Go east: Your future in jewelry could be in China

The Chinese jewelry market has become, and will remain so for generations, one of the most important on the globe. Columnist Jan Brassem provides a "Freshman 101" study guide for those who are considering expanding into this growing luxury market.

Michelle Graff michelle.graff@nationaljeweler.com

Jan Brassem is a senior partner at MainBrace Global Partners, a global jewelry advisory and & firm. You can e-mail him at Jan@MainBraceGlobalPartners.com.

Compared to the U.S., China’s economy has soared to extraordinary heights. Their exploding middle class of ferocious consumers will soon redefine the Chinese jewelry market, if not the world’s.

No small wonder that China offers an astonishing range of expansion opportunities for U.S. jewelers.
It hasn’t always been that way, of course. At one time, China possessed an export-driven manufacturing economy (much like the U.S. economy in the 1920s and 1930s) with most western countries, including the U.S., as customers.

The country has now pivoted to a more manageable, “slower” growing (projected at around 7.5 percent), consumer-oriented economy that is focused on China’s future. This government’s reform strategy required massive investment in buildings, roads and infrastructure.

Those projects have, for the most part, been completed, but not without well-publicized financial discomfort. Fortunately, however, China’s population is rapidly urbanizing with a ravenous appetite for consumer goods they couldn’t get before the modernization. The Chinese jewelry market has become, and will remain so for generations, one of the most important on the globe.

China’s population of 1,320.2 billion is larger than U.S.’s 308.9 million ... 4.3 times larger, to be exact. Of that total, more than 325 million are in the middle class, more than the entire U.S. population. In other words, there are 325 million potential jewelry buyers in China. More to the point, that number is growing like gangbusters and is forecast to reach 600 million by 2025. Not surprisingly, China has become the world’s fastest growing luxury consumer market.

This brings us to another fact; about 25 million-plus Chinese consumers enter the middle class each year, about the size of the entire population of Australia. The implications, of course, are obvious. A recent article in The Economist stated, “Retail sales in China are $1 trillion a year and growing by around 18 percent annually.”

The well-known consulting firm McKinsey & Co. warns U.S. companies that operate in a crowded and shrinking market that, “ignoring China is not an option.”

The next step and hardest part, for Chinese companies anyway, is to build brands that earn consumer confidence, still a major retail concern in China. Many Chinese CEOs, with solid corporate bank accounts, have been on a buying spree of late, including the acquisition of several U.S. firms. They seem to believe it may be cheaper to buy a jewelry brand than to make one.

“Clearly,

Banner will be right here …

China’s economy has moved from the factory floor,” says Harold Sirkin in a recent issue of BusinessWeek, “to the retail store and showroom.”

How should a jewelry leader, having created a successful retail operation but now facing the highly competitive and consolidating U.S. jewelry industry, build on his accomplishments? Almost by necessity he, or she, needs to explore overseas markets. Why not start with China?

My partners, many with Hong Kong and Chinese jewelry and acquisition experience, like Lyle M. Rose, our associate in Hong Kong, have created a simple, “Freshman 101” study outline for the jewelry executive considering a Chinese initiative.

1. What’s the mission?
   a. Reinvigorate sales growth
   b. Be acquired by Chinese company
   c. Acquire a Chinese retailer
   d. Acquire a Chinese supplier
   e. Other

2. Researching the Chinese culture and consumer market
   a. Characteristics of the Chinese consumer
   b. Geographic consumer concentrations: Tier 1, Tier 2, Tier 3?
   c. Popularity of silver vs. gold?
   d. Popular product price point?
   e. Competition (Chow Tai Fook, Luk Fook and others)?
   f. Brand importance?
      i. Quality
   g. Importance of anything American?
   h. Characteristics of the consumer environment
   i. Characteristics of government role

3. Developing cross-border alliance strategy
   a. Acquire a Chinese jewelry retailer
      i. Stock or asset purchase

   b. Merge with:
      i. Chinese manufacturer, retailer, other

   c. Joint venture with:
      i. Chinese manufacturer, retailer, other

   d. Alliances with:
      i. Chinese manufacturer, retailer, other

   e. Partnership with:
      i. U.S. organization

   f. Any combination of the above

4. Support/advisor team
   a. U.S.-based (New York), Chinese lawyer
   b. Consultant with Chinese-based jewelry experience
   c. Executive from Chinese Trade Association, (i.e. HKTDC, the Hong Kong Trade Development Council)
   d. M&A firm (investment banker) or M&A-experienced Chinese lawyer
   e. Hong Kong, or Chinese, jewelry supplier
   f. Public relations firm

5. Initial cross-border strategy
   a. Even with this information at hand, developing a cross-border market strategy takes brain power, research and intelligence. But whatever you decide there is, of course, no magic formula.

Don’t forget, while this précis may look complicated at first, jewelers will have to move away from their comfort zone. Instead of managing in-store salesmen or considering showroom décor -- things they have been doing for years -- they will be required to wrestle with the brain-numbing demands of estimating risk premiums, adjusting CAPM, computing cash flows and calculating the cost of capital.

They may no longer simply be known as a jeweler, but rather recognized as a sophisticated global businessman. From my experience in working with these leaders, the global market entry process transforms veteran jewelers into dynamic and enthusiastic strategic thinkers. Whether it’s due to their new strategies or exposure to innovative ideas, he or she seems to have a new outlook on life itself.

Michelle Graffis the editor-in-chief at National Jeweler, directing the publication’s coverage both online and in print.