High-End Caution

Avi Krawitz

There is somewhat of a dichotomy present in the high-end diamond sector. While the ‎European luxury jewelry and watch companies continue to post strong growth, suppliers ‎of diamonds used by this sector have noted a sharp slowdown in demand. ‎

In fact, they point out that the slump in demand for small, high-quality diamonds used in ‎the watch industry has been a unique feature of the current downturn. The luxury market, ‎after all, has enjoyed an unprecedented boom in the past few years as new wealthy ‎consumers in the Far East, Asia and Eastern Europe have splurged on bling.‎

Now, the prolonged European economic crisis is taking its toll.‎

After unprecedented polished price hikes in 2011, the global economic slowdown in ‎‎2012 is affecting the watch sales forecasts, resulting in a sudden slowdown in demand ‎for high-end polished diamonds below 195 millimeters in size,” said Laurent Grossman of ‎Antwerp-based Grossman Diamond Manufacturing.‎

Grossman noted that diamond suppliers are currently focused on manufacturing specific ‎millimeter sizes, which are still in demand, either in full cuts or eight cuts. He stressed that ‎current market volatility requires the utmost flexibility in order to adapt to the prevailing ‎prices and specific demands, as well as to preempt future price changes.

Abraham Fluk, chairman of Yoshfe Diamonds International (YDI), a leading ‎manufacturer of small and medium-size, fine-make round diamonds that supplies many ‎of the high-end luxury brands, agreed and stressed that the prolonged economic crisis in ‎Europe has started to have a deeper impact on the diamond market.

He noted that while the Swiss watch industry – as well as the French luxury brands – had ‎been an island of growth in the past two years, demand from these sectors has slowed in ‎‎2012 as they have started to feel the effect of the economic crisis.

‎“Both these segments are suffering because there is a slowdown in the Far East, ‎especially in China, and to a lesser extent in Russia, as these countries have been the ‎biggest customers of luxury products,” Fluk said. “During 2011, which was a boom year ‎for them, the luxury brands bought large quantities of small, top-quality diamonds to avoid ‎shortages in supply and now their buying has slowed due to an overall economic ‎slowdown and in order to reduce their inventory.

The change was sudden. Diamond suppliers noted that demand was strong in the first ‎quarter and reported an upbeat market at the Baselworld show in March. Since then, ‎however, demand has gradually softened and then suddenly stopped, explained one ‎supplier, who asked to remain anonymous. “We’ve never seen such a situation,” he said. ‎‎“Even in 2009, there was still business, but now everyone seems to just be waiting ‎around.” ‎

Swatch Group stressed in its recent interim report that there has been a certain ‎weakening in the high-end segment in parts of greater China. Similarly, Goldman Sachs ‎noted in its 14th annual Watch Retailer Survey, published in June, that it expects to see a ‎softening in retail sales from Hong Kong and China, especially because the comparative ‎base in the year 2011 was so strong.‎

Swatch also noted that high gold and diamond prices and the overvalued Swiss franc ‎‎continue to put pressure on margins for its brands. Goldman Sachs added that it expects ‎to see a continued tightening of margins, tight supply and strong demand in the very high-‎end watches.

Still, the numbers are staggering. Swatch reported record profits in the first half of 2012 ‎with its watch and jewelry unit – which includes the high-end Breguet, Blancpain and ‎Omega brands – posting sales growth of 18 percent year on year. Similarly, LVMH Moët ‎Hennessy Louis Vuitton reported organic growth of 13 percent at its watches and jewelry ‎segment, which includes TAG Heuer, Zenith and Hublot.

Other companies are expected to follow suit. Goldman Sachs found that 77 percent of ‎the 130 retailers questioned worldwide in its survey expect sales to grow in 2012 and ‎foresee that momentum in the watch industry continuing.

Certainly, the industry remains an important one to Switzerland. Swiss watch exports ‎grew 16 percent year on year to $10.38 billion (CHF 10.14 billion) in the first half of 2012, ‎according to the Fedaration of the Swiss Watch Industry. This total was 39 percent higher ‎than the one recorded for the same period of 2010.

But while retailers are predicting continued growth, they are also keeping lower-than-‎average inventory levels. Goldman Sachs reasoned that brands are increasingly taking ‎control of their distribution by opening more mono-brand stores and reducing the number ‎of third-party retailers.

‎”The significant de-stocking in the multi-brand retail channels seen in 2008-09 ‎accelerated this change,” Goldman Sachs analysts wrote. “The implication is that we ‎believe that inventory across the fragmented retail networks in Europe and the U.S. are ‎much lower than in 2008. Hence, we believe the risk of major de-stocking of the scale of ‎‎2008-09 is lower today.

Most significantly, however, Goldman Sachs reported that retailers expect a slowing ‎down of precious metals watches, while the technical brands are projected to see more ‎strength. As Swatch noted, high gold and diamond prices are pressuring profit margins.

In addition, as we have witnessed before, while wealthy consumers don’t necessary curb ‎their spending in tough times, they do tend to opt for more modest purchases while their ‎peers struggle.

It is little wonder then that luxury watch companies are limiting their diamond buying. ‎They’re indicating that they have enough diamonds in stock to satisfy their short-term ‎watch and jewelry manufacturing needs.

Some in the diamond industry are preparing for an upsurge in demand when these ‎inventories run out. Others note that watchmakers’ recent cautious approach to ‎managing their inventory signals a long-term trend and strategy.‎

Either way, working with lower inventories has been the reality across the pipeline since ‎the crash of 2008 and has certainly been a feature in the diamond market throughout ‎‎2012. And that has now caught up with the high-end watch segment.‎

Not that they were buying loosely before. But their high level diamond purchases over the ‎past two years served as a positive forecast for the sector – even through the first quarter ‎of 2012.

As high-end watch sales continue to outpace the rest of the jewelry market, the watch ‎sector’s sudden restraint in buying diamonds represents a change in outlook. The watch ‎industry may be projecting that its own sales growth momentum will continue, but it is ‎also sending a strong, and possibly harsh, message of caution to the diamond industry. ‎

Source Rapaport