The Bloom Is Off the Boom

The soaring economy has finally landed, and jewelry stores were among the first to touch down. Holiday sales were down when compared with the record sales growth of the past couple of years. And economic indicators show that consumers will remain cautious in the new year. While economists disagree on how rough the coming year will be, they’re nearly unanimous in their view that discretionary spending will be down.

The indicators provoking this cautionary outlook include:

  • The stock market. In 2000, the NASDAQ turned in its worst performance ever and showed the worst drop of any index since 1931, as the tech-heavy stock exchange fell 39%. The Standard & Poor’s 500 had its worst performance since 1977, dropping 10%, and the Dow Jones Industrial Average suffered its worst year since 1981. The downward trend appears to be continuing into 2001.

  • Confidence in the economy. The Consumer Confidence Index dropped to 128.3 in December, its third consecutive monthly drop and a new low for the year 2000.

  • Higher taxes. Since people are earning more, they’re paying more in taxes.

  • More debt. The household debt burden has hit 13.7%, the highest it’s been since the late 1980s.

  • More conservative spending. Holiday spending was up slightly, but shoppers weren’t buying much jewelry, according to the International Council of Shopping Centers. In fact, jewelry sales in malls were down more than 3% between Nov. 24 and Dec. 24, 2000, finishing ahead of only music and videos in the eight categories the organization tracks. By contrast, in 1999, jewelry stores were among the biggest gainers, with an increase of 11%.

  • Smaller transactions. Overall, this year’s jewelry purchases cost far less than last year’s, based on a sampling of jewelry retailers contacted by JCK.

The usual suspects. Some retailers and economists are blaming poor weather, the uncertainty of the presidential election, and millennium-related buying in 1999 for the less-than-stellar holiday season. But Celia Chen, an analyst with West Chester, Pa., firm that provides economic, financial, and industry research-is having none of it.

“Typically, retailers are hesitant to attribute their poor fortunes to a fundamental weakening in consumer spending growth,” Chen says. “Instead, they trot out the usual excuses that suggest a temporary slowing in consumer demand. This time, in addition to the perennial ‘poor weather,’ retailers laid the blame on the political turmoil, last year’s millennium fever, and high winter fuel prices. These explanations are offered to quell fears among investors that the retail industry is falling upon a prolonged period of hard times. However, only the most naive investor would buy this story, as most economic data suggest otherwise.”

Chen also says job prospects and income growth have declined slightly and will remain lower than they’ve been for the past two years. However, “Job growth and income growth will remain fairly strong,” she adds.

Cashing the reality check. Although many people have been earning dramatically more money over the past few years and will at least be able to hold onto their jobs, their spending has outpaced their earnings.

“Borrowing has really soared over the past few years. [Consumer] debt levels are very high right now, making lenders very nervous,” Chen says. “We’ve already seen a slight increase in the number of bankruptcies. It lowers the amount of credit people get.”

And she noted that the consumer buying frenzy of the past two years has led to “spent-up-demand” in the marketplace.

It’s the new rich who will pull back the most, predicts one Chicago-based analyst-particularly those who made their money in the high-tech sector. “It’s been kind of scary how NASDAQ has mirrored discretionary spending,” he says. “As NASDAQ declined, discretionary spending declined as well.”

Jeff Pfeffer, senior vice president, Bank Leumi, is one of several analysts who insisted in late December and early January that it was too soon to determine long-term economic trends.

“We have concerns about 2001,” Pfeffer says. “Less economic wealth is more of a perception than a certainty. Because of the market instability, we do not feel wealthy.”

He does believe that the stock market losses will motivate people to reduce spending on large-scale purchases this year. (Retailers experienced this during the Christmas season.) But he also believes people will still buy, because the mood of the country is generally positive. Retailers will be forced to sell goods at lower prices, he says, which will affect margins. “Thousand-dollar earrings may sell for much less.”

David Rocha, senior vice president, Jewelers of America, says that although jewelers will continue to do well, the record-setting pace of the past few years will be a distant memory: “While the current climate can be disheartening, it’s not dismal.”

The holiday blues. Sara Moreno, an analyst with who specializes in the retail industry, says jewelry retailers-more so than those in other industries-will feel the impact of Christmas for the entire year.

“The effects are already [being] experienced,” she says. “Comparable store sales dropped 3.1% last year from a rise of 11% the previous year. The difference of 12 months is pretty significant. Durable goods (such as jewelry) are more expensive and require greater financial commitments. This Christmas, I don’t think people were walking into jewelry stores. Consumers were more pragmatic, and the sales were so great people took advantage of them.”

JCK‘s recent sampling of jewelers seems to support that analysis. While there were exceptions, almost all jewelers interviewed said that year-2000 holiday sales were both very late and lower-ticket than in 1999. Michael Jurado, owner of Hoover’s Jewelry in North Pratt, Neb., said, “The traffic is there, but people are spending less per item than [in] the previous two years. Of course, the last two Decembers were record Decembers for us. It is noticeably down now, but not significantly down.” Deb McShane of Wimmer’s Diamonds in Fargo, N.D., said, “Sales were off about 15% from last year, and what we were missing were the big-ticket items.” Most of her sales ranged from $400 to $1,000, and like many other stores, those sales came late-the store’s busiest day was the Friday before Christmas.

The importance of the holiday season can’t be overlooked, Moreno says. She tracked holiday sales as a share of annual sales for 10 segments of the retail sector (see chart below). The results are dramatic. For example, in 1991, when the country was feeling the effect of a recession, jewelry accounted for just below 30% of annual sales. That figure gradually rose to the 1999 level of 34.6%. In contrast, for all 10 retail sectors (including jewelry), holiday sales accounted for just 19% of total sales in 1999.

What to do? Moreno and other analysts say the extent of the drop in consumer spending was sudden and unexpected. Jewelers had already stocked up for what they thought would be a busier holiday season. This has left them with more inventory than expected, affecting others in the industry.

“What happens now is that jewelers have inventory backlogs,” Moreno says. “Expect huge sales, because first they need to move merchandise over. This will probably start a ripple effect-ordering less, so manufacturers will be affected. They’ll probably carry a more varied mix of merchandise. They started to do it last year because consumers wanted variety at different price points.”

JA’s Rocha says many jewelers will focus on target marketing campaigns. “They’ll be paying a little bit more attention to pulling in customers through mailings and e-mail,” he says.

Having a large workbench operation is one way to offset sales decreases, says George Fritz, owner of Mills Jewelers, Lockport, N.Y.

“We have a very strong repair business. We do a lot of custom-made pieces, remounting, and repair work,” Fritz says. “Our repair business seems to go up whenever there’s a slowdown. So we do fine either way.”

Fritz also notes that the Buffalo, N.Y., area, where his store is located, wasn’t part of the recent economic boom. He says his business increases about 10% every year. This holiday season was slower than previous years, but he’s not complaining.

“We did 2.5% over last year’s figures,” he says. “Last year was our all-time high, so we’re pretty pleased with our business.” Fritz says that during times when he expects slower sales, he and his staff are more selective about the merchandise he stocks.

But no matter how jewelers adjust during the next few years, economists agree that the country isn’t headed for a recession. The drop in sales is more a reality check than the beginning of hard times.

“There is no recession, and no recession will be happening,” Chen says. “The past few years, spending has been very, very strong and just could not be sustained. The party can’t last forever.”

JCK staff members contributed to this story.

Log Out

Are you sure you want to log out?

CancelLog out