Italian gold masters struggling to survive - International Herald Tribune 17/02/08

Some years back, the owners of the gold jeweler Unoaerre realized that they would have to adapt to survive.

Gold had more than tripled in value since the start of this decade, and competition from emerging markets made life increasingly hard for Italian jewelry workshops like Unoaerre, which was founded in 1926 and helped make the city of Arezzo's reputation as one of the top suppliers of the quality gold jewelry sold by internationally known retailers.

Once No. 1 in gold jewelry production, Italy has in the last few years slipped behind China and India. Turkey, too, is breathing down its neck.

How did Unoaerre and its peers respond to the challenges? They invested in research and development to manufacture similar, but lighter, items containing less gold; they used new metallurgic processes in the alloys, which improved metal strength; they started expanding into trendy accessories rather than just sticking to traditional jewelry; and some started using semiprecious metals and base metals.

"To fit into the consumer market price points and stay competitive without compromising quality and design, we had to change our processes," said David Stettler, chief of product development at Unoaerre. "Branding marketing, quality, style and craftsmanship - these are the way out for us."

Despite the workshop revolution, the sellers of the finished product at the top end of the market - like Christian Dior and Richemont's Cartier in Europe, or Gurhan and Tiffany in the United States - appear to be much less affected by the new market realities.

Their response to the rise in gold prices has been a combination of slightly higher retail prices and slightly lower - but still healthy - margins in-house, according to analysts.

"The luxury brands have reacted very fast to these recent challenges - faster than during pervious periods of uncertainty," said Françoise Izaute, the president of Club Degli Orafi Italia, an independent association of the major players in the Italian jewelry sector.

Some of the luxury brands have been saved because they buy gold in advance, while for most, margins are healthy enough to comfortably accommodate gold's rise, said Richard Farrell, research director at the luxury specialist Ledbury Research in London.

And for some, like Dior, gold does not constitute the majority of the raw material in most of its collections. "The jewelry business at Dior is insulated from this type of risk because rather than coming to us for the gold, clients are coming to us for the creativity of our jewelry," said Laurence Nicolas, director of jewelry at the company. Dior sources its gold from the workshops where it places orders, rather than directly from banks or brokers.

Neal Meader, research director at the London-based metals consultancy GFMS, added: "In the West, gold jewelry is relatively price-inelastic" - meaning that a change in price is not accompanied by a large change in demand. In developing markets, especially India, the elasticity is much greater because available cash is customarily used to buy gold jewelry rather than, for example, putting it in the bank, and a greater proportion of an item's price is the value of the gold rather than labor, design and brand.

Gurhan, meanwhile, works exclusively in the purest gold, 24 karat, and buys its own metal every week. Fiona Tilley, the president, said that she had considered hedging against higher prices but found the kind of financial instrument that she needed was unavailable. "Of course we feel it when the price goes up and we rejoice when it falls," she said by phone from a trade show in Tucson, Arizona.

Then there is the sensitive issue of price, and how luxury brands have responded to increasingly expensive raw materials. There has been some evidence of markups by luxury retailers, but they have been cautious and limited.

"At the very superpremium end, consumers won't be put off by a 3 to 4 percent rise in price, and there is evidence that that has happened," said Dennis Weber, a luxury goods analyst at Dresdner Kleinwort in London. "In mid segments, that would have more of an impact. But the clients of Bulgari, Cartier, Piaget are not in this sector."

Bulgari, the Italian jeweler, raised some of its prices last year, and its chief executive, Francesco Trapani, was quoted as saying last fall that prices could rise again in 2008 depending on the trend in commodities. At Gurhan, Tilley said that prices had been increased slightly but that the company was careful not to go too far and aimed to share the burden. "It eats into our margins too - there's only so much you can pass on and still retain a perception of value."

It is hard to pick out a consistent trend in recent demand for jewelry. When prices are volatile, consumption tends to stall until there is stabilization, according to Philip Olden, managing director of the World Gold Council, while steady, higher prices are often an incentive to consumers to buy. Demand, meanwhile, is seasonal, with the fourth quarter the strongest because of Diwali, Christmas and other end-of-year festivals.

According to World Gold Council data based on figures from GFMS, demand for gold in jewelry - which makes up about 70 percent of final demand for gold globally - rose slightly in 2007 from 2006.

From a recent peak of 774 million tons in the second quarter of 2005, demand slipped to 532 tons in the second quarter of 2006 before recovering to 703 tons in the second quarter of 2007 and then falling back again.

Tilley said that Gurhan had not been greatly affected by the gold rush - or even the downturn in the stock market and recession fears. Privately held, Gurham does not divulge earnings. But, Tilley said, sales rose 20 percent last year, and while the company is forecasting some moderation this year for planning purposes, many of its most important retailers "are saying that they had very strong January sales and are feeling quite comfortable."

But it could just be early days.

Michael Kowalski, chief executive of Tiffany, told The New York Times last month that sales had been disappointing in the midtier lines, $1,000 to $10,000, rather than the top end.

Also, a survey in the latest issue of the High Net Worth newsletter from Ledbury found that high earners, or those with annual incomes exceeding $200,000, intend to spend 4 percent less on jewelry this year versus last in the most important European, Asian and U.S. markets. The outlook for watches also looks softer.

Back in Italy, where most of the luxury players still order their collections from the thousands of companies still in business, mostly in the Tuscan towns of Arezzo and Vicenza, the workshops are still adapting to factors like the rising price of metals, the ascent of the euro, and the lower costs and steep learning curves of jewelers in developing countries.

But what is apparent, in conversations with industry figures, is that most of the luxury companies have kept faith in Italy for their most important lines. Some famous brands tried transferring some production to emerging markets with mixed success and ultimately went back to Italy.

There, they find an industry that has been responding, particularly through innovation; there has been an emphasis on using hollow gold and thin gold sheets with higher resistance so the surface can be textured; gold reinforced by alloys; and cut-out patterns and stamped surfaces. These trends save money either by reducing processing costs or by using less of the precious metal.

"We can no longer compete on cost - it's a lost battle," said Matteo Rigon, president and chief executive of Superoro, a family manufacturer with 150 staff members based in Vicenza. "We can only compete with passion, quality, service and innovation."