Will investments in jewellery companies sparkle ?

Updated: Mar 24, 2012, 12:01 PM IST

The Indian Jewellery industry is estimated at Rs 973 billion in 2009-10, and it contributed 6 percent to the overall retailing sector.

As India grows, one megatrend is the emergence of the organised sector in many industries. Consistent with this, there are an increasing number of organised players representing 10 percent of total Jewellery market.

Tata's Tanishq (by Titan) was the first branded player in the industry in 1996. Then more branded players entered (like Gitanjali, Reliance Jewels) and with intense competition the Jewellery sector underwent a dramatic change.

Traditionally, Indians have been more comfortable with the idea of a family jeweller, who looks after the needs of the entire family, and who has a relationship with the family over generations. His services are called for whenever there is a wedding or any other auspicious occasion. Now, due to changing lifestyles, the Indian consumers' buying habits are also changing. They now prefer to shop in the showrooms where they get multiple design and price options under one roof. The Gems & Jewellery industry is expected to grow at 13 percent annually over next 2-3 years. In this article and a subsequent one, we analyse if investing in companies in this sector provide "sparkling or shining" investment opportunities.

Why has jewellery become so popular ?

There are several reasons for the growing popularity of both unbranded, and more so, branded gems and jewellery in India. First, a major factor is obviously India's fundamental economic growth. This has resulted in a large and growing middle class population. The proportion of middle class is expected to be 41 percent in 2025 up from 5 percent in 2005. (Source: FICCI report). This middle class has rising aspirations, increasing discretionary spending power, and is buying more jewellery along with other consumer goods.

Second, with the recent global economic crisis, investors have become more aware of, investment in gold as an asset class. Jewellers have recognized this opportunity and have responded by offering various easy installment payment gold investment schemes. Tanishq's Swarn Nidhi and Gitanjali's Tamanna are such schemes.

Third, branded jewellery brings with it the hallmarks of trust and image association. This along with brand building activities, advertising and service is "hooking" consumers to brands that they connect with.

Finally, gems and jewellery also account for a substantial, approximately 15 percent of India's exports. To enhance this opportunity, the government has declared jewellery as a thrust area, and provides various incentives to increase exports.

So, a combination of the growing middle class with increased spending power, a move to gold and jewellery as an investment asset class, the creation of branded jewellery and increasing exports have all contributed to the sustainable growth of this industry.

Growth challenges and pangs for the Jewellery Industry

However, as this industry grows, we feel that intense competition will put pressure on profit margins. Raw materials account for a major portion of the total costs and higher demand will push raw material prices further up. This along with high lease rentals will reduce profit margins.

An interesting phenomenon is that when consumers use the price of gold as an indicator to make jewellery purchase decisions. So they prefer they prefer stable gold prices, or wait for gold prices to drop before buying jewellery. Lately, gold prices have been very volatile thereby adversely impacting jewellery demand.

Also, companies need to keep pace with the evolving tastes of the Indian consumer. Companies need to invest in skilled manpower, creating newer and more contemporary designs, and brand building including advertising and hiring brand ambassadors.

Further, jewellery buying is essentially discretionary in nature. As evidenced in the recent economic crisis, during times of slowdown, such spending will suffer. Also, as the table below indicated, Indian consumers seem to favour owning vehicles and travel over jewellery. So the latter's share of the average Indian's consumption basket is expected to decrease.

Jewellery is lowering in consumer purchasing priority

Rank 2009 Category Rank 2014*
1 Food and Grocery 1
2 Healthcare 2
3 Apparel and Home Textiles 4
4 Housing 5
5 Education 3
6 Telecom 6
7 Jewellery and Watches 9
8 Personal Transport 7
9 Travel and Leisure 8
10 CDIT $ 10

* Expected Rank in 2014
$ CDIT: Consumer Durable and IT Products
Source: Retail Consultancy Firm Technopak's Research

Jewellery companies will also have to contend with the existing major "family" jewellers who will try and evolve and some will become local brands themselves.

Knowing that India is a diverse country with varying local tastes and preferences, brand differentiation, product innovation and operational efficiency will be challenging and a huge opportunity for those that can deliver.

To conclude

Demand for branded jewellery is expected to increase over the next few years. A major reason is the growing Indian economy, resulting in a growing middle class with discretionary income, and which will be exposed to significant brand building and advertising messages. Also, recognition of gold and jewellery as an investment asset class, and exports has benefitted the Jewellery Industry.

Branded players will benefit from this rising demand. However, while revenues will increase, competition from the existing "family jeweller", as well as other branded jewellers, will exert pressure on their profit margins.

In such a scenario, branded Jewellery companies will have to be more innovative and efficient, while investing in real estate and brand building. Leveraging first mover advantage will be important for early entrants. But we need to review other parameters too before investing in these companies.

In our next article we will discuss the pros and cons of investing in these branded jewellery retailing companies.

Courtesy: Equitymaster

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