Pretend for a moment that you are an American consumer, and you’ve just been given $350. What would you do with it?

 

That’s a very real question. Over the next few months, every taxpaying American will receive up to a $600 tax rebate from the government as part of its economic stimulus program.

 

We picked the number of $350 because that is the average ticket for jewelry for a mass market retail jeweler. Consumers will have money to spend, and jewelry’s retail sweet-spot – $350 – is right in the middle of the range of the average American’s tax rebate.

 

Consumers Will Say One Thing, Do Another

The government wants people to spend the money. After all, consumer spending represents two-thirds of Gross Domestic Product, and consumers are clearly the engine of the U.S. economy (in contrast, consumer spending is much lower – in the 40-55 percent range of GDP – in most other countries). Congress, the government, and the Fed recognize that if consumers tighten their purse strings, this could be a long, deep recession, something no one wants.

 

Ask consumers what they plan to do with their rebates, and many have already answered: I’ll pay down my credit card balance and I’ll save the rest. That’s a very patriotic answer. In fact, that is what they should have been doing all along (and they know this, but didn’t follow through).

 

But what will consumers really do with their tax rebate? When asked by the pollsters, they will give their patriotic answer – “pay down debt, maybe buy something small, and save the rest.” American consumers, being the consumption addicts that they are, will view their answer as virtuous, and because of this virtuousness, they will reward themselves with a shopping trip to the mall where they will blow their entire tax rebate and maybe a little more. For better or worse, that’s exactly what the government wants to happen, and it will be good for the economy. But it won’t help the financial health of American households, which are ailing and will continue to be on the sick list for a while to come.

 

Shopping is a passion with Americans. Americans claim to have invented recreational shopping (they didn’t, but that doesn’t stand in the way of this old adage). They use a trip to the mall as a stress-reliever. Americans were born to shop. Baseball may be this country’s national pastime, but shopping is its passion. And the adages go on and on.

 

Where Can Americans Spend $100-300?

Very shortly, most of the 120 million or so American households will receive a rebate check: up to $600 per person, up to $1,200 per married couple, and an extra $300 per dependent child thrown in as a bonus. That’s serious money that will be available for spending.

 

We believe that most households will make a discretionary purchase of some type with their tax rebate, and will spend somewhere in the range of $100 to $300, the jewelers’ sweet-spot for “fine” fashion jewelry.

 

Which retailers are vying for this discretionary purchase?

 

Over the past week, we’ve combed through newspapers along the East Coast, looking at ads and circulars. We looked for merchandise that could be purchased for $100 to $300 that would be a reasonable purchase for a couple looking to splurge a little. We didn’t visit malls, nor did we try to create a full array of merchandise in this price range that consumers might purchase. Rather, we let the advertising circulars tell us what to look for. If it wasn’t advertised, we didn’t consider the product.

 

Our conclusion at the end of the study: a diamond might be forever, but a flashy new GPS unit or a snazzy computer is much more fun. And those purchases take our minds off the doom and gloom of the current economic situation.

 

Sears – This venerable retailer is still trying to figure out who it is and what customers it is targeting. Its advertising circulars are clearly trying to reposition the company more upscale. The first few pages of Sears’ 56-page circular, with the company’s new tagline “Re-imagine You” have virtually no prices: it illustrates classes of merchandise that range from 30 percent to 50 percent off regular price. Pricing roulette rules: you don’t know the real price until you visit the store. Handbags are an accessory that women might consider, if they want a fashion accessory. Most are priced at $50 or so, with 30 percent to 50 percent discounts. That puts them far below our target price range, but the look of those handbags is good.

 

Roughly a third of the way into the circular, Sears has three pages of watches and jewelry. Watches are priced uniformly at 25 percent off, with two-thirds of those watches priced below $100. The rest are $250-350. Most so-called “fine” jewelry is priced around $100, and is shown as “40-70 percent off”. Only two pieces are listed above $100: a ¼ ct total weight diamond anniversary ring for $199, and – shock of shockers – a 2 ct weight 14K diamond engagement ring for $1,349. Otherwise, you need to go another ten pages to find any merchandise above $100 retail. That would be a stainless steel cookware set, and we’d bet that is not an alternative purchase to jewelry in any woman’s mind. Even the entire range of appliances – refrigerators, stoves, etc – are priced less than the most expensive piece of jewelry. There are a large number of new sparkling appliances priced in the $350 range; that might be an alternative purchase to jewelry. Exercise equipment is generally priced far above our $100-300 target, so we don’t consider it a possible alternative purchase (Americans spend heavily on exercise equipment, because an estimated 30 percent are overweight).

 

Sears’ consumer electronics are priced far above our target range – most items are in the $2,000-3,000 area. You can buy four new tires for your car for about $300, but that, too, doesn’t strike us as an alternative purchase to jewelry. Fancy outdoor grills are priced within our target range, and they are a viable alternative to a piece of jewelry, in our opinion; the entire family benefits. There are lots of lawnmowers price in our target range, but they really don’t qualify as an alternative to jewelry. Several pages of power tools (“boy toys”) are priced in the $100-200 range. The Bottom Line: Lower-end customers might shop at Sears with their rebate check, with the husband choosing a new power tool, and the wife choosing some accessories, including jewelry under $100. But specialty jewelers probably aren’t “top-of-mind” for the Sears customer.

 

Kohl’s – Kohl’s 80-page flyer, with the company’s “Expect Great Things” tagline, leads with “save an extra 30 percent or 20 percent or 15 percent on everything.” In even bigger type, it says 40-50 percent off all dresses and dressy apparel. Kohl’s circular is full of cheap stuff (sorry, but that’s what it is); more than 80 percent of the pages are devoted to apparel. Almost nothing is above $100; only a little more is above $50. What is above $100? Rugs, vacuum cleaners, outdoor furniture, kitchenware, and, of course, “fine” jewelry. The first piece of fine jewelry listed as follows: “diamond solitaire earrings, 1/8 ct TW, regular $100 pair for only $29.99 in 14 kt gold.” (Any guesses about what color and clarity those diamonds are?) Kohl’s Journey diamond jewelry is priced at $259 and below; interestingly, moissanite jewelry is priced at $579 to $399, far above most of the diamond jewelry offerings. The most expensive piece of jewelry is priced at $1,299, and it is a one-carat total weight three-stone diamond ring in 14 kt gold. The Bottom Line: Kohl’s is not a store with viable alternatives for our $100-300 discretionary expenditure.

 

J.C. Penney – Penney’s 28-page flyer, with the company’s tagline “Every Day Matters” (no, we aren’t sure what it means, either), leads with “40 percent off” for its new American Living house brand (see americanliving.com). We like the “new” J.C. Penney. Under Beryl Raff’s leadership in the jewelry division, it has become a viable competitor to almost any mall jeweler. But, other than a few housewares and some men’s suits – and fine jewelry, of course – Penney really doesn’t offer viable alternatives for our $100-300 discretionary purchase. Maybe we can buy several lower-priced accessories – that’s probably the proposition that Penney would make. The Bottom Line: It is conceivable that J.C. Penney will be the beneficiary of some discretionary spending from the rebate checks; jewelers should view Penney as a competitor for discretionary expenditures.

 

Target – With its department store background, Target is a fancy discounter. Most analysts suggest that it competes head-to-head with Wal-Mart. We’d argue that it doesn’t: Target’s customer service is multiples better, the store is infinitely cleaner, and the merchandise is higher quality in Target. Target actually has some products that might be a viable alternative for our $100-300 discretionary expenditure. After you get past the apparel (all relatively low priced), Target offers some neat consumer electronics gadgets for $199 and below. And, there are some housewares and outdoor merchandise (fancy grills) in that price range. The Bottom Line: Jewelers should think of Target as a competitor, though not for jewelry: other than some costume jewelry and watches, Target really isn’t in the fine jewelry business.

 

Staples – This specialty retailer’s 12-page flyer, with the tagline “That Was Easy”, offers many products in the $100-300 price range, with some above. Staples carries a full line of computer printers in the $100-300 price range. It also has computers for as low as $499 (Acer with 1GB of RAM and a 160GB hard drive, wireless LAN, and Vista Home Premium – a great deal). The Bottom Line: The computer category will compete with jewelers for consumers’ rebate check.

 

Ritz Camera – Gadgeteers love cameras, and Ritz is the place to go. Its four-page flyer has cameras priced from $89 up to $2,000. The Bottom Line: Ritz will benefit if the husband and wife agree to split the rebate check: the man will buy a camera, and the woman will buy something from J.C. Penney.

 

Radio Shack – Like Ritz, this retailer is the domain of the male shopper. Interestingly, GPS units, which were priced in the $300-400 range during the 2007 Holiday Selling Season and competed head-on with jewelry demand, and now priced under $300. These units, which can also be purchased at Staples and consumer electronics retailers, have continued to fall in price. The Bottom Line: As a result of the perceived value, they will likely remain a viable alternative for discretionary spending.

 

Lowe’s Home Improvement - Lowe’s 20-page circular, with the tagline “Let’s Build Something Together”, competes head-to-head with jewelers for the tax rebate check. For Americans, their home is their castle, and they continually try to improve their standard of living. Home fashion is as important to most consumers as personal fashion. Lowe’s offers all kinds of things for the home in our target price range: lamps, chandeliers, ceiling fans, flooring, bath and kitchen accessories, and other products that allow consumers to make their home “special.” The Bottom Line: Jewelers will see many of the tax rebate dollars flow to Lowe’s and competitor Home Depot, in our opinion.

 

Best Buy – Best Buy (and Circuit City) were jewelers’ nemesis during the 2007 Holiday Selling Season. With just about every new electronic gadget known to humankind, these consumer electronics giants competed head-to-head for consumers’ discretionary spending, and they will be beneficiaries of expenditures funded by the tax rebates. You name it, and Best Buy’s 28-page circular, with no tagline (the name “Best Buy” apparently says it all) has it for a price that is in our target range of $100-300. Two-thirds of the merchandise featured on the front cover is in that price range. The first two pages feature GPS units and car stereos mostly in the $100 to $300 price range. Elsewhere, Best Buy offers speakers, DVD players, cordless telephone systems, game systems, computer accessories, MP3 players, and cameras in the target price range. The Bottom Line: Men will likely be the heavy shoppers at Best Buy, but women also seem to like this electronic gadgetry as well as flashy appliances at Best Buy, so count on consumer electronics retailers to chase tax rebate expenditures with a vengeance.

 

Jewelers – Unfortunately, there were no jewelry circulars in any of the newspapers we purchased. Jewelers had a few ROP (run-of-the-paper) ads, but their ads were small. Merchants offering to buy consumers’ gold jewelry at a premium price were actually larger than jewelers’ ads. It is no surprise that jewelry ads were minimal, since this is not an important seasonal selling period. The Bottom Line: The industry’s competitors are out there with circulars hammering home the message that they have a reason for shoppers to come into their stores.

 

Travel – The Washington Post (Washington DC) devoted its entire travel section (ten-pages) to domestic travel. With the U.S. dollar weakening, overseas travel is getting much more expensive. While some of the travel ideas in the Post’s travel section were for week-long adventures, the editors highlighted many weekend ventures costing no more than $350-400. That’s the sweet-spot for jewelry expenditures. Consumers are seeking more experiential things to do (climbing walls in sporting goods retailers, hands-on computing experiences at the Apple store); experiential spending also includes travel. In fact, The Washington Post noted that consumers should consider domestic travel because the dollar still buys great values.

 

Interestingly, the marketers at De Beers have often said that travel (a cruise, for example) is the number one competition of the diamond industry. The Bottom Line: The travel industry, which has been hurt by a slowdown in overseas trips due to the weak dollar, will be a beneficiary of tax rebate dollars – dollars that could have been spent in a jewelry store. The opportunity for jewelers is to convince consumers that a diamond won’t fade like a photograph or our memory.

 

Other Stores – While we did not analyze potential expenditure alternatives at any stores which did not advertise via flyers or large ROP ads in the newspaper, we know that they are out there. Dell, Apple, and HP are vying for a sizable chunk of spending related to the tax rebates. Sporting goods stores can help consumers spend $300 in a hurry – sporting goods have gotten expensive. Department stores’ boutiques offer women’s apparel in our target price range. That’s a woman’s purchase, and is absolutely a viable alternative which competes directly with jewelers.

 

The Longer Term Outlook

Tax rebate-fueled consumer expenditures are a one-shot stimulus to the economy. Jewelers will be the beneficiaries of some of that spending, though not as much as we’d like.

 

Longer term, jewelers need to take a hard look at who their competition really is (surprisingly yes, Lowe’s is a viable competitor, as we pointed out earlier, because it offers fashion for the home). Jewelers need to realize that they are in the fashion accessory business. They must learn how to compete against everyone who is in the fashion accessory business. Consumers have a far larger pot of gold (discretionary dollars) earmarked for fashion goods than they have set aside for jewelry purchases. It is our job to figure out how to tap some of their fashion budget.