In today’s Finshots, we talk about Aditya Birla Group’s foray into the jewellery retail space.

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The Story

Last week, the Aditya Birla Group made a dazzling entry into the Indian jewellery market with the launch of its new brand, Indriya. This shiny new venture will be part of the Novel Jewels family. And it’s not holding back. It’s investing a whopping ₹5,000 crores to tap into India’s sparkling jewellery market, which is valued at over ₹6 lakh crores.

And here’s the ambitious twist. It aims to be one of the top three jewellery retailers in the country within the next five years.

But can it really pull this off?

To understand that we’ll have to peek behind the curtain a bit and see why the Aditya Birla Group is diving into the jewellery business, in the first place.

For starters (and there’s no prize for guessing this one), jewellery is a “natural extension” for a group that’s been in the fashion retail and lifestyle industry for over two decades. The Aditya Birla Group already rakes in about 20% of its revenue from consumer businesses, which include everything from lifestyle retail to financial services and telecom. In FY24 alone, these sectors brought in a hefty ₹1 lakh crore ($13 billion). And they want to double this number over the next five years. That’s also why they dipped their toes into the decorative paints market a few months back. So, stepping into the jewellery business is just another piece of the puzzle.

And why not?

The jewellery sector has seen a major shift towards formalisation. Gone are the days when buying jewellery meant visiting your trusted local jeweller. Nowadays, people are gravitating towards the organised market.

A big part of this shift is thanks to Tanishq, Titan’s crown jewel, which entered the scene in the early 2000s and revolutionised how people shopped for jewellery by building trust.

Tanishq noticed that India’s jewellery market was mostly unorganised — about 95%, to be exact. Local jewellers were seen as the go-to experts, and customers relied heavily on their knowledge and taste. However, there was no easy way for customers to compare products, prices or quality standards. Tanishq aimed to change that by introducing the Karatmeter in its stores. This nifty device allowed customers to verify if the jewellery they bought from their local jeweller was truly 22-carat gold or not. For context, the karat rating indicates gold’s purity, with 24 karats being the purest at 99.99% purity. And since pure gold is too soft to be used in jewellery on its own, it’s mixed with other metals like copper to create a more durable alloy. That’s why 22 karats is the go-to standard for high-quality jewellery pieces.

This move by Tanishq, subtly pointed out that not all local jewellers could be trusted to deliver on quality. The strategy worked, and more people began trusting organised jewellers.

Fast forward two decades, and the organised market now accounts for over 35% of the total jewellery market. This growth has been impressive especially over the last five years, climbing from about 20% in FY19 to 35% today. Plus, the jewellery market’s revenue has been growing at a compounded annual growth rate of 8% over the same period.

And these revenues are only expected to shine brighter, with a projected growth of nearly 20% in FY25.

There are a couple of reasons for this. First, jewellery storefronts in malls are becoming quite the crowd-pullers, boosting revenues. These stores now take up nearly 5% of total mall space, a significant jump from just 1% two years ago. But they account for a fifth of the mall revenues. This trend has organised players like Tanishq, Reliance Jewels, Kalyan Jewellers and others expanding their presence in malls.

Then there’s the government’s recent cut in import duty on gold, making it cheaper. With the festive season around the corner, this price drop could lead to a surge in demand for gold, further driving up revenues.

And the Aditya Birla Group is pulling out all the stops to dazzle its way into the jewellery market. It’s got a grand plan to open stores in over 10 cities within the next six months, each sprawling over 7,000 square feet. That’s about 30%-35% larger than your average national brand store! This extra space will let them showcase an impressive array of 15,000 curated pieces, including over 5,000 exclusive designs, with new collections dropping every 45 days.

But it’s not just banking on size. It’s also taking a page out of a Motilal Oswal report on the jewellery sector, which highlights the importance of effective inventory management and enhancing customer experiences. And that’s exactly what Indriya plans to do. It’ll offer customisation services with in-store stylists and expert jewellery consultants to create a top-notch customer experience.

But of course, it’s not all glitter and gold. There are challenges ahead.

Jewellery buying is all about trust. Once you’ve started buying from a jeweller you trust, switching to someone else isn’t easy. It’s not like the QSR (Quick Service Restaurant) sector where you can hop around and try new things, thanks to deals or discounts. This concept, known as substitution risk, doesn’t really apply here. In the jewellery sector, customers tend to stick with their trusted brands, making it tough for new players like Indriya to break in and build a loyal customer base.

Then there’s the part about Aditya Birla Group’s somewhat rocky history in retail. Nearly two decades ago, it went all-in on Trinethra, a supermarket chain it rebranded as More. It quickly expanded, opening more stores than Reliance had at the time. But this growth came at a cost. It was fuelled by heavy borrowing and wasn’t turning a profit. And we all know how that story ended. More was eventually sold to Amazon and Samara Capital, a private equity firm.

And it’s not just grocery stores we’re talking about. Take Pantaloons, for instance. The group acquired it from Future Group, which was also struggling with debt. A few years later, it merged Pantaloons with its other apparel brands like Louis Philippe, Allen Solly and Van Heusen, creating Aditya Birla Fashion and Retail (ABFRL)*.

But ABFRL hasn’t quite made the splash in the retail world like Tata-owned Trent’s Zudio has. As The Ken puts it,

The retailer has been made to look more and more ordinary by Tata-owned Trent’s growth in recent years, thanks mostly to the value-fashion chain Zudio.

In the past five years, Trent shares have surged over 12X. ABFRL has not even doubled in value.

And there’s a real risk that this fast-paced growth, at the expense of profitability, could repeat itself with Aditya Birla’s jewellery venture. That’s because jewellery businesses typically have a payback period of 3-5 years. This means that Aditya Birla Group might only be able to recoup its ₹5,000 crore investment within the next five years — the same period it aims to become one of the top three jewellery retailers in the organised space. So, capturing a significant market share and turning a profit will take more time.

Even Tanishq, which is one of the top jewellery brands in the organised sector, took two decades to capture just about 7% of the entire jewellery market and a fifth of the organised market, all while building trust.

How the Aditya Birla Group will defy that trend is anyone’s guess. For now, we’ll only have to wait and see how it all unfolds.

Until then…

*Recently, ABFRL decided to split up its lifestyle brands into a separate entity again and list it to unlock more value.

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