SMEDA Gold Jewelry Manufacturing & Retail Shop

Pre-Feasibility Study
GOLD JEWELRY MANUFACTURING & RETAIL SHOP
Small and Medium Enterprise Development Authority

Government of Pakistan
www.smeda.org.pk
HEAD OFFICE Waheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA Lahore Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756 Helpdesk@smeda.org.pk
REGIONAL OFFICE PUNJAB REGIONAL OFFICE SINDH 5TH Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) 111-111-456 Fax: (021) 5610572 Helpdesk-khi@smeda.org.pk REGIONAL OFFICE NWFP Ground Floor State Life Building The Mall, Peshawar. Tel: (091) 9213046-47 Fax: (091) 286908 helpdesk-pew@smeda.org.pk REGIONAL OFFICE BALOCHISTAN Bungalow No. 15-A Chaman Housing Scheme Airport Road, Quetta. Tel: (081) 831623, 831702 Fax: (081) 831922 helpdesk-qta@smeda.org.pk
6th & 8th Floor LDA Plaza, Egerton Road, Lahore. Tel: (042) 111-111-456 Fax: (042) 6304926-7 helpdesk@smeda.org.pk
January, 2006
Gold Jewelry Manufacturing & Retail Shop
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PURPOSE OF THE DOCUMENT ............................................................................................... 3 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT..................... 4 2.1 2.2 2.3 SWOT ANALYSIS ................................................................................................................... 4 ENTREPRENEURIAL FIT ........................................................................................................... 6 BUSINESS MODEL: IN-HOUSE MANUFACTURING VS. OUTSOURCED MANUFACTURING ............... 7
PROJECT PROFILE.................................................................................................................... 7 3.1 OPPORTUNITY RATIONALE ...................................................................................................... 7 3.2 PROJECT BRIEF ....................................................................................................................... 8 3.3 MARKET ENTRY TIMING ......................................................................................................... 8 3.4 PROPOSED BUSINESS LEGAL STATUS ....................................................................................... 8 3.5 PROJECT CAPACITY AND RATIONALE ....................................................................................... 8 3.6 PROJECT INVESTMENT ........................................................................................................... 11 3.7 PROPOSED PRODUCT MIX ...................................................................................................... 12 3.7.1 Product Mix - Workshop Operations ............................................................................... 12 3.7.2 Preferred karatage........................................................................................................... 12 3.7.3 Item Wise Stock Composition ........................................................................................... 12 3.8 PROPOSED LOCATION ............................................................................................................ 14 3.8.1 Location for Workshop Unit............................................................................................. 14 3.8.2 Location for Retail Unit ................................................................................................... 14 3.9 KEY SUCCESS FACTORS/PRACTICAL TIPS FOR SUCCESS .......................................................... 15 3.9.1 Key Success Factors for Workshop Unit ........................................................................... 15 3.9.2 Key Success Factors for Retail Unit ................................................................................. 15 3.10 STRATEGIC RECOMMENDATIONS ........................................................................................... 15 3.10.1 Marketing ................................................................................................................... 15 3.10.2 Ratio of Order to From-Counter Purchase................................................................... 15 3.10.3 Nature of Stock Keeping .............................................................................................. 15 3.10.4 Pricing Policies: ......................................................................................................... 16 3.10.5 Mode of Payment ........................................................................................................ 16 3.11 PRODUCT RANGE IN TERMS OF DESIGNS, ITEMS AND QUALITY ............................................... 16
SECTOR & INDUSTRY ANALYSIS......................................................................................... 16 4.1 4.1.1 4.2 4.2.1 4.2.2 4.2.3 4.3 4.3.1 4.4 4.4.1 4.4.2 4.5 INDUSTRY STRUCTURE .......................................................................................................... 16 Average Workshop........................................................................................................... 17 EXPORT MARKET .................................................................................................................. 18 Major International Market Players................................................................................. 18 Pakistans Jewelry Export................................................................................................ 19 Export Regulations and Procedures ................................................................................. 20 LEGAL ISSUES REGARDING INDUSTRY ................................................................................... 24 Taxation .......................................................................................................................... 24 MARKET POTENTIAL ............................................................................................................. 24 Customer Loyalty............................................................................................................. 24 Trends ............................................................................................................................. 24 TARGET CUSTOMERS ............................................................................................................ 24
PRODUCTION PROCESS......................................................................................................... 26 5.1 PRODUCTION PROCESS FLOW ................................................................................................ 26 5.1.1 Contracting out an order.................................................................................................. 27 5.1.2 Jewelry Designing ........................................................................................................... 27 5.1.3 Gold Refining and Mixing ................................................................................................ 27 5.1.4 Converting Gold Ingots into Gold Sheets and Wires ......................................................... 27 5.1.5 Transfer of Design / Pattern Making ................................................................................ 28 5.1.6 Engraving........................................................................................................................ 28 1
5.1.7 Finishing ......................................................................................................................... 29 5.1.8 Polishing and Buffing ...................................................................................................... 29 5.1.9 Beading and Stone Studding............................................................................................. 29 5.1.10 Gold Recovery............................................................................................................. 30 5.2 CASTING PROCESS AND MACHINERY REQUIREMENT .............................................................. 30 5.2.1 Supply of Machineries...................................................................................................... 30 5.3 JEWELRY ITEM MANUFACTURING TIME ................................................................................. 31 5.4 RAW MATERIAL .................................................................................................................... 31 5.5 MISCELLANEOUS E XPENSE .................................................................................................... 32 5.6 INITIAL INVESTMENT IN GOLD JEWELRY STOCK ..................................................................... 33 5.7 MACHINERY REQUIREMENT .................................................................................................. 33 5.8 FURNITURE & FIXTURES ....................................................................................................... 34 6 LAND & BUILDING REQUIREMENT .................................................................................... 35 6.1 LAND REQUIREMENT ............................................................................................................ 35 6.1.1 Rent................................................................................................................................. 35 6.2 UTILITIES REQUIREMENT ...................................................................................................... 36 7 8 HUMAN RESOURCE REQUIREMENT................................................................................... 37 FINANCIAL ANALYSIS............................................................................................................ 38 8.1 8.2 8.3 9 PROJECTED INCOME STATEMENT ........................................................................................... 38 PROJECTED CASHFLOW STATEMENT ...................................................................................... 39 PROJECTED BALANCE SHEET ................................................................................................. 40
KEY ASSUMPTIONS................................................................................................................. 41 9.1 9.2 9.3 ASSUMPTIONS RELATED TO THE SCOPE OF OPERATIONS ......................................................... 41 INCOME RELATED ASSUMPTIONS ........................................................................................... 41 EXPENSE RELATED ASSUMPTIONS ......................................................................................... 43
Pre-feasibility Study
DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject matter and provide a general idea and information on the said area. All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. Although, due care and diligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA does not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The prospective user of this memorandum is encouraged to carry out additional diligence and gather any information he/she feels necessary for making an informed decision. For more information on services offered by SMEDA, please contact our website: www.smeda.org.pk
DOCUMENT CONTROL
Document No. Prepared by Issue Date Issued by PREF-87 SMEDA-Punjab Jan 2006 Library Officer
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PURPOSE OF THE DOCUMENT
The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The document also provides sectoral information, brief on government policies and international scenario, which have some bearing on the project itself. The purpose of this document is to facilitate potential investors in gold jewelry manufacturing and retail enterprise by providing them a macro as well as a micro view of gold jewelry business with the hope that such information as provided herein will aid the potential investors in crucial investment decisions. The need to come up with pre-feasibility reports for undocumented or minimally documented sectors like jewelry manufacturing and retailing sector attains greater imminence as the research that precedes such reports reveal certain thumbs of rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and its successful management. This particular pre-feasibility is regarding Gold Jewelry Retail Enterprise, which comes under a broader Gem and Jewelry Sector.
CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT
Below are some factors and variables that have a great bearing on setting up jewelry manufacturing and retailing enterprise: 2. 1 SWOT Analysis Before stepping into any venture, one has to analyze the strengths, weaknesses, opportunities and threats (SWOT). An industrial / sectoral SWOT analysis is given below. A prospective entrepreneur would have to conduct a micro-level SWOT analysis on the basis of the intended city / town / village for his business.
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SWOT Analysis Strengths 1. Stock of skilled craftsmen; 2. Low manufacturing cost; 3. Low capital investment in machinery; 4. Price inelasticity of demand for gold jewelry implying the relative ease with which an entrepreneur may pass on increase in costs to the customer. 5. Easy exit since gold stock can be resold easily (though capital gains / loss possible due to change in gold price); 6. Premium mark-up is accepted in general by customers if they perceive that the jewelry item they are purchasing is unique or has a designers value. Thus there is greater opportunity for an entrepreneur to charge higher mark-up on exclusively positioned jewelry line. Opportunities 1. Increasing population thus expanding potential domestic market; 2. Gold price is perceived to be outmatching inflation thus purchase of gold jewelry is more readily justified in terms of future security. 3. Increasing demand for 22k gold jewelry abroad amongst South Asian expatriates; 4. Increasing demand of 18k jewelry within Pakistan provides opportunity for jewelers to increase their stock size and range with lesser investment in gold. 5. Increasing participation of females in work-force, thus greater purchasing power of women to
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Weakness 1. Weak sharing of information and best practices within the industry. Trade secrets tend to be kept within family; 2. Demand for exclusivity prevails over demand for standardized items. Thus the degree of mechanization of the jewelry manufacturing process tends to be low; 3. Maintaining exclusivity of designs is difficult due to absence of copyright laws within the industry. Investment in exclusive designers is thus risky. 4. Highly skilled craftsmen are concentrated in few clusters, mainly in Karachi and Lahore; 5. Practice of hallmarking products for export is low, thus non-hallmarked items are less reliable abroad than competitive but hallmarked jewelry.
Threats 1. Improving trade relations with India may lead to import of competitive jewelry items into Pakistani Market; 2. Competition from Far-East Asian countries is already somewhat visible; 3. Proper designing matching the market taste is crucial to sales, if designing does not match the market demand, the entrepreneur may be stuck with slow conversion of stock to sales. 4. Frequent turnover of key craftsmen risks loss of quality and exclusivity;
purchase jewelry items; 6. Increasing trend and inclination in the market to pay premium for exclusive designs / brands has a created a niche market for products bearing higher profit margin. 2. 2 Entrepreneurial Fit
The prospective investor will need to assess an entrepreneurial fit in the sector in light of the sectoral SWOT analysis. Table 2-1 below gives an example of crucial traits contributing to entrepreneurial fit in the jewelry sector, and course of action to be taken in case the crucial trait is present, and also if its lacking. Table 2-1: Entrepreneurial Fit
ENTERPRENURIAL FIT CRUCIAL TRAITS
Importance Source of process knowledge; Prevents costly managerial mistakes more probable in trial and error based decision making; Better knowledge/ guidance of the market in terms of trends, suppliers, craftsmen..etc. Effective quality control; Feasibility assessment of selecting production technology Unique selling proposition; Premium pricing Customer Loyalty
If Positive Entrepreneurial advantage; Lower risk than if any industrial background is lacking.
Action Needed if Negative Intensive industrial and sectoral study in terms of processes, modes of quality control, workers' management practices; Preferred technology; Preferred suppliers..Etc.
Family Background
Process Know How
Entrepreneurial advantage; Effective quality check; Less risk in management and ownership of retail / manufacturing unit. Entrepreneur is able to determine the stock of jewelry items in terms of designs and variety.
Acquire process know how; Delegate Quality Control function to employee or partner who has the process / production know how Prospective customer's feedback on preferred / not so preferred styles; Advice of established jewelers catering to similar target market; Hire graduates from designing / arts' institutions; Greater investment in jewelry catalogues.
Flair for designing / Ability to gauge trends
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2. 3
Business Model: In-House Manufacturing vs. Outsourced Manufacturing
The entrepreneur - assuming sufficient financial resources - then needs to decide on his business model in terms of having his workshop in-house, or outsource jewelry production. The following table gives advantages and disadvantages of the two options. Table 2-2: Pros and Cons of In-House vs. Outsourced Manufacturing
Pros and Cons of In-House vs. Outsourced Manufacturing In-House CONS Greater total set-up cost Outsourced CONS Less convenient in terms of quality control Difficult to keep designs from being copied by competitors Lesser control over order completion time
PROS Greater control on quality Greater chance of securing design exclusivity Optimal order processing Better process control when production under one roof
PROS Lower set-up cost
Greater investment risk Greater labor cost in order to prevent craftsmen's turnover Cases of design leakages and craftsmen refusing to work exclusively for one jeweler commonly reported Not feasible for small scale jewelry business
lower investment risk feasible for small scale jewelers Possible to rationalize on total labor cost for small/ medium size business Greater range of choice in terms of craftsmen to be used
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3. 1
PROJECT PROFILE
Opportunity Rationale
A lack of passion for gold jewelry in Pakistan, and even amongst the Pakistani expatriates, is hard to imagine. It is a cultural idiosyncrasy within the South Asian Region. Gold jewelry is perceived not only as a decorative item but a symbol of status. This perception pervades all classes. Another reason for the vitality of the gold jewelry market is that all domestic jewelry products are priced by weight, which results in the fact that people perceive gold jewelry as a means of security net for the future because gold alone has an internationally agreed price (although there is no regulated appraisal system for selling second-hand jewelry, more often people get much less money than they have paid when they try to return the jewelry). On the supply side, gold jewelry manufacturing is labor intensive. The skill of most of the craftsmen is passed on from generation to generation or through a process of intense apprenticeship. Gold jewelry manufacturing units tend to specialize in terms of process,
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thus they all tend to form a cluster of independent units that utilize each others service to complete a jewelry item. This makes it easier for a new entrant to identify craftsmen in terms of skill, reliability and quality. In case the entrepreneur wishes to set-up an integrated business (retail and manufacturing), most of the machinery used is now locally made (largely in Gujranwala) and is considered almost at par with the Italian machines for the same purpose. Hence, initial capital investment in machinery is less and does not pose a great barrier to entry into enterprise of gold jewelry manufacturing and retailing. 3. 2 Project Brief The subject enterprise of this pre-feasibility study is an integrated business gold jewelry manufacturing and retailing business. The manufacturing unit known as the workshop is a self sufficient unit that out sources only the following processes: gold refining and mixing, mechanized chain and bangle making. With required rate of return for the project being 21%, the project is with conservative assumptions is expected to have a net present value (NPV) of Rs. 17,979,862/- and a modified internal rate of return (Modified IRR) of 34.50%. The discounted payback period is about 3.6 years. Project Outcomes Net Present Value 17,979,862 Modified IRR 34.50% Discounted Payback (years) 3.6 3. 3 Market Entry Timing The gold jewelry retailing sector faces a seasonality factor that becomes apparent in the sales. Sales tend to peak during the wedding season. Wedding seasons fall in winters (October - February); and in summers (June August). As far as the importance of timing of setting up a gold-jewelry business is concerned, its preferable that the business be set up to coincide with either of the wedding seasons. This would not only help the initial cash flows but also render any promotional tactic (even if it may be just an attractive faade of the shop or a w ell designed jewelry) more effective by having greater number of prospective gold jewelry buyers in the market. 3. 4 Proposed Business Legal Status Since majority of Gold Jewelry business are family owned, most of these enterprises hold the status of registered partnerships. The other option mostly taken up is that soleproprietorship. The latter two options are preferred over the option of incorporation mainly due to requirement, in the case of incorporation, of periodic disclosure of financial information. 3. 5 Project Capacity and Rationale The capacity of the workshop is defined as the volume of output the workshop is can produce when working to full capacity at a given period of time. In this case, the capacity of the workshop is defined as the amount of gold jewelry in terms of grams (weight) that
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the workshop can produce in a year when working at its full capacity. The research, based on interviews with gold jewelry making craftsmen suggests that on average, a skilled craftsman can produce gold jewelry worth 575 grams of gold in a month or 6900 grams (600 tolas) worth of jewelry in a year. Since majority of gold jewelry is handmade and only small portion, if any, of the jewelry involves casting process, number of gold jewelry manufacturing craftsmen is the key variable determining the capacity of the workshop. The capacity of the retail unit in gold jewelry industry, on the other hand, is described in terms units of gold invested in stock of jewelry prepared by a jeweler at any one time. Table 3-1 shows how a manufacturing unit and gold jewelry retail enterprise is described in terms of capacity and scale. Table 3-1: Capacity Description Capacity Description Capacity Description for Workshop Unit SCALE Small Medium Large SCALE Small Medium Large Number of Output / year (grams) Output / year (tolas) Craftsmen 3-5 20,700 34,500 1,800 3,000 6 - 10 41,400 69,000 3600 - 6000 11 or more 75,900 - more 6,600 - more Capacity Description for Retail Unit Stock Level (Grams) Stock Level (Tolas) 1150 - 2300 100 - 200 2300 - 8050 200 - 700 8050 or more 700 or more
This pre-feasibility report suggests that to enter the gold jewelry manufacturing and retail industry with an integrated business of manufacturing and retailing, the new entrant should enter with at least a medium scaled workshop and also a medium scaled retail unit. The medium sized workshop and retail business is the minimum feasible scale for integrated unit since the larger number of overheads (as compared to if manufacturing and retail were separate independent businesses) require a minimum level of sales for the overhead costs to be met. This minimum level of sales is met with operations at medium scale. Medium scaled workshop can provide jewelry items for its own retail units where generating greater profit margins. Furthermore, in order to keep working capital required, especially in terms of investment in gold jewelry stock, the manufacturing unit can offer its services to other gold jewelry retailers who outsource manufacturing of gold jewelry items. Starting at a larger scale would expose the entrepreneur to greater risk while starting too small, with given fixed and administrative costs, can push the break even period for the project too far ahead. For example, with the given cost parameters described as assumptions, starting with workshop of 4 craftsmen and retail unit with a stock of 2300 grams of gold can push the discounted payback period to more than 10 years.
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The financial model given at the end of this report assumes initial capacity of workshop to be manufacturing of gold jewelry worth 69,000 Gms / year (6000 tolas / year) and retail outlet with initial capacity in terms of gold jewelry stock at any one time to be 5175 grams of gold (450 tolas) worth of jewelry. The model as depicted in Table 3-2 shows that the workshop will initiate its operations at 60% of its capacity in year 1, and the level of operations will increase as manufacturing unit receives more orders from its own retail unit and from other gold jewelry retailers. It is estimated that the manufacturing unit will be able to operate at 90% of its initial capacity by year 8. The model also assumes that in initially, in year one, the proportion of workshop output sold be self and that manufactured for others will be 60 % and 40% respectively. This implies that in its initial year the modeled enterprise will rely on orders from another jewelers due to limited capacity of the self owned retail unit to absorb the workshop capacity and also as a risk managing strategy since the greater the proportion of workshop output is to be sold be self owned retail unit greater the investment in stock required of the entrepreneur, thus greater level of investment tied up in stocks. The ratio of workshop output sold is self owned retail against that manufactured for other jewelers increases as the self-owned retail unit marks its place in the market and gathers its greater market knowledge that will ensure greater sales and thus greater capacity to absorb the output of the workshop. Hence by year 10, the model assumes that the business reaches equilibrium in terms of product mix whereby 85% of the workshops output is sold by self and 15% is manufactured for other jewelers. This accelerating ratio is based on the assumption that the marginal return on investment on selling gold jewelry by self is greater than that on gold jewelry manufactured for others till the 85:15 of product mix. Table 3-2: Capacity and Operations Parameters
Capacity and Operations Parameters Annual manufacturi ng Capacity = 69,000 grams Level of Operations (ratio of capacity) of Workshop Level of workshop Operations (volume of gold) grams Stock Level of Gold Jewelry Items to be Maintained by Retail Unit at Any Given Time Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
0.6
0.65
0.7
0.75
0.8
0.85
0.85
0.9
0.9
0.9
41,400
44,850
48,300
51,750
55,200
58,650
58,650
62,100
62,100
62,100
5175
5399
6261
6469
6133
6924
6924
7331
7331
7331
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Ratio of workshop output sold by self-owned retail unit Ratio of workshop output manufactured for other gold jewelry retailers
0.6
0.65
0.7
0.75
0.8
0.85
0.85
0.85
0.85
0.85
0.4
0.35
0.3
0.25
0.2
0.15
0.15
0.15
0.15
0.15
3. 6
Project Investment
Table 3-3 below gives an estimate of the initial investment required to set up a workshop with annual capacity to manufacture gold jewelry items worth 69000 grams and gold jewelry retail unit operating initially with stock level of 5,175 grams (450 tolas). Table 3-3: Initial Investment Description Shop Lease Down Payment Retail Shop Work Shop Total Lease Payment Furniture and Fixtures Retail Work Shop Total Furniture & Fixture Machinery Wire Making Machine Plate making machine Wax Casting Machine Polishing Machine and Accessories Tools for craftsmen Tools for gem studders Scales Total Machinery & Equipment Raw Material + Jewelry Stock Initial Gold Jewelry Stock Nitric Acid Wax Total Raw Material Fee Licenses Pre-Operating Cost (personnel cost)
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Amount (in Rs.) 200,000 72,000 272,000 197,000 50,308 247,308 25,000 25,000 315,500 14,000 40,000 8,000 6,600 434,100 6,073,380 8,000 6,000 6,087,380 10,000 10,000 80,000
Minimum Cash Reserve Total Investment 3. 7 Proposed Product Mix
329,878 7,470,666
3.7.1 Product Mix - Workshop Operations The workshop operations will be based on orders from other gold jewelry retailers who outsource gold jewelry manufacturing and on gold jewelry items sold directly through self-owned retail unit of the model. Table 2.5.2 explained earlier shows how total workshop operations are expected to be distributed between output made on order for other jewelry retailers and output sold directly through self-owned retail unit. The following subsections refer to product mix of the gold jewelry retail unit. 3.7.2 Preferred karatage Pakistanis and Indians abroad and at home prefer 22-karat jewelry. The West and Far East prefers jewelry of 18 14 karat gold. Because Pakistanis consider gold jewelry an asset, a trend towards preferring low karat jewelry by the mainstream local market is unlikely in the foreseeable future. However, a niche for 18 karat jewelry has emerged. This niche constitutes largely of working women belonging to age group 25 years - 40 years. The business model in this report assumes traditional / mainstream customers who prefer 22 karat gold jewelry as the target market. 3.7.3 Item Wise Stock Composition Based on the interviews of established jewelers, we were able to establish rule of thumb for stock composition of total amount of gold invested in stock of jewelry available for display. We were also able to establish an average amount of gold per item type and average number of units stocked per item type. Table 3-4 below shows average gold content in grams per jewelry item. Table 3-4: Average Gold Content AVERAGE GOLD CONTENT (Grams) PER ITEM Item Gold Content (grams) - Range 80% of items of 20% of items of same category sold same category sold 3.5 7 3 7.5 43 34 10.25 24.75 15 7 34.5 37
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Average Gold Content / Item 4.2 3.9 41.2 13.15 13.4 35
Earrings Rings 12 Bangles' Set Bracelets Chains Necklaces
Pendants Teeka Bridal Set Jhoomer
3.25 4.375 57.5 11.5
4 3 115 17.25
3.4 4.1 69 12.65
Calculation of average gold content for earrings (as an illustration) is calculated thus: 3.5 grams * 0.8 + 7 grams * 0.2 = 4.2 grams Table: 3-4 is to be read as, for example, of the total units of earrings kept as stock for sale, 80% weigh around 3.5 gms, while 20% of earrings kept in stock weigh about 7 grams. Given the average weight of gold (gms) per jewelry item and the information regarding average item wise stock composition of jewelers participating in this research, Table: 3-5 below gives an idea as to how, percentage wise, total gold available for jewelry stock may be distributed among various jewelry items. Further more this distribution is translated into number of units per jewelry for initial stock level of gold jewelry items worth 4600 grams (400 tolas). It is of note that smaller items have higher sales turn-over than larger jewelry items. Thus, though small items like earrings, rings and pendants utilize together only 16 % of total gold available for stock, unit wise they constitute 61% of total units prepared as stock. Table 3-5: Weight wise distribution of gold metal
WEIGHT WISE DISTRIBUTON OF GOLD METAL STOCK AMONG JEWELRY ITEMS
Item Earrings Rings Bangles' Design (four bangles per design) Bracelets Chains Necklaces Pendants Teeka Bridal Set Jhoomer TOTAL
Item-wise Distribution of Gold Stock (%) 4% 9% 14% 7% 3% 43% 3% 0% 17% 0% 100%
Units per Item Type given 4600 gms (400 tolas) of Gold 40 units 108 units 16 units 24 units 10 units 56 units 42 units 2 unit 12 units 0 units 310 units
It is important to note that as such jewelers in Pakistan do not compose their stock on the basis of any hard and fast rule. The stock size and its composition are improved as the retailer gains experience of the market itself.
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3. 8
Proposed Location
3.8.1 Location for Workshop Unit The ideal location for workshop would be within a jewelry cluster often referred to as sirafa bazaar in main urban cities. The advantages of locating the workshop are many and some of them relate to the fact the cluster is almost self suffieicient in terms of supply of raw material, small tools and equipment, ancillary services such as machine repair, and also in terms of gold jewelry making processes that may need to be outsourced. More important are the advantages in terms of networks and links developed with suppliers, gold jewelry retailers who may be potential customers, and with potential craftsmen who may be recruited when required. The downturn of locating the gold jewelry manufacturing workshop that integrates many processes that are usually outsourced (eg. Polishing and buffing, casting) is that the space required for the model workshop will be far greater than the average workshop found in sirafa bazaar. Sirafa bazaars are often located in the oldest part of the city. Finding rentable space is hard and if available, space in terms of complete room is often small. This implies that the workshop may have to be set up in two different rooms / tiers. Also, the rents and rates of space in a jewelry cluster is almost double that of space for workshop outside the cluster. The difference becomes greater the further one goes from the cluster. For example, space 22 by 88 square feet may be let at Rs.6000/month if located within the cluster but may cost Rs.3000/month in old part of the city but far from the cluster. 3.8.2 Location for Retail Unit An ideal location for setting up a jewelry shop would be in main market or shopping center where more females tend to shop frequently. Ideally that location should not only have a wide range of shops in terms of clothes, shoes etc but also have a cluster of competing jewelry shops. The latter characteristic is important for jewelry buyers tend to shop around for designs and variety before making a purchase, and because it is convenient for a prospective buyer to window shop amongst clustered shops, they are less likely to enter a recently set-up, and not so renowned shop located in isolation. Its noted that even shops of established reputation ultimately shift to main market areas to boost their sales. In short, factors important in considering the location of the shop would be: Accessibility Security Area frequented by female shoppers Cluster of competing jewelers
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3. 9
Key Success Factors/Practical Tips for Success
3.9.1 Key Success Factors for Workshop Unit The key success factors in gold jewelry manufacturing business are: Quality of craftsmanship Managing turnover of key craftsmen; Establishing a reputation of reliability (in terms of honest and timely processing of orders) and quality; Networking to attract and ensure sufficient orders to cover overhead costs; Networking to identify suppliers and service providers who are reliable and provide adequate quality. Housing as many processes in-house so as to provide as many services under one roof. Location 3.9.2 Key Success Factors for Retail Unit The key success factor in gold jewelry retail business is the turnover which in turn depends on: Quality Design Variety and product range displayed under one roof. Location 3. 10 Strategic Recommendations
3.10.1 Marketing Marketing and promotional schemes are financially feasible only if you have sufficient capital / stock in terms of finished product that you are able to satisfy a customers need. Hence, unless one has a sufficiently wide range of jewelry items to cater to a prospective buyer attracted by marketing scheme, the attraction of that customer to your shop may not translate into sales but into higher average selling cost. 3.10.2 Ratio of Order to From-Counter Purchase In the wedding season, purchases on order outnumber those from the displayed stock and vice versa on other occasions. 3.10.3 Nature of Stock Keeping Increase the average stock size to hedge against gold price increase if the trend in of rising gold price is expected to continue for some time. Some stock is kept of gold and those stones, precious and semi precious gems the type of which have been used in displayed jewelry items to cater to the possibility that a customer may want to purchase a displayed item with some alterations. Stock in term of duplicates of displayed jewelry item is not kept.
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3.10.4 Pricing Policies: Increased competition has reduced jewelers control in terms of price determination of smaller, and relatively non-exclusive jewelry items. One is, however, able to charge a premium on exclusivity and uniqueness of the design. Price of gold jewelry item is extremely sensitive to price of gold. Furthermore since gold jewelry has a high income elasticity of demand, the jeweler is not free to pass all of the increase in cost of raw material to the customer but has to absorb some of it himself. If a customer has ordered an item, then the rate of gold that a customer will pay is established when the order is given by the customer and is largely the current market rate at that time. 3.10.5 Mode of Payment Advance: Advance is normally taken when the jewelry item being sold is to be made on order. There is no fixed percentage of the orders cost demanded since our business depends on relationship building and we keep a customers ability to pay advance at a given moment under consideration. On the Spot Payment: On the spot purchases of displayed items are paid for at the time of the purchase. Credit: Credit sales are neither an industry norm, nor encouraged by the jewelers. In the rural areas, however, payment if not purchase coincides with the harvesting of crops. 3. 11 Product Range in Terms of Designs, Items and Quality
The type of jewelry items in term of design and quality depends on the clientele of the jeweler. The type of clientele, in its turn depends on the location of the shop. The choice of target customers may be gauged by the general trend as seen via the jewelry items sold by other jewelers in the same or similar area and by trial and error. However, the jewelers vision and his understanding of the market trend have a great bearing on the range and variety of jewelry items displayed in his shop.
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4. 1
SECTOR & INDUSTRY ANALYSIS

Industry Structure
Pakistans jewellery sector is basically retail driven due to a huge local market. Karachi and Lahore are the main hubs for jewellery manufacturing. Dubai is the main exporter of bullion to Pakistan. The dominant reason for the purchase of jewellery in Pakistan is marriage, as gold is perceived as a form of savings and it is accumulated for this purpose over several years. However, with increasing awareness and education, along with other emerging investment opportunities, jewellery is now gaining preference as more of a fashion symbol. The range of jewellery items produced by the jeweller is very wide. The popular items of Pakistans jewellery are Teeka, Pendants, Bazuband, Jhoomer, Bangles, Nose Pin, Kara, Earrings, Ring, Balian, Pazeb and Necklace.
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Jewellery industry is highly fragmented, with very few players having complete in-house production facilities. Most of the players outsource manufacturing process to small vendors. The trade consists of small companies (generally up to 15 workers) with freelance craftsmen. The workforce works in the traditional manner sitting on the floor at low benches rather than seated at conventional workbenches, which are more comfortable and productive. The tools and technology employed are mostly basic. The use of hightech machinery is missing throughout the value chain. Each of the major cities of Pakistan has a Sarafa Bazaar, consisting of hundreds of small showrooms, bullion dealers and casting shops. Major cities and their markets are: KARACHI LAHORE RAWALPINDI/ISLAMABAD Zaibunisa Street (Saddar), Tariq Road & Hydery Gulberg, the Mall Road, Suha Bazaar Muree Road, Mareer Chowk, & Jinnah Super Market
The industry structure is very fragmented and one with high degree of operational / functional specialization. For a polisher of gold jewelry will not do anything but polish. Thus a polisher can be an independent unit in manufacturing process and may cater to multiple jewelers. Complete jewelry manufacturing and integrated retailing units are rare in the industry. The markets preference leans towards exclusive designs. Thus jewelry manufacturing is very labour intensive, and unlike in the West, degree of mechanization and production of standardized items except in case of generic gold chains and perhaps bangles is very low. Hence, every process of jewelry making requires high level of expertise and skill so mush so that jewelry manufacturing is closer to being a form of art. It is an art in the sense that when it comes to making of hand made jewelry, each process has more than one way of doing it, and the quality of work depends on the skill of an individual worker/ craftsman. Because jewelry manufacturing is spread over number of specialized units in terms of process, jewelry making industry tends to be clustered or geographically concentrated. These clusters of workshops are found in Lahore, Karachi, and Rawalpindi in what are called the Sirafa Bazaars. Large and renowned jewelers tend to have their workshops preferably in Karachi or in Lahore due to exceptional skill level developed there over time. In order to supervise the quality of workmanship and design of their jewelry item, jewelers not located in the main jewelry manufacturing cities but having their workshops there then have a representative or an agent in the city where their jewelry is being manufactured. 4.1.1 Average Workshop An average gold jewelry manufacturing workshop tends to be a 10 by 20 square feet covered area that is located within or near a jewelry manufacturing cluster if the workshop depends on outsourcing some of the processes as gem setting or polishing. Workshops visited in the jewelry manufacturing clusters (Sirafa Bazaars) were further specialized in terms of bangle manufacturers alone; makers of plain jewelry only; makers
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of studded jewelry only, making gold balls to be sold to other workshops ..Etc. A completely self-sufficient workshop is seldom found in the industry. Average number of workers in a typical gold jewelry manufacturing workshop found within a cluster like Sirafa Bazars is 5 to 6 craftsmen. These craftsmen tend to be generally the pattern makers, or those craftsmen who transfer the design on to the gold. Few workshops have a polisher and a finisher, and even fewer have a stone setter in the same workshop. Within the workshop, however, workers tend to be specialists in terms of their functions. For example, a workshop will have one worker who specializes in copying designs from catalogues; another, a maker of studded jewelry; another, a maker of plain jewelry, or a worker who only makes bangles Etc. The average number of hours worked are 9 hours a day, six days a week. Workers are often part of a local union. The recruitment of craftsmen is based on references and personal recommendations. According to some jewelers the turnover rate of workers recruited on the basis of personal recommendation / reference tends to be low since the workers recruited in this manner would not like to loose the confidence of their referees. The remuneration of the craftsmen is a combination of base salary and performance (in terms of units made and / or quality of work). 4. 2 Export Market
4.2.1 Major International Market Players Global trade for Gems and Jewellery has shown a positive growth trend showing increasing demand for these valuable fashion articles in international market. For Jewellery the total trade expanded from US$21.0 billion in 1999 to US$27.9 billion in 2003. Whereas for Gemstones trade expanded from US$44.7 billion in 1999 to US$56.5billion in 2003. Following are the figures in terms of million US Dollars for top ten Gems and Jewellery exporting countries: Table 4-1: Jewellery Exports (US$ Million)
1999 Italy Hong Kong USA India Switzerland United Kingdom China Thailand Germany France 4,979 1,716 1,938 865 1,283 1,260 1,994 788 680 2000 5,317 2,132 2,180 1,019 1,346 1,043 1,791 901 795 842 2001 4,864 2,081 2,596 1,208 1,537 1,480 1,498 890 805 1,013 2002 4,857 2,442 2,718 1,443 1,970 1,605 1,660 1,062 816 966 2003 4,537 2,854 2,768 2,175 2,056 1,948 1,761 1,202 1,035 1,018
United Kingdom 9% Switzerlan d 10% India 10% Thailand 6% China 8% Germany France 5% 5%
Italy 21% Hong Kong 13%
USA 13%
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Source: UNSTAT 1
Table 4-2: Jewellery Imports (US$ Million)

1999 USA United Kingdom Hong Kong Switzerland France Germany Singapore Italy Canada Thailand
Source: UNSTAT 2
2000 6,553 1,627 1,261 1,183 829 861 552 374 404 44
2001 6,359 1,988 1,236 1,174 948 792 529 408 388 78
2002 7,221 2,320 1,435 1,393 950 844 434 386 101
2003 7,615 2,843 2,023 1,323 1,074 928 604 550 432 158
Switzerland 8% Hong Kong 12% France 6% Singapore 3% Germany 5%
5,772 1,713 1,070 1,054 723 887 582 307 283 -
Italy 3%
Cananda 2% Thailand 1% USA 44%
United Kingdom 16%
4.2.2 Pakistans Jewelry Export The export of jewelry constituted only about 1.3% of the total exports made by Pakistan. The export of jewelry had been around Rs.807 million (US$ 1,366,000) over the period of July 2004 to March 2005. This was in effect a decrease of 16% over jewelry exports reported over the period July 2003 March 2004, while the total exports showed an increase of 18% over the period considered above.3 Pakistans export of jewelry targets mainly the South Asian expatriates in Dubai, USA and UK. Several factors contributing to an insignificant share of world jewelry export contributed by Pakistan is that firstly, the industry is still fragmented and not well documented. Secondly, the designs produced by the jewelers are very traditional and are made in 22 carat. No hall marking or branding system exists. The larger export market, on the other hand demands 18, 14 and 8 carat jewellery with new and lightweight designs. The giftware market is negligible. Pakistans Export Promotion Bureau has identified Pakistans jewelry industry as a sector with major potential. To support this sector, a gold assaying / hall marking facility is being established in the proposed Dazzle Park in Karachi. The necessary ground work is complete and funding has been lined up from the Export Development Fund. Following tables contains information on Pakistans export performance in the Jewellery Sector for the last 5 years. Table 4-3: Jewellery Exports of Pakistan (US$)
897 SITC Code Revision 3 897 SITC Code Revision 3
STATEMENT SHOWING EXPORTS OF SELECTED COMMODITIES DURING THE MONTH OF MARCH, 2005 Ministry of Commerce, Pakistan. 19
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Years Amount 24,429,084 2003 30,145,136 2002 19,419,226 2001 23,800,144 2000 12,242,415 1999 110,036,005 Total Table 4-4: Five Years Cumulative Export Figures with Major Trade Partners (US$) Country Utd. Arab Emirates USA United Kingdom Canada Singapore Other partners Total Amount 50,003,601 34,405,920 18,467,423 2,543,479 825,053 3,790,529 110,036,005
Source: Source: UNSTAT4
Most of the jewellery exported from Pakistan is purchased by Pakistani expatriates. There is a need to improve our understanding of international designs and trends to increase our customer base beyond our traditional cliental. 4.2.3 Export Regulations and Procedures The export of precious and semi-precious stones and gold jewelry is governed as per special procedure notified vide S.R.O. 266(I)/ 2001, dated 7-5-2001.5 3.2.1.1 General Rules: (1) Export of gold jewellery shall be allowed by air, parcel post, courier service and by sea, as accompanied or unaccompanied baggage. (2) Export of gold jewellery shall be against advance payment, irrevocable letter of credit firm order or contract, delivery or payment or delivery on acceptance (DP/DA), or consignment sale, as well as on self-consignment basis through authorized representative. (3) In addition to registration under the Registration (Importers and Exporters) Order, 1993, exporters of jewellery and gemstones shall also be registered with the Export Promotion Bureau as exporters for jewellery and gemstones on application in the form as set out in Annexure A of S.R.O. 266(I)/ 2001, dated 7-5-2001.
897 SITC Code Revision 3
Reference : Export Promotion Bureau. (www.epb.gov.pk). Section 3.2.1 is abstracted from S.R.O. 266(I)/ 2001, dated 7-5-2001. 20
(4) Exporters of jewellery and gemstones shall be required to be members of one of the recognize Associations such as the All Pakistan Gem Merchants and Jewelrs Association, Karachi, or the All Pakistan (5) Commercial Exporters of Rough and Unpolished Precious and Semi Precious Stones Association, Peshawar. or any other Association for jewellery and gemstones recognized by the Ministry of Commerce under the Trade Organizations Ordinance, 1961 (XLV of 1961) (6) Exporters of jewellery and gems stones shall maintain a Jewellery Pass Book duly authenticated by the Export Promotion Bureau and all export and import transactions, as well as import entitlements and actual imports, shall be entered in the Jewellery Pass Book and authenticated by the Export Promotion Bureau. 3.2.1.2. Export procedure:1. Export of gold jewellery shall be made according to the usual Form E procedure of the State Bank of Pakistan. 2. The sale proceeds of gold jewellery and gemstones exported under any provision of this notification shall be repatriated either wholly in foreign exchange through normal banking channels or partly in the form of gold up to one hundred per cent weight of gold content of jewellery exported including wastage, and gemstones, and partly in foreign exchange for value addition. 3. Export of gold Jewellery and gemstones and import of gold and gemstones shall be provided preferred handling by the Customs authorities for clearance of related goods, and, in the weighment of gold, variation of one per cent shall be allowed. 4. The exporter or his authorized representative shall produce the parcels or boxes containing gold jewellery or gemstones along with export documents to the Customs authorities for weighment and examination under strict security and privacy. 5. The Customs authorities shall verify the weight of gold as per exporter's declaration, and shall assess the minimum value addition norms as specified in this notification. 6. The export documents shall clearly indicate the type of gold jewellery, whether plain or studded or embedded, and purity and karatage of gold used in making the gold jewellery. 7. For gold jewellery studded or embedded with gemstones, the value of gemstones shall be shown separately in the export documents including Form E, clearly indicating therein the kind, value and weight of gemstones of each article. 3.2.1.3. Entrustment scheme:- The Entrustment Scheme provides for export of gold jewellery and articles against import of gold supplied as partial advance payment, by the foreign buyer, to the extent of the quantity of gold to be used including wastage, in the manufacture of the items to be exported. 3.2.1.4 Export of gold jewellery and gemstones on self consignment basis:-In case of export of gold jewellery and gemstones taken out by authorized representative of an exporter on self-consignment basis, the following procedure shall be followed, namely: i) The exporter shall submit to the Export Promotion Bureau, an application in the form as set out in Annexure E. in duplicate for export approval and import authorization and
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such application shall be checked and verified by the Export Promotion Bureau and entries shall be made in the Jewellery Pass Book; (ii) The import authorization shall be valid for one hundred and twenty (120) days from the date of departure of the exporter's representative for bringing back gold and gemstones o_ export proceeds and any unsold gold jewellery or gemstones; (iii) The Jewellery Pass Book, duly authenticated by the Export Promotion Bureau, shall be produced by the exporter's incoming representative to the Customs authorities on, arrival for clearance or release of gold, gemstones and any unsold gold jewellery and gemstones (iv) The sale proceeds shall be realized, within one hundred and twenty days from the date of export in foreign exchange through normal banking channels or partly in the form of gold content of the jewellery exported including wastage and gemstones; (v) The unsold jewellery or gemstones shall be deposited with the Customs authorities and shall be cleared against relevant entries in Jewellery Pass Book, and a bill of entry shall be filed for such import of unsold jewellery or gemstones; (vi) Import entitlement for gold and gemstones, as well as other imported inputs, shall be entered in the Jewellery Pass Book; and (vii) Bill of entry for gold and gemstones imported in lieu of foreign exchange and for unsold jewellery or gemstones shall be produced to the bank, through which consignment was exported, within a period of one hundred and twenty days from the date of export. 3.2.1.5. Import of gold and gemstone against export of jewellery (1) In case of exports of gold jewellery made from locally procured gold and gemstones. where sale proceeds are realized wholly in foreign exchange, the exporter shall be entitled to replenishment of gold at one hundred per cent of gold content of jewellery exported including wastage and gemstones actually used in the jewellery exported and the exporter shall be entitled to claim import entitlement for the replenishment within one hundred and eighty days from the date of realization of export proceeds. 3.2.1.6. Import entitlement:- Import of raw materials used in the production of gold jewellery and gemstones shall be allowed to the exporters as replenishment according to the following parameters, and such imports shall be freely transferable, namely: a. Gold: Equal to the gold content of gold jewellery actually exported, including wastage. b. Gemstones: Up to seventy per cent of the f.o.b. value of gemstones used in embedded or studded gold jewellery or loose gemstones actually exported. c. Other raw materials and equipment: Import of the following raw materials and equipment shall be allowed up to seventy per cent of value addition i.e., the f.o.b. export value of gold jewellery and gemstones actually exported, less value of gold
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content including wastage and value of gemstones, up to maximum percentages where indicated namely: i. ii. iii. iv. v. vi. vii. viii. ix. Jewellery casting power. Moulding rubber. Injection wax. Rhodium plating solution concentrate. Bright and chrome lacquering solution. Alloys of silver copper and zinc for mixing the twenty four carats gold. Mounts and findii1g of gold, silver and platinum jewellery. Steel balls and pins (different sizes) used for polishing. Jewellery casting machines and accessories. Diamond cutting tools (different sizes).
3.2.1.7. Import duties and taxes:(1) Import of gold and gemstones under all schemes shall be exempt from normal import tariffs. The import of other raw materials, tools, machinery and equipment as' provided in section 3.2.1.5 and 3.2.1.6 shall be- allowed free of customs duties and without payment of advance Income Tax in terms of the Notifications Nos. S.R.O. 592(1)/97, dated the 7th August, 1997, and S.R.O. 490(1)/2001, dated the 17th July, 2000, retrospectively. (2) In case an exporter uses duty-paid raw materials procured .from the market, duty drawback shall be admissible according to the standard duty drawback system in force. Refund of sales tax, if paid on any raw material inputs, shall be allowed according to the Sales Tax Refund Rules made under Notification No. S.RO 417(1)/2000, dated the 20th June, 2000. 3.2.1.8 Advance import of gold:- Exporters .may also apply, in the form as set out in Annexure, E, for advance authorization of import of gold and gemstones, before export of jewellery, as per letter of credit or firm export order or contract, subject to deposit, with their bank of cash margin equal to one per cent of the value of gold and gemstones and in this case the procedures under the Entrustment Scheme in shall apply. 3.2.1.9 Sale of jewelry to foreign buyers and overseas Pakistanis: -Foreign national and overseas Pakistanis shall be allowed to take out personally gold jewellery or gemstones up to the limit of US Dollars ten thousand, against foreign currency encashment certificate, with itemized purchase receipts(s) and, if the value exceeds US Dollars ten thousand, the normal export procedure shall be followed. 3.2.1.10 Display or sale In international fairs and exhibitions: Exporters shall be allowed to take out gold jewellery and gemstones, for display and sale in international fairs and exhibitions, either as accompanied baggage or through parcel post or courier service, according to the procedures of entrustment scheme and subject to the following conditions namely: (a) Items not sold abroad shall be re-imported within forty-five days of the close of the exhibition;(b) the gold content of items sold in such exhibitions may be imported as replenishment within sixty days after the close of the exhibition; and (c) exporters may take out as personal baggage gold jewellery and gemstones as samples up
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to a value of US Dollars one hundred thousand, for export promotion tours and temporary display abroad, Such gold jewellery and gemstones shall be brought back within fortyfive days from the date of departure. 4. 3 Legal Issues Regarding Industry
4.3.1 Taxation The gold jewelry manufacturer / retailer is exempt from paying sales and income tax as long as the years profit before tax is less than Rs.5,000,000/- Once the profit moves beyond the threshold of Rs.5,000,000/- the gold jewelry manufacturer / retailer is liable to pay 15% sales tax and 0.75% income tax on the years profit before tax. 4. 4 Market Potential The consensus amongst the jewelers spoken to is that the demand driven growth is definitely positive and potential of annual growth can be between 15% to 20% given an adequate stock size, regardless of the state of the economy as experienced over past five years. 4.4.1 Customer Loyalty Customer loyalty in urban areas and cities is less than in rural areas. Urban customers tend to shop around for an item before making a purchase. The loyalties of these customers have to be retained via good designs, long product range and relationship building. 4.4.2 Trends The main driver of demand for jewelry tends to be weddings whereby shopping for jewelry to be given in dowry starts years back and goes on till few days before the event. Larger, prominent and gem studded jewelry, thus, constitutes the traditional demand. However, with increasing rate of females working and earning a salary for themselves; and greater exposure to outside culture through magazines and TV the demand for smaller and contemporary western designs is emerging in the main urban cities. The rural and semi rural areas tend to present a more traditional demand. 4. 5 Target Customers The gold jewelry manufacturing and retail enterprise will have two broad sets of target market. Given the proportion of workshop output sold by self, the main set of target market are the consumers (purchasers) of gold jewelry. The other set of target market are those gold jewelry retailers who outsource the manufacturing of gold jewelry. These jewelers are potential source of orders for the workshop. The first set of target market consumer market can be sub-defined in terms of how the enterprise decides to position its gold jewelry items. Tapping an exclusive niche that falls under Designer Jewelry may require lower initial investment in terms of stock per gross margin. However, that position strategy would have additional demands of offering exclusive and appealing designs and range to the target market.
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The positioning strategy, that is, whether the prospective jeweler (retailer /manufacturer) decides to cater to a local niche or mainstream market; or to the export market has crucial bearing on gamut of decisions ranging from site and dcor of the showroom to production process / feasibility of mechanization of process. The following table depicts how the choice of target market affects some of the decision variables. Table 4-5: Implications of Various Positioning Strategies
Implications of Various Positioning Strategies6 Target Market NICHE MARKET / DESIGNER Price Designer's Premium for exclusivity LOCAL MAINSTREA M MARKET Promotion Exhibitions; Fashion Shows; Fashion Magazine shoots / Ads Word of mouth; Window displays; If justified by capacity, fashion magazine advertisement near seasonal peaks. Exhibitions Product 22 karat - 18 karat; Exclusive designs; Low duplicity; Labor Intensive processes Distribution Location in the main market is not crucial; Dcor of showroom must support the brand image High importance of central location in a busy shopping centre, or in a cluster of jewelry shops
Competiti ve pricing; Lesser profit margin than in designer products.
EXPORT MARKET (Expatriates from the SubContinent)
Competiti ve in the foreign market
EXPORT MARKET (NonExpatriates)
Competiti ve in the foreign market
Trade promotion
22 - 21 karat items; High stock to sales ratio; Larger range of jewelry items available for display; Variety of smaller (high turn over items) 21 karat; Studded jewelry preferred; Both Asian and contemporary designs; Smaller / lighter jewelry 18- 14 karats; Contemporary designs; Smaller / lighter jewelry; Mechanization feasible for mass distribution
Importing agents; Own agent abroad; Exhibitions
Importing agents; Own agent abroad; Exhibitions
Note: This model is based on catering to the local mainstream market. The various target markets mentioned above, however are not mutually exclusive. For example a gold jewelry manufacturing and retailing enterprise may have mainstream local market for volume of sales as the primary target market but can have separate product lines for exclusive / niche and export market for greater profit margin as secondary target market 25
5
5. 1
PRODUCTION PROCESS
Production Process Flow
Figure 4.2.0 below shows the production process flow from contracting an order and completing an order. The production process depicted in Figure 4.2.0 is described in detail later.
4.2.1 Contract Order
4.2.2 Jewelry Designing
4.2.3 Gold Refining and Mixing
4.2.4 Converting gold ingots into plates and wires

4.2.5 Pattern Making
4.2.6 Engraving
4.2.7 Finishing
4.2.8 Polishing and Buffing
4.2.9 Beading and Gem Studding
4.2.10 Gold Recovery
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5.1.1 Contracting out an order There are two main ways a jeweler contracts out an order. Firstly, if a jeweler has his / her own basic workshop, then he/she assigns the task of manufacturing a particular jewelry item to the workshop supervisor / lead craftsman in the workshop. The person to whom the task is assigned in effect becomes the project manager for the manufacturing of the assigned jewelry item. The other route is that the jeweler himself takes the order through different manufacturing process located in independent specialized units like Gold Mixing Unit; independent designing and crafting unit, the polishing unit, and the stone / gem setting Etc. The latter route is more costly and time consuming, however the jeweler can apply greater quality control and be more satisfied with the end result. 5.1.2 Jewelry Designing The design of the jewelry offered is crucial to a cash flow favorable stock-turnover. There are several sources of jewelry designs: Copy of designs from jewelry magazines and catalogues; Hiring of professional jewelry designers with a related educational and professional background; Jewelry design may be provided by the client himself / herself; Jewelry designing by the jeweler himself / herself. Once the jewelry design is provided to the craftsman / pattern maker, the latter makes a sketch of the design and shows it to the jeweler / entrepreneur for approval. This process till the approval may take about 2 days. 5.1.3 Gold Refining and Mixing The jeweler commissioning the manufacture of a gold jewelry first purchases gold in form of ingots amount more than what that item would take. For example for a 1 tola (11.5 gram) gold item, the jeweler would purchase 1.5 tolas of gold) from gold wholesalers in sirafa bazaars. Next, the gold is mixed to get the desired karatage. The mixed gold is molded into small bars and given to the craftsman who manufactures the order. If the jewelry design requires setting of gems / stones, they too will have to be bought. The quality of the stones can be checked by the Gem Corporation. 5.1.4 Converting Gold Ingots into Gold Sheets and Wires In accordance with the design requirements, the craftsman converts the gold ingots into gold sheets and wires with thickness required by the design. The gold sheets and rods are made from a machine locally called sheet and wire making machine (Patra or Ari ki Machine). This machine compresses the gold fed into it in one end to produce sheets / wires according to the setting from the other end.
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5.1.5 Transfer of Design / Pattern Making There are two main ways a craftsman may transfer the design into a jewelry item: Direct transfer of design on Patra (flat gold sheet) by the Engraver locally referred to as Ari ka Kaam Karrney Wala; Casting. The direct transfer of design is a more popular method. The disadvantage of direct transfer of design on gold sheet is that one requires more gold than is required to make an item. The excess gold at the end of the process is then melted and re-used in other items. However, the jewelry item itself requires less gold through the direct method than it requires if casting method is used. Jewelry made via casting is heavier for it requires more gold. Same design made via casting, taking 30g of gold may be prepared by hand using 20g of gold. Casting method is used for repeated designs. Casting designs are those that are used currently either as piece in a jewelry item or a jewelry item itself. Cast process follows thus: First, a model referred to as a dye is prepared on an iron sheet. The model is then used to prepare rubber casts / moulds. These models are used in a casting plate (Casting Machine) to make the gold jewelry. Wax casting is used for Kundan and very light jewelry, like Dhaka or Bangals jewelry. Kundan making skills are concentrated in Lahore, Multan, Bahawalpur, Sargodha and Karachi. The Casting method is time saving. A casting plate has a capacity of 50 tolas. Unless casting work of 50 tolas is not lined up, the machine will not (or cannot) operate. Because casting method is not popularly used, casting work is not sufficient at any given time to operate the machine. Hence, workshops having their own casting shop set specific days of a week for casting. For example, a workshop may set two days in a week for operating the casting machine, and the craftsman may have to wait for these days for his work-in-process to proceed. This is one reason why the casting process is often outsourced by workshops to independent casting units in the jewelry cluster. These independent units run their casting plates every day; hence the casting process does not prove to be a bottleneck for a craftsman. On getting the casted design, the craftsman gives a finishing to the casted pieces. Locally manufactured casting machine and its accessories would cost about Rs.315,500/, whereas imported machines German or Italian. 5.1.6 Engraving Most jewelry design often requires engraving whereby intricate patterns are etched onto the gold base. Basic engraving may be done at the workshop. However, engraving is a specialized task, and sophisticated engraving may need to be outsourced to an independent engraver in the market. Engraving mainly requires basic chip forming tools such as miniature chisels made of hardened steel. In proper engraving a sharpened tool is set against the metal at a specific
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angle and pressure applied both own-ward and forward. The tool buries itself into the sheet, forms a chip, and pushes that curl of metal ahead of it as it cuts. 5.1.7 Finishing Once the design has been transferred, engraved and design pieces soldiered to form one item, the craftsman gives the piece a finish technically called deburring before the item is sent for polishing. Deburring is the removal of all sharp edges, air bubbles and burrs on a piece. 5.1.8 Polishing and Buffing Polishing is the use of abrasives to get general surface finish improvement. Buffing is the step to get a smooth, bright, high luster final finish. There are many different polishing and buffing compounds. An often-used breakdown of compounds is: Cutting Compounds: These include the brown Tripoli and bobbing compound Intermediate Compounds: These include Gray Tripoli, Graystar, white diamond, and crocus. Platinum Tripoli and yellow bobbing compound. Polishing Compounds: Some polishing compounds are red rouge, yellow rouge, white rouge, black rouge, green rouge. Super Finish Compounds: Blue rouge, Blue magic, Fabuluster, and Zam.
The Polishing and Buffing process is performed on buffing wheels. There are buffing wheels to go with different types of compounds being used. There are cotton wheels, chamois wheels, bristle brush wheels and more. Cotton buffing wheels are the most common, felt wheels are also popular as are the brushes. Chamois wheels are great for final buffing, but they are also fairly expensive. Polishing may take one to three days depending on the item being polished and buffed. The polisher is paid in kind that is considered as wastage by the jeweler. A polisher sets his rate in terms of 500mg on 11.5g (1 tola) of gold. This means that if a polisher is given 13g of gold to polish, and after polishing the weight of gold goes down to 12.5 g, then 500mg was his compensation. If the weight lessens by more than the set rate, the gold-jeweler will write the excess amount payable by the polisher and will be adjusted at the end of a month when the polisher will melt his gold and pay off the excess to the jeweler. 5.1.9 Beading and Stone Studding Beading and gem studding process occurs after the finishing, polishing and buffing of the main gold base of the jewelry item. Beading is the stringing of gem beads on to the main gold jewelry item. There is often a beader in every workshop whose job is only to put on the beads on to the gold jewelry. Gem studding is fixing of gem stones on to the jewelry. While some workshops may have their own gem studder, most of the workshops outsource the gem / stone studding to an independent stone setter. Stone setting may take two to three days.
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5.1.10 Gold Recovery On completing the gold jewelry item /s the craftsman must return to the jewler who had given the order the same amount of gold in terms of jewelry and scrap net of a fixed rate of wastage. For example, if the jeweler had given the craftsman 30g of gold (24k) for a necklace requiring 15 grams of gold, then the craftsman has to return gold in terms of 15 grams constituting the necklace and 13.2 grams in scrap gold after netting wastage at 6% (1.8 grams of gold). 5. 2 Casting Process and Machinery Requirement If a new design is to be casted, the first step to casting is making a model of the design by hand either with gold, silver or iron. The model is then used to make a rubber mold known as dye. For this process, rubber that comes in rolls and is known as Casting Rubber is heated, using a Dye Press Machine, under pressure and flows around the prototype making a mold. When cool it is then is cut apart leaving a cavity in the rubber in the shape of the original piece. Wax Injector machines are used to inject molten wax is into the rubber mold creating a wax copy of the original. The wax model is attached to a rubber base with a heating pen like device known as Waxer with a number of others into a tree like form in the process known as sprueing. The wax tree is then surrounded by a metal cylinder called a flask which fits onto the rubber base. This cylinder is then filled with plaster which has been mixed under vacuum in a vacuum machine to draw out the air it contains. The plaster encases the wax pieces and then hardens. The base is removed and the assembly is placed in a Gas Furnace. The flasks with the plaster encased waxes are heated overnight to 1350 degrees which burns away the wax leaving cavities in the plaster in the shape of the original pieces. Gold is melted in a flask like attachment on a casting machine. The flasks of plaster that are ready from the Gas Furnace are put on the Cast Machine that is turned on. The caste machine, using system of pressure makes the molten gold travel into the plaster mold while at the same time removes trapped air and gases. When the process is done, the plaster is broken off and the tree is then put under a motorized pressure machine that wahes away any remaining plaster. The gold tree is then dipped into nitric acid and heated with a blow torch to get the gold colour on the gold caste pieces. The caste pieces are then cut away from the base and are sanded and filed to remove traces of the spruce, mold lines and any imperfections. The pieces are oxidized if required and undergo a multiple step tumbling process using different grit media to achieve the final desired finish. 5.2.1 Supply of Machineries As mentioned above, most of the gold manufacturing machinery is made in Pakistan. Gujranwala is the hub where most of the locally made gold manufacturing machinery is manufactured. The suppliers are concentrated in Sadar bazaar of Gujranwala. Simple machines like motorisd polishing and buffing machines can be bought from any sarafa or old city bazaar of main urban centres. Earlier, casting machines had to import from either Italy or German. The main suppliers through which the imported casting machines were bought are located in Karachi. Some
30 PREF-87/Jan, 2006/ Rev 1
of the suppliers of imprted casting machines have now started manufacturing (with some imported parts) the casting machines and equipment themselves.7 5. 3 Jewelry Item Manufacturing Time Table 5-1 below gives an average time for a medium sized workshop to produce the respective jewelry items. Table 5-1: Jewelry Item Manufacturing Time Item Ring Bangle Earring Chain Necklace Teeka Jhoomer Nose pin Pendant Baazoband Bridal set Time 1-2 days 1 week 2-3 days 3 days 1 week 1 day 3 days 1 day 2 days 5 days 1 month
The time taken on completion of a small order is not far less than time taken for a bridal set because of the way craftsmen schedules the work on order. Craftsmen prefer to work on larger items since for almost a similar amount of concentration the craftsmens earning on a large item is far greater than his earning on a smaller item. 5. 4 Raw Material Table 5-2 below lists the main raw material needs and the purpose for their use. The monthly requirement assessment for each raw material is based on the workshop operations at 41400 grams / year. The raw material assessment below suggests the proportion of raw material cost to grams of output in terms of gold jewelry is Rs.6.4 / gram.
One such supplier is Ayub Brothers Engineering Works and Alay Casting Equipment. Phone# 0212254747, Address: LR9/14, Amil Street, Wahab Road, Ghazi Nagar, Karachi 3. 31
Table 5-2: Raw Material Required Raw Material Needs for Workshop output of 41400 grams in Year 1 Raw Material Purpose Total Monthly Cost Casting Rubber For making casting dyes 7000 for new designs Whip Mix Jewelry Required in the process 10,000 Investment Powder of casting (Plaster) Wax Required in the process 2000 of casting Nitric Acid For bringing out the color 2000 of gold after casting process and during polishing Surf / Detergent Required during 200 polishing and buffing process Coloring Chemicals Required to change color 1000 of gold jewelry item after finishing process Table 5-3 below shows how proportion of raw material cost to output over the period of 10 years change and the respective expected annual raw material cost. The change in proportion of the of raw material cost to output is based on the planned level of production of the workshop and on 5% annual increase in raw material cost. Table 5-3: Yearly Raw Material Cost
Expense Variables Proportion of Raw material Cost to Output (Rs / gram) yearly raw material cost (Rs) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
6.40
6.72
7.06
7.41
7.78
8.17
8.58
9.01
9.46
9.93
264,960
301,392
340,805
383,405
429,414
479,065
503,018
559,238
587,200
616,560
5. 5
Miscellaneous Expense
Miscellaneous office expense includes: Stationary expense: Printing (receipt vouchers, business cards..Etc), writing material (pens, pencils, ink pads...etc); Tea and entertainment expense for favored customers and employees; Commuting expense (visits to workshops, suppliersetc). Other non-recurring expenses.
32 PREF-87/Jan, 2006/ Rev 1
5. 6
Initial Investment in Gold Jewelry Stock
The retail unit of the integrated modeled enterprise will begin operations with initial stock level of 5175 grams of 22k gold. Given the parameters below, the initial investment in gold jewelry stock required is Rs. 6,073,380/Table 5-4: Parameters for Initial Investment in Gold Jewelry Stock Parameters Initial Gold Stock (Grams) Gold Price (Rs) / Gm Ratio of other material to value of gold used (Rs) Direct Labour (Rs) / Gm with annual increase of 10% Wastage Ratio to value of Gold Content 5. 7 Machinery Requirement Year 0 5175 905 0.06 160 0.06
A basic gold manufacturing workshop can be set up quite inexpensively. Cutting (separating materials), soldered construction and finishing are the three main things that jewelers do. However the more processes included within the workshop, the greater the level of investment. The model subject to this study includes the following processes and the tools, equipment and machines required are in accordance. The workshop of this model has the capacity to perform all processes. The only process it out sources is gold refining and mixing. Processes performed in the workshop are: 1. Gold refining and Mixing 2. Handcrafting of jewelry by engravers and craftsmen 3. Polishing 4. Finishing 5. Gem / stone Beading 6. Gem Studding 7. Casting For this purpose the tools, equipment and machinery requirements are as follows: Table 5-5: Details of Machinery & Equipment Machines, tools and equipment Wire Making Machine and accessories Plate Making Machine and accessories Wax Casting Machine & Equipment Polishing Machine and Accessories Tool set for craftsmen No. of Units 1 1 1 2 5 Price / unit (Rs) 25000 25,000 315,500 7,000 8,000
33 PREF-87/Jan, 2006/ Rev 1
Total Cost (Rs)
Place of Origin /Manufacturing 25,000 Gujranwala, Lahore 25,000 Gujranwala, Lahore 315,500 Karachi 14,000 Gujranwala 40,000 Gujranwala
Tools for gem studders Manual scale
2 1
4,000 600
Digital scale
6,000
8,000 Gujranwala 600 Gujranwala, Lahore, local market 6,000 Chinese / Italian
Most of the above mentioned tools and machines are manufactured locally. Gujranwala specializes not only in gold jewelry making tools, equipment and machinery, but also in terms of furnishings (like special safes) required by gold jewelry retail outlet. However, some machines like gold plate making and wire making machines are also manufactured in Faisalabad and Lahore. There are clusters of Gold jewelry related tools and machine manufacturing and are located in Sadar bazaar in each of the three main cities mentioned above. The general practice amongst the jewelry manufacturers is to use locally made tools and machinery. Machines generally imported are chain making, bangle making and casting machines. The main origin of imported machines is primarily Italy or Germany. Till recently, casting machines had to be imported as electricity based casting machines were not being manufactured in Pakistan. Casting machines are now being manufactured in Karachi at a small scale. Interviews with users with locally manufactured casting machines have expressed their satisfaction with the latter. Because the enterprise subject to this model deals primarily with hand crafted jewelry and casted jewelry component or whole items constitute only small portion of total output, the model enterprise invests in locally manufactured casting machine and equipment. Table 5-6 below shows the casting equipment and machinery required and respective cost. Table 5-6: Casting Equipment and Machine Casting Machines and Tools Die Press Wax injectors Waxer Vacuum Machine Automatic Gas Furnace Caste Machine Pressure Machine Blow Torch Total 5. 8 Furniture & Fixtures Units 1 2 1 1 1 1 1 1 Rate / Unit (Rs) 13,000 8,000 500 18,000 25,000 230,000 18,000 3,000 Total Cost (Rs) 13,000 16,000 500 18,000 25,000 230,000 18,000 3000 315,500
Furnishing and fittings (including 2 heaters) required for a workshop (22 by 88 square feet) is estimated to cost around Rs.50,000/- (Rs.50,308/- to be exact based on current prices). The workshop requires very basic furnishing and fittings.
34 PREF-87/Jan, 2006/ Rev 1
A simple furnishing of an 11 by 44 square feet jewelry shop can cost about Rs.197,000/(Rupees One hundred and ninety seven thousand) on average, including an air conditioning unit and a heater. The fancier the fittings and the furniture, higher the cost. Table 5-7 below shows the break-up of the cost for furniture and fixture for both the retail and the workshop unit. Table 5-7: Furniture and Fixture Cost Items Units Retail Unit Furniture (counters, chairs, wall mirrors, lighting, installed safes) Unit Cost 1 15,000 Total Cost 125,000 15,000 7,000 5,000
Cash Register Digital Weighing Machine 1 Hand tools (magnifying glass, gem 1 set inspection glass, ring size gauge .etc) Split Unit / AC 1 Heater 1 Total Cost on Furniture and Fixture - Retail Unit Manufacturing Unit Jute / date leaves floor matting 1452 work benches 11 Safe 1 Heater 2 Total Cost on Furniture and Fixture - Workshop Unit Total Furniture and Fixture Cost
2,000 5,000
30,000 15,000 197,000 4 2500 7,000 5000 5,808 27,500 7,000 10,000 50,308 247,308
Mostly Gold jewelry retailers contract for fixtures like lockers and showcases and decided upon after consultation with and recommendation of other jewelers who have had experience in acquiring those items. The whole industry runs on the basis of trust and word-of-mouth reputation. Jewelers tend not to recruit un-vouched for suppliers or workers. However, Gujranwala specializes in specialized lockers for gold jewelry retail shops.
6
6. 1
LAND & BUILDING REQUIREMENT

Land Requirement
6.1.1 Rent Rent varies with space and location. For workshop, the location may be within a jewelry a cluster or outside it. The rents and rates within the jewelry cluster tend to be higher. For example, a workshop space 22 by 88 square feet within the jewelry cluster would seek rent of Rs.6000/- per month whereas the same nature of space further to the jewelry
35 PREF-87/Jan, 2006/ Rev 1
cluster may seek only Rs.3000/- per month. This model assumes a workshop space of 22 by 88 square feet located within the jewelry cluster. Hence the monthly rent for the first year is Rs.6000/- per month with annual increase of 5%. The rent for the gold jewelry retail shop 11 by 44 square feet, located in a central shopping centre of a major urban city, is estimated to be around Rs.17,000/- month and is estimated to increase at 5% annually. The rent for both the workshop and retail shop is often pre-paid in terms of lease. 6. 2 Utilities Requirement A medium sized 324 square feet sized retail shop that is open six days a week for about 10 hours / day, tends to incur electricity bill worth about Rs.84,000/. This amounts to a monthly average of Rs.7000/- after considering the fact that electricity bill tends to be higher in summers and lower in winters. Yearly gas bill averages to Rs.12,000/-, amounting to Rs.1000/- per month. Currently established gold jewelry manufacturing workshops concludes that of utilities, electricity and gas costs amounts to, on average Rs.5000/ month and Rs. 2000/ month on average (use of casting machinery and equipment and wire and plate making machine tends to high use of electricity and gas. The main electricity usage in the workshop will be in terms of lighting and operation of machines such as wire and plate making, polishing and most significantly, the casting machine. The gas expense will be on heating in winters and use of gas furnace in the casting process. Both the workshop and the retail shop will have at least one telephone line. The average monthly bill for each line is expected to be Rs.1000/-. Table 6-1 below shows the break-up of utility costs for year one. The cost of utilities is expected to rise by 5% annually. Table 6-1: Utilities Utility Type Estimated Monthly Bill for Year 1 7000 1000 1000 Estimated Annual Bill for Year 1 84,000 12,000 12,000 108,000 60000 24000 12000 96,000 204,000
Retail Unit Electricity Gas Telephone Total Utilities Cost - Retail Unit Manufacturing Unit Electricity Gas Telephone Total Utilities Cost - Manufacturing Unit Total Utilities for Year 1
5000 2000 1000
36 PREF-87/Jan, 2006/ Rev 1
HUMAN RESOURCE REQUIREMENT
The model enterprise recruits two types of employees in terms of the latters remunerations: salary based and performance based. Table 7-1 shows the remuneration scheme for the employees employed in both the retail and manufacturing units. The monthly salary cost of the retail unit is Rs.45,000/- while the monthly salary cost of the planned workshop is Rs.13,000. Within this scheme, all the employees in the retail unit are employed on the basis of fixed monthly salary. However, the workshop employs three different sets of employees. The chief craftsman is a also the workshop manager. He is paid a combination of monthly salary and wage based on quantity of output produced. Other craftsmen are employed, as is the practice in the industry, on performance based wage whereby they are paid on the basis of Rs./grams of gold jewelry produced. The polisher is paid in terms of wastage (grams of wastage / tola) and machine operators are paid on basis of fixed salary. According to this scheme, the monthly fixed salary. The annual salary fixed salary cost for the first year is Rs.696,000/- and this amount increases with 10% annual increase in fixed salaries. Table 7-1: Human Resource Required and Remuneration Plan Designation / Responsibility Retail Unit Shop Manager Sales Assistant Errand Boy Guards Manufacturing Unit Chief craftsman Craftsmen Beader Studder Polisher Casting Machine operator Number employed Monthly Remuneration / person 25,000 6,000 2,000 3000 5000 + Performance related wage @ Rs.90/gram @ Rs.90/gram performance related wage @ 36/gram on average performance related wage @ 60 / gram on average Wastage 4000
1 2 1 2 1 9 2 4 2 2
37 PREF-87/Jan, 2006/ Rev 1
8
8. 1
FINANCIAL ANALYSIS
Projected Income Statement
Y ear 2 42 ,005,823 3 ,021,769 45 ,027,592 Y ear 3 49,8 88,2 18 3,0 68,2 58 52,9 56,4 75 Y ear 4 58 ,702,109 3 ,013,467 61 ,715,577 Y ear 5 68,5 29,0 26 2,8 28,64 1 71,3 57,6 67 Y ear 6 79,46 1,074 2,47 9,481 81,94 0,554 Y ear 7 81 ,707,106 2 ,727,429 84 ,434,535 Y ear 8 89,06 2,984 3,17 6,652 92,23 9,637 Y ear 9 91 ,800,400 3 ,494,318 95 ,294,718 Y ear 1 0 94 ,743,701 3 ,843,7 49 98 ,587,450
P R O JE C T E D IN C O M E STA T E M E N T Y ear 1 R evenue from sale o f Jewelry Stock 34,98 2,669 R evenue from m anufacturing for other jewelers ,89 8,000 2 T otal Incom e 37,88 0,669 C ost o f G oods S old directly 6,07 3,380 O p ening B alance 29,56 1,224 P u rchases 6,48 2,380 C losing B alan ce C ost o f m anufa ctureing g old jew lery for o ther 2,64lers jew 9,600 T otal C ost o f G o ods / services Sold 31,80 1,824 G ross P ro fit 6,07 8,845 G en eral A dm inistratio n & Selling E xpense U tilities R aw m aterial Perso nnel E xp ense Shop L ease / R ental E xpense O ffice E xpense (Stationary E tc.) Profe ssio nal E xp ense (Legal, Audit..) A sso ciation's M em be rship Fee D epre ciation E xpense A m ortizatio n o f Pre-O perating C ost T otal C ost o f Sales O pe rating Incom e Interest o n Sho rt T erm L oan Interest E xp ense on Lo ng T erm D ebt E arning B efore T ax T axable E arning for the Y ear T ax N E T P R O F IT / (L O SS) A F T E R T A X
6 ,482,380 36 ,221,272 7 ,698,799 2 ,762,760 37 ,767,613 7 ,259,979
7,6 98,7 99 42,0 27,7 86 8,1 53,0 71 2,8 05,2 64 44,3 78,7 79 8,5 77,6 96
8 ,153,071 48 ,696,954 7 ,931,600 2 ,755,170 51 ,673,594 10 ,041,982
7,9 31,60 0 58,3 72,8 05 9,1 96,88 4 2,5 86,18 6 59,6 93,7 08 11,6 63,9 59
9,19 6,884 66,47 7,519 9,45 6,841 2,26 6,954 68,48 4,515 13,45 6,039
9 ,456,841 68 ,940,630 10 ,308,216 2 ,493,649 70 ,582,904 13 ,851,631
10,30 8,216 74,53 5,984 10,62 5,046 2,90 4,368 77,12 3,521 15,11 6,115
10 ,625,046 76 ,840,993 10 ,965,706 3 ,194,805 79 ,695,138 15 ,599,580
10 ,965,706 78 ,953,084 10 ,965,706 3 ,514,2 85 82 ,467,369 16 ,120,081
20 4,000 26 4,960 69 6,000 27 2,000 3 6,000 2 0,000 1 2,000 6 8,141 2 0,000 1,59 3,101 4,48 5,744 44 7,400 4,03 8,344 4,03 8,344 63 6,039 3,40 2,305
214,200 301,392 765,600 285,600 37,800 20,000 13,200 68,141 20,000 1 ,725,933 5 ,534,046 376,975 5 ,157,072 5 ,157,072 812,239 4 ,344,833 3 ,402,305 4 ,344,833 4 ,344,833 7 ,747,138
2 24,91 0 3 40,80 5 8 42,16 0 2 99,88 0 39,6 90 20,0 00 14,5 20 68,1 41 20,0 00 1,8 70,1 06 6,7 07,5 91 2 98,09 9 6,4 09,4 92 6,4 09,4 92 1,0 09,4 95 5,3 99,9 97 7,7 47,1 38 5,3 99,9 97 5,3 99,9 97 13,1 47,1 35
236,156 383,405 926,376 314,874 41,675 20,000 15,972 68,141 20,000 2 ,026,598 8 ,015,384 209,757 7 ,805,626 7 ,805,626 1 ,229,386 6 ,576,240 13 ,147,135 6 ,576,240 6 ,576,240 19 ,723,375
2 47,96 3 4 29,41 4 1,0 19,01 4 3 30,61 8 43,75 8 20,00 0 17,56 9 68,14 1 20,00 0 2,1 96,47 7 9,4 67,48 2 1 10,81 5 9,3 56,66 7 9,3 56,66 7 1,4 73,67 5 7,8 82,99 2 19,7 23,3 75 7,8 82,99 2 7,8 82,99 2 27,6 06,3 67
26 0,361 47 9,065 1,12 0,915 34 7,149 4 5,946 2 0,000 1 9,326 6 8,141 2 0,000 2,38 0,903 11,07 5,136 11,07 5,136 11,07 5,136 1,74 4,334 9,33 0,802 27,60 6,367 9,33 0,802 9,33 0,802 36,93 7,169
273,380 503,018 1 ,233,006 364,506 48,243 20,000 21,259 68,141 20,000 2 ,551,553 11 ,300,077 11 ,300,077 11 ,300,077 1 ,779,762 9 ,520,315 36 ,937,169 9 ,520,315 9 ,520,315 46 ,457,484
28 7,048 55 9,238 1,35 6,307 38 2,731 5 0,656 2 0,000 2 3,385 6 8,141 2 0,000 2,76 7,506 12,34 8,609 12,34 8,609 12,34 8,609 1,94 4,906 10,40 3,703 46,45 7,484 10,40 3,703 10,40 3,703 56,86 1,188
301,401 587,200 1 ,491,938 401,868 53,188 20,000 25,723 68,141 20,000 2 ,969,459 12 ,630,121 12 ,630,121 12 ,630,121 1 ,989,244 10 ,640,877 56 ,861,188 10 ,640,877 10 ,640,877 67 ,502,065
316,471 616,560 1 ,641,1 32 421,961 55,848 20,000 28,295 68,141 20,000 3 ,188,4 08 12 ,931,673 12 ,931,673 12 ,931,673 2 ,036,7 39 10 ,894,935 67 ,502,065 10 ,894,935 10 ,894,935 78 ,396,999
B alanc e B rought Forward T otal P rofit Availab le fo r Ap prop riation 3,40 2,305 D ividend E arnings used for C ash in H and for N ext Y ea r A dditio n to retained earning 3,40 2,305 C um ualtive retained e arnings 3,40 2,305
38 PREF-87/Jan, 2006/ Rev 1
8. 2
Projected Cashflow Statement

Year 1 3,402,305 88,141 Year 2 4,344,833 88,141 Year 3 5,399,997 88,141 (454,272) (32,912) Year 4 6,576,240 88,141 Year 5 7,882,992 88,141 Year 6 9,330,802 88,141 (259,957) (43,806) Year 7 9,520,315 88,141 (851,375) (48,186) Year 8 10,403,703 88,141 (316,831) (53,005) Year 9 10,640,877 88,141 (340,660) (58,306) Year 10 10,894,935 88,141 0 (64,136)
PROJECTED CASHFLOW STATEMENT Year 0 Net Income Depreciation and Amortization (Increase) Decrease Current additional Gold Jewelry (Increase) Decrease in Prepaid annual shop lease Pre-Operational Costs Increase (Decrease) Current Short Term Loan Cash Flow from Operations Initial Investment Expenditure Furniture and Fixtures Machinery + Equipment Cash Provided (Used) from Investments Proceeds from Borrowings Payments of Principal of Long Term Loan Payments of Principal of short term loan Issue Stock / Exercise Options Cash Provided (Used) from Financing Increase (Decrease) to Cash Beginning Cash Balance Ending Cash Balance 0 0 (6,073,380) (272,000) (100,000) 0 (6,445,380)
(409,000) (1,216,419) (27,200) (29,920)
221,471 (1,265,283) (36,203) (39,824)
0 3,054,246 0
0 3,186,635 0
0 5,000,954 0
0 6,849,648 0
0 6,666,026 0
0 9,115,180 0
0 8,708,895 0
0 10,122,008 0
0 10,330,052 0
0 10,918,939 0
(247,308) (434,100) (681,408) 3,728,333 0 0 (586,876) 0 3,728,333 7,456,666 329,878 0 329,878 0 (586,876) 2,467,370 329,878 2,797,248 0 (657,301) 0 0 (657,301) 2,529,334 2,797,248 5,326,581 0 (736,177) 0 0 (736,177) 0 (824,518) 0 0 (824,518) 0 (923,461) 0 0 (923,461) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,122,008 39,183,128 49,305,137 0 0 0 0 0 10,330,052 49,305,137 59,635,189 0 0 0 0 0 10,918,939 59,635,189 70,554,128
4,264,777 6,025,130 5,742,565 9,115,180 8,708,895 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128
39 PREF-87/Jan, 2006/ Rev 1
8. 3
Projected Balance Sheet
PROJECTED BALANCE SHEETYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Assets Current Assets Cash & Near Cash Assets 329,878 2,797,248 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128 49,305,137 59,635,189 70,554,128 Cash & Near Cash Assets 329,878 2,797,248 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128 49,305,137 59,635,189 70,554,128 Closing Gold Jewelry Inventory 6,073,380 6,482,380 7,698,799 8,153,071 7,931,600 9,196,884 9,456,841 10,308,216 10,625,046 10,965,706 10,965,706 Pre-Paid Annual Shop Lease 272,000 299,200 329,120 362,032 398,235 438,059 481,865 530,051 583,056 641,362 705,498 Total Current Assets 6,675,258 9,578,828 13,354,500 18,106,461 23,946,324 30,993,996 40,412,939 50,021,395 60,513,239 71,242,257 82,225,332 Fixed Assets Furniture & Fixture Machine and Equipment Less: Depreciation To Date Total Net Fixed Assets Pre Operation Costs Less Amortization to date Net Intangible assets Total Assets Liabilities & Shareholders' Equity Current Liabilities Short Term Loan Current Long Term Debt Total Current Liabilities Long Term Liabilities Long Term Debt Total Long Term Liabilities
247,308 434,100 681,408 100,000 100,000 7,456,666
247,308 434,100 (68,141) 613,267 100,000 (10,000) 90,000
247,308 434,100 (136,282) 545,126 100,000 (20,000) 80,000
247,308 434,100 (204,422) 476,986 100,000 (30,000) 70,000 18,653,447
247,308 434,100 (272,563) 408,845 100,000 (40,000) 60,000 24,415,169
247,308 434,100 (340,704) 340,704 100,000 (50,000) 50,000 31,384,700
247,308 434,100 (408,845) 272,563 100,000 (60,000) 40,000 40,725,502
247,308 434,100 (476,986) 204,422 100,000 (70,000) 30,000 50,255,817
247,308 434,100 (545,126) 136,282 100,000 (80,000) 20,000 60,669,521
247,308 434,100 (613,267) 68,141 100,000 (90,000) 10,000 71,320,398
247,308 434,100 (681,408) 100,000 (100,000) 82,225,332
10,282,095 13,979,627
586,876 586,876
657,301 657,301
736,177 736,177
824,518 824,518
923,461 923,461
3,728,333 3,728,333
3,141,457 3,141,457
2,484,156 2,484,156
1,747,979 1,747,979
923,461 923,461
0 0
Shareholders' Equity Paid-Up Capital 3,728,333 Retained Earnings Total Equity 3,728,333 TOTAL CAPITAL & LIABILITIES,456,666 7
3,728,333 3,728,333 2,825,429 7,109,837 6,553,762 10,838,170 10,282,095 13,979,627
3,728,333 12,440,958 16,169,291 18,653,447
3,728,333 18,938,857 22,667,190 24,415,169
3,728,333 26,732,907 30,461,240 31,384,700
3,728,333 36,997,169 40,725,502 40,725,502
3,728,333 46,527,484 50,255,817 50,255,817
3,728,333 56,941,188 60,669,521 60,669,521
3,728,333 67,592,065 71,320,398 71,320,398
3,728,333 78,496,999 82,225,332 82,225,332
40 PREF-87/Jan, 2006/ Rev 1
9
9. 1
KEY ASSUMPTIONS
Assumptions Related to the Scope of Operations Assumption Gold Jewelry Retailing and Manufacturing Retailing and Manufacturing Gold refining and mixing Medium Sole proprietorship
Aspect Scope In-House Operations Outsourced Function Scale Legal Status 9. 2
Income Related Assumptions
Variables Assumptions Total Annual Capacity of The total annual capacity of the workshop estimated the Workshop (69,000 grams) is based on the assumption that when working at full capacity, a craftsman can manufacture gold jewelry worth 575 grams / month. Level of Operations (ratio It is assumed that the workshop will begin operating at of capacity) level of 60% of its capacity in year 1, 65% in year 2, 70% in year 3, 75% in year 4, 80% in year 5, 85% in year 6 and year 7, and 90% in year 8, year 9 and year 10. Sales to Stock Ratio The sales to stock ratio increases with time as the enterprise gets established in terms of popularity and the stock composition is more in tune to the taste of the market. It is assumed that in year one 40% of stock at any time sells over a given period. This percentage rises to 45% in year 2 and year 3, 50% in year 4 and 60% in year 6. Because gold jewelry is relatively slow moving item 60% sales to stock ratio is an average sale to stock ratio of well established gold jewelry retailers. This ratio is assumed to be maintained till year 10. The sale to stock ratio also determines in this model the stock replacement. In order to maintain ones stock level, the entrepreneur will have to replace the stock sold. Hence if 40% of stock is sold at any time, the entrepreneur must purchase 20% of the gold jewelry stock so that the opening balance of the gold jewelry stock and the closing balance remains the same. Stock Level of Gold It as assumed that the initial capacity of the retail unit in Jewelry Items to be terms of stock level will be based upon the ratio of total Maintained by Retail Unit workshop output sold through the self owned retail shop at Any Given Time and on the stock turnover rate assumed for each
41 PREF-87/Jan, 2006/ Rev 1
Ratio of workshop output sold by self-owned retail unit Ratio of workshop output manufactured for other gold jewelry retailers Change in gold price
Gold Price (Rs) / Gm Ratio of other material to value of gold used (Rs)
Direct labour cost (Rs) / Gm excluding polishing cost with annual increase of 10%
Wastage Ratio to value of Gold Content Retailer's Margin
respective year. Thus in year 1, 60% of workshop output is sold be self, furthermore 40% of any stock level in year 1 will be sold at any given time within the year. Thus stock level for retail outlet is 5175 grams worth items. 60% of total workshop output is sold be self owned retail in year 1. The percentage increases in year 2 to 65%, in year 3 to 70%, 75% in year 4, 80% in year 5 and from year 6 to year 10, it remains constant at 85%. The ratio of workshop output manufactured for other jewelry retailers is inversely related to ratio of workshop output sold by self-owned retail unit The average annual change in gold price is estimated to be 1.13%. This is based on the 10 year (1994 2004) trend in gold price change as reported by World Gold Council. Gold price in Pakistan at the time of this report was Rs.905 / gram for 24 k gold. It is assumed that the value of gems, beads and other metals used in gold jewelry item is about 60% of total value of gold used in gold jewelry items produced over a years period. The direct labour in terms of Rs / grams is calculated on the basis of the wage rate of craftsman, beader and studder and on the proportion of jewelry (in terms of grams) that require the labour of the latter three. The wage rate of the craftsman is based on the type of jewelry item and the weight of the jewelry item. The estimates in this analysis are based on what the craftsman, beader and studder earn on average per gram. In a medium sized workshop, craftsmen on average would earn Rs.90 / gram. A beader would earn Rs. 60 per average item he works on, but it is assumed that about 60% of total workshop items would require beading, an average rate of Rs.36 / gram is assumed for a beader. Similarly, given an average item wise rate of Rs.100 / gem studding and 60% of total out requiring studding, the average wage rate for studder will be Rs.60 / gram. These rates are subject to 10% increase per annum. The wastage of gold is assumed to be 6% and constitutes remuneration of polisher as well. The retailers margin is assumed to be 20%
42 PREF-87/Jan, 2006/ Rev 1
Manufacturer's Margin Rs. The model assumes that on average the entrepreneur will / gram on goods made for charge a margin of Rs.15 per gram from other jewelry other jewelers on order retailers outsourcing production to the workshop. This margin will increase at the rate of 10% annually due to corresponding increase in wage and production cost rates. 9. 3 Expense Related Assumptions Annual rate of increase (ratio) Utilities increase at the annual rate of 5% Fixed salaries increase annually by 10% Annual increase in office expense is 5% The annual member ship fee to jewelers association increases by 10% Expense Variables Utilities (Rs) / year Personnel Expense (net of performance related wages) Office Expense Jeweler Association Membership Fee @ Rs.1000 / year for Year 1 Debt to Capital Ratio
The long term debt to capital ratio during the start up is 50:50 Annual Shop Lease The annual shop lease increases by 5% Annual lease for workshop The annual shop lease increases by 5% Rate of Raw Material Cost to In year one the ratio (Rs / gram) of raw material Workshop Output (Rs / Gram) cost to total workshop output is Rs 6.4 / gram, and assuming annual increase in raw it increases with 5% annual increase in cost of material of 5% raw material. yearly raw material cost The yearly raw material cost is based on total workshop operations (output) and on rate of raw material cost to workshop output. Depreciation Straight line over 10 years Annual Interest Rate (Long Term) 12% Rate of Tax on Operating income 15% sales tax and 0.75% income tax if years operating income is above Rs.5,000,000 (five million)
43 PREF-87/Jan, 2006/ Rev 1

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Pre-Feasibility Study

GOLD JEWELRY MANUFACTURING & RETAIL SHOP

Small and Medium Enterprise Development Authority

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

3 PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

PURPOSE OF THE DOCUMENT

CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT

4 PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Process Know How

Flair for designing / Ability to gauge trends

6 PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Business Model: In-House Manufacturing vs. Outsourced Manufacturing

PROS Lower set-up cost

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

10 PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Minimum Cash Reserve Total Investment 3. 7 Proposed Product Mix

Average Gold Content / Item 4.2 3.9 41.2 13.15 13.4 35

Earrings Rings 12 Bangles' Set Bracelets Chains Necklaces

Gold Jewelry Manufacturing & Retail Shop

Pendants Teeka Bridal Set Jhoomer

3.25 4.375 57.5 11.5

3.4 4.1 69 12.65

Item-wise Distribution of Gold Stock (%) 4% 9% 14% 7% 3% 43% 3% 0% 17% 0% 100%

Gold Jewelry Manufacturing & Retail Shop

14 PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Key Success Factors/Practical Tips for Success

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Gold Jewelry Manufacturing & Retail Shop

SECTOR & INDUSTRY ANALYSIS

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Italy 21% Hong Kong 13%

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Gold Jewelry Manufacturing & Retail Shop

Table 4-2: Jewellery Imports (US$ Million)

5,772 1,713 1,070 1,054 723 887 582 307 283 -

Cananda 2% Thailand 1% USA 44%

United Kingdom 16%

897 SITC Code Revision 3 897 SITC Code Revision 3

PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Source: Source: UNSTAT4

897 SITC Code Revision 3

PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

Gold Jewelry Manufacturing & Retail Shop

24 PREF-87/Jan, 2006/ Rev 1

Gold Jewelry Manufacturing & Retail Shop

Competiti ve pricing; Lesser profit margin than in designer products.

EXPORT MARKET (Expatriates from the SubContinent)

SMEDA Gold Jewelry Manufacturing & Retail Shop

SMEDA Gold Jewelry Manufacturing & Retail Shop