Diamonds & Jewelry
COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Diamond and Jewelry INDUSTRY Updated August 26, 2020
- Pre-pandemic Market Conditions: The diamond and jewelry business enjoyed a good start to 2020 following a fairly strong holiday season; however, pressures in the diamond business were unfolding prior to the COVID-19 crisis as rough diamond prices were under pressure from an oversupply of polished diamonds.
- Inventory Levels: Large mining companies began to see goods go unsold, and customers pull back on purchasing as overseas markets were soft. Watch companies had been having very strong sales and most were rebounding from being depressed for several years. Wholesalers were trying to reduce inventory positions as lenders demanded better turnover and less aged inventory, which most tried to deem ineligible for borrowing. Aged inventory was moved to off-price retailers who enjoyed healthy sales at great value, which boosted the online off-price channel.
- Replenishment: Prior to COVID-19 retail jewelers were looking forward to the jewelry show season to restock inventory, and most had allowed inventory levels to decline post-holiday as long as sales volumes maintained. The industry will see many manufacturers unable to survive this crisis as payments for vendors will cease, demand for goods will be depressed, and the price of diamonds will decline due to liquidity, causing most dealers to buy less. Dealers and manufacturers with cash on hand will survive and will benefit from greater profits as they continue selling to retailers with the ability to pay for goods as agreed.
- Valuation Outlook: In the short term, the industry will clearly be under pressure; however, jewelry markets have always been associated with celebrations, and should return to robust as the economy returns to normal.
Date February 2021
- After declining significantly in the second quarter of 2020, retail jewelry and watch sales in the U.S. rebounded in the third and fourth quarters, ending down just 0.4% over 2019.
- In 2020, diamond jewelry outpaced other jewelry segments due to the relatively strong performance of luxury jewelry in Asia per Bain & Company research.
- Bankruptcy filings for retail jewelers in the U.S. and Canada were up 10% through November 2020 per data from the Jewelers Board of Trade.
- Value perception is paramount in the mined versus lab-grown diamond debate.
Approximate net recovery on cost
Jewelry Retail Shows Glimmers of Resilience Amid COVID-19 Pandemic: Jewelry and watch sales were down slightly at the beginning of 2020, at negative 4.2% and negative 3.6% from 2019, respectively, for the first quarter as tracked by the Bureau of Economic Analysis. As pandemic-related shutdowns began around the world in March 2020, non-essential brick and mortar retailers faced an impossible situation as malls and shopping centers closed and their sales evaporated. Combined jewelry and watch sales for the second quarter decreased almost 25% over the same period in 2019.
As retailers pivoted to innovative customer service and marketing efforts in support of their digital platforms, followed by phased store re-openings in May, customers responded, and trends turned positive. Pent-up demand coupled with the additional disposable income that consumers had previously spent on travel and entertainment found a new spending category in jewelry.
Industry giant Signet Jewelers, which operates approximately 3,200 stores internationally across eight retail banners, posted positive comparable sales of 15.8% and 7.8% for North America and international, respectively, for the third quarter. The company followed with a comp increase of 5.6% for the nine-week holiday period, which began November 1, 2020.
International retailer Richemont, which owns luxury jewelry and watch brands including Cartier, Van Cleef & Arpels, A. Lange & Söhne, Baume & Mercier and Jaeger-LeCoultre, among others, posted positive sales for the quarter ended December 31, 2020. The company noted that both its online and offline retail channels posted sales growths of 8% and 17%, respectively, for the period. Retail sales for the company were particularly strong in China, Taiwan, Russia and Saudi Arabia. The company’s online retail channel posted its strongest relative performance, and the company noted that demand was strong in China, Japan, France and the U.S. Diamond jewelry in particular outpaced other jewelry segments internationally due to the relatively strong performance of luxury jewelry in Asia, per research by Bain & Company.
Not all retailers turned their negative trends around, however. Tiffany & Co.’s comparable store sales for the Americas decreased 15% for the third quarter, while sales for LVMH’s total Jewelry and Watches group revenue was negative 14% for the same period. It’s important to note that, despite the negative trends, both companies showed improved performance when compared to the first half of the year.
Competition Continues Between Lab-Grown and Natural Diamonds: The lab-grown diamond market went through an industry-changing shift three years ago as the De Beers Group, which still controls about 40% of the diamond market, became a B2C producer. DeBeers had been producing lab-grown diamonds for industrial use for many decades through their subsidiary Element Six. Their new brand, Lightbox Jewelry, backed by a $100 million investment from De Beers Technologies, launched in 2018 bringing its patented diamond synthesis technology to consumers by offering them quality lab-grown diamonds at a much more accessible price. Lightbox markets itself as offering a consistently higher quality of lab-grown diamond. This move opened the gates for other manufacturers and brands to move into this space as awareness quickly grew.
At the time of the Lightbox launch, the Jewelers Board of Trade noted “the debate between real vs. synthetic is here to stay,” adding that De Beers’ entry into the market “is a response to reports that U.S. millennials are driven to lab-grown diamonds because of popular pricing and a definitive transparent supply chain.”
In the summer of 2018, the Federal Trade Commission (FTC) revised its Jewelry Guide confirming “the Commission no longer defines a “diamond” by using the term “natural” because it is no longer accurate to define diamonds as “natural” when it is now possible to create products that have essentially the same optical, physical, and chemical properties as mined diamonds.” This was viewed as a victory for lab-grown companies, giving lab-grown diamonds a more valued position while opening the market manufacturers and suppliers. After the revision to its Jewelry Guide, the FTC monitored several companies’ marketing claims to ensure the appropriate wording was used to describe lab-grown diamonds, specifically cautioning against the use of the word “synthetic” to describe lab-grown diamonds.
Three years later, the debate over lab-grown versus mined diamonds continues. A recent article featured in jewelry industry publication JCK Magazine (JCK) described ongoing intra-trade battles over what defines levels of preciousness such as the debate over the value of platinum versus palladium. Palladium has since become more expensive than platinum because of worldwide supply constraints and high demand.
In December 2020, lab-grown diamond manufacturer Diamond Foundry registered a group called the American Diamond Council that aims to promote lab-grown diamonds. After some tension on whether the new organization would wage a marketing war with the Natural Diamond Council over the merits of lab grown versus natural stones, the rhetoric has recently calmed down.
The Natural Diamond Council began changing its strategy in 2020, as it saw a greater opportunity in focusing on the emotional connection consumers have to natural diamonds compared with other luxury goods. As noted in JCK, Gwyneth Borden, the director of public policy for Diamond Foundry, agrees negativity doesn’t serve either industry’s interest.
“Both products should be able to coexist with their value propositions,” she said, adding, “Conflicting messages can mean consumers choose diamonds less.”
According to market research done in 2020 by market research and consulting firm MVI Marketing, awareness for lab-grown diamonds among jewelry consumers is currently at 80% across gender, age and household income demographics. That number is up 22% in just the past two years. The research also found most consumers are drawn to the size-to-value equation, which is higher for lab-grown diamonds over natural stones.
While it’s important to note lab-grown sales have grown quickly in recent years, they still represent a small percentage of diamond sales for use in jewelry. As interest in the category continues to broaden for reasons not limited to a lower price per carat, an increase in market penetration is sure to come.
Jewelry Sell-Through Assumptions Impact Gross Recovery Value: For liquidations in the jewelry sector, it is assumed a percentage of the retail inventory would be sold through wholesale channels in a going-out-of-business event. For all jewelry appraisals, Gordon Brothers assumes a portion of the inventory would be sold to consumers via retail stores, with the balance sold through wholesale channels concurrent with the retail sale term. Separate gross recoveries and sell-through percentages are assigned to each category of inventory, with a blended recovery value representing a consolidation of both the wholesale and retail portions calculated on a departmental level.
Typically, the portion assumed sold through wholesale channels would not exceed 10% of the total retail inventory. This percentage can be higher if sales capacity is constrained by high inventory levels, especially in non-peak periods. The percentage of jewelry inventory sold through wholesale channels can also be affected if lower-recovering categories, including those assumed to be “melt” or “scrap,” make up a larger portion of the total inventory.
For traditional jewelry retailers, lower-demand categories that could be expected to sell through wholesale channels include semi-mounts, loose melee diamonds, loose colored stores, wedding bands, remounts and watch straps and supplies.
Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.
Reference sources: BAIN & COMPANY, BUREAU OF ECONOMIC ANALYSIS, CREDITNTELL, JEWELERS BOARD OF TRADE, JCK MAGAZINE, FEDERAL TRADE COMMISSION, RICHEMONT, SIGNET JEWELERS, LVMH, MVI MARKETING, LIGHTBOX JEWELRY, BUSINESSWIRE, BLOOMBERG, THE DIAMOND PRO