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Business as Usual in Hong Kong

Mar 6, 2015 5:50 AM   By Avi Krawitz
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RAPAPORT... The March Hong Kong show that took place this week was not a game changer for the diamond industry. If anything, the show signaled business as usual, which lately, hasn’t been great, and trading just about met dealers’ low expectations.

There was business to be done. Visitor traffic was a bit light, but there was demand for specific categories of diamonds. Prices held relatively stable at their current low levels and there was neither urgent buying, nor panic selling. Buyers were hesitant as they suspected prices might soften further, but sellers generally held their prices firm even if they compromised a bit to close a deal.

Therefore, it was a fairly neutral show with mixed sentiment that was indicative of the various factors currently at play in the diamond industry.

High among those factors is uncertainty about the Chinese jewelry market. The show immediately followed the all-important Chinese New Year Spring Festival, and many hoped it would provide an opportunity for jewelers to replenish inventory they sold during the busy retail shopping period.

However, exhibitors noted that the event came a week or two too soon after the festival. Many of their Chinese clients didn’t attend as they were still on vacation, or had only just got back to work. They didn’t have time to assess their inventory after the holiday or plan what they need for the coming half year.

Chinese New Year

That’s not to say that Chinese buyers were completely absent, or that they don’t still intend to buy. The next few weeks may be more telling, especially since reports about jewelry retail sales during the Chinese New Year were fairly encouraging for the diamond trade.

Chow Tai Fook and Luk Fook Holdings, two of the larger jewelers in the region, this week reported that their respective same-store sales of gem-set jewelry rose by more than 60 percent year on year in Mainland China during the Chinese New Year season. Hong Kong sales were weak all around and gold sales dropped from last year’s highs.

However, with strong sales of gem-set jewelry the data signals that demand for diamond jewelry continues to be driven by China’s growing middle class — which is typically Chow Tai Fook and Luk Fook’s target market.

That trend has filtered to the diamond trade and there was good demand at the show for under 1-carat, H-M, SI diamonds, suitable for the mid-income group.

Wendy Ma, an economist at the Hong Kong Trade and Development Council (HKTDC), which organized the show, explained that the motivation among Chinese consumers to buy diamonds has evolved from being just a value purchase. She noted that the ratio of planned purchases has increased and that more women are buying diamond jewelry to complement their clothing and be trendy. In 2014, she reported that the average spent on jewelry was about $640 (CNY 4,000), while consumers’ average budget is expected to continue to rise.

Diamantaires agreed that the market in China is maturing and observed that there has been a shift in demand from VVS-VS goods to SI-quality diamonds in the past number of years. That trend is continuing and there was good demand, and some scarcity, for SI-clarity diamonds at the show.

The Anti-Corruption Campaign

In contrast, demand for large, expensive diamonds above 3 carats was weak. Reports suggest that luxury sales were soft during the Spring Festival as the government’s campaign against corruption and conspicuous consumption has affected open displays of wealth and spending.

Fan Qin Fen, managing director of 21Gem, a research and service provider to the jewelry market, claimed that retailers complain about the effect the anti-corruption campaign has had on their business, but it will ultimately benefit the economy.

One positive, she explained, is that the campaign includes land reform in the rural areas, which will help improve the purchasing power in those less developed regions. Fan added that long-term growth is being driven by expansion into Tier II and Tier III cities, although she stressed that jewelers need a strong brand presence in the big Tier I cities before they can effectively grow elsewhere.

There was a sense among diamond exhibitors that Chinese jewelers expanded too quickly in recent years. While many stores opened in the smaller cities, consumer demand hasn’t yet lived up to those expectations. “There’s been strong development in the Tier II and III cities but there’s no traffic,” said one Hong Kong-based dealer. “We saw a lot of people in the stores in Beijing and Shanghai [over the Spring Festival], but not in those smaller emerging cities.”

The rapid expansion of retail stores in the past few years stimulated diamond demand as retailers needed to fill their new showcases. However, the market has since slowed as the rate of expansion eased – and in some cases contracted. Fan estimated that there are currently about 18,000 jewelry retailers and 64,000 stores across Mainland China, with most of those being small independents. For many of them, including the majors, 2014 was a relatively difficult year as sales dropped compared to the gold-driven highs of 2013.

Consequently, Fan suggested that the golden age of Chinese jewelry growth has ended and companies are now more focused on strategy that extends beyond just expansion to drive their sales.

Its little wonder then that Chinese buyers displayed little urgency to buy at the show, or that they were hesitant as they suspected prices might soften further. They, like their high-end clients, have become frugal in their spending as they transition toward a different business model.

Market Consolidation

The reality for manufacturers and dealers is that jewelers in both the U.S. and China are managing with smaller inventories. While consumer demand is growing, market conditions have changed. The current era is not one of waste and high-risk spending on inventory, but of caution and cost controls.

That has left businesses in the middle of the distribution chain scrambling to find their place in the market. While jewelers are moving upstream to source their product, they’re cutting out dealers and in some cases, doing their own manufacturing. Today, retailers such as Chow Tai Fook, Signet Jewelers and Tiffany & Co., are among the largest buyers of rough diamonds. Simultaneously, diamond manufacturers are moving downstream as they try to generate better profit margins through jewelry manufacturing.

It seems that everyone is encroaching on each other’s space, including dealers. A number of exhibitors noted that their dealer customers are now their competitors – displaying their own goods at the show.

Therefore, the diamond industry is in a process of consolidation. Leibish Polnauer, of Leibish and Co., a supplier of fancy color diamonds, explained that this consolidation is noticeable not only in companies downsizing their operations, but in the number of middlemen that the market can sustain as well.

“To earn a margin today you have to create added value or get closer to the end user,” he said. “Before, a diamond changed hands five or six times before it reached its final seller. Today it does so maybe twice. Business for the middleman broker is diminishing.”

Consequently, while there were more exhibitors than before at the Hong Kong show, many felt that such large numbers is unsustainable in the long run – especially since manufacturers are struggling to make reasonable profits.

The market has therefore changed for diamantaires. Polished suppliers have to differentiate to attract buyers at events such as the Hong Kong show and add value to build a sustainable business in the long run.

Among the big takeaways from the show was that the middle of the distribution chain is somewhat stuck in a bind. Manufacturers are stressed by their lack of profitability and dealers are unsure of when to buy and at what price.

The show consequently lacked its usual hustle and bustle of exhibitors trading among themselves. Perhaps dealers recognize their place after all. To succeed in such an environment, diamantaires will have to break the current cycle of conducting “business as usual” by adding real value to their diamonds, to their clients and the industry. Only then can a show, such as in Hong Kong this week, be a game changer for the diamond market. Only then will the trade be able to lift its low expectations. 

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.


Copyright © 2015 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.

Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags: Avi Krawitz, Chinese New Year, Chinese Spring Festival, Chow Tai Fook, Diamonds. Jewelry, editorial, Far East, Hong Kong, Luk Fook
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