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India Rising

Sep 1, 2009 4:15 PM   By Martin Rapaport
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RAPAPORT... Mehul Choksi, chairman and managing director of the Gitanjali Group, one of India’s largest integrated diamond and jewelry manufacturers and retailers, spoke exclusively with Martin Rapaport, chairman of the Rapaport Group, about how to lead the diamond industry out of the recession and into the future. Choksi has pioneered the development of branded jewelry in India and has led the expansion and diversification of his publicly traded, Mumbai-based company. He is also the chairman of the Gems and Jewellery Committee of the Federation of Indian Chambers of Commerce and Industry (FICCI) and a member of the Gem & Jewellery Export Promotion Council’s (GJEPC) Diamond Panel Committee.

The Gitanjali Group is a vertically integrated sightholder that includes the brands Nakshatra, Gili, D’Damas, Asmi, Sangini and others. Operations span the globe from the U.S., U.K., Belgium, Italy and the Middle East to Thailand, Southeast Asia, China and Japan. The firm has developed approximately 25 patented facet patterns, including the Flame Cut, the Maharaja Cut and the Wild Orchid Cut.

Choksi is now spearheading the integration of the group into the luxury lifestyle segment, with a major expansion at the retail level and the development of sector-specific Special Economic Zones (SEZs) for the manufacture of high-end jewelry. The group has a retail presence in the U.S., the Middle East and China through acquisitions and partnerships. The firm operates 1,246 retail outlets in India and 143 in the U.S.

Gitanjali’s net sales grew by 11 percent to $279.2 million (INR 13.5 billion) for the quarter that ended on June 30, 2009. The company’s diamond segment saw its sales increase 5 percent to $149.4 million (INR 7.2 billion).

Martin Rapaport: How do you view the global diamond industry?

Mehul Choksi: We are going through a very interesting restructuring that only occurs once in 50 years. The industry has nearly halved this year. Manufacturing centers have been hard hit while retail has probably declined by only 10 percent worldwide. We have had too many middlemen clogging up the distribution system and many of them are now out of business. We must cope with a very high borrowing rate. Over the next two to three years, there will have to be a very heavy building up of capital by manufacturers. I believe that it is now time for diamond manufacturers to make money. As rough prices soften, there will be a manufacturers’ paradise for the next two or three years. The business may be halved, but it will be much more profitable for manufacturers.

MR: Aren’t rough prices too high for cutters to make profits?

MC: No, in fact, rough prices have been lower than polished prices this year and cutters made good profits. In the past few months, there has been speculation and rough prices have gone up, but rough is still behind polished. This speculative trend is temporary and not sustainable. Diamond manufacturers should be able to make a 15 percent to 20 percent gross profit margin.

MR: Will rough prices decline?

MC: I think rough is going to be a very volatile business. Russia and Africa have been holding back supplies, but at some point, they will have to meet their financial obligations and sell. I feel that rough prices may fall further post-October. About half of India’s diamond cutters, some 400,000 people, have left the diamond trade, reducing production capacity and rough demand. And the recession has also reduced working capital. With these two factors working together, rough will be under continuous pressure. Whatever has happened this year, the real picture will only come out in 2010, when the rough-producing countries and De Beers may not hold back production.

MR: Do you think the DTC [Diamond Trading Company] sight system will survive?

MC: So far, the sight system has been the largest, most consistent and sensible supply system. Things could be fluid over the next couple of years, during which there would be all kinds of systems for selling rough diamonds.

MR: If rough prices decline, will polished follow?

MC: Cutters have been buying expensive rough, but have not been able to support proper marketing efforts that increase polished prices. Over the past few years, the level of returns from jewelers has not decreased. High rough prices have not helped us. On the other hand, in spite of a 10 percent decline in jewelry sales, many retailers have resisted lowering prices to the consumer. While polished prices may go down within the pipeline, they will not go down at the consumer level. If cutters have profits and are able to make the right marketing efforts, there is scope for polished prices to increase.

MR: Sales to retailers have been heavily reliant on extended credit and memo terms. Will that continue and will India become more of a credit/memo market?

MC: There will be a remodeling of the whole business. Many middlemen will be going out of business and there will be a new structure of finance. The present financial system that has survived for the past 30 years based solely on trust in the company owner will vanish. Finance will become more corporate and asset based. Banks will lend money to retailers based on their inventory, enabling retailers to pay cash for diamonds. However, this asset has to realize its full potential and be productive by adding value to the balance sheets of diamantaires -- diamonds in shops and in retail and not diamonds in offices is a perfect example.

MR: Can retailers increase their profits by paying cash?

MC: Absolutely. The cost difference between buying on memo and paying cash is about 20 to 25 percent.

MR: What impact has the global recession had on demand and where are the markets of the future?

MC: The United States, Japan and Europe have declined by more than an average of 15 percent, while India, China and Saudi Arabia have probably increased by about 25 percent. While overall sales will decline by some 10 percent this year, the markets in India and China are coming up strongly.

MR: But India and China don’t seem big enough to take over from America.

MC: We should not underestimate India and China. In my opinion, India is already the world’s second-largest diamond jewelry market with sales of about $5 billion. And I think it will be in the first position within the next three to five years. India’s total jewelry business exceeds $35 billion and jewelry demand is moving from gold to diamonds. India is going to be the fastest-growing market and will beat China for the next five to ten years. This is not because Indian GDP [Gross Domestic Product] will be higher than China’s, but because China’s jewelry market is very new, while India’s jewelry markets are large, well developed and firmly established in tradition. The growth of diamonds in India is relatively easy. It’s just a matter of switching demand from gold jewelry to diamond jewelry and that is already happening. Another significant point is that, compared to the U.S., Indian jewelry retail requires lower expenditure, as well as attracts lower margins. This indicates that the sales volume is much higher compared to American retail. For example, the $5 billion retail sale in India is equivalent to $10 billion in retail sales in the U.S. or Japan.

MR: Is Indian demand limited to weddings?

It is about 70 percent wedding based. But other occasions are now also being celebrated. Every occasion sells its kind of jewelry. For Valentine’s Day, it’s smaller, less expensive jewelry and for more serious festivals, it’s higher-value jewelry. India has two major wedding seasons, November to January and again after April to June. India only slows down during three months of the year: March, July and August.

MR: So, you think India can lead the diamond industry out of recession?

MC: I would say that India and China can lead the diamond industry into the future. The most important thing for India’s growth is marketing. It is also important to note that Indian buying is about 50 percent influenced by investment buying, so ethical practices and consumer confidence are going to be critical. These two things have to be kept up if India is to fulfill its role.

Real growth is also coming from second- and third-tier cities in India. We are opening shops in cities that even I have not heard of. Regional areas of India have made money in the past five years as the government has wooed the masses, particularly farmers, in a very big way. Land prices have increased greatly and many have made a lot of money for the first time in their lives. So, what do they do? They want to be modern and they like what they see on television. They want to have brands and identify with prosperity. That and the idea that jewelry is a good store of value are important factors fueling India’s growth.

Also, India has 20,000 tons of gold in store; it uses 40 percent of the world’s mined gold on a year-on-year basis. If you really consider the net value of jewelry — mostly of gold as a raw material — India already surpasses America. There is a great probability of moving some share of gold to diamonds.

MR: Can diamonds be an investment? How much does a consumer lose if he resells a diamond?

MC: A consumer would probably pay about 3 or 5 percent above the Rapaport Price List and lose about 25 percnt to 30 percent upon resale. However, not even 1 percent of jewelry is ever resold by Indians.

MR: What are Gitanjali Group’s annual sales?

In 2008, sales rose 5.5 percent to $1.1 billion. We are a fully vertically integrated company with 17,000 employees involved in all aspects of diamond/jewelry production, marketing and retailing. We have many brands that sell through modern and traditional retailers in 27 different formats. Gitanjali sells through 250 wholly owned and franchised stores and in over 550 departmental stores as shop-in-shop. Seventy percent of jewelry sales in Indian department stores are Gitanjali brands. We also have another 2,000 designated showcases in various outlets, which are an important part of our business. In India we have six brands, which are very active, and another three or four shops brands, which are becoming very active. Gitanjali also contributes nearly 70 percent of the total spend on communications through media and advertising in the jewelry category in India.

MR: I understand that you promote jewelry using a lot of movie stars.

MC: There are three important things that tie into our Indian marketing efforts: the wedding, Bollywood and cricket. So, we try to hang on to these three things very strongly. We have about 25 to 30 Bollywood stars working with us and 80 percent of our promotion is centered around Bollywood.

MR: How do the movie stars add value?

MC: I will give you an example. We started marketing Italian watches about a year and a half ago. For one year, we ran the Italian ads with little or no response. Over the past few months, we tied the brand to two Bollywood stars and sales have gone up by 500 percent. We have been receiving about 70 calls every day for the particular watches the stars are wearing in the ads.

MR: So, people really want to wear what their heroes wear?

MC: Yes. If you roll out a brand without any Bollywood star, people will not recognize your brand and it will take a long time to establish a presence in the market.

MR: Do you think that diamond jewelry should be branded like watches?

MC: Absolutely, that’s the right model to look at. If watches can do it through branding and achieving higher multiples, why can’t diamonds do the same? A diamond has a much more beautiful story: it's rare; it’s not a machine-made product. There cannot be a more beautiful story than this. I think that if the whole trade had sold through good marketing efforts, we would have achieved over 100 percent valuation by now. Diamonds are a perfect example of what you can achieve through branding.

Gitanjali is currently at $150 million of diamond jewelry sales in India. What is your prediction for future diamond jewelry sales?

MC: Including gold and other jewelry items, our total sales are nearly $250 million. We expect to grow at about 50 percent per year as we have been doing for the past eight years.

MR: Who is your target market?

MC: We target prewedding and postwedding women aged 18 to 45, with the average wedding age at 25.

MR: How about nonwedding diamond jewelry gifts?

MC: It all depends on marketing. You have to keep diamonds at the top of people’s minds. We have made 23 television commercials this year and about 60 percent of India’s diamond jewelry marketing is done by us. We see a direct relationship between diamonds and other occasions based on our advertising. Valentine’s Day in India was basically introduced by us and has become an important day to celebrate jewelry for everyone.

MR: Do you miss De Beers generic marketing campaigns and what about the new International Diamond Board (IDB)?

MC: It was a mistake for them to stop all generic marketing in India. Concerning IDB, why should individual companies do generic marketing? They should market and promote their own products and brands.

MR: How has the economic crisis affected India?

MC: Last year was very difficult. There was a big squeeze as inflation rates were up and banks were trying to raise already high interest rates. But since the beginning of 2009, and with all the stimulus packages around the world, there’s a lot of money coming into India. We are seeing a new sunrise. We still have two major threats in front of us: a huge budget deficit and the lack of monsoon rains, which is hurting the important agricultural sector. India could slip backward if these issues are not well managed by the government.

MR: How active are you outside of India?

MC: We’re active in the United States, where we have approximately 150 retail Samuels & Rogers stores. In Japan, through our associate Diminco, we have nearly 110 Verita stores, Japan’s third-largest chain. In China, we have about 50 Giantti shops and in the United Arab Emirates [U.A.E.], we have several channel partners, like Damas, Solomon Rothman, Al Haseena and Alukkas.

MR: How is the U.S. market?

MC: In 2008, the U.S. must have lost about 30 percent of its stores and this year, it will probably lose another 10 or 15 percent. U.S. sales will probably decline by about 15 to 20 percent in 2009. It’s going to be a year or two before America stabilizes. The entire American mess may be bigger than what it looks like. At this moment, it seems like the U.S. is reviving, but I am not too sure about it. Existing stores will not lose much, primarily due to diminishing competition, but overall sales in America are steeply going down.

MR: How are your U.S. stores?

MC: The sales are down by an average of about 11 percent, which affects the bottom line by about 6.5 percent, so it’s a constant fight between decreasing costs and increasing the marketing budget. But the model still works very well for us because we have captured most of our supply chain. Nearly 85 percent of the supply to our retail stores is done by our own factories, which are highly profitable. Moreover, in the past couple of months, the declining trend was arrested. The crucial period was November to March; thereafter, we have been able to restrict the decline to 6 percent to 7 percent and we are looking at increasing sales in the coming season.

MR: So, you believe that the vertical integration of the diamond jewelry industry is essential?

MC: It’s the only way to survive. You can’t survive making 2 percent or 3 percent. You need the higher consolidated profits of vertical integration. The retail chain has to become a diamond manufacturer and the diamond manufacturer has to be a retailer. Companies must connect the dots  throughout the supply chain. This is what we will see happening for the next 10 to 15 years.
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Tags: Banks, Belgium, China, Damas, De Beers, DTC, Government, India, International Diamond Board, Japan, Jewelry, Manufacturing, Production, Russia, United States
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Diamonds, Jewelry & India:
Sep 5, 2009 2:57PM    By dharmesh
Mark the words of Mehul Choksi! The man has been a pioneer and will be a legend in his own life-time. The business of professionally marketing Branded Jewellery thru various channels is his brain-child and the fact that Gitanjali Brands rule the roost today, is a mark of the brilliant marketing strategy ( including that of using filmstars). The sole difference with Mr.Choksi's thoughts lie in the belief that every diamantaire can turn into a jewlry manufacturer cum retailer. The fact that Jewelry is a specialized business and has tested (more adversely than positvely) the mettle of most of the top diamond merchants is proof thereof. Aside from Gitanjali - Most Jewelry brands hosted by diamantaires are still in circulation ONLY owing to the deep pockets of the owners and or easy Bank finance.It remains whether the trade will pick up the clues from Mehul Choksi and first "unlearn' AND THEN REVAMP THE JEWELRY BUSINESS! Till then -for Branded Jewelry - Gitanjali's brands will rule the roost.
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