Chinese luxury goods market During the 1980’s, entry into the Chinese market by international luxury brands was restricted by the Chinese government, despite the implementation of a so-called ‘open door policy.’ Many Chinese people still remember the days when luxury meant a short queue for the toilet at the end of the street, or a bus conductor who wasn't excessively rude.

The luxury goods market in China started to develop in the early 1990’s when a few international luxury brands such as Armani and Hugo Boss entered into China’s main cities. The development of the Chinese luxury goods market was relatively slow at the beginning, partly because of the limited purchasing power of Chinese households.

N AFA en t e r s m a r k e t NAFA recognized the opportunity and entered the Chinese market many years ago. Since the early 1990s, NAFA has been working diligently to establish itself and promote its high quality furs. Through strong promotional campaigns and marketing efforts, NAFA began to make a name for itself and create a coveted luxury brand identity. In the early 2000’s, several international luxury brands launched their plans for expansion in China and began to open retail outlets. It was during this time that NAFA established a solid footprint in the luxury fur market.

The NAFA brand is now the most recognizable brand in China for high quality fur. NAFA’s plans to maintain this enviable position are threefold. First, we will continue to market through image advertising in magazines and billboards. Second, we will work directly with retailers through co-operative events and third, we will work diligently with the media to earn third party accolades in editorials. This strategy allows NAFA to keep a high profile at all levels of the trade and consumer markets.

As we look forward to the upcoming marketing season in China, consumer demand for fur garments and especially high quality North American mink remains solid however weather is still an extremely important component. With fur in such identifiable demand throughout China, the government itself is also recognizing the large economic impact of the fur trade. Given this, they are intensifying their inspection levels and controls throughout the Chinese fur trade. At present, we are not sure what impact this will have on the upcoming market. However, the upcoming December Kopenhagen sale should give us some direction. page 3

A behind the scenes look at organizing the t The process of sorting, grading, napping and coloring over 10 million mink is a demanding task but one that is planned with exacting precision each and every year. The challenging process begins with over 140 technicians in NAFA’s three locations- Toronto, Stoughton and Poland. The technicians are responsible for sorting, inspecting and categorizing the pelts. Hours upon hours are spent labouring over the pelts and organizing them in a way to ensure maximum value for both the farmer and the buyer.

Gregg Dolinsky is the Senior Vice President of Global Operations and is charged with the rigorous job of ensuring that each pelt is carefully processed and graded properly. It is a detailed and labor intensive undertaking that has undergone significant reforms in recent years, mainly because of the volume of mink being sold to China.

“The auction houses that succeed the best are the ones that look forward; see what is on the horizon and adapt accordingly,” said Dolinsky. “NAFA did that fifteen years ago. We were the first to adjust our strategy. ” “The Chinese buy in high volume and because they are bigger, we have gone from smaller lots to bigger strings,” he pointed out. “Instead of having individual separate units grading mink, we have taken a more systematic approach to the process.. It better meets the needs of the buyers and ensures maximum value for the farmer,” he said.

There are five stages that go into grading the mink before it is all grouped together, catalogued and hung up on the hook for the buyers to inspect.

PR E -SORT “This is an initial grading of sorts. We sort the mink into three basic categories. The first category is the ‘labelled’ category and this means that the pelt has no imperfections.

It is flawless,” said Dolinsky.

“The next category is called V.S.L which means the pelt has some imperfections but it is less than ten percent of the pelt. The next category is called Section Three. All Section Three pelts get sold at the end of the year – in June. That is the pre-sort stage.”

N APPIN G The length of the nap is the next phase in the process and it is considered to be an extremely critical phase because the buyers want a uniform selection and they want to ensure the naps are done correctly.

Dolinsky pointed out, “In today’s world, if you ask buyers what they believe to be the most important aspect of the mink, most will say the nap. So, it is important that we sort them into the right nap length. We have five nap lengths, which means our technicians need to be vigilant during this phase of the sorting process. NAFA trains its technicians to be meticulous in this phase.” page 4

task of sorting NAFA’s collection QU ALITY “Sorting the mink into quality is the next step,” explained Dolinsky. “We want to ensure that our buyers know which pelts are what we call Gold or Silver. Gold has a heavier underfur, it is a silkier mink and is uniformly covered.

Silver is a bit flatter, not quite as silky. Our technicians are trained to categorize them into Golds and Silvers after the napping.”

COLORING & F i nal i z i n g “Our coloring stage is also very important. We sort them into the various colors to ensure uniformity for the buyers.

At this stage, for some color types, we use an electronic coloring machine that uses a high tech light sensor to sort them into the different shades. This is used for all colors except Blue Iris, Silverblue, Unique Mutations and Blacks, which are all still done by technicians’” he said.

“After it is colored, it gets sized and finalized. We do one last check of each pelt and how it has been categorized to ensure that each lot is bundled together properly.”

Q u es t i o ns & A nswe r s w i t h Question: How does NAFA’s grading and sorting process stand out?

Answer: One of the reasons why I think our company has been recognized as having the best assortment in the world is because our producers provide us with the highest quality mink in the world. We also combine technology with technical staff. We use the latest technologies available and have highly experienced staff.”

Question: What role do the technicians play in the process?

Answer: What makes NAFA’s system better than others is the specialization of our technicians. We have technicians who specialize in napping the mink - that is all they do. We also have a group that specializes in coloring the mink and ensuring quality. It’s not the way it used to be with one person doing it all. Like with everything, we all have our strengths and weaknesses. One person could be a better napper and not as good with the quality and vice versa. We put the technician in the area that suits him. That is a big difference, I think that what really distinguishes us from others.

Gregg Dolinsky

NAFA AROUND THE WORLD NAFA’s experienced and diligent marketing team has been circling the globe in the last few months – promoting our luxury brand of furs and preparing for the upcoming auction season. Our international marketing agents have been busy meeting buyers, organizing Studio NAFA outreach sessions and holding exclusive fashion shows to highlight exquisite fashions from the world’s top designers.

Chi na In Harbin, China, NAFA joined Guifuren Fur Square, a premier fur retailer, for their annual fur gala show. This year’s event was a tribute to the ten years of partnership between NAFA and Guifuren, along with the fifth extravaganza at the Heilongjiang Television Studio. Over two thousand guests gathered for an evening of entertainment and fashion.

Highlights of the show will be broadcast on TV stations throughout the fur season, reaching an audience of over 10 million viewers!

NAFA also joined Shulan, one of China's largest manufacturer/retailers, for a special fur fashion show in Chang Chun. The three story retail location in Jilin province in northeast China was the setting for a special fashion show that drew a crowd of 400 people to view a full array of NAFA Mink as well as collections highlighting NAFA Northern Fisher, Sable and trims of Lynx Cat.

D uba i In Dubai, UAE, NAFA organized a contemporary evening of fashion and added a splash of intrigue to the event with a treasure hunt in November. NAFA joined forces with four of the leading fur retailers in Dubai and those who visited the fur boutiques of Abel, Di Cara, Ego and Manzari not only had the opportunity to view the treasure trove of furs in the exclusive boutiques, but to also discover another ‘treasure’ was awaiting them - an invite to join NAFA for a scenic boat cruise! 120 guests were treated to a lavish dinner on a ninety foot luxury craft which sailed into the Arabian Gulf for a special ‘treasured’ evening hosted by NAFA.

Sout h K o r ea In South Korea, our agents were busy with two special evenings in December – the 5th annual Seoul Success Awards and an exclusive fashion show by NAFA. The Seoul Success Awards honors those who’ve made a special contribution in their fields – from leading politicians, pop stars to designers. Over 500 VIP guests attended the special evening as NAFA kicked off the festivities with a high powered fashion parade of the latest fur collections from Jindo, Korea’s leading retailer.

The following evening NAFA hosted a special “Italian Night” at South Korea’s iconic landmark, the Seoul Arts Centre, for a close up look of Italian culture from history and travel to music and fashion. NAFA worked closely with one of Korea’s leading fur manufacturers and retailers, Yoonjin Fur Fashions, to provide highlights from their international designer collection. Over 200 VIP guests attended the event for an evening that took guests on a journey of enjoyment through refined Italian culture. page 6

AMC and WFSC have new websites The American Mink Council and the Wild Fur Shippers Council both have launched new websites this fall to better serve their members – once registered, you will find valuable information that will help you in the day to day running of your ranch. Take a few minutes to register at www.amcouncil.com. If you have colleagues or friends who are trappers, have them check out the WFSC website at www.nawfsc.com

www.amcouncil.com

www.nawfsc.com

2013 Leonard Werner Scholarship recipients We are pleased to announce the following recipients of the 2013 Leonard Werner Memorial Scholarship.

Trevor Clinkenbeard

Erin Kahnke Daughter of Brian Kahnke, a mink rancher from Melrose, WI

Darby Eistetter

Granddaughter of Ron Pikowicz, a wild fur shipper from Pierceland, SK

Carols Guillermo

Son of Marcelo Boxco, a mink rancher from Mount Steward, PEI

Clinton Crowell

Leah Glodowski Daughter of Paul Glodowski, a wild fur shipper from Rosholt, WI

Alexis Stewart Daughter of Lorinda Stewart, who runs NAFA’s Toronto staff cafeteria

Taylor Saxton

Grandson of Paul Flemming, a mink rancher from Green Road, NB

Son of Ron Crowell, a mink rancher from Yarmouth, NS

Grandson of Jerry Hawkes, mink rancher from Franklin, ID

NAFA congratulates these eight outstanding individuals and wishes them every success in their future academic and career endeavours.

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Re v ised 2 014

Auc t ion schedul e

In an effort to accommodate the international fur trade, NAFA is announcing a change to its April auction dates, to start selling on April 28 th. The revised 2014 schedule is as follows:

February 17 – 23, 2014 (on show february 12 – 16)

April 28 – MAY 3, 2014 ( on

show april 23 – 27)

June 27 – july 2, 2014 ( on

show june 22 – 26 )

NAFA NEWS is published by

North American Fur Auctions 65 Skyway Avenue, Toronto, ON, M9W 6C7, Canada www.nafa.ca

Toronto, ON Tel : 1.416.675.9320 Toll Free : 1.800.745.0693 Fax : 1.416.675.6865

Stoughton, WI Tel : 1.608.205.9200 Toll Free : 1.800.872.3877 Fax : 1.608.205.9210