Still many jewelers did better than last year when 80% said sales were either flat or down, while 65% reported sales down 10% or more in the November-December selling season. This year, a survey by the National Jeweler, about 56% of single store jewelers and small chains responding said sales were good to very good over the last weekend before Christmas. Whether that survey is representative of the whole industry is problematic, but it does suggest that buying behavior had become more normalized this year, only at a much lower sales base.
There are other differences between this years sales performance and last. For instance, small jewelers and local chains appear to have, at best, out performed large chains, at worst, held their own. That’s an arguable point for some analysts that believe the industry will ultimately consolidate the same way the department industry did in the latter half of the 20th century. Their point of view is partly supported by store closing estimates through October 2009 suggesting more than 800 doors had closed during the previous 10 months.
However, Zale announced sales declined 18.6% in November 2009. That was followed by order cancelations and increased discounting in December as the company’s sales continued to plummet. Now, Citi Bank has given notice that it won’t renew Zale’s private label credit card agreement. Lastly, it’s reported the company is looking to restructure its nearly $500 million debt on its balance sheet. If creditors decide to liquidate Zale, which is a distinct possibility, that would eliminate about 1,931 jewelry doors, including kiosks, from the market. More importantly, it would mark the third liquidation of what was the top five large jewelry chains as of 2007, including Friedman and Whitehall Jewelers…fourth, if you add Finlay to the mix.
With about 29,000 specialty jewelry doors in the market, the trend seems to be pointing toward an industry structure that will remain fragmented, with both fewer large and small jewelers. In fact, if Zale closes, the Kay Jewelry brand will be the only national jeweler in the US, with little likelihood, Fred Meyer (owned by Kroger) or Helzberg Jewelers (owned by Berkshire Hathaway) will be positioned to take them on coast to coast. That would put a lot of market share up for grabs for independents and chains alike. Certainly, some of that business would accrue to the market leader, Kay. However, a disproportionate amount could be acquired by single store jewelers and small local chains if they aggressively implemented market share management techniques in their businesses.
In contrast, one thing that hasn’t changed this year is sales. Despite the fact that 2008 was such a bad year for jewelers, this year’s sales remain generally unchanged based on comparable figures. That means several things for jewelers. First, the changes owners and decision-makers made to reduce costs last year are permanent, not temporary. Second, more cost cutting will probably be necessary in 2010, and third, sales growth for most of the upcoming decade will be anemic compared to historical norms unless jewelers substantially change their cost structure.
Those too are arguable points for some analysts, some of which have already predicted a return to rapidly escalating sales growth early in the decade. Nevertheless, who’s right and who’s wrong remains to be seen. However, it’s important to point to the fact that economists, both partisan and nonpartisan, say high unemployment, depressed housing prices, and tight credit will likely continue well into the middle of the next decade. That’s a strangle hold on consumer liquidity, which can only translate into meager sales growth for luxury items, including jewelry.
Another factor depressing store sales could be the liquidation of significant inventory by jewelers closing down in 2010. Many analysts thought 2009 would be the decisive year for store closures, but that proved to be wrong. By some accounts, closures were up about 15% through October 2009, which was significant, but much less than anticipated. The fact was many jewelers managed to survive the 2008 sales decline by reducing staff, selling off toxic inventory, and closing redundant stores. Now, about half the jewelry companies are faced with mediocre profitability, while the other half may have another year of losses to fund. That means more cost cutting and inventory sell offs, whether they stay open or close down. Add, Zale liquidating $2.0 billion in retail inventory if it goes Chapter 7 and this could be a great year for jewelry buyers, but a terrible year for jewelry stores. Even if Zale doesn’t liquidate, any restructuring will certainly mean more store closures and a significant inventory sell offs.
Then, there’s the gold factor. Simply put, gold is likely to continue to remain high, if not materially increase, well into the next decade. Again, this is an arguable point. However, as of December 28,2009 the average gold price is up 11.4% over last year and reached a whopping $1,212 or a 39% over last year average price on December 2, 2009. Since then it has declined to about $1,085. Whether driven by fears of inflation, a weaker dollar, stronger demand from overseas, or central banks buying gold for reserves, it appears clear there are strong macroeconomic forces acting on the price of gold now that will continue well into the next decade.
According to the BLS, jewelry store prices have already begun to increase. According to their numbers, retail jewelry prices increased about 2.9% in November, while manufacturer prices increased about 9.7%. Clearly, neither manufacturers nor retailers can absorb these higher costs and weak consumer demand preclude their being passed on to consumers.
Besides sales, working capital will also be a bigger problem for all jewelers. Asset based lenders became more restrictive in 2009 and will become even more so in 2010. In addition, higher gold prices make financing more difficult since manufacturers have to finance higher amounts to make the same goods as the previous year and retailers need more working capital to support the same breadth and depth of inventory. Moreover, trade financing, especially for diamonds, will continue to shrink as downstream supplier financing for polished diamonds becomes even more scarce.
These are some of the big challenges facing specialty jewelers in 2010 and probably for much of the next decade. They are also constitute the big opportunities. The question is, “Are these the shadows of the things that Will be, or are they shadows of things that May be, only? That was what Scrooge asked the ghost of Christmas Future in the fabled tale A Christmas Carol.
Scrooge answered his own question saying, “Men's courses will foreshadow certain ends, to which, if persevered in, they must lead. But if the courses be departed from, the ends will change.”
So it must be with the jewelry industry unless current “courses be departed from”.
