Jewellers go slow on expansion due to changing economic policies, increasing overhead costs and reduction in liquidity
Experts say the difficult regulatory environment is directly hurting the consumer demand. The regulatory curbs on the sector have left jewellers grappling with tough supply conditions and tight demand. Hence, the jewellers are left with no option but to corner their expansion plans till rectification in the market.
The stringent import curbs and the 80:20 policy of procuring gold have forced the jewellers to shelve their expansion plans. The overhead cost of procuring gold has gone up drastically and availability of adequate licit gold is also a challenge. With the increase in these costs, the return on investing in a new store is relatively much lower.
The retailers have no option but to cut corners in expansion and other overheads including laying off people. “Less supply of gold definitely means less work,” said a leading retailer who is also a manufacturer. Most of the jewellers claim to be in a wait-and-watch mode at least till the next Lok Sabha elections. “The policies are very antigold and the elections can turn out to be a game changer for us,” says Anand Prakash, director of Abhushan Jewellers.
The sharp rise in the premium on domestic gold, as a result of the higher import duty (10 per cent), is sending non-resident Indians, who account for 15-20 per cent of the jewellery sales, to make their purchases outside. There the jewellery can be procured at a 10 to 25 per cent discount to India prices. Some analysts say unless there is a healthy pick-up in purchasing activity, the scenario is likely to remain grim for some more time for jewellery companies. Firms have resorted to offering discounts and attractive schemes to cope with the situation.
“Given the market scenario, jewellers are likely to go slow on store expansion in the near to medium term. Jewellers like PC Jeweller and TBZ, noted the long-term view on store expansion (with some focus on large shops) remains, but in the current external environment, expansion could be more measured,” Citi says. In short, jewellers face not just a supply issue but a demand problem, which is the bigger menace. The sales numbers during the last festive seasons have been comparatively poor as compared to previous years.
Altering Expansion Plans
Presently, the independent chain stores as well as national players claim to make the most of the existing stores more so as the liquidity with the customer’s is also drying up due to the rising interest rates and high rate of inflation. Among the other players, Riddhi Siddhi Bullion has recently launched a retail brand called Dia Jewels and had chalked out an aggressive expansion plan, involving as many as 50 new stores in Tier II and III cities and rural areas. However, this has now been shelved completely. Tribhovandas Bhimji Zaveri, which was earlier planning to add 36,000 square feet (sq ft) this fiscal, has modified its plans and would be adding only 20,000 sq ft now.
A spokesperson of Tara Jewels said, “Our company has decided to re-strategies the Indian business to adapt to the regulatory framework. The company proposes to continue to expand its business through an asset-light franchise and shop-in-shop models.”
Tara Jeweller’s became the first retailer to come up with first-ever pop-up store in Surat, Gujarat. ‘Pop-up shops’ are temporary stores that set up shop at different places for a limited period of time. Vikram Raizada, Executive Director and CEO Retail, Tara Jewels Ltd. Said, “We have recently launched a few new formats and happy to launch our first pop-up format at Surat.” The store will be live for six months at VR Surat.
Anand Prakash of Abhushan Jewellers, who was in the process of opening up two more stores in two years says, “I have noticed a drastic change in the way consumers are buying jewellery. While earlier customers bought jewellery more as an investment, today they are shying away from the metal. In return, we need to observe their behaviour a little longer and then take a plunge.”
The operating income for organized jewellers has grown at a considerable pace over the past few years, driven by the increasing demand for the branded jewellery, aided by the aggressive expansion undertaken despite of an increase in gold prices. Profits within the sector have also expanded with widening sales and improving value addition, varying across market players based on product mix, scale of operations, sourcing method and funding mechanism. But, with the stringent government policies the climate of uncertainty continues to prevail in the jewellery industry.
The ambiguity in the market has also cast shadow on expansion plan of Senco Gold, one of the premier jewellery houses from Kolkata that boasts of 44 retail stores. “We have adopted a ‘go slow’ policy as far as expansion is concerned,” says Suvankar Sen, executive director, Senco Gold. In this financial year, they have opened four stores, three in their home state West Bengal and one in Bhopal, Madhya Pradesh. “We had plans to open 5 more stores in this financial year. But, we have diluted our aggressive expansion plans to only 2-3 more stores,” says Sen. According to Sen, the non-availability of raw material has thrown a spanner to the entire process. With no solution in sight, jewellers with expansive expansion plans are lying low at the moment.
Aditya Mathur of Citi Research says, “Store-opening targets are being pushed out. Tribhovandas Bhimji Zaveri would take longer to reach its 57-store target by 2015 (currently 27 stores), whereas PC Jeweller could be delayed six months to achieve its 50 stores by March 2014.”
“For Titan, we estimate an increase of 10 per cent year-on-year space increase in two years versus a compound annual growth of 25 per cent year-on-year. The environment is tough. Last quarter, there was a 10 per cent decline in footfall for Titan’s jewellery business with 20 per cent of space.”
Haresh Soni, Chairman of the All India Gems and Jewellery Trade Federation, “There is a liquidity crunch and neighbours are flourishing with business from Indians.”
Somasundaram PR, managing director (India), World Gold Council, said the picture would look better in the second half of 2014. “Even if you consider 140 million have come above the poverty line between 2005 and now, the first asset class they would perhaps put their money in is gold. Even if they buy 5g, it will make a huge difference to demand.” WGC estimates demand in 2014 at 1,000 tonnes. Experts said if the restrictions lasted a year, the sector may see the larger firms buying the smaller ones.
However, some jewellers are going ahead with their expansion plan. According to Mohit Anand, managing director, Harsahaimal Shiamlal Jewellers, the people of Uttar Pradesh are not affected by Chidambaram’s appeal to stop buying gold or bearish stock market. “I am going ahead with my plan of setting up a 15,000 sq ft large store in Lucknow,” says Anand. BT Dinesh, owner of Vasavi Jewellery from Dindigul in Tamil Nadu is also setting up a 5000 sq ft showroom next year.
Recently, Kalyan Jewellers, India’s largest directly owned retail chain opened three showrooms in Delhi, taking the total number of brand’s showroom to 61. The showrooms are spread over 15000 square feet each and have a separate floor for diamond and gold jewellery. Kalyan Jewellers further plans to open 19 more showrooms with an investment of 1000 crores. P.N. Gadgil Jewellers too launched its brand new store in Ahmednagar, which is the 12th store of P.N. Gadgil globally and 10th store in Maharashtra alone.
In the meantime, the gems and jewellery industry has appealed to the government to relax the norms and discussions are still underway. The All India Gems and Jewellery Trade Federation (GJF) has in fact also proposed measures to recycle the existing gold in the country in order to meet the demand. The RBI is also considering reversing the 80:20 policy. But the veterans of the industry strongly feel that policy changes are likely only post elections.