By David Robinson
In seven years, Firoz Merchant has built Pure Gold up into one of the region’s dominant jewellery chains, with revenues reaching hundreds of millions of dollars each year. He tells David Robinson how.
Gold Finger|~|Gold-finger-200.jpg|~|CAUTIOUS: Merchant built Pure Gold up gradually.|~|GOLD, ACCORDING TO AN ancient Iranian proverb, bears more gold. After close to 20 years in the yellow-metal business, it’s an adage Firoz Merchant, chairman and founder of Pure Gold, one of the UAE’s largest jewellers, might well agree with.
The 48-year-old Indian national first came to Dubai on honeymoon back in 1981, fully intending to promptly head back home to Mumbai and, like a dutiful son, take the reigns of his father’s real estate business. But during his holiday in the Emirate, he was bitten by the gold bug. He describes events like he had a premonition: “During my honeymoon in Dubai I became fascinated by the gold souk in Deira; I began to understand why I did not want to enter my father's real estate business. In fact, I spent most of my time at the gold souk. My new wife was very upset with me. She said ‘did you come here for the business or the honeymoon?’”
When he got back to Mumbai, Merchant announced to his bemused parents that he had decided to forego the family firm back in India and opt instead to plunge into the previously uncharted territory of the gold market in faraway Dubai. “I said to my father, ‘I don’t really understand it, but I’m totally convinced I have to go into the gold market'. My father laughed at me. My whole family laughed at me. They thought I was crazy,” he says, with a grin.
Judging by Pure Gold’s returns in the last couple of years, it’s Merchant junior that’s having the last laugh. Pure Gold is one of three big chains — alongside Damas and Alukkas — that dominates the local jewellery market, and is the fastest growing; recording a 65% growth in sales last year, with turnover last year a little north of US$100 million. This year looks even more promising, says Merchant, who expects annual turnover to touch US$200 million. This growth is on the back of an aggressive expansion strategy that should take the number of outlets in the UAE to more than 35 by the end of this year, and encompasses new markets like Oman, Kuwait, Qatar and Bahrain.
Such a stellar performance is a far cry from the modest US$10 million turnover the firm pulled in when it commenced retail operations in 1998. Pure Gold expects to have at least of 60 outlets by the end of 2007. “The skies the limit,” Merchant says, without a hint of cliché.
The bulk of Pure Gold’s product range comprises mainly of 22, 21, and 18 karat gold jewellery, along with diamond and other precious stone collections, and designer watches. The company also specialises in a number of Italian jewellery makers such as Marciano, Caudoro, and Arando.
Gold’s purity is measured in karats. The term “karat” harks back to the ancient bazaars where “carob” beans were used to weigh precious metals — 24 karat is pure gold, but its purity means it is more expensive and less durable than gold alloyed with other metals. Different alloys — for example silver or copper — are used in jewellery for greater strength, durability and colour range. The karatage of the jewellery will tell you what percentage of gold it contains: 24 karat is 100%, 18 karat is 75%, and 14 karat is 58%, while 10 karat, the lowest, is 40%.
After eventually convincing his sceptical father, Merchant started his firm’s operations slowly and cautiously. Initially, he travelled back to Dubai every few months before eventually setting up Pure Gold, as a wholesale operation only, in 1989. “Started in wholesale is easy,” Merchant quips. “Going into retail is the hard part.”
From the outset, the operation specialised entirely in the wholesale trade of 24-karat gold — the purest form of the precious metal — hence the name: Pure Gold. “The initial wholesale operation was intended to supply manufacturers; we slowly diversified from the bullion business to the retail business in 1998, when we opened our first retail outlet at the gold souk in Deira. Its success gave us a lot of confidence,” he says.
Pure Gold now has more than 150 employees and has become something of a family operation. Merchant’s children, unlike their wily old man, have dutifully followed in their father’s footsteps. His son Karim is the managing director, while his daughter, Amreen, has recently taken over the diamond division. The group, which is the first ISO 9001:2000 certified retail jeweller in the Middle East, has drawn up plans to introduce an exchange scheme for diamond jewellery in which Pure Gold will pay the full amount for the jewellery, provided customers exchange fresh items against this amount.
Meanwhile, the value of the precious metal that makes up the bulk of Merchant’s trade continues to rise. Gold prices were hovering around the US$430 an ounce mark last week, supported by geopolitical tensions, a relatively weak US dollar and inflation concerns related to high oil prices. “The price of gold is always related to the value of the dollar. When there is uncertainty in the world, gold always looks a safe-haven investment,” Merchant says.
The value of gold has shot up by more than 40% in the last five years — a mixed blessing for Merchant’s operation. “In the beginning it affected our business,” he says, “but customers have come to accept the rise. The business is growing after all. Most consumers understand the market fluctuations.”
Merchant says his business can accommodate a gradual appreciation or depreciation in the price of gold. But what markets, consumers, or anyone else for that matter doesn’t want to see is instability. “Whenever we see uncertainty in the market then traders will never be happy,” he says.
“When the market was going higher consumers were [initially] upset, and didn’t realise the reality of the pricing. The price rise was very hard for many consumers to understand. When the price was going higher we faced a lot of problems to convince our customers. Finally they understand. They educated themselves. They have confidence now and are happy to buy at this range,” he adds.
Merchant dismisses longer-term fears that any strengthening in the US dollar and higher interest rates will reduce incentives to invest in gold. “Now we see interest rates rising, but the price of gold is holding up, [that’s] a good sign,” he says.
The US Federal Reserve looks set to keep pushing interest rates higher for the rest of the year and probably well into next year in an effort to keep inflation in check. The federal funds rate, the interest rate banks charge each other on overnight loans, has been raised by one-quarter percentage point ten times since June last year.
In addition to any fluctuations in the value of the dollar, a recovery in gold production to levels last seen in 2003 and an easing in demand growth are expected to place some downward pressure on gold prices. But Merchant is unperturbed. “There is still there is plenty of room for the upside and limited room for the downside,” he says confidently.
Some observers say gold prices could steadily appreciate and more than double in value — to US$850 an ounce — in the next three years as ongoing concerns about the weaker dollar and rising oil prices attract more and more investors to the precious metal. The record US trade deficit coupled with high consumer debt may hurt the dollar and the economy, increasing the allure of alternative investments. Meanwhile, oil producing-nations, benefiting from record prices for the fuel, could also buy more gold.
Middle Eastern nations are receiving record amounts of US dollars in exchange for oil, and this is clearly having a positive impact on demand as vast quantities of petrodollars are diversified into hard assets. This last happened on a grand scale during the 1970s when a skyrocketing oil price contributed to gold hitting an all-time-high of US$850. In addition, rising demand from the emerging superpowers of China and India could impact gold prices. Merrill Lynch forecasts that gold may rise to US$725 by 2010, as economic growth turns China into the world’s biggest jewellery consumer. In the shorter term, market watchers are talking about the possibility of gold hitting US$500 an ounce at the end of this year.
In November, the Dubai Gold and Commodities Exchange, the first electronic multi-commodity derivatives exchange in the Middle East, will commence operations. It will initially trade in gold futures contracts, followed by options trading in gold and silver at the start of next year. Merchant says the exchange will offer additional support for regional traders, which can only be good for business. In the meantime, the lack of tax or duties should maintain Dubai’s position as one of the pre-eminent gold trading centres in the world, he says. “Dubai is a transit point. It’s a very comfortable place for import and export. Dubai is not depending on any country or state. It has buyers from all over the world. Manufacturers from all over the world bring their jewellery here.”
To paraphrase the Iranian proverb, gold has certainly borne gold for Merchant. And if World Gold Council figures are to be believed, he looks set to continue to do so. The organisation claims approximately 90% of the 5 million tourists that currently visit Dubai drop into to the Emirate’s gold and jewellery stores. If that’s the case, then in the longer term, Pure Gold’s fortune’s look even better — Dubai’s rapidly expanding tourism industry is expected hit 12 million visitors a year by 2014. That could mean close to 10 million people popping into his stores every year. And should that come about, then Pure Gold’s prospects look positively glittering.||**||