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India Jewellery Retailing Model

 

Jewellery Retailling Business Model

There is a strong undercurrent of investment in every retail consumer?s purchase of gold jewellery - the dominant category of jewellery.

For as long as the pricing fundamentals and economic backdrop are gold positive, consumers will first consider gold above any other jewellery option. That does not change.

Exhibit 7-1: Gold's broad appeal as a safe haven investment in India

Rationale Behind Gold Purchases.png

Source: FICCI Gold Survey - Why India Needs a Gold Policy, 2014

Nevertheless, investment+adornment consumption of jewellery is commoditized and standardized so there is limited scope for retailer differentiation. Product design and marketing still has to fit into the gold retailing straitjacket model.

Essentially, retailers can only sell their gold products at 8 to 18 percent margin no matter the creativity of designs and attention to detail. Nonetheless, this is very limiting for growth options and the way to increase revenue is to grow volumes.

Fed up retailers trying to disrupt the dominant business model

The dominant profile of the jewellery retailing business in India is low margins and high volumes. However, margins have been under severe pressure owing to a steep rise in commodity prices and steep competition.

For this reason, many jewellery retailers are working hard to push for large-scale adoption of branded jewellery, diamond jewellery and platinum jewellery. Such moves would create space for differentiation and more sustainable margins in the sector.

Exhibit 7-2: Retailer margins for precious jewellery

Retailer margins for precious jewellery.png

Source: Equity Communications

Retailers at the frontier of change are working hard to pull consumers away from the investment+adornment mindset of jewellery. They hope to push them towards the adornment-only mindset of jewellery consumption.

There is a strong business case for this:

If consumers are more focused on adornment, then the psychology of the purchase process shifts from investment to individualism. In essence, consumers begin to care more about styling and design and want to make jewellery pieces their own creations and creations they can identify with. By extension, this immediately opens up more opportunities for jewellery retailers who can establish brands targeted at various consumer groups. Jewellery brands can adjust margins to higher and more desirable levels.

Modernization of the retailing landscape crucial for branded jewellery and retail jewellery brands

Organised retailing is the future of jewellery retailing in India - an inevitable result of economic development.

Principally, economic growth and development is about departure from the past...departure from the informal old way of doing business and departure from the old way of customer engagement.

Today's jewellery customers demand a modern take on business and customer engagement that enables people to hold on to a culture that they love so dearly but with a modern twist. That is what consumers are ultimately looking for.

Indians traditionally go to the preferred and trusted neighbourhood jeweller for their jewellery requirements. However, this is gradually changing with the emergence of numerous regional retail chains and a sprinkling of countrywide retail chains.

Modern stores not sustainable at current gold margins

Jewellery sales are more competitive in adornment+investment markets like India, leading to substantially lower margins. The system works because turnover cycles are fast for gold jewellery.

However, the system starts to fall apart once consumers demand modern-looking stores with a modern ambience. The problem is that retailers are required to spend lots of money in efforts to modernize their stores and business processes...but still expected to maintain competitive gold margins of 8 to 11 percent if they want to remain in business.

In other words, consumers demand modern stores but they have been unwilling to absorb the additional costs to businesses in the form of higher margins for gold jewellery products sold – the dominant product category.

Exhibit 7-3: Higher business costs...same margins

Modernization Dilemma.png

Source: Equity Communications

Modern jewellery stores are not sustainable with the current standardized selling model, especially for gold jewellery. You are only increasing your business costs without a boost to the bottomline.

For creating a long-term sustainable business model, it is necessary to move away from price-based competition. It is ultimately about getting to the point where customers do not ask, “What are the making charges for this piece of jewellery?” – the point where you do not even have to display them.

However, realistically, it is not possible to move away from the price-based model for gold jewellery. The investment dynamic is insurmountable. Therefore, the solution is to introduce diamond jewellery products that provide scope for higher margins in addition to the low margin gold jewellery products.

Overall, diamond jewellery has a much lower turnover rate - usually two to four times slower than gold jewellery- and has higher capital investment needs. Still, the high-volume but low-margin gold business can be used to cover a major part of fixed costs that enable retailers to sell diamond jewellery at significantly higher margins of 20 to 40 percent.

Links to Pages on India Jewellery Market

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