Challenges of the emerging markets and the outlook of branded jewelry retail by 2020

1. Emerging EEA
(Specific Markets)
BEYOND THE SPARKLE
The Swarovski Case
István Brém
www.linkedin.com/in/istvanbrem
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2. Index
Content………………………………………….…………………………………………………………………………………Page 2
Introduction (2 mins) ………....………………………………………………………………………………………………….Page 3
Swarovski fact sheet: Multifaceted business (1 min).…..………………...………………………………………………….Page 4
Outlook of global jewelry sales by 2020 (3 mins)……….…………………………………………………………………….Page 5
Current state of affairs on the specified Emerging EEA Market (4 min)…………..………………………………………..Page 6
Numerical facts of the specified Emerging EEA Region (5 mins)……………….…………………………………………..Page 7
SWOT analysis (5 mins)…………………………………………………………………………………………………….…...Page 8
Opportunities – Short term operational implementation (5 mins).…………………………………………………………..Page 9
Financial assumptions for the specified region by 2020 (5 mins)……………………………………………………..…...Page 10
References……………………...………….…………………………………………………………………………………….Page 11
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3. Introduction
This present study comes from the wish to provide an outlook to EEA Emerging and Growth markets’ luxury consumer
goods business (CGB) through the Swarovski concrete reality for the upcoming 3 years.
The name “Swarovski” is synonymous with luxury. For many years, the company has been known as a manufacturer of fine
crystal pieces, perfect for collectors and gift-giving. They then expanded into the world of fashion with collections in both
jewelry and accessories.
Countries in scope in this study are - Romania, Slovakia, Ukraine, Kazakhstan, Serbia, Mongolia, Montenegro, Moldova,
Armenia - with 88 POS (50 monobrand and 38 multibrand). Swarovski owned stores and their 17 retail partners deliver EUR
20 mn annually with significant positive market growth and one of the best productivity in the entire CGB world.
In the current economic climate of the emerging markets jewelry sales significantly outperformed the total luxury consumer
goods segment and delivered a 10% comparable growth (or even higher double digit in certain markets) in 2017 vs. the
total luxury category growth of 5%.
The industry in the emerging markets is anticipated to continue growing at around 5-6% annually and companies that are
able to take a long-term view, data-driven choices about where to play; get their channels and formats right; and become
digital innovators can double their growth in the region in the next five years.
An investment horizon of one or two decades, rather than the typical two to five years, can help companies prepare—both
mentally and organizationally—for the economic ups and downs in this volatile region.
Jewelry and watch specialist retailers - the luxury channel where Swarovski generates about 65% of their total SCB
(Swarovski Crystal Business) revenue - flourish due to improving economy and continue to dominate the distribution
of jewelry in the emerging markets in 2018.
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4. Swarovski Fact Sheet: Multifaceted Business
SCB
Revenue: EUR 2.6 bn
Number of employees: 26,000
Stores worldwide: 2,680
Operated by Swarovski: 1,380
Partner-operated Stores: 1,300
Swarovski’s products are sold in 170 countries.
Production: Austria, India, Thailand, Vietnam, Serbia, US.
Global luxury good sales ranking #23.
Compound Annual Growth Rate: 5.6% (FY2014-16).
CGB
Revenue: EUR 1.97 bn
75% of Total SCB Net sales
JWA
Revenue: EUR 1.7 bn
65% of Total SCB Sales
CL
Revenue: EUR 270 mn
10.5% of Total SCB Sales
4
The Swarovski Group comprises Swarovski Optik, which produces optical instruments of the highest precision such as
telescopes and binoculars; Tyrolit, a leading manufacturer of grinding, sawing, drilling, and dressing tools, as well as a
supplier of tools and machines; and the Swarovski Crystal Business.
IMPORTANT:
While the total growth in CGB
is at around 6% the Watch
category achieves an average
30% annual growth.
Positioning: Premium market, extremely refined signature, using many of the techniques of fine jewelry but accessible.
Values: Inspiration, Innovation, Excellent quality, Beauty, Positive influencing, Sustainability.
Heritage: “A diamond for everyone”. Swarovski Woman: Successful, Feminine, Beautiful, Fashionable and Modern.

5. Outlook of global jewelry sales by 2020
Consumer appetite for jewelry is restored, which was dampened by the global recession (2008). After a relatively tough
period again FY2014-16 when the global luxury jewelry and watch industry achieved negative sales growth (-1.1% vs
5.6% growth of Swarovski for same period), the channel is set to re-bounce at an expected 5-6% growth each year.
Trends shaping the jewelry industry:
• Internationalization of brands and industry consolidation: National brands expand to the international market and
international retail groups acquire small, local jewelers.
• Growth of branded jewelry: Branded jewelry is only 20% of the overall jewelry market today and expected to grow to
30-40% (watches already at 60%). Consumers types driving the growth of branded jewelry:
• New Money – to show off newly acquired wealth
• Emerging market consumers – sense of upgraded lifestyle
• Millennials – means of self expression and self realization
• Reconfiguration of the channel landscape: Online sales from current 4-5% will reach 10% in fine jewelry, and will
grow to 10-15% in fashion jewelry. Increased importance of digital media. Omni-channel distribution.
• Polarization and hybrid consumption: Growing high and lower end while stagnating middle market. Fine jewelers
might consider introducing entry point into the brand or play exclusively in the high end and communicate that message
strongly through its advertising, in-store experience, and customer service.
• Fashionability and acceleration: Trends from the fast fashion industry (shortened supply-chain processes, couture
inspired fashion on bargain prices, multiple annual collection launches).
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6. Current state of affairs in the specified Emerging EEA Market
The year 2017 has been an interesting and eventful one. Companies had to deal with economic and political
uncertainties.
Fundamentals are promising: Population growth exceeds world average, rapid urbanization is bringing about a rise in
consumer spending. Growth in consumer spending is expected to be 1.5 times that in Western Europe.
The outlook for the luxury consumer sector is improving. GDP is projected to grow at 5-6% per year.
Political instability could delay a return to stronger growth, but local and multinational companies alike can double
their growth in the region in the next five years.
Companies must consider local circumstances in order to grow:
• Consumer-centric choices with regard to formats and channels due to infrastructure challenges or a lack of desirable
real estate. Consumers in the region are becoming omni-channel shoppers (educating themselves on price and product
features). Mobile commerce is expected to grow as well, at a rate of 25-30% between now and 2020.
• Accept multiple payment options, due to large number of customers not having bank accounts and credit cards.
• Customers are financially trapped but selective in their purchases. They are looking for value for their money.
• Customers expect broader assortment, and products associated with local heritage from retailers.
Competitive landscape: Mostly local jewelry businesses, not big and powerful enough to sell branded products or ensure
consistent presence across channels. Pandora represents real challenges on the market due to their popularity with
Millennial customers and record dynamic current value growth (over 30% average sales growth FY2014-16).
Costume jewelry remains the most dynamic category of jewelry (affordable prices and regular new collections on offer)
but the jewelry and watch specialist retailers channel continues to dominate the distribution of jewellery.
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7. Numerical facts of the specified Emerging EEA Region
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Findings:
• GDP Growth: 4.4%
• GDP Growth in buying power: 2.7%
• Inflation rate: 4.7%
• Unemployment: 10%
• Urbanization: 59%
• LSM 9-10 households: 17.9%
• Poverty: 14.6%
Primary target market:
Working female population, aged 25-55 in
urban areas, living in LSM 9-10 households
with disposable income in their respective
economic area. There are an estimated 2.25
mn female inhabitants in the region who
match the above criteria.
Country
(FY2016-17)
GDP
PPP
(EUR)
GDP
PPP
Growth
(%)
GDP
Growth
(%)
Inflation
rate (%)
Populatio
n (Million)
Labor
Force
(Million)
Unemploy
ment (%)
Urban
(%)
Female
Age 25-
55
(Million)
LSM 9-10
household
income (%)
Population
below
poverty line
(%)
Romania 21,200 5.6% 7.0% 1.3% 21.5 8.9 5.3% 54.0% 4.9 7.6% 22.4%
Slovakia 28,500 3.1% 3.4% 1.3% 5.4 2.8 8.1% 54.0% 1.2 19.3% 12.3%
Ukraine 7,500 2.3% 2.5% 14.4% 44 18 9.5% 69.0% 9.9 21.6% 3.8%
Kazakhstan 22,700 0.3% 4.0% 7.4% 18.6 9 5.0% 57.0% 4.0 23.3% 2.6%
Serbia 13,000 3.5% 1.8% 3.1% 7.1 2.9 16.0% 56.0% 1.5 17.9% 9.0%
Mongolia 11,200 0.0% 5.1% 4.6% 3 1.2 7.3% 68.0% 0.7 5.7% 30.0%
Montenegro 15,300 2.9% 4.2% 2.4% 0.6 0.3 16.1% 67.0% 0.2 17.9% 9.0%
Moldova 4,900 5.5% 4.0% 6.6% 3.5 1.3 4.1% 43.0% 0.7 22.1% 10.0%
Armenia 8,200 1.0% 7.5% 0.9% 3 1.5 18.9% 63.0% 0.7 25.7% 32.0%
14,722 2.7% 4.4% 4.7% 106.7 45.9 10.0% 59.0% 23.8 17.9% 14.6%

8. SWOT analysis
SRENGHTS
• Rich cultural heritage (positive impact, value adding)
• Innovative, high quality product (desirable)
• Branded product (customer loyalty)
• Brand positioning (affordability with refined signature)
• Sustainable production (environment)
• Global network of stores (accessibility, competitiveness)
• Retail architecture (Crystal Forest, Retail Calendar)
• Exclusive retail-partner business model (operations, profit)
• Omni-channel distribution (accessibility, digital, 24/7)
WEAKNESSES
• Penetration and distribution to emerging markets (lack of
infrastructure and desirable real estate)
• Shipping from Global Hubs (growing store numbers)
• Packaging (showroom vs. storage room)
OPPORTUNITIES
• MOB and Travel retail expansion (higher margin, growing tourism)
• Ability to speak to Millennials (price and value proposition of jewelry,
digital media, influencers, m-commerce in EEA)
• Developing stronger leadership capability (remaining relevant and
customer focused, management behavior focus on store visits)
• Elevating in-store operations and experience to a premium-luxury level
• Brand ambassadors and consultants (employee engagement)
• Value added services (warranties, insurance, interest free credit)
• More frequent collection launches (faster marketplace)
• Focus on customized product ranges (REMIX) and watches (growth)
• Digital innovation (Electronic displays, Augmented reality, Facial
recognition, Beacon Technology, Flagship stores “interactive art
galleries”)
THREATS
• Crystal production capabilities worldwide eroding historical USP
• Unregulated cheap production (China)
• Possible untimely tightening of monetary polices of EEA countries
• Geopolitical tension of the EEA region
• Increasing competition in branded jewelry (share from 20 to 40%)
• Pandora (popularity with Millennials, price points and over 30%
annual sales growth globally)
• Overproducing (loss of margin, pressure on off-price channel, and
supply chain, unregulated discount trade of branded products,
maintaining exclusivity, diminishing brand value)
• Increasing demand on instant delivery of on-line purchases
(competition by Amazon, 1 day delivery, impulse buying)
• Safety concerns of EEA region (cash handling, theft, shrinkage)
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9. Opportunities – Short term operational implementation
• Focus on expanding the Exclusive retail-partner business model, finding new potential partners. Prioritize MOB for
stronger brand message and higher margin. MUB channels are set to shrink due to increasing branding in jewelry.
Department store concept is in global downturn. Travel retail is to expand due to increased tourism.
• Assist existing partners and store management by creating and implementing operational plans to deliver seasonal
brand and product training to the stores and ensuring knowledge is transferred into sales skills. Possible regional trainers.
• Management visits to focus on behaviors instead of operational checks. Creating an environment of internal
celebration of success via communication.
• Be the change leader for major change program of a consumer centric operating model, insuring the maximum
impact on customers. Elevating in-store customer experience to a unique, premium-luxury level. Accelerate the process
around developing teams of Brand ambassadors. Change management in stores as this process affects every aspect of
the business from product, selling language, back-office operations, interactions, conversion rate, ATV, ASP, L4L etc.
Work closely with HR to develop and retain the right caliber of people.
• Actively monitoring customer satisfaction and feedback systems, the behaviors and patterns of the stores‘ customer
base, drawing conclusions and coaching Store Managers to meet or exceed customer expectations. Using CRM and
VOC for store and individual specific development plans.
• Specially set KPI’s around key products, such as watches, the customizable REMIX range, and crystal figurines of
local interest, e.g. “The Apple” in NYC.
• Work closely with all departments in order to increase operational excellence in execution. Provide a data based and
factual, high level feedback on weekly meetings, so senior team can make informed decisions faster, and to ensure a joint
achievement of objectives and financial targets.
• Focus on procedures around cash management as internal theft and security is higher risk in EEA regions.
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10. Financial assumptions for the specified region by 2020
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At the size of an 88 POS real estate portfolio, in case of a non-aggressive expansion (new store opening), the predicted growth in the number of
stores is at around 5% annually. For this region it would mean a total of 14 new doors over 3 years. By focusing on MOB retail partners (35-50
sqm), and a minimum expectation of EUR 0.5 mn per annum, in cumulative sales growth it would add an estimated EUR 13.5 mn to the
regional turnover for the period, excluding category sales growth (at current price).
Conversion is without a doubt the most important KPI to focus on (elevated in-store experience “The Five Moments of Truth”). One point
increase on conversion rate can generate 20% incremental sales. That is EUR 4 mn additional revenue, excluding all other factors.
Currently approx. 5% of sales are on digital media. The current EUR 1 mn revenue will grow to EUR 1.33 mn at an annual rate of 10% in 3
years and it is predicted not having any cannibalization effect on the brick and mortar business in the EEA market. This growth rate is forecasted
at 25-30% annually in m-commerce.
Prices have been stagnant over the past few years in the region, however the rate of inflation at 4.7% annually suggest an estimated 10% retail
sales price increase which seems to be inevitable within the next 3 years. That is an additional EUR 2 mn without considering any other factors.
Category
2017
sales
(EUR mn)
Current
Contribution
(CGB %)
Projected
CAGR
(FY2018-20)
Estimated
added
sales
(FY2018-20)
(EUR mn)
Estimated
sales
(FY2020)
(EUR mn)
Estimated
sales
growth in 3
years (%)
Comment
Jewelry, Accessories 15 75% 6% 2.87 17.87 19.10%
Watches 2 10% 30% 2.39 4.39 119.50%
Crystal living 3 15% 6% 0.57 3.57 19.00%
Total CGB 20 100% 5.83 25.83 29.15%
This assumption is based on current
forecasted category growth only. No price
increase, KPI's (in particular to conversion
rate increase), new store opening, or
buying power increase with GDP growth is
taken into consideration.

11. References
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• Swarovski Home Page https://www.swarovski.com
• Swarovski Retail-partner https://www.retailpartner.swarovski.com
• Bain: Global Luxury Report 2018 https://www.bain.com/about/media-center/.../2018/bain-spring-luxury-report-2018/
• Deloitte: Global Powers of Luxury Goods 2018 https://www2.deloitte.com/content/.../global/.../cb-global-powers-luxury-goods-2018
• McKinsey & Company: Perspectives on retail and consumer goods 2017/18 https://www.mckinsey.com/industries/retail/our-insights/perspectives
• McKinsey & Company: A multifaceted future: The jewelry industry in 2020 https://www.mckinsey.com/industries/.../a-multifaceted-future-the-jewelry-industry-in-...
• Forbes: Watches at Swarovski https://www.forbes.com/sites/arieladams/2015/05/07/making-modern-womens-watches-at-swarovski/#1cf3c734844b
• Boyden: Luxury Retail Trends in Emerging Markets https://www.boyden.com/media/consumer-and-retail-practice-luxury-retail-trends-in-emerging-ma-169937/index.html
• Baltic Jewellery News: Jewellery Trends in Eastern Europe https://www.balticjewellerynews.com/single-post/2017/10/23/Jewellery-Trends-in-Eastern-Europe
• Central Intelligence Agency: The World Fact Book: https://www.cia.gov/library/publications/resources/the-world-factbook/geos