Bank Consolidation Puts Pressure on Jewelers

The number of jewelry manufacturers in the United States continues to decline, partly because of the mature nature of the industry, as larger companies seek to grow through an acquisition or merger while smaller companies find it increasingly difficult to compete. The Jewelers Board of Trade reports that the number of U.S. jewelry manufacturers has declined by 25 percent over the last decade.

Meanwhile, the lifting of federal regulations governing the financial services sector has led to significant consolidation in that industry in the last decade, as the number of U.S. banks fell from roughly 12,000 in 1995 to about 9,000 in 2005. The number of U.S. banks serving the jewelry industry has also dwindled, from roughly 80 banks after the U.S. government ended the gold standard in 1971 to just a handful of banks today.

"Bank mergers have significantly impacted the ability of banks to finance the jewelry industry. We've seen fewer and fewer players comfortable financing these companies, and we've watched a number of banks leave the industry," says Albert Brown, president of Sovereign Precious Metals LLC, a subsidiary of Sovereign Bank.

Based in Providence, R.I., where the U.S. jewelry industry was historically concentrated, Sovereign's national precious-metals lending unit is, itself, a product of industry consolidation. Sovereign predecessor Rhode Island Hospital Trust National Bank was the first bank in the country to be authorized by the U.S. Treasury Department to buy and sell gold for industrial and investor use, in 1968.

Irene Spector, manager of the Diamond and Jewelry Group at J.P. Morgan Chase in New York, notes that in the current era of bank consolidation, financing pressures have increased on both ends of the spectrum, from the small diamond and jewelry companies to the largest jewelry manufacturers. "On the one hand, the small companies have very limited avenues to find credit due to minimum-size criteria for lines of credit, even by smaller banks. On the other hand, the largest jewelry companies may not be able to find enough industry banks to support their growing businesses," says Spector.

Aurafin LLC of Tamarac, Fla., the largest karat-gold jewelry manufacturer and distributor in the United States, has access to a number of financial institutions, because of both its size and strong reputation in the industry. But Aurafin chief financial officer Steve Hansen does see a growing impact on the jewelry business from the shrinking number of banks.

"It's been a concern that more and more players are exiting the precious-metals lending business as the bigger banks are combining," Hansen says. "Precious-metals lending hasn't always been highly profitable for banks, so only those with the highest level of expertise have survived."

Sovereign's Brown notes that the rapidly declining number of U.S. jewelers has added to financing pressures, because the smaller number of retailers and jewelry companies has meant fewer potential bank customers and higher credit concentration per customer. "Ten years ago we were seeing a larger number of companies needing $5 million lines of credit," he says. "Now we see fewer companies needing much larger credit lines—up to $50 million. The average size of credit line we extend has probably doubled in the last decade, from about $7.5 million to $15 million, though we also still do the smaller deals."

Jewelers' banks have had to adapt to the changing financial landscape by diversifying and adding services such as cash management, accounts- receivable financing, and financing of diamonds and gemstones.

"Fifteen years ago, 95 percent of the business was gold financing," says Brown. "Today, in addition to precious-metals products, financing of diamonds and gemstones has really ballooned. You have to be a full-service bank for the jewelry industry and serve a whole range of clients in order to compete."

Spector says J.P. Morgan Chase relies on its long-term relationships with jewelry companies "whose reputations are stellar" to stay competitive, in addition to its credit products. "We are known in the industry for our streamlined credit structure and ability to respond to requests in an extremely timely manner, which gives us a competitive edge," she says.

Looking at current trends in the jewelry industry, Spector sees several continuing, including a diminishing role for middlemen or wholesalers in the diamond and jewelry segments. "They're getting pushed out because there's not enough gross profit to have so many companies in the distribution pipeline," she says.

Spector also sees the line between diamond and jewelry companies continuing to blur as companies continue to strive for higher gross profit margins. "We used to see a greater division between the diamond people who sell loose stones and the jewelry people who make and sell the jewelry. You still see some of that, but now more diamond people are also setting jewelry. If you're a small company that sells loose stones, it's getting tougher to make enough gross profit margin, unless you have a niche in the industry."

Both Brown and Spector foresee continued rapid consolidation in the jewelry industry, largely because of ongoing globalization of the business, as U.S. companies increasingly seek out less-costly sources of labor abroad. "This makes it more difficult for the small U.S. companies to survive, because they can't do what the big players can do," Spector says.