RAPAPORT... Indian jewelry retailers seem to be in a hurry to expand these days, but this has nothing to do with trying to outdo competitors during the wedding season. Retail jewelers are discussing expansion of their operations, but the interesting thing is that they are looking at smaller cities. Why? Aren’t jewelers making money in their existing stores or towns?
In the past decade, several jewelers in major metropolitan areas and big cities have expanded significantly, establishing unique identities and gaining market share through brand-building initiatives. But their growth is stagnating due to both high rents and increased competition in large urban centers, which is where smaller cities come in to the picture.
There are an estimated 500,000 jewelry retailers across India. The country’s domestic jewelry industry is fragmented, with organized retail players accounting for about 20 percent of the market. Gold occupies a special place in the Indian psyche and it is a cultural tradition to give gold for weddings, festivals and auspicious occasions such as Diwali or Akshaya Tritiya. In rural areas, farmers purchase jewelry after a successful harvest season. Gold serves as both a sound investment and a hedge against inflation.
Small to mid-size cities, with their growing population of younger consumers, a higher number of working women and greater disposable income, have caught retailers’ attention. Jewelry is becoming a preferred item for discretionary spending, too. According to an estimate by McKinsey & Company, discretionary spending in India is expected to comprise 70 percent of the average household’s consumption by 2025, up from 52 percent in 2005. Tier 2 and Tier 3 cities – where the population is under one million and between one million and four million, respectively – are seeing a strong demand for gold jewelry, with consumers preferring lightweight and branded products. Moreover, due to the lower cost of living in these locations, consumers in smaller cities are willing to spend more on jewelry than residents of big cities.
Industry estimates suggest that India’s domestic jewelry market, which is valued at $48 billion per year, will grow by about 13 percent annually to $70 billion by 2015. But strong demand is not the only reason that jewelers are opening shops in India’s small to mid-size towns. These cities offer lower operating costs, as well as substantial business growth opportunity for organized players due to the current low levels of market penetration. Moreover, CRISIL Ratings has projected that by the end of the 2013 fiscal year, gold jewelry retailers are expected to derive over half their revenue from small towns, up from some 40 percent in fiscal 2010.
Jewelers are well aware of this potential and are tapping the equity market to raise funds. This past year, Tribhovandas Bhimji Zaveri (TBZ), Tara Jewels, and PC Jeweller (PCJ) successfully raised a total of $180 million through an initial public offering (IPO) – mainly to be used for their planned expansion across the country. It seems fairly obvious that other jewelers, who couldn’t raise money earlier due to weak market sentiment, will also revive their fundraising plans to expand into smaller cities.
HOT EXPANSION SPOTS
The key question that jewelers need to answer is where to open their stores. Which are the hot cities for expansion? Since customer preference for jewelry designs and type varies from region to region in India, any wrong decision could increase costs and cause unnecessary delay, proving fatal to the expansion plan. The solution? Market analysis.
Approaches could include conducting exhibitions to identify a given market's potential and the opportunity it offers retailers to sell across all product categories, helping jewelers determine whether opening a new showroom in the targeted location is feasible. Offering consumers in these cities unique jewelry design and price points will help companies gain market share from local jewelers.
Market analysis has helped jewelers, who have recently raised funds for expansion, identify a number of promising second and third-tier cities. Key cities in northern states comprise of Jalandhar, Amritsar, Ludhiana, Chandigarh, Gurgaon, Lucknow, Allahabad, Kanpur, Varanasi, Noida and Dehradun. In the south of India, potential cities for expansion include Mangalore, Coimbatore and Visakhapatnam. Cities identified as ripe for expansion in eastern India include Patna, Ranchi and Bhubaneswar, along with Guwahati in the northeast.
Cities in India's western region seen as offering potential for growth include Ahmedabad, Vadodara, Rajkot, Valsad, Jalgoan, Kolhapur, Solapur, Nagpur, Pune, Ahmednagar and Aurangabad, as well as the hub of India's diamond manufacturing industry, Surat. In central India, Bhopal, Jabalpur and Raipur are seen as possible markets for expansion by retail jewelers, as are Jaipur, Udaipur and Sri Ganganagar in the northwest.
“There will be a spurt in the completion of modern retail projects across the country in 2013. And while the metros will continue to see huge concentrations of malls and lifestyle stores, almost a third of new development will be in the Tier 2 and Tier 3 cities,” said Mehul Choksi, the chairman and managing director of Gitanjali Group. “These will see the sharpest rise in modern retailing, with even stand-alone stores opting for greater emphasis on visual displays, staff training and modern ambiance. We will also see the entry of modern stores… into even smaller towns.”
GROWTH PROSPECT LURES
Companies such as Gitanjali and Titan Industries Ltd. have significantly expanded their retail operations in the past few years and they continue to penetrate into new markets. Gitanjali, whose jewelry brands include Gili, Nakshatra, Asmi, D’Damas, Sangini, and Diya, currently has over 4,000 points of sale throughout the country. Titan, another leading jewelry player that owns brands such as Tanishq, Zoya, Mia and GoldPlus, operates over 170 jewelry retail stores in more than 110 towns. Jewelers who are already expanding to or keenly looking at smaller cities include Orra, Malabar Gold and Diamonds, Rajesh Exports Ltd., Kalyan Jewellers, and Thangamayil Jewellery Ltd. Most of the players are taking retail space on rent or lease basis and some are opting for the franchise route to reach new locations while controlling their costs.
Expansion in smaller cities will certainly raise jewelers’ revenue, but what about the costs entailed by so many stores? How companies will manage to support inventory for all the retail outlets if they expand too rapidly? Will they seek to borrow from external sources to fund expanded inventory? There is a risk that too much reliance on outside borrowing may stretch companies' capital structure, putting unnecessary burden on their financial obligations. To avoid such a scenario, they need to handle their working capital requirements efficiently and complete store openings well within the projected time frame.
What other options do jewelers have in terms of inventory management? Given the varying consumer taste and preference in jewelry design from city to city, it could be a daunting task for jewelers to maintain vast enough inventories of jewelry to suit the requirements of every location. Should they fail to provide a wider enough choice of jewelry designs, retailers run the risk of losing customers. How can they tackle this issue?
“[Jewelers] can keep a lot of catalog and brochures with different jewelry designs for consumers to choose from. Once the order is confirmed, jewelers can finish the work and deliver the jewelry. This will help in keeping the inventory at lower levels,” explained Divyesh Shah, CARE Research’s assistant general manager, who tracks the Indian jewelry industry. However, Shah said, retailers should maintain certain levels of stock on site and replenish them as necessary.
But there is a chance that consumers who have long-standing relationships with their traditional family jewelers may not be easily attracted to new stores. Therefore, companies expanding into new cities must employ marketing and promotional activities, including special offers, to create brand awareness and gain market share.
According to Choksi, much of the jewelry that will retail in smaller cities will be lighter weight and trendier in design, as young consumers seeking to own branded jewelry are putting more emphasis on craftsmanship and less on the amount of gold being used.
What does the expansion of established jewelers into India's smaller cities mean for local players? Will they feel the heat from new competitors and struggle to survive? Or they will remain unscathed? A possible impact on local jewelers' sales volume as large and organized players move into smaller cities can't be ruled out. If they want to survive in the long term, local jewelers will have to re-invent themselves to fit the changing realities of the consumer market.
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