The Fat’s in the Fire

That’s the only way to put it. In the last few weeks I heard the same expression voiced in the auto industry and ours: “Down 20 percent is the new good.” The industry has emerged from a disastrous season, though figures for 2008 are bearable because business didn’t hit a wall until the last two months. But 2009 won’t have that advantage. The recession is over a year old, and despite some claims that we’ll emerge from the downturn after mid-year—a sort of pro forma recovery based on a belief in historical perspective—we are in highly precarious times.

Some feel this is only a matter of confidence, which we’ll eventually recover. True, but far too simplistic. Years of bingeing on cheap money and abusive credit policies have nearly flattened our financial system. As a result, we’re probably in for a protracted and painful recovery.

Suppliers and retailers are cutting every cost possible, living on inventory in preference to restocking, closing unprofitable divisions or stores, and reducing staff. This has little to do with planning for the year or devising new lines. It’s survival mode, a term I’ve heard several times, and at best a preamble to forward-looking actions.

One excellent retailer told me he’s restructuring to break even, with business volume 50 percent lower. If business picks up later this year, that will be gravy. He sees no reason to believe recovery will come that soon but will restock quickly if business improves. Another said he’d already made every cut possible, even reducing the number of telephone lines.

Suppliers have reduced work days, frozen pay, broken out old stock, and otherwise reduced inventories.

People are suddenly getting serious about money, including the public, which has begun to save for a rainy day. We’ve been getting a lot of rainy days lately.

But we should not be paralyzed. In fact, these are the times when the most serious planning and forceful actions are required. Retailers who spoke of survival mode also continue to plan special promotions and events. And they want to see suppliers that will help coordinate new and innovative programs. Suppliers are devising new lines—carefully—and planning visits to retailers. Customer service, always important, will be paramount.

Business this year will be fraught with unknowns. The biggest issue is the availability of credit. Some banks are backing out of our industry. Others are revising lending requirements. Good retailers and suppliers may be pushed out of business for lack of credit. Some of that has already begun. Gold prices have become more volatile in a market now dominated not by jewelry manufacturing but by investors buying gold as an inflation hedge and worldwide scrapping by people in need of cash. Diamond pricing, especially in larger and better stones, has dramatically weakened in spite of sharp cutbacks in production by the leading producers. De Beers is reducing staff in London by 25 percent and curtailing mining operations. Retailer and manufacturer bankruptcies could dump merchandise onto the retail market at distress prices that will present serious competition to continuing operations. Caution will prevail everywhere so long as we don’t know who can meet their obligations. This complicates planning and will unsettle seasonal promotions.

As the number of brick-and-mortar retailers continues to decline, online competition will grow. Certain categories of jewelry, in particular high-fashion designer merchandise, will increasingly shift to the Web. High-fashion sales in localized markets are thin, as some retailers report, making broad access via the Internet an attractive option. It’s far more efficient and reaches customers wherever they are. A few designers report that online sales built over the last few years have been their salvation.

We are bound to see some suppliers become retailers, in some cases out of concern they will run into collection problems, in other cases because sales to retailers have ground to a near halt. But mostly it will be recognition that business will forever be changed by this recession and by the restructuring of the financial marketplace. I know I have said this before, but tomorrow will belong to the financially sound, the innovative, and the quick.