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The World’s Largest Jewelry Retailer

By Karolyn Schuster

Chow Tai Fook, Hong Kong.

After 83 years in business as a privately held enterprise, Chow Tai Fook sold off 10.5 percent of its company in the closing days of 2011 to raise expansion capital that will assure its continued dominance of the jewelry industry in China. With the Initial Public Offering (IPO) completed on December 15, 2011, in Hong Kong, the jewelry giant cast the ultimate vote of confidence in the potential for continued growth of the
Chinese economy and in the Chinese consumer’s appetite for luxury goods. The move also signified the company’s confidence in its own ability to accurately assess the mind-set of the Chinese consumer and to design and market jewelry that will appeal to new customers and further increase market share.

Family-owned Chow Tai Fook was built by Cheng Yu-Tung, now 86 and ranked by Forbes magazine as Hong Kong’s fourth-richest individual in 2011. Although his gold and jewelry stores were the source of his earliest wealth and have been a great source of profits in recent years, some of Cheng’s estimated fortune of $16 billion is from property and real estate investments held by New World Development Co., a holding company he founded in 1970. In addition, Cheng holds a share of and is a nonexecutive director of Stanley Ho’s Macau gambling conglomerate SJM. Cheng’s son, Henry, and grandchildren, Adrian and Conroy, hold executive positions in Chow Tai Fook.

With this recent public offering in the jewelry group, the family enterprise issued 1.05 billion shares at $1.93 each, the low end of the pre-offering estimate of $1.93 to $2.70 per share. The $1.93 price was seen by investment analysts less as a reflection of the appeal of the company — which is an established, respected brand in China — and more as a sign of the overall negative impact of the volatile global economy on investor appetite for risk. Other companies’ IPO share prices also came in at the low end of estimates in Hong Kong in 2011 and some companies even pulled their offerings due to lack of investor interest. 

A sale at the high end of the estimate would have netted Chow Tai Fook $2.83 billion in proceeds, compared to the $2 billion raised. The offering established an overall value of the company of around $19 billion on the IPO date, more than twice the market capitalization of Tiffany & Co. at that time. It is trading on the Hong Kong Stock Exchange under the symbol 1929, the year the company was founded. In the weeks following the IPO, the stock’s price traded from a high of $1.95 on January 26 to a low of $1.52 on April 5.


In wooing potential investors prior to the IPO, the company announced that approximately 50 percent of the proceeds would be used to finance a rapid expansion of the already-dominant Chinese jeweler that would increase its number of retail outlets by 200 annually to reach 2,000 stores by 2016. Chow Tai Fook currently has approximately 1,600 retail outlets in over 320 of China’s 712 cities.

Approximately 5 percent of the capital raised by the IPO will renovate existing sales outlets and acquire other wholly owned points of sale (POS) locations, 2.5 percent will be spent on production and research and development equipment and another 2.5 percent for construction of a new office building in Shenzhen, scheduled for completion by the end of 2013. An additional 36.5 percent will be used to pay down outstanding loans related to working capital and the IPO expenses.


Sometimes referred to as Asia’s Tiffany & Co., Chow Tai Fook is a household name in China but relatively unknown in the global market. It is the leading jeweler by market share, with a 12.6 percent share in the People’s Republic of China (PRC) and a 20.1 percent share in Hong Kong, Macau and other Asian cities, according to Frost & Sullivan, a global market research firm, in a report commissioned by Chow Tai Fook in advance of the offering.

Initially, the company capitalized on the allure of gold in the Chinese culture, where it is not only a show of wealth but also a traditional gift to mark special events. Today, the company manufactures and sells mass-market and high-end luxury products, including jewelry set with diamonds and gemstones, gold jewelry and gift items and watches. Its largest market is the PRC, accounting for approximately 55.6 percent of its $4.5 billion in annual sales, followed by Hong Kong, Macau and other Asian markets, with a 44.4 percent share. The mass luxury segment accounted for 56.7 percent of the PRC’s overall jewelry market in 2010, with retail sales of $22 billion. And it is expected to grow at a compound annual growth rate (CAGR) of 39.1 percent from 2010 to 2015 to reach $114 billion by 2015.


China and Chow Tai Fook are closely connected by the fact that the country and the company have traveled parallel growth paths — almost in lockstep — in recent decades. China’s gross domestic product (GDP) is expected to rise by 13.5 percent CAGR between 2010 and 2015 and its retail spending on consumer goods by 20.5 percent CAGR to reach $6 trillion by 2015. Likewise, Chow Tai Fook has seen high single-digit and low double-digit increases in its own CAGR in recent years. The fact is that everything that has been good for the Chinese economy and Chinese consumers has been very, very good for Chow Tai Fook.

James Roy, senior analyst, China Market Research Group (CMRG), a market intelligence firm headquartered in Shanghai, said “We are very positive about Chow Tai Fook’s growth prospects in China for the next few years. More than any other jewelry retailer, they have been very successful at gaining widespread retail penetration in China and they have a very prominent place in consumers’ minds. That is due to the coverage of their physical retail locations and their prominent signage in practically every Mainland Chinese city. They’ve used a franchising model to expand, which means that they have been able to open a large number of stores very quickly. And they’ve been able to secure not just any location but the key areas in each city where people really go to buy jewelry. Other Hong Kong chains haven’t had quite the level of success in expanding as widely or getting as many key locations as Chow Tai Fook.”

Peacock necklace.
Against the recent backdrop of global economic turmoil and retailer retrenchment, the Chinese government and Cheng have successfully ridden a wave of GDP gains, a rising middle class and a voracious appetite by Chinese consumers for luxury goods. Far outpacing any other country on growth, China’s GDP has ranged from 9.1 percent in 2002 to a projected 7.5 percent in 2012. During six of those years, the gains were in double digits.

Even though world financial markets panicked a bit in April 2012 with the news that the country’s growth eased to 8.1 percent year to year in 2012’s first quarter — down from 8.9 percent the previous quarter and the slowest growth since the second quarter of 2009 — most analysts were optimistic that the pace of growth would resume once the government fine-tuned its monetary policies. In fact, some of the slowed growth was attributed to recent government moves to control inflation.

What is almost revolutionary about Chow Tai Fook’s current expansion plans is that it appears to have no intention of locating its new stores or fueling its future growth outside the geographic boundaries of the Great China Region, which includes the PRC, Hong Kong and Macau. But then, why should it? The forces that have fueled past growth appear to have put the company on a trajectory for continued success going forward.


A variety of factors have fueled Chow Tai Fook’s rapid expansion and continued profitability.

Urbanization. The Chinese government, in its most recent five-year plan for the years 2010 to 2015, is emphasizing decreased reliance on exports and increased consumer consumption in the country’s smaller cities toward its goal of what it terms “more sustainable growth.” Although they are not official definitions, China market analysts generally divide its cities into four tiers. Tier I consists of the well-developed Shanghai, Beijing, Shenzhen and Guangzhou. The 59 cities in Tier II, the 92 cities in Tier III and the 105 cities in Tier IV represent, progressively, cities with less infrastructure, fewer amenities, less wealth and fewer resources. It is these cities that the government says have the greatest growth potential and into which it is pouring the most development money.

It is no coincidence that it is these same cities Chow Tai Fook is targeting for its growth. The company began moving into Tier III cities in 2000 and Tier IV cities in 2002 (see chart below) and most of the new IPO money will be spent opening new retail outlets in those locations.

Recent social and economic reforms already have transformed and reshaped the industrial, commercial and regulatory landscapes of China’s developing Tier II cities, according to The China Business Review. “As living standards and the business environment improve, these cities have enormous potential to grow even faster than Tier I cities. Consumer spending is an important factor in Tier II cities’ growth.”

Changing middle class. China’s middle class is emerging rapidly and is expected to increase from the current 235 million to 330 million by 2025.  At that point, this population segment, with increased discretionary, disposable income, will represent 25 percent of the country’s 1.3 billion consumers.

Women’s position. In the 1950s, women in China contributed just 20 percent of household income. By 2009, they were contributing 50 percent, according to Shaun Rein, managing director of CMRG.  According to Georgette Tan, MasterCard vice president, three-quarters of Chinese women say they are the ones who control the family purse strings.

The New York City–based Center for Work-Life Policy reports that two-thirds of college-educated Chinese women describe themselves as “very ambitious,” compared to about one-third in the U.S. In addition, more than 75 percent of women in China aspire to hold a top corporate job, compared with just over half in the U.S. Grant Thorntown International, a global tax consultancy, reports that approximately eight out of ten companies in China have women in senior management roles, compared with half in the European Union (EU) and two-thirds in the U.S. In China, 31 percent of top executives are female, compared with 20 percent in the U.S., the company says.

This female executive and career woman is the key demographic for self-purchasing in luxury goods because she buys luxury goods to reward herself for her achievements and hard work and as a symbol of her success.

Gift-giving culture. Chinese consumers love to give gifts for ceremonial and festive events — and jewelry is a favorite choice. “The Chinese love affair with gift giving is one of the key drivers for luxury brands,” Rupert Hoogewerf, chairman of the Hurun Report, which tracks China’s wealthiest consumers, told USA Today in January 2012. “The money spent on gifting, especially at Chinese New Year, is staggering compared to the West.” International consulting firm Bain & Co. estimates that personal and business gifts account for 25 percent of luxury goods sales in Mainland China. Global public relations firm Ruder Finn said a survey of 1,057 Chinese buyers in 2011 showed three-quarters of the country’s luxury consumers buy gifts for their significant others, half for family members and one-third for business partners.  

Appetite for luxury goods. The World Luxury Association’s 2012 report ranks China as the world’s largest consumer of luxury goods. Others put China in second place behind Japan. Reuters reported that CLSA Asia-Pacific Markets estimates Greater China demand is expected to account for 44 percent of the global luxury goods market by 2020. Analysts say Chinese consumers spend an average of 10 percent to 12 percent of total household income on luxury items.

Luxury spending is not limited to the wealthy, according to Peter Snell, Hong Kong–based chief executive of business consulting for market research firm Synovate, which was acquired by Ipsos in late 2011. “People want to get into the luxury market on a scale that they wouldn’t want to in other countries,” he told USA Today, noting that the middle class in China will save for months to be able to buy a luxury item.

Westernization. Increasingly, Chinese consumers are buying gifts to celebrate such traditionally Western holidays as Valentine’s Day and Christmas. But the greatest impact of Western tradition is on the country’s wedding market. Before De Beers began promoting its diamond engagement rings to the Chinese market in 1993, there was no such thing as a diamond engagement ring, and wedding rings tended to be made of gold or jade. Today, with 13 million couples marrying in China each year, a diamond solitaire engagement ring is part of more than half of the ceremonies.

“Diamond engagement and wedding rings continue to become not only more popular but they have become an expected part of getting married, much like owning an apartment and a car are part of getting married in many cities in China,” said CMRG’s Roy.

It is true that the diamonds are smaller by Western standards, with many in the 15-pointer to 30-pointer range. At the same time, consumer interest in diamonds has extended to other jewelry. Engagement rings represent 20 percent to 30 percent of the diamond jewelry market in China; the rest are anniversary and fashion pieces.

Wealth diversification. The Chinese have had a long love affair with gold, not only in the form of jewelry to mark life’s milestones, but also as an investment. As the economic crisis has roiled more traditional financial markets, gold has regained status as an investment. 


Chow Tai Fook is known for blanketing the market with products that reflect a wide range of designs at an equally wide range of price points. There are more traditional gold objects, such as Buddha statues and dragons to commemorate the Year of the Dragon, along with jade items, as well as high-end custom designs, such as the recently introduced Danseuse de Ballet collection that features pink diamonds. The custom-designed jewelry offerings include bejeweled rings, bracelets and necklaces, decorated in rare pink and yellow diamonds. Mass luxury jewelry is priced at $250 to $13,000, and high-end luxury begins at $13,000.

 “In addition to their strong brand visibility and the trust they’ve gained in the market, the main thing we see that will continue to drive growth for Chow Tai Fook in the future is continued rising demand for jewelry as consumer incomes continue to rise,” explains CMRG’s Roy. “Gold jewelry is an ‘aspiration buy’ for many Chinese women, who are buying it not just for themselves, but also as gifts for friends of theirs, and this is an area where Chow Tai Fook is especially strong. As a Hong Kong company, they have long experience selling jewelry styles that appeal to Chinese consumers’ tastes, including pieces that incorporate Chinese zodiac animals and other symbols for things like good fortune, which make good gifts. International jewelers tend to stick to the styles they make and sell all over the world and they haven’t customized their product lines as much.”

The company also benefits from its vertical integration. From design through manufacturing to retail, the company produces 80 percent of its product line in its
12 factories, making for streamlined inventory control and quick adaptation to changing tastes and trends.

Loyal, repeat customers also cite Chow Tai Fook’s shopping experience to explain their return visits. “In addition to being the most prominent jewelry retail brand, Chow Tai Fook has done a very good job of supporting its middle-high-end positioning with very nice store environments and strong training of sales staff, who have good awareness of what local customers are looking for,” said CMRG’s Roy. “Jewelry buyers we interview tell us the staff is very helpful and well-trained, and in their minds, the brand stands for strong quality and good service. The products they have aren’t too high-end. They’re in the price range that is affordable for the consumers who are not going overseas to buy jewelry, like the wealthier people are doing.”

The company’s brand is reinforced by extensive, colorful marketing, with its slogan — sincerity and eternity — plastered on 1,900 city buses in Hong Kong, as well as in subway stations and on billboards.

“The major international jewelry brands like De Beers, Tiffany & Co., Cartier and Van Cleef & Arpels are present but they have only a handful of locations in the larger cities and do not have nearly the scale that Chow Tai Fook has, or even other Hong Kong jewelry chains like Luk Fook, which has about 700 locations in the Greater China region, and Chow Sang Sang, with approximately 240 locations,”continues Roy. “So you don’t usually see a Cartier side-by-side with a Chow Tai Fook or a Luk Fook counter. They are also positioned at the higher end of the market, which means the consumers most likely to buy from them may buy on the Mainland but are just as likely to buy from them in Hong Kong, elsewhere in Asia, or in Europe, where they have the opportunity to travel frequently and where prices are lower.”


With Chow Tai Fook’s public offering comes increased public scrutiny of its operations. The question is raised: What could stop their continued growth and profitability?

First, and most obvious, is the fact that the company has all its eggs — and the $2 billion in new capital — invested in one basket: the Greater China market. Just as it has prospered by riding China’s economic growth, it could also be devastated by changes in the country’s political stability, economic prosperity or consumer confidence. Also a consideration: the considerable control the PRC government exerts over domestic economic growth through allocating resources, setting monetary policy and preferential treatment of particular industries and companies.

There is a challenge in managing growth in a fast-moving expansion. And it is a multifaceted challenge, including selecting prime locations, hiring and training new employees, finding knowledgeable local partners, identifying the right merchandise and price point mix in stocking new, more remote retail outlets and maintaining quality standards.

Any decline in tourism would impact sales, and tourist traffic could be adversely affected by a number of events, including natural disasters, health hazards or political turmoil. The number of Mainland visitors to Hong Kong in 2011 was 28 million, up 23.9 percent from 2010, according to the Honk Kong Tourism Commission. Visitors from the Mainland represented 67 percent of all 2011 visitors to Hong Kong, the commission said, and the usual purpose of their visit is to shop, especially for luxury goods, because of the tax savings in buying in Hong Kong. Further evidence of the strength of the Mainland customer can be seen in the fact that 45 percent of Chow Tai Fook’s Hong Kong sales are in renminbi, the official currency of the PRC.

Foreign companies could make serious inroads into the Chinese market. So far, that hasn’t happened. The fact is that foreign companies, including luxury goods retailers, have long found it difficult to do business in China, a fact that has worked to the advantage of Chinese-born and -bred companies like Chow Tai Fook. Domestic companies have the experience and insight to create a buying experience tailor-made for the Chinese consumer. Some market analysts suggest that foreign companies are held back in China because of their reluctance to modify or adapt their products to local tastes and preferences out of fear such change will erode the integrity of the global brand.

Those are the risk factors, the downside, the cautions, the potential storm clouds in Chow Tai Fook’s future. But the upside is the company’s proven ability to read its customers, to have something for all ages who stop in to shop, including a welcoming cup of tea. The company has taken the lessons of personalized, local retailing to a massive audience. That is something that a homegrown retailer does best.

Article from the Rapaport Magazine - May 2012. To subscribe click here.

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