The biggest jeweler, and arguably the best known, isn’t in the U.S. or Europe — it’s in China. After raising $2 billion in an initial public offering in December, Chow Tai Fook Jewellery Group Ltd. was crowned the world’s largest listed jewelry retailer.
Founded by billionaire businessman Cheng Yu-tung, the jeweler, which is listed on the Hong Kong Stock Exchange, boasts of nearly $4.5 billion in annual revenues and more than 1,350 retail stores in Mainland China, Hong Kong and Macau combined. WWD spoke with the founder’s grandson, Adrian Cheng, who is also the firm’s executive director, to find out what’s behind the retailer’s success.
Related Articles
You May Also Like
RELATED STORY: ChinaFile: Made in China, Branded in Paris >>
WWD: Broadly speaking, what’s the difference between the Chinese consumer and the Western consumer in terms of shopping habits, trends, how they spend?
Adrian Cheng: With the Chinese gift-giving culture and traditions, gold products are more popular in the Chinese market. Chinese consumers buy gold jewelry as gifts at ceremonial and festive events such as weddings and newborn arrivals. Western consumers are more interested in buying gem-set jewelry than gold jewelry. Nevertheless, Chinese consumers have become more and more interested in gem-set jewelry in recent years, especially during birthdays, anniversaries, or Western festivals such as Valentine’s Day and Christmas.
WWD: What jewelry trends are you seeing emerge?
A.C.: Apart from the mass luxury products, more and more high-end customers prefer specially designed or unique items. Therefore, high-end luxury products will be another trend for customers, as well.
WWD: Have you been impacted at all by rising labor costs or commodity costs such as the price of gold?
A.C.: Our cost as a percentage of turnover remained at a healthy position, and hence, it didn’t bring adverse effects to our business. Given our large scale of business and our expansion plan, we would be able to enjoy economies of scale and operating leverage. In order to reduce commodity price risk, we adopt a gold hedging policy by entering into gold loans and bullion forward contracts to hedge against movements in the price of gold, thereby mitigating the impact of gold price movements on our margin.
WWD: What’s the price range of your jewelry?
A.C.: Our jewelry products range from high-end luxury to mass luxury to young line. High-end luxury refers to products priced over 100,000 Hong Kong dollars ($12,902 at current exchange) per piece. Mass luxury refers to products between a price range of 2,000 Hong Kong dollars (or $258) to 100,000 Hong Kong dollars (or $12,902) per piece. Young line refers to products of less than 2,000 Hong Kong dollars (or $258) per piece.
WWD: What is your consumer buying?
A.C.: In Mainland China, mass luxury is the key market, which accounted for more than 56 percent of the jewelry market in 2010, according to an industry survey conducted by Frost & Sullivan in 2011. Different customers prefer different kinds of jewelry; both gem-set jewelry and gold products are very popular among customers.
WWD: What are your thoughts on the IPO market in China?
A.C.: We are a listed jewelry retailer in Hong Kong, but we are not an expert in the capital market. However, we see a strong growth potential in the jewelry market in Mainland China, especially in tier-two to tier-four cities.
WWD: What are the growth plans for Chow Tai Fook, in terms of store expansion, global growth and merchandise development?
A.C.: We will continue to expand our points of sale network in the Greater China region, particularly in tier-two, tier-three and tier-four cities in Mainland China. We plan to reach more than 2,000 jewelry POS by 2016, and aim to open approximately 200 jewelry net POS per year, by opening wholly owned POS and collaborating with joint venture partners and franchisees to leverage on their local relationships. We see a strong growth potential in the jewelry market in Mainland China, especially in tier-two to tier-four cities and, therefore, will focus on this market.
Regarding merchandise development, we expect mass luxury products will continue to be a popular product range, and we will continue to develop our own diamond brand, “Perfect Mark.”
WWD: What is your annual revenue? Net income?
A.C.: Our annual turnover for the past three years was 18 billion Hong Kong dollars ($2.31 billion) in fiscal year 2009, 23 billion Hong Kong dollars ($2.96 billion) in fiscal 2010 and 35 billion Hong Kong dollars ($4.49 billion) in fiscal 2011. Our annual turnover grew at 24.6 percent in fiscal 2010 and 52.8 percent in fiscal 2011. Net profit was 1.9 billion Hong Kong dollars ($245.1 million) in fiscal 2009, 2.2 billion Hong Kong dollars ($283.4 million) in fiscal 2010 and 3.7 billion Hong Kong dollars ($475.1 million) in fiscal 2011.
WWD: What are some short-term financial goals for the company?
A.C.: Our near-term financial goal is to reach a net profit of not less than 6.3 billion Hong Kong dollars ($821.8 million at current exchange) for the year ending March 31, 2012.
WWD: Who are your biggest competitors?
A.C.: Chow Tai Fook is the leading jeweler by market share in Mainland China, Hong Kong and Macau. We adopt a vertically integrated model from raw material procurement, design, production and marketing to sales through our extensive retail network. Given our vertically integrated business model, we do not see direct competition. There are international or local jewelry retailers who can be considered as peers from the retail perspective, but we prefer not to name them.
WWD: In the U.S., e-commerce has been growing faster than sales at brick-and-mortar shops. Please describe how e-commerce has grown at your company, and how you see it developing in Hong Kong and in China.
A.C.: We conduct online sales through our own official e-shop and also on other online merchant channels. Our e-commerce channels would also enable us to collect customer consumption data and feedback more systematically. We believe that e-commerce will enable us to significantly extend our customer reach and increase our sales with relatively small amounts of investment due to the strong scalability of an online product offering.
In recent years, we have increased our online marketing activities by leveraging online social networks such as Weibo in Mainland China and Facebook internationally with a goal of creating interest in our products and attracting end customers to visit our various POS and e-commerce channels. We have also created a Chow Tai Fook iPhone application, through which customers can download and browse our product offering, latest news and promotions and locate the POS nearest to them. With the increasing use of the Internet in China and the continuing development of e-commerce channels, we believe that it will be a business potential.
WWD: Where do you source your materials and manufacture your products?
A.C.: Approximately 60 percent of the polished diamonds are purchased from trade dealers and wholesalers. We are also one of the few DTC Sightholders and a Rio Tinto Select Diamantaire, which give us the right to source rough diamonds. The remaining 40 percent of the diamonds are produced from rough diamonds polished at our three diamond-cutting and polishing factories in South Africa and Mainland China. We purchase our colored stones from more than 50 vendors, stonecutters and mine owners. We purchase our precious metals from companies in the precious metals business in Hong Kong and the Shanghai Gold Exchange in China.
WWD: From a cultural perspective, what do Western brands moving to China or Hong Kong need to know when they bring their businesses to Asia?
A.C.: I believe Western brands moving to China or Hong Kong have to understand the Chinese gift-giving culture during festive events.