"China News Weekly" reporter: Li Mingzi
Published in the 1133rd issue of "China News Weekly" on March 25, 2024
The price of gold rose, but the gold that had been in custody for more than ten years was lost.
During March 15 this year, the news that the "China Gold Beijing Concept Store" was suspected of closing the store and running away attracted attention. Many consumers reported that they handled gold "escrow" business at this store. Gold worth more than 30 million yuan disappeared with the closure of the store.
In fact, most of the gold stores with the slogan "China Gold" are franchise stores. According to the 2022 annual report of "China Gold", 3,642 stores have been opened nationwide, of which 3,537 are franchise stores, accounting for more than 97%.
Chow Tai Fook, which has the highest market share, also relies on the franchise model to expand its territory in the mainland's sinking markets. As of September 2023, Chow Tai Fook has opened more than 2,700 stores in third- and fourth-tier cities, accounting for nearly 40% of all stores. Chow Dasheng, which is of similar size, also regards franchising as an important means to develop lower-tier markets. As of June 30 last year, 71.88% of its franchise stores were located in third- and fourth-tier cities and below.
“Since the relationship between franchisees and brand companies is a cooperative relationship rather than a direct employment relationship, it is often difficult for brand companies to directly intervene in the operation and management of franchise stores. Problems such as poor management and uneven service quality in franchise stores may not be resolved in a timely manner. Proper solution." Feng Wenting, associate professor at the School of Jewelry of China University of Geosciences (Wuhan), analyzed to China News Weekly.
Gold, which has its own hedging properties, has been put at risk. Why has the franchise model with hidden dangers become the first choice for jewelry brands to explore the sinking market? As the price of gold reaches the top of the mountain, are gold stores that are expanding like crazy still a good business to make money?
18 gold stores in one shopping mall
The competition for customers by gold stores has penetrated into the next generation of customers. A Hong Kong-funded jewelry brand joined by Gu Yao is located in a high-end shopping mall in Ningbo. The most profitable product in the store is probably the "little golden beans" placed in the corner, attracting young consumers to come to the store for "regular investment". The youngest "golden investor" in the company is only in the second grade of elementary school, and he brings his mother to buy one for himself every week.
In Gu Yao's impression, the offline gold buying craze has continued since the end of the epidemic. By the Spring Festival of the Year of the Dragon, store sales had nearly doubled from the previous month.
"With rising geopolitical risks and changes in the economic environment, the relative investment advantage of gold as a safe-haven asset has become increasingly prominent." Xu Ying, chief analyst of macro strategy at Orient Securities Futures, told China News Weekly that in addition to a variety of gold investment targets, The status of pure gold jewelry with wearable functions in jewelry consumption is gradually increasing. She observed that among the major business districts in Shanghai, gold stores have the most traffic, and some hot-selling gold jewelry still need to be queued up to buy, or even out of stock.
The increase in demand for gold purchases is driving the expansion of jewelers. In the mall where Gu Yao is located, other categories of stores have changed owners one after another. Only gold stores have remained strong, with as many as 18 stores. "New and old stores are opening together, which is extremely common in local shopping malls."
First- and second-tier cities have always been the focus of jewelry brand layout. Chow Tai Fook, which currently has the highest market share, entered the mainland market in Beijing in 1998. According to Chow Tai Fook's "2023/2024 Interim Report", as of September 30 last year, Chow Tai Fook had opened more than 900 stores in first-tier cities. , the number of stores in second-tier cities is close to 3,600, accounting for nearly 60% in total.
However, the opening speed of brand gold stores in third- and fourth-tier cities in recent years has far exceeded that in first-tier cities. Huang Shaoji, managing director of Chow Tai Fook Group, said in a previous interview with the media that as mature jewelry markets such as Beijing, Shanghai, and Chengdu become saturated, jewelry brands are expanding in lower-tier markets in order to expand market share and find new performance growth points. .
Zhou Taisheng, which is also accelerating its efforts to sink the market, opened a net of 215 stores in the first nine months of last year, opening an average of about 5 new gold stores every week. As of the end of September 2023, the number of Chow Taisheng brand terminal stores has reached 4,831, nearly 70% of which are located in third- and fourth-tier cities and below.
Gu Yao's family business has been in the gold store business for more than 20 years. It has opened more than a dozen stores in Ningbo urban and county towns, most of which are brand franchise stores. "If you only look at brand stores, the gold business in small counties is actually better than in big shopping malls." Gu Yao said that small towns like to do big things, and it is almost necessary to buy three pieces of gold when getting married. In areas with relatively underdeveloped economies, the requirements for betrothal gifts are on the contrary. The higher it is, even the five and six golds. In recent years, as the investment properties of gold have strengthened, buying gold has gradually become a new necessity for "big life events" such as childbirth, promotion, and birthday celebrations.
The demand for gold among county residents is higher than imagined. Frost & Sullivan data shows that from 2017 to 2022, the compound annual growth rate of sales of gold jewelry products in third-tier and below cities will exceed 11%, which is higher than the 6.7% and 8.3% in first- and second-tier cities. At the same time, the scale of the gold consumption market in third-tier and below cities has also increased from 102.4 billion yuan in 2017 to 174.2 billion yuan in 2022.
Dong Mi, who started his own goldsmithing business, couldn't help but be attracted by the excitement of the branded gold shop in his hometown. I returned to my hometown in Mengdong County during the Spring Festival this year. The gold stores in the core area are all next to each other. Coming out of Chow Tai Fook, I turn the corner to Chow Sang Sang and Lao Fengxiang is opposite. The newly opened northeast local brand Huihua Building has catalyzed the price war among gold stores in the county. . "Reduced prices, discounts, old and new discounts, there are all kinds of advertisements."
"Consumers in China's sinking markets pay more attention to brands." Chow Tai Fook's "2023 Jewelry Survey Report" shows that 89% of consumers in third-tier cities and 92% of consumers in fourth-tier cities will be affected by jewelry brands. Huang Shaoji, managing director of Chow Tai Fook, once pointed out that according to the statistical records of Chow Tai Fook members, many consumers go from third-tier cities to first-tier cities to buy gold jewelry. It is imperative to develop the sinking market, and major brands have set their sights on the new consumption battlefield-county towns.
Franchise becomes a powerful tool for brand expansion
"This round of rapid expansion of jewelry brands started when Chow Tai Fook opened up franchising." Gu Yao recalled that in the early years, her company had always maintained a "purchase retail" model. At that time, consumers trusted "channels" more, and time-honored stores and large shopping malls had more appeal, thus neglecting its own brand building. When it realized that competing products were becoming more homogeneous and consumers began to chase big brands, their own company had already missed Chow Tai Fook's earliest opportunities to expand into lower-tier markets.
As early as 2014, when the number of Chow Tai Fook stores nationwide exceeded 2,000, the franchise proportion had reached 30%. Chen Shichang, then executive director of Chow Tai Fook, once stated in the media that before 2010, the brand paid more attention to first- and second-tier cities with relatively stable economic foundations. Since promoting urbanization construction to become a national strategy, sinking cities have released more business opportunities, and in In the vast mainland market, compared with the high cost of the "self-operated" model, "franchising" has gradually become Chow Tai Fook's main expansion method in secondary cities.
In April 2018, Chow Tai Fook launched the "New Town Plan" to open up franchises in lower-tier markets. The following year, it launched the "provincial agent" policy and further accelerated store expansion with the help of "provincial agent" resources. From fiscal year 2020 to fiscal year 2023, Chow Tai Fook's overall retail outlets increased from 3,984 to 7,655, almost doubling the number. Chow Tai Fook Group mentioned in its financial report that completing the store opening target of the "New Town Plan" ahead of schedule will "help us seize the opportunities for economic recovery and growth after the epidemic."
Seeing the consumption upgrading trend in sinking markets, Lao Fengxiang also proposed for the first time in the 2018 financial report the plan to "gradually expand to third- and fourth-tier cities." Lao Fengxiang's channel strategy is to "adhere to three-dimensional marketing", including five models including self-operated bank building construction and joint ventures, general distribution, dealers, and specialty stores. As of the end of 2022, Lao Fengxiang has a total of 5,609 marketing outlets, including 5,415 chain franchise stores, accounting for more than 96%. Franchising has become a powerful tool for brand expansion.
Zhou Dasheng, whose store scale ranks among the first echelons, also relies heavily on provincial agents and franchises. As of the end of 2022, Chow Tai Seng franchise stores accounted for 94.6%. "There is still a huge market in third- and fourth-tier cities, and the establishment of chain outlets needs to be accelerated and the space needs to be encrypted and optimized." He Xiaolin, deputy general manager and secretary of the board of directors of Zhou Dasheng Jewelry, responded at the performance briefing meeting.
Leading jewelry brands have further expanded their market share by competing in sinking markets, gradually widening the gap with their competitors. As of the end of the first quarter of 2023, the number of retail outlets of Chow Tai Fook Jewelry in third- and fourth-tier cities has exceeded the total number of stores in the mainland of Luk Fook Group, which is also a Hong Kong-listed company.
During the epidemic, it was the most intense stage of expansion for various brands. During that period, Gu Yao's family business also received intensive franchise authorizations from many brands. Gu Yao said that franchisees give priority to Hong Kong-owned brands with more appeal, and jewelry brands need to conduct a comprehensive inspection of the franchised company’s financial strength, business philosophy, corporate reputation, and familiarity with the local consumer market.
"To join a gold store in second-tier cities now, the threshold is at least 6 million yuan." Gu Yao said that there are certain differences in the franchise fees of different brands, but leading brands value location most, and rent and labor costs in core business districts remain high. But the most expensive thing is distributing goods. For the brand she joins, the minimum purchase quantity of gold products alone is 10 kilograms, and in order to operate better, the inventory is only a lot more.
In Gu Yao's view, when competing for brand franchise rights, family businesses that are already operating local gold businesses are more likely to win. At the same time, the brand's subsequent franchise stores in the local area will also give priority to partners. "Most of the local jewelry industry is run by a few family businesses, and they are also the main force in the local expansion of leading brands."
After running a gold shop for more than two years, Gu Yao feels that the industry is getting more and more involved. The efficiency of gold stores is directly proportional to the influence of the brand. The current situation of the gold industry in second-tier cities and below is polarized by drought and flood. For franchisees, good brands are a scarce resource. Competition has already started from the franchise stage, and new stores will continue to follow. Crazy squeeze into the "siege". “If the brand does not roll up, its popularity may be lower, and it will be more difficult to survive in the competition.”
In Quzhou, Zhejiang, there are 15 gold stores scattered on a street less than 200 meters long, most of which have been opened in the past two or three years. "I haven't counted the number of gold shops in the local county, but the situation of opening together is almost the same." Gu Yao said.
“The number of people engaged in gold farming is at least three times that before the epidemic.”
The gold pre-orders Wan Xipeng received have been scheduled for half a month. His goldsmithing shop is located south of Zhongjie, the oldest pedestrian street in Shenyang City, in a non-busy area close to the city center. It is very popular and the rent is not too expensive. After opening every day, the customer rest area quickly fills up, and some people wait for four or five hours to get their favorite jewelry as soon as possible.
This past Saturday morning, Wan Xipeng just received a typical "post-00s" customer, who came to buy jewelry with the gold bars he had just received from a bank branch. The premium of precious metals in banks is low, and each gram of gold is tens to hundreds of yuan cheaper than the market price. However, you only need to pay the manual fee for goldsmithing, and the on-site processing can be customized, which perfectly fits the current young people's "both money and money". Save money” consumer psychology.
In order to pick up the goods and go home as soon as possible, some out-of-town customers wait until the day of the appointment and take the earliest high-speed train to Shenyang. The nights are long in winter and it is not bright when they arrive at the door of the store. "Every now and then, I get a call to wake up and open the business early." Wan Xipeng recalled that in addition to regular local customers in Shenyang, there are also many customers from surrounding cities such as Fushun, Dalian, Dandong, Anshan, etc. Some people even drive here to make gold. Including the fuel cost, it is more cost-effective than buying the finished product directly.
Contrary to jewelry brands capturing the sinking market, goldsmith shops are more likely to survive in big cities. "Gold pricing is transparent. The main income from goldsmithing comes from manual fees, and the pricing range is basically limited to a limited range of brand premiums." Wan Xipeng told China News Weekly that first- and second-tier cities have large populations, high consumption levels, and multiple channels for obtaining information. The acceptance of gold mining is also higher.
In the summer of 2019, Wan Xipeng ended his eight years of drifting to the north and returned to his hometown in Inner Mongolia to open a store and start a business. "It is difficult for private gold shops to gain the trust of customers, especially in small cities. It is even more difficult to gain customers. They received more than a dozen orders within one month of opening." Wan Xipeng said frankly that most of the older generation have experienced being deceived by "gold trading". His own grandmother was once a victim. When she learned that he was making a living by making money, she repeatedly told him to "never do anything immoral."
In order to survive, Wan Xipeng opened a new store in Shenyang, the provincial capital city closest to his hometown. At that time, the epidemic had just begun to spread and offline stores could not open. He made a short video of his gold making process and posted it on various platforms. On the one hand, he did industry science popularization and established trust; on the other hand, he also created private domain traffic and Convenient to acquire customers. Wan Xipeng was also surprised by the continuous orders. After placing orders online, customers sent the gold directly to the store. After the jewelry was finished, it was mailed back by express. Dozens of grams of gold passed through without even meeting him in person. .
Around the Spring Festival in 2023, the store began to open, and the goldsmithing business continued to be booming. The store has changed from a small store of more than 20 square meters to a store of more than 180 square meters. In order to improve work efficiency, he has also successively purchased hundreds of thousands of yuan in machinery and equipment. After March last year, he hired two more goldsmiths, and demand is still in short supply.
"All aspects of gold mining are transparent and open. As long as the customer is willing, he can personally supervise the whole process." Wan Xipeng joked that some customers bring their own weights to calibrate the electronic scale. He knows that building customer trust in a private store is a long-term process. "Individual gold stores naturally do not have the influence of big brands, but once they gain the trust of customers, customer loyalty and repurchase rates are extremely high."
As the popularity of gold purchases continues to rise, the gold mining business that also takes into account gold recycling is also rising. The number of goldsmith shops has increased significantly in the past year. "In Shenyang alone, the number of people engaged in gold mining is at least three times that before the epidemic." Wan Xipeng said.
Wang Dachui, a gold miner from Meishan, Sichuan, has just entered the industry this year and has already felt the pressure of competition in the industry. He discovered this business only when he was preparing to get married and earn three golds last year, so he spent his own money to study at a training class near Shuibei, Shenzhen. There were more than 40 people in the class at that time, and at least one-third of them were new to the industry like him. After he finished his studies and returned home to start a business, another nearby goldsmithing shop had already opened before him while the store was being renovated.
Wang Dachui records the daily life of his business on social platforms. In the first month, there were orders almost every day, and the turnover was higher than expected. What’s more in demand than gold mining is the consultation on “learning to mine gold”. “At least 40 people came to ask me where I got training, and some even asked me to learn gold mining.” Wang Dachui said.
It’s easy to open a store but hard to attract money
"Actually, sales in the first two months of 2024 are basically the same as the same period last year." Gu Yao carefully compared the sales data of the two years and found that due to the increase in gold prices this year, gold sales in the first two months were no more than last year. . On the other hand, this year's popular pure gold products are the category with the lowest gross profit margin in stores. The increase in pure gold sales does not make a big contribution to store profits.
Gold is known as a luxury product, but it is difficult for stores to make profits on luxury goods. Chow Tai Fook's gross profit margin in fiscal year 2023 was 22.36%, a nine-year low, but it is still a profitable top student among major brands. Mengjinyuan's gross profit margin in the first half of 2023 is only 5.7%, while China Gold's gross profit margin in the first three quarters of 2023 is as low as 4.23%.
Mengjinyuan disclosed in its prospectus that the main reason for the long-term low gross profit margin is the product structure. In the first half of 2023, 98.1% of Mengjinyuan’s revenue came from gold jewelry, with K gold and diamond jewelry accounting for less than 2%. However, the gross profit margin of Mengjinyuan gold jewelry is only 4.9%, while the gross profit margin of K gold and diamond jewelry is 25.6%.
Leading companies rely on the franchise model to expand rapidly, which flattens out the high profits brought by the self-operated model and further dilutes gross profit margins. Chow Tai Fook's 2023 fiscal year semi-annual report disclosed that during the reporting period, the company's operating profit was 4.349 billion yuan, a year-on-year decrease of 2.7%; the adjusted gross profit margin fell to 22.4% from 23.5% in the same period last year, setting a record low. Chow Tai Fook admitted that it was mainly due to the increase in wholesale business and the proportion of gold jewelry and products.
"Unlike consumers in first- and second-tier cities who pursue the design style of jewelry, the lower-tier market places more emphasis on cost-effectiveness." Gu Yao said that consumers in county towns are price-sensitive and it is normal to shop around. If the price of this store is high, they will just go there. Inquiry at the door-to-door gold store. The brand stores fought hand-to-hand, and finally became a "Shuibei model" store that sells goods at low prices.
“The lower listing prices will also affect goldsmith shops, which is equivalent to lowering the ceiling for manual labor costs.” Dong Mi said, “Goldsmith shops are under attack from both sides, and the more direct pressure comes from peers, who are most afraid of the trend of lowering prices to gain customers. In the vicious involution, no one will be able to survive in the end.”
In an interview with the media, Wang Lixin, CEO of the World Gold Council China, reminded that the downward layout of the entire industry has been basically completed. In the future, national gold jewelry consumption will not show explosive growth. The industry should compete towards high added value and high quality instead of It is simply a competition based on the number of stores.
Chow Tai Fook, which currently has the largest stores in the industry, has slowed down its expansion. The financial report mentioned that Chow Tai Fook Jewelry has achieved the goal of opening 7,000 stores in fiscal year 2025 ahead of schedule. Future business growth plans will focus on high-quality expansion and improving the store efficiency of the existing retail network.
Before this "gold loss" crisis, China's gold had already adopted a contraction strategy. In 2022, the number of China Gold stores closed will exceed the number of newly opened stores, with a net decrease of 85 stores.
The overall consumption prospects of the gold industry are not optimistic. The World Gold Council analyzes that high gold prices and potential slowdown in economic growth may put pressure on gold jewelry consumption. The overall marriage rate has been declining in recent years, further putting pressure on consumer demand for gold jewelry.
Faced with involution, goldsmith shops are also trying to operate through multiple channels. There is no unified charging standard in the industry. Usually, small weights are charged on a piece-by-piece basis, while large weights charge different amounts of manual fees based on complexity. "Pricing mainly depends on personal skills and self-marketing capabilities. It's okay to set the craftsmanship fee to a few hundred yuan per gram, as long as the market can recognize it." Wan Xipeng said. However, the efficiency of gold mining limits the income. To this end, Wan Xipeng has added retail categories. The finished product display area in the store not only includes handmade jewelry in his spare time, but also finished jewelry purchased from Shuibei. At the same time, he recycles gold and earns a small price difference.
"Compared with brand stores, goldsmith shops have an extra expense, and they have to bear the losses." Wan Xipeng has been in the business for more than ten years. Before the rise of this goldsmith craze driven by social platforms, this craft was only available on a small scale. Popular, but really unpopular. "Gold mining has always been a profitable business, but it is by no means a huge profit."
"Although branded gold stores are capital-heavy operations, when the market is good, it is very common to earn a million a month, and the capital can be recovered in as fast as half a year." Gu Yao said frankly that now the competitors have doubled, and each store has its own share. The market space has been further compressed. "Opening a gold shop is no longer so profitable, but it won't leave you with nothing."
(At the request of the interviewee, Gu Yao and Wang Dachui are pseudonyms in the article)
"China News Weekly" Issue 11, 2024
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