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From JCK Magazine

Where Will Consumers Buy Their Jewelry In 1999?

Features
By Russell Shor, Senior Editor with George Holmes, editor in chief and Hedda Schupak, Editor-in-Chief and Michael Thompson, Senior Editor and William George Shuster, Senior Editor
This story appears in the May 1995 issue of JCK magazine
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Never before has the traditional jeweler been challenged by so many other businesses selling jewelry. But the likely winners and losers – those who will make most of the sales as we head into the 21st century and those likely to fall behind– are becoming easier to identify

In this final decade of the 20th century, jewelry retailing in the U.S. is undergoing more change than it did in the preceding 90 years. Merchants who were marginal sellers of jewelry just a few years ago – or who didn't even exist – now crowd the market. Pressure to capture the consumer's patronage and dollars is intense.

It's likely to become even more so. Giant retailers such as Wal-Mart, Service Merchandise and J.C. Penney have catapulted themselves into major players and are ambitious to grab an even bigger share of a relatively slow-growing market. TV shopping, at least in the eyes of those who control it, is still in its adolescence. And the potential of computer on-line shopping, extolled by many as the true future of retailing, is just in its infancy. Even jewelry suppliers are getting into the act as more open their own retail outlets or consider doing so.

Where does all this activity leave the traditional jeweler?

There is no definitive answer. But after a six-month study of the market, involving well over 100 personal or telephone interviews and a written poll of the 500+ members of the JCK Retail Jewelers Panel, it's possible to draw a pretty clear outline.

The traditional jeweler, who owned 60% of the total jewelry market as recently as 1982, saw that share drop to 48% by last year, according to estimates by some key industry leaders. They further predict the figure will shrink to 42% by 1999. Since one percentage point of market share represents between $325 million and $350 million, the dollar stakes are very high.

Our study makes possible some educated guesses of where, in addition to jewelry stores, consumers are likely to shop as we enter the 21st century.

Jewelry retailing will be split conclusively. At one extreme, the market will belong to the jeweler who offers unusual, appealing, high-quality products, superb service, a skilled and attentive staff and an attractive shopping atmosphere. The other end will belong to the merchant who offers convenience and attractive, middle-of-the-road merchandise in an unthreatening location at very competitive prices. Quality will not be of prime importance in this market; perceived value will be.

The retailer who fits neither profile is going to be in trouble; hardest hit will be the independent store run by an individual whose love of jewelry far exceeds his or her business savvy. In this list, count many typical Main Street and Mom and Pop jewelers. Those who die, says Dr. George Lucas, professor of retailing at the University of Memphis, will "lack sufficient capital to invest in sophisticated inventory control and management systems required to run businesses efficiently." Those who try to compete on price are equally at risk, he says. The big merchants can outgun them on any deal.

Price is a critical issue in how the industry is reshaping. Indeed, it's the basic marketing tool for high-volume operators. "Today, if you don't have the right price, you're not in the game," says J. Richard Blickstead, president of Wal-Mart's jewelry division and former chief operating officer of the Peoples Jewellers chain in Canada. It may be put less bluntly at the high end of the market; the customer willing to spend $30,000 or $40,000 for a particular piece of jewelry won't haggle over minor shifts in dollars and cents. But the high-end jeweler more than ever stresses value. The mantra-like message: the item may cost a lot but it's worth it.

Equaling price in importance to the jewelry customer are convenience, quality and service, according to the select group of industry leaders questioned at length for this report. The problem is that except in the rarest of cases, the four elements have a built-in contradiction. The store that offers rock-bottom prices can't afford the best in quality and service. The store that stresses convenience – promoting speedy shopping, 10:00 a.m. to 10:00 p.m. hours daily and so on – to some extent is unlikely to put a premium on service.

The reality is that today's jewelry retailers must choose. Some – mainly the mass merchants – pick price and convenience. Others – mostly guild jewelers – pick quality and service. These are not exclusionary choices, of course. The mass merchants give at least lip service to good service and improved quality, and often try to achieve the best quality price will allow. Some high-end stores try to be more competitive on price and more accommodating on convenience. But in practice, we come back to the high-low split. It's not possible, and often not desirable, to try to be all things to all people.

More pressure: The competitive pressures facing traditional jewelers from mass merchants, TV home shopping and an exploding home-delivered catalog business are heightened by another key factor: the nation has become "seriously overstored and overmalled," in the words of Michael D. Roman, chairman of Jewelers of America. The figures certainly bear him out.

The number of retail stores of all types has grown 28% since 1980, outstripping U.S. population growth by a ratio of almost 2-to-1; that ratio is even higher for jewelry stores. In the same period, the number of shopping malls has grown from about 22,000 to almost 40,000. Put another way, there was one retail store for every 186 people in 1980 compared with one store for every 167 people today.

This store-to-customer ratio makes holding existing customers a daily challenge and attracting new ones even harder. This is especially true for traditional jewelers because they're in an industry bedeviled by sluggish sales. In raw numbers, jewelry store sales just about doubled between 1980 and 1994, reaching $16.6 billion last year. But discounting inflation, the growth for that 14-year period totals only 24% – less than 2% a year in constant dollars.

It's tough to make money in such an economic climate. JA's Michael Roman points out that a typical jewelry store's pretax net profit was a lowly 6.5% of sales in 1993, the latest year for which figures are available. The figure for the highest profit companies was 11.5%.

Comments the University of Memphis's George Lucas: "There are too many people selling jewelry and other products in the U.S. That will keep margins down and force retailers to look for more efficient ways to buy. This situation will continue for some time and probably get worse."

ASSESSING THE PLAYERS: INDEPENDENT JEWELERS

The small independent jeweler, the much-dissected Mom and Pop store, clearly is the most vulnerable member in the overall jewelry community. Four of every five industry leaders questioned for this report expect these stores' share of market to decline, often drastically, over the next few years. More than half the independent jewelers on JCK's panel agree.

The reasons are simple enough. These stores often lack good management and sales skills, have no real handle on their inventory and can't afford the marketing efforts that could build sales. "Most of these jewelers don't have a game plan," says Stanley Marcus, former owner of a successful group of jewelry stores in New Jersey and now a consultant to the industry. "They tell their banker, `If we have a good Christmas, everything will be OK.' That's not good enough. They have to have a plan."

Additionally, such stores often face succession problems. As their name implies, they are family businesses, but they're rarely successful enough to support more than Mom and Pop. And when the time comes to take over, children often are reluctant because they see a demanding job that promises few rewards. The stores that do survive will be specialists (concentrating perhaps on repairs), serve a market bypassed by the competition or do business with loyal customers who feel a special bond with the owner.

The future of what might be called the middle-of-the-road jeweler is harder to predict. Defining the business itself is the first issue. The store probably handles a significant volume of repairs; does maybe a third of its business in diamond jewelry with a stress on engagement rings, tennis bracelets retailing for $400-$700 and inexpensive multistone pieces; carries basic karat gold jewelry; and stays with the tried-and-true in colored stone jewelry. The store probably carries few watches, perhaps a few popular brands that retail between about $100 and $300. Location? It's probably in the shopping district of a small town or a suburban strip shopping center. The cost of doing business keeps most of them out of malls.

One of the more supportive voices for this group comes from Michael Frieze, chief executive of Boston-based Gordon Brothers and a specialist in dealing with troubled retailers. "I've a strong feeling that if the customer is interested in buying a nice product with some design," he says, "then the independent jeweler will be a major player." The middle-of-the-road jeweler is equipped to meet such needs. But the store must be able to offer more than a nice product. The price has to be realistic – not carry what Stanley Marcus calls "an insane" 3.5- or 4-time markup – and the staff has to be equipped to sell the product.

George Lucas of the University of Memphis tells a revealing story about shopping for a piece of jewelry for his wife's Christmas present. "The salesperson in a nice jewelry store repeatedly showed us items my wife didn't care for," he recalls. "They were so similar and the salesperson obviously didn't listen to us. I decided if I'm going to be jerked around by know-nothing salespeople, I might as well go to a discount place and save money in the process. They [the discount store] had everything displayed. We just picked up what we wanted and told the salesperson."

Price and salesmanship. A good jeweler can work with price objections, but untrained salespeople can kill the business. Comments William E. Boyajian, president of the Gemological Institute of America, "The segment of the industry that will lose ground can be classed less by category than by those who educate their people versus those who do not."

High hope at the high end: Just as much as the small Mom and Pop jeweler seems on most people's lists as a sure loser, the smart, imaginative independent with exciting and varied inventory is regarded as a sure winner.

One reason is that the polarization of the jewelry market into relatively vibrant high and low ends with an uncertain and financially strained middle reflects a similar pattern in U.S. family life. The economic upheavals of the past few years have split the population into a nation of have's and have not's. The strong upmarket independent retailer will do well in the next years catering to the have's, says Andy Johnson of the Diamond Cellar in Columbus, Ohio, one of the most successful independent jewelers in the country. He identifies the have's as "those who have developed investment income or are professionals with good income."

The upmarket independent jeweler builds business with service and cultivation of customer relationships. "An independent store gives clients individual attention," says Joseph A. Rosi Jr. of Joseph A. Rosi Jewelers, a 45-year-old family business in Harrisburg, Pa. "It has salespeople who know and work with clients. It creates customer confidence through after-sale service."

The right merchandise also is vital. Some stores specialize in the unusual – in colored diamonds or elegant, expensive watches or jewelry created by a big-name designer. Many create their own jewelry, designing pieces to match the taste and budget of an individual customer. At Underwood's Jewelers in Fayetteville, Ark., the leading store in its region, the owners estimate their custom-made jewelry accounts for about half of a substantial annual dollar volume.

Not only do better stores carry what their lower-priced competition does not, they also make a point of not carrying what the competition does. "I see the high-end independent vacating the lower-end goods," says Harvey B. Brown, a former jewelry manufacturer who now is director of merchandising for ViaTV Network, a TV home shopping concern that also offers specialty programs.

Certainly the jeweler who works at the high end has little trouble competing with those who operate at the other end of the scale. Stanley Kahn, a jeweler in Pine Bluff, Ark., is a good example. Pine Bluff has two Wal-Marts, one perched at each end of town, and most businesses between them have closed. Not Kahn. "We compete against the Wal-Marts by not paying attention to them," he says. "We sell completely different products; we're known for high-quality and higher-priced pieces. People here know us and trust us as they have for many years."

But independent jewelers – high, middle and low – face competition from more than just the likes of Wal-Mart.

ASSESSING THE PLAYERS: THE JEWELRY CHAINS

Next to their own kind, independent jewelers view jewelry chains as their next most important competition. This study raises questions about just how important a role these chains will play as the century nears its end.

There's no doubt many of them have gone through gut-wrenching trauma since the mid- to late-1980s. Zale, Barry's, Merksamer, Glennpeter – all in and out of bankruptcy reorganization. Sterling acquired by Ratner (now Signet), itself a troubled British company. Kay absorbed by Sterling. These have not been easy times.

Those who've been tested by bankruptcy say the experience strengthened them. They say they're leaner, more focused and more knowledgeable about their markets and the merchandise they need to meet those markets' needs. They're optimistic about their futures.

Their optimism is shared sparingly by the industry leaders and jewelers whose input shaped this report. While the industry group forecasts growing share of market for jewelry chains at all levels – local, regional and national, with the regionals enjoying the best potential – independent jewelers are much more skeptical. They see the local and regional chains growing slightly while the nationals' market share declines.

"We're seeing a more sophisticated [jewelry] customer and I'm not sure the chains know that," says Blaine Orr, assistant manager of Pilcher Jewelry Co. in Mexico, Mo., a family-owned business with two stores that was founded in 1868. "This is a customer who takes more time to learn about a product, who is more mobile, who goes from store to store. The problem for the chains is that they usually have people behind the counter who are just warm bodies filling space, without much [product or sales] knowledge."

Orr hits the target in the center when he draws attention to staffing problems. Those taking part in this study indicate hiring and training a good sales staff comprise the single most critical operating issue they face. "It is absolutely essential to be able to recruit and train good salespeople," says John Belknap, former chief financial officer for Zale Corp. and now a strategic planner for the company. "It is the single most important ingredient in store management." Belknap concedes that building a good staff is more difficult for a chain than for a local jeweler with an owner-manager who can act as a day-to-day mentor. "A large chain will have lots of [training] resources and sophisticated programs not available to local jewelers," Belknap adds, "but those really aren't a substitute for a good mentor. When you have stores all over the country it's difficult to do that."

JA's Michael Roman estimates the annual turnover for salespeople at chain stores is 20% and can run as high as 50%.

Jewelry chains face other problems. Most of their stores are in malls and, with few new malls under construction or being planned, they face a dearth of new markets. Moreover, escalating mall costs mean some chains "can't afford the real estate any more," says Willis R. Cowlishaw, former chief executive of the Zale Fine Jewelers Guild and a consultant to the industry for the past decade. "As a result, you're going to see more downsizing of the big chains."

You also may see fewer chain stores in malls because landlords don't like them as much as they used to, Cowlishaw adds. "Jewelers are not as productive as they could be. The landlords don't want to cut the jewelry pie any more than it's cut now." A factor in these stores' declining appeal is the sameness of the merchandise they offer – merchandise that often barely exceeds the quality of jewelry offered by discounters but certainly costs more.

The big chains have closed more than 500 stores since their financial troubles hit in the late 1980s. According to some observers, the blood-letting is not finished.

While the outlook for large chains may be questionable, that appears less true for small (up to 10 units) and regional (usually fewer than 100 units) chains. The regionals are particular favorites of our leadership group, with almost three in four forecasting growing market share. A very clear vote of confidence for the regionals came in mid-March when Berkshire Hathaway, the investment firm run by the legendary Warren Buffett, acquired Helzberg Diamond Shops. Helzberg, one of the bigger regionals with 148 stores, is widely regarded as one of the best-managed companies in its class. In the under-100 store category, that title is readily awarded to the Seattle-based Ben Bridge chain.

Interestingly, Helzberg was one of the first chains to experiment with a larger-than-normal store to cater to changing customer needs. The idea is catching on in the industry. Sterling now has four Jared superstores and an ultimate goal of 100, though that target is some years off. Lorch Diamond Centers with 56 stores and 22 leased departments has opened its first Goodwin's Jewelry Superstore in its headquarters city of Birmingham, Ala.

"The biggest change [in retailing] is the superstore – whether it be in jewelry, electronics, books or office supplies," says Robert Keller, president of Lorch. "It is simply a response to the changing retail environment. The reason for [their creation] is that we're all working harder to give customers a reason to leave home and come out and shop."

ASSESSING THE PLAYERS: MASS MERCHANT DISCOUNTERS

These juggernauts offer the most immediate threat to the traditional jeweler, especially the small-town jeweler who lacks distinctive merchandise and remains wedded to a minimum keystone markup. But when megaretailers offer diamond engagement rings at $1,299 and a reasonable selection of ruby, emerald and sapphire jewelry for around $450 along with basic 14k pieces – as does Wal-Mart, for example – you're looking at real competition for sizable numbers of jewelers, both independents and chains. The ambiance at Wal-Mart may not be romantic, but the prices are very competitive for the qualities shown.

Among the biggest players in the field are such discounters as Wal-Mart, Kmart, Target, Service Merchandise, Venture and such lower-end department stores as Sears Roebuck and Montgomery Ward. All make a point of stressing bargain prices, though they prefer to talk in terms of value rather than price. They share a common obsession with margins – by product category, by line and by item. They monitor sales scrupulously, always seeking the hot item that will take off, in their own stores or in a competitor's. Return on investment is a constant concern.

Many of them also share a concern that while the size of their jewelry operations makes them very big fish in the jewelry industry, they are pretty small fish in their own companies, which sell a multitude of different products. Because buying, stocking, selling and marketing are so different for jewelry than for shoes, toasters or T-shirts, the people running the jewelry operations in such massive companies worry that management doesn't understand or appreciate them. Gordon Brothers' Michael Frieze, for one, questions the management commitment. "There's great potential there," he says. "But will the companies commit the resources? Will they live with the slow turns, the big inventories, the need to have better-paid staffs?"

The answers to these questions will have a huge impact on how big a force mass merchants continue to be in the jewelry market. They'll also have a huge impact on the traditional jewelers who compete with them.

The quality question: Meantime, many of these companies say they want to upgrade the quality of the jewelry they offer – though it still seems price usually wins in any battle with quality. It's an open question how the customer feels. Frieze says the lure of the price-off notice remains very strong. "Consumers understand that markups are phony, but they still shop when the item is 50% off and they don't when it isn't." Many agree with him.

But there's also a growing feeling in the retail trade that significant numbers of consumers have had it with tissue paper gold that lacks any substance and diamonds that look, in an unpleasant but accurate description, like frozen spit. A veteran marketer of Far Eastern goods to the U.S. market says that "customers are tired of the Bangkok and Chinese crap. They're becoming more quality-conscious and, hopefully, they'll be willing to pay more."

One important question: "Will existing market forces allow the huge retailers to upgrade?" The way they buy suggests they may not.

A number of Asian jewelry manufacturers say they turn out the quality of goods they do because U.S. buyers demand products that can be sold at a low price point. The supplier who's producing a diamond pendant to retail at $29.95 or a ruby ring to retail at $69.95 or a 1-ct. total-weight tennis bracelet to retail at $149.95 can't pay much attention to quality. What's more, it's common for major retail buyers to demand even lower prices once they have a manufacturer committed as a prime supplier. Because of such practices the retailer may be able to pare the margin on such items to 10%-20% – certainly lower than the big discounters' usual low margins – but the products will indeed be junk.

"The manufacturers hate being ground down by the big retailers," says G. Peyton Kelley, an executive with the Bangkok-based jewelry manufacturer Bijoux d'Amour, which prides itself on the quality of its goods. Because the U.S. business is important, many Asian producers are willing to go with the flow. But at least some of the more quality-minded manufacturers are either pulling out of the U.S. market (concentrating instead on Japan and Europe) or considering ways to reach the U.S. consumer directly. Direct selling catalogs are one option.

In any debate on mass merchant jewelry prices you must keep one salient fact in mind. By the very nature of their operations, they can and often do offer genuine low prices. A look at Wal-Mart, the biggest of them, shows how.

Wal-Mart lives by a basic formula: low overhead permits low margins, low margins permit low prices, low prices permit good value. It all starts with a Spartan way of business life that rejects any frills and applies to everyone from the cleaners to the chief executive officer. "Our team works hard to keep down costs, which we believe gives us a competitive edge," says Rick Blickstead, president of the jewelry division. "We have a low expense structure. All the money we save goes into the stores."

The low expense structure means, among other things, that "there are no company cars, no auto expenses and when we travel we stay at the Red Roof Inn and sleep two to a room," he says. That's pretty hard living for a division head whose operation sold more than $1 billion worth of jewelry and watches last year. Between a half and two-thirds of that falls in the fine jewelry category – diamonds, other gemstones, karat gold jewelry and watches. Fashion jewelry accounts for the rest.

"We're working very hard to increase quality," says Blickstead, "and we've just hired a manager of quality control. Quality for quality, we're as good as anyone else." He says his buyers are merchandising better quality diamonds, though the company still must carry a promotional line. The Wal-Mart superstore near company headquarters in Bentonville, Ark., has a number of cases with colored stone and diamond jewelry (diamond rings in "good," "better," and "best" qualities range in size from fifths to thirds and in price from $199 for a "good" fifth to $599 for a "best" third).

A diamond engagement ring marked at $1,299 comes with a valuation appraisal of $2,550 from the International Gemological Information division of the International Gemological Institute in New York City. "That's what they say it's really worth," a saleswoman explains.

Return to sender: The emergence of mass-market retailers – whether in stores or by way of television – has created a relatively new jewelry-industry phenomenon: merchandise that comes back to the supplier.

This occurs in three main situations. The buyer may have an agreement with the seller that merchandise that doesn't sell will be returned, for credit or for alternate merchandise. This is a so-called "guaranteed sales" agreement.

Second, the buyer may return merchandise without any agreement. He says, in effect, "I don't want these goods. They aren't selling. If you want to continue to do business with me, you'll eat them."

Third, the buyer may simply have taken the merchandise on consignment. What sells is paid for, sometimes after a long delay; what doesn't sell goes back.

In the past few years, unsold merchandise – much of it promotional-type goods – has been going back to suppliers by the ton. Neither individual retailers nor the TV sellers will disclose figures on returns, but informed industry guesses say they run from a low of 10%-20% to a high of 50%. One cynic describes a scenario that runs something like this:

A home shopping channel sends back 2,000 items. These are refurbished and sold at a suitable price to a mass merchant which, in time, returns 1,000. After another refurbishing, the goods are sold to a warehouse club which, in time, returns 500. These are sold to a liquidator at rock-bottom prices. The liquidator either scraps them or sells them to a retail jeweler looking for a real bargain.

Retailers who do return goods aren't particularly happy about it; they'd rather sell them. And they're not ready to be branded as the bad guys. They argue that a number of suppliers have only themselves to blame because they force-fed the goods to the retailer in the first place. Says one: "When times were good, they didn't mind a 20% return because they were selling so much. But when orders were cut in half and they got the same returns, they couldn't handle it."

Wherever the blame lies, the supplier is the real sufferer. In fact, some suppliers have been so overwhelmed by the return of goods they counted as sold that they've been forced out of business. Others are just hurting. At least one major U.S. manufacturer now has 60 staff members whose sole function is to rehab returned merchandise. This is not a situation with winners.

ASSESSING THE PLAYERS: THE DIRECT SELLERS

Bypassing the usual distribution channels and selling directly to the consumer is one of the hottest of all retailing issues today. Most obvious here is the TV shopping channel that goes right into the consumer's home; this already is a huge market. The two top players, QVC Network and Home Shopping Network, between them sell about $1 billion worth of jewelry merchandise a year.

Jewelry sales through catalogs are booming; they account for another $1 billion or so yearly. And, although almost impossible to pin down, there's a growing business in manufacturers who sell direct to the public, either through their own retail outlets or through private office transactions.

Finally, a whole new era of direct selling by way of computer is just beginning.

Just about everyone polled for this report expects TV home shopping's market share to grow over the next few years. The industry group asked to estimate current and future market share for various jewelry sellers is most optimistic about TV's growth opportunities. The group estimates TV sellers accounted for 4% of the total jewelry market in 1994 and should account for 7.5% by 1999.

In the midst of all this euphoria over shopping via TV are some non-believers. They say the early excitement of home shopping programs is wearing off and that TV channels will never be able to break the $200-$400 price barrier consistently. They also say major suppliers to TV channels are tired of having to eat the high number of returns. One supplier complains that certain stations, which he won't identify, have asked to have planned shipments delayed by three to four months. Looking to the longer term, critics wonder whether computers will replace TV screens as the primary home seller.

Some evidence supports such caution. Late last year, for example, Fingerhut canceled a much-ballyhooed plan for a 24-hour TV shopping channel after escalating costs chilled financing plans. The Home Shopping Network early this year reported disappointing results for its final 1994 quarter, ended Dec. 31. Sales of $301 million were up a meager 1.6% from the 1993 period, while operating net was down significantly. At QVC, while final net of $67 million for the year ended Jan. 31 was up 12% from the year before, the company lost more than $37 million on new ventures that did not take off as well as expected. Total revenues were up 14% to $1.4 billion.

TV lacks the personal attention that many service-conscious shoppers like. Some also feel there's a real or implied stigma in being a TV shopper. But any new medium that can go from zip to more than $1 billion in sales within just five years is a major player.

ViaTV Network's Harvey Brown ticks off a list of pluses. TV offers more product than a typical store, he says. It searches out and experiments with new products – often being a leader that jewelers follow. It allows the customer to make choices without any pressure. It provides a huge audience. And it offers security (more and more shoppers are fearful of crime, especially after dark).

One of the biggest pluses, says Brown, is that those who present jewelry on TV are far more qualified than most jewelry store salespeople to inform and educate the customer about it. Jeff Taraschi, senior vice president of jewelry merchandising at QVC, hammers home this point. "TV's great strength is its ability to convey information about the product," he says. "The single biggest deficiency in retailing is the unwillingness to pay for good help. The average jeweler doesn't make the commitment to consumers to make them shop with him exclusively."

Taraschi dismisses the idea of a price barrier that TV shoppers are unwilling to cross. "I truly think price will become less important," he says. "We have not found any price resistance." He won't set any upper limit, but says he can see no problem selling a piece of jewelry priced at $3,500 provided it offers good value.

The QVC executive also dismisses jeweler complaints about the quality of merchandise offered on the network. He concedes there have been some problems in the past, particularly with herringbone chain priced in the $49-$59 range. But he says QVC today is a stickler for quality – a boast that suppliers to QVC sustain. Taraschi also says he's sure consumers will be willing to pay higher prices to get higher quality.

Meet your maker: One of the most surprising findings in this JCK study was the pervasive belief that we'll see more manufacturers selling directly to consumers and more of them opening their own retail outlets. At the same time, of course, more and more retailers are making their own jewelry. How far this blurring of the lines between maker and seller will go is unclear. But it seems unlikely it will reach the proportions it has in Asia, where the distinction between manufacturer and retailer is almost academic.

Members of the special group questioned for this report believe – by a margin of more than 2-to-1 – there will be more vertical integration, with major companies controlling a product all the way from production to the final sale to the consumer.

QVC's Jeff Taraschi is one who sees more suppliers opening their own retail businesses. "It will come with [consumer] disillusionment with retailers and how they train their staffs," he predicts. Some others see it happening because of supplier disillusionment with retailers who don't pay their bills. During the great jewelry-retailer bankruptcy shakeout at the end of the 1980s, many failing companies stiffed their suppliers for a lot of dollars.

Getting a handle on just who does such selling – other than some well-known jewelry designers who do it openly and successfully – is next to impossible. One major bank with a large jewelry industry business says 20%-30% of its customers have some sort of direct-sales outlet. But the bank was unable to persuade any of these companies to talk with JCK for this report – even when they were promised anonymity. Mostly, manufacturers see these outlets as a cheap way to get rid of returns or pieces that didn't get past quality control.

Consultant Willis Cowlishaw says he's had more calls in the past two years than in the previous five from manufacturers who've asked him to find a retail store they can buy. But total calls number only 15-18 a year, and very few follow through when they learn the full costs of operating a retail outlet, including inventory, staffing, rental costs and so on. Cowlishaw dismisses the majority of the inquiries as "mostly talk. These are people who've been hurt and they're looking at their options." Gordon Brothers' Michael Frieze also has heard about suppliers who are considering going retail but he adds, "It's a lot of talk, little action."

Some of the most direct action in this area took place in the fall of 1993, when a group of manufacturers opened a jewelry outlet mall called the Direct Gold and Silver Outlet in Attleboro, Mass. The prime goal of the organizing manufacturers was to raise money for a local hospital and a downtown business association through the sale of discontinued lines. Jewelers in the area were upset, however, when the outlet ran ads with the headline "Prepare to meet your maker; we've got prices to die for."

The outlet closed this January because of lease problems and not because of slow business, as some jewelers thought, says Bob Schriever of Najarda Pearl, one of the participating companies. "It was a great place to sell returned items," he says. "Before this outlet, we had no good way to sell off merchandise that wasn't selling." Schriever also used the outlet to test-market new lines.

Plans originally called for the outlet to reopen at a new location in February. The opening was postponed and, as of late March, no new date was scheduled.

Some companies involved in the Attleboro outlet were shy about publicity. That's certainly not the case with jewelry designers who have their own retail outlets – among them John Atencio with six designer boutiques in Colorado, Etienne Perret with a store in Maine, Diana Vincent with one in Pennsylvania and, most recently, Steve Lagos, also with one in Pennsylvania. Some jewelers who carry designer lines worry they'll face direct and unfair competition from "the manufacturer." However, studies in the apparel and shoe industries, both flooded with outlet stores, show the opening of a brand-name outlet actually increases business at non-outlet stores carrying the same lines, thanks largely to the added exposure and prestige.

Perhaps jewelers should have greater concern about high-end catalogs, many of which carry jewelry – including some very expensive pieces. Bill Dean, a catalog industry consultant in San Francisco, was quoted in The New York Times in March as saying, "Catalogs are now too common a way for too many high-income people to shop to consider it a low-end business."

The Times article was about the revitalized Gump's store in San Francisco and its stepped-up catalog sales, which this year should surpass the store's expected volume of $21 million and are projected to reach $75 million to $100 million within five years. The company with a controlling interest in Gump's also controls, through other connections, such luxury goods makers as Sulka, Dunhill, Cartier, Mont Blanc, Baume & Mercier and Piaget. Dean indicates these connections raise the interesting prospect of yet more high-end catalogs.

When do shoppers go on line? Despite all sorts of hype among the lap-top set, shopping by computer will be more curiosity than reality for the foreseeable future. This doesn't mean computers won't bring buyers and sellers together, by e-mail or telephone, to conclude business deals. That already happens in the jewelry world on the RapNet and Polygon networks. But reaching out to consumers in their homes is another issue.

There are three principal reasons why. First, not enough consumers have the necessary equipment. Second, a lot of bugs still must be worked out. Third, security is a concern; few consumers will flash their credit card numbers on the Internet or any other computer network that can't guarantee privacy.

"Computer on-line probably will be a major force in retailing some day, but it won't be as soon as many predict," says Walter Ife, director of operations for the Diamond Promotion Service. "Right now there's a huge learning curve and acceptance to deal with. But when it gets here, it will be really big. Many kids today grow up with computers as first nature, not second nature. They'll be used to computers, and they'll do a lot of shopping that way. This could transform retailing in 30 years."

ASSESSING THE PLAYERS: THE REST OF THE TEAMS

There are other competitors, of course. Department stores. Pawnshops. Military PXs. Among them, department stores have the largest share of the jewelry market, an estimated 8% last year. Those polled and interviewed for this study expect that share to hold even or shrink a bit. Walter Ife, for one, sees it going down "because the medium to higher end of the market will be concentrated in more traditional jewelry stores, largely because of the trust and service they stand for. Also, department stores are less committed to jewelry as a business. Departments that don't yield the right returns can be given over to others that will, cosmetics, perfurme and so on."

Pawnshops, as JCK documented last year, are making a bigger stand in the jewelry business, but they're still relatively small fry. Our panel members see only modest sales growth and little if any change in market share for pawnshops. And with military bases closing left and right, PXs are in clear decline.

A more silent form of competition could gain strength: the upstairs diamond dealer. "These are in every major city now," says consultant Cowlishaw. "In Dallas alone there must be 100. A lot of these are people who worked for Zale and retired early or were let go. They've got diamond connections; they can sell out of a briefcase." These dealers can work on paper-thin margins and still make money; many specialize in carat-plus stones. With so many cut by the big chains in the past few years, there's no shortage of these entrepreneurs. They're one more indication that this is a changing market.

And the future? Jewelry retailing will remain in a state of flux right into the 21st century. There almost surely will be more contractions and consolidations, as there will be in all retailing. Last year, for example, Gordon Brothers helped to close down about 1,500 retail outlets, perhaps 10% of them jewelry stores or other retailers stocking a lot of jewelry. In all, these stores carried about $1 billion in merchandise. There will be more such closings.

There probably also will be more newcomers. And there's little doubt that by 1999, the main activity in jewelry sales will be concentrated in fine jewelry stores dealing with the high end and in high-volume sellers – whether stores or TV stations – dealing with the low end.

That leaves the middle ground. Nature, as they say, abhors a vacuum, so someone will have to serve this market or at least the portion not taken by the high end reaching down or the low end reaching up.

The jeweler is the logical one to do so. To succeed, this jeweler must meet some non-negotiable terms. He or she must run a tight, well-managed business, be different enough from the competition in some specialty to be a desirable destination, have a truly competent and welcoming staff, know exactly what market the business wants to serve and know how to buy, mark up and sell the right merchandise for that market.

There's a rich jewelry market promised for 1999. The challenges to capture a share of it are big, exciting and more than a little scary.

Ben Janowski of Janos Consultants in New York City was an editorial adviser for this project, providing insight on market trends and helping in the preparation of a questionnaire sent to 22 individuals chosen for their experience or special knowledge of the industry. The share-of-market figures in this report are based on answers from these individuals or, where so identified, on replies from the 500-member JCK Retail Jewelers Panel. Here are the 22 people who served on the industry panel:

Ed Anderson, Princess Pride Creations, Chicago, Ill.

John Belknap, Zale Corp., Irving, Tex.

J. Richard Blickstead, Wal-Mart, Bentonville, Ark.

William E. Boyajian, Gemological Institute of America, Santa Monica, Cal.

Harvey Brown, ViaTV Network, Wynnewood, Pa.

Thomas Chatham, Chatham Created Gemstones, San Francisco, Cal.

Hans Clapper, Wright & Lato, East Orange, N.J.

David Cornstein, Finlay Fine Jewelry, New York, N.Y.

Willis R. Cowlishaw, Dallas, Tex.

Michael Frieze, Gordon Brothers, Boston, Mass.

Jonathan Goldman, Frederick Goldman Inc., New York, N.Y.

Walter Ife, Diamond Promotion Service, New York, N.Y.

Robert Keller, Lorch Diamond Shops, Birmingham, Ala.

G. Peyton Kelley, Bijoux d'Amour, Bangkok, Thailand.

William Levine, William Levine Inc., Chicago, Ill.

Nathan R. Light, formerly of Sterling Inc., Akron, Ohio.

Marvin Markman, Suberi Brothers, New York, N.Y.

Michael Paolercio, Michael Anthony Jewelers, Mount Vernon, N.Y.

Etienne Perrett, Etienne & Co., Camden, Me.

Jeff Taraschi, QVC Network, West Chester, Pa.

William Thompson, A.A. Friedman, Savannah, Ga.

Jacques Voorhees, Polygon Network, Dillon, Colo.

VOICES

The nation is "seriously overstored and overmalled," says Michael D. Roman, chairman of Jewelers of America Inc. He also says it's very tough for a jeweler to make a decent profit, faced with today's intense competition.

Many small independent jewelers will fail, says Dr. George Lucas, professor of retailing at the University of Memphis, because they "lack sufficient capital to invest in sophisticated inventory control and management systems required to run businesses efficiently."

"The segment of the industry that will lose ground can be classed less by category than by those who educate their people versus those who do not," says William E. Boyajian, president of the Gemological Institute of America.

The future looks very bright for the upscale independent jeweler who offers high-quality merchandise, one-of-a-kind pieces, a friendly and well-trained staff and an attractive place to shop. The store: Elaine Cooper & Co. in Philadelphia's tony Chestnut Hill district.

Future growth of the big jewelry chains may be choppy, a number of industry leaders say. They're located almost exclusively in malls, where costs are escalating and landlords are increasingly reluctant to lease to too many jewelers. Some chains, such as Barry's, are confident they have weathered tough times and now look for a strong future.

The superstore has arrived in the jewelry industry and indications are that it will have a significant impact. Sterling Inc., for example, has opened four Jared superstores and plans to increase that number to 100 eventually. The vast merchandise selection offers everything from inexpensive watches to rare and intricate designer jewels costing many thousands of dollars.

Escalating mall costs mean that some jewelry chains "can't afford the real estate," says Willis R. Cowlishaw, former chief executive of the Zale Fine Jewelers Guild and now an industry consultant. "As a result you're going to see more downsizing."

"The biggest change [in retailing] is the superstore – whether it be in jewelry, electronics, books or office supplies," says Robert Keller, president of Lorch Diamond Centers. "It is simply a response to the changing retail environment."

The Wal-Mart Supercenter sells food, clothing, golf clubs, hardware – and a great deal of jewelry. Much of the jewelry retails for less than $20, but some of the diamond engagement rings sell for more than $1,000.

"Our team works hard to keep down costs," says J. Richard Blickstead, president of Wal-Mart's fine jewelry division. "We have a low expense structure. All the money we save goes into the stores."

Kathy Levine, QVC's star jewelry salesperson, has built a large and loyal audience among the 22 million consumers who tune in to the network shopping programs.

Fine china and tabletop companies have operated their own factory or outlet stores for years. More recently, watch companies have opened stores to display their full line, test-market new models and/or sell out-of-date or unpopular merchandise. Seiko now has seven stores; Movado's new store on New York City's Fifth Ave. – a transfer from Madison Ave. – is designed more as a showcase for the company than to build sales, though these are strong. An added benefit: retail advertising costs represent a real bargain for the parent company, allowing it to reach out to potential customers more effectively.

John Atencio is a top jewelry designer who has six retail boutiques. Designers say their own stores give added prestige and exposure to their jewelry, actually helping to build demand and benefit other stores that carry it. Atencio's stores cater to an upscale clientele; he encourages out-of-state visitors to buy his jewelry from their hometown jeweler.

"TV's great strength is its ability to convey information about the product," says Jeff Taraschi, senior vice president of jewelry merchandisingat QVC Network. "The single biggest deficiency in retailing is the unwillingness to pay for good help."

"Computer on-line probably will be a major force in retailing some day but it won't be as soon as many predict," says Walter Ife, director of operations for the Diamond Promotion Service. However,"this could transform retailing in 30 years."

Jewelry marts that say they sell "wholesale to the public" provide tough competition for traditional jewelers. So do individuals who sell diamonds from upstairs offices with low overhead. Many are displaced jewelry chain store managers and buyers.

WHO WILL WIN THE OVERALL SHARE-OF-MARKET BATTLE?

This is how a select group of industry observers sees the jewelry market pie being sliced. The 1987 figures are from the U.S. Census; the 1994 and 1999 figures are medians based on predictions by the group. The names of those in the group appear on page 201.

Type of outlet 1987 1994 1999
(actual) (est.) (est.)
Jewelry stores 53% 48% 42%
Conventional department stores 9% 8% 8%
National chain department stores 5% 6% 5%
Mass merchant discount stores 6% 8% 9%
Other general merchandise stores 14% 12% 10%
Apparel and accessory stores 4% 4% 3%
Catalog and mail order houses 3% 3% 4%
Direct-selling establishments 1% 1% 3%
Military PX's   N.A. 1% 1%
Pawnshops N.A. 1% 1%
TVhome shopping N.A. 4% 7%
Computer on-line shopping N.A. 0% 2%
Other 5% 4% 5%
Total 100% 100% 100%


The sales categories are those used by the U.S. Census Bureau.

WHAT CONSUMERS WILL WANT MOST WHEN THEY BUY JEWELRY?

On a scale of 1 (little importance) to 10 (great importance), the JCK industry group rated how important the following 10 factors are likely to be to jewelry-buying consumers.

8 Convenience
Price
Quality
Service
7 Selection
6 Brand name
Return privileges
5 Exclusivity
4 Use of natural materials
2 Country of origin


SHARE OF MARKET FORECAST

How members of the JCK Retail Jewelers Panel and a group of informed industry observers forecast changes in various outlets' share of the jewelry market between 1994 and 1999.

JCK PANEL MEMBERS INDUSTRY GROUP

Will increase Will decrease No Change Will increase Will decrease No Change
Independent jewelers
Mom & Pop jewelers 21% 51% 28% 12% 82% 6%
Middle-of-the road 44% 31% 25% 12% 64% 24%
High-end independents 67% 17% 16% 56% 19% 25%
Jewelry chains
Small (up to 10 stores) 35% 24%
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