Gold prices vary as unpredictably as diverse weather. Price peaks and valleys seriously affect the vital activity of enterprises selling gold jewelry in retail, as well as buyers’ behavior. Launching a new company or store, current operations, progressing in the market or leaving the market – everything has its specifics, but each of the sides of this business is instantly dependent on gold price.
After a new world record was set for the price of one ounce of gold at the New York Mercantile Exchange on May 12, which was first of all due to an unstable euro, prices for jewelry made of pure gold went up by 27 yuans (US$3.9) per 1 gram in various cities of China. Thus, if in the end of April the average price for one gram of gold was 308 yuans ($45.3) by May 13 it reached already 329 yuans ($48.4) in a matter of record-breaking three days, having added 6 yuans more the next day after that. “We have not had enough time to feel the consequence for ourselves yet because the price jumped up during the week and not in the days off when we have our major part of sales,” the director of the Chow Tai Fook jewelry store in Urumqi said. The seller in the Chow Sang Sang jewelry store in the same city commented: “Prices grow too fast, with a new one coming each 2-3 days, and because of this customers observe more often than buy.” According to the available statistics, in May 2009 the price for one gram of gold in China varied from 253 to 272 yuans ($37.2 - $40), that is during one year it went up almost by 100 yuans.
In view of the sensitivity of retail companies to price variance and their attempts to protect themselves against the risks related to price fluctuations, the ability of business to analyze the current situation and forecast short- and long-term conjuncture becomes a recipe for its survival and one of key competitive advantages in the gold market of China. It seems that the recommendations of Winston Chou, Chairman of the Diamond Federation of Hong Kong, to jewelry companies for 2010 advising them “to stay vigilant and ready to adapt in a sweepingly changing market environment” acquire increasing urgency, and 2010 in China may become a year of the Metal Tiger in its full sense: the competitive struggle there will be won by ‘hunters’ with iron nerves.
While global gold prices broke their historical records last May reaching their new peaks, jewelry retailers appeared the most vulnerable: after all they are the last link in the industry and can accept existing prices only in a passive way. Taking into account that Chinese retail companies, as a rule, have no well-developed analytical units in their corporate structure carrying out the functions of an echo sounder for golden depths they frequently select their route at a venture taking up the risk of turning into a weak link in the current situation.
Taking the trouble of prime cost management
Gold jewelry is a reliable investment providing for high safety of capital and serving a good indicator of return on investment (ROI). In recent years, many investors infused large capitals in the jewelry industry. Since they did not sufficiently understand the behavior of world prices for gold and due to massive inception of retail companies during the peak period of sales, the cost of investments has increased, while their rate of return, on the contrary, dropped.
Besides, during the high sales season gold prices were on the incessant rise accordingly pushing up purchasing costs for retail companies established at that time. Thus, the competitors who came to the market earlier got a huge advantage: they had lower average procurement prices. The outcome of this price war for newly opened jewelry companies was deadly. The major method in the competitive fight going on in the present-day jewelry market in China is unsophisticated – using the price which means the cheaper you sell the more customers you get. And the main marketing tools are discounts, sales, “Two for the Price of One” actions, etc. Clearly that a low cost price (and in this context it is the procurement price) is the ace of trumps in the game.
Difficulties in stabilizing operational profit
Gold price fluctuations across the globe hits hard not only newly born jewelry companies but those well-established retailers find it uneasy to keep afloat. Business hopes for a relative stabilization in procurement and retail prices, since after all their stability also means stable profits. However, it will hardly occur in the foreseeable future. Gold price fluctuations naturally affect buyers’ behavior and expectations. As prices continue to rise up to a certain level clients tend to turn into observers which has an immediate impact on jewelry companies, whereas with prices going down makes buyers postpone their instant purchases waiting if prices will drop further on. Thus, if higher prices may inflict losses onto a company virtually on the fly it will otherwise not be able to draw quick profit if they will go down.
It should be separately said about widespread promo-actions in China, timed to coincide with various holidays. Retailers say it is often difficult to predict if holiday sales will bring profit or loss. Special sales which are called near charitable (this is how low the initial price offering is) have long been included into the techniques practiced by jewelry companies. In this way they hope to earn by way of much higher sales. Moreover, business expects a recession in the market and a slack period which may bring in lower procurement prices, according to the cyclic theory. However, in practice what they get is in complete contrast to what they expected and gold prices rise after the holidays due to a number of reasons. As a result, the profit obtained during the holiday sales is then gradually exhausted with nothing left.
The “Sensitivity Analysis on Variation of Gold Prices for Jewelry Enterprises” released by the Gemmological Institute of the China University of Geosciences and published in the Journal of Gems and Gemmology last March stressed the modern trend of dividing between raw gold price and production cost to determine retail prices of gold jewelry with a view of increasing their transparency.
The analysis of jewelry retail prices was based on mathematical models and MATLAB software. The research proved that the sensitivity degree was better denominated at well-known nation-wide enterprises where retail prices were more elastic in relation to global prices and faster reacted to changes, while regional and private companies demonstrated lower sensitivity.
All the jewelry companies surveyed being a representative sampling of the industry were quick to rise prices for gold if it went up in the world market and were passively reducing prices if it went down to obtain a maximum profit in this way.
The survey gives a detailed analysis of the situation on March 17, 2008 when gold price at the Shanghai Exchange rose to 233.09 yuans per gram. On the next day, March 18, the large-scale jewelry enterprises like Chow Tai Fook, Chow Sang Sang Jewellery, and Lao Miao Gold reacted by increasing their retail prices up to 298 yuans which proved a high degree of their sensitivity. Jinfuxing Jewelry (seated in Wuhan, Hubei Province) set its price as high as 297 yuans on March 7 which proved its strong ability to forecast. However, small private companies reacted to the price change as late as April 1 increasing their prices to 233 yuans.
Major conclusions:
1) Changes in retail prices for gold jewelry and decorative goods lag behind gold prices registered at the Shanghai Gold Exchange.
2) Retail prices appear less sensitive starting from national-scale jewelry enterprises (displaying the highest degree of sensitivity) down to provincial companies and specialized private firms operating at a town level.
3) All the jewelry companies demonstrate a higher degree of sensitivity during an ascending trend in gold prices and a lower degree during a descending trend.
What are the reasons behind the different degree of influence caused by global gold prices onto retail prices offered by Chinese companies? They may include a number of factors resulting from irregular influence produced by the jewelry market, local policy and alternative business models pursued by various enterprises, but major reasons may be summarized as follows:
1) Distinctions in price updating
Pricing and price updating are essentially different in various jewelry companies. Chow Tai Fook, Chow Sang Sang Jewellery and Lao Miao Gold being nationwide companies tie their prices to daily movements of the gold market. Accordingly, the elasticity of their retail prices is very high. Regular provincial companies, as for instance Jinfuxing Jewelry, resort to monitoring the gold jewelry market to define their pricing position and adjust their prices once in a certain period. They are also strongly influenced by political factors, therefore their sensitivity to global gold prices may be considered rather low. Small-scale private companies price their jewelry proceeding from their latest purchases; hence, their retail prices are influenced first of all by what price they paid for a particular batch of goods. Within a trade cycle for the given batch of goods no essential changes in retail prices occur, so the sensitivity in this case is the lowest.
2) Distinctions in business models and marketing strategy
Because the sphere and scale of activities of jewelry companies vary essentially, both their retail pricing and marketing strategy are different from the point of view of their approach. As a rule, large companies, have a special department which is responsible for price updating. For example, at Chow Tai Fook it is common practice to give instructions to all subordinate branches and stores every evening on what gold prices are to be set for the next day. Provincial companies have much less funds, therefore they do not divert them for price control and updating and instead proceed from the conjuncture of local markets and price policy of local administrations. Small private firms (in the Russian practice the closest to this definition is the status of sole proprietorship) are independent in taking all their economic decisions and have no standardized approach to price management. Currently, private stores are mainly engaged in selling diamonds and emeralds. Gold jewelry serves only as an add-on to the main product range and occupies there a rather modest segment. Owners of jewelry stores cannot spend too much money for forecasting and adapting prices; therefore the sensitivity to global gold prices in the given category of jewelry business remains low.
On the basis of the above analysis experts offer the following recommendations:
For large nation-wide companies – Pursue a more thorough approach to their pricing strategy paying a particular attention to frequent and periodic fluctuations in retail prices as this will improve buyers’ confidence in and trust to the trade mark.
For provincial companies – Try to set prices on a daily basis and inform buyers about them in an easy-to-see way (stands, notice plates) and rely not only on a general conjuncture of the trading complex where the store is located but take into account a broader view of the market.
For small private stores – Use an undisguised way to indicate your prices. Although this step will allow your competitors to receive information related to your store’s pricing, it will nevertheless help to raise essentially your customers’ confidence towards your company.
The recommendations to buyers of gold jewelry in an environment of fluctuating prices are laconic and boil down to the rule of “Three Do Nots”:
- Do not hurry about purchases if prices start to go down – tomorrow prices may become even less.
- Do not indulge into price comparison choosing jewelry pieces offered by reginal-level companies: their prices differ just slightly and it would be better to pay more attention to models and design.
- Do not buy at small private stores before you compare prices at least in three other stores because each of them has different procurement prices and the time spent for comparison in this case may pay off over and above.
Olga Patseva, Rough&Polished, Shanghai
