RAPAPORT... Special report, “Global Gems and Jewellery: Visions 2015: Transforming for Growth,” released by KPMG — the global network of professional services firms of KPMG International — in association with India’s Gem and Jewellery Export Promotion Council (GJEPC), offers insight on the state of the gem and jewelry industry. It covers current size and scale of the value chain, identifies trends that will have an impact on the future, predicts the likely state of the industry by 2015 and recommends initiatives that need to be taken.
Commenting on the findings of the report — and the challenges they represent for the industry — GJEPC Chairman Sanjay Kothari, says, “The time has come when every individual player in this industry will have to work efficiently and professionally to take this industry to the next level. I urge the entire industry and trade organizations worldwide, such as World Federation of Diamond Bourses (WFDB), International Diamond Manufacturers Association (IDMA), Jewelers of America (JA) and others to play a pivotal role as facilitators and work in synergy for the betterment of this industry.”
Adding to this, Neelesh Hundekari, director, advisory services, KPMG India, says: “There has been no global study undertaken so far on the gems and jewelry industry. The entire jewelry chain has interesting facets attached to it. Our primary aim for the study was to bring forth the industry’s potential and also to study and forecast its future. If our recommendations are implemented, then the industry can grow at the rate of 6.7 percent instead of 4.6 percent over 10 years as forecasted. According to us, the industry needs to work on improving its image, which will allow it to access talent and capital and operate with less interference from government.”
KEY FINDINGS ON INDUSTRY SIZE, SEGMENTS
The size of the global gems and jewelry industry is estimated at $146 billion at retail prices in 2005. The industry has grown at an average Compounded Annual Growth Rate (CAGR) of 5.2 percent since 2000. Diamond-studded jewelry is the largest segment of this industry — 2005 sales estimated at $69 billion — and has grown at a CAGR of 5 percent over the past five years (see figure 2).
According to the report, the sale of jewelry is concentrated in eight key world markets, which corner more than three-fourths of the world’s sales. The U.S. is the world’s largest market for jewelry and accounted for an estimated 31 percent of the world jewelry sales in 2005. India and China are the emerging centers of jewelry consumption and steadily increased their share of the pie to 8.3 percent and 8.9 percent, respectively, in 2005.
TRENDS AND LIKELY SCENARIOSThe report states that various socioeconomic and political forces have been driving the pace of change in the gems and jewelry industry. These forces have given rise to a number of visible trends in each segment of the jewelry value chain.
Sourcing: This segment, according to the findings, has witnessed an increased fragmentation of rough diamond supply, emergence of new mines, local beneficiation movement in mining companies and a bull run in precious metals prices. Competition and overcapacity in polishing and high debt levels have placed intense financial pressure on most players in traditional processing centers.
Jewelry fabrication: The findings of the report point out that accelerating fashion cycles, relative factor costs between manufacturing and consuming nations and volatile metal prices have fuelled a drive towards moving fabrication to low-cost countries.
Jewelry retail: Increasing consumer sophistication, dwindling investment-driven purchases and competition from other luxury goods are influencing the quantum and pattern of jewelry markets and retail organizations in emerging markets are continuously altering the geographic distribution of jewelry consumption.
The report also predicts that the structure of the diamond processing industry will change considerably and India’s share of the processing pie will drop from 57 percent to around 49 percent, in value terms, by 2015. China will emerge as a strong player with 21.3 percent of the diamond processing share. By 2015, around 9 percent of the world’s diamonds, in volume terms, will be processed locally by mining countries, with Angola, Namibia and Botswana emerging as profitable cutting and polishing diamonds (CPD) centers in Africa. Fragmentation of supply sources and slow diamond jewelry growth will make the rough diamond industry more demand sensitive. The share of centralized distribution will decrease from the current 55 percent to less than 40 percent, in value terms, and rough sold through traders will increase to account for 45 percent of total rough. As more rough is channeled through traders and sold directly by mining companies, the industry will become more competitive, leading to a drop in the value addition in diamond trading from the present 12.9 percent to 11.6 percent in 2010 and 9.9 percent in 2015. Demand supply trends will also exert a downward pressure on rough prices, which will fall by 15 to 20 percent to ensure the sustainability of the downstream industry.
In reference to the future of the global jewelry industry, the report states that global jewelry sales growth will grow 4.6 percent year-on-year to reach $185 billion in 2010 and $230 billion in 2015. Diamond jewelry will be the slowest-growing segment, at a CAGR of 3.3 percent.
EIGHT KEY SCENARIOSThe report identified the following eight scenarios as likely to impact the industry:
• Mining countries encourage local beneficiation and capture a share of the polishing industry.
• Supply sources get fragmented and rough supply increases.
• Consolidation occurs across the jewelry value chain.
• Existing centers of the industry lose out in favor of new ones.
• Substitutes such as synthetic diamonds and nonprecious metals capture a share of the precious jewelry market.
• Demand for plain gold jewelry declines.
• Large emerging retail markets, such as China and India, organize and consolidate.
• Jewelry loses out to competing luxury goods.
In light of these scenarios, the report recommended that the industry should take the following steps:
• Develop demand for jewelry as a category.
• Promote jewelry as a category instead of distinct metals and stones.
• Identify new product and consumer segments.
THE WAY FORWARDSo far, according to the study, the industry has grown due to the intrinsic attraction of its product, the sporadic marketing push by some incumbents and the entrepreneurial skills of individuals. However, the threat posed by luxury goods, changing consumer habits, industry’s opaque and transactional mode of operation and various socioeconomic and political forces are fast changing the environment in which the industry operates. Growth of the industry — and of individual players — is dependent on the successful reinvention of the category, substantial infusion of capital and talent and the adaptability to change.
The industry, according to KPMG’s findings, needs to enhance its image in the eyes of the government, regulators and consumers by means of publishing information, promoting transparency in business, professionalizing and transforming family-owned businesses and reducing the cost of financing.
Article from the Rapaport Magazine - February 2007. To subscribe click here.