RAPAPORT... The diamond and jewelry market, like the global economy, is sending mixed messages ahead of the holiday shopping season. The prevalent claim that the economy is showing its strongest prospects since the 2008 crash is being disputed by market volatility, geopolitical factors, currency fluctuations, an apparent slowdown in China and overall caution in the luxury segment. Meanwhile, the diamond and jewelry sector has witnessed a slowdown in the high end and a shift toward lower-quality, more affordable items.
Still, many believe that, for the first time in a while, all the major consumer markets have been well positioned this year to fuel steady jewelry demand, influencing a positive outlook for the fourth quarter season.
The U.S. gained momentum as money continued to be pumped into the economy with low interest rates encouraging investment and consumer spending. There was a concentration of wealth in the Middle East as money flowed from troubled countries to centers such as Dubai that resulted in increased consumer spending in the Emirates. China was showing improvement after a difficult year in 2013 while the country adjusted to its new leadership. India also shook off a tough 2013, with confidence restored by this year’s election of the Modi government. Even in Europe, there was a sense that the worst of the crisis was behind them.
Perhaps 2013 was a particularly difficult year, which has highlighted the positive trends that have occurred in 2014. However, events in the past weeks have unnerved market confidence.
To start with, the various economies that make up the Euro Zone remain uncertain. Notably, economists expect the German economy – which has long been the region’s mainstay – to contract for the second straight quarter, technically placing the country in a recession, as exports declined in recent months. China’s economy grew by 7.3 percent in the third quarter, which was its weakest showing in more than five years, while concerns have arose regarding ballooning corporate debt levels. In Japan, the government recently downgraded its own assessment of the economy as companies have reduced production due to weaker consumption.
Markets also became jittery on expectations that the Federal Reserve will soon end its quantitative easing program and subsequently begin raising interest rates – a move that would likely impact investor wealth and consumption levels. Add Ebola, Islamic State, Russia’s crisis and protests in Hong Kong to the mix, and it’s understandable that overall uncertainly prevails.
These factors have weighed on growth in the luxury sector, according to Bain & Company. The group stated this month in its 2014 annual global luxury study that the global luxury market has settled for slower, but more sustainable, growth. The researchers expect the global luxury market to grow 5 percent to $281.2 billion (EUR 223 billion) in 2014, down from the 7 percent growth recorded in 2013.
As a sign of the uncertain times, Bain explained that many consumers are seeking out greater luxury value for their money. Mature consumers are capping their luxury budgets and downgrading to accessible brands, while mid-income, aspirational consumers have stimulated growth in the next tier of premium brands and in the secondhand market, the study noted.
“We are seeing strong polarization among luxury brands and the fast growth of an ‘alternative to luxury’ segment – those upper premium brands ‘winking’ at luxury ones and promoting an image of status that exceeds that of their products,” said Claudia D’Arpizio, a Bain partner who helped author the study. “Recently, we have also witnessed a revamp of the secondhand market, fostered by an online revolution. While this market threatens new product sales, it is simultaneously turning luxury goods into durables with an increasingly defined re-sell price, thus increasing their value.”
Similar trends have emerged in the diamond market, filtering from consumer demand to the trade. Demand for better-quality diamonds for the high end, such as D to F color, IF to VVS clarity goods, has softened, while commercial-quality stones remain robust. The trend reflects high-end consumers looking for value in their purchases of expensive jewelry and the growth of the middle-income consumer that typically purchases more affordable diamond jewelry.
It is the continued growth of the middle-income segment, particularly in emerging economies such as China and India, and the stability of the core U.S. consumer in that same group, which sustains the global diamond industry – especially through periods of volatility.
In understanding the mixed messages that the global economy and the jewelry market are sending, the negative economic and geopolitical trends naturally bring caution to the high-end segment. Meanwhile, the prevailing economic growth means that there are more people in the world who can afford – and want – to buy diamonds, albeit at lower price points. As in the revamped secondhand luxury market, lower-quality diamonds are winking at the high end as they become accessible to the masses.
The diamond industry has evolved into a two-tier market catering to exclusive-luxury and middle-income consumers respectively. While the high-end will inevitably rebound, the market is currently being sustained by the growing global middle class. That is encouraging for the trade as it means that growth will be upheld even under conditions of volatility and weaker economic conditions – as long as diamonds maintain their overall aspirational and emotional appeal.
As a result, growth forecasts for diamond and jewelry consumer demand remain positive for the rest of 2014, despite the caution that has enveloped the global economy in the past few weeks.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
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