Consumer Confidence Crisis In The Offing?
January 31, 12
The Indian jewelry retail industry is in the process of undergoing a transformation that will change it completely from what it has been for thousands of years. Underpinning this is a rapid move by Indian consumers towards assigning value to diamonds and actively seeking their greater inclusion in the jewelry they buy. In addition, Indian consumers are increasing their knowledge and assessment abilities of diamonds. But along with this is the looming danger of a massive crisis of consumer confidence. The main issue centers on the grading and valuation of diamonds.
“Except for a proactive minority, most Indian jewelry retailers have relatively little knowledge about diamonds,” says a leading Indian retailer who declined to be identified. “They’re not very sure on how to grade them and they have no clear idea about how to value them. This has led to a practice where retailers simply work on the principle that they will mark up the jewelry they set with these stones high enough to cover all their costs and earn a margin. This is fine as long as the jewelry sold is considered a product in its own right with a substantial value attached to its design and fabrication. But in India, the overwhelming majority of the jewelry sold is valued according to the sum of its component materials with a fabrication charge thrown in. A consumer wanting to invest value in the diamonds he or she buys is going to lose confidence in the product if the diamonds aren’t valued at the current market price.”
“The problem is that there have been too many instances through the long history of the trade in India, when the purity of the gold used in the jewelry was vitally important, when consumers have found out that they have been shortchanged on the karatage. So today, when the internet and information technology has empowered them, they are not willing to accept what we say,” said another retailer who was also unwilling to be identified.
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Consumers also have easy access to gold pricing information. Trade bodies such as the All India Gem & Jewellery Trade Federation (GJF) have also taken proactive measures to ensure the standardization of the price of gold all around the country.
“There aren’t so many avenues to profit from insider knowledge of either the purity or price of gold,” the retailer added. “This has also meant that margins have been squeezed for those retailers who have operated on this insider knowledge – and the consumer’s lack of it – for so long. “So what most of these people have done is to switch to diamond-heavy designs, while keeping their gold inventories at the bare minimum. Now they’re doing in diamonds, what they used to do in gold – and succeeding with those consumers who don’t know all that much about diamonds.”
This, say many retailers, is a time bomb waiting to go off. There is a need greater than ever before, to standardize diamond grading and valuations, they add.
Meanwhile, the move by many retailers to switching their stock in trade from gold to diamonds has led to a surge in diamond buying in India, with a consequent upward pressure on diamond prices. “Once this stockpiling has been completed,” noted the first retailer, “there will suddenly be an easing of domestic demand for diamonds. This will result, of course, in a softening of diamond prices and you can imagine what consumers will think as prices rapidly oscillate.”
But the ebb and flow of prices is not going to affect consumer confidence say most retailers – nobody has lost confidence in gold despite the extreme volatility in its price. What will affect consumer confidence, they observe, is if consumers feel they were not given fair value at the time of purchase. The determining of fair value for a diamond in the Indian consumer market is, they note, a series of factors working against it.
To begin with, the certification of diamonds by a plethora of diamond grading laboratories around the country offers no standardized result. One recent industry meeting on the subject learnt that there could be a difference of literally tens of thousands of rupees between two parcels of diamonds, both certified by different laboratories to exactly the same clarity, color and cut grades.
“The problem,” noted the head of one major laboratory, “is that you can insist on and standardize the procedures to be followed for the certification of diamonds. But who is to police the adherence to detail, accuracy – and blatant accession to commercial pressure to generate a superior grading report?”
This issue was brought up for discussion at the general body meeting of the GJF last year. Should the government be asked to regulate laboratories? Should the institutions that certify diamonds themselves be certified? The overwhelming feeling was that government regulation had not really helped with the issue of hallmarking gold. The majority opinion held that there was, therefore, not much hope in government regulation bringing about any significant change for the better in diamond certification.
Industry watchers note that consumers have already signaled their lack of confidence in the jewelry industry’s hallmarks by opting to pay a premium and buying gold biscuits from banks, as they believe the latter’s warranties of purity. But consumers also like their gold in the form of jewelry and here, they want to be able to deal with a retail industry that inspires confidence in the purity of its product. That, industry leaders point out, sadly hasn’t happened.
But in the rapidly changing consumer buying pattern in India, with diamonds increasingly being desired by consumers even at the lowest end of the price-point spectrum, the issue of diamond grading and valuation is key. Both diamond dealers and retailers point out that the accurate grading of a diamond is fundamental to the larger issue of its valuation – a key issue in India. “If you buy jewelry from one of the big global brands,” said the first retailer, “you are obviously not buying it for the intrinsic value of the metal and gemstones; the brand is what holds the value. It is the other way around for the vast majority of Indians who buy jewelry. The value of the metal and gemstones is of prime importance, as there is a historic need for jewelry to also be something of a storehouse of value. That’s the way jewelry has been bought for millennia in the country. It isn’t about to change overnight.”
Even after a diamond has been reliably graded, note retailers, there is the issue of reliable valuation. “It doesn’t matter to the consumer if a particular category of diamond is much more expensive than when someone else bought it,” noted a retailer, “what matters is that when the purchase is made, no one else should have been able to get it at a substantially lower price anywhere else. That is the essence of standardization and that is the basis of consumer confidence.”
The two issues of grading and pricing are currently the biggest worries for those who hope to guide the Indian jewelry retail industry towards a secure and prosperous future. The question they ask is, should this be tackled at the industry level, or should the consumer be co-opted in the effort? “Co-opting the consumer would certainly bring about a much better framework for standardization,” said a diamond dealer who has been working on the issue with other industry leaders, “but it is a double edged sword. The fact that grading and pricing are not standard today could immediately blow up in our faces as consumers turn away from our product.”
In recent times, efforts have been revive the world over to spark interest in diamonds purely as an investment. Earlier efforts had come to nothing due to a variety of reasons including the inability of diamonds to provide ready liquidity. With gold soaring to previously unimagined prices – accompanied by some extreme volatility – diamonds have got a second chance to establish themselves as an asset class. This, say diamond dealers, is a huge opportunity, as success would elevate diamonds to the same category as gold – something consumers turn to instinctively in times of uncertainty. Something that conveys a sense of value when worn. But there is really no such thing as a diamond, say dealers, only a whole raft of categories of diamonds. In order to perform as a single asset class, each category has to be accurately graded and valued to form a price matrix for the group that will behave the way the prices of other known asset categories do.
The foundations for this accurate valuation of diamonds lie not in financial institutions but in the jewelry retail industry and its interactions with consumers. A firm foundation can only be laid if there is unquestioned consumer confidence in the diamond’s value, even at the individual level.