Last week’s post, “What I learned at the LINK Jewelry Summit in Vienna,” contained a collection of my favorite quips and comments from the April 23–24 event, which I likened to a mini-TED conference for jewelry. But I deliberately left out some of the most interesting bits of information—the financial predictions—because I knew they deserved their own blog post.
I’ll start with a review of a day one presentation entitled “Outlook 2020: Crystal Clear Vision,” by Thomas Tochtermann, a director of McKinsey & Company’s Apparel, Fashion & Luxury Group. (One caveat: His research appeared to have a strong European bias.)
Attendees at the LINK Jewelry Summit, held April 23–24 in Vienna (photo courtesy of Swarovski and International Herald Tribune Conferences)
Tochtermann’s predictions centered on a key hypothesis: “I believe in the next 10 years, jewelry will match what’s happened to apparel in the last 20 years,” he told the audience of some 300 decision-makers in the worlds of fashion and fine jewelry.
“Jewelry has more high-ticket items, but the general trends are similar,” he said, pointing to a slide that spelled out his high-level predictions:
- Trading up & down, segments are blurring
- The changing role of brands
- The use of multiple channels
- The consolidation of core players
- The rise of megacities
Tochtermann referred to rising prices, and premiums, in the luxury sector—for example, a Gucci suit sold for 1,180 euros in 2000 (about $1,530 at today’s exchange rate) and now goes for 1,671 euros)—and compared them with the flat or declining prices of mass-market goods, such as clothes from H&M. He said the jewelry industry was facing a similar development: “There’s a blurring of traditional price points, of fine vs. fashion, where clearly differentiated segments don’t exist anymore.”
Online and mobile commerce have clearly made their mark on the jewelry trade, but Tochtermann was bullish on prospects for brick-and-mortar retailers. “Jewelry customers use online more as an information source than as a sales point,” he said. “They still prefer to touch and feel. Fine [sales] remain offline, mainly due to trust issues.”
He wasn’t nearly as optimistic about prospects for non-branded retailers. As distribution strategies go, Tochtermann predicted robust growth for monobrand stores and online shops, an ambiguous future for multibrand stores, and flat growth for department stores.
“The clear winners, we believe, are monobrand stores,” he said, citing Pandora and Swarovski. “The advantage of a monobrand stores lies in the control of brand identity and closeness to customers.”
“Only a small part of the jewelry market is branded today—about 20 percent,” he said. “In the last decade, since 2003, we saw the branded segment double. In 2020, we expect it to be 30 to 40 percent of the market.”
The drivers behind this evolution, he said, will be buyers from emerging markets who’ve been weaned on brands and are keen to buy familiar luxury labels that have expanded into jewelry.
No talk about the future of the jewelry industry would be complete without a segment on consolidation, and Tochtermann’s presentation didn’t disappoint: “Today, the top 10 houses only comprise 12 percent of the market,” he said. “By 2020, consolidation will increase. We expect the jewelry market will be dominated by global jewelry brands rather than one-shop artisans. We expect heightened M&A activity in jewelry.”
His next slide provided a clear-cut incentive for financiers. “Today’s jewelry market is about 150 billion euros—about a 10th the size of apparel,” he said. “Profitability in jewelry is about 8 percent and in apparel it’s about 10 percent. Experts believe jewelry has the potential to become significantly more profitable.”
The presentation’s next point hit on the concept of fast fashion, which refers to the constant stream of fresh merchandise flooding retail stores as a result of “cooperation between the catwalk and the high street.”
“Will fast jewelry happen in the next 10 years?” Tochtermann asked, alluding, perhaps, to the specter of 3-D printing.
He failed to answer this tantalizing question before moving on to the last slide: “Today, about half the world lives in cities. The top 600 cities generate 65 percent of global GDP. There’s been a radical shift from developed to developing. In 2025, 440 of those 600 will be in developing markets.
Thomas Tochtermann, a director of McKinsey & Company’s Apparel, Fashion & Luxury Group, predicts the rise of mega-cities will reshape the jewelry market by 2020. (photo courtesy of Swarovski and International Herald Tribune Conferences)
“We’ve counted 60 mega-cities that will, by 2025, generate 25 percent of global GDP,” Tochtermann said. “Today, we have 30.”
He described the following cities as “most relevant to apparel in 2025”:
- New York City
- São Paulo
- Los Angeles
“We believe the jewelry market in 2020 will be more dynamic and significant than it is today, more competitive, and there’s also the potential for it to be more profitable,” he concluded.
During the Q&A session that followed, Tochtermann shared some of the nuances of his analysis, providing some helpful takeaways for independent jewelers (albeit those with grand ambitions).
- “Expanding into the lifestyle category is not the holy grail for luxury brands. Be careful. We’ve seen brands branching out too fast.”
- “Many companies are trying to move away from wholesale to retail, but the capabilities are not there. One step at a time. Build your first stores, expand mindfully.”
- “Licensing—stay away from it. If you have a good brand, you could lose control by licensing. Many brands could deteriorate.”
- “Franchising is an incredibly strong model if you have a good concept but you’re not an insider in that part of the world. But manage it properly.”
Tochtermann’s parting prediction was about the looming wave of private equity groups taking an interest in the jewelry business.
On day two, that prophecy was all but confirmed by Colin Welch, president and COO of Financo, a boutique New York City investment banking firm that specializes in the retail and consumer sectors. (Over dinner on our first night, Welch confided that his firm had advised the Qatar Investment Authority on its deal to buy shares in Tiffany & Co.)
Welch’s spirited morning presentation, entitled “Strategic Activity in the Jewelry Sector,” kicked off with a rousing soundtrack by Kanye West and a direct reference to Tochtermann’s presentation. “Thomas set up the consolidation themes,” Welch said. “It’s not if, it’s not when, it’s how much and who. It’s not a new phenomenon—it’s more about a scarcity of assets.”
Colin Welch, president and COO of Financo, a boutique New York City investment banking firm that specializes in the retail and consumer sectors, said consolidation in the jewelry biz is not a question of if or when, but “how much and who.” (photo courtesy of Swarovski and International Herald Tribune Conferences)
Welch went on to enumerate the qualities that make jewelry companies attractive to investors and therefore ripe for consolidation: “Brand is key. Global presence is key. The ability to demonstrate you’re not a single product company. Quality control. Product innovation.”
“The jewelry industry, in terms of investment, is still quite nascent,” he said. “The trend is positive if you’re a seller.”
Welch used the history of Tiffany & Co. as a potent example. The retailer was acquired by Avon in 1979, sold to a management team in 1984 for $135 million, and is today worth $10 billion. “That’s the model—and we think it’s going to happen,” he said. “There are rumors of a potential IPO of David Yurman. But assets are still scarce, and there’s a significant amount of untapped capital. The emphasis, more and more, will be on finding a business that delivers globally.”
Welch cited a very 21st-century example: PPR’s 2012 purchase of the Chinese jeweler Qeelin.
“From an acquisition standpoint, the game changer has been the availability of private equity,” he said. “Because of that continued availability of capital, there’s a continued push to do deals. You need brand distribution and integrity in your market, but at the end of the day, you need money.” (Don’t we know it!)
Welch concluded with a few top-line thoughts:
- “For emerging smaller brands, hold on to control and your own DNA. Look for partners that will let you accelerate.”
- “The emphasis should be on larger, more stable vendors.”
- “Singular distribution emphasis is risky.”
Conference attendees included representatives of some of the world’s largest jewelry companies, such as Ofer Azrielant (far r.), executive vice president of Richline’s Gem Group (photo courtesy of Swarovski and International Herald Tribune Conferences)
When Welch finished his remarks, it was time for me to cut out and head back to the hotel to pack my things and make my way to the airport for my flight to Zurich (Baselworld was beckoning). I mulled over Tochtermann’s and Welch’s conclusions on my journey, and wondered where independent jewelers, like JCK’s readers, fit into a world of global branding strategies and high-profile M&A schemes. Where would 2020 find them?
I’m no psychic, but my gut says they’ll still be around, though I fully expect the next decade to bring about a significant purge that will leave only those independent businesses that possess healthy balance sheets, clearly defined brands, and the hearts and minds of local consumers.
Setting aside the question of a global presence, Tochtermann made two small but compelling points about how retailers with multibrand offerings should navigate the competitive retail waters of the next decade: He emphasized a strong value proposition and curated product, and this is what I keep coming back to when I consider the best strategies for independent retailers in the years to come.
In order to compete against jewelry brands with Gucci’s cache, Cartier’s global saturation, and Tiffany & Co.’s balance sheet, it seems to me there’s only one way for a small American jeweler to style itself: as a venue for unique, value-added products chosen carefully for consumers with global experience matched only by their local pride, and community-minded sensibilities.