High prices spur change in jewellery buyers' tastes

With the way gold prices have been behaving and the spiralling costs local jewellery retailers have to contend with, is Dubai's fabled gold trade at risk of becoming less accessible to consumers? This year there has been unevenness in the demand for jewellery among local consumers, principally as a consequence of the extreme highs gold prices were treading. To compensate, buyer preferences gradually shifted towards gold bars and coins as investment products. Therein lies a risk to retailers. According to market sources, there has been a noticeable drop in jewellery sales, which is where they make their margins. It is a trend that is likely to continue into next year as well, or until gold prices start to show extreme volatility. But are retailers here overcompensating for the drop in volumes as well as their own increased costs by placing higher margins on their jewellery sets? "I don't agree — the margins on jewellery pieces are fixed either as a percentage of the total cost or as the making charges on a per gram basis," said Salam K.P. of Malabar Gold. "In both cases the market is following a price structure which is time tested. "Moreover, the market is very price conscious and the customer reaction to any hike will be instant." This is a view that Chirag Vora of Bafleh Jewellery is in agreement with. "An end-user knows exactly the price of gold per gram and its appropriate making charges," he said. "Also, most of the jewellery shops are placed in concentrated locations, hence the buyer freely surveys the market before making a final purchase." Also, to create a uniform margin structure across the trade would be impossible. Until two years ago, there was enough demand for both basic and the more intricate jewellery pieces in an intensely competitive market. But in 2010 gold prices started to show serious gyrations and, for Dubai's gold trade particularly, life has never been the same. Bigger retailers responded by putting their marketing muscle behind dedicated jewellery collections and backed them up with a blitz of marketing campaigns. During this period, the making charges too showed an inexorable upward march. These changes have to be reflected in the margins for any retailer to stay in business. So, how are retailers making it happen? "Making charges is a very subjective affair — it depends on a variety of factors such as karat, design and the expertise that has gone in to the making of a particular piece," said Anan Fakhreddin of the Dubai Gold and Jewellery Group. "Jewellery retailers have been extremely cautious in maintaining standard margins to attract consumer demand and not lose out on sales to their competitors. "As a matter of fact Dubai is known for its low mark-up on gold jewellery and one of the main reasons for Dubai to be known as the City of Gold and the jewellery destination of the world." But some changes are happening to the status quo, at least within the operations of individual retailers. "There is a lot of differentiation in the products offered by different jewellers and so uniformity in making charges will be difficult," Salam said. In the interim, some retailers have responded to the fluid market by fixing making charges as a percentage of gold's value, which is the standard practice in most of the other markets. Some are also going the extra distance. Malabar Gold plans to soon have its making charges shown as a separate item on the price tags of each jewellery piece. "This will ensure that all customers are getting the same price in all our showrooms, irrespective of their bargaining efficiency," Salam said. "I believe the Gold and Jewellery Group should guide towards a uniform percentage based pricing policy which will be beneficial for everyone in the chain — the craftsmen, manufacturer, trader, and the consumer." Other retailers will come up with their own ways to counter soft consumer demand. One thing is for sure — the changes are certainly not going to be mere window dressing efforts or interim measures. Depending on how far they go, these are likely to bring about far-reaching changes in the way the trade operates. But for the time being all eyes are set on what 2012 could offer. "Retailers have the necessary expertise to formulate strategies to optimise their inventory holdings depending upon the market situations," said Fakhreddin. "We are very optimistic about 2012 and we think it will see the market moving in the recovery path." A question of margins If in the US and Europe, margins are fixed on a per piece basis, in India it is a percentage of the gold price. Dubai's jewellery trade has historically preferred to sell on a per gram basis. "Even if there is a small increase in the making charges it's not a result of a reduction in the customer demands, but as a result of the drastic increases in the price of gold over the past two years," said Chirag Vora of Bafleh. "For this year alone, it has gone up by around 25 per cent to 30 per cent."