Sanctions caused by the tense geopolitical situation affected all spheres of the Russian economy, affecting even one of the most stable ones – jewelry business. According to RIA Novosti, in 2022, the precious metals market decreased by 10%, and its turnover for I quarter 2023 decreased by 8%, according to Forbes. To survive and develop, domestic jewelry companies are forced to adapt to new realities.
What problems arose in the jewelry business of Russia
The sanctions affected absolutely all jewelry industries – from production to wholesale and retail – and caused many serious problems, capable of even destroying business.
Access to foreign raw materials was partially closed
First of all, logistics suffered: it became more difficult and more expensive. Direct flights from Europe and the USA to our country have been canceled (and flying with transfers became noticeably more expensive) and the visa regime became more complicated. These events caused certain restrictions on the supply of materials, gems and jewelry itself – access to foreign raw materials and technologies was partially closed.
Material prices up
At the beginning of 2022, there was a sharp jump in the dollar/ruble rate – from 75.68, as of February 1, to 104.07 rubles on March 23. And since all stones and raw materials are valued in dollars and euros, so is the price of the original materials for making jewelry, as well as for equipment for their production. After the fall in the exchange rate, there was a pullback in prices, but it almost did not affect in any way the overall situation due to the increased costs incurred by companies at the beginning of the year.
Demand for jewelry has fallen
There are several reasons for this phenomenon facing the events of 2022. Firstly, jewelry is not an essential product. In crisis such purchases are usually delayed, or customers prefer to invest in important things that are necessary at the moment, for example in real estate, or cars. After all, facing the volatility of the national currency, people try to save money by investing it in more understandable and familiar objects.
Secondly, demand was affected by the outflow of buyers with the corresponding level of revenues abroad. Many of them previously had or were able to get a residence permit in European countries, America, or Asia.
The third reason concerns sellers of luxury and premium jewelry, like us. Our clients are mainly businessmen and top managers. In conditions of economic crisis they primarily think about preservation and development of business. Buying jewelry, of course, is not their priority need.
The demand for jewelry has become difficult to satisfy
Falling demand for jewelry has led to the fact that this demand has become harder to satisfy. Prices for gems have risen, and the need in them decreased, so it became less profitable to keep stocks of stones.
Accordingly, their choice has also decreased.
Before the imposition of sanctions, we could satisfy right on the territory of Russia customers’ inquiry for interesting large stones: diamonds, sapphires, emeralds.
Many customers, before creating custom jewelry, always want to look at the materials with their own eyes, holding them in their hands, to appreciate beauty and quality.
Now our company is forced to contact foreign partners directly or place orders for stones abroad, and then wait, until they are officially imported into Russia. This, of course, complicates our work significantly.
Legislative restrictions make life difficult for the small and medium-sized businesses
Another significant problem are new legislative restrictions for jewelry business. From January 1, 2023, according to the Federal Law from 09.03.2022 No. 47-FZ, manufacturers and sellers of jewelry cannot continue to apply a simplified taxation system (STS) and a patent. They are obliged to switch to the general taxation system (GTS) and, accordingly, to start paying VAT.
This law did not affect big business. Its representatives already paid VAT. But at the same time it complicated the life of medium and small businesses: for them the tax load increased. Another consequence of this legislative initiative was complication of accounting. Working on CTS is much harder than on STS. This requires more qualified accounting, that is, hiring the appropriate specialists, as well as the purchase of additional software that entails increased costs.
Also, the new system of GIIS DMDK, which tightens control over the turnover of precious metals and gems, does not make life easier for jewelers.
For the qualitative implementation of these legislative initiatives they probably will have to expand the company’s staff, paying for access to certain technological solutions, and applying marking special to precious materials, which complicates the manufacture of jewelry.
It turns out that innovations and restrictions complicate work in small and middle business segment of the jewelry market. Many companies are experiencing difficulties or even leaving the market. If you look at the dynamics of small and medium-sized enterprises in the jewelry industry in Russia, then their the number from year to year is decreasing. It’s a bad trend because it leads to the burning of the competitive field and the formation of two, three, four major players in the jewelry industry. Monopolists get the opportunity to create alliances and regulate the entire market in terms of pricing, thereby destroying competitors.
Large suppliers can afford to work at a minimum mark-up, using mechanisms to buy metal from the population for “kopecks.” From it they make jewelry of the mass segment and sell it at minimum prices per gram. With such prices, small and medium-sized businesses simply cannot compete without loss.
Effective advertising platforms are gone
Due to sanctions, the business lost a large marketing segment. Google, Facebook and Instagram (the last two are owned by Meta, which is recognized as an extremist organization, its activities on the territory of the Russian Federation are prohibited) left Russia and actually banned advertising. Our company reallocated budgets, sending the released funds to Yandex advertising capabilities. But we failed to fully replace the lost sources of customers’ attraction. Russia does not yet have its own alternatives approximating in their effectiveness to the above mentioned foreign giants.
Nevertheless, the sanctions have a downside: they opened for domestic jewelry business previously inaccessible opportunities.
What opportunities have appeared in the jewelry business with sanctions
First, due to the departure of foreign companies competition between domestic manufacturers and global brands has decreased. For example, now we rarely hear from customers the names of foreign jewelry houses like Cartier, when they choose their jewelry. Really high-quality Russian brands (and they do exist!) obtain more chances to become noticeable and occupy the vacated market segment.
Of course, it takes time to form an understanding among the audience that domestic jewelry can replace foreign one. In addition, part of clients left together with global brands. Nevertheless, the domestic jewelry business faces now a huge field for activity, and if you are proactive, you have a good chance of success.
Thirdly, there are opportunities for communication with companies that were aimed previously solely at large profits and large partners. During the crisis, many business representatives (for example, IT developers, payment systems, logicians, etc.) lower the bar of claims and become open to different, not just big-budget proposals.
How jewelry companies can survive in a crisis
As it becomes harder for small and medium-sized businesses under sanctions, this means that it is necessary to move towards their development, and enlargement. But how can it be achieved? Here are some appropriate ways.
Networking of Multiple Companies
For example, there are several stores that operate on the territory of one city. It will be difficult for them to survive one by one, so you need to think about association. It can lead to lower personnel costs, cheaper logistics and most likely growth, because the network will definitely have higher sales volume than a sole store.
Vector towards IT technologies and online trading
E-commerce is a relatively cheap and fast way to expand the business.
Suppose a jewelry store in a small town trades in silver. If its owner makes a site and begins to develop Internet commerce, then with a large likelihood, customer geography will expand. Over time, you may need points of sale in other cities, at first, perhaps small delivery points, and then – full-fledged stores. So IT can help transform from small to medium-sized businesses.
By the way, we tested this way of expanding the business from our own experience. In 2022 we launched a mobile application that has already benefited. First, it contributed to sales growth. Secondly, it increased the level of trust to the store. Thirdly, it has strengthened our connection with customers: we started closer interaction with them, maintaining constant communication by different means, for example, using push notifications, mailing personal offers, etc.
What will happen to the jewelry business of Russia next
In my opinion, trends that occur in the jewelry market in recent years, can lead to a significant reduction in small and medium-sized businesses in this industry. It can be especially difficult for jewelry companies that can’t grow (my opinion: if a jewelry business does not grow by at least 40% in one year, then it has a great chance of closing for several years). With big probability small jewelry stores that do not start to master online sales are likely to close.
Under the conditions of sanctions in jewelry, as in many other industries of the Russian business, there will be changes designed to support the economy. But not all of them can be favorable, especially for small market players. Medium and large businesses are likely to suffer less and even to some extent can gain an advantage. Nevertheless, specific forecasts are now difficult to make, facing plenty of uncertainty factors.
By Vladimir Yazov, co-founder of the Russian jewelry brand Diamonds Are Forever