Valentine’s jewelry sales gains in the U.S. market are expected to be modest – up 2-3 percent over the same period last year, according to projections by IDEX Online Research. This weak performance follows on the heels of soft sales during the 2005 holiday selling season. At this rate, jewelers will continue to lose market share to other retail categories as total U.S. retail sales gains continue to gallop along at a 7-8 percent year-over-year increase. 

The Valentine’s selling period, generally starting around the last week in January and continuing through the first two weeks of February to February 14, is one of the three most important selling periods in the year for jewelers.  This three-week period represents about 8 percent of a typical jeweler’s annual sales. The other two important selling periods are Christmas / Holiday (November-December), which represents about one-third of annual sales and Mother’s Day (May), which represents just under 8 percent of annual sales. 

 

In 2006, IDEX Online Research is forecasting Valentine’s jewelry sales to be in the range of $4.2 billion, up from just under $4.1 billion last year. This represents a sales increase of just over $100 million dollars. On a per-store basis, the typical U.S. jeweler will see a sales increase of about $4,000 over last year’s Valentine’s selling period. This represents the equivalent of selling just under two additional engagement rings at the industry average retail price of $2,500 for Valentine’s. However, with the average Valentine’s jewelry item retailing for about $100, this represents the sale of forty (40) more items this year than last year. Clearly, customer traffic and conversion rates will need to improve, if jewelers are to achieve our projected sales increase. 

 

Averages Are Deceiving

While IDEX Online is projecting a 2-3 percent jewelry sales increase in the Valentine’s selling period, it is important to note that some market niches will significantly out-perform others.  By market niche, IDEX Online is forecasting the following:

 

• High-end jewelers – +5-to-7 percent – Valentine’s sales gains are expected to be in the +5-7 percent range. Sales gains could exceed this level, especially if jewelers are well-stocked with new, innovative, and colorful jewelry.
  
  
• Mass-market jewelers – +1-to-3 percent – Valentine’s sales gains may well be limited to 1-3 percent. Unfortunately for mass-market jewelers, middle-American shoppers have turned their spending toward other categories. For example, during the 2005 holiday selling season, this included consumer electronics and travel. While consumer electronics are typically not a viable Valentine’s gift for most women, a romantic weekend at an exotic location will fulfill many couples’ desires.
  
  
• Credit jewelers – 0-to+2 percent – With high U.S. consumer debt burdens, it may be more difficult than usual to create new and add-on sales for lower-end consumers. Thus, IDEX Online is projecting that sales among popular-priced credit jewelers will be flat-to-up 2 percent. 

Further, those jewelers who outperform the average will be offering consumers the following:

 

• Solid in-stock inventory position – Consumers are looking for “something new.” For several quarters, the jewelry industry has failed to introduce new, innovative merchandise. We are not sure whether no one is willing to take a risk or whether there is a creative vacuum; either way, there is not nearly enough differentiated merchandise in the market. Research shows that luxury goods must be aspirational products; “same-same” merchandise does not qualify as an aspirational product. While the DTC continues to develop new marketing programs, these new promotions are largely based on tugging at the emotional heartstrings rather than introducing new product concepts such as three-stone jewelry. While jewelry distribution pipelines are bulging and diamond industry debt is soaring, the goods being offered do not appear to match consumers’ wants. 
  
  
• Color – Clearly, colored jewelry is hot. Whether it is colored diamonds, colored precious and semi-precious gemstone jewelry, or gold, color is back in demand. Further, collections and designer goods appear to be popular. 

Valentine’s 2006: Stronger than 2005, But Weak Compared to Historical Average

Our jewelry sales forecast for the 2006 Valentine’s selling period of +2-3 percent is stronger than last year’s puny performance of +1.5 percent, but it is below the historic average gain of about +7 percent for this February sales event. The graph below summarizes actual Valentine’s sales gains (and losses) since 1992 as well as this year’s projected sales gain. 

 

Factors Affecting Valentine’s Jewelry Demand in the U.S. Market:

1.                  Jewelry sales trends are weak – While final results have not been tallied for the all-important 2005 holiday selling season, it appears that U.S. jewelry sales were probably up 2-3 percent, year-over-year, somewhat below the IDEX Online Research forecast of +3-4 percent. While luxury jewelers posted solid sales gains – in some cases, they posted spectacular sales increases – the typical mass market jeweler who represents 70-75 percent of the market posted a very modest sales gain. While sales comparisons are relatively easy against last year’s +1.5 percent sales gain, we have seen no signs of strengthening demand momentum for jewelry. 

 

2.                  Consumers’ financial health is mixed – Financial doctors who examine the fiscal health of U.S. consumers report a mixed bag.  On one hand, household wealth is at record high levels, driven by large home price gains and a rising stock market. Further, personal income levels continue to rise moderately. On the other hand, consumer debt burdens are at record high levels, and the consumer savings rate has been negative for the past several months. These latter trends will have a significant impact on credit jewelers. In the U.S., just under one-half of all jewelry sales are made on some type of credit program – monthly-pay or periodic easy-pay. Thus, credit availability is very important for jewelers.

 

3.                  Employment gains are strong – The U.S. labor market is beginning to tighten, and wages are being bid up. This is positive for the consumer sector. As more money flows into consumers’ pockets, they will spend most of it.

 

4.                  Energy prices are high – During the 2005 Valentine’s selling period, a gallon of gas sold for $1.87 in the U.S. This year, most consumers are paying about $2.33, an increase of 25 percent.  Thus, the typical U.S. consumer is spending more than 6 percent of total expenditures on oil and gasoline, up from under 5 percent last year. While this year’s winter heating season has been mild, oil prices remain stubbornly high, a trend that is unlikely to reverse itself near term. 

 

5.                  Competition for consumers’ spending will be intense – While we don’t look for the hotly competitive conditions we saw during the 2005 holiday selling season, jewelers will feel competition from other retail categories. For example, many consumers have stepped up their travel, after reducing it substantially post-September 11, 2001. De Beers has claimed that travel spending is one of the major competitors for consumer spending versus jewelry.  Consumer spending on consumer electronics in the 2005 holiday period was well above expectations (both Circuit City and Best Buy reported strong sales); however, ipods and other personal consumer electronics gadgets selling in the $100-300 range are typically not considered to be appropriate Valentine’s day gifts.

 

6.                  DTC promotions should help – For the first time in five years, the DTC has developed a promotional program for diamond sales during the Valentine’s selling period. This should provide a boost to demand. Rather than pushing the diamond right hand ring as a sign of a woman's independence, the DTC is moving in a new direction with the launch of a national Valentine's Day campaign positioning the ring as a "gift of love".

 

The Valentine's campaign is designed to encourage men aged 25-54 to give a right hand ring as a gift. The DTC changed its advertising tactics after learning that 70 percent of right hand rings are given as presents rather than bought by women for themselves.

 

This campaign, called "Romantic Heroes", was launched on February 1 and will run nationally during the two weeks leading up to Valentine's Day. This campaign is so important that the DTC has allocated it 5 percent of its 2006 marketing budget. The campaign will run in national newspapers, magazines, radio and online media in the U.S.

 

7.                  $99 is the hot retail price point for Valentine’s jewelry – Research by the National Retail Federation (NRF) suggests that the typical U.S. male will spend between $90 and $100 for a Valentine’s gift versus the $34 that the typical U.S. female will spend on her spouse / boyfriend / special person. Jewelers who have a significant level of $99 merchandise to entice male mass-market shoppers will likely post stronger sales. 

 

In an effort to determine how important the $99 retail price point is with jewelers, IDEX Online Research conducted an exclusive study of key mass-market jewelers’ 2006 Valentine’s advertising flyers. 

 

IDEX Online Research studied the pricing for Valentine’s merchandise in advertising flyers published by Kay Jewelers, Zales, Fred Meyer, Helzberg Diamonds, and Whitehall Jewellers. While most of these flyers were 12-16 pages long, virtually all of the Valentine’s merchandise was featured on the first three pages (including the cover). Most of the other pages were devoted to jewelry that was not specific to the Valentine’s selling period (though it could be argued that the multi-page layouts of engagement rings might be inspired by Valentine’s). In terms of retail pricing, IDEX Online Research assumed that merchandise selling in a range of $50 to $149 was close enough to the “magic” $99 price point to be counted as $99 merchandise. In fact, most of the merchandise we surveyed was priced at exactly $99, though we found some priced at $59, $79, $129 and $149. 

 

Clearly, some of the key mass-market jewelers believe in the $99 price point more than others. As the graph below illustrates, 52 percent of Kay Jewelers’ Valentine’s merchandise (goods on the cover, page 2, and page 3 of its Valentine’s flyer) is priced in the range of $50 to $149. Zales was close to Kay, with 46 percent of its Valentine’s jewelry priced near $99. Fred Meyer and Helzberg Diamonds priced about 1/3 of their Valentine’s goods near $99. 

 

At the other end of the spectrum, mass-market jeweler Whitehall has completely abandoned the $99 price point in its Valentine’s flyer. Whitehall implemented a strategy to upgrade its product line a couple of years ago. Despite stores that are located in mass-market malls where middle-America congregates, Whitehall continues to push its upgrading strategy (somewhat unsuccessfully, based on recent sales results). None-the-less, Whitehall’s least expensive Valentine’s jewelry is priced at $199 (one item only); most (63 percent) of its Valentine’s jewelry is priced above $1,000 retail in its advertising flyer. This price level is clearly well above the price that NRF research says is popular among mass-market consumers. 

 

$99 Valentine's Merchandise - 2006 Percent of Valentine's Product Priced $50 - 149 In Valentine's Advertising Flyer Source: Company Flyers

 

Jewelers’ Profits Will Remain Under Pressure

U.S. jewelry industry profits remain under pressure, though the decline in retailers’ gross margins appears to have moderated in recent quarters.  Several factors will keep pressures on margins, including the following:

 

• Gold prices continue to rise – Gold jewelry represents up to one-third of a typical jeweler’s sales. With gold prices spiking, jewelers will need to re-price goods to maintain margins. However, competitive pressures may discourage re-pricing jewelry prior to the Valentine’s selling period.
  
  
• Other precious metals prices are up – Platinum and silver prices are also up. The only good news is that neither of these precious metals represents a major portion of jewelers’ sales. 
  
  
• Online competition is intense – Online retailers such as Blue Nile utilize an entirely different economic operating model than store-based jewelers. This economic model allows them to sell the same goods much less expensively to consumers. Until store-based jewelers can create a new economic operating model, online jewelers will continue to take market share and push retail prices lower. 
  
  
• Modest sales gains will cap profits – With operating expenses rising, weak same-store sales will fail to efficiently absorb relatively fixed operating costs. Thus, jewelers who post weak sales will experience poor profits. 

Longer Term Outlook – Cloudy

The U.S.-based NRF predicts that fashion accessories such as shoes and jewelry will post solid gains in 2006. IDEX Online Research respectfully disagrees with the NRF. The only single factor in favor of the NRF prediction is that sales comparisons are particularly easy against 2005’s dismal performance. Otherwise, the factors we have listed above are likely to remain in place for the balance of the year and will likely restrain industry growth.

 

We also note that the DTC suggests that diamond demand will be moderate in the first half of the year, followed by more robust demand in the second half of 2006. Our sense is that this statement may be more of a balm for over-inventoried diamond pipeline suppliers rather than a reflection of reality. 

 

IDEX Online Research will publish its 2006 jewelry industry sales forecast in mid-February.