Organized retail is thriving, beating pandemic blues: Dinesh Lakhani, Kiran Gems

As we draw towards the close of 2021, we have to be cognizant of the far-reaching changes underway in the underlying global business landscape - given the unprecedented last two years – redefining all the consumer-focused businesses and creating new paradigms. The macro-economic backdrop across the globe has been pointing towards a medium- and long-term sustainable uptick in the demand for goods and services, both in the developed markets and emerging markets.

Additionally, the following key incremental and business redefining trends have emerged.

Input cost pressures and supply chain constraints: Businesses across the globe have been grappling with cost inflation due to the firming up of prices of all input commodities on one hand, and sustained and entrenched wage inflation on the other. World over, from the large consumer markets of the west to the large supplier countries, supply chain constraints are being faced due to various factors, leading to retooling of global supply chains with an incremental focus on realigning of the supply models away from the existing conventions.

Retailers and all consumer-facing businesses rising above the challenges: Despite the above-mentioned challenges of cost and supply chain issues, organized retailers, both offline and online, have responded to meet the surge in demand. From a point where it was being envisaged that the consumer-facing businesses will not be able to adequately supply to the surge in demand led by the reopening of economies and the holiday season, we now see a clear trend of organized retail being able to restock the shelves adequately. Apart from a few constraints still being seen in subsets, like consumer electronics, largely, the supply has been managed in time for the holiday season and the sales for the full season are expected to be at record high levels. The retail industry has put in unprecedented measures, for example, tapping into much more expensive supply mechanisms through air freight when the global shipping was going through disruption, to measures like hiring high additional staff for curb-side pick-ups and quick checkouts.

Healthy sales growth, while maintaining and improving profitability: While the total sales figures for the entire season are expected to beat past records, the key takeaway is that the organized retail industry has not only been able to grow and meet the demand by scaling the above mentioned hurdles, but also pass on the incremental cost pressures in a rational manner to the consumer, thus maintaining long-term sustainability and consumer satisfaction. Globally, the discretionary space has seen a material increase in pricing of goods at all levels – from discount retailers like Dollar Tree increasing the price to $1.25 across the board from its earlier price of $1, to premium luxury brands in US and Europe reporting higher margins through higher pricing across the board, while tackling the supply chain and input cost issues. Even in FMCG space, giants like Nestle have been passing on the incremental higher pricing to the consumers, while managing growth, tackling input cost pressures and investing in new avenues.

This economic recovery is different; the Individual has been empowered: Unlike the economic recovery effort post the previous recessions, the rebuilding and recovery effort this time around has largely been centred towards providing direct support to individuals, apart from supporting institutions. This phenomenon has been manifested globally and has resulted in income growth and stronger balance sheets at the individual household level in all the top developed and emerging market economies, wherever there has been a sizeable fiscal and monetary support from the government.

This has led to the following key points:

Flush household demand: Aggregate global consumer demand should be stronger for longer, backed by rapid income growth and solid balance sheets that contrast with the post-2009 recovery. Retail sales are growing at roughly 3x the pace of the last two economic cycles, partly reflecting higher prices, but also much faster demand growth. US retail sales are up 18% since the end of the 2020 recession, hitting a new high just three months after their low. After the 2009 recession, it took 25 months to reach new highs.

Off-the-charts household wage growth: Income powers spending, and wage and salary income is growing at its fastest rate since 1992. US wage and salary income dipped as much in 2020 as in 2009, but bounced back from lows after just seven months vs. 23 months after the 2009 lows. It's now rising at the fastest pace in three decades. US households are on track to earn USD 10.3 trillion this year, 10.5% above the August 2019 peak. For perspective, households earned USD 6.5 trillion by the end of 2010, still below the USD 6.52 trillion level at the end of 2007. The wage inflation is now a deeply entrenched phenomenon across the developed and emerging markets.

Total household worth reached record highs in 2020: Globally, households are sitting on record levels of net worth, with high cash balances and low liabilities, suggesting a long runway for strong demand growth in years to come. USA net worth is currently USD 134 trillion, or 21.8% above the pre-crisis peak of USD 110 trillion. Globally, high cash levels and low liabilities have contributed to significant improvement in balance sheets.

Low household debt: Household debt relative to income is at its lowest level in 25 years, and the debt-service ratio is at an all-time low level, setting up for a cycle of potential demand growth that's significantly different from past economic recoveries. Low debt and debt-service levels indicate considerable flexibility to spend, and healthier potential for consumer-spending growth in years to come.

Change in preferences also leading to higher willingness to pay more: Covid-19 has resulted in record high savings growth, even in the erstwhile low savings and consumption-led economies like US. As these developed market consumers restart the consumption, they are joined by large populations of emerging market consumers, including the ever-increasing younger participants, who are manifesting a shift in preferences towards consuming goods and services of a personal nature. Covid-19 has brought closer home the ever-present idea of “Live in the now”, which is not only leading to a global spurt in demand of discretionary goods and services but also acceptance to pay higher parity prices and consuming higher value product and services.

The road ahead for the diamond industry

Unprecedented increase in factor costs: Rough diamonds price hike, along with irreversible wage inflation: Rough diamond prices have seen a higher one-way spike over the last many months, and even at such high prices, the quantities available have been lesser and poised to reduce even further due to structural issues at the mining end, like stagnation in output and closure of mines. Wages, the other most important production cost factor, have gone up considerably over the last year. These two factors combined have created an irreversible and substantial shift upwards in the cost structure of polished goods.

Polished prices yet to reach parity level: The lack of pass-through of higher cost structure into the polished goods prices has left a large gap between the parity value of various polished goods, vis-a-vis the still unsustainably low polished prices yet to catch up with the fundamental reality. It would be pertinent to note that polished diamonds are perhaps the only set of premium and branded products in the consumer discretionary category -- sold directly to consumers -- wherein the prices have largely stagnated for more than a decade.

It can only be termed as an anomaly that in some categories of smalls, the prices are at almost half of the level where they were a decade ago. This mismatch becomes all the more unsustainable now as the end consumer demand is at record high levels and is poised to grow further. This leaves the polished prices in wide disparity, relative to the fundamental cost structure, and, hence, ripe for a swift correction upwards.

With all forces aligning, a perfect storm is setting for increase in realizations for the industry. The facts and data above are summarized in the key points below:

• Global aggregate demand for all discretionary goods and services; along with it, the demand for diamond jewelry is set to grow stronger for longer.

• Global consumers, collectively, have never had so much earnings growth and cumulative net worth. This has led to record high purchasing power, as the debt levels are low with high savings.

• The willingness to spend and “Live in the Now” theme is deeply entrenched, post Covid-19, as consumers come out of an extended period of savings with a shift in mindset.

• Consumers are ready to pay higher parity price for goods and services, as manifested across the discretionary space at all levels.

• Prices of rough goods are high, while supply is less. The demand for polished goods is at record high levels.

• In an era where all prices have gone up, there is no other product like polished diamonds, where the product retains value, unlike other discretionary goods. The product is seeing robust demand growth and prices are still stagnated – this is a price rerating just waiting to happen.

The confluence of the above factors presents a remarkable opportunity – we as an industry need to do a thorough introspection and ask ourselves if we could have ever imagined coming across this set of positive enablers all happening at the same instance. Now, since it’s all coming together, we need to be confident in sustainably increasing the realizations of our product from the end consumer. The end consumer paying a parity price for a product makes the entire value chain sustainable, all the way from the mine to production to retail. There could not have been a better time, the industry must act now.