Smaller towns add glitter to branded jewellery

Smaller towns add glitter to branded jewellery

The intensifying competition in the large cities has led to stagnation in growth for players

The Tier-II and Tier-III towns will drive growth for the branded gold jewellery retailers over the medium-term as around two-thirds of the new outlets that these retailers set up over the medium-term will be in such small towns.

According to a Crisil study of 63 gold jewellery retailers rated by it which account for 20 per cent of the revenue of gold jewellery retailed in India in 2010-11, the demand for gold jewellery in these centres is strong and growing, buoyed by increasing affluence and preference for branded jewellery. The gold jewellery retailers are therefore, expected to derive over half their revenues from such small towns by 2012-13 as against around 40 per cent in 2009-10.

In the decade through 2010-11, some rated players have grown from being one or two outlet retailers and expanded significantly in the metros and Tier-I cities. In the process, they have established a distinct identity through brand-building initiatives that have fuelled their growth.

However, Gurpreet Chhatwal, Director, Crisil Ratings said “the intensifying competition in the large cities has led to stagnation in growth for players. The branded jewellers are, therefore, now increasingly pursuing opportunities that expansions into Tier-II and Tier-III centres can offer.''

The rising disposable income in households, favourable demographic trends in customer profile (including the increasing proportion of young consumers), and growing consumer preference for branded jewellery, are among factors that will buttress the retailers' expansion plans. Further, Mr. Chhatwal said, “The wide variety of designs, aggressive marketing and promotional strategies, including hallmarking, and innovative offers such as gold deposit and buy-back schemes, will also bolster the growth of branded players in the Tier-II and Tier-III towns.''

The expansions will strengthen the business risk profiles of players, supported by increasing scale of operations, enhanced geographical diversity, and improved cost efficiencies. However, expansions will result in larger working capital requirements, essentially to support inventory, which accounted for 86 per cent of the current assets of players during the three years through 2010-11. Excessive reliance on external borrowings to fund inventory will, in turn, stretch the players' capital structure. R. Vasudevan, Head, Crisil Ratings, said “the average gearing of Crisil-rated players will remain high at 2 to 2.25 times over the medium term, on account of expected increase in external debt to fund inventory. Nevertheless, the cash-sale model and liquid nature of gold will continue to support the financial risk profiles of gold retailers. Players that efficiently manage their working capital requirements, and successfully ramp up operations in the Tier-II and Tier-III outlets early, will witness rating upgrades in the next 12-18 months.''