With the gradual recovery of the consumer market, especially the non-real estate-related consumer market, the revenue and profits of the gold and jewelry industry have increased significantly compared with 2022. According to data from the China Gold Association, in the first three quarters of 2023, national gold consumption reached 835 tons, a year-on-year increase of 7.32%.
At the same time, the operating income of listed companies in the gold and jewelry industry, such as Lao Fengxiang, Chow Dasheng, China Gold, Caibai Shares, Chao Acer, etc., in the first three quarters of 2023 has also increased significantly compared with the same period last year.
If we observe the historical financial statements of the gold and jewelry industry, we will find that its return on equity is generally high. Among them, leading companies can often maintain a return on net assets of 15% or even 20%, and companies in the second and third tiers can often maintain a return on net assets of about 10%.
This kind of high return on equity is rare in most industries (generally 12% to 15% for leading companies and about 7% for second- and third-tier companies is considered good). It can only be found in liquor, moon cakes, banks, etc. Occasionally appear in home appliances and other industries. So, where does the high return on equity in the gold and jewelry industry come from?
Brand importance due to special purchasing meaning
The primary source of high profit margins in the gold jewelry industry is consumer goods such as gold jewelry, jewelry, and jewelry. What is important to consumers is brand significance.
For consumers who buy gold jewelry, when the consumption behavior occurs, it is often accompanied by special meaning. It can be as big as a wedding, birth, or birthday anniversary, or as small as buying a jewelry to comfort yourself after work.
In the consumer industry, when purchasing behavior is given more meaning, consumers are often willing to pay a premium for the brand: Marriage is such a big event that only happens once in a lifetime (in fact, many people prove it more than once), so why don’t you buy one? A better brand of ring! The premium paid under this willingness to consume has become an important source of high profit margins in the gold and jewelry industry.
We can see the “high profit margins brought about by meaningful consumption behavior” in high-end liquor and Warren Buffett’s heavily stocked See’s Candy. In California, Shishi candy is given an important meaning by lovers: you must eat this when you are in love. So, since it is a necessity, Seeshi Candy’s profit margin is very high. As for whether it is delicious or not, and whether it is cost-effective or not, these are not issues that consumers consider.
Lack of product identification leads to trust in brands
Another reason why when consumers buy gold jewelry, if they want to buy products with guaranteed quality and quantity, they must choose a brand they trust, and they are hesitant to try new and unheard of brands: this reason is consumption Those who lack the ability to discern product quality.
When buying a gold bracelet, how can we be sure that it is not adulterated? There are many ways to adulterate gold products. Unless destructive testing is carried out and the gold jewelry is cut open and examined on the spot, consumers may not know that the gold bracelet on their hands is actually a fake.
Pay careful attention, and we can often find news such as “I have had a gold bracelet for nine years and wanted to remake it into a different style, but it turned out to be fake.” In 2020, there was even a major fake gold case involving 83 tons of fake gold, which shocked the financial market at the time.
However, if the purchased gold jewelry undergoes destructive testing and is found to be genuine, then the damaged goods must not be returned or exchanged. This puts consumers in a strange dilemma: without testing, they cannot be sure it is genuine. If it is tested, if it is not fake, the jewelry will be damaged. In this case, the only choice left for consumers is to trust the brand.
Similar to gold, for precious jewelry such as jewelry, jade, jade, diamonds, etc., there is a common market rule that “it is difficult to identify the authenticity, and you can only choose to trust the quality of the brand”. Under this rule, since consumers are unwilling to buy non-branded gold jewelry, gold jewelry companies with stronger brand effects will naturally have higher profit margins.
The economies of scale that big brands and companies can enjoy
Since the role of brand is so important in the gold and jewelry industry, it is natural for leading companies and large companies to enjoy greater economies of scale and thus earn higher profit margins.
Relative to small companies, large companies tend to have stronger brand effects. This comes from several aspects, most of which are related to scale: large companies have wider product coverage and appear more frequently in front of consumers; large companies can afford higher advertising fees, and due to their larger In terms of sales volume, the higher advertising fees diluted on each product may actually result in lower sales costs; large companies have a longer history, and have more reputations and consumer impressions accumulated in history.
Therefore, in an industry such as gold and jewelry where brands are very important, large companies and leading companies have a natural advantage over small companies. This advantage appears in almost all consumer products that rely on brands. For example, the profit margins of leading liquor companies are not comparable to those of mid- to low-end liquor companies, and the profit margins of leading pet food companies are also much higher than those of ordinary pet food companies.
Since in the gold and jewelry industry, brand effects and profit margins vary with the size and market position of the company, investors also need to take this difference into consideration when choosing investment targets. They must not consider “the entire industry” High profit margins” are confused with “Every company has high profit margins.”
Rich product categories block price wars
Another source of high profit margins in the gold and jewelry industry is that each company has a very rich product category, which to a certain extent prevents the outbreak of price wars. Generally speaking, when other conditions are similar, the fewer categories there are in an industry, the greater the probability of price wars, and vice versa. When consumers only see a few standard products with similar functions from each manufacturer, Consumers’ ability to compare prices between different brands will increase, and price wars will often become an option. On the contrary, if each company provides dozens, even hundreds, or thousands of categories, the probability of price wars begins to decrease: the reason is that the comparability between different categories is not high.
For example, price wars for air conditioners and cars are often more frequent than price wars for small home appliances. There are relatively few categories of air conditioners and automobiles, but there are too many categories of small home appliances, so the significance of the price war is not as great as that of air conditioners and automobiles.
In the gold and jewelry industry, it’s the same thing: every company has hundreds and thousands of different products for sale at the same time. From a consumer’s perspective, it is difficult to unify these products, so it is not easy to make unified price comparisons.
According to Lao Fengxiang’s 2022 financial report, the company has formed a business including “gold, platinum, diamonds, silver, white jade, jade, pearls, colored gemstones, enamel, K gold jewelry, glasses, coral, watches, amber, brooch jewelry, arts and crafts tourist souvenirs ” and other huge product lines, each of which has hundreds or thousands of specific products. It is undoubtedly very difficult for consumers to compare such a huge price system with competing products from other companies.
Why is the profit margin of gold bars not high?
The reasons behind the higher profit margins in the gold jewelry industry can be found in the lower gross profit margins of gold bars: as they are also valuable personal consumption collectibles, for merchants, the gross profit margins of gold bars are lower than those of gold jewelry. Much more.
Generally speaking, for the same gold products, the price increase in the basic gold price of various banks, gold stores, etc. is not as huge as the increase in labor costs of jewelry gold. Of course, there is a reason why the production cost of jewelry gold is higher, but more reasons are caused by the different business structures of the two.
First of all, due to the intervention of banks (banks will sell gold bars, but basically not jewelry gold), consumers are very discerning about gold bar products under the generally high credit rating of China’s existing banking industry: banks approved by the state , the gold bars sold will never be fake. As a result, it is very difficult for the power of the brand to play a role in the sales premium of gold bars.
Therefore, in most cases, the bank’s gold bar selling price becomes the benchmark price, and it is difficult for ordinary gold stores to mark up this price. Since banks, regardless of size, have similar credit (consumers think that ICBC and Shanghai It is impossible for the gold bars sold by banks to be fake, even though the total assets of the former are more than ten times that of the latter). Therefore, it is difficult for big bank brands to generate brand premiums over competitors. This is completely different from gold jewelers. Due to the lack of national credit similar to banks, consumers’ trust in different gold jewelers varies greatly.
Consumers’ ability to actually physically identify gold bars is actually very low (almost non-existent), and it is still difficult for consumers to trust gold bars from very niche brands. However, because the competition among trustworthy brands is too fierce, and there is no difference between banks, the result of competition in the gold bar market is not that trustworthy brands earn higher profits, but that too small brands It’s impossible to survive.
Secondly, the category of gold bars is very single. The main information of the product is the gold of a certain purity and the weight in grams, such as 50 grams of 9999 gold. And since gold bars only have collection properties and no wearing properties, different shapes will hardly produce much product difference. Therefore, it is easier for consumers to compare prices and it is more difficult for merchants to earn excess profits.
Therefore, in today’s peaceful era, in the gold bar business, the brand premium enjoyed by the gold and jewelry industry has disappeared, and it is not easy for companies to earn too much excess income. However, in history, when society was in turmoil and there was no bank group today to provide national credit, gold bars and silver nuggets produced by big brands still enjoyed high brand value.
The gold and jewelry industry has long been recognized for its remarkable profit margins, consistently outperforming many other sectors. This exceptional profitability has attracted significant investor interest and prompted curiosity about the underlying factors driving such success. This article delves into the key elements that contribute to the industry’s high returns, exploring the impact of brand significance, consumer behavior, product diversification, and the unique dynamics of gold bar sales.
Brand Significance: The Power of Reputation and Emotional Resonance
A fundamental pillar of the gold and jewelry industry’s profitability lies in the power of brand significance. When consumers purchase gold jewelry, they often seek out brands that exude trust, prestige, and a sense of luxury. These brands have cultivated reputations over time, establishing themselves as purveyors of quality, craftsmanship, and enduring value. Consumers are willing to pay a premium for these brands, recognizing the intangible benefits associated with their reputation and emotional resonance.
Consumer Behavior: Emotional Connections and the Willingness to Pay
The purchasing decisions of consumers in the gold and jewelry industry are often driven by emotional connections and special occasions. Gold jewelry is frequently associated with life’s milestones, such as weddings, anniversaries, and birthdays. These emotional connections elevate the perceived value of gold jewelry, fostering a willingness among consumers to pay higher prices.
Product Diversification: A Shield Against Price Wars
The gold and jewelry industry is characterized by a vast array of product categories, encompassing a wide range of designs, styles, and price points. This rich product diversification acts as a safeguard against price wars, as consumers are drawn to the unique offerings of different brands. The sheer number of product options makes it challenging for consumers to directly compare prices, reducing the likelihood of price-driven competition.
Gold Bars: A Tale of Different Dynamics
The sale of gold bars presents a unique contrast to the high-margin nature of gold jewelry. While gold bars are also considered valuable personal collectibles, the profit margins associated with their sales are typically lower. This discrepancy stems from the involvement of banks in the gold bar market. Banks, with their established reputations and widespread recognition, effectively set the benchmark pricing for gold bars. As a result, the power of branding plays a diminished role in gold bar sales, limiting the ability of merchants to command significant price premiums.
Conclusion: A Multifaceted Puzzle Solved
The gold and jewelry industry’s high profit margins are not a coincidence; they are the result of a complex interplay between brand significance, consumer behavior, product diversification, and the unique dynamics of gold bar sales. Understanding these factors provides valuable insights into the industry’s resilience and its ability to generate consistent returns.