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What effect will Brexit have upon the gem & jewellery industry?

BREXIT-PIC-EDIT

(The UK public voted to leave the European Union by 52% to 48% in a referendum on 23 June 2016)

Brexit is one of the hot media topics of the moment in the UK and elsewhere around the world. In this article we are going to examine the possible implications of Brexit on the gem and jewellery industry. Whilst Brexit remains a journey rather than a final destination there are of course unknowns at this stage but we are starting to shine a light on the future trajectory of the fine jewellery, gem and luxury markets. Interestingly views within the sector prior to the 23 June 2016 referendum were as divided as they were across the nation as a whole. One poll at an industry dinner indicated that 38% were preparing to vote leave, 42% remain and 19% were undecided. There are three main issues to which the jewellery sector is acutely vulnerable and we will look at each of these in turn below.

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Uncertainty & volatility

It is a universal truth that no market likes uncertainty. When you are running a business it is a precious asset to know what your future costs are likely to be to enable you to budget accordingly. Luxury items, including jewellery, tend to be one of the first things consumers cut back on in times of volatility. Despite highly pessimistic warnings regarding retail spending last summer, it seems to have remained buoyant and indeed many retailers reported record Christmas sales in 2016, especially online. The one caveat to this optimism rests in the fact that the UK has not actually left the European Union yet and will not do so until at least 2019 so we need to be cautious when considering the medium to long term implications. That said, most forecasters believe that the UK economy will perform strongly in 2017 and 2018 so it is clear that the predicted worst case scenarios are unlikely to be realised.

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Precious metal prices

One of the most significant Brexit risks to the gem and jewellery industry was a prolonged and substantial increase in the price of precious metals, especially gold. This is the sector’s Achilles heel and something that often exacerbates the ill effects of reduced consumer spending, as gold is often used as a ‘shelter’ or ‘safe haven’ commodity for investors during an economic downturn, which has the effect of inflating its value. In the immediate aftermath of the vote to leave the EU the price of gold did spike significantly from around $1,250 per ounce to just over $1,370 in just two weeks. It has however cooled off since then and currently sits at $1,213 (25 Jan 2017). At the same time other ‘defensive’ assets, including Swiss Francs, sovereign bonds and some equities also spiked temporarily but these too have returned to similar pre-vote levels.

Currencies

Currency fluctuation

 Gems and precious jewellery are very international by their very nature and they are usually priced in US dollars, a currency that tends to remain fairly constant whilst others float up and down against it far more rapidly. The record fall of sterling against the US dollar in the aftermath of the Brexit vote and its stubborn refusal to rise significantly in the 7 months that have so far followed has certainly disadvantaged businesses that earn their revenues primarily in sterling. The same is also true in reverse in that firms that mainly trade in dollars have been handed a competitive advantage over those that rely on sterling receipts.

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Given the above, the obvious question that follows is what can British jewellers do in order to mitigate the potential downsides? The most practical steps that any business can take when faced with uncertainty is to provide reassurance to their target market and encourage them to keep spending. Evidence suggests that marketing and advertising budgets have not appreciably changed in the past 7 months since the referendum result and crucially sales volumes have increased a little, posting circa 5% gains in the UK and USA in 2016 overall. A general restraint has also been shown by most retailers who have, by and large, resisted the urge to raise prices in line with the increasing costs they are facing with imported raw materials. Tiffany & Co, who achieve over 40% of their European sales in the UK (totalling more than $200 million per year), initially warned that the “weakening of foreign currencies against the US dollar would require the company to raise its retail prices in order to maintain its worldwide relative pricing structure.” However, they later went on to actually cut some of their prices in the run up to the festive season in 2016 and enjoyed strong Christmas sales as a result.

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One unforeseen consequence of the Brexit vote on the UK jewellery industry was that the slide of the pound made it considerably more competitive versus their Swiss counterparts, who have suffered significantly from the inflation of the Swiss Franc versus not just Sterling but also the USD and Euro. The knock on or ‘trickle’ down effects of the UK’s decision to quit the EU may also have far reaching consequences even further beyond our shores. India exports more than $4 billion (US) in gems and jewellery to the UK each year, more than 10% of its total exports of these products, and that figure has been rising in recent years. A further consideration is the fact that a good many diamond companies, including Anglo American (the owners of De Beers), Rio Tinto (who operate the famous Argyle mine in Western Australia producing 90% of the world’s pink diamonds) and Gemfields (the world’s largest supplier of coloured gemstones) are listed on the London Stock Exchange (LSE). In a fascinating twist, the FTSE100 index of leading shares on the LSE has now broken through all of its previous records, at one point crossing 7,330, demonstrating that whatever the future holds for the gem and jewellery industry there are certainly still some surprises in store.