India

2015 Guide to Jewellery Market Actionable market intelligence for jewellery businesses

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2014 Review

Source: Equity Communications

Retail sales of precious jewellery increased 2.8 percent to reach 2,535 billion rupees (US$41.57 billion) in

2014. Domestic changes in the way gold jewellery is traded helped make 2014 a record year for jewellery

sales.

Retail sales of gold jewellery increased 1.4 percent to reach 1,995 billion rupees (US$32.71 billion) in

2014. Consumption of gold jewellery increased 7.9 percent to reach 660.8 tonnes in 2014 according to

Equity Communications' preliminary assessment of retailer sales and this was offset by a 6.4 percent

reduction in the rupee gold price.

Retail sales of diamond jewellery increased 8.2% to reach 517 billion rupees (US$8.49 billion) in 2014. In

general, demand for diamond jewellery is stronger and more competitive at steady gold prices because

consumers will be less concerned about potentially losing out on positive gold price movements. Consumer

demand for diamonds is more discretionary.

Retail sales of platinum jewellery increased 16.8 percent in 2014 to reach 17.84 billion rupees. Volume

take-up increased 23 percent to reach 172,000 ounces in 2014, boosted by successful marketing of men's

platinum jewellery.

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The story of gold jewellery sales in 2014

80:20 gold rule introduced in third quarter of 2013 scrapped in fourth quarter of 2015 -

results in lower domestic premiums on gold

Rupee gold price down 6.4 percent in 2014 - results in cheaper gold for consumers

Companies Act rewrite forces retailers to restructure gold buying schemes - results in a flood

of redemptions before March 31, 2015

The gold rush of the second quarter of 2013 was always going to be a hard act to follow. Nevertheless,

sales in 2014 were actually helped by the forced review of retailer gold buying schemes because of new

Companies Act rules. This factor was the biggest contributor to record sales of jewellery in 2014.

Source: Equity Communications

Consequently, jewellery retailers are winding down standing instalment schemes with the view of

reintroducing them in compliance with new laws. Such schemes let consumers spread out purchases of

jewellery pieces they normally would not afford. Instalment schemes are estimated to make up to 25

percent of annual gold jewellery sales.

Forced early redemption of instalment schemes meant that gold jewellery sales in the third quarter of 2014

were almost similar to sales in the second quarter of 2014. A weakening of the rupee gold price during

August and September also supported redemption efforts.

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2015 Outlook

Fundamentally, there is strong investment incentive in consumption of jewellery in India. Gold continues

to be a dependable hedge against inflation and trusted store of value. Therefore, for as long as the pricing

fundamentals and economic backdrop are gold positive, consumers will first consider gold above any

other jewellery option.

Economic backdrop in 2015

lower interest rates

lower inflation

faster gdp growth

On one hand, India's economic outlook for 2015 is more positive than it was in the period 2012 to 2014.

The abundance of economic good news seems likely to fuel an eventual recovery of the rupee vis-à-vis

the U.S. dollar in 2015-2016. At the same time, the price of gold in international markets is expected to

remain subdued in 2015-2016. These events should combine to send gold prices lower in local currency

terms for the period 2015.

Our view is that the economic backdrop is not gold positive in the short term therefore we anticipate

reduced appetite for gold as an investment. In theory, this should push gold demand lower.

On the other hand, the surprising plunge in oil prices helps narrow the current account and fiscal deficits.

By extension, this has led to a broad-based decline in different inflation measures (CPI, WPI & GDP

deflator).

With CPI inflation below the Reserve Bank of India's target (8 percent in January 2015), the bank has

greater room to cut its benchmark repo rate by a greater margin. Without doubt, this is a further boost to

India's growth outlook and the dividend will be higher investment flows into India.

The positive economic growth outlook could boost incomes for Indian consumers and this does help

consumption of gold for important cultural occasions and festivals. In theory, this should push gold

demand higher.

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Nevertheless, in practice, India has just completed two straight years of very high gold jewellery demand

because of one-off exogenous events.

In 2013, when the price of gold first plunged to levels last seen in 2010, consumers of gold jewellery in

key markets quickly saw this as a buying opportunity and rushed to make purchases. Many reasoned that

the dip in gold prices was an anomaly and therefore expected gold prices to return quickly to their long-

term upward trajectory. However, this did not occurred and that is why investment demand for gold

jewellery subsequently remained muted in China in 2014.

A similar situation was anticipated for India but the forced redemption of gold buying schemes, in

compliance with new Companies Act regulations, actually led to another rush of gold jewellery purchases

in 2014. Such instalment schemes are very popular in the market. First, they let consumers spread out

purchases of higher priced gold jewellery pieces over many months. Second, they are also a lucrative

investment for consumers since jewellers typically sponsor the last month or two of an instalment period.

Instalment schemes are estimated to make up to 25 percent of annual gold jewellery sales. However, new

rules require redemption of outstanding gold buying schemes which were accepted before April 1, 2014,

as and when they become due or before the 31st of March 2015 (whichever is earlier).

For the above reasons, 2015 could actually witness reduced demand for gold jewellery owing to

consumer fatigue. In fact, our view is that consumption of gold jewellery could retreat by as much as 15

percent from 2014 levels. Gold consumption in 2013 and 2014 was substantially higher than the 546

tonnes annual average for the prior ten years.

For the last two years, consumption of gold positively diverted from trend in response to exogenous

events and our assessment is that consumers will likely take time out to rebuild gold buying liquidity.

Add to this, new gold buying schemes consistent with new companies act rules are half as appealing as

previous running gold schemes to retailers and their customers. The funding period is now limited to one

year and the investment return cannot be in excess of 12 percent per annum. Some retailers have found

creative ways to work around this but it will require at least the first half of 2015 for the industry to

rearrange gold buying schemes.

In the final analysis, retail sales of precious jewellery could retreat 4.5 percent to reach 2,421 billion

rupees (US$39.70 billion) in 2015. Greater sales of diamond jewellery will likely be offset by decreases

in gold jewellery sales volumes at lower gold prices.

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Trends in retail sales of precious jewellery 2003-2013

2014 review

What lies ahead

Demographic trends

Economic growth and income trends

Retailer business models and marketing

Precious materials price trends

Mobile internet and smartphone penetration

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30

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The basics of jewellery demand in India 7

Guide to India Jewellery Market 2015

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Contents

page

Introduction 1

How you benefit from Equity Communications' analysis 4

Section A

1. The basics of jewellery demand in India 7

Gold rules in India 8

Push factors helping consumption of complementary jewellery 8

2. Trends in retail sales of precious jewellery 2003 and 2013 10

Trends in retail sales of precious jewellery 2003-2013 11

Retail sales of precious jewellery have been supported by 14

Real per capita gdp growth 14

Precious materials price growth 14

Rupee US dollar exchange rate 15

Trend in consumption of gold jewellery 15

Key Takeaways 16

Gold jewellery 16

Complementary jewellery - diamonds, platinum, silver, gemstone 16

3. 2014 review 17

2014 precious jewellery sales 18

2014 gold jewellery sales 19

Quarterly gold demand trends 19

2014 diamond jewellery sales 20

2014 platinum, silver and other gemstone jewellery sales 21

4. What lies ahead 22

Peer review 23

Gold demand in top four jewellery markets 24

Top four platinum jewellery markets 25

Top four diamond jewellery markets 25

2015 Outlook 27

Economic backdrop in 2015 27

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Contents continued

page

Section B: Factors shaping consumption of jewellery in India

5. Demographic trends 30

Demographic trend positive for jewellery consumption 31

6. Economic growth and income trends 33

India versus China economic growth path since 1980 35

Can India play catch-up? 37

The wealth effect 40

India likely to stumble along at 4 to 7 percent growth 41

India's structural challenge 42

What it means for jewellery consumption going forward 45

Women's financial empowerment crucial for fashion jewellery 49

7. Retailer business models and marketing 50

Fed up retailers trying to disrupt the dominant business model 52

Modernization of the retailing landscape 53

What it means for organised jewellery retailing going forward 55

Franchise model most suitable for expansion 56

Key factors for success in organised jewellery retailing 57

8. Precious materials price trends 58

Gold price trends 59

Gold price outlook 60

Gold jewellery outlook 60

Diamond price trends 61

Diamond jewellery consumption outlook 62

9. Mobile internet and smartphone penetration 64

Mobile internet and smartphone penetration 64

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Catalog of charts and tables

Section A: The jewellery market in India

Page

1. The basics of jewellery demand in India

Exhibit 1-1: Gold and diamond jewellery demand by region 9

2. Trends in retail sales of precious jewelry (2003-2013)

Exhibit 2-1: Trend in retail sales of precious jewellery (national currency) 2003-2013 11

Exhibit 2-2: Trend in retail sales of precious jewellery (US Dollars) 2003-2013 11

Exhibit 2-3: Trend in retail sales of gold jewellery (national currency) 2003-2013 12

Exhibit 2-4: Trend in retail sales of diamond jewellery (national currency) 2003-2013 12

Exhibit 2-5: Trend in retail sales of silver, platinum and gemstone jewellery (national currency) 2003-2013 13

Exhibit 2-6: Trend in retail sales of precious jewellery (Table) 2003-2013 13

Exhibit 2-7: Real per capita gdp growth 2003-2013 14

Exhibit 2-8: Trend in rupees gold price 14

Exhibit 2-9: Trend in rupee/dollar exchange rate 15

Exhibit 2-10: Trend in consumption of gold jewellery 15

3. 2014 Review

Exhibit 3-1: 2014 retail sales of precious jewellery 18

Exhibit 3-2: 2014 retail sales of gold jewellery 19

Exhibit 3-3: Key one-off exogenous events fuel jewellery demand 19

Exhibit 3-4: 2014 retail sales of diamond jewellery 20

Exhibit 3-5: 2014 retail sales of platinum, silver and other gemstone jewellery 21

4. What lies ahead

Exhibit 4-1: The top four markets for precious jewellery 23

Exhibit 4-2: Distribution of global demand for precious jewellery 23

Exhibit 4-3: Gold demand in leading jewellery markets (2010 versus 2013) 24

Exhibit 4-4: Top four markets for platinum jewellery 25

Exhibit 4-5: Top four markets for diamond jewellery (2010 versus 2013) 25

Exhibit 4-6: Weight of diamonds in jewellery pieces 26

Exhibit 4-7: Value share of diamond jewellery sales by weight 26

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Catalog continued

Section B: Factors shaping consumption of jewellery in India

5. Demographic trends

Exhibit 5-1: Increasing number of persons in core ages for marriage 31

Exhibit 5-2: Increasing number of marriages per year 32

Exhibit 5-3: Women taking longer to get married 32

Exhibit 5-4: Age profile of married couples 33

6. Economic growth and income trends

Exhibit 6-1: India rapidly catches up to China in population 35

Exhibit 6-2: GDP growth in China outpaces growth in India 36

Exhibit 6-3: China leaves India behind 36

Exhibit 6-4: India's adult wealth pattern 37

Exhibit 6-5: Wealth share by region 37

Exhibit 6-6: Wealth distribution in country 38

Exhibit 6-7: Current and projected membership of wealth pyramid strata 39

Exhibit 6-8: Probability of moving between wealth pyramid strata 40

Exhibit 6-9: GDP forecasts - comparatively slower growth ahead page 41

Exhibit 6-10: Rising youth population in India 42

Exhibit 6-11: Long run youth employment problems 43

Exhibit 6-12: Economy not ready to reap advantages of demographic advantage 43

Exhibit 6-13: India not ready to reap advantages of demographic dividend 44

Exhibit 6-14: India's overall labour market not stuctured for rapid economic growth 45

Exhibit 6-15: India nominal gdp per capita 46

Exhibit 6-16: India gdp per capita growth likely to remain at current pace 47

Exhibit 6-17: India grows toward inflection point 48

Exhibit 6-18: More women in organised sector 49

7. Retailer business models and marketing

Exhibit 7-1: Gold's broad appeal as a safe-haven investment in India 51

Exhibit 7-2: Retailer margins for precious jewellery 52

Exhibit 7-3: Higher business costs…same margins 54

Exhibit 7-4: Organised retailing versus informal retailing 55

8. Precious materials price trends

Exhibit 8-1: Gold price outlook 2013 to 2014 60

Exhibit 8-2: Polished diamonds production outlook 61

9. Mobile internet and smartphone penetration

Exhibit 9-1: Mobile internet penetration in India 64

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Blank Page

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Introduction

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Consumption of jewellery in India will get stronger.

India is back to being number one in gold jewellery consumption by volume, still number one in diamond

jewellery consumption by volume and number four in platinum jewellery consumption. The country will

remain the most important market for precious jewellery in terms of potential for many years to come.

For one, demand for precious jewellery is already formidable because of strong cultural traditions and yet 95

percent of adults in India possess wealth valued below US$10,000, according to Credit Suisse. With further

economic growth, a large number of Indians will move to higher wealth bands and this will lead to an

acceleration of precious jewellery consumption.

The outlook for jewellery consumption in India cannot be clearer: Income growth for Indians will result in

higher levels of jewellery consumption. Indeed, we believe the majority of Indians will likely have more

money to spend on jewellery in the coming decades.

However, what is less clear is the anticipated level of income growth. For instance, many people believe

India is the next China in terms of economic growth potential. At Equity Communications, our view is that

such beliefs are most optimistic based on our understanding of India's structural deficiencies and business

culture problems. Our thinking is that India will stumble along at 4 to 7 percent annual GDP growth rate -

but still good enough to move a large number of Indians out of poverty.

In terms of consumption potential, India's chief redeeming quality is its gigantic population of 1.26

billion people.

The country is the poster child of 'sachet economies' whereby the majority of consumers in a country are

accustomed to buying products and services in small, affordable portions rather than foregoing consumption

of costly goods.

“Income growth for Indians will result in

higher levels of jewellery consumption.

Indeed, we believe the majority of Indians

will likely have more money to spend on

jewellery in the coming decades.”

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Therefore, we find that millions of Indians buy 22 karat gold rings in weights as little as 1.5 grams if that is

what they afford at the moment of consumption. With this in mind, imagine what would happen to gold

demand in India if incomes receive a massive boost.

Having said that, while we all know where India needs to go in the future, getting there is not so

straightforward. For one thing, India requires a strong centre to have a chance of emulating what China has

achieved in the last thirty years. Unfortunately, the country remains vulnerable to poor policy decision as

evidenced by the missed economic opportunities in the recent past.

Against this background, in this publication we predict the likely future direction of jewellery consumption

in India.

“We find that millions of Indians buy 22

karat gold in weights as little as 1.5 grams if

that is what they afford at the moment of

consumption. With this in mind, imagine

what would happen to gold in India if

incomes receive a massive boost.”

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How you benefit from Equity Communications' analysis of jewellery markets

Five principles guide us in our analysis of jewellery markets:

- There is always steady demand for precious jewellery. People desire exquisite jewellery for adornment

purposes and for socio-cultural traditions like weddings

- Precious jewellery is traditionally costly. Therefore sales are regulated by the buying power of consumers

- Socio-economic and cultural conditions that people face when making lifestyle decisions matter a great

deal in the consumption of precious jewellery

- The business economics of the jewellery business are such that retailers require large margins to

compensate for the fact that precious jewellery inventory is costly while consumers buy precious jewellery

infrequently.

- The economics of the precious jewellery business are not sustainable in areas with sparse populations

From these principles, we have obtained a method of determining the health and potential of any jewellery

market we study.

We track certain data to provide us with information on the current state of components that we believe are

relevant for jewellery consumption and the jewellery retailing business.

strength of socio-cultural traditions

strength of consumer buying power

strength of customer base

strength of the jewellery retailing model

strength of jewellery promotion efforts

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Jewellery industry stakeholders cannot control or influence some of these components. However, we will

tell you the likely implications of changes for each component.

Specific to India, we believe the following five factors will play a leading role in shaping the direction of

jewellery consumption in the country:

Demographic trends

Economic growth and income trends

Retailer business models and marketing

Mobile internet and smartphone penetration

Precious materials price trends

It is our hope that jewellery retailers can use the insight gleaned in here to adjust or improve their business

models so that they increase profitable jewellery sales in a sustainable way.

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