How Can Jewelers Adapt to the New Normal?

Article

Date August 2010

Featured in the August 2010 Edition of National Jeweler

The worst of the recession appears to have passed, as evidenced by cautious consumer spending and jewelers restocking shelves, but recent shifts across the industry—changes in the competitive landscape, fluctuations in the cost of essential materials and consumer-driven price points—have established a "new normal" for jewelers.

Capital, liquidity and consumer spending are nowhere near the prolific flow seen in the glory days of 2007, and jewelers who wish to succeed in this unique business climate must adapt to all of the market's latest nuances.

For starters, there are fewer competitors, and those jewelers who lack capital continue to teeter on the brink of uncertain futures. However, despite the severity of the economic crisis and the precipitous drop in consumer spending on luxury, surprisingly few jewelry companies failed in 2009. The number of manufacturers fell by 130 firms, but this was actually in step with the gradual reduction in U.S.-based manufacturing that has been the trend since 1999 as production has migrated offshore. 

Last year, 1.9 percent of jewelry stores closed, just slightly higher than the average number of store closings, 1.7 percent, over the last decade. 

According to IDEX, the recession impacted jewelry wholesalers more than manufacturers or retailers. Even so, only about 4 percent of wholesale firms exited the market, with 4,356 remaining, down from 4,500.

On the operations side, jewelers in every sector—manufacturing, wholesale and retail—took on economic challenges by selling inventories down significantly. 

Now, there is a concerted effort to rebuild those inventories all along the supply chain, but replenishment must be done conservatively, without lifting a finger from the pulse of demand driven by actual sales. 

Supply and Demand

Manufacturers have already begun to adapt production to the "new normal." De Beers and other diamond mining firms temporarily halted mining in late 2008, in anticipation of falling prices and in an effort to stabilize values. This helped tighten supply across the market. 

Demand for diamonds, a critical barometer of the health of the jewelry sector, surged this year, and diamond prices, which peaked in 2008 before dropping dramatically in 2009, have started to rise again, with the IDEX diamond index showing prices have been rising on a sharp incline since January. While consumer demand certainly influenced diamond prices, manufacturers also impacted prices through controlled production. U.S. rough diamond imports rose 391 percent in value, year-over-year, and 126 percent in volume in February alone. 

Although De Beers has resumed production, it recently announced a plan to limit annual diamond production to 40 million carats per year starting in 2011. This will likely yield continued diamond price increases. 

Additionally, the price of metals, most significantly gold, has stabilized in 2010. In the 12-month period preceding April, gold prices fluctuated from a low of $885 per ounce to a high of $1,214 an ounce in October. In March and April of this year, the price of gold consistently hovered in the $1,100 to $1,150 range. 

Big Looks for Less Money

The challenge for jewelers has been to work with materials that will consistently command higher prices while also offering designs that support lower price points without sacrificing quality. 

Even higher-end jewelry retailers, whose core customers were less impacted by the recession, have been forced to rethink merchandising and design as consumers across the socioeconomic spectrum are scaling back and choosing more value-priced merchandise. 

To achieve lower price points, jewelers are buying more pieces with mixed metals, often combining gold and silver, sometimes with platinum and palladium, and fashion jewelry that integrates numerous smaller gemstones rather than larger, more expensive ones. 

The industry also has to expand beyond the bridal mindset. While bridal sales have historically accounted for more than 30 percent of jewelry revenues, jewelers will have to strengthen their fashion offerings in other categories going forward to attract additional customers in the future. 

However, shoppers are returning to the jewelry counter. Although overall jewelry retail sales slipped to $59 billion in 2009, from $60 billion in 2008 and 2007's industry high of $61.6 billion, many jewelers reported positive sales for the fourth quarter of 2009. 

Even moderately priced department store J.C. Penney reported "an excellent response to diamonds"  during the company's fourth quarter. 

On the high end, Tiffany & Co. reported worldwide sales rose 17 percent and comparable store sales were up 8 percent in the company's fourth quarter. Granted, the premier high-end jeweler did not escape the economic crisis unscathed, and in 2009, Tiffany & Co. closed its 16-store Iridesse brand that was devoted exclusively to pearl jewelry.

Adapting to the "new normal" means that whether jewelers are selling in a department store or a high-end luxury store, they have to create the illusion of expensive pieces while keeping retail prices in line with cautious consumer spending.