Pseudo Sales

I recently read about the dramatic reversal of fortunes in Dubai. Some 500,000 cars have been abandoned by departing foreign workers, and construction has ground to a near halt, including completion of the world’s tallest building. Businesses are bailing out. It brought to mind a conversation I had a couple of years ago with an American engineer as we returned to the United States from Dubai. He said he had seen some very poor engineering in the construction of some major buildings. In particular, foundations were improperly prepared to support buildings on sand, which is about all you have in Dubai. He thought a day would come when some of these buildings would begin to fail, if not collapse.

Dubai is a metaphor for the economic upheavals we’re experiencing. We have our own version of Dubai. Las Vegas has suffered a dramatic halt to the super-size expansion of recent years, though at least Las Vegas never presumed to be more than a great escape.

Dubai was, and is, an experiment in adventurism of a different sort. It seeks to become the world’s next great commercial center and spares no expense to reach that goal. Included is the construction of a major diamond trading center. The plan was based on a belief that we would see ever-expanding commerce. But that foundation may be as faulty as the foundations of buildings that house many of those ventures.

There are parallels with our industry. Most notable has been the entry of private equity firms, which in a few dramatic cases has led to the dissolution of the acquired businesses. Years ago the use of junk bonds for the same purpose led to the same results. The expectation was that large-scale infusions of cash—invariably debt—would leverage the business into competitive advantage. There is a big misfit here, since so-called equity investors essentially look for high-profit, short-term exit strategies. Anyone familiar with our business knows that it takes years to build a brand, service niche, or strong identity. Cash helps, but it doesn’t replace innovation, solid management, and a long-term view.

Like the sheik of Dubai, we were dazzled by the possibilities of what appeared to be a booming luxury market. We saw multimillion-dollar homes, extravagant resorts, and $100,000 watches. Suppliers expanded their businesses, building new factories and offices around the world. Retailers expanded, added product lines, and renovated stores. But each layer of the economy was buttressed with mountains of debt, starting with consumers believing in the tooth fairy. They used (or overused) credit cards and home equity loans for many purchases. Those sales weren’t real. Yes, it was cash in the till, but they were not sales we would see again.

These are what I call pseudo sales. And nobody wanted to see them end, these ephemeral gifts proffered by a self-indulgent public. So here we are, trying to fix it.

I’m not sure the outlook is all negative. People saving money, for a change, is not a bad thing. A good retailer told me he and his staff are working full time on restructuring his business. They want to assume far lower sales for 2009 and plan on being profitable at those reduced levels. Every company I talk to has done something similar—reduced staff, cut costs—but not everyone tries to figure out how to capture market share, which is where growth will come from. This retailer says he doesn’t need to be in business. He’s made his money. But he envisions real opportunities in a radically altered and consolidated market.

If anyone questions that a chastised public will not return to their old profligate ways, new market facts will counter their belief that the old ways will come back. We’ll see inflation and much higher interest rates. Banks will be far more reluctant to grant generous mortgages, car loans, and credit card lines of credit (or they’ll be regulated that way). Gold and diamond prices will drift higher as a function of inflation and as mine production declines. Meanwhile, wages will stagnate as long as unemployment remains high.

Even with all that, I remain positive about our industry. Sales continue every day because jewelry still has immeasurable psychic value, as it has for millennia. Our day-to-day business, however, will be based on people spending their own money. We will have real sales. And some of us will own the business.

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