Thursday, November 10, 2016

The New America!

I'll say the obvious to start.  This has been a disorienting, and at times ugly, presidential campaign.  The outcome for almost everyone is a totally unexpected result.  We now face months of uncertainty as we watch to see what Mr. Trump actually formulates as policy.  He has a Congress that is fully Republican, so unknowable change is a certainty (is any change a certainty anymore?).  And uncertainty of that kind is destructive to business.  Or even to a sense of balance and normalcy in our daily lives.

The election has taken some acknowledged problems in our country - notably the decline of the middle class, the deep-rooted disaffection with Washington, the widening income gap, and an angry working class that feels ignored and exploited - and made them the main direction of the country.  In the process, business interests here and abroad are now at a loss of how to measure anything, as both political parties have been left in a shambles.  Enough said.

So, if anyone has been wondering why business has been so rocky over the last year or so, we could, erroneously in my opinion, simply attribute it to the bizarre primaries and election.  I have presumed for a while that the changes in the nature of business are not temporary, but based on fundamental changes in the population and in our common priorities going forward.  Despite the pledges we have heard from President-elect Trump, we are not bringing back high paying, high employment manufacturing jobs, and we are not going back to those halcyon days, if there ever were any.  Nor is there any way of reversing the deepening chasm between the highly skilled and educated tech-oriented classes and the rest of the country.  Jobs will continue to be extinguished by automation, not just here but all over the world, China included. 

What can we (possibly) say at this point about the jewelry business, which is like going from macro problems to micro problems.  I'll take a shot at it, but please remember that we are only one day into the New America!

 - The commitments of marital engagement will continue, and might even increase.  In a time of stress, two people being mutually supportive is a plus.

 - The diamond business as a whole, and especially in non-bridal, will become tougher.

 - The public has been taught that costume is OK, that alternative materials are OK, that spending a lot less money to accessorize is OK.  Unit sales may still not go up, but dollars and bottom line will go down.  Retailer profits will be under increasing pressure.  Suppliers will feel even more pressure.

 - As a result, consolidation and business discontinuation will continue, especially among independents.  Chains will reduce store count, and push the use of their web sites to drive customers to stores.  That will be true at all levels of business, including the high-end luxury chains.

 - Merchandising will narrow.  SKU's will be cut.  Retailers will further limit the number of vendors they use.

 - Diamond prices may decline, and the legitimate use of MMDs (man-made diamonds) will accelerate.  Gold may become more expensive if currency exchange rates become more volatile.

 - Christmas 2016 may just have been dealt a serious blow.  Any economic prognostications for 2017 are out the window for now.

This may all sound like relatively mild changes, and it does presume that Donald Trump will temper his proposed actions.  We hear reconciliation in the first speeches after the election, but the rancor runs deep, and we may see a level of governmental malfunction unseen in our history.  The undoing of open world trade will be a disaster matching the Great Depression.  Imagine for a moment the effect we will see from high tariffs on all the jewelry we import from Asia and elsewhere.  Should such things actually happen, all bets are off.  All our retail, not just jewelry, is mostly built on imports.  The prospect is truly frightening.






Wednesday, August 31, 2016

Diamond Dreams and Diamond Daydreams

Diamonds have been around for a long time, but it has only been in recent decades that the public's feelings about diamonds have become greatly enhanced.  We have had, for example, Marilyn Monroe and Elizabeth Taylor to thank for raising our aspirations and encouraging women to become diamond lovers.  We have had De Beers and Tiffany and Winston and Graff and Hollywood to help us along to diamond heaven.

But now, it seems, our angels have mostly disappeared.  Hollywood stars rarely buy diamonds - they mostly borrow them for the Oscars.  I could not name a modern Taylor.  De Beers gave up diamond promotions years ago, and now only spends money when tied to Forevermark.  (Would anyone even suggest that Forevermark is a respectable replacement for Taylor?)  Winston, now owned by Swatch, is not even a ghost of old Harry.  Graff focuses on the 1/2%, not even on the 1%, so that's not much help for us there.  Tiffany stands out among the global brands as a strong diamond merchant, but does not see itself as carrying the diamond torch.

For the last forty years, the middle class has slowly seen its buying power fade away as wages have stagnated while inflation slowly had its effect.  In jewelry, the problem has been exacerbated by rising prices for diamonds, colored stones and precious metals.  Unlike t-shirts, we can't just import a cheaper product from Bangladesh.  Clearly, retailers of all stripes recognize all this as a long term problem, not one that we can see reverse anytime soon, and they are starting to close stores - or go out of business.  We were, in any case, way over-stored, and the adjustment was past due. 

In spite of all this, the diamond dream stays alive.  The engagement ring still symbolizes love and commitment, something men willingly pay a high price for.  It publicly acknowledges all that for everyone to see.  It is unlikely, barring totally bizarre events, for that to change in the coming years.  Yes, the technology to produce man-made diamonds could suddenly burgeon to the point where diamonds would become dirt cheap, but that possibility is, for now, as remote as the earth being hit by a massive meteorite. 

That is not to say that we should go blithely on as if nothing has really changed.  The Dream is not impervious to all downturns in the economy or the mindset of the public.  I think it was Georgio Armani who once said, in a perfect pun, that his "brand hangs by a thread." One bad mistake and it is gone.  De Beers did an historic job of creating the Diamond Dream, but that is not to say it can't be undone.

We are in the midst of a distinct decline in jewelry sales, including diamonds.  And how has the trade reacted?  With diamond daydreams.  One blogger says that the industry needs to step up and spend the money to build (or rebuild) the diamond image.  This is a pure fantasy.  De Beers was able to do that when it was a true monopoly, but even they had to step back because the cost is prohibitive unless all sources are on board.  That is not possible, not just because some major sources (Alrosa, Rio Tinto) will be reticent; not just because diamond prices are now too volatile; and not just because the major sources can already begin to count the years before their mines will become uneconomic.  It is also because there are huge stocks held by the public that will be an ever growing, uncontrolled source of diamonds.  It is also because profit margins for diamond cutters and dealers are razor thin, essentially making contributions to an image campaign a non-starter.  It is also because no one wants to pitch in unless every one of the other thousands of diamond companies also pitch in. 

Another daydream is that the development and marketing of man-made diamonds (MMD's) needs to be stopped or discredited.  That's like opening Pandora's box, as it invites a counteraction that will point out all the well-known depredations and frauds that exist in the natural diamond business.  Need I list them?  Martin Rapaport wants MMD's stopped because it endangers the livelihood of diamond miners.  That's a bit like saying that we should reverse all the technologies and robotics that have cost tens of millions of workers all over the world their jobs.  Somehow, Rapaport thinks that the diamond business should be exempt from the forces of commerce, bad as many of them are.  Child labor, as an important example, exists in too many places in Asia and Africa.  We need to fight to stop the abuses, to level the playing field, but also to give all legitimate businesses a chance to flourish. 

In the diamond and jewelry business, protecting the future will take an open and inclusive effort to coordinate the very diverse interests of large and small companies.  Major financial institutions (like Morgan Stanley) are issuing reports warning of the dangers ahead in the diamond business.  Important publications, like The New York Times, The Guardian, the Wall Street Journal and the New Yorker have covered the subject.  They all sense a parameter shift, and think a major story is brewing.  It is already the case that major banks will no longer finance the business.  And if fair-weather friends are no longer with us, then maybe the weather is not so good.

It is incumbent on the broad-based industry organizations all over the world to set aside defending their fiefdoms and reorient the industry towards a workable future.

Monday, March 28, 2016

Diamonds and Robots

I have not written in a while, so please forgive that.  I have been occupied with some real work, thankfully, and fitfully absorbed by a political process that is telling us there are some profound changes occurring in America.  We are seeing the tip of the iceberg, but it is that mass below the waterline that is causing the real damage.

Rather than mention everyone's shoot-from-the-hip reactions to the race for the presidency, is there a way we can suss out what it means for the jewelry industry.  How is this insanity we are watching related to our business, or even more generally, to the economy as a whole.

On the surface, the likely economic scenario is not that troubling.  Regardless of who wins the election, Washington will no doubt continue to be a battleground that will preclude Congress causing real harm.  Some people view a divided Washington as a benefit, even as the public is giving Congress historic low marks.

But that is not the underlying case.  It is not considering the the danger out of view underwater.  For all our voiced concerns about the income gap, terrorism, faltering economies all over the world, the state of our educational standards and infrastructure, we see the US economy continue to recover, albeit slowly, from the battering it took during the Great Recession.  The President considers climate change our greatest challenge, one that might cause us, and the whole world, disruptions of immense proportions.

OK, I guess I should not try to be too down about the future.  I am often surprised and impressed by the young.  They show real awareness of the problems, and, at times, unbounded optimism that we will confront and overcome them all.


Well, getting back to our subject, what about jewelry.  We already know that an important base of the business in the US is the middle class.  Historically, that has been the support of the mass market jewelry business that blossomed in the mid-twentieth century.  The substantial decline of the middle class, abetted by the economy's shift from manufacturing to services, has stalled the US jewelry business.  For some 20 years or so, US jewelry business has stayed at about $30 billion a year, in spite of steadily rising material costs.  So we sell fewer units, year by year, even as we struggle to create product at affordable prices.

Meanwhile, technology is advancing, and is now accelerating its impact on how we live.  There are the obvious impacts.  Swiss watch exports last year dropped by 8%, at the same time that Apple sold millions of Smart Watches.  Jewelry design is increasingly computer designed and produced.  Maybe good, maybe not.  But how about robots?  What impact will they have?  

I recently watched Bill Gates being interviewed by Charlie Rose.  Gates is a very thoughtful man, and we all know about his, and his wife Melinda's, remarkable devotion to solving human problems.  The conversation turned to AI, artificial intelligence, and what that might mean to us.  We already know that technology in all its manifestations has already wiped out many jobs.  At every turn, we see where the interaction with people is no longer needed to get something done. Just think secretaries, assembly line workers, and meter maids, and countless other jobs.

Yes, we know those jobs are not coming back, and many more are fading away.  Even China is automating, thereby creating unemployment is some industries.  Rose asked Gates where does it go from here, as machines get smarter.  Gates responded by saying that in the short term, maybe five to ten years at most, machines will be developed that are as smart as us in many ways.  The range of jobs they will be able to assume will grow exponentially. 

But beyond that, he said, in the next 40 to 100 years, machine will become three or four times smarter than us.  He did not mean, I would think, in a creative sense, but rather in their ability to solve problems by cranking masses of data, by figuring out how to improve on processes and even redesign themselves.  Think of IBM's Watson, which beats the world's best chess players and wins at Jeopardy, and extend that into every aspect of our lives.  Self-driving cars, coming soon to your neighborhood, will eliminate cab drivers, will park themselves and come to your front door when you call them.  Call your robot about dinner, and it will be ready when you get home in that car.  You like that suit you just saw on TV?  Robbie knows your exact measurements, suggests colors, fabrics and design tweaks, and you have it delivered in two days, maybe the next day.

But Gates in not sanguine about all this.  He knows that every step forward in automation is a step away from needing people to get something done.  When Rose asked him if it worries him, he said yes, that he is very concerned about automated production and massive unemployment.  He says that the social upheavals are unimaginable.  And he worries about who will control those machines.  (Note: if you want to watch this interview go to https://www.youtube.com/watch?v=L52dgChT3uk.  It a a version that was broadcast on Bloomberg, so ignore the market data.  The part I refer to starts at about 26:50 minutes into to interview, though it is interesting to watch it all.)

I think we are already seeing the first signs, as reflected in a worried youth championing Bernie Sanders' call for universal health and free education, two basic needs that seem to be slipping out of our grasp.  And we see it in Donald Trump's boastful, arrogant, bullying call to rip up political correctness.  His supporters are losing hope, are sinking economically in a world composed more and more of have's and have-nots.  The more they feel they have nothing to lose, the more revolutionary they will become, to everyone's peril.

So, to come back to my point, how will this affect our tiny piece of this huge economy, this huge problem?  These are complex issues, requiring far more study and discussion than I have done, but here are my bullet points:

  • People already sense that they need to become savers (witness the decline in outstanding credit card debt).
  • The return of high paying jobs for the masses, say $25/hour or better, has no chance of occurring.  It's a pipe dream, with politicians offering false hope to struggling people.
  • Robots, or robotics, will be the only way the US economy stays well ahead of most of the world.  We may not like that it kills jobs, and we may even fear it, but it is coming fast.
  • Jewelry will not fade as a desirable product.  How it is manufactured, what it is made of, and where it is sold will rapidly change.  More robotics, more non-precious stones and metals, and far more multi-channel marketing - a mix of stores and Internet.
  • Engagement rings will remain a staple, for both married and unmarried couples.  But jewelry will not live by the solitaire alone.
  • The number of retail stores in the country will continue to decline.  But destination stores will become much bigger and stronger.
  • Customization will become king.  Think fast design, 3-D printing, automated setting and finishing, fast service, and large service providers backing up retailers of all sorts - not just jewelers but many fashion oriented retailers, on-line and not.
  • Serving the rich and super-rich will be dominated by brands and global retailers who will essentially own the category.  
I am sure that I underestimate the changes to come.