The dismal 2007 holiday selling season provided the American jewelry industry with a taste of expectations for 2008: weak demand and sluggish sales. Jewelry demand in the U.S. market is expected to be weak during 2008. The country’s economic growth is slowing, and a recession is a real possibility. Historically, when economic growth slows, shoppers retreat and jewelry demand weakens substantially.

 

There is a catch to this forecast: despite weak jewelry demand, total industry sales are expected to rise. That’s in stark contrast to prior economic slowdowns when jewelry sales declined on a year-to-year basis.

 

Here’s what is different this time: inflation. While inflationary pressures typically precede a recession, the U.S. jewelry industry has usually been an exception to this fundamental economic rule. During nine of the past twelve years, retail jewelry prices have declined in the U.S. market, despite economic cyclicality. But that won’t happen in 2008. With gold flirting with $900 per ounce, rampant jewelry price inflation, both at the consumer and producer level, is expected.

 

Here’s our forecast for jewelry sales in the U.S. during 2008:

 

Jewelry Sales (measured in dollars): Up 3 percent

2008 Sales $65.9 billion vs. 2007 $64.0 billion (estimated)

 

Jewelry Sales (measured in units): Down 4-5 percent

 

Simple math suggests that the inflation rate in 2008 for jewelry will be around 7-8 percent, a level the industry has not seen for nearly twenty years.

 

Here’s what else is different this time: bifurcation of demand. During 2006 and 2007, jewelry demand began to diverge, despite a growing economy, with middle-market and lower-end jewelers reporting flat to negative sales comparisons while upper-end jewelers reported strong gains. Historically, market bifurcation occurred only in a weak economy, when mass market consumers cut back but wealthy higher-income consumers continued to spend.

 

This time, though, there is a new factor causing market bifurcation: consumers appear to want something “new and unique,” and the only place they can find that merchandise – typically branded, fashion, and designer goods – is by shopping in higher-end jewelers who have exclusive merchandise and brands. Mass market jewelers are learning that promoting a beautiful one-carat diamond pendant does not create a competitive differential.

 

As a result of demand bifurcation, it is likely that middle-market and lower-end jewelers will post negative sales comparisons in 2008, while upper-end jewelers will report moderate gains.

 

The graph below summarizes our forecast for jewelry sales trends in the U.S. market for 2008. The sales gain for 2007 is preliminary, since final year-end results have not yet been reported.

 

Source: JIRI

 

The graph below summarizes U.S. jewelry industry sales, actual and estimated, in billions of dollars.

 

Source: JIRI

Challenges & Opportunities:

U.S. Jewelers Will Face A Tough Retail Environment in 2008

In their quest for share of consumers’ wallets, U.S. jewelers will face an uphill battle in 2008. The following factors will have a significant impact – both negatively and positively – on their sales.

 

Challenges

The following are some of the key challenges for the U.S. jewelry industry in 2008.

 

• Weak Economic Conditions – There is a high correlation between economic cyclicality and jewelry demand: when economic growth is strong, jewelry demand soars. Conversely, when the economy slows, jewelry demand plummets. Broad economic factors are weakening in the U.S. market. Further, American shoppers are pressured by housing and mortgage woes, less credit availability, high energy costs, smaller wage gains, and rising unemployment. Will the U.S. economic slip into a recession, defined as two quarters, back-to-back, of negative economic growth? The stock market certainly is predicting it, but it is important to remember that the stock market is a poor predictor of anything. There’s an old adage on Wall Street that says, “The stock market has predicted twelve of the past six recessions.” Consensus economic forecasts are evenly divided. The Fed is working hard to avoid a recession.

• Sharply Rising Costs – Inflation has hit the jewelry industry: precious metals costs have risen dramatically. Gold has more than doubled in price over the past three years. Platinum and silver are also up dramatically. Jewelers haven’t passed on those cost increases via higher retail prices. As a result, their profits are down. The challenge for jewelers will be to re-price their goods to reflect current costs without driving away loyal customers.

• Online Competition – Most online jewelers sell merchandise for less – often significantly less – than store-based merchants. Further, online shoppers can browse at their own pace, learn about diamonds, and see infinitely more product than in a typically jewelry store. The online financial operating model is far superior to the financial model used by most store-based jewelers. While we don’t think that online merchants will replace jewelry stores, they will change the way store-based merchants do business.

• Restricted Credit Availability – The sub-price mortgage mess has caused banks to tighten their credit standards. As a result, jewelers are experiencing a higher rate of rejected credit applications. Since roughly half of all jewelry is sold on the monthly payment plan – typically in-store credit programs – restricted credit conditions mean that jewelers will lose sales in 2008.

• Financial Deterioration – As profits slump and cash flow slows, jewelers will find it much more difficult to obtain capital for new “open-to-buy.” With less merchandise in their stores, the opportunity to make sales diminishes. This often creates a downward spiral which can land a merchant in the financial abyss of bankruptcy.

• Dull In-store Experience – Jewelry merchants haven’t updated the way they do business in generations. De Beers missed the opportunity to show the world how to sell diamonds, when they began opening De Beers stores several years ago. If you think retail is dull by its nature, go to an Apple Computer store or some other retailer which offers a rich in-store experience – that is, if you can get into the front doors of those stores which are frequently crowded to capacity with customers.

• Questionable Retailer Integrity – Far too many jewelers promote price – “cheap, cheaper and cheapest” – to attract customers. This reduces their integrity levels to those of a used car lot. Customers call it “pricing roulette” – the price marked is never the price they will pay; the game is to haggle for the lowest possible price. Retailers cannot win on price alone, since a competitor can always price goods lower. Saturn and CarMax proved that there are a large number of shoppers who dislike haggling. Retailers who price the goods correctly are rewarded with growing gross margin dollars, increased inventory turns, a growing customer base and rising integrity levels.

• Commodization of Diamonds – In an effort to bring integrity to diamonds, the industry began certifying these gemstones. That was a double-edged sword. Now, shoppers can easily compare prices for diamonds and buy from the cheapest merchant. Because so many consumers have access to diamond industry price lists, at least one price list purveyor has established a price list with “discounts only for the trade.” It will take only about 15 minutes for a copy of this list to hit the internet and become available to the world. Jewelers will need to develop value-added services and products to overcome the fallout from the commodization of diamonds.

• Alternative Spending Opportunities – America is the land of opportunity, in part because virtually all consumers – even those at the lowest income levels – have some discretionary income. When consumers tighten their purse strings, they don’t stop shopping; they buy things that they perceive will make their life more fun in difficult times. During the 2007 holiday selling season, consumer electronics retailers siphoned off significant demand from the jewelry industry by offering a plethora of products – GPS units, cameras, and other electronic goodies, for example – in the $300-500 price-point range. This is the heart of the price-point range for mass market jewelers in the holiday period. IDEX Online compared circulars from Best Buy and Circuit City to those from Kay Jewelers, Zale’s, and others; the merchandise price points were similar. And, apparently, a flashy fun new GPS unit won out over a flashy new diamond.

• Shifting Market Positioning of Jewelry from “Luxury” to “Fashion” – If “luxury” is defined by “stuff that you want, but don’t really need,” then jewelry is a luxury item. If “luxury” is defined as a non-essential item that is expensive or difficult to obtain, then jewelry is not a luxury. De Beers has been repositioning diamonds as a fashion item by developing programs such as Three-Stone Jewelry, Right-Hand Ring, Journey, and others. Unfortunately, far too many jewelers don’t understand those concepts, and they continue to try to sell commodity diamond pendants and rings as “luxury” items, perhaps as an investment (gold jewelry, for example). Jewelry is neither a luxury product nor is it an investment instrument; rather, it is a fashion product, and the industry must understand that the way it sells jewelry should reflect “fashion.”

Opportunities

The following are some opportunities which will help fuel demand for jewelry in 2008 and beyond.

 

• Fashion – In an otherwise lackluster market, here’s what is selling: brands, designer, fashion goods and estate jewelry. What’s the message? Consumers want something different. A “one-size-fits-all” approach is no longer an option. Throughout history, jewelry has been used by people to differentiate themselves by gender, social class, age and ethnic group. A diamond pendant no longer provides that differentiation; jewelers will need to develop more fashion-forward merchandise to appeal to shoppers’ changing tastes.

• Favorable Market Demographics – Of the list of demographic factors which have a measurable propensity to create sales, income trumps all. A high-income household will spend as much as fifteen times more on jewelry annually versus a lower-income household. Currently, about 18 percent of all U.S. households earn $100,000 or more annually; this will grow to near 20 percent by 2010. Further, younger consumers – especially tech-savvy people right out of college – are earning six-figure incomes. Forecasters suggest that this demographic group – dubbed Millennials – will out-spend their free-spending Boomer parents.

• Developing Market Niches – Jewelers have the opportunity to target developing market niches such as mens jewelry and estate jewelry. In addition, jewelry for a growing market of gay Americans is an opportunity, especially as these consumers celebrate their civil marriages in a more open manner. Finally, the Hispanic market purchases jewelry which is highly differentiated from mainstream jewelry which most merchants sell. Currently, Hispanic consumers represent about 13 percent of all Americans; in twenty years; demographers are predicting that they will grow to 25 percent of the American population in a few decades.

• Growing Bridal Market – In less than ten years, the number of weddings is projected to rise to nearly three million annually from the current level of about 2.3 million. Sharply higher birth rates of Millenials are driving the growth of the bridal market. Not only are Millennials more likely to get married – rather than live together like children of the 1960s – they are also more likely to spend heavily on bridal jewelry because they have more wealth than their predecessors. Further, they are less likely to divorce, based on their moral and ethical attitudes.

• Increased Branding – Branding offers a way for jewelers to differentiate their merchandise from competitors. Further, branding brings integrity to the product. Brands can drive consumers to specific stores. The growth of brands such as Hearts on Fire, David Yurman, Tiffany, and others illustrates the power of brands to create demand and sales. Despite dismal demand for jewelry during the 2007 holiday selling season, branded jewelry posted solid sales gains.

• Diamantaires’ Growing Marketing Expenditures – De Beers’ DTC seems to be “the dog to kick” when anything goes wrong in the industry, but it is the only company which has consistently allocated marketing and advertising expenditures to promote diamond jewelry (or any jewelry, for that matter). Further, the DTC’s downstream partners are also expected to increase funding for marketing and advertising. Overall, the jewelry industry under-spends most other high-end consumer goods market categories, so increased spending by industry participants will benefit the entire jewelry industry.

Slowing Growth Creates Opportunities

Far too many jewelers – suppliers and retailers – appear to be wringing their hands, crying “woe is me,” in the face of the expected tough industry conditions in 2008. Here’s what they fail to see: almost $66 billion will be spent on jewelry in 2008 in the U.S. market. That’s a lot of money. Some merchants will get a greater share than others. Some merchants will be so obsessed with the fear of failure that they will fail. That, too, creates opportunities for the remaining competitors.

 

Smart merchants will use the coming economic slowdown to build a springboard for business when the economy recovers.

 

###

 

Over the next several weeks, IDEX Online Research will prepare articles which will expand on each of the challenges and opportunities enumerated in this article. In addition, IDEX Online’s director of online research, Ken Gassman, is available to speak to corporate management groups and others about the State of the Jewelry Industry. He has developed a PowerPoint presentation which can be customized to your group. For further information, please email Ken at research [at] idexonline [dot] com.