Anu Raghunathan 06.30.0
Mehul Choksi took his family’s tiny Mumbai diamond business and turned it into a $1 billion international retailer. But he won’t be satisfied until Gitanjali Gems is much, much bigger
Growing up, Mehul Choksi recalls, he often hunted for rough diamonds in his Mumbai home. His father, a diamond trader, would bring home diamonds for grading and sorting and often a loose stone or two would fall on the floor. The kids–six of them, with Mehul the youngest–would scour the floors for anything gleaming. And whenever he found a diamond–some were as thin as a hair strand–his father would reward him with a few rupees. “I realized that this was a lucrative business,” he chuckles.
But Choksi learned that the money wasn’t so easy after he started working for the family business just out of high school in 1977. Endless competitors meant razor-thin profit margins for this end of the diamond business. So after he took over the business in the 1980s, a company that had stuck to cutting and polishing rough diamonds for three generations started making and selling jewelry–and creating brands. Today Gitanjali Gems–named after two of his sisters, Gita and Anjali–has more than 20 branded jewelry lines, 1,250 retail outlets and 35 franchise stores. In the last few years it broke into the U.S. market, opened jewelry shops in China and began selling its brands in the Middle East. The company boasts a modern diamond processing plant and two jewelry manufacturing units in Mumbai. “I wasn’t interested in selling a commodity,” Choksi says. “I wanted to sell a brand.”
Gitanjali’s growth has been remarkable. In the mid-1980s it produced just $7 million in annual revenue. This year it will top $1 billion. Most of that growth has come since 2005, when revenue totaled $310 million. Profits were only $2 million that year, before the branding and retailing efforts really began paying off. But for the first nine months of the year that ended Mar. 31, profits reached $33 million. Full-year results will be announced near the end of June.
The company went public in 2006 at $4.74 a share and hit a high of $12.43 last December before tumbling along with much of the Indian market. Recently it traded at $6.50, giving it a market capitalization of $555 million. Choksi and his wife, Priti, own 46.4%. None of his siblings has a stake, though two sisters and a brother-in-law work in the U.S. operation. “Gitanjali is best poised to capture the growth in the gems and jewelry sector with its strong brand equity, robust retail network and an equally strong distribution franchise,” says Sanju Verma, executive director at HDFC Securities, in a report on Gitanjali last November.
Choksi, 49, who serves as chairman, is now expanding his retail business beyond jewelry. Backed by joint ventures with companies such as armo Netherlands Finance B.V. and Italy’s Mariella Burani Fashion Group, Gitanjali plans to open dozens of lifestyle retail stores across the country in the next few months, hawking everything from watches and leather handbags to haute haircuts. As disposable income and discretionary spending rise in India, the company expects a surge in sales of branded and luxury products. “This is action time,” says Gaurav Marya, managing director of Gitanjali Lifestyle. “The opportunity has just begun.”
The company’s move beyond diamond trading began in earnest in 1991, when it tied up with Continental Jewelry Manufacturing of Hong Kong and entered the mass-produced jewelry business. In 1994 it launched a branded jewelry line called Gili–a shortening of Gitanjali. Selling branded jewelry was novel in a country where jewelry is often purchased from the neighborhood family jeweler and mostly for investment. One innovation: It issued customers a certificate to authenticate the diamonds and a buyback guarantee. Gili didn’t catch on overnight, but Choksi went on to introduce more brands. Last December he bought the Nakshatra brand, which had been rolled out by diamond giant De Beers. “Gitanjali is a pioneer in branding,” says Prasad Kapre, business director at De Beers Group Marketing, which works to create a demand for diamonds in India. “They are very dynamic in terms of their approach to the market. They have different brands for different segments.”
Still, the competition is stiff. Using attractive merchandising and sophisticated marketing, Tata’s Titan Industries sells a range of high-end gold, diamond-studded and platinum jewelry under the brand name Tanishq. And it has a line of jewelry for semiurban and rural areas called GoldPlus. The company has 133 showrooms and plans to add 26 this year, including two in the U.S. In the year ended Mar. 31, it reported $507 million in jewelry sales, up 57% from the previous year. “Tanishq is a completely professional outfit,” says Kapre. “It has got reach and reliability. Since it is a Tata company, the name carries trust.”
But Tanishq focuses on gold jewelry while Gitanjali specializes in diamonds. And Choksi believes that he has a distinct edge with his mines-to-market approach. He buys diamonds directly from the Diamond Trading Co.–the rough-diamond trading arm of De Beers–and has the rest of the supply chain under his control. Titan buys diamonds that are already cut and polished.
Gitanjali also has been more aggressive than Titan in expanding overseas. It entered the U.S. market 18 months ago by buying a family-run jewelry chain in Texas, Samuels Jewelers. Started in 1891, the company had $100 million in annual revenue at the time of the purchase and nearly 100 outlets. Then last November it bought Rogers Jewelers, a Midwest chain with $80 million in revenue. That gave Gitanjali nearly 50 more outlets. At both Samuels and Rogers, Choksi has retained the U.S. management and staff, but the jewelry now comes from his diamond processing and design centers in India.
His long-incubating strategy of moving from low-margin diamond processing to upmarket retailing is paying dividends with higher profit margins. He expects to clear 10% to 12% in the U.S., before interest, taxes, depreciation and amortization. The Ebitda margins on diamond processing are only 2% to 3%. Diamond jewelry manufacturing and wholesaling aren’t much better: margins come in at only 4% to 5%.
The U.S. market is drawing Choksi because it accounts for half of the world’s diamond jewelry sales, and it’s growing at a steady clip. “Jewelry is expected to outpace [overall] retail sales growth between now and 2016, driven largely by an increase in the bridal business, and this is heavily diamond-dominated,” says Kenneth Gassman, president of the Jewelry Industry Research Institute in Virginia, who also cites increased marketing efforts by the industry.
One challenge for Gitanjali is competing with the plethora of jewelry retailers in the largely unconsolidated U.S. market. The top four jewelry chains account for only 12% of the market. The rest of the market is divided among 23,000 jewelers, mostly independent, family-owned operations. Choksi’s U.S. strategy is straightforward: He wants to build his business through acquisitions.
He’s also making a foray into China but not just with stores. He has a diamond-cutting factory in Qingdao and a diamond manufacturing plant in Panyu. China is also serving as a second hub for Gitanjali to design diamonds for the U.S. market and supply it.
Back home, Choksi is getting into the real estate business by developing a 170-acre special economic zone in Hyderabad for the jewelry industry. The government is offering 15-year tax breaks for companies that move in. Gitanjali will be first, with operations for diamond processing and jewelry manufacturing, and then will rent out the rest of the land to other jewelry companies. It also is buying casting, laser-cutting and refining equipment that these companies can rent. “This will help the [companies] avail themselves of the best manufacturing technologies without incurring a large capital investment,” says Prashant Rege, Gitanjali’s president.
Gitanjali is also focused on developing workers for the industry. It runs training programs in diamond processing and jewelry manufacturing and expects to be soon churning out 3,000 students every six months.
Analysts fret that Gitanjali is growing too fast, too soon with its multipronged business. “They need to manage growth,” says HDFC’s Verma. “Gitanjali’s task is all the more challenging, given the sheer nature of the business, which has high working capital requirements.”
But Choksi certainly doesn’t see any stops ahead. “I want to be the number one jewelry retailer in the world,” he declares.
Diamond King, For Now