Gold's own country

Going by the number of puns, proverbs, metaphors and fables that abound in praise — or criticism — of the yellow metal across the world, it would be safe to assume that it is not just Indian companies or the general population alone that is obsessed with gold. Why, if even a renowned fund like Warburg Pincus can bet ₹1,200 crore on Thrissur-based jewellery brand Kalyan Jewellers after suffering a 90% loss on an earlier jewellery investment, who can blame lesser mortals?

In what was perhaps the biggest PE investment in the Indian jewellery sector so far, Warburg Pincus in October 2014 inked a deal with Kalyan Jewellers, one of India’s largest jewellery retailers, whose reach has even spread to the UAE. “While there was a lot of interest from other PE players, we decided to go with Warburg Pincus because we were on the same wavelength and had the exact same vision on how to grow the business,” says Ramesh Kalyanaraman, executive director, Kalyan Jewellers. 

For Warburg Pincus, this was its second investment in the jewellery sector. In 2011, the company had exited the aforementioned five-year-old arrangement with gems and jewellery exporter Vaibhav Gems at a 90% loss.

But, more importantly, its deal with Kalyan Jewellers is the second-biggest bet that Warburg Pincus has taken on an Indian company since its investment in Bharti Tele-Ventures ($290 million), which is the biggest winner in the fund’s Indian portfolio. So, what is it that makes Warburg Pincus bullish on the Indian jewellery market in general, and on Kalyan Jewellers in particular?

One reason could be the fact that the ornaments major represents the change that has transformed the Indian jewellery market in the past decade, with consumers moving from buying only from their trusted family jeweller to demanding good quality and a wider range of products.

“Customers have now become more discerning and they are no longer just price-sensitive. They want to be assured of good quality and do not mind paying a premium price for exclusive designs,” says Rajiv Popley, director, Popley Group. 

While it is true that India’s demand for gold and other precious jewellery has always been insatiable, over the years, there has been a distinct change in the way Indians are buying gold, giving these jewellers the confidence to step out of their traditional strongholds and enter new markets.

In the past, families would frequent the same jeweller over generations, convinced that the establishment would not cheat them in terms of pricing and the quality of the gold.

The first disruption in the market came when the Tata Group launched its jewellery brand Tanishq in 1995 with the intention of selling jewellery uniform in design, quality and price, a move that changed the landscape of the jewellery market.

This meant that you could purchase ornaments in one city and get them repaired or exchanged for a new set in another city, no longer tied down to one establishment or city. With more people moving out of their hometowns for work and income levels rising across board, consumers preferred switching to a retailer with a national presence; the Tata brand name was an added advantage as they would no longer have to worry about the quality of the gold.

Branded and loving it

This paradigm shift from a clutch of unorganised players to a standardised and branded retail jewellery chain opened up new markets for regional jewellers. Larger players such as Kalyan Jewellers sensed that customising its offerings to suit local tastes and standardising the quality of gold it worked with would open up new opportunities for the company outside its traditional market.

And that’s exactly what it did: from a single store in Thrissur in 1993, Kalyan Jewellers now boasts of 72 stores across the country and nine in the UAE. Today, Kalyanaraman is a man in a hurry, opening 13 stores in the past two to three months, with five of them springing up in a single day in Kerala; his target is to open an additional 28 stores by March 2015. While the cash raised by the stake sale to Warburg Pincus will be used to fund these outlets, the company will also invest ₹300 crore - 400 crore to increase their manufacturing capacity. 

Kalyan Jewellers is not alone in its singular zeal to expand — retailers such as Joyalukkas, PC Jewellers (PCJ) and Tribhovandas Bhimji Zaveri (TBZ) have also jumped onto this bandwagon.

Mumbai-based jeweller TBZ has been around for nearly 150 years now, a family business that has evolved over the years to its current network of 28 stores across 22 cities. It now plans to increase its footprint to 55-60 retail stores over the next two years. “The company is looking at future retail expansion from  91,000 sq ft to 150,000 sq ft in the next few years through a mix of co-owned and franchise stores, which is an asset light model,” says Prem Hinduja, CEO, TBZ.

If research estimates are to be believed, there is enough space for this expansion — the Indian jewellery market is estimated to be worth around ₹3 lakh crore today and is likely to grow to ₹5 lakh crore by 2018, according to a study by Ficci-AT Kearney. About 80% of all jewellery purchases are still wedding-related, while the rest are discretionary purchases. 

While analysts peg the organised players’ share of the industry at 20%, only 5% of the players have a pan-India presence. Brands such as Kalyan Jewellers, Joyalukkas, TBZ and PCJ, which have plans to expand across the country, are hoping to take away market share from unorganised players and are betting on rising income levels in tier 2 and tier 3 towns to fuel demand for branded jewellery.

For instance, Delhi-based PC Jewellers, which currently has 47 stores across 38 cities, aims to open 20 showrooms over the next five years. About 80% of this expansion is expected to be in tier 2 and tier 3 cities; the brand recently opened showrooms in Patna, Jammu, Guwahati, Ranchi, Mathura and Kolkata.

“We see a lot more opportunities in tier 1 and tier 2 towns, where some of the larger players are not yet present, giving us a first-mover advantage,” says Balram Garg, managing director, PC Jewellers. The brand is also exploring the franchisee route for expansion in tier 3 towns.

“Small towns don’t require much investment and provide us better access to local talent,” adds Garg. According to him, the capex required to open a new store is around ₹45 crore, the figure dipping to ₹27 crore in tier 1 towns and to ₹20 crore in tier 2 and tier 3 towns, with 90% of the costs going towards inventory; these stores break even within 8-12 months as well. PCJ expects expansion to drive revenue growth by 25% in FY15 and aims to triple its revenue by 2019, with the funds coming from its 2012 IPO bounty of ₹600 crore.

This expansion is important for growth as — like any other retail business — getting the right location is critical in the jewellery segment. But there is one thing that is even more crucial than location — the product. While customers prefer kundan and diamond jewellery in the north, in south India, traditional designs in plain gold rule the roost.

“Customer preferences vary from region to region. We have a thorough understanding of every region and the local preferences in jewellery and, with the help of our designers and craftsmen, create collections keeping basic preferences in mind,” says Joy Alukkas, chairman of the eponymous brand. Often, design preferences may vary based on different localities within the same city. “Our design mix depends on the location and the consumers there. For instance, our product offering is altered to cater to a more cosmopolitan crowd in an upmarket location like Bandra. 

Moving to the suburbs, we retail more traditional offerings catering to a predominantly Gujarati population in Borivali and Ghatkopar and Maharashtrian audiences further ahead in Thane and Vashi,” says Popley. The Popley group, which operates in India and Dubai at the moment, is looking to expand further to four  stores in Mumbai suburbs by the end of the current fiscal.

Demographic variations are not limited to just regional preferences, however. Thanks to the increasing tribe of working women, lightweight everyday jewellery is also enjoying its moment in the sun, and jewellers are hard at work to capture this audience. While Tanishq led the way with its work-wear collection Mia, most brands now have a line targeting the working woman. “We want to capture the interest of young working women early in life so that we become their preferred choice when the time comes for them to buy their wedding jewellery,” says Garg.

Chasing changing tastes

Given the changing preferences of consumers and the varied preferences across regions, jewellers do their homework thoroughly before entering new markets. Almost all brands have dedicated teams that not just track suitable locations, measure the purchasing power of potential customers and the share of unorganised players in the market, but also speak extensively to customers about design preferences. All this groundwork is laid out months ahead of a planned launch and the brands take a decision on whether to go ahead with the launch based on these findings.

“We have a core team that has been with us for 20 years. It has a good understanding of the business and thoroughly surveys locations that we plan to enter. Unless we are confident about the market potential, we don’t go ahead with the launch,” says Kalyanaraman. One of the trusted methods jewellers use to gauge the potential of a location is to hold exhibitions to ascertain the audience’s propensity to consume, and not all test locations make the cut. “We hold three to four exhibitions a year at all test locations. We had surveyed nearly 100 locations before zeroing in on the current 55-60,” says Hinduja.   

After understanding the profile and needs of the buyers, jewellers come up with the best possible mix of designs. “We generally don’t go wrong in the assessing local preferences since this is researched thoroughly. But we might commit errors in judgment in the additional stocks and designs that we offer,” says Alukkas. According to him, since Indian consumers are strongly rooted in their local customs and traditions, it takes them a long time to open up to unconventional designs when it comes to jewellery. But he believes that things are definitely changing. “We are seeing a shift in this regard because consumers are buying jewellery on more occasions than they conventionally used to,” he adds.

Kerala-based jewellery retailer Joyalukkas, which has 51 stores across India and 44 overseas, has chalked up ₹1,200 crore for its expansion plan, of which ₹600 crore will be for overseas expansion. “We have charted out an aggressive growth plan for the next two years, which will see 20 new Joyalukkas showrooms opening across India and 10 new showrooms in other parts of the world, taking our overall count to 125,” says Alukkas.

The company’s plan also includes entering two new markets — the US and Sri Lanka. Of course, moving out of its comfort zone and taking on competitors such as Tata Group’s Titan and local incumbents is quite a challenge. Titan is the largest player in the branded space, with a network of 170 Tanishq stores and 33 GoldPlus outlets across the country; jewellery accounts for around 80% of the overall company sales. The plan is now to add 30 new Tanishq stores in FY15 in smaller towns through the franchisee route.

While increasing competition is not something that Titan can wish away, analysts believe that there is enough room for all brands to grow as the sector transitions and takes on a more organised form. “Given the Indian consumer’s appetite for gold and the size of the sector, there is an opportunity for each player to create its own niche, which is what most of them are doing,” says Gautam Duggad, vice-president, Motilal Oswal Securities.

Since in newer locations the brands don’t have the benefit of the goodwill they enjoy in their home markets, they must work on innovative promotions to make that local connect. Which is why Kalyan Jewellers chose to make regional superstars its brand ambassadors at different locations — in Tamil Nadu, it has signed on Prabhu Ganesan, son of yesteryears superstar Sivaji Ganesan and a popular actor himself; in Seemandhra, it has Nagarjuna, a leading Tollywood actor and son of late Tollywood veteran Nageswar Rao. 

“We came up with the sons-of-legends campaign as a regional superstar’s endorsement of our products reassures customers about the quality of our gold,” says Kalyanaraman. Under the campaign, the stars act as advisors to the customers, educating them about what to watch out for when buying jewellery. For its national campaigns, the brand has signed on none other than Amitabh Bachchan and his daughter-in-law Aishwarya Rai Bachchan to endorse its products.

Kalyan Jewellers spends around 2% of its revenue on marketing campaigns and is looking out for alternate channels to reach out to customers as well, much like other brands. It has converted its My Kalyan service centres — initially set up to educate consumers in smaller towns and rural areas on the purity, transparency and utility of buying gold — into retail outlets that sell affordable diamonds in the ₹5,000 to ₹50,000 range. “Consumers in rural areas have no access to diamond jewellery because jewellers there predominantly sell gold; they have to come to the city if they want to buy diamonds. So, we came up with the idea of making diamonds more accessible for them through our network of My Kalyan centres,” says Kalyanaraman.

With this move, the brand is also hoping to increase the contribution of diamonds to its overall revenue from the current 10%. Since south Indians traditionally prefer to buy plain gold jewellery, brands such as Kalyan Jewellers and Joyalukkas derive almost 90% of revenue from gold jewellery, where the margins are as low as 10-12%. TBZ, PCJ and Tanishq, which have a large presence in the north and west parts of the country, have a higher contribution of around 25-30% from diamond jewellery, where the gross margins are around 30%. Kalyan Jewellers also hopes to reach out to consumers through its online platform by 2015. 

Along similar lines, PCJ has also tied up with Flipkart to sell its offerings online, apart from hosting a dedicated portal of its own. The company will introduce specialised collections in the ₹5,000 to ₹25,000 range, offering a 10-12% margin on diamond jewellery and 1-2% on gold jewellery to its online partner.

Customers will have the option of buying jewellery online and getting it exchanged or repaired offline, ensuring a seamless buying experience for them. Garg is hopeful that the Indian online jewellery market will follow in the footsteps of China, where the online market has grown from 0.3% in 2006 to 5-6% in 2014. TBZ is also looking at having an online presence which will help the company have a national impact, says Hinduja. TBZ is also working with an e-commerce player to offer its product lines on the latter’s platform.

But while jewellers may fervently explore new channels, much of the growth over the past few years has been through new store expansion, and most expect the trend to continue. Both Alukkas and Garg expect their companies’ revenue to grow by 25% over the next two years, while Kalyanaraman is more optimistic about revenue growth, given Kalyan Jewellers’ more aggressive expansion plans; he expects revenue to grow by 50% in FY16.

Not all that glitters

The past two years have been challenging for the jewellery industry, with consumer discretionary demand taking a hit and regulatory changes impacting growth. In May 2013, in a bid to contain the current account deficit, RBI withdrew its lease provision for gold. In the past, a jeweller could lease gold from a bullion banker for 90 days at a fixed price by paying 3-4% interest, which meant that even if the jeweller only sold half the quantity he leased in a month’s time, he would only have to pay for the quantity sold and at the price sold.

The removal of this lease meant that jewellers now had to pay up for the gold upfront, leading to a hike in working capital. “While we always had to contend with volatility in gold prices as per demand and supply trends, the regulatory change pushed up the premium on gold prices rather significantly. So, customers started to defer purchases, and the uncertainty before the elections didn’t help our cause either,” says Hinduja. At its peak in December 2013, the premium on gold zoomed up to $160 per ounce, before settling down to the more acceptable $3-4 per ounce currently, once regulations were relaxed first in May and then December 2014. 

In a bid to put a lid on the rising current account deficit, the central bank also introduced the 80:20 rule in August 2013, which deemed that 20% of all imported gold has to be re-exported after value addition. Not only did this lead to supply constraints and a spurt in premiums, but also gave birth to a renewed bout of smuggling. The rule was finally junked in early December this year, much to the relief of the industry, bringing down these premiums from $10-15 per ounce to $3-4 per ounce. 

In addition, the new Companies Act of 2013 construed the advances collected under gold schemes as public deposits and capped returns at 12% and the total amount of deposits to 25% of net worth. Traditionally, customer deposits have been one of the major sources of funding for jewellers, rising from 8% in FY08 to 26% in FY14.

 Almost all jewellers not only stopped accepting fresh deposits, but also had to offer the option of redemption through jewellery purchases or switch over to new schemes.

All this had an impact on their working capital and debt position — in the absence of gold-on-lease plans, Titan went from having net cash of ₹83 crore on its balance sheet as of March 2014 to having a net debt position of ₹730 crore as of September 2014.

With regulations slowly easing up, jewellers are now hopeful that discretionary demand will improve on the back of positive sentiments, benign gold prices and the expectations that the new government will usher in a period of economic growth. 

With an annual consumption of 850-900 tonne, India remains the second-largest consumer of gold in the world, next only to China (see: The sheen is showing). According to a report by the World Gold Council, Indians spend 8% of their daily consumption on gold, after accounting for medical and educational expenses.

Much of the demand is investment-led, thanks to the lack of alternate financial investment options, the freedom to invest small amounts and the returns the metal has generated over the past decade, and this is not likely to change anytime soon. Jewellers are betting on this notion and the improving economic sentiment in the country to drive demand and are looking to take market share away from unorganised players as they expand their footprint, starting from regions they already have a strong presence in. 

But given that gold is not only an integral part of any big, fat Indian wedding and festivals but also one of the main avenues for savings and investment, jewellers are quite confident of sustaining their growth momentum. “Indians love jewellery. Ever since Sita dropped her bangles on the way to Lanka in order to guide Rama in his search for her, the metal has been an integral part of every Indian household. While there may be short-term blips in demand or regulatory constraints, we are confident that in the long term, gold will continue to be the preferred asset class,” says a confident Kalyanaraman.