RAPAPORT... This article is a synopsis of the GJEPC–KPMG report titled “The Global Gems and Jewellery Industry Vision 2015: Transforming for Growth.” It expands on what was first reported in the February 2, 2007, issue of Rapaport Diamond Report.
BACKGROUNDAs one of the world’s most traditional industries, the global gems and jewelry industry has witnessed sweeping changes, such as the fragmentation of supply sources, rise in raw material prices and consumers becoming more demanding and less loyal than ever before. In the absence of a comprehensive global view of the current and likely state of the industry, players have indulged in selective future gazing to decide on their plans.
Given the leadership role of Gem and Jewellery Export Promotion Council (GJEPC) of India in the development of the industry, it was considered appropriate to initiate a study to take stock of the current challenges and predict a future for the industry. KPMG, a global network of professional services firms, which has done extensive work in the industry, along with GJEPC, conducted a study of the global gems and jewelry industry in 2006.
The study focuses on understanding the current size and scale of the value chain, identifying trends that will have an impact on the future, predicting the likely state of the industry by 2015, recommending initiatives and developing a road map for various players given the expected changes in the environment. Apart from interviews with major industry leaders to gather insights, the study used quantitative modeling techniques to estimate changes in the size and structure of the industry.
INDUSTRY SIZE AND SEGMENTSThe size of the global gems and jewelry industry is estimated at $146 billion at retail prices in 2005.
Diamond-studded jewelry is the largest segment of this industry with 2005 sales estimated at $69 billion, and the plain gold jewelry segment is a close second with total retail sales of $60.7 billion in 2005.
The sale of jewelry is concentrated in eight key world markets, of which the U.S. is the largest. India and China are the emerging centers of jewelry consumption.
KEY TRENDS AND LIKELY SCENARIOSVarious socioeconomic and political forces are driving the pace of change and have given rise to a number of visible trends in each segment of the jewelry value chain.
• Sourcing: This segment has witnessed an increased fragmentation of rough diamond supply, emergence of new mines, local beneficiation movement in mining countries and a bull-run in precious metals prices.
• Jewelry fabrication: Accelerating fashion cycles, relative factor costs between manufacturing and consuming nations and volatile metal prices have fueled a drive toward 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 consumption in markets across the world.
Stagnation in key jewelry markets and retail organization in emerging markets are continuously altering the geographic distribution of jewelry consumption.
Based on trends distilled from an analysis of current events and expectations of industry experts, eight scenarios, likely to cause a significant disruption to the industry equilibrium, were identified during the course of the study. These were as follows:
• 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 are organized and consolidated.
• Jewelry loses out to competing luxury goods.
FUTURE OF THE GLOBAL JEWELRY INDUSTRYBased on the collective impact of the eight scenarios identified, some key conclusions have been drawn about the size, state and structure of the industry in 2010 and 2015.
• Global jewelry sales growth will be sluggish and will see emergence of new markets like China and India. Our analysis indicates that global jewelry sales will grow at 4.6 percent year-on-year to touch $185 billion in 2010 and $230 billion in 2015.
• Jewelry fabrication will feel the pressure of sluggish demand and will move to new centers.
• Value addition in the diamond processing stage will increase significantly. Centers for Cutting and Polishing of Diamonds (CPD) will be the primary beneficiaries of the fall in rough prices. Also, the value addition in polishing will increase from 29.3 percent in 2005 to 34.1 percent in 2015.
• The jewelry pipeline will see consolidation. Shrinking margins and increasing debt levels in the industry will force the diamond industry to consolidate, which will significantly impact the diamond-processing segment of the value chain.
• The structure of the diamond-processing industry will change considerably. By 2015, India’s share of the processing pie will drop from 57 percent today to around 49 percent (in value terms) by 2015, and China will emerge as a strong player with a 21.3 percent share of the diamond processing.
• Fragmentation of supply sources and slow diamond jewelry growth will make the rough diamond industry more demand sensitive.
• A number of distinct business models will emerge along the value chain by 2015. By 2015, the industry will witness the emergence of six to seven large
conglomerates with presence across the jewelry value chain. These large conglomerates will be the industry leaders of tomorrow. In addition to this, players in each part of the industry value chain will evolve into business models that will enable them to remain competitive in the changed industry scenario.
AN ASPIRATIONAL VIEW OF THE FUTUREIn addition to the “realistic case” detailed earlier, which showcases the most likely turn of events, it is believed that if the actions recommended in this report are undertaken, the industry has the potential to grow beyond $230 billion.
To achieve this growth, stakeholders must come together, overcoming internal differences and competitive issues, to undertake certain actions. These programs need to be initiated within the next 12 to 18 months for benefits to be realized over the next ten years
DEVELOP DEMAND FOR JEWELRY AS A CATEGORYInitiatives will have to be undertaken to foster the growth of jewelry as a category and defend itself against the stiff competition from other luxury goods.
• Promote jewelry as a category instead of distinct metals and stones. Individual promotion organizations (World Gold Council, Diamond Trading Company, etc.) have done a great deal to sustain the demand for jewelry; much more can be achieved if these agencies act collectively. We recommend the formation of World Jewelry Federation to promote jewelry as a category.
• Identify new product and consumer segments. Unlike other luxury goods, the target segments and value proposition of jewelry have remained relatively unchanged. We believe it is time for the industry to think creatively and target new customer segments and address newer needs.
• Manage the portfolio of markets. Like any enterprise, an industry needs to have a portfolio of markets that provide both scale and growth. For this, the industry would need to:
– Reestablish value proposition in developed markets through aggressive marketing, brand development and product and service innovation.
– Maximize the potential of emerging markets, and
– Identify markets of the future.
STRENGTHEN INDUSTRY-LEVEL CAPABILITIES
Increased transparency, professionalizing, lowering of financing costs and attracting high-quality talent are required to compete with the more glamorous luxury-goods industry and improve the general health of the sector.
• Enhance image of the industry in the eyes of governments, regulators and consumers. The industry needs to eliminate allegations of conflict diamonds, suspected links with money laundering etc., that hamper growth.
– Publish information.
– Promote transparency in business.
• Professionalize and transform family-owned businesses. The bulk of the industry is comprised of family-owned businesses. To grow, these enterprises need to transform into professionally managed corporations that are listed on stock exchanges, guided by visionary founders and managed by professional managers.
• Attract talent from luxury goods industries.
We believe the industry can benefit significantly by attracting talent from other luxury goods industries. They can strengthen the branding, marketing, retail experience capabilities and help the industry garner a greater share of discretionary spending.
• Reduce the cost of financing and improve access to funds. High-value raw materials have made the industry capital intensive, and low transparency has led to a premium on financing. The industry can reduce this cost and improve access to funds if individual players embrace transparency and go public.
PLAYERS TO SELECT STRATEGIC POSITION AND ENHANCE INDIVIDUAL CAPABILITIES
The changes that the industry is likely to face in the coming years should be looked upon both as challenges and opportunities. Over the next few years, players that develop multiple capabilities to manage growth will flourish.
• Compete on one of the four strategic positions. The fast-unfolding future holds several challenges for the industry, but, at the same time, provides an opportunity to morph into players with sustainable business models. In the future, industry players will have to choose one of the following four strategic positions to survive and build sustainable competitive advantage.
– Big brother: Players with a presence across the value chain.
– Volume player: Players with large-scale operations in a single segment.
– Specialist: Players with a large repository of talent.
– Straddler: Players with a presence in adjacent segments.
• Critical capabilities for segments. Although the capabilities required by a player will be dependent on future strategic position and business model, a dominating presence in one segment of the value chain will force it to master certain skills.
– Mining: Widespread exploration, mining and possible mergers and acquisitions are expected to place tremendous pressures on the availability of capital in this segment of the value chain. Therefore, the ability to raise capital at low costs will be crucial for players in this segment.
– Sourcing and processing: Effectively managing mergers, acquisitions and alliances will be a capability that players in this segment must possess.
– Jewelry fabrication: Operational planning — including demand forecasting, supply chain
optimization and distribution planning — will be a critical capability for players in this segment.
– Jewelry retail: Given the increasing consumer sophistication and competition from luxury goods, branding and marketing jewelry will be of utmost importance to these retailers.
WAY FORWARD
So far 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, the 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 their successful reinvention of the category, substantial infusion of capital and talent and the adaptability to change.
For specific queries related to the GJEPC-KPMG Report, please contact Ashwin Jacob, Manager, Advisory Services (KPMG in India) at atjacob@kpmg.com.
To get a copy of the whole report, please contact GJEPC or KPMG. The report is also available at the following websites: www.in.kpmg.com or www.gjepc.org.
Article from the Rapaport Magazine - October 2007. To subscribe click here.