State of Confusion

Being a retail jeweler isn’t what it used to be. Many of the factors that have already transformed most of the retail industry are now affecting the jewelry business. Among them:

  • Consolidation. Like other retail industries, the retail jewelry industry is increasingly dominated by fewer players. The same is true at the manufacturing and wholesale levels.

  • Supply chain changes. Supplier of Choice, the shortage of diamonds, the Internet as a way to move diamonds and jewelry to both retailers and consumers, and the demands of large jewelry retailers for product at the lowest cost possible are squeezing wholesalers and manufacturers like never before. Manufacturers and distributors, particularly those dealing with diamonds, are starting to use the Internet to sell directly to consumers.

  • Consumers and the Internet. Not long ago, it appeared that the Internet was going to overtake the brick-and-mortar business. That hasn’t happened. However, businesses such as Blue Nile and the recently launched jewelry Web portal at Amazon.com are capturing a growing customer base.

  • Discounters. More people are buying less-expensive jewelry at jewelry chain stores and at large discount retailers that sell everything from garden equipment to electronics.

  • Changes in consumer demographics and buying habits. Examples include female self-

  • purchase, the aging of the Baby Boom and the emergence of Generation Y, and the tendency of consumers to cross-shop between upscale and discount stores.

Individually, any one of these factors could be absorbed by the industry. But taken together, these and other changes are transforming the jewelry business.

What does this mean to the retail jeweler?

“Jewelers are going to have to focus on the business of jewelry rather than the jewelry business,” says jewelry industry analyst Kenneth Gassman.

Some retailers understand the issues and are reacting to the changes. For example, Georgie Gleim of Gleim the Jeweler, which has three stores in the Palo Alto area of California, says the industry has evolved from one in which a variety of skills were valued to one in which good business practices rule.

“The changes are coming faster, and jewelry and retail in general are going through some profound changes,” Gleim says. “Way back, jewelers used to be watchmakers, engravers, and encompassed all the skills in one person. It’s harder to be a single person and encompass all the things you need to do. Being successful at running the business is critical right now.”

Consolidation. On both the retail and manufacturing levels, the industry is getting smaller.

According to the Jewelers Board of Trade, the past seven years have seen roughly a 10% drop in the number of jewelry-only stores in the United States—from 27,580 in 1997 to 24,888 in 2003, or roughly 450 stores per year. And Gassman notes that in the cases where a new jewelry store replaced an old one, the new store is usually part of a chain operation.

Number of Jewelry-Only Stores, 1997-2003

1997 1998 1999 2000 2001 2002 2003
Source: Jewelers Board of Trade
27,580 27,156 26,754 26,189 25,753 25,043 24,888

According to Gassman, the jewelry industry is facing many of the same changes that other retail categories have faced. In other retail industries there are two or three dominant companies, such as Home Depot and Lowe’s in hardware, or Staples and Office Depot in office supplies. Even in highly specialized service industries, the trend is toward consolidation.

For example, Gassman says, “Who would have guessed that a few companies would own thousands of hair-cutting operations, a highly personalized service to consumers?”

Gassman doesn’t necessarily believe that two or three dominant players will emerge in the jewelry industry, but he says business conditions favor the larger players.

The supply-side squeeze. While consolidation at the retail level is quickly becoming a reality, the trend toward consolidation on the supply side is even greater. Large retailers continue to demand better price points, quicker delivery options, and, in some cases, even demand that manufacturers have offshore facilities to take advantage of lower labor costs.

These and other factors are reducing margins in the 10% range for manufacturers, Gassman says.

“The jewelry business is risky for those low returns,” Gassman says. “What happens is that the suppliers go out to borrow money from banks and they say ‘Nope, your profit margins aren’t high enough.’

“Chain retailers in particular want to deal with fewer and more important suppliers. That places additional pressure on small suppliers. Not only are they unable to get capital but they are unable to get Zale and Kay’s. … At some point if enough of these small suppliers go out of business, retailers will have fewer alternatives.”

De Beers’ Supplier of Choice model and the Internet are drastically changing the way diamonds are distributed, and this is having an impact on the entire industry. That’s the opinion of jewelry industry consultant Abe Sherman, CEO of Buyers International Group, South Lake Tahoe, Calif. “The changes in the industry are directly attributed with the supply side,” Sherman says. “We call this convergence. Supplier of Choice has changed forever the way diamonds are distributed. The middle distribution chain is now selling online.”

Sherman adds that obtaining diamonds has become much more difficult as demand is outstripping supply.

“The majors are having problems fulfilling their orders for the season, going into the fourth quarter with a serious shortage of goods,” Sherman says.

The upshot, Gassman and Sherman agree, is that there will be fewer businesses in the jewelry and gem industries.

“I can tell you, five years from now we will have significantly fewer independent jewelers in America and significantly fewer suppliers and wholesalers in America,” Gassman says. “I see it happening in other retail categories, and I don’t see why it can’t happen in this industry.”

Sherman says, “Over the next five years there will be thousands fewer retailers and wholesalers. … Ultimately, for the people that survive, it will be great, because there will be many fewer doors selling to the same customer base.”

The Internet. comScore Networks estimates that last year consumers spent between $800 million and $1 billion on jewelry products online. (Total sales of jewelry and watches were $53.2 billion in 2002, according to the U.S. Bureau of Economic Analysis.) This figure doesn’t include the world’s largest Internet auction site, eBay, which in April reported $1.6 billion in annualized jewelry sales. But jewelry is a rapidly growing Internet category—and there are e-commerce operations ready to take advantage.

The Blue Nile business model of making it easy for consumers to learn about diamonds and jewelry, to design their own rings, and to order product at discounts by keeping overhead low is the model of a successful Internet company. The Seattle-based company, which launched in 1999, has been profitable since 2002 and earned $27 million in 2003 on $128.9 million in revenues (a 78.7% increase over 2002 figures). Net profit was $27 million and included a $15.7 million tax benefit. There was continued strength in the first quarter this year, with sales and earnings climbing 43% and 12%, respectively. In May, the Seattle-based company held a successful initial public offering of its stock.

Not to be outdone, online retail giant Amazon.com in April started its own online jewelry Web portal, with the goal of undercutting Blue Nile. While Blue Nile’s focus is on diamonds and bridal jewelry, Amazon.com is trying to appeal to consumers looking for a broad selection of jewelry.

Neither Blue Nile nor Amazon pay for retail space, and both carry a larger variety of items because they rely on the virtual inventory of suppliers rather than trying to stock the inventory themselves. This means that, unlike most jewelers, neither retailer has to carry multiple copies of the same item.

Discounters. Wal-Mart is not only the largest retailer in the world but also the largest jewelry retailer, with estimated jewelry and watch sales of more than $2 billion in 2002, says Pam Danziger, president and CEO of Unity Marketing Inc., Stevens, Pa., in her upcoming second edition of Why People Buy Things They Don’t Need. Kmart, Target, and Costco also have made huge strides in attracting customers for jewelry. Together, television retailers QVC and HSN generated approximately $1.4 billion in jewelry sales in 2002, and there are other shopping networks bringing in plenty of money through jewelry sales as well.

In a report titled “Future Vision: Jewelry Market,” Danziger says Wal-Mart has been successful at capturing a previously “undisclosed need” to provide bargain shoppers with affordably priced fine jewelry. Meanwhile, the TV shopping networks are skilled at attracting consumers with the “strong emotional appeal of jewelry sold by passionate television spokespeople.”

The evolving jewelry consumer. 2002’s $53.2 billion in total sales of jewelry and watches was up 4.1% over 2000’s sales of $51.1 billion, according to the U.S. Bureau of Economic Analysis.

Jewelry and watch industry sales snapshot (in millions of dollars)

2000 2002 % Change
Source: U.S. Bureau of Economic Analysis
Jewelry and watches $51,062 $53,157 4.1%

The U.S. Census Bureau’s retail census reports that traditional jewelry store sales totaled $25.3 billion in 2002, virtually flat when compared with jewelry store sales in 2000. “That means that market growth in the jewelry business has come about through increased sales in all other retail channels of distribution,” Danziger says.

Traditional jewelry stores sales snapshot (in millions of dollars)

2000 2002 % Change
Source: U.S. Census Bureau
$25,338 $25,334 0.02%

Where are customers going? Shoppers used traditional jewelry stores for 39% of their jewelry purchases in 2003, Danziger says. Traditional department stores were used by 48% of jewelry shoppers in the past year; discount department stores by 38% of shoppers; and non-store retailers including Internet, mail-order, and television shopping by 17% of jewelry shoppers. “Direct-to-consumer channels are increasingly capturing a greater and greater share of the jewelry business,” she says in Why People Buy Things They Don’t Need.

Individually, women (51%) are more likely than men (41%) to have purchased jewelry and/or watches in 2003. “While the highest purchase incidence of jewelry is found among households 18 to 24, jewelry is actively purchased at all age levels under 65 years of age. Even seniors have a purchase incidence of 37%, which is less of a drop-off than found in many other discretionary categories,” Danziger says.

Among households, after advancing from 40% in 2000 to 48% in 2001, household purchase incidence of jewelry and watches remained about even in 2003, Danziger says. Some 46% of households bought jewelry and/or watches in the past year.

While households at all income levels buy jewelry, those at the highest level—$50,000 and above—report the highest purchase incidence (52% among $50,000-$75,000, and 59% for $75,000 and above). Two-person households are more likely to buy jewelry than households with children or other members.

And, as previously reported in JCK (“Soft in the Middle,” April 2004, p. 84), middle-market consumers are changing their purchasing patterns by looking for value and shopping for luxury.

High, low, bridal … and a new breed of woman. So how do jewelers compete in this confusing new world? Gassman says that with the middle market declining, the opportunity for independent jewelers lies at either end.

“Stay out of the mass market,” Gassman advises. “Lower-end credit jewelers is where there is a great opportunity, or go upscale where there is another great opportunity. … Kay and Zale are rapidly becoming thousand-pound gorillas in the jewelry industry.”

Marriages in the United States are expected to increase 30% by 2015, Gassman says, so bridal will be an area on which jewelers should focus. “Married women are the biggest jewelry consumers in the United States,” he notes.

Another big growth area is the self-purchasing woman, says Danziger.

“The real opportunity in jewelry marketing is the self-purchasing female. Women present significant growth potential—every new outfit and every special occasion is an opportunity to sell jewelry accessories,” she says.

In addition, it’s important for jewelers to find ways to reach consumers that other retailers are neglecting, particularly through new distribution channels.

“Broadening the retail channels of distribution will be key to future jewelry marketing success,” Danziger says. “Marketers need to identify their best potential target markets and meet them where they shop. It is astonishing that television sells to only 4% of jewelry consumers—a tiny share of buyers—but generates in excess of $1.4 billion in retail sales. Think of the opportunities here.”

Turn and churn, memo or cash. In order to make it in today’s business environment, jewelers need to change their philosophy on how they manage their inventory.

“Retailers need to stop thinking of inventory as an asset and start thinking of it as a liability,” Sherman says. “They need to get into inventory that turns. It’s going to be critical for them to be great inventory managers rather than buyers.

“We have significant success with jewelers who begin to lower their price points, work on establishing a ‘never-out system,’ and build their inventory based on basics first. There are stores that are having 20% to 30% increases while lowering their inventory.”

Gassman agrees, saying that the new breed of retailers has created the model for jewelers to follow.

“Discounters and Internet companies are causing an overhaul in the economic operating model of the jewelry industry,” Gassman says. “Basically they are showing jewelers that you can actually make more profit by selling jewelry at a much lower margin, provided that you have a much higher inventory turn.”

Ronda Daily, owner of Bremer Jewelry, Peoria, Ill., is one jeweler who is focusing more of her inventory on products that sell.

“I’m basically carrying less,” Daily says. “I believe that for a lot of years many of us carried way more merchandise than we needed to carry. You can survive with less inventory, which makes us better able to analyze inventory based on what turns instead of what we like.”

Sherman and Gassman disagree somewhat on using memo. Sherman stresses the importance of buying items with cash in order to lower the cost of purchasing inventory. Gassman, however, maintains that using memo can be a good inventory strategy as long as it is used as a tool to quickly turn over merchandise. But the bottom line is turnover.

“I would rather turn my inventory every 24 hours at a 1% margin than turn my inventory once a year with a 50% margin,” Gassman says. “The economic operating model of the traditional jeweler is going to change, and the change is going to be precipitated by a rapid increase in market share by discounters and the Internet.”

As for jewelers who haven’t automated their inventory, Sherman says, “They’re going to be among the doors that are closing. There’s no way they can keep up.”

Know your customer. Sherman says that one of the most important things a jeweler can do is to have in-depth knowledge of the customer and the community.

“The reality is that most jewelers don’t really understand their customers’ jewelry needs,” Sherman says. “We stand in stores that are ‘high-end’ and then drive through the neighborhood and look at the demographic information—and find that the stores are positioned improperly for their marketplace. … Unless jewelers really understand the makeup of their customers and the bell curve of their life stages, they won’t know how to merchandise their stores.”

Once you have a strong customer base it’s important to provide those customers with an exceptional and personalized shopping experience, Gassman says.

Daily notes that in her business she is using modern marketing strategies to focus on her best customers, or, as she says, “taking care of basics by taking care of the people who put you here.”

Daily says, “Database marketing is everything now. If someone gave me $50,000 I would put it into our top 5,000 clients.”

She also notes that change can be a positive.

“I’ve seen a lot of changes, but I think they’ve all been good ones.”