Friday, January 6, 2012

Seven billion and counting - part 3

My wishes to everyone for a healthy and successful 2012.  This holiday season has been most enjoyable around here, highlighted with the Giants making the playoffs!  Let's see how far they go.

And let's see how far we go!  The jewelry industry will continue to see profound changes from mining to retailing.  In parts 1 and 2 of this overview, I offered some thoughts on sourcing and retailing.  We know that the exiting of the Oppenheimer family from De Beers signals big changes to come in distribution; we already see that material costs, advancing consolidation and the boom in online sales have deeply affected all retail channels.  But how might manufacturing fare in all this?

We have noted that an explosive population growth, and particularly the expansion of the middle class and affluent classes all over the world, must mean that opportunities to sell luxury products of all sorts are growing.  Judging by early reports from luxury retailers, high end sales seem to support that contention.  We also know that the middle class in the US and some other developed countries have shrunk in the face of long term declines in real wages, made worse by the financial crisis of the last three years that wiped out trillions in consumer net worth.  I, for one, doubt that the declared end of the recession as of 2009 means we are all on a track back to where we were.  The economic damage suffered by many may never be restored.

One manufacturer mentioned that sales of pieces at over $20,000 wholesale were steady, far above averages for a number of years, while bread and butter categories at core ranges from perhaps $2,000 to $10,000 were very slow.  This did not make him happy - nervous, in fact - because such a tilt can to easily dent dollar volume if affluent customers decide to hold back due to new geopolitical events (need I mention the Euro crisis?).  Every manufacturer ideally wants steady unit production going through a factory.  

So the core questions relate to what might be a radically altered landscape.  Will fine jewelry once again, after many decades, become the domain of the elites?  What sort of products will fill the large mid-market?  And what retail channels will be selling what range of products?  These are not easy questions to answer, as we are still in the midst of a profound sea change in the structure of the business.  But, in some way, all sectors of the trade must address these changes, especially manufacturers.

For the time being, many retailers will be buying steadily, partly because they are well located to take advantage of the trend for wealthy consumers to be buying again; partly because many retailers are flush with cash generated by successful and highly profitable campaigns to buy jewelery from the public.  And for all retail channels, deepening consolidation will produce big time winners and many losers or struggling operations.

To begin, some aspects to be considered:
  •  Manufacturers should be assuming that material costs will not decline sufficiently to broadly rebuild the middle class market.  Some manufacturers have already acted on that account.  When i visited the Vicenza show a year ago, several manufacturers told me that they had shifted entirely from gold jewelry to silver.  And, they added, the Italian consumers (whom we assume to be as judgmental as any) totally accepted the move.  Gold prices, compounded by Italian markups, had crushed the mid-market for them, both domestically and for export.  Other manufacturers stayed with gold jewelry, but readily admitted that they had to accept lower turnover.  If anything, many of them moved up to still higher price points.  We will shortly be seeing what this year's show will reveal.  The story elsewhere is the same to differing degrees, even in China.
  • Distribution becomes more of a problem under these circumstances.  Silver jewelry started out a few years ago at lower price points, meaning that volume for both manufacturers and retailers had to be much higher in order to develop enough cash flow.  Independent jewelers had a hard time moving enough pieces, understandably, to make it all worthwhile for them and for the suppliers.  And suppliers needed to figure out how to sell retailers who were writing lower value orders, even though margins were raised.  
  • Silver (and other alternative materials) has moved up in price points to meet these needs, and that has been somewhat successful.  Low-end, high volume silver has moved to the big chains and the Internet.  Branding has become even more important.  In the future, silver jewelry retailers will be defined by what they carry, split very much as gold did for years between 10 karat, 14 karat and 18 karat jewelers.  
  • Gold jewelry will move towards classic design, and will still dominate bridal jewelry.  (Platinum is well positioned now to grow in these areas, and we will address that potential in a future blog.)  Gold in the fashion categories will still be possible, but in carefully merchandised product.  It may take years for the public to adapt to much higher priced gold jewelry and to perceive value for dollars spent.
  • The nature of opportunity will change.  The US, a very mature market, will see slow growth, much of it a reflection of rising material costs, while still dealing with long term economic problems.  Manufacturers will need to maximize opportunity by testing all channels and avenues, including entering retail, until it is clear where the market is headed (that could be years).  Entering strong overseas markets will be very difficult, though not impossible.  So proper market position is key (we could write a book about that!).  Add to that product innovation.  Nobody can presume where trends will lead, so knowledge of new technologies and materials has to be acquired.
Retail has been consolidating for decades now, which presents formidable challenges for manufacturers.  The competition for case space in traditional retail stores is fierce, especially as local markets are increasingly dominated by handfuls of strong retailers.  That's good for the retailers, but raises the bar for manufacturers.  More than ever, manufacturers need to reinforce their businesses in every aspect - high quality; innovation and response to trends; technology; range of services; consistency; timely delivery; competitive pricing; training; "green" and sustainable production; etc.  Need I go on?  How a manufacturer plans all of this is the job at hand.