Friday, December 16, 2011

Seven billion, and counting - part 2

We left off, on the last post, posing a question.  Just what will retailers need to consider in the coming decade, especially when it comes to the diamond business?

We can make some reasonably good assumptions, and speculate from there.  (I am thinking mostly of the US market, but most of these points apply in many established markets).

  • The number of brick and mortar retailers will slowly decline.  Persistently high costs of materials (metal and stones) will cause local markets to consolidate further, spurred by low unit sales.  That will mean that efficient, well-capitalized and marketing-oriented operations will accrete volume, become dominant and drive even more operations out of business.  We already see that effect now, with some retailers having very good business in these economically difficult times, while others are doing poorly.
  • Diamonds will remain the bedrock of the business (even though specialized retailers dealing in fashion goods made with alternative materials, inexpensive colored stones, etc., will flourish as well).  The bridal business, in all its manifestations, will remain the key strength of brick and mortar stores.  
  • Internet jewelry retailers will continue to grow as the millennial generation becomes the dominant buying power.  It is the most efficient business model, especially for niche marketing, and the sophistication of that model will eventually make it the largest jewelry retailing channel.  Traditional retailers will have to learn to fully use the Internet's retailing and distribution power.
  • We reviewed in a recent post the sale by the Oppenheimer's of their share in De Beers.  Part of the issue there is the acceptance that diamond production will decline in the coming years.  De Beers market share and market leverage will also decline. The future for diamond mining is not bright, a fact supported by the subsequent announcement by BHP that it may seek to sell its diamond operations - too small for them, and little prospect for it to become any larger.  This will change the diamond landscape rather quickly, as markets will begin to compete aggressively for existing supplies.  Immature markets such as China and India will be the toughest competitors, even if their overall economic boom cools off substantially.  An indicator of buying power was mentioned in a recent report.  Twenty years ago, average per capita US income was 50 times that of average Chinese per capita income.  Today it is 10 times.  The sheer number of middle and upper income Chinese and Indian consumers with unsatisfied ownership of diamonds will become larger than the entire US population.
  • These facts suggest that my now old contention that "the next diamond mine will be the US public" will become ever more important.  As it is, many retailers have aggressively been buying off the street, especially since 2008.  What more dramatic evidence do we need than the just completed auction of Elizabeth Taylor's jewelry collection? Of course, this was an over-the-top auction, producing astounding prices for special pieces (and many not so special) that even shocked the auctioneer, Christie's.  The provenance was clearly special, but it seems that the prices were pushed by foreign bidders.  It is unlikely we will see any comparable auctions (nor will we see so outstanding a Hollywood celebrity).  But this is not to say that the US market is dead or dying.  Hardly so.  The US will still be a dominant market for many years.  But retailers are going to find that overseas competition for diamonds, especially 2-carat plus, will make stones scarcer and more expensive.  Diamonds being recycled here will more often be sold overseas.  US retailers will need to get entrenched in that cycle, plan inventory needs, and buy to meet those needs.  I can see where guaranteed recycled gold and diamonds will be a salient selling point; no conflict diamonds or gold.
  • And finally, the tougher aspects of business in the future.  A booming world population facing depleted world resources is going to make life in general tougher.  This is not a new story - pressure on food and water supplies, never mind employment, has been on the table for decades.  The census bureau just released an analysis showing that nearly 50% of US population, some 146 million people, are living at or near poverty levels, or at very low income levels.  Sure, the wealthy will march onward - and so will retailers that serve them.  But this is not a condition favorable to sustaining a consumer economy.  As Henry Ford pointed out, his preference is to "sell to the masses and eat with the classes." Who better to exemplify American capitalism.  Well, we have to have a reasonably well employed and paid population to feed the spending.  Contrary to a commonly heard opinion, wealth trickles up, not down.  Manufacturing is now about 12% of GDP, and declining.  And we have done a good job of applying ever-better technologies to get rid of employees.  We are even getting rid of parking meters.  This suggests, as I have heard it described, that our economy looks like an hour glass - fat on the bottom and on the top, but with a large, skinny middle.  Most gold, platinum and diamond jewelry may be relegated to the elites, the middle largely will get sucked out, and the bottom will deal with fine jewelry alternates and costume.  
All of this leads me to believe that jewelry retail will have to become far more specialized and targeted.  Whether it is attracting the elites or those in search of low-priced but satisfying alternates, it will take careful merchandising, and steady and responsive marketing.  But deep capital and the right location will be just as important.