IDEX Online Special: Don’t Panic, It’s Not The End of the WorldOctober 15, 08
There’s an old adage among jewelers that says the industry is one of the first sectors to slow when the economy softens, and it is one of the last sectors to recover when the economy perks up.
In truth, it’s not that bad. Simplistically, when the economy slows, jewelry demand typically weakens; when the economy rebounds, jewelry demand typically soars. Jewelry sales have higher peaks and lower valleys than economic cycles, but jewelry demand doesn’t necessarily soften early – it has remained relatively strong in the current cycle – and it will come back along with the economy.
Jewelry: A Product for the Ages
Jewelry is not a fad product; it has been around for at least 50,000 years – and some new archaeological evidence suggests that jewelry has been around for perhaps 100,000 years. Throughout history, it has been an aspirational product, worn to denote wealth, power, and privilege. Kings and queens routinely wore jewelry; the common person could view jewels only from afar.
In today’s market, jewelry is a discretionary purchase for consumers. When consumers begin to trim their spending budgets, jewelry is one of the first sectors to feel the softness. However, despite some weakness in demand in today’s environment, the cycle will eventually reverse itself, as it has always done.
The Consumer: In A Mental Recession
The media and the politicians are tossing around phrases like “a depressed economy” or “on the verge of the Great Depression.” This makes great political fodder, and the media knows “fear” sells. But this does not make those phrases true, just because they appear in print. In recent weeks, some economic indicators have softened, but they are no where near “desperate”, and the U.S. economy is not about to plunge into a financial abyss of bankruptcy.
However, all this talk of recession, depression, and worse appears to have plunged the typical American consumer in a mental recession. Consumers are worried about their job prospects. They’ve taken on a wagon-load of debt, and if their paycheck stops, they could be headed for trouble.
Consumer confidence has never been an accurate predictor of retail sales, despite the media trying to tie the two together. If anything, the old adage about American consumers may apply here: “When the going gets tough, the tough go shopping.”
Jewelry Is Still Selling
Jewelry sales do not dry up when the economy slows; demand merely softens. Twice over the past two decades – when the economy slowed – jewelry sales growth year-over-year was negative. But jewelers continued to sell jewelry – just not as much as in “good” years. Jewelry sales growth may have slowed – or even declined – but an incredible amount of jewelry was sold, even when the economy weakened. In 1984, U.S. jewelers sold just under $20 billion of jewelry; last year, they sold nearly $65 billion of jewelry. Jewelry sales declined in only two years during the past two-and-a-half decades; the declines were very modest – in the range of about $1 billion – at most, just under 3 percent of sales.
When the numbers are examined on a jewelry-by-jeweler basis, the result is the same: sales swings really aren’t nearly as bad as some jewelers lament. In 1987, the typical jeweler in the U.S. sold just over $400,000 from their store. By 2007, sales had risen to just over $1.3 million per unit. While sales per store in a couple of years showed a modest decline, sales per jeweler have shown solid long term growth.
Jewelers: A Plan for Action
Jewelers should hit this period of softness head-on with a strategy and tactics that will help weather the storm. While the following list is by no means exhaustive, here are some suggestions:
- Minimize media impact – Keep the newspapers in the back room (or ban them altogether) in your store; the headlines are depressing and often incorrect. Turn off the television in your break room.
- Ignore the research – Research surveys are being published that indicate consumers are planning to cut back on holiday spending. The headlines blare: “Consumers say they plan to spend much less this year than they spent last year.” Don’t believe it. Consumers are giving the politically correct answers. And, they may even have some intention to cut back on their holiday spending. But it virtually never happens. It is ingrained in the American culture to shop, shop, shop.
- Increase customer contacts – Set up a “clientelling” program to contact your best customers. Just over 25 percent of a jeweler’s business comes from Valentine’s, Mother’s Day, and Christmas/holiday sales; these are annual calendar events. The other 75 percent comes from life cycle milestone events such as anniversaries, birthdays, graduations, and other events. If a jeweler has kept good customer records, they can call their customers – especially their best clients – to remind them that they have “just the thing” for the upcoming life cycle event.
- Target advertising – Mass market advertising may work when the economy is awash in cash, but when the economy softens, highly targeted advertising is usually more efficient. Direct mail and phone calls are the most targeted advertising tactics: jewelers can use them to reach their best customers.
- Target new customers – When the economy slows, some marketers suggest that it is difficult to develop new customers. However, this may be the perfect time: a jeweler’s competition probably is not spending enough time trying to cultivate its “heavy spenders”, so the opportunity for a jeweler to snag new customers increases. Who are those customers that are heavy spenders? The probably look like a jeweler’s current heavy spenders in terms of income, occupation, etc. They probably live in the same section of town; wealth tends to concentrate in small geographic pockets. Those new customers will likely remain loyal to a jeweler when the economy recovers, if for no other reason than the jeweler contacted them frequently.
- Properly incentivize sales associates – Jewelers should make sure that their compensation system for sales associates rewards them primarily for selling. Is it time to make adjustments in sales compensation? Perhaps obtaining new clients by telephone allows sales people to get a special “spiff” or one-time commission. Make sure sales people are not burdened by paperwork: their primary job is selling.
- Focus on the real competition – Far too many jewelers really don’t understand who their competition is. They lie awake worrying about Wal-Mart or the jeweler down the street. They fret over online jewelers. The real competition comes from merchants selling handbags, scarves, sunglasses, cosmetics, shoes, and other accessories.
- Shop the competition – Learn more about your competition – their products, their prices, their store. Go beyond the typical specialty jeweler: about half of all jewelry is sold by merchants who are not specialty jewelers. Spend a little time in the country’s largest jeweler: Wal-Mart.
- Network with other merchants – Jewelers should participate in both local and national networking opportunities. Join the local retail merchants association. Join a jewelry share group. Participate in activities such as the AGS Conclave and other educational opportunities. Take a class on selling.
- Go online for help – Search online for ideas to help boost sales. We typed in “retail sales tactics” and found enough information for a month of reading.
- Keep the store fresh – Give customers a reason to come into the store. Have fresh merchandise – trade goods with other jewelers, trade it in with the vendor. Make sure displays are fresh.
- Have the “right” goods – Many jewelers are reporting that their customers are “shopping down” – that is, they are seeking goods at lower price points than in the past. Blue Nile recently reported that some of its customers are moving away from diamond solitaire rings for engagements (average ticket just over $6,000) in favor of diamond bands (average ticket $3,000). As a result, Blue Nile is beefing up its assortment of lower-priced goods. The lesson here is simple: stock what your customer wants. If customers are shopping down, and jewelers don’t have the goods, the risk is that they will lose the sale. So, the choice is simple: will a jeweler take half the normal revenue, or run the risk of no revenue at all?
- What’s selling? Anything that says “fashion” – Jewelers have complained that their bread-and-butter goods aren’t selling. That’s because those goods aren’t exciting; they don’t make a statement. Take a look at what’s selling, according to a large number of jewelers in our sample. These goods make a fashion statement.
- Branded jewelry
- Fashion jewelry
- Designer jewelry
- Custom jewelry
- Estate jewelry
- Colored gemstone jewelry
- Bridal jewelry is a huge market – Bridal revenues represent up to 40 percent of some mass market jewelers’ revenues, so this is an important category. The best news for jewelers is this: there is absolutely no correlation between the number of weddings and economic cycles. The number of weddings this year was determined by the number of births about a quarter of a century ago.
- Sales aren’t the only measure of success – As this year’s Jewelers of America study showed, America’s high profit jewelers didn’t necessarily have the highest sales numbers. Those highly successful jewelers focused on profits; that’s what made them so successful.
- Take time to tend to your physical and mental health – A jeweler can control his or her business. A jeweler cannot control the economy, the stock market, or any of those other demons that have helped put consumers into a mental recession. So, don’t try to control them! Take time off – to contemplate, to enjoy, to relax. Depending on your faith, you get only one trip through life: make the most of it.
Long Term Opportunities Remain Bright for Jewelers
The long term prospects are bright for both the American jewelry industry as well as global jewelry markets. Several factors are expected to fuel demand for jewelry over the longer term, including the following:
- Favorable consumer demographics – Consumer demographics relating to income, household growth, and shifts in spending by age are favorable for the jewelry industry.
- Younger consumers are spending disproportionately more on jewelry than their predecessors.
- Consumers’ incomes are rising rapidly. In the American market, about 19 percent of all households (roughly one in five) will earn $100,000 or more annually. In other countries, the rapidly growing middle classes have discretionary spending budgets. Higher income consumers spend disproportionately more on jewelry than lower income consumers.
- The number of households is growing. As the global population grows, the number of households – potential jewelry consumers – continues to grow. While household formation in Europe is waning, it is still on the upswing in the U.S., and is growing rapidly in other developing markets such as China and India.
- The number of weddings continues to increase – In the American market, the annual number of weddings could reach three million by 2016. In the decade of the 1990s, there were only about 2.3 million weddings annually.
- Consumers continue to desire unique luxury products such as jewelry – What makes jewelry unique? There are several factors including brands, custom, estate, designer, and other unique goods.
The Rewards of Success
What will be the reward of this successful rite of passage? With fewer competitors, the remaining jewelers will automatically get a larger market share, as they pick up business from those who have failed. Further, as the market grows, this market share will also increase in total dollar size.
In short, those jewelers who are doing business when the economy recovers will be well-rewarded with higher sales per store, higher sales per associate, and other efficiencies of scale, including potentially significantly higher profits.
A Word of Caution . . .
Some jewelers have begun promoting diamonds as an investment. This could be very dangerous. The U.S. Securities & Exchange Commission has always taken a dim view of using the word “investment” loosely. Those who sell “investments” must be properly trained and licensed. In the new world of increased regulation, it will be increasingly difficult to use the term “investment” legally. Further, diamonds are not traded on a public exchange, and they are not liquid. In the past, only “accredited investors” – not customers walking in off the street – could participate in those types of investments (often long term real estate deals and other complex financial schemes). We recommend that jewelers not attempt to sell diamonds as a financial investment, and we recommend that they avoid using this term, even when talking about diamonds as “an investment of love.”
Each Morning . . .
When jewelers get up in the morning, they should decide how they are going to greet the day and ask themselves: “Am I part of the problem, or am I part of the solution?” Act accordingly.