The Feasibility of Sparkle Ltd’s Opening Jewellery Retail Store in Hong Kong PROBLEM This study was designed to analyze and evaluate the feasibility and possibility of Sparkle Ltd’s idea to open a jewellery retail store in Hong Kong. Specifically, the study seeks answers to these questions: * What is the opportunity for opening a jewellery retail store in Hong Kong? * What is the risk of opening a jewellery retail store in Hong Kong? * Do the advantages overweigh the disadvantages in this initiative? BACKGROUND CEO, Mr.
Lee, authorized this study to examine the market and tell whether it is good time to open a retail store as the overall economy of Hong Kong is still strong. To achieve the goal, this study must identify and compare both the potential risk and opportunity of the investment. Data for this report came from website of Hong Kong Jewellery Manufacturers’ Association and some secondary data on Hong Kong trade and development Council DISCUSSION OF FINDINGS Opportunity 1. Change in constitution of global demand for jewellery. As a kind of luxury good, demand and price for jewellery are very sensitive and would fluctuate as economic condition changes.
Since the financial crisis in the end of 2008, United States and Euro Zone have been trapped in serious recession; as a result, their demand for jewellery dropped dramatically, while originally the two economies consumed an unchallengeable majority of global jewellery. On the other hand, demand from developing countries like China, India, Malaysia, Thailand, etc. increases quickly, having strong potential to replace the dominative status of US and EU. Figure 1 Area or Country| Growth rate of export value of Hong Kong Jewellery in2010| China| 18. 2%| Russia| 96%| Macao| 160%| America| 19. % (recover gradually to former level while its proportion dropped from 35% to 31%)| Southeast Asia| 25. 4%| Europe| 7. 8%| Source: Hong Kong Jewellery Manufacturer Association (HKJMA) http://www. jewelry. org. hk/jma/html/tc/overview. jsp Figure 1 shows the growth rate of export value of Hong Kong Jewellery in2010 and also reflects the change in global demand and consumption of jewellery. It proofs that although demand from Europe and America gradually recovers after financial crisis, emerging market like China, Southeast Asia and Russia tends to soon constitute an ever higher proportion of total consumption.
Figure 2 Source: Hong Kong in figures 2012 edition, Government of Hong Kong Special Administrative Region. Figure 2 reflects the financial crisis in the end of 2008; during its most tough time, Hong Kong Jewellery’s export dropped by 30% of the value before the crisis because the major demand from America and European Union plunged. Nevertheless, it finally overcame the challenge and backed to its original level in 2010; in 2011, it even reaches its new highest record.
According to Hong Kong Jewellery Manufacturer Association (HKJMA), it is because the whole industry turns its focus to niche of emerging markets and enjoys the high growth rate of those economies. Projection - As overall Asia improves its economic situation and the global demand constitution of jewellery changes, Hong Kong enjoys the wealth brought from the tourists of its neighbors like Mainland China. It provides a strong demand and opportunity for Sparkle Ltd to adapt itself to the global tendency by turning its focus from Europe and United States to Asia timely before too late. 2. Growing Market With No Entry Bar
Hong Kong jewellery market is still growing rapidly; the overall turnover increases year by year with an amazingly high growth rate. Under such favorable condition, there are so many well-performing companies of different scale and position. Chow Tai Fook, Chow Sang Sang and Luk Fook are the most famous and largest local jewellery retailors in the market, while foreign brands like Tiffany and also many other small local businesses have their faithful customers, too. Low Concentration Rate - In 2010, Chow Tai Fook got 20. 1% in Hong Kong market, meanwhile Chow Sang Sang got 8. 7% market share in Hong Kong, and Luk Fook got 7. % market share. The top ten jewelry enterprise got total 51. 7% market share in Hong Kong and Macau; it means a rather low concentration rate. In other words, no one can dominate the Hong Kong jewellery market to exclude new entrants. Space to Grow - Chow Tai Fook got net profit 6. 341 billion in 2011 at a growth rate of 79. 23%. The turnover was 56. 571 billion. In 2011, Chow Sang Sang’s turnover was 5. 749 billion, increasing by 55%, and its profit increased by 40% as well. Luk Fook’s turnover was 8. 09 billion, increasing by 50. 2% in 2011, and its profit was 8. 66 billion, increasing by 63. 0%.
Their strong growth not only reflects the fact that there is still significant space left for new enterprise to join and compete in the marketplace but also supports their huge retail chain. Actually, Chow Tai Fook owned 93 shops in Hong Kong and Macau, Chow Sang Sang owned 40 shops in Hong Kong and Macau. Luk Fook owned 35 shops in Hong Kong. Projection – Even though it is never easy to compete in any industry in any marketplace, Hong Kong jewellery market is relatively favorable or friendly to new entrants. The market demand is still growing obviously and the top ten companies only got barely more than 50% market share in total.
These conditions may last in the foreseeable future and provide great opportunity and environment for Sparkle to establish its business in Hong Kong. Besides, both Mong Kok and Tsim Sha Tsui are good places to open jewellery retail store; many companies have already opened and gathered there to enjoy benefit of collective economy. Risk 3. Soaring Material Cost The major raw materials for jewelry Industry include gold, silver and gem. Since global demand for these luxury material increases faster than supply, the price of these raw materials has been soaring during past five years.
Gold - Figure 1 shows that from 2007 to 2012, gold price increases from $712. 3 USD per ounce to $1724 USD per ounce, growing by 125%. Figure 1 Source: goldprice. org Silver - Figure 2 shows that from 2007 to 2012, silver price increases from $14 USD per ounce to $33 USD per ounce, growing by 58%. Figure 2 Source: www. kitco. com Gemstone - Under the strong demand from emerging markets such as China and India and the decline of supply due to rise in mining cost, the price of gem increases dramatically, too.
Figure 3 shows that Gemval Aggregate index, which is calculated as a total value of twenty-six gemstone standard specimens (the GVA Basis Set) and represents overall pricing trend in the jewelry market, increases from 100 to 165. 88 from2005 to 2012; this means that generally price of twenty-six gemstones increases by sixty-five percent. Figure 3 ( Source: Gemval. com) Projection – Recently, global demand for jewellery material keeps growing because emerging markets especially China and India are growing quickly and America and Europe recover gradually after financial crisis.
On the other hand, the rise in mining cost and difficulty in finding experienced miners causes many mining area no longer manufactured. Under such situation of strongly growing demand and continuously decreasing supply, the price may keep increasing in following years. This will heavily and adversely affect profitability of jewellery industry. According to HKJMA, since material gets more expensive, their pricing also gets higher while consumers turn to lower class products which generate less margin.
CONCLUSION AND RECOMMENDATION This study suggests that Sparkle should open a retail store in Hong Kong either for the reasons below: 1. To adapt to the trend of restructuring of global demand and purchasing power. 2. To create a fruitful revenue source and consolidate overall financial structure. 3. To improve its brand visibility in Asia before further expansion. 4. To retain its competitiveness in the whole jewellery industry. 5. To take the advantage of the growing and open local market. 6.
To enjoy the favorable trade agreements like CEPA and the existence of representative regional trade organizations like APEC. As the global economic construction changes, gap between East and West is getting closer and more and more western traditional industries and companies including jewellery follow the tendency and adapt to Asian markets to retain and consolidate their competitiveness. Therefore, Sparkle should set and run its own plan to enter into Asian and other developing markets as soon as possible, too, or it may lose good timing of the opportunity and can never survive afterward.
From such strategic perspective, Hong Kong is an ideal marketplace for Sparkle to start its first step because the market is still growing with no entry bar and no dominators. Beside economic conditions, Hong Kong also has a mature and complete legal system and even provides comprehensive infrastructure and facility for business development. Thus, it is appropriate for Sparkle to open a new retail store in Hong Kong and manage and develop it into a regional base for further expansion into Mainland China, Southeast Asia, India, and even Australia.
However, Sparkle should also be aware of the soaring cost of material which may affect the profit ratio negatively since consumers may turn to cheaper and less profitable products. Also, adapting to Asian culture and taste or so called localization can be a great challenge for not only product design but also the overall management. In short, it is profitable to open a new retail store in Hong Kong undoubtedly if and only if Sparkle can do the right things right. Reference http://www. hkej. om/template/onlinenews/jsp/detail. jsp? title_id=111374 http://airmanblue. blogspot. hk/2011/11/29-nov-11-0590. html http://www. etnet. com. hk/www/tc/stocks/realtime/quote_ci_detail. php? code=116 http://www. headlinefinance. hk/ipo_content. php? nid=2824 http://realblog. zkiz. com/greatsoup38/29667 http://airmanblue. blogspot. hk/2011/08/21-aug-11-0116. html http://zh. wikipedia. org/zh-tw/%E5%91%A8%E5%A4%A7%E7%A6%8F http://www. chowtaifook. com/index. asp#hk,b5,shop,hk http://www. lukfook. com/#/contact-us/shop-locator/