Bain & Company together with the Antwerp World Diamond Centre (AWDC) has published their sixth annual report on the global diamond jewelry trade, with the lead insight being that in 2015 - not a banner year by any stretch of the imagination - retail sales grew 3% at constant exchange rates but declined about 2% in US dollar terms due to currency depreciation and slower demand in China. This followed a period of growth from 2012 through 2014, signifying that diamond jewelry consumption has entered "a moderation phase". In 2015, the US remained the sales growth engine of the global diamond jewelry market, as the same-store revenues of mainstream US jewelry retailers improved, reflecting strong middle-class consumption. Greater China is still rebalancing as slowing tourist flows to Hong Kong and Macao offset otherwise positive dynamics in mainland China.
Midstream US dollar revenues declined 2% due to slowing demand, and a drop in polished prices resulted in some of the lowest profit margins in years, as well as high inventory levels. As the year came to a close, cutters and polishers significantly reduced rough-diamond purchases and off-loaded about $5 billion of inventories to improve cash flows. Major rough-diamond producers in 2015 reacted to the challenging circumstances of their customers by reducing output, increasing their own inventory levels and providing more flexible purchasing terms while cutting rough-diamond prices. As a result, rough-diamond sales fell 24% in 2015.
Elsewhere around the world, Greater China continues to rebalance as slowing tourist flows to Hong Kong and Macau offset otherwise positive dynamics in Mainland China. This shift in tourist spending benefitted 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 U.S. dollar, which drove global markets into negative growth rates.
Olya Linde, a Bain partner and lead author of the report, comments: "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."
Rebound in 2016
The report notes that the industry has rebounded in 2016. Restocking by midstream players, following their inventory sell-off in late 2015, produced growth of around 20% in rough-diamond sales during the first half of 2016. However, strong rough-diamond sales in 2016 may again lead to swollen midstream inventories if retail demand does not strengthen proportionately. Declining sales at major jewelry retailers in the first half of 2016 indicate a possible demand slowdown in the US and China. The final growth trajectory for 2016 and the strength of midstream and rough-diamond sales in the beginning of 2017 will be determined by the performance of the diamond jewelry retail segment during the year-end holiday season.
No 2016 report would be complete without reference to the new generation of consumers - the Millennials - who together represent a compelling opportunity for the diamond industry. The population of Millennials in China, India and the US totaled roughly 900 million in 2015, and their combined gross income amounted to approximately $8 trillion. Taken together, they are the fourth largest economy, behind the U.S., European Union and China, and are likely to double to some $16 trillion, or 38% of total gross income, by 2030. Like earlier generations, they rank jewelry high among their gifting preferences - it is first in China and India and third in the U.S., behind money and electronics, but not in their shopping behaviors. To fully capture millennials’ demand over the longer term, industry players need to invest in both category marketing and brand-building efforts and redefine the customer experience in the retail environment. “As this new generation of consumers heads toward its prime spending years, the diamond industry needs to find ways to effectively engage with them now,” said Linde. “Smart producers and retailers are actively looking for ways to appeal to them. Those that don’t will encounter yet another hurdle to overcome in an already-turbulent market.”
Bain writes that the outlook for the diamond industry in the medium-term remains challenging. Over time, however, the positive macroeconomic outlook is expected to work in the industry’s favor—as long as diamond producers behave responsibly and industry players sustain their marketing efforts to support diamond jewelry demand, especially among Millennials. Longer-term, the diamond market will trend in a positive direction. Bain projects rough-diamond supply and demand to be tightly balanced through 2019-2020. Demand for rough diamonds are expected to recover from the recent downturn and return to a long-term growth trajectory of about 2-5 percent per year on average, relying on strong fundamentals in the U.S. 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 percent in value terms through 2030.
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