Directions

A capsule look at business, economic and demographic trends affecting the jewelry industry

JEWELERS TO CONGRESS: CUT TAXES, STIMULATE GROWTH

Jewelers have a clear message for the new Congress: reduce taxes, especially on capital gains, and stimulate business growth.

That’s the consensus gleaned from a December poll of the JCK Retail Jewelers Panel, which comprises hundreds of jewelers throughout the U.S. Panelists were asked what they consider the most important business issue facing the Congress and what legislation would most benefit their business.

Taxation issues dominate the answers to both questions. One in five urges Congress to cut corporate and personal taxes for the benefit of business, consumers and the country in general. “A tax decrease is required to grow the economy,” says Terry Chandler of MichelsonJewelers in Paducah, Ky. Adds a Massachusetts jeweler, “Lower taxes will put more spendable dollars into middle-class [pockets].”

The one tax many jewelers specifically want Congress to trim or even erase is the 28% capital gains tax. Doing so, they say, would create more purchasing power among consumers, encourage expansion and create jobs. “Eliminating or indexing [it] would stimulate the overall economy,” says Stephen Alie of Portsmouth, New Hampshire.

Others urge reform of the tax code (simplify tax forms, say several) and reinstatement of tax credits to stimulate small-business investment and expansion.

Other concerns: Taxes aren’t the only topic on jewelers’ minds as the GOP takes control of Congress for the first time in a generation. Health care provoked comment from one in 10 of the respondents. While some are glad proposals for comprehensive coverage have failed in Congress, others still want health-care reform, including cost control. “I pay 100% of mine and my employees’ health insurance and I’m going to have to raise the deductible or go to a percentage,” says a Virginia jeweler.

Many also call for reducing the huge federal debt, reforming the welfare system, balancing the federal budget and sharply cutting federal waste, spending, bureaucracy and foreign aid. “Controlling the deficit would be the biggest boost [because] the government’s borrowing is stifling business,” says Pat Gilmore of Dunbar Jewelers in Yakima, Wash. While these issues may have little to do directly with business, the comments reflect the conservative mood of voters who gave the GOP its November electoral sweep.

Though most jewelers want less federal government in their lives and businesses, some still want Uncle Sam to stimulate struggling local economies, such as those hit by the closings of military bases or poor crops.

Interest rates: One thing many jewelers say definitely affects their business is the Federal Reserve Board’s recent decision to boost two key short-term interest rates. The Fed’s intent was to slow inflation. But a number of jewelers contend it could dampen the overall economic recovery. “Why raise rates now?” asks a jeweler in Branson, Mo. “Just as business is getting better, they stop it.”

Specifically, many worry that the rates raise will slow the sale of high-end merchandise. “[This] raises payments for people with adjustable-rate mortgages, leaving them with less spending capital,” says Pete Kouwenhoven of Fort Myers, Fla. Adds Doug Brougham of Brehmer’s Jewelers in Kerrville, Tex., “This scares some customers. They think we’re doing better and feel the government is trying to slow down progress.”

The Fed’s action also makes it more expensive to borrow, and some jewelers say they’ll respond by buying less merchandise than planned in January and February.

JEWELERS CHOOSE THE MOST IMPORTANT BUSINESS ISSUES FACING THE NEW CONGRESS

Taxation (including tax reduction, capital gains reduction, tax reform and tax breaks for small businesses). Chosen by 41% of respondents.
Government’s fiscal health (including a balanced budget, welfare reform, deficit reduction, job creation, economic stimulation). 27%
Government waste, spending. 14%
Health care reform. 11%
Trade (including reducing trade deficit). 8%
Other (including tougher crime policies, term limits, aid to cities, more defense spending and stopping illegal aliens). 10%
No answer. 21%
Note: Total adds to more than 100% because of multiple answers. Source: JCK Retail Jewelers Panel.

EFFECT ON BUSINESS OF INTEREST-RATE HIKES BY THE FEDERAL RESERVE

None 26%
Little 12%
Some 34%
Very much 5%
Will benefit 8%
No answer 15%
Source: JCK Retail Jewelers Panel

COMMUNIST ASIA:NEW LOW-WAGE HAVEN

A third generation of Asian low-wage havens has caught the attention of jewelry manufacturers and diamond and colored stone polishing operations.

More than a decade ago, U.S. and European manufacturers started to set up production facilities in Hong Kong and Singapore because cheaper labor wages offered them competitive advantages. But then wages began to rise in Hong Kong and Singapore, so the manufacturers moved on to Thailand and Taiwan.

Now wages in those nations have risen also, prompting some manufacturers to examine the lower-wage centers of Malaysia and three communist countries that foreign businesses once shunned: China, Vietnam and even North Korea.

Many companies with offices in Hong Kong, for example, are now establishing stone setting and jewelry finishing plants in China. Actually, China has played a role in the international jewelry industry for about 10 years, since it became the first communist Asian country to allow joint-venture gem-polishing operations. A number of those early operations failed because of government interference or lack of essential services. However, Harry Winston Inc. and Argyle Diamonds still have operations there, though smaller than originally envisioned.

In recent years, China has worked to encourage such joint ventures. The government has scrapped “political overseers” who had tried to ensure that joint-venture employees weren’t indoctrinated with capitalist ideas. The country also has improved electrical and telephone services – at least in major cities. (For more on China, see “The China Market:Poised to Take Off,” page 124.)

In Vietnam, about a dozen joint-venture stone polishing operations have started since the government launched an economic liberalization program two years ago. Most of the companies are based next door in Thailand, including the large polishing and jewelry manufacturing Pranda Group. And most of them are eager to take advantage of lower wages in Vietnam and other emerging Asian nations.

And in North Korea, the government has just signed a contract with an unnamed Belgian diamond manufacturer to set up a polishing factory on the outskirts of capital Pyongyang, according to Asian press reports. The government will own 50% of the operation, which is designed to produce small diamonds up to .20 ct.

The North Korean operation may be getting some of its rough diamonds from alluvial deposits along the Tumen River, which divides North Korea and China, says Asian Jewellery magazine. The operation will employ 180 Belgian-trained Koreans and will sell its output in Antwerp.

HIRING PLANS BRIGHTEN

The nation’s employers plan to add workers in the first quarter of the year at a faster rate than any first quarter since 1989, according to the quarterly Employment Outlook Survey conducted by Manpower Inc., Milwaukee, Wis.

Of the more than 15,000 businesses surveyed, 22% plan to increase staff, 12% expect a decrease, 63% foresee no change and the rest are uncertain. In the previous year’s survey, 18% anticipated additional staffing, 13% planned decreases and the rest were uncertain about staffing for the first quarter.

Employers in the wholesale and retail trades usually report significant decreases after temporary holiday workers leave their jobs in the first quarter. This year, however, their hiring plans stand at the highest level of any first quarter in the survey’s 18-year history. This also is the first time more employers plan to add rather than to reduce staff in the first quarter. Twenty-one percent said they will increase staff, 18% plan decreases, 58% expect no change and the rest are uncertain regarding hiring.

Manufacturing industries – another key segment of the nation’s economic growth – also report stronger hiring plans. That’s good news, according to many economists.Government and private economists had feared that many manufacturers would send production south to Mexico after approval of the NorthAmerican Free Trade Agreement last year.

Considering just durable-goods manufacturers (including jewelry manufacturers), 32% plan increases, 9% plan decreases, 57% predict no change and the rest are uncertain.

Regionally, hiring prospects are best in the South and Midwest, though all regions indicate their highest projections in five years.

“Any question as to the durability of this recovery in the short-term is certainly resolved in the new findings,” says Mitchell S. Fromstein, chief executive officer of Manpower Inc. “Projected employment growth is moderate, but very steady.”

REGIONAL FIRST-QUARTER EMPLOYMENT OUTLOOK
(% of employers who plan to increase or decrease staffing)

Will increase staffing Will decrease staffing No change planned  Don’t know
NORTHEAST
Wholesale and retail trades 18% 21% 60% 1%
Durable goods manufacturers 26% 12% 60% 2%
All industries 19% 14% 64% 3%
MIDWEST
Wholesale and retail trades 19% 20% 58% 3%
Durable goods manufacturers 37% 7% 54% 2%
All industries 23% 13% 62% 2%
SOUTH
Wholesale and retail trades 23% 16% 58% 3%
Durable goods manufacturers 31% 9% 58% 2%
All industries 24% 10% 63% 3%
WEST
Wholesale and retail trades 22% 19% 56% 3%
Durable goods manufacturers 27% 12% 56% 5%
All industries 21% 13% 62% 4%
TOTAL U.S.
Wholesale and retail trades 21% 18% 58% 3%
Durable goods manufacturers 32% 9% 57% 2%
All industries 22% 12% 63% 3%
Source: Manpower Inc. Employment Outlook Survey

JEWELRY-STORE SALES RISE MODESTLY

Sales in the nation’s jewelry stores totaled $9.95 billion in the first three quarters of 1994, according to the latest figures available from the U.S. Department of Commerce.

That’s a record high, but it reflects only a modest 1.6% increase from the same period of 1993 (see chart for a comparison of sales in the first three quarters from 1988 to 1994).It’s also considerably lower than the 7.8% growth for total retail sales for the period.

The biggest contributors to overall retail sales growth in the first three quarters of 1994 were automotive dealers (up 15.9%), sporting goods stores (up 15.7%), building materials stores (up 13%) and furniture group stores (up 12.5%).

The only retail categories to rank below jewelry stores in sales growth were apparel/accessory stores (up 0.7%) and camera and photographic supply stores (down 3.1%).

Still, retail jewelry stores reported higher sales in five of the nine months. And jewelers were optimistic that consumers would reverse their midyear belt-tightening during the Christmas shopping season. The government should release preliminary year-end sales figures next month.

Between 1988 and 1993, jewelry-store sales in the first three quarters accounted for 60.2% (in 1988) to 62.7% (in 1991) of total annual sales.