Jewellery Retail

According to A T Kearneys Global Retail Development Index (GRDI) 2012, India is the 5th most favorable destination for international retailers (Fig 1). Of the total Indian retail market, 8% constitutes the organised retail segment which is estimated to grow at a rate of almost 30% by 2015, and hence at a much faster pace than the overall retail market which is forecast to grow by 16% in the same period. Clothing & Apparel make up almost a third of the organized retail segment, followed by Food & Grocery and Consumer Electronics. India currently has a small penetration within the organized retail segment as compared to other emerging markets such as China, which has a penetration of more than 20% within organised retail according to the Global Retail Index report by the World Retail Conference. The Indian retail market is estimated to exceed US$ 750 billion by 2015, according to the India Retail Report 2013 (IRIS Research), presenting a strong potential for foreign retailers planning to enter India. Until 2011, the Indian Central Government denied Foreign Direct Investment (FDI) in multibrand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or other retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process. In late 2012, the Government of India passed a Foreign Direct Investment policy which allows foreign retailers to own up to 51 per cent in multi-brand retail and 100% in single brand retail. It is expected that these stores will now have full access to over 200 million urban consumers in India, approximately 47% of which are below the age of 30 with high levels of consumption.

Source: Michaelpage.co.in

The gems and jewellery industry is extremely global in nature- given the geographic dispersion of the value chain- from mining of gold, diamond and platinum in Africa,Canada, Australia, and Russia to polishing and jewellery manufacturing in India, china and turkey and retailing in the U.S., European Union, Japan and the emerging markets of India and china. As one of the most tradional industries, it has witnessed sweeping changes since the beginning of this millennium. Suply sources have become fragmented, raw material prices have shot up, and consumers have become more demanding and less loyal than ever before. Regulators are cautious and consumer activism is on the rise. These pressures have driven changes that are more intense and lasting than any witnessed in the previous 50 years. The trends that have unfolded in the apparel sector over the last three decades appear to be playing out in the jewelry sector, but at a much faster pace. The jewelry industry seems poised for a glittering future. Annual global sales of 148 billion are expected to grow at a healthy clip of 5 to 6 percent each year, totaling 250 billion by 2020. Consumer appetite for jewelry, which was dampened by the global recession, now appears more voracious than ever. Today, the jewelry industry is still primarily local. The ten biggest jewelry groups capture a mere 12 percent of the worldwide market, and only twoCartier and Tiffany & Co.are in Interbrands ranking of the top 100 global brands. The rest of the market consists of strong national retail brands, such as Christ in Germany or Chow Tai Fook in China, and small or midsize enterprises that operate single-branch stores. In the past, most of the growth in branded jewelry came from the expansion of established jewelry brands, such as Cartier and Tiffany & Co., and new entrants such as Pandora and David Yurman. By contrast, future growth in branded jewelry is likely to come from nonjewelry players in adjacent categories such as high-end apparel or leather goods companies like Dior, Herms, and Louis Vuittonintroducing jewelry collections or expanding their assortment.

Research identified three types of consumers driving the growth of branded jewelry: new money consumers who wear branded jewelry to show off their newly acquired wealth (in contrast to old-money consumers, who prefer heirlooms or estate jewelry) emerging-market consumers, for whom established brands inspire trust and the sense of an upgraded lifestylea purchasing factor quoted by 80 percent of our interviewees young consumers who turn to brands as a means of self-expression and self-realization. The offline landscape is also evolving. In apparel,monobrand stores have been gaining ground at the expense of mail-order players and some multibrand boutiques; department-store sales are stagnating (Exhibit 2). The same is happening in jewelry. Pandora, for example, quadrupled the size of its store network in just four yearsfrom 200 locations in 2009 to more than 800 in 2012. In 1990, there were just 2 Swarovski boutiques; by 2012, there were 860. The jewellery market in India is estimated to be around 2,50,000 crore (2011) and branded jewellery accounts for 20% of the total market. The market is highly fragmented and unorganised. However, increased investment by industry bodies such as DTC, PGI, and the like is spurring the rapid growth of branded jewellery market in India. Tanishq, established in 1996, is the first branded jewellery player in India. (Source: Titan company presentation) Research by ICRA shows the following : Indian gold jewellery industry is the largest globally, valued at ~USD 40 billion (including recycled volumes), driven by a gamut of cultural, social and demographic factors. India along with China are the two largest consumers of gold, with jewellery constituting bulk of the yellow metal consumption. ICRA believes that the domestic gold jewellery retail industry is witnessing a structural transformation with organized retailing gaining prominence. Contribution of organized retail to total jewellery consumed in India has grown to ~18% from less than 5% (largely over the past decade), aided by the widening retail network of organized players and shifting consumer preferences towards organized / branded jewellery. Jewellery consumption over the past decade has recorded a strong growth upwards of 15% driven increasingly by organized retail. Rising quality awareness of customers has also provided a fillip to the organized retail segment, which is banking on its reliability and quality to compete against t he highly fragmented unorganized jewellers. Organized players have steadily chipped away market share from smaller / unorganized retailers by addressing the need for enhanced experience of a demanding customer base, which is marked by shifting demographic and socio-economic profiles. Jewellery consumption in India has been traditionally driven by the strong cultural affinity for gold, with it being the preferred form of jewellery worn. Gold jewellery is an integral part of weddings in India, and is considered as a necessity with wedding related demand accounting for substantial portion of overall jewellery demand, especially in the South. Jewellery demand has also been supported by the increasing appetite for gold jewellery from rural and non-urban markets which constitute a major chunk (about 70%) of the total consumption. Gold has also served as a means of

savings especially for the rural sector, owing to the lack of any major alternative investment options supported by its anti-inflationary characteristics. Demand for gold ornaments comprises bulk (~80%) of the domestic jewellery consumption, with studded jewellery including diamonds / other precious metals contributing the rest. Keeping in mind the demand profile and the vast untapped tier 2 and tier 3 markets, organized retailers are undertaking large scale geographical diversification and focussed marketing initiatives to improve volume growth tweaking their product portfolio to suit local needs. The shift can be witnessed with, even the traditional & regional players undertaking significant scale expansions. The demand for value added fashionable jewellery including designer, lightweight, custom-made, low carat and high fabrication jewellery have gained higher prominence in the recent years, driven largely by the urban population. Jewellery consumption / demand in India is also characterized by its inherent seasonality, with the consumption being at the highest during the festive and wedding seasons. The seasonal demand and widening market reach has resulted in increasing spends on advertising and other brand building initiatives by retailers, to garner / improve market share in the new and existing markets. Operating income for organized jewellers has grown at a considerable pace over the past few years, driven by the increasing demand for the branded jewelry, aided by the aggressive expansion undertaken coupled with the continued increase in gold prices. Profits / accruals within the sector have also expanded with widening sales and improving value addition, varying across market players based on product mix, scale of operations, sourcing method and funding mechanism. While demand is likely to be strong during the current year (2013) aided by lower prices, operating margins of retailers are expected to be under pressure on account of the sharp decline in gold prices during April 2013. Further, the recent RBI directive curbing import of gold by banks on consignment basis for domestic could also moderate margins of domestic retailers to an extent. The working capital intensity of organized retailers is also likely to increase owing to rising stock levels necessitated by the aggressive expansion of retailers, funded primarily by short term borrowings. Jewellery volumes after recording a steady growth over the past decade and peaking in CY2010, has moderated over the last two fiscals weighed down primarily by unprecedented increase in gold prices (compounded growth of 20% over the last two calendar years). The decline in jewellery consumption was also accelerated by increasing investment appetite for gold in the form of medallion and bars (investment in bars/medallions increased by ~25% as against de-growth in jewellery volumes during CY11) as a hedge against economic uncertainty and inflation. The declining trend continued during H1 CY12, exacerbated by regulatory developments including the imposition of excise duties for unbranded jewellery (repealed subsequently) and also the increase in customs duty for gold imports, which impacted operations and profitability of retailers. Further, earnings were also strained by the continued price volatility, aggravated by the fluctuating exchange rates. Faced with sustained periods of price and consequent demand volatility, coupled with intensifying competition, jewellery retailers focused on inventory management strategies to support earnings. Focused marketing initiatives coupled with moderate recovery in demand driven by

festive seasons and some pre-buying (in Q4, 2012) in anticipation of impending import duty boosted jewellery volumes during the second half of 2012. ICRA believes that the recent sharp decline in gold prices is a positive for retail jewellery demand. However, growth over the medium term may remain moderate and would depend on overall macro-economic conditions. Organized retailers are, however, expected to grow at a relatively healthier pace continuing to gain on unorganized players. Over the long term, gold jewellery demand is likely to witness consistent growth driven, primarily, by cultural underpinnings in India, evolving lifestyle, anticipated recovery in economic conditions and expected improvement in demand from tier 2 / tier 3 and rural markets which account for a major chunk of the demand.