David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

For retailers, unlike politicians, the middle ground can be a deeply uncomfortable place to be. No wonder shares in the world's biggest publicly traded jeweler Chow Tai Fook have fallen 32 percent over the past year.

The 87-year-old group made a bold bet over the last few decades to turn itself into mainland China's predominant jewelry chain by opening thousands of stores across the country. Even as growth has slowed in the face of slumping luxury spending, it's still got more outlets than its two Hong Kong-based competitors combined.

Middle Kingdom
Chow Tai Fook has the biggest mainland Chinese store network among its Hong Kong competitors
Source: Bloomberg; company reports

Still, ubiquity isn't everything when it come to luxury products -- just ask Gerald Ratner, who lost his job running the eponymous British jewelry chain after giving a speech describing one of the company's products as "total crap." Tiffany & Co. has fewer locations globally than Chow Tai Fook has in Shanghai and the two adjacent provinces of Jiangsu and Zhejiang put together. That doesn't seem to have done it any harm.

Chow Tai Fook's real problem is that a home-grown competitor has crept up on it. A decade ago, Lao Feng Xiang was a unit of a pencil factory owned by Shanghai's provincial government. Now it's a mainland behemoth, with 2,957 stores at the end of December and plans to add 100 more this year.

Fool's Gold
Lao Feng Xiang's gross margins are far lower than the competition's
Source: Bloomberg

Lao Feng Xiang's skew toward commodity gold dealing rather than the more profitable business of selling gem-set jewelry gives it lower margins than its Hong Kong competitors. But it's seizing market share on the mainland, GF Securities analyst Albert Yip wrote in a note to clients last month.

That aggressive competition is exacerbating the retreat from luxury spending that's caused sales from mainland Chow Tai Fook stores open at least 12 months to fall in seven of the past eight quarters. The company reported a 46 percent drop in full-year profit Tuesday, saying net income for the year ended March was HK$2.94 billion ($378.5 million), about 8 percent lower than what analysts had been expecting.

Sales of gem-set jewelry, the fashion product that should be Chow Tai Fook's strong suit, fell 11 percent last year, the first annual decline for the segment since 2013.

Drop of Gold
Sales from Chow Tai Fook stores open at least 12 months have barely grown in two years
Source: Bloomberg

The risk for Chow Tai Fook is that it gets squeezed. On one side there's a state-backed competitor with the scale and ambition to cement its position in China's mass market. On the other are Hong Kong consumers, many of whom tend to look down on mainland visitors and may avoid the products they covet.

Midas Touch
Chow Tai Fook's revenue is still dominated by the commodity gold business
Source: Bloomberg data

That dynamic means that even if China's luxury spending starts to recover, Chow Tai Fook will have a fight on its hands. The challenge of mass-market luxury is to reach the largest number of consumers without losing your sense of prestige. It's a task made even harder when wealth and snobbery, the perennial drivers of the luxury trade, run high on both sides of the fence dividing Hong Kong and the mainland.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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David Fickling in Sydney at

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Katrina Nicholas at