Jewellery retail growth adds little sparkle to global diamond market

Source: Antwerp World Diamond Centre (AWDC) and Bain & Company 

Millennials could give a further boost to the jewellery retail industry’s sales, if the industry finds a way to reach them effectively. 

In their annual report on the global diamond jewellery market, management consulting firm Bain & Company and the Antwerp World Diamond Centre (AWDC) reveal that the global diamond industry performed moderately well in 2015, propelled by diamond jewellery retail sales, which grew 3% at constant exchange rates.
However, currency depreciation in 2015, as well as slower demand in China, contributed to a decline in global revenue of about 2% in US dollar terms. Similarly, in the midstream, US dollar revenues dipped by 2% and rough diamond sales fell nearly a quarter (24%), says the report.

Findings show that the decline was the result of reduced purchasing volumes in the cutting and polishing sector and the release of about US$5 billion of their inventories into the downstream markets.

Bain and AWDC further report that the diamond jewellery market demonstrated relative stability in 2015. The US remained the global sales growth engine, as mainstream jewellery retailers benefited from strong demand among middle-class buyers.

Elsewhere around the world, Greater China continued to rebalance as slowing tourist flows to Hong Kong and Macau offset otherwise positive dynamics in mainland China. This shift in tourist spend benefited Europe and Japan, as reflected in positive consumption growth in local currencies. In India, strong macro-demographics, particularly the growing middle class, supported positive gains. Yet, even these positive trends were no match for the strong US dollar, which drove global markets into negative growth rates.

Additional findings from the report reveal that revenues in the cutting and polishing subsector declined by about 2% in 2015 due to the slowdown in global diamond jewellery demand, which increased retailers’ inventories. This scenario forced the midstream segment to reduce rough-diamond purchase volumes and unload inventory surpluses accumulated in 2013 and 2014. Combined with the demand slowdown, the move contributed to a decline in polished-stone prices of about 10% in 2015.

Rough-diamond producers reacted to their customers’ challenges by reducing output, increasing their own inventory levels and providing more flexible purchasing terms while cutting rough-diamond prices.

“In 2015, the diamond jewellery and midstream segments showed relative stability, but the same cannot be said for rough-diamond producers, who experienced a double-digit revenue decline,” says Olya Linde, a Bain partner and lead author of the report. “Although demand for rough diamonds has rebounded so far in 2016, the holiday season will determine the retail and midstream segments’ full-year performance.”

The report added that even though the industry may be poised for a modest rally, several key headwinds persist — secure access to financing within the midstream sector; slowing consumption in China; and the ongoing threat of synthetics and counterfeit diamonds.

However, the sheer number and growing spending power of millennials, as well as strong overall macro fundamentals, present a glimmer of hope over the mid to long term.

Millennials’ spending power key to growth

Bain and AWDC conducted a survey of more than 1,500 millennials in China, India and the US and found that they are similar to previous generations in terms of size, current and future spending levels and positive attitudes towards diamond jewellery.

The population of millennials in these countries totalled roughly 900 million in 2015, and their combined gross income amounted to approximately US$8 trillion. Taken together, they are the fourth-largest economy, behind the US, European Union and China, and are likely to double to some US$16 trillion, or 38%, of total gross income by 2030.

Like earlier generations, they rank jewellery high among their gifting preferences — it is first in China and India and third in the US, behind money and electronics.

However, differences in shopping behaviour suggest that revised marketing and customer acquisition strategies are needed to reach this group of customers effectively.

In the US, millennials actively use the Internet for jewellery purchases; in India, they tend to prefer department stores. Chinese millennials, like other age groups in China, prefer specialised retailers for jewellery shopping and tend to make their purchase decisions in stores.

To fully capture millennials’ demand over the longer term, industry players need to invest in marketing and brand-building efforts and redefine the customer’s retail experience, says the report.

“As this new generation of consumers head towards its prime spending years, the diamond industry needs to find ways to effectively engage with them now,” says Linde. “Smart producers and retailers are actively looking for ways to appeal to them. Those that do not will encounter yet another hurdle to overcome in an already-turbulent market.”

Looking ahead, the outlook for the diamond industry in the mid-term remains challenging, as new supply is expected to come online and uncertainties cloud the social, political and economic environments in key markets, says the report.

Over time, however, the positive macroeconomic outlook is expected to work in the industry’s favour — as long as diamond producers behave responsibly and industry players sustain their marketing efforts to support diamond jewellery demand, especially among millennials.

In the long term, the diamond market will trend in a positive direction, concluded the report. Using its proprietary forecasting method, Bain projects rough-diamond supply and demand to be tightly balanced through 2019-2020.

Demand for rough diamonds is expected to recover from the recent downturn and return to a long-term growth trajectory of about 2%-5% per year on average, relying on strong fundamentals in the US and the continued growth of the middle class in India and China. The supply of rough diamonds is expected to decline annually by 1% to 2% in value terms through to 2030.