Rapaport Magazine

Satisfying Diamond Demand

Chow Tai Fook’s acquisition of U.S.–based luxury diamond brand Hearts On Fire this past August was a strategic move to capture the fast-growing market for diamonds in China.

By Mary Kavanagh
“In the past five years, our diamond jewelry sales in Hong Kong and China have garnered year-on-year double-digit growth,” says Kent Wong, managing director, Chow Tai Fook (CTF), a leading jeweler in Mainland China, Hong Kong and Macau, and the world’s largest jewelry retailer by market value. That robust diamond demand undoubtedly was a significant factor in the retailer’s recent decision to acquire U.S. diamond brand Hearts On Fire (HOF).
   Although CTF reported a drop in revenue of 22.4 percent year-on-year in its interim report for the half-year that ended on September 30, 2014, sales of gem-set jewelry, particularly of diamonds, grew from 25 percent to 30 percent during that time — unaffected by the volatility of gold prices. Fifty-eight percent of the company’s total revenue came from Mainland China, up from 51.4 percent over the same period the previous year.
   “Diamonds have been doing very well,” says Adrian Cheng, executive director, CTF. “The new generation of customers in China is shifting to diamonds. Hearts On Fire is part of our future strategy…. We are buying the company, not just the brand.” The acquisition provides CTF with an extensive, proven diamond jewelry product line to immediately meet growing demand by young Chinese consumers for diamonds and premium luxury products. At the same time, the deal allows CTF to capitalize on HOF’s “artisanal skill set,” including its special diamond processing and trademarked cutting technique, according to Cheng. “We can source better diamonds together, fulfill our customers’ needs and those of our future customers,” Cheng goes on to say.
   The $150 million acquisition of HOF reflects not just a heightened interest among Chinese in diamonds and diamond jewelry but also the increasing sophistication of Chinese consumers. “Customer demand is changing,” Wong explains. “In Tier I and Tier II cities, customers want to buy more gem-set jewelry, especially diamonds. And nowadays for weddings, roughly 50 percent of women receive a diamond engagement ring,” he adds, noting this is an evolving trend and still a relatively new tradition.
   CTF’s future customer base consists of those born between 1980 and 1990. “We believe there is a huge marketing opportunity there,” says Wong. “We are building up a wedding and engagement culture, so we are both following and leading demand.” Spending in the category is on the upswing. Customers are currently buying bigger diamonds than previously and spending more on wedding and engagement rings, as well as diamond jewelry in general. “Before, a .30-carat stone in a platinum setting was popular, but now customers are willing to spend more money and buy .50 carat,” Wong says. “In 2013, the average selling price for a diamond purchase was around $900 per piece of diamond jewelry. In 2014, we have seen low-single-digit growth in the average selling price.”

Win-Win Situation
   Both CTF and HOF stand to reap significant advantages from their new business partnership. CTF offers HOF, founded by Glenn and Susan Rothman in Boston in 1996, a ready-made infrastructure to quickly and easily enter the Greater China market, which was one of the company’s goals. The HOF brand is associated with Hollywood glamour and a red-carpet lifestyle, which the Rothmans are keen to share with potential Chinese customers. Currently, HOF has a retail-partner network with more than 500 locations in 31 countries and its outlets include ten of the company’s own shops: two in the U.S. and eight in Taiwan. The first HOF store in Taiwan opened in 2004 and was quickly followed by seven additional stores over the next two years.
   “The idea was that we would create a template to roll back into Hong Kong and Mainland China knowing that the effective growth in the diamond business would be in China,” Glenn Rothman says. “We were waiting to move into China until we could determine how to create the infrastructure and resources to be able to do it properly.” Chow Tai Fook came up during HOF’s search for an entry path into the growing, largely untapped — and potentially lucrative — Chinese market for diamonds. “With the combination of Chow Tai Fook’s distribution and its deep know-how of this market that we can learn from, we believe that Hearts On Fire will be an enormous success in China,” Rothman says.
   Chow Tai Fook is certainly in position to capture any emerging jewelry categories. It has more than 2,100 retail outlets in over 480 cities in Greater China, Singapore, Malaysia and a recently opened store in South Korea to appeal to Chinese tourists vacationing there. It plans to double the number of its stores in China over the next ten years — 200 new retail outlets annually — so it is well placed to help HOF enter the Chinese market. “It is easier for us to do it than for them to do it themselves. We have a good network and can open doors for them,” says Henry Cheng, CTF chairman. “We are only open in 400 cities in China. There are 750 cities where we can open in the future, so the number of stores could be explosive. We will keep on opening stores until the market is saturated.” HOF is the first acquisition of an international company by CTF, and Henry Cheng says he plans to monitor the rollout of the HOF product line before making any decisions on further acquisitions.

Two Distinct Brands
   “We believe from our experience that the Chinese consumer likes top quality and admires global brands, including American brands,” says Rothman. “We think the combination of being at the top of the quality pyramid for diamonds and diamond cutting and being an American brand will be very appealing to the Chinese customer.” Under the terms of the acquisition by CTF, Hearts On Fire will continue to be marketed as a distinct brand and run as an independent business.
   Rothman emphasizes the importance of stand-alone HOF stores to establish the brand and create a unique HOF shopping experience with Chinese consumers. Three such stores are scheduled to open before the Chinese New Year in mid-February. The first HOF store in Shanghai is scheduled to launch in mid-January, followed by a second in Nanjing and a third in Haikou on the popular vacation island of Hainan. Identifying the right store locations is an important part of the strategy, with the focus being on sites next to other high-end luxury brands. Another two HOF stores are due to open before summer 2015 and, at some point in the future, CTF plans to open HOF stores within its existing retail outlets.
Globally, HOF sales are approximately 50 percent bridal and 50 percent fashion and couture. Rothman expects to see a similar breakdown in China, where the company will sell designs from its global and Taiwanese collections, as well as its new Fire Collection, which was specially created for the Chinese market. The typical Chinese customer is between 25 and 45 years old — “sophisticated, educated professional women and those who have seen the world and appreciate the finer things in life,” according to Adrian Cheng.

Celebrations in Shanghai
   CTF and HOF senior management gathered in Shanghai at the end of November 2014 to celebrate the official launch of HOF in China and CTF’s 85th anniversary. Both firms seem confident of the success of the premium diamond brand in China and convinced of the synergies between their respective businesses.
   “We are very confident about the prospects for Hearts On Fire in Mainland China. It is ideally suited to the key emerging luxury, diamond and jewelry market trends,” CTF concluded in a company statement. “As demand for diamond jewelry continues to increase here, Hearts On Fire will become a household name, known not only for its extraordinary diamond cutting process, but also for the luxury lifestyle that it represents.”

Article from the Rapaport Magazine - January 2015. To subscribe click here.

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