“Is the global diamond jewellery market on the up, or is an apparent rise in sales since the start of this year a temporary recovery. Alternatively, is the sales increase only being felt in select regions? After all, in the crucial U.S. market, unemployment is still at record highs, consumer confidence has been up and down in recent months despite an overall upward trend, and credit terms are still tough,” www.antwerpfacetsonline.be says.
A report released recently by the influential business consultancy Bain & Co. projects sales of luxury goods around the globe will rise by 4 percent this year to € 158 billion euros ($213 billion). The firm revised its forecast following a report it published last October predicting growth of just 1 percent in jewellery sales in 2010. That followed an 8 percent drop in 2009 in sales in 2009.
It appears that the better-off have started opening their cheque books again in the belief that the financial crisis is over, according to the report. However, they are still looking for value for money and high levels of craftsmanship. "Luxury brands are gaining appeal again, [it's] the end of shame for local consumers in mature markets," said the Bain & Co report.
To some extent, people are still self conscious about spending large sums of money on jewellery. This is evident by a 20 percent jump in Internet sales, due to what Bain called "luxury shame." In other words, consumers preferred to shop in the privacy of their own homes rather than to flaunt their wealth in stores.
The Bain report follows encouraging financial results published by leading luxury and jewellery retailers, including Richemont, Moet Hennessey Louis Vuitton (LVMH), and Tiffany & Co. LVMH, the largest luxury goods firm by sales in the world, last week reported stronger than expected first-quarter sales. The company said it had seen a 13 percent rise in like-for-like sales growth to € 4.47 billion ($6 billion), apparently showing a recovery in an industry which Bain & Co said shrank by 8 percent last year.
The group said the strongest rise had been seen in the sectors that took the strongest hit from the financial crisis. Sales of jewellery and watches rose 34 percent in the first three months of 2010. Predictably, there was continuing strong growth in Asia. However, there was also increased demand from the United States and European markets which have been sluggish as they struggle to emerge from recession.
Although some in the industry claim the rise is little more than an easy comparison with the poor performance in the first three months of 2009 and is due to re-stocking by retailers, other analysts say the level of sales is beyond that. "The performance looks very impressive and of high quality,” Dennis Weber, analyst at Evolution Securities, told Associated Press.
Bain & Co. said the reason for revising upward sales this year was a result of the fourth quarter of last year being "better than expected" while the first quarter of this year "were brilliant for almost all regions, with the exception of Japan," according to Milan-based Bain partner Claudia D'Arpizio.
The Bain report stressed, however, that even if sales do rise by 4 percent this year as forecast, that would still mean they were lower than the € 160 billion achieved in 2006. Last year had been "the worst year ever" for the industry, the consultancy said, adding that sales may not recover to the record levels of 2007 of ? 170 billion until 2012.
In terms of specific markets, the report forecasts sales in the United States, which accounts for about a third of all luxury goods sales, increasing by 4 percent, in line with global trends. However, China, where designer names are rapidly opening stores, is expected to see the fastest rate of growth of 15 percent. In the retail jewellery sector, Tiffany & Co. President James Quinn said earlier this month that it aims to open 25 more stores in China within five years to reach a total of 35.
Meanwhile, the Bain report said Japan will see luxury goods sales continue to drop, and it is forecasting a decline of 3 percent. Japan accounts for around 12 percent of luxury goods sales globally.
The Bain & Co report appears to be borne out by global jewellery brand Tiffany & Co. whose results show the jewellery retailer is benefitting from the change in the economic climate. That led global banking institution Deutsche Bank to start initiating coverage on the company last week. Deutsche Bank said: “We believe Tiffany fits well within our luxury sector view: as a leading brand with a strong heritage and distribution, strong balance sheet, proactive approach to costs, and strong management, Tiffany has not only weathered the past 18-24 months well but is also set to benefit from the ongoing macroeconomic improvement, market share gains from U.S. capacity withdrawal, and growth opportunities from increased internationalization.”
Tiffany & Co had some tough quarters during 2009, but the end of the year proved to be much better for the jeweller. The increase in demand during the Christmas holiday season gave the company a boost and it raised its 2010 guidance in January. Sales across the Americas rose 14 percent to $523.5 million in the fourth quarter with comparable store sales in the U.S. up by 11 percent. Tiffany’s quarterly profit more than quadrupled to $140.4 million.
Now that fears of a deeper recession or possible depression have subsided, businesses and analysts are expecting profits to rebound. Consumer driven businesses should not be so quick to assume that the positive momentum will automatically spill over into their earnings. Yes, there have definitely been some improvements in earnings, but consumers are still dealing with the lasting effects of the recession. The consumer market still remains tough for businesses that provide products or services that are considered luxuries.
In a final comment, D'Arpizio said one effect of the recession was that smaller companies, with less than € 250 million in annual revenues, were finding the situation more difficult to deal with than larger firms. As a result, there will likely be a surge in mergers. That forecast appears to be accurate, with Signet Jewelers saying recently that acquisitions are a possibility as the effect of the slowdown in the United States has impacted the retail jewellery market leading to bankruptcies and consolidation.
Signet Jewelers, which operates large chains in the United States and United Kingdom, is considering the acquisition of another retailer in a move to create a second store chain in the U.S., according to CEO Terry Burman. Since setting up a new chain throughout the U.S. by opening single stores is too expensive, Signet is now planning to grow through acquisitions, Burman said. The company, which runs the Kay Jewelers chain in the U.S. and the H. Samuel and Ernest Jones stores in the United Kingdom, might buy a local brand and merge it with some of its regional chains, he added.
Meanwhile Swatch Chief Executive Nick Hayek has said Italian luxury jeweller Bulgari could be a target for the firm, while some analysts see Tiffany & Co as an acquisition target. "There will be more M&A in the luxury sector in the next six to 12 months as buyers will want to be picking up businesses on the upswing," Valerie Blin, a luxury and lifestyle investment banker at London-based M&A boutique Avista Partners, told Reuters. Valuations of luxury goods firms have risen sharply in recent months, thus narrowing the gap between their asking prices and what buyers are willing to pay.
Another factor that could give a boost to merger and acquisition activity is the weaker euro which should make European brands more attractive to foreign buyers, particularly from China, Japan, India, Russia and the Middle East. Buyers from China, for example, might be eyeing the possibility of securing some of the big profits European luxury companies make by selling products in their fast-growing home market. Meanwhile, Japanese buyers, deterred by their moribund economy, could see the potential of benefitting from countries posting rapid economic growth.
Can the luxury goods sector, including the diamond jewellery industry, look forward to a continuing rise in sales in the belief that the global recession is over? Despite its impressive financial results, LVMH, for one, is not certain that this will be the case. It provided analysts with gave a cautious outlook, saying the uncertainty of the economic recovery meant it would control costs invest selectively. It warned that it might not be able to continue the powerful first-quarter growth that sent its shares close to a 10-year high earlier this month.
"We might not have during the year the more-than-20 percent, even 30 percent sales growth we saw (at some divisions) in the first quarter," LVMH CEO Bernard Arnault told the firm's annual general meeting. "We can hope for it but I think we really have to be prudent."
