Saturated metros take gold jewellers to tier I, II locations

Mumbai: Driven by rising incomes, smaller cities and towns are expected to drive consumption of jewellery. Jewellery retailers are expected to derive over half their revenues from small towns by 2012-13, as against around 40 percent in 2009-10, according to a study by Crisil, a credit rating agency.

In fact, Gitanjali Group, one of the largest branded jewellery retailer, says they already have franchise boutiques in smaller towns.

“While shop-in-shops are the growing in Tier I towns, over 70% of our new stand alone franchise stores are coming up in tier II and tier III towns,” Mehul Choksi, chairman and MD at Gitanjali Group said. The company has identified 600 towns in India where branded jewellery (both gold and diamond) could be sold. “So far we have reached 300 of them and soon we will spread across all cities,” he added.

[caption id=“attachment_45634” align=“alignleft” width=“380” caption=“Cities are no longer money-spinners for jewellery shops. Reuters”]  [/caption]

Crisil studied 63 gold jewellery retailers rated by it which constitute one-fifth of revenue generated by retailed gold jewellery in India in 2010-11. They concluded that growing demand for branded gold jewellery from tier II and III towns will mean two-third of the new outlets will be set up in such small towns in the medium term. The total jewellery retail market in 2010 was estimated to be Rs 97,300 crore.

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Last year, single outlet retailers have spread their wings through the metros and bigger cities. “The intensifying competition in the large cities has led to stagnation in growth for players,” said Gurpreet Chhatwal, director, Crisil Ratings. The branded jewellers are, therefore, now increasingly pursuing opportunities that expansions into tier II and III centres could offer.

This rise of gold retail in tier I and III cities would owe itself to increasing working women population, rising disposable income and more working people as a percentage of total population.

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“Stores in these towns demand a greater mix of gold jewellery, both as a complement to our diamond jewellery and as a connect between traditional and modern retail,” Choksi said. The company’s branded bouquet satisfies aspirations of consumers in smaller towns and cities.

The demand in these towns is mainly driven by recent rise in income of farmers and entrepreneurs and their immediate spending in luxury is in the form of jewellery. A recent consumption survey by the government said that non-food expenditure rose sharply in rural and semi-urban households over the past decade. Analysts term this as a ‘game changer’ for consumption of goods and services.

Jewellers are leaving no stones unturned. Aggressive marketing by the retail players and enticing schemes like buyback and gold deposits is a key. As such expansions will give the companies greater geographical reach and improved cost efficiencies, they will also be exposed to greater requirement of working capital loans. In fact, working capital loans mainly meant to support inventory formed 86 percent of current assets of the players over the last couple of years.

“The average gearing of Crisil-rated players will remain high at 2 to 2.25 times over the medium term, on account of expected increase in external debt to fund inventory,” R Vasudevan, head of Crisil Ratings said.

Players that efficiently manage their working capital requirements and successfully ramp up operations in the Tier-II and -III outlets early, will witness rating upgrades in the next 12-18 months, he added in a release.

India’s demand for gold has gone up by 25 percent despite the 400 percent rise in price of rupee in last decade. The World Gold Council feels India will be key driver of gold demand and attributes it to a phenomenon similar to what Crisil talks about. It says, the vast majority of the Indian population (70 percent) lives in villages, which have traditionally formed the source of more than two-thirds of Indian gold demand. This sector has been growing at less than 1% per annum but is projected by CMIE to grow in future at over 5% per annually, further fuelling gold demand.

No wonder, the retail jewellers are gearing themselves up to tap the huge potential in the smaller towns and villages in India. To support the extensive expansion plans, it’s not surprising that more and more retail jewelers are resorting to the capital market for more funds. Three retail jewelers, Joyalukkas India Ltd, Tribhovandas Bhimji Zaveri Ltd (TBZ) and Ratanchand Jewellers Ltd have already filed their draft herring prospectus with the Sebi. Bangalore-based Ratanchand wants to enter the capital; market with a maiden issue of Rs 150 crore. TBZ will utilize the Rs 166 crore that it wishes to collect to establish new showrooms (Rs 18 crore) and for working capital requirements (Rs 157 crore). Joyalukkas has in fact got necessary approvals for the Rs 600-660 croe IPO it wants to hold. It has said it will use Rs 425 crore for establishment of new retail outlets and another Rs 104 crore to repay borrowers. It is also in talks with private equity players for funding.