In local currency terms, there was positive growth in consumer demand for diamond jewellery across all the top five diamond markets, which account for 75 per cent of global demand. However, the unexpected magnitude of the strengthening of the USD against the currencies of several of the main diamond consumer markets in the latter part of 2014 depressed global growth in USD terms (at constant exchange rates, growth amounted to almost five per cent). Continued USD strength in the first half of 2015 means that global USD demand growth is likely to remain lower than local currency growth for 2015 as a whole.
The fastest growing consumer market in 2014 was the US with a seven per cent increase in diamond jewellery consumption. Growth of six per cent in local currency saw China remain the second-fastest growing market. Indian demand increased by three per cent in local currency terms, while two per cent growth in local currency was achieved in Japan and the Gulf region.
Global demand for polished diamonds contained in diamond jewellery increased by three per cent in 2014 (measured in USD polished wholesale prices), totalling just over US$25 billion (see Fig. 2). Growth in polished diamond consumption was more mixed in the major diamond markets, owing to the weakness of some currencies against the USD, slower than anticipated growth over the Christmas season and slowdown in demand in China. The US led global polished diamond demand growth with a seven per cent increase, followed by China with five per cent and the Gulf region with two per cent. However, in India and Japan, local currency depreciation against the USD resulted in negative growth of one per cent and 11 per cent, respectively.
As a result of these growth dynamics, the US grew its overall share of global polished demand, with its 42 per cent share representing a level not seen since 2008, before the global financial crisis. China (including Hong Kong and Macau) increased its overall share of demand to 16 per cent, while India was the third-largest market for polished diamonds in 2014 with eight per cent, followed by Japan with five per cent. With the Gulf region accounting for eight per cent of global demand, the top five markets accounted for almost 80 per cent of global demand for polished diamonds in 2014.
Global diamond consumption has seen a significant resurgence since the global financial crisis with the five-year compound annual growth rate (CAGR) since 2009 standing at five per cent for diamond jewellery and six per cent for polished diamonds.
Looking at the composition of polished diamonds consumed in the leading markets in 2014 (see Fig. 3), there were areas of both growth and decline in carat terms. The main growth areas globally have been smaller diamonds below 0.18 carats. Fewer carats were consumed globally in the 0.18 carats and bigger ranges of medium quality, driven mainly by the slowdown in Chinese demand growth.
While in developed markets, such as the US, brands provide product differentiation, identity and distinctive designs, in developing markets, such as China and India, brands serve as reassurance of product authenticity and quality and support consumer confidence. The industry in China and India has accordingly witnessed high acquisition rates from well-known and established local retailer brands, with sales of these products representing close to 80 per cent of new acquisitions in China and about two thirds in India.
Although the diamond jewellery sales growth of international designer brands was relatively low in India and China (with share in the low single-digits), sales of these branded products represented a more significant proportion of new acquisitions in the mature markets of the US and Japan, accounting for around one in seven and one in five acquisitions, respectively.
In the US, retailers consistently reported higher proportions of consumers looking for diamond jewellery brands (see Fig. 4), with only around one in five retailers in the US saying they do not stock any brands. Around 40 per cent of retailers said they stocked designer diamond jewellery brands such as Tacori and Scott Kay; around three quarters stock their own jewellery brands or those of diamond manufacturers; and about one in seven stock diamond brands such as Forevermark and Hearts on Fire.
An updated view of the diamond jewellery retail landscape in the US was informed by a study undertaken by De Beers in early 2015, which covered 42,000 unique diamond retail locations, representing close to 25,000 companies. While the overall number of diamond jewellery shops in the US has declined since 2007, the retail scene is not homogeneous and different trends have been in evidence in different channels.
Among specialist independent retailers, the number of doors has declined by about 4,000 since 20071. However, the larger chains saw closures of an even greater number of doors over this period (see Fig. 5), resulting in a slight increase in share of doors for the independents and small/medium chains and a slight reduction in share for the large chains. However, in terms of sales value, the trend is reversed and the share of independents has declined dramatically to a little over a third. Over the same period, chains – from small to large – have overtaken the independent channel, generating more than 40 per cent of sales value.
The decline in fragmentation of the US market has been accompanied by a divergent profitability trend, where the chains and stores with sales over US$1 million per year have maintained their profit margins in recent years, while independents and smaller stores have reported lower profitability (from all jewellery sales).
Concerns over profitability have prompted retailers to look at optimising their stock levels. Many have also employed the services of aggregator companies, which can source required diamonds just in time, in addition to providing a seamless link between retailers’ websites and their broader product assortments. Another approach some have taken is sourcing more directly from cutters and manufacturers, thus bypassing the wholesale distributors.
In Greater China, the major jewellery retail chains have followed an expansion programme with the CAGR in number of doors since 2011 of between 13 per cent and 17 per cent. However, the slowdown in diamond jewellery demand growth in China in the past year has influenced retailers to revise their store opening plans. Thus, a lower rate of growth is evident during the latest financial year ending in March 2015 for Chow Tai Fook and Luk Fook and in December 2014 for Chow Sang Sang (see Fig. 6). Often the strategy of retailers is to optimise their store network by closing underperforming shops and opening new ones in different locations. This approach has been used in addition to pure expansion.
In the US, where online penetration across both traditional and mobile devices is very high, online diamond jewellery sales are estimated by different sources to be in the range of seven per cent to 13 per cent of sales value. Meanwhile, the respective share of online sales in India and China is less than one per cent. Looking ahead to 2020, analysts estimate2 that the annual US online jewellery sales growth will be twice as high as bricks and mortar growth.
Diamond jewellery e-commerce has become a fact of life in the US, mainly as a result of the activity in this area of pure online operators and the large chains: these two channels account for nearly two thirds of all online diamond jewellery sales in the US. However, 2014 saw a new development in the pure online area, as Blue Nile opened a physical presence in a bricks and mortar store at the Nordstrom department store in Seattle3. While customers can only browse the wedding collection in store (with any resulting orders having to be placed online), this development acknowledges the power of a multichannel presence, particularly where emotionally significant and more expensive diamond pieces are involved. An example of a similar dual presence in China is Z-bird4, which operates a ‘clicks and mortar’ concept with ‘experience stores’ where customers can physically explore and buy more important pieces, such as engagement and wedding rings.
For traditional diamond jewellery retailers, the online channel is as much a marketing and communications tool as it is a sales channel. In fact, in many cases the importance of the online presence in providing information outweighs the contribution to sales, as almost 40 per cent of consumers research their purchases on the internet before visiting shops and an online presence helps boost footfall. This makes an e-commerce enabled website, including for mobile devices, a necessity for all retailers in order to help them stay competitive.
However, in 2014 growth in jewellery advertising spend started to catch up with fashion, which had the highest growth rate in the luxury competitive set (see Fig. 7). While it is too early to say if the trend will continue, this positive development will need to be sustained if the jewellery category is to regain its pre-crisis share of advertising voice of close to 30 per cent of the luxury competitive set (2014: 23 per cent).
The trend in jewellery marketing spend in China has been quite different over the past five years. Luxury jewellery brands increased their spend annually between 2009 and 2012 by double-digit percentage figures, but reduced their spend in 2013 and 2014, with the downward trend continuing into the first half of 2015. Spend by jewellery retailers, on the other hand, was on a downward trend between 2009 and 2013, but increased somewhat in 2014, only to resume the downward trajectory in early 20155. While these most recent declines in spend could be explained by the slowing demand growth in China, they are counterproductive in supporting demand during this period. Keeping diamonds top of mind for consumers in the new reality of lower economic growth in China will be important for both luxury brands and retailers. One positive aspect of this development is that jewellery spend has declined less than the competitive set, thus putting the category in a relatively more prominent position.
The marketing developments in Hong Kong, which forms an important part of the Greater China market, were positive in 2014, with jewellery spend increasing the most within the competitive set – a move which could help reinvigorate demand growth in a market that has faced a challenging political and economic situation.
Finally, in India, the position of jewellery weakened in 2014, as the competitive set continued to spend more, while jewellery spend declined and share of voice was diminished. Clearly, reversing this situation is an opportunity for jewellery retailers and brands to consider in the immediate future.