For the first half of the current decade, U.S. specialty jewelers have generally enjoyed good business conditions. The economy has been strong, gross margins have stabilized, and growth has come relatively easily.

 

As we move into the second half of the decade, the “big picture” fundamentals remain solid for the jewelry industry. Driven primarily by favorable demographics as well as a number of other positive factors, demand for luxury goods should be quite strong.

 

However, there are some challenges facing the jewelry industry – challenges that are likely to be around for the longer term. Jewelers who recognize and acknowledge these challenges will be the survivors at the end of the decade.

 

We have identified five major challenges which are expected to affect the U.S. jewelry industry – particularly independent specialty jewelers – over the next several years and examine them in a series of articles. They are:

 

• Financial Deterioration
• Online Competition
• Lack of Pricing Power
• Loss of Market Share & Share of Wallet
• Industry Consolidation

 

Financial Deterioration

 

Jewelers’ gross margins have been declining for the past twenty years, as the graph below illustrates. While they appear to have stabilized during the first half of the decade, new margin pressures from online commerce, increased competition especially from mass market discounters, and rising commodity costs are poised to put new pressure on margins.

 

 

Source: JA

 

 

In 2005, the gross margin for every major category of jewelry declined, as the graph below shows.

 

 

Source: JA

 

Jewelers’ net margins have been steadily declining, though they appear to have stabilized near 4 percent, as the next graph illustrates. That implies a pretax margin of near 6 percent. Historically, jewelers’ pretax margins were as high as 10 percent. It is difficult to attract equity capital or borrow money when pretax margins fall much below 10 percent.

 

 

Source: JA

 

The jewelry industry credit rating bureau, The Jewelers Board of Trade, has downgraded the credit rating of more jewelers than it has upgraded in six of the past seven years, as the following graph illustrates. 

 

 

Source: JBT

 

 

Independents to Feel Impact of Direct Sourcing

In an effort to boost margins, large chain jewelers have implemented “direct sourcing” programs with overseas producers for both jewelry components and finished jewelry. By eliminating wholesalers, the chains can cut their costs.

 

Unfortunately, small independents cannot easily implement direct sourcing programs. Thus, their sourcing costs will remain relatively high, and their cost disadvantage versus the chains will grow.

 

Next week: online competition.