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Hong Kong's Big Three

Chow Tai Fook, Chow Sang Sang and Luk Fook Holdings have each embarked on different strategies to capitalize upon China’s growth.

Sep 1, 2014 4:00 AM   By Ronen Shnidman
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RAPAPORT... The major Hong Kong-based jewelry companies are well positioned for further growth despite the significant drop in earnings so far this year. However, each has embarked on a different strategy to capitalize upon the projected growth in China’s jewelry market, ranging from Chow Tai Fook’s shift toward a franchise model to Chow Sang Sang’s reliance on self-operated stores.

Those two companies, along with Luk Fook Holdings, have enjoyed rapid growth in the past 15 years, largely due to their successful expansion into Mainland China, emerging as the most dominant jewelers in the region.

“Global brands like Tiffany have a presence in Hong Kong but Chow Tai Fook, Chow Sang Sang and Luk Fook are the most happening jewelry retailers in terms of quality, service, and price, in this region and perhaps the world,” said Mehul Vora, a Hong Kong-based sales executive for Gemasia (Hong Kong) Limited, a diamond jewelry and timepiece manufacturer.

The companies had a particularly strong year in 2013 when lower gold prices motivated a rush for gold products among Chinese consumers. However, set against last year’s high revenues and profit, earnings have dipped in 2014.

Chow Sang Sang this week reported that its jewelry retail sales dropped 25 percent year on year to $1.06 billion (HKD 8.214 billion) in the fiscal half year that ended June 30, 2014. Profit fell 15 percent to $67.1 million (HKD 519.8 million). Similarly, Chow Tai Fook earlier reported that retail sales fell 32 percent in the first fiscal quarter that ended June 30, while Luk Fook’s same-store sales dropped 54 percent.

Still, the outlook for jewelry demand in the region is positive. While the U.S. remains the largest market for diamond jewelry, China has become the world’s number one overall jewelry market, according to the World Gold Council (WGC). A recent report by the WGC estimates that gold jewelry demand in China accounts for about 30 percent of global demand, and is expected to grow from 669 tonnes in 2013 to 780 tonnes by 2017.

While the WGC reported that there are now over 100,000 retail outlets selling 24 karat gold in China, analysts recognize the strong brand presence and positioning of the ‘big three.’

Having already established their brand names in Mainland China by selling jewelry in Hong Kong and Macau to Chinese tourists, the three companies are expanding their physical presence in China using differing strategies to spur growth.

Franchising in the Lower Tiers

Considered the largest jeweler in the region – if not the world – Chow Tai Fook has the greatest exposure in Mainland China. Of the company’s 2,077 watch and jewelry points of sale reported as of March 31, 2014, 1,965 were in Mainland China – accounting for 55 percent of its $9.99 billion (HKD 77.407 billion) in total revenue generated during the fiscal year.

Having first opened as a goldsmith in Guangzhou, a city in southern China, in 1929, the company established itself in Hong Kong through several innovations that helped the brand develop a reputation for quality and gain consumer trust, a company spokesperson explained.

Among its innovations was the decision to introduce 99.99 percent pure gold jewelry in 1956, which raised its appeal to local buyers who purchased gold jewelry as an investment. Similarly, its fixed price policy that was introduced in 1990 assured consumers that they were receiving a fair purchasing price rather than the traditional bargaining with jewelers that had taken place until then, the spokesperson explained.

Taking its strong brand name to China, Chow Tai Fook’s early growth focused on the leading economic centers, referred to as Tier I and Tier II cities. Today, the company is expanding more aggressively into smaller and relatively less affluent markets, the Tier III and Tier IV cities, which typically lack competition from the global luxury brands and other Hong Kong-based jewelers. In fiscal 2013-14, 64 percent of Chow Tai Fook’s net store openings were within lower-tier cities.

Along with that expansion, the company has increased its reliance on the franchise model compared to its previous focus on opening self-operated stores. One independent jeweler familiar with the three major jewelers, who requested anonymity, explained that Chow Tai Fook’s initial strategy in China was to build a core group of well-trained, competent personnel before it expanded its store network, and that could only be achieved through self-operated stores.

However, once established, Chow Tai Fook has now shifted its strategy toward the franchise model. “We expect the ratio of franchised points of sale to continue growing rapidly in the future as we will focus more on opening points of sale in Tier III and lower-tier cities,” a Chow Tai Fook spokesperson told Rapaport News.

Creating a Niche

In contrast, Chow Sang Sang, which moved from Guangzhou to Hong Kong in 1948, has a relatively small network of self-owned stores in Mainland China. At the end of 2013, the jeweler had 298 stores in China, out of a total of 377 stores globally. The company’s stores in China accounted for 37 percent of its $2.57 billion (HKD19.943 billion) in revenue in the fiscal year that ended December 31, 2013.

Since opening its first store on the mainland in 1998, the company has remained focused on selling its jewelry in China’s major cosmopolitan and economic centers, where consumers typically have higher disposable income than those in the lower-tier cities.

“For Chow Sang Sang, it’s not necessarily a bad thing that they don't have as many stores as Chow Tai Fook or Luk Fook,” said the independent jeweler. “Chow Sang Sang is trying to be more exclusive among the Chinese jewelers and is trying to create something unique through its business strategy, product style and even public relations.” Spokespersons for Chow Sang Sang declined to comment for this report as the company was in a quiet period before the announcement of its interim results.

Rapid Expansion

If Chow Sang Sang is taking a more conservative and niche approach to its position in China, then Luk Fook has embarked on a more aggressive expansion approach in comparison.

Founded in 1991, Luk Fook grew by rapidly licensing jewelry stores in the mainland as branded franchises and supplying them with Luk Fook’s jewelry at wholesale prices.

“Luk Fook is a relative newcomer in Hong Kong,” said Michael Huang, managing director of the Diamond Index Group, a supplier of high-end diamonds and diamond jewelry in China and Hong Kong. “Chow Tai Fook and Chow Sang Sang have more of a pedigree dating back to the first era of Hong Kong jewelry in the 1970s and 1980s, when Hong Kong was a jewelry factory for the entire world.”

Huang explained that the massive influx of Chinese tourists visiting Hong Kong and Macau since the late 1990s propelled Luk Fook’s growth into a significant Hong Kong retail chain. These tourists buy jewelry and other luxury goods during their stay and their spending has caused the number of jewelry stores in Hong Kong and Macau to mushroom over the past two decades, he added.

According to Luk Fook’s spokesperson, the company opened its first franchise store in Mainland China in 1994. By March 2014, 93 percent of its 1,208 points of sale in Mainland China were franchises.

However, while Luk Fook’s approach has helped it develop a large network of branded retail stores, its franchise owners receive most of the retail profits from their stores. As a result, just 22 percent of Luk Fook’s $2.48 billion (HKD 19.21 billion) in revenue in the fiscal year that ended in March 2014 was from its stores in China – despite the fact that about 95 percent of its total store count is located there.

In addition, while Luk Fook originally focused its efforts on the more developed Tier I and Tier II jewelry markets, its current strategy has evolved as it seeks to expand its retail network by 15 percent per year.

“To fully capitalize on the tremendous potential of the Chinese market, Luk Fook plans to continue to expand its retail network in the third-tier and lower-tier cities through franchise shops,” a Luk Fook spokesperson told Rapaport News. “We will also make a strategic move to open [self-operated] flagship stores in prominent cities to strengthen our market penetration.”

In line with its rapid expansion strategy, Luk Fook recently acquired a 50 percent stake in China Gold Silver Group Company Limited, which has more than 400 points of sale in China that operate under the brand name 3-D Gold.

The independent jeweler stressed that Luk Fook has been consistent in targeting almost all cities and areas. “I think it is part of its corporate character that they aggressively open stores wherever they can – even in Tier I and Tier II cities where Luk Fook franchises already exist,” he said. “Chow Tai Fook would be very careful not to allow any franchises in a tier 1 city or in areas where there are existing self-operated stores that are doing very well.”

Positioned for Growth

Regardless of the varying strategies at the three companies, their successes are heavily influenced by the gold market. The overall product mix is still fairly similar across the three companies' portfolios.

In fiscal 2014, 61 percent of Chow Tai Fook’s retail sales were from gold products and 21 percent from gem-set jewelry, with the remainder made up of platinum products and watch sales. Luk Fook had 67 percent of sales from gold and platinum products and 33 percent from gem-set jewelry.

Chow Sang Sang does not breakdown the sale of gold products and gem-set jewelry as a proportion of its total sales. However, in 2012, investment banker Oriental Patron estimated that 62 percent to 66 percent of total sales were gold products, while between 31 percent and 34 percent of sales were gem-set jewelry, and the remainder mostly comprised of watch sales.

Encouragingly for the diamond industry, gem-set jewelry sales have maintained modest growth in the current fiscal year while gold jewelry sales have slumped. Analysts at BNP Paribas Securities (Asia) noted that there is an ongoing structural shift from gold to gem-set jewelry that will drive market consolidation and lead to margin expansion. The analysts also forecasted jewelry demand to outpace general economic growth in the coming years.

“Rising disposable income in China accompanied by the rise of the middle class should continue to drive demand for jewelry,” BNP Paribas analysts wrote in a March 2013 report. “We think that rising disposable income will have a multiplier effect on the demand for jewelry, and the industry’s retail sales will outperform total China retail sales.”

Looking beyond the anticipated sales slump in 2014, one expects these trends in disposable income and consumer taste to be reflected in the operations of Hong Kong's big three in the years to come. With differing strategies, Chow Tai Fook, Chow Sang Sang and Luk Fook are each poised to take advantage of the expected growth in China’s jewelry space.

Avi Krawitz contributed to this article.  

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Tags: China, Chow Sang Sang, Chow Tai Fook, goldsmith, Guangdong, Hong Kong, Jewelry, lower tier, Luk Fook, lukfook, macau, Ronen Shnidman, Tier I, Tier II
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