The end of growth?

The sale of Zales to Sterling announced last month did not come as a surprise to many. It looks like one of the final strokes of a long-term consolidation that has occurred in the mall-based jewelry field - in all of retail, actually - since the years of near-rampant expansion in the last century.

What is notable about all the consolidations we have witnessed is not so much that that the stronger, more aggressive companies have slowly taken over particular channels, as that no new competitors have come up within those channels. In mall jewelry there have been a couple of efforts, but they too have been sucked into the black hole of consolidation. People make note of the handful of chains that have disappeared in the last few years. But I remember making a list in the late '80s of mall chains that were bought out or absorbed, very often by Zales or Sterling. I came up with 40 names.

So is all this just an accumulation of power, or is there more to it? From the supplier point of view, it certainly has not been beneficial. Trade shows in the '70's and '80's were very busy with hordes of buyers from dozens of expanding mall retailers. There was real diversity in what they bought, and how they bought. That is largely gone now.

Zales had perhaps 100 stores at the time, and was growing rapidly through acquisition and expansion. (And so was Sterling.) Many of the acquisitions were the dominant guild stores in larger cities around the country. They initially retained their names and historic uniqueness, even as they were being assembled to form Zales' guild division. That division was led by Bailey, Banks and Biddle, a fine Texas jeweler, into which all the others were eventually merged. BBB never could fully exploit the images and histories of all the original stores, and a long decline began.
Now Zales will be part of Sterling, essentially doubling Sterling's size. Is this growth? Of course not. But there is more to think about.

I would like to draw a parallel with a different product entirely - cars. In 1970, there were 8.4 million cars sold in the US, both domestic and foreign, owned as well as leased. In 2010 sales totaled 5.635 million, 33% less. (The peak in those 40 years was 10.979 million in 1985; the lowest was 5.401 in 2009.) In 1970, US population stood at 203,211,926. In 2010 it was 308,745,531. That means that in 1970, one car was sold for every 19 people. In 2010, the number is 57. I do not want to make too much of this, as there are many factors involved - the prices on cars, people moving into cities, a change in public mindset, etc. Still, this is a dramatic demonstration of the decline of the middle class. Over the same period, I am guessing, car prices went up tenfold, or more, while employment in the industry plunged. Inflation does account for some of push on prices. More of it was a need to maintain profitability - the fewer the number of cars sold, the more prices had to be pushed. I feel that the major factor is a gradual erosion of growth, even as replacement of cars remained a necessity.

Jewelry, however, does not wear out like cars. Tastes do change, leading to some replacement. But so does the public's priorities. Unfortunately, there are no comparable statistics in jewelry. But even without hard numbers, there are facts we do know. Around 1980, the year we saw a crazy spike in the price of gold, diamond sales were very strong. I recall manufacturing three, four and five carat total weight diamond cluster rings. In the many thousands. Women's and men's. Imagine a 7-stone, 5-carat total weight man's ring - that's 7 three-grainers - in a heavy solid-back shank! This heavy use of fifths, quarters, halves and up carried across all categories.

Unlike cars, however, retailers and jewelry manufacturers over the years felt they needed to hold certain price points. (After all, jewelry is not a necessity!) So, as wholesale prices generally climbed, diamond weights and qualities declined, gold weights declined, until now we have a preponderance of jewelry where diamonds do not exceed one point in weight. In many ways, the industry has done the equivalent of painting itself into a corner. Where do you go now, when stones cannot get smaller, and shanks can't get any thinner?

One direction, as I pointed out earlier this week, is the move to silver and non-precious materials. The line between fine jewelry and costume has blurred, and we are training the public to accept inexpensive, bold, disposable alternatives to fine jewelry. The pressure mounts to offer those key price points. Are we eroding the image of jewelry as we fight the end of growth?

To some degree, the same has happened with cars as the struggle to maintain sales of mid-priced cars for the middle class continues. More stripped down cars and small cars, down to two-seaters, have appeared because real price limits are being reached in the mass market. Concurrently, in both jewelry and cars, super-luxury is rolling along fine.

It is not as if there is too much competition, and too many companies entering the field. The Jewelers Board of Trade has reported that there is a continuing decline in the net number of operations. No doubt that a key factor is stagnant wages and stubborn unemployment, driven by accelerating technological advances that are extinguishing jobs and steadily raising productivity.

We see major retail chains in all types of merchandise appearing to hit limits. Maybe it is just this long, difficult recovery from a major financial crisis and recession. And maybe not. Either way, real damage is being wrought on the industry and on the public's view of just how they will accessorize apparel. There is little doubt that great talents will still rise, as will new concepts in jewelry that will excite the public's imagination. But when we hear that sales have risen 6%, that is dollars, not units. Where is the growth?

We should not dismiss out of hand that growth as we experienced it in the past will return. It very well may not.

This article was written by Ben Janowski, founder of Janos Consultants, who has been providing service to the diamond and jewelry industry for over two decades. This article originally appeared on his blog at: http://janosconsultants.blogspot.com