The jingle of the cash register has quieted, holiday returns and exchanges are mostly completed, and life has returned to a more normal pace, after a frantic holiday selling season in November and December 2006.  

 

It is now time for jewelers to contemplate the lessons learned from the 2006 holiday selling season. There were five lessons that IDEX Online Research has identified from the all-important November-December selling period for U.S. jewelers.

 

1. Shoppers are fickle – Just about the time we think we can predict shopper behavior, we find that shoppers are as unpredictable as ever. In a “normal” year, we expect shoppers to wait until the last minute to complete their shopping. Jewelry shoppers delay more than most, since they are usually men who wait until just days prior to Christmas before rushing to their neighborhood jeweler to pick up a sparkling bauble for their loved-one.
   
   However, in 2006, the holiday selling season started very strongly, with solid sales gains in late November. This led many jewelers to believe that demand would be even stronger in December. After all, that was a reasonable projection, based on historic demand patterns.
   
   After the initial post-Thanksgiving burst of shopping energy, fickle jewelry shoppers held off …and held off …and held off. And they never really came surging back into jewelry stores in the final days prior to Christmas. Tiffany reported that its November sales were stronger than its December sales. Other jewelers, both at the mass market level and among guild merchants, reported a similar trend. Most merchants did report that sales were particularly strong during the week immediately following Christmas, when consumers went shopping for discounts.
   
   What happened? Three factors dampened demand in December:

• The lack of a pre-Christmas surge was due to the timing of Christmas day – From a merchant’s viewpoint, Monday is the worst day of the week for Christmas. Most shoppers in America end their seasonal shopping on Saturday afternoon, December 23; they spend that evening and all day Sunday with their families, rather than sprinting to the mall for last minute purchases.

• Consumer electronics equipment, priced in the same range as jewelry – $300 to $1,000 – took share of wallet from the jewelry industry – The whole family can enjoy a big screen TV or new computer. Jewelry is not a “family gift.”

• Consumers have become conditioned to wait for the inevitable discounts – It is no longer imperative to have a gift under the tree on Christmas Eve. A simple envelope with a note will suffice, telling the recipient that a gift is forthcoming after Christmas, when merchants traditionally offer even better values.

2. High-end demand was strong – Tiffany illuminated this trend when its management announced that sales were strongest for jewelry priced above $50,000 retail. Among the sample of jewelers which IDEX Online Research polled, guild jewelers consistently posted stronger results than mass market or lower-end credit jewelers.
   
   What drove demand at guild jewelers? Respondents to our sample indicated that “bigger was better” during the 2006 holiday selling season. Big diamonds, big colored gemstones, big anything – that’s what sold. Who had the big diamonds? Guild jewelers had the goods. Shoppers wanted nothing to do with the one-half to one and one-half carat diamonds that filled mass market jewelers’ showcases.
   
   The trends among the publicly held jewelers also tend to confirm that upper-end jewelers posted stronger sales gains than most mass market jewelers did, though there was some variation, as the table below illustrates.
   
   

   Source: Company reports

Guild-jeweler Mayor’s posted disappointing numbers in its U.S. division, but the regional economy in Florida, where most of its stores are located, has been a challenge this year.

Among mass market jewelers, only Sterling posted notable gains. In part, this is due to the large number of immature stores which the company has. Typically, it takes about five years for a jewelry store to reach maturity. Roughly 30 percent of Sterling’s stores have yet to reach maturity, by our calculations. In contrast, Zale, which posted disappointing sales results, has opened few new stores in the past five years; thus, most of its stores are mature and unable to make a significant incremental contribution to same-store sales gains.

 

3. Diamonds dominated – It was truly a white Christmas for the lucky people who received jewelry in the 2006 holiday selling season: diamonds dominated. For example, based on strong diamond sales during the holiday season, Sterling indicated that its diamond sales mix for the year would represent about 73 percent of total sales, up from 71 percent in the prior year.
   
   Jewelers reported that diamond circles were strong, along with three-stone jewelry. Big diamonds dominated – white stones, colored stones, expensive stones. Jewelry with multiple diamonds, as well as other gemstones, was also popular with holiday shoppers.
   
   The surprise of the season was the newly introduced Journey diamond concept. Many jewelers hesitated to commit to Journey, which was introduced to the trade around mid-year in the U.S. In part, jewelers’ reticence was based on the early lack of success with three-stone jewelry as well as the problems associated with the initial launch of right-hand rings. Journey appears to have been an instant success, and diamond suppliers reported that reorders poured into their factories in the weeks prior to Christmas.
   
   While some in the industry may criticize De Beers and the DTC, they have put their money where their mouth is. They created the story of diamonds as “forever,” and they have committed – and continue to commit – hundreds of millions of dollars annually to promoting diamond jewelry. Promotional spending by backers of other jewelry categories – platinum, silver, gold, colored gemstones – is a mere pittance when compared to the DTC commitment toward promoting diamonds.

4. Color is back in fashion – Jewelers reported solid gains in colored stone jewelry, often combining colored gemstones with diamonds. While colored stone jewelry is important at popular price points, jewelers reported that they saw demand for colored gemstone jewelry at much higher price points in the 2006 holiday selling season.
   
   In addition to strong demand for colored gemstone jewelry, some jewelers reported that jewelry with mixed metals – for example, stainless steel mixed with metal alloys – sold well. In part, they ascribe this trend to demand for color, since mixed metals produce colorful jewelry.
   
   History suggests that demand for “color” is often a fad. Jewelers who want to be at the forefront of fashion trends need to include colorful jewelry offerings in their product line.

5. Gross margins under pressure – Nearly every jeweler bemoaned declining margins. While this is often a common whine, the numbers suggest that there is very real pressure on retail jewelers’ gross margin.
   
   At least three publicly held jewelers – Tiffany, Sterling, and Zale – mentioned pressure on their margins due to several factors, including the following:

• Higher commodity prices – Sharply higher gold, silver, and platinum prices hurt jewelers’ margins. In addition, much higher costs for better quality, larger diamonds also took their toll on jewelry margins. Jewelers were unable to pass along all of the cost increases associated with higher commodity prices.

• Sales mix – Diamonds have an inherently lower gross margin because they have become commoditized. Because of a larger sales mix of diamonds at retail, merchants’ aggregate gross margins have fallen. The only jewelers who reported stable diamond margins were those who have a well-recognized, exclusive branded diamond line which can be sold without discounting.

• Competitive conditions – Jewelers generally noted that price competition seemed more intense this year. The chain jewelers started beating the “price discount” drum earlier this year and used more mass media such as television to spread their message. Independents were forced to follow the chains, or risk losing market share.

Despite price competition and margin pressures, jewelers were generally enthusiastic about the products which moved out of their showcases. However, some product categories sat ...and sat ... and sat.

 

Unfortunately, most jewelry made from precious metals experienced sales weakness. We attribute this lack of demand to higher retail prices which created the perception that these products were not a value. While most retail jewelers did not fully pass along the huge price increases that affected precious metals in 2006, consumers were reluctant to commit spending on this jewelry category.

 

After posting solid gains all year, jewelers said watch sales were “OK”, but not robust during the holiday season. The current slowdown is likely to be cyclical. Watch prices have not risen appreciably, and there are no other notable factors which appear to be dampening consumer demand for watches.