Holidays 2011: Trending and Strategy

Article

Date September 2011

Featured in National Jeweler

The jewelry industry continues to face unique challenges in 2011 that differ from years past. While optimists had hoped the industry would be riding the momentum from an earlier-than-anticipated rebound in 2010, the reality is jewelry retailers and suppliers are battling the uncertainties of global economic instability and a quagmire of inertia.

Driven by the continued increase in the costs of metals and diamonds, there is a disturbing trend on the part of jewelry manufacturers to limit price commitments and adjust prices before merchandise delivery. Prices are not expected to stabilize until the first quarter of 2012, which means that jewelers must plan strategically for the 2011 holiday season.

The first step, before critical initiatives can be taken to position jewelers for productive holiday sales, is to establish clear insights into the current state of the industry.

Escalating Prices

Continued price escalation has eroded margins so that the prices retailers quote and advertise become obsolete, sometimes to the point that the retailer loses money on the sale. Overall, the price of raw materials has continued to climb, with gold hitting $1,900 per ounce last month.

Even more dramatic was the escalation in diamond prices, which rose five times faster than gold in the first half of 2011, fueled by surging demand from China and India. By mid-year, diamond prices had increased an average of 25 percent over 2010. Despite the price inflation, demand was robust at the Diamond Trading Company’s July “sight,” one of ten sales the company hosts throughout the year. Insiders noted that prices jumped another 5 to 10 percent at the event and placed the size of the July sight at $850–$900 million, making it one of the largest in recent history.

Global Markets

While much of the global economy is struggling and the U.S. market certainly remains among the most stressed, China and India have thriving consumer markets and, in 2010, these two countries accounted for 20 percent of global demand for diamond jewelry, compared to 12 percent in 2008. Within the jewelry industry, the consumer market for jewelry and diamonds in China has begun to rival the U.S. market.

However, India is the fastest-growing jewelry market, and forecasters believe it has the potential to overtake the Chinese market in the diamond and jewelry industry by 2050. The Rapaport Group has predicted that within 10 years the combined consumer markets for jewelry and diamonds in China and India will exceed the U.S. market.

In addition to the growing consumer demand for jewelry in both India and China, the economic boom in those countries is having another unique impact on the global jewelry market. The cost of labor is rising as workers’ expectations become “Westernized,” with workers in China looking for benefits such as health insurance, paid vacations, improved working conditions and a better quality of life.

As these expectations evolve into added costs for suppliers, there may be a subtle shift that returns manufacturing of some jewelry to U.S.-based factories. This would likely occur if the price points of jewelry, driven by rising labor costs combined with increased costs of materials, create a viable incentive for making the jewelry stateside.

Domestic Forecasts

Historically, November and December have represented one-third of U.S.-based jewelers’ annual revenues. In 2010, domestic jewelry sales in these holiday months increased 8.3 percent year over year, climbing to roughly $19.3 billion. However, the stalled economic recovery compounded by continued high unemployment and marked consumer skepticism has led many jewelers and forecasters to lower expectations for 2011 holiday sales. For instance, in response to sales declines through the second quarter, Pandora lowered predictions from an optimistic 30 percent increase for 2011 to a conservative estimate that sales would remain relatively flat comparable to last year’s revenues.

Jewelers that celebrate successful holiday sales in 2011 will be those that respond assertively to the U.S. consumer’s desire for smaller pieces that are high quality. Tapered, manicured styles and more classic designs are in vogue, and the classics will prevail over fast-fashion trends. Even with conservative budgets, U.S. consumers still demand selection and expect to see new merchandise in the display case, which fosters the ultimate conundrum for jewelers.

The Inventory Conundrum

When the only sure bet is that the cost of goods is going to keep rising, it becomes increasingly risky for jewelers to place orders for holiday inventory. This is a dramatic departure from historical precedent, when jewelry retailers typically finalized holiday orders by September because suppliers committed to prices through the fourth quarter. This is not the case in 2011—at best, jewelry retailers are making their lists and checking sales projections twice, with many merchants delaying orders for new inventory until October or even early November.

Last-minute ordering carries risk as well—particularly when the availability of raw materials continues to be a challenge for jewelry suppliers. This may be particularly true for diamonds, since suppliers have predicted for years that consumer demand for polished product would outpace supplies of rough stones in late 2011 or early 2012.

The soaring prices of diamonds have many in the industry on edge and suggest that diamonds may be the most difficult product to stock this holiday season. A wedding ring that retailed for $1,499 in the 2010 holiday season will likely be priced $2,000 this season. For consumers, that’s a significant sticker shock, and while it probably won’t stop a couple from becoming engaged, it will prompt them to buy smaller.

Inventory Recommendations

When retailers postpone ordering new inventory, stores look dated and associates become bored with the merchandise. Rather than helping curb costs, failure to update the showroom “costs” the retailer in brand erosion and stagnant sales. To keep loyal customers coming back, jewelers need to do whatever is necessary to continue to bring attractive new inventory into the store. Investing in a modest number of new and exciting pieces will refresh the presentation and make the older pieces more appealing.

Similarly, store-level replenishment can positively impact sales in the holiday season and beyond. For instance, fast-selling inventory that turns frequently must remain well stocked, while aged inventory, or slow-moving categories, need to be invigorated with new pieces to refresh appeal. Proactive initiatives to inspire holiday sales can be as simple as remerchandising display cases by moving product around in the store.

Another way to facilitate inventory churn is to sell dated pieces on the Internet; and jewelry can be discounted on the Internet without the potentially adverse repercussions that result when customers see contrasting prices inside the store. In addition to bringing in new pieces to attract customers, new inventory will also invigorate sales staff and create a buzz. In the coming holiday season, jewelers will need to inspire enthusiasm in their sales associates and offer special incentives to associates for selling aged inventory.

Mark to Market

Finally, jewelers need to make sure inventory is priced to the market. Jewelry is a commodity—it makes no sense to sell a product that is valued at $140 for $100. Every jewelry retailer that Gordon Brothers performs appraisals for is remarking inventory to reflect the rising costs of raw materials. Retail jewelers should take advantage of the current uptick to capitalize on the additional profit potential in their existing inventories. Gold jewelry has always been adjusted according to market conditions and now diamond jewelry is being assessed and remarked as well.

In such a dynamic market, the challenge is determining how often to remark merchandise. Ideally, jewelers should analyze different merchandise categories every week to establish ongoing pricing updates. Remarking to current values increases the retailer’s margin on aged pieces and helps mitigate the rising costs of new inventory. It also serves the additional purpose of aligning consumer perception. For example, consider the mixed messages a consumer receives when a $1,400 wedding band from last holiday season is in the display case beside a very similar, new $2,000 wedding band. The natural inclination is for the consumer to think something is wrong with the less expensive piece. To diffuse that misconception, a jeweler will clean, polish and remark the older piece, raising the price to $1,800, which doesn’t seem that far from the $2,000 new piece.

Although the rapid increases in diamond prices have slowed and to some extent stabilized, there remains a huge disconnect between diamond prices last holiday season and this year. Even with a potential 5 percent decline from peak costs, diamond prices still average 45 percent higher than they were seven months ago.

Supplier Strategies

In the current business climate, opportunities also exist for suppliers and retailers to work together to engage consumers and motivate jewelry purchases. For example, suppliers can agree to take back aged inventory and give the retailer a full credit that can be applied to new orders. This effectively creates an open-to-buy scenario that benefits both parties: The retailer refreshes inventory; the supplier sells a higher-priced product that is more likely to turn over; and the supplier can scrap the aged inventory and turn the materials into a new, higher-priced product.

Equally beneficial, suppliers can work in concert with retailers to supply stores with the fastest-turning product. In best-practice scenarios, the supplier helps the retailer identify core products to stock and commits to replenishing sold merchandise quickly. In turn, the retailer may carry a full collection of pieces, as opposed to one piece, and focus on selling an ensemble of pieces from one supplier.

Winning Seasons

The same strategies that position jewelry retailers to succeed in the 2011 holiday season will provide lasting results into the new year. In summary, jewelers should merchandise to local consumers but understand the impacts of shifting demand across global markets; they must establish a replenishment plan to keep display cases fresh and augment aged inventory with updated classic pieces.