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Chow Tai Fook Setting the Stage for Hearts On Fire Growth

Q&A with Kent Wong, Managing Director of Chow Tai Fook Jewellery Group
Jun 12, 2015 4:42 AM   By Avi Krawitz
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RAPAPORT... Chow Tai Fook acquired the Hearts on Fire luxury diamond brand in June 2014 for $150 million as part of the jeweler’s strategy to expand its high-end product range. One year later, Rapaport News sat with Kent Wong, managing director of Chow Tai Fook, at the recent Couture Show in Las Vegas to discuss the brand’s integration and other developments at the Hong Kong-based jewelry company:

Rapaport News: What does Hearts on Fire bring to Chow Tai Fook?

KW: Hearts on Fire is complimentary to Chow Tai Fook because it’s a premium luxury diamond brand that has been in the industry for decades.

Chow Tai Fook can benefit from Hearts on Fire’s experience in developing a luxury brand. It has excellent jewelry design and brings more of a global vision to our design team.

The company now has two powerful brands in two important consumer markets. The first is Chow Tai Fook Jewellery, which is a Hong Kong-based brand focused on Greater China, and the other is Hearts on Fire, which is a U.S. global brand. With the Hearts on Fire acquisition, you can say that Chow Tai Fook has become a global company.

Rapaport News: Will it require different strategies to grow Hearts on Fire in the U.S. and China respectively?

KW: From a branding position, Hearts on Fire is a U.S. global brand. So all product development, storytelling and marketing is controlled by the team in Boston.

We might have some localization in terms of the marketing campaign because the platform to access one’s target audience may differ in each market. However, the storytelling will be consistent and developed in Boston.

We unveiled a new advertising campaign in Las Vegas that we will be rolling out globally in September. We will provide television, print, video, outdoor, social media and digital marketing for our retail partners around the world to leverage in their local markets. There may be small local customizations but the platform will be consistent and will look similar in every retail location around the world.

Rapaport News: Does Hearts on Fire’s education and training differ in China?

KW: One of the first things we did after the acquisition was to host our first Hearts on Fire Academy in Shenzhen. That was in October 2014 and we opened our first store in Shanghai soon after on November 28. Our training is the same and used around the world.

Rapaport News: How many Hearts on Fire stores do you have now in China?

KW: We have three standalone stores in China, one shop-in-shop in China and one shop-in-shop in Hong Kong. Our plan is to have 10 standalone stores in China by the end of the year and we continue to open shop-in-shop locations.

Rapaport News: How is the high-end jewelry market in China?

KW: The Chinese government measures to cap gift-giving to government officials has affected industries like luxury watches, apparel and beverages, but not jewelry.

Our research shows that about 70 percent of women in China’s Tier I and Tier II cities, want to receive a diamond engagement ring. Every year, we have about 12 million to 13 million couples getting married in China so the bridal market provides stable demand, no matter the market situation.

Rapaport News: Does that play into the Hearts on Fire message given its focus on bridal?

KW: Half of Hearts on Fire’s business in the U.S. and Asia is bridal and half is fashion jewelry. The bridal customer creates that lifetime relationship and stays with the brand when buying fashion jewelry. They start with the classic studs, bands and bracelets and then move into the designer collections.

Rapaport News: How is the Hearts on Fire brand awareness in China?

KW: It's a very young brand, but we have experience with the Chinese community in Taiwan where Hearts on Fire is ranked as the most desired and sellable diamond brand. Chinese consumers in Taiwan like perfection. Therefore, the perfectly-cut diamond is something that they have to have. The same taste applies in Mainland China.

Hearts on Fire can leverage Chow Tai Fook's huge customer base. Chow Tai Fook manages about 1.5 million VIP customers in China. Their repeat purchases account for about 35 percent of our total sales, and about 65 percent of our repeat purchase customers want gem-set jewelry, especially with diamonds.

Rapaport News: What qualifies a customer as VIP?

KW: We have three tiers of VIP customers. A customer who purchases more than $16,000 (CNY 100,000) annually gains a gold membership. Spending more than $40,000 (CNY 250,000) qualifies for platinum membership and more than $80,000 (CNY 500,000) gains diamond membership.

Rapaport News: Explain Chow Tai Fook’s use of technology to track customer preferences and trends?

KW: We’re investing in technology to understand customer buying preferences so that we can forecast their future needs. We can also use the data to improve our sales techniques and customer support.

The industry generally uses bar codes to tag jewelry but we use RFID technology, which is the most advanced electronic tag available so that we can capture the data.

Every piece of jewelry has an RFID tag and we invented what we call a smart jewelry tray that encompasses an RFID receiver and a small computer that is connected to each tray. For example, if we put three pieces of jewelry on a tray, we automatically capture that those pieces were displayed for that particular customer. We can then analyze the data to understand which pieces will be most desirable to the customer in the future.

We have a report that tells us what the customer is interested in. We know how many items were picked up and how many were purchased. We’re also able to tell the success of certain products on different customers, as well as the performance of our sales staff.

Rapaport News: Your efficiencies are also driven by your rough sourcing. What percentage of your goods are supplied in house?

KW: We run a vertically-integrated business model and have a consistent supply of rough from De Beers, ALROSA and Rio Tinto. In the last year about 50 percent to 60 percent of the diamonds we sold to the end customer were sourced directly and cut in our own factories. In the long run, we would like about 60 percent of our polished supply to be manufactured in-house.

We have a sophisticated computer system through which we analyze what size and quality diamonds we need, partially based on our past sales. From that we can prepare our rough sourcing, polishing and even our jewelry manufacturing.

We’re also able to plan some of our marketing according to our rough sourcing. We partnered with Rio Tinto to use production from the Argyle mine to market fashion jewelry to professional women for their daily use. That is a developing market in China that requires strong marketing to raise customer awareness. The benefit of being vertically integrated is that everything is under our control.

Rapaport News: How is the general market in China?

KW: China has had tremendous double-digit year-on-year growth in the past decade, especially in diamond jewelry. Given that high base, I’m not surprised that growth is slowing.

China is maturing and it has also been affected by global economic uncertainty. Exports have decreased and economic growth slowed and that has affected consumer sentiment. Consumer preferences are also changing and so is the customer demographic. Our core customer is younger and more educated. Most importantly, they are gadget-savvy, so the way we engage with them has changed.

We have to develop an effective omni-channel strategy so that we can interact with them online and bring them to the store. We’re investing a lot of money in technology like smart trays and RFID to better understand consumer demand and customer demographics.

Rapaport News: What percentage of your sales are made online?

KW: About 1.5 percent of our sales in Mainland China are made online. It's a very small number but jewelry is less affected by online sales because every piece of jewelry has its own character. Customers have to go to the store to touch and feel the jewelry because every piece is different.

In the long run, any brand will have to make use of both online and offline channels. But ultimately, people like to have somewhere they can touch and feel the jewelry. Jewelers will also have to use more technology in the store to interact with the customer. Technology can be used to tell the story of the jewelry and it enables us to keep customers in the store longer.

For Hearts on Fire we have representatives responding to our online customers 24/7 and driving them into the store. The shop-in-shop staff then has all the information about the customer at their disposal. That is an example of combining offline with online, and the drive to omni-channel. But in the end it's about building a connection with the person across the counter.

Rapaport News: What is your forecast for the diamond market, Chow Tai Fook and Hearts on Fire?

KW: I think we will have stable low single-digit growth in China in 2015. Hong Kong might be difficult because it’s seen a decrease in tourist numbers. But we’re optimistic and continue to open and upgrade stores in China. About 10 percent of our stores will be upgraded to what we call an elite store, where we would present more gem-set jewelry, targeting the high middle class Asian customer.

For Hearts on Fire, we have already set a three-year development plan. We want to enhance the shopping experience in the store through advertising campaigns and programs to support the brand.

Then we will further develop our points of sale. Currently, we have two standalone stores in the U.S. and in the coming years we will hopefully expand that. But we’re not in a hurry and want everything to be excellent. If a property becomes available that is spectacular, we will not ignore it. So we have no immediate plans. We're focused on our independent retailers and helping Chow Tai Fook roll out Hearts on Fire in Greater China.

Our strategy in the coming years is to build a strong infrastructure and team with the right systems and inventory to help our existing retailers succeed.

In the year that Hearts on Fire has been working with Chow Tai Fook, the brand has doubled its diamond inventory. For our retailers, having access to the best diamonds is an enormous opportunity. So we're setting the stage to be able to grow very quickly with the right talent, technology and infrastructure in place.
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Tags: Alrosa, Avi Krawitz, China, Chow Tai Fook, De Beers, diamonds, Hearts On Fire, Jewelry, luxury, Rapaport, Rio Tinto
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