Leaving the Comfort Zone

Last month, this page examined the cost of gold today compared with 1981 and argued that the sky is not falling. Shortly after our January issue went to press, bad news—OK, terrible news—tumbled forth from the economic sector. The major stock indexes dropped, holiday sales were disappointing, housing starts plummeted, and more. The first two business weeks of 2008 were enough to make one want to crawl back into bed and hide under the covers.

The Jan. 18 report from Wachovia Economics Group likens the economy to a patient with a severe cold, which, if not taken care of, could develop into something worse. If properly cared for, it will bounce back as quickly as a 6-year-old.

Let’s examine some of the worrisome indicators.

Most of the weakness in housing starts was in the Midwest, which suffered a 30.8 percent decline, pulling the U.S. total down 14.2 percent. What happened? The answer is simple, and not alarming: Old Man Winter has been cantankerous. Two severe snowstorms and one massive ice storm are not conducive to new home construction. Normal winter weather typically affects certain economic data, and severe winter weather affects it more.

Stock market declines always set people on edge, but the market always heads back up, and, if history is any indication, fairly quickly. Even after the crash of 1929 and the one in 1987, the stock market regained its value within a relatively short time. The damage to the nation’s psyche was greater than the damage to the Dow.

With some notable exceptions, stocks have peaks and valleys, but over the long term, their value goes up. Situations like the dot-com crash earlier this decade and the recent real estate plunges in certain markets have a rational explanation: When any product is grossly overvalued, reality eventually asserts itself. The tech boom was characterized by astronomical stock prices for companies that had yet to turn a dime of profit. In the housing market, many cities that saw a huge run-up in home prices didn’t have a population affluent enough to sustain it, so prices fell back to levels reflecting what people can afford.

As for holiday sales, the news for jewelers overall wasn’t jolly (see “Holiday Report,” p. 35), but a reasonable number did well. Anecdotally, first reports filtering back from the Vicenza First fair, which closed shortly before press time, were far better than expected. While much of the strong business at the fair was coming from non-American buyers, some prominent American retailers were buying classic gold looks. These were not lightweight goods, as one might expect in a market where the weak dollar is combined with $850-plus gold, but solid, salable pieces.

Holiday retail sales across the board did grow, albeit by a slim margin. That means there’s money to be spent. Sure, it’s much less than in the flush years we’ve grown used to, but if consumers were truly worried, they wouldn’t have spent much of anything. What they didn’t do, however, was spend it on jewelry—and that’s what the industry needs to address in a serious way.

Senior editor Rob Bates discussed this in his “Cutting Remarks” blog post of Jan. 15 titled “Christmas: What Went Wrong.” You can read the entire text—and some follow-up commentary—at www.jckonline.com/blog/870000287.html#1750020175.

In that vein, industry analyst Ken Gassman did an interesting exercise. He took all the advertising circulars from the high-volume jewelry retailers and all the circulars from the top electronics stores and set them side by side. The sweet-spot price for best-selling gizmos (such as GPS devices) was around $300 or so. The sweet-spot price for much of the jewelry advertised was—you guessed it—around $300 or so. The difference was that the electronic products offered something new and exciting. The jewelry didn’t. Higher-end jewelers who didn’t have the holiday they hoped for should try the same exercise using specialty store catalogs and fliers for expensive electronics and appliances. What are products in your sweet-spot price range competing against, and what kind of “newness” factor do those products have?

Tough economic times typically provoke two responses from businesses. One is to hunker down, stick with what’s proven, and try to ride it out; the other is to intensify one’s efforts and try something novel to grab market share from weaker or less creative competitors.

More than ever, these times demand that we as an industry step out of our comfort zones and learn to innovate. Tough times are temporary; “out of business” is permanent.