India Gold jewellers benefit from expansion to small towns: CRISIL

India gold jewellery retailers have continued to perform well despite the economic slowdown and their sales growth was fuelled by opening of new outlets in new territories, according to a report by CRISIL.

The jewellery retailers are expected to sustain growth momentum on rise in gold and additional revenue from new outlets, CRISIL report added. Sales growth in existing stores have become muted on intense competition eroding margins.

Retailers are expected to expand in the medium with two of every three new stores coming up in the smaller towns. Revenues from Tier-II and –III towns are therefore expected to contribute around 55 per cent of the rated retailers’ revenue in 2013-14—up from around 45 per cent in 2010-11.

Retailers expanding to smaller centres benefit from lower operating costs than in metros and Tier-I centres.
Says Subodh Rai, Senior Director, Bank Loan Ratings, CRISIL, “Smaller showrooms and lower rentals will help retailers save around 25 per cent on operating costs. The favourable demand and cost structures in the smaller towns will help them attain early
breakeven and maintain profitability.”

However, new stores will necessitate significant investment in working capital for gold jewellery inventories. The high price of gold may raise retailers’ average inventory costs, and weaken their ability to absorb any steep fall in gold prices. CRISIL believes that the margin between the average inventory value and gold price has narrowed by 50 per cent; retailers whose gold inventory was previously valued at 20 per cent lower than the market price have witnessed the gap contract to 10 to 12 per cent over the past year, owing to the large expansions. However, prudent inventory hedging strategies and successful scale-up at the new stores should help retailers maintain operating margins at 6 to 7 per cent as in the past.
Source: Commodity Online