Date February 2019
- After a decrease in 2017, jewelry store closures were up 4.1% in 2018; however, retail jewelry sales were up 9.0% year-over-year through November
- Despite more closures for retailers, jewelry manufacturer and wholesaler closures were down over 27% in 2018 from 2017, indicating a healthier supply chain
- The De Beers Group disrupted the market with its lab-grown diamond collection, which launched in late 2018, setting a new price floor for lab-grown diamonds
- Millennials represent 29% of the world’s population and are the current largest group of diamond consumers per research conducted by the De Beers Group
Approximate net recovery on cost
Mixed results for holiday 2018: Leading into the holiday period, jewelry store sales increased an estimated 0.6 percent in November over last year, according to preliminary Census Bureau data. For the full holiday period, individual results for major jewelers were mixed. Luxury brand Tiffany & Company reported that its worldwide net sales decreased 2.0 percent, but were flat in the Americas for the two-month period ended December 31, 2018. Management reported that the global decline was due to weaker demand in China coupled with overall uncertainty and market volatility. Despite the holiday period weakness, the company still expects to generate record sales and earnings for 2018 overall, which bodes well for the luxury market heading into 2019.
Signet Jewelers’ consolidated same store sales decreased 1.3 percent, on top of last year’s decline of 5.3 percent, reflecting significant declines across its major mall-based banners Kay Jewelers (negative 0.8) and Jared (negative 8.0). Offsetting the decreases, its Zale’s brand generated positive holiday sales of 2.9 percent, representing an increase over its positive 2017 trend of 4.0 percent. Creditntell noted that Signet engaged in more promotional activity in response to declines in its legacy product lines, driven by slow foot traffic in December and competitive pricing in the industry. The company’s profitability was further compressed by higher credit costs in 2018 over the prior year. Year-over year through November, U.S. jewelry stores’ sales were trending up 9 percent, indicating another healthy revenue year for the industry.
Lab-grown diamond shakeup: The lab-grown diamond market went through an industry-changing shift in 2018. As the De Beers Group, which owns over 40 percent of the mined diamond market, became a producer. After years of downplaying lab-grown stones as less desirable (and less valuable) than natural stones, De Beers’ lab-grown diamond concept, Lightbox, had its official launch in September 2018. De Beers’ Chief Marketing Officer Sally Morrison noted that “initial sales were healthy.” In late November, Lightbox opened its first pop-up store at the Oculus at Westfield World Trade Center in New York City. The temporary location was a trunk show concept to give customers an opportunity to see the product and to find out more about the line, while building brand awareness, according to Morrison. A second pop-up store, which stocked a selection of inventory for sale, ran from early- to mid-February 2019 at the Westfield Century City mall in Los Angeles.
De Beers’ entry into the lab-grown market served as a major endorsement of lab-grown stones as a legitimate alternative to natural stones. De Beers’ marketing message for its lab-grown collection leads with the message that diamonds can now be considered as fun and affordable fashion accessories, or an alternative to traditional “formal” diamond jewelry. As has been the case with its fellow lab-grown stone producers, De Beers will target millennials for its lab-grown collection, highlighting it as a less expensive, cruelty-free, and more eco-friendly alternative to mined diamonds.
Despite its entry into the lab-grown market, De Beers’ underlying strategy continues to reaffirm the superiority of natural diamonds. The company continues to feature a traditional and innovative advertising campaign stressing the intrinsic value and unique, timeless beauty of natural diamonds. Additionally, last year De Beers raised its global annual natural diamond marketing budget from $140 million to $170 million to focus attention on its core business.
Per The Jewelers Board of Trade (JBT), “the debate between real vs. synthetic is here to stay.” JBT goes on to note that De Beers’ entry into the market “is a response to reports that U.S. millennials are driven to lab-grown diamonds due to popular pricing and a definitive transparent supply chain.” Per reporting by De Beers, millennials represent 29% of the world’s population and are the current largest group of diamond consumers. To emphasize that lab-grown gems are unlike natural stones, De Beers’ retail price is just $800 per carat versus a (pre-Lightbox) retail range of similar quality lab-grown stones at $3,000 to $8,000 per carat.
Moving forward, to the extent that lab-grown market pricing decreases sharply, profit margins of competing lab-grown producers could fall. This development is expected to play out in the industry over time, and the implications are as yet not fully known. Understanding the implications of changing values for owned lab-grown diamond inventory may require an updated appraisal or the implementation of a sell-down strategy to reduce risk for a potentially devaluing asset pool.
Jewelry sell-through assumptions impact gross recovery value: For liquidations in the jewelry sector, it is assumed that 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 the 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 to be sold through wholesale channels would not exceed 10 percent of the total retail inventory; however, this percentage can be higher if sales capacity is constrained by high inventory levels (especially in non-peak periods) and/or if lower-recovering categories, including those assumed to be “melt” or “scrap,” comprise 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.
Branding and its impact on value: Brand names like Tiffany & Co., Harry Winston, and Cartier are synonymous with luxury and quality and have achieved iconic status in the jewelry industry. For many consumers, a brand name defines the value of their jewelry as much as the precious materials used to make it. Branded items already account for over half of sales in the watch market, and branded jewelry accounts for a growing percentage of the overall jewelry market. Consulting group McKinsey & Company noted that, in the past, most of the growth in branded jewelry came from the expansion of established jewelry brands, such as Cartier and Tiffany & Co., as well as new entrants such as Pandora and David Yurman. By contrast, future growth in branded jewelry is likely to come from non-jewelry players in adjacent categories such as high-end apparel or leather goods—companies like Dior, Hermès, and Louis Vuitton—introducing jewelry collections or expanding their assortment.
Brand names can have a substantial impact on the recovery values achieved in a liquidation event. Names like Rolex, Tag Heuer, Brietling, Patek Phillipe, David Yurman, Cartier, and others present the opportunity to achieve a high recovery on retail; in some cases, minimal discounting would be required to sell through this product. The caveat to clients lending on these exclusive assets is to ensure that all branded product would be available for sale in a liquidation and that significant branded product is not encumbered by additional liens or vendor sales restrictions that may kick in under a distressed asset sale or bankruptcy scenario. Timely appraisals that take into consideration the variability of the Net Orderly Liquidation Value with and without proprietary product can provide clarity to lenders with luxury jewelers, and brands, in their portfolios.