Tuesday, September 12, 2017

All you need is Love

It is fair to say that the last year or so has left us at a loss trying to understand where the business is headed.  There are the obvious changes, which I have noted in the past - a steady stream of store closings, the continuing growth of on-line sales, and a real weakness in diamond prices.  We know that some retailers are doing well, but many are struggling, trying to figure out just what to do to stimulate sales.

By now, nobody thinks we are simply going through a slow period, and sales will rise as the economy continues to grow, even though it is at a slow pace.

For starters, jewelry will continue to be an important expression of love, status, and achievement for many years to come.  But is not alone in satisfying those psychic needs, and the competition is growing.

We read a great deal of commentary on what needs to be done, most of it focused on much better marketing, creating experiential environments, wooing millennials, and becoming far more innovative and creative in merchandising.  I think that those thoughts are not new, but seem so because the tools for implementing all of that have changed and expanded so radically.  These are, after all, the basic aspects for all successful retailing.

I think it takes a macro view to begin to grasp the size of this storm.  For a change, a look at the forest instead of individual trees.

Society and economics are not just different from where we were a decade ago.  It is profoundly changing and the old formats are dying, never to come back.  We recall wholesalers, catalog showrooms, cataloguers (think Wards, and now Sears and Penney as they fade), discounters (too many to count), department stores (the entire format has collapsed into a few operations), and discounters (two or three now beyond Walmart and Target).  And, of course, mall jewelers, who disappeared by the dozens.

Was this a healthy consolidation?  Maybe for some retail categories, but in jewelry it resulted in a homogenization of most of the market, one that runs counter to the very heart of what jewelry is really all about.  And that is wonderful, innovative variety and personalization.

How did this happen?  And what does it say about where we are today?

Without going into an economic treatise (not my specialty anyway), here are some mile markers:

  • After World War II, the US owned the world.  Not only was it the biggest economy, but the rest of the world was a shambles.  Business boomed for us, and the middle class rose with a vengeance - something we believed would never end.  A chicken in every pot, two cars in every garage.
  • With that came rapid development of infrastructure.  The interstate highway system, air conditioning, and an acquisitive, newly moneyed public led to 25 years of rapid growth.  Main Street yielded to the mall.  Sleepy parts of the country boomed.
  • By the early 90s, it started to dawn on people that we were stalling, though the Y2K phenomenon masked what was happening.  Wages stalled as the rest of the world fully rebuilt and began to compete with our domestic manufacturing.  Big business built factories overseas, the only way they could compete in the world market, and that led to satisfying our domestic demands as well.
  • The American middle class started to collapse.  Millions of jobs disappeared as automation and foreign manufacturing became the major solutions for lowering costs and raising productivity.  (Jewelry is the best example for us.  It only took a few years for American jewelry manufacturing to largely evaporate.  Today, most American based manufacturing is at the high end, or in commoditized products.)
  • By 2006, the last of the malls was built in the US.  Now, over 50% of those built during the boom are closed or converted to other uses.  The only truly viable ones are the top luxury malls.
  • The US had way overdone retail expansion, but added to the woes was sharply increased competition fostered by the Internet and social media, student debt that went from practically nothing to a trillion dollars in barely a decade, and, maybe most damning, a public that has turned to disposable or shared products (e.g., costume jewelry and Uber), a sense that they own enough "stuff", and a realization that relationships and experiences are more important anyway.
We are now at a moment in which the country's very spirit is being challenged.  The two benchmark moments of our day are the near catastrophic collapse of the economy in 2008, which shocked and frightened all of us, and the election of Donald Trump.  The economy has recovered, but it now seems a very good bet that growth will be slow and fragile.  And the fears of many people that the future is shaky has led in part to Trump's election.

In all industries, and certainly in the jewelry business, companies are heavily invested in established modus operandi.  They are fearful of restructuring and rethinking their businesses, and so many will sink.  We are already seeing the devastation in retail, but it is occurring throughout the value chain.

Two hurricanes have just shown that we still react well and together when facing major disasters.  The spirit of innovation and improving our lives is very much alive.  But the middle class will never be what it was, wage gaps will get bigger, and the costs of renewal and modernization will be huge.  Still, the transformation will occur whether we like it or not, and we could very well have a new boom in the US.

With such a New Age will come the need for people to seek reward, recognition and, as I started out saying, expressions of love.  We will still be here, but the landscape will be very different.


Wednesday, June 21, 2017

Where is retail headed?

Nobody knows for sure.  Present trends show that retailers of all sorts are working hard to adapt to a marketplace that is shifting dramatically.  Jewelry retailers are not exempt from this paradigm shift, but their issues are not quite the same as for other retailers, and that holds true for most of their suppliers.

Stated quickly, what are the specific issues confronting traditional jewelry retailers?
  • The low end of the market continues to move steadily towards Internet retailers.
  • The low end of any store's business is the traffic builder, and important opportunities to build long term relationships.
  • The low end of the market, now significantly composed of non-precious materials, is appearing in many non-jewelry environments, further diluting the business.
  • The mid-market has been suffering for decades now, but will still serve a substantial part of the public.  It is increasingly owned by larger chains, but faces daunting prospects due to buyer burnout, a very mature market, high priced materials, and effective promotion of alternative luxury products who have the scale to spend heavily on marketing.
  • People are now far less inclined to "own" and collect; regardless of age, they are far more into sharing, borrowing, experiencing; that leads the mid-market consumers to either step up (if they can!) into the upper market, or step down into the fashion area.  Again, that is a trend we have all observed for years.
  • The top end of the market is alive and kicking.  The rapid growth in the number or rich and super-rich households has produced extravagant luxuries and flamboyant products.  Even so, the luxury market seems to be stalling.  The rich will only buy so much.
  • Location means everything.  It used to be that neighborhoods evolved and changed slowly and maintained their character.  Now we read about a luxury boom on one street coming and going in barely five years. Jewelry retailers have a hard time reacting to demographic changes.  Their brand and merchandising have distinct targets, and such changes can bankrupt the business quickly and easily.  So move, change or die.
  • For all channels, not having an effective web site is now becoming a sure path to failure.  Shoppers are checking the web before shopping, and checking it after shopping.  
OK, one can say that there is actually nothing new in all that, except that the pace and pressure keeps building, and that many of the traditional modes of selling jewelry are fading further and further.  And we know that in many cases, retailers selling discretionary products have a hard time recasting their brand image.

Most impressive lately has been how major luxury brands (mostly in apparel) have closed hundreds of stores, maybe thousands by now.  Some have shifted to Internet only sales.  These are not easy moves, as each location involved high setup costs, so these closing essentially acknowledge that these chains do not view current conditions as temporary.  We have entered a period of profound adjustment to new retail rules.  Clearly, the country was, and still is, over-stored, a leftover in many cases from the period of exuberant mall construction and urban renewal.

Add to that the double-digit growth rate of Internet-based retailers.  The Internet has, it seems, countless ways of seeking and reaching potential customers, and that means invading everybody's back yard.  Think you have geographic exclusivity from a brand?  Forget it.  "Local" retailers are now nationwide, if not worldwide.  That means that even in a time when there is a steady decline in the number of jewelry retailers, which we would assume benefits those still in business, we find that everyone is competing with everyone - more competition, not less.

It might not seem so, but I am not trying to be negative!  I only point out what we all should be seeing, and dealing with.  The jewelry business will not disappear.  Nor will brick and mortar stores, which will continue to be the primary means for moving merchandise.  There are a good number of retailers who have reacted to all these issues (and there are many more I did not list) and are doing well.  Some are doing very well.  

What is unfortunate is the loss we see in diversity and experience.  When we see so many high quality independent jewelers closing, usually for perfectly good reasons, we lose some of the industry's reach into local communities, and we lose their years of knowing just how to merchandise and sell better jewelry.  The reality is that starting and building that kind of store these days is really tough.  

Can the industry find its way through all this without us ending up with a few mass market super chains, a few global brands, on-line and multi-channel retailers, and a handful of fortunate independents sitting in great locations?  I sure hope there are ways to re-energize the creativity and personality of the business.  A very good independent retailer recently complained that there is nowhere near enough creativity and fresh styling ideas.  Too many companies rushing to copy whatever seems to be trending, hunkering down in this difficult time.  We don't want boring, do we?

Central to a re-thinking of what we do should be an oft-repeated but poorly promoted aspect of jewelry.  Buying jewelry, regardless of price or content, is always an emotional act.  It inevitably involves a judgment on the part of the buyer about personal statement, psychic satisfaction, reward, a gift of love to another person, and pure pleasure.  All of these aspects are far more important than the claim that a consumer "needs t try it on."  That is a mechanical or technical aspect, the piece's fit and feel, that can contribute to all the aspects just noted, but isn't itself the driver of a sale.  On-line retailers, for all their efficiency and reach, will be striving to take on that emotional element. We saw such an effort recently with one site that has a very attractive and knowledgable person walk through a decision making process with a potential buyer, all done face-to-face on Face Time.  A good start, I think, towards bringing real diversity back into jewelry.



Wednesday, April 26, 2017

Protecting the Image of Diamonds

Late last year there were two events in New York about the diamond business.  I'd call them bookends to the business, in that they address two real concerns - the image of diamonds, and the growing presence of man-made diamonds (MMDs).

The first was the presentation by DPA (Diamond Producers Association) on the new advertising and promotional program for natural diamonds, "Rare is Real."  This was, finally, an attempt by the leading mining companies to rebuild the natural diamond image in the minds of consumers.  Two ads were shown (you have probably seen them by now) and I liked them both, if that means anything, while other people were very dubious.  Both were appeals to the millennials, with different approaches, though both skated around the classic themes of commitment and happiness.  As I think further about it, both reflect lifestyles that most Trump supporters, and even many Clinton supporters, probably disapprove of.  In introducing "real life" stories, filled with doubt and adventure, the DPA seems to be trying to equate real life with real diamonds.

One question here is whether the DPA at this point is deliberately not reaching for Boomers and Trumpers, and plain old-fashioned thinkers.  It seems so, though I was told a whole range of ads have been prepared targeting other demographics.  Another question is money.  The DPA reportedly has put in some $15 million, to get this rolling, but getting money from the trade over an extended period is a real question.  It will take a lot more than that to reinvigorate the image of diamonds, I'd say at least ten times as much.  In the New America, I suspect, people will be keeping their wallets closed.  Money goes further in these days of social networking, but will this new message carry?

Here we are, months later, and I sense no impact from the DPA initiative.  And when the subject is raised at various industry get-togethers, I see eyes glaze over.  People involved in the program made a point of saying this is not a short term blast, and that it will take time, maybe a couple of years, before the effort is full-blown and showing results.  OK, we are patient, and we will wait and see.  But frankly, I can't seem get very energized by this program.

For one thing, the message is so subtle as to beg explanation.  Rarity in diamonds starts at stones of a few carats.  But jewelry is composed overwhelmingly of small stones, of which there is tonnage.  Of course that factoid will not be publicized.  So is the message that rarity is the important aspect, or that "real" is the important aspect?  (I needn't add that an MMD of eight or ten carats is also rare, at least for now, and some say it is real.)  I guess DPA is pitching both, not an easy chore.

I do not watch much TV, or dabble much in social media, but I have not seen anything from DPA so far.  Nor have I heard of any retailers, wholesalers, manufacturers, diamond dealers, cutters or traders getting on the bandwagon and putting money into the program, though I imagine there are some.  Could it be that everyone is already working on very thin margins, and image programs have no budget lines for them?  Or is everyone taking a wait and see attitude?

Diamond producers fully understand the importance of protecting the diamond image, as does everyone else involved in the business, even those now expanding production of MMDs.  Mines will still be producing for a decade or two, and anything resembling a decline in public interest will be damaging, if not destructive.  We do need to remember that diamonds are still a huge draw, with spectacular prices still being paid for unusual stones and beautifully made jewelry.  But, again, is "real" and "rare" the message, or is beauty, excitement, love and life events the message?  Real and rare no doubt applies in the auctioning of multi-million dollar stones, but can the same motivation be applied in the local store?

The other "bookend" was a special session held in New York to discuss MMDs.  The speakers concentrated on the dangers MMDs present, and the need for all parties to expend every effort possible to assure themselves that they are dealing only in natural stones.  This was followed by presentations on a range of equipment that will make it possible to check all diamonds, loose or mounted for MMDs.  An important sponsor of the event, Sterling Jewelers, has more recently offered to pre-check all diamonds to be used by their vendors.  A good move, as it makes vendors responsible if any MMDs slip through.

I noted to an attendee here that the whole session is a tribute to the creativity, dedication and genius of the criminal mind!  For all our efforts and pleas that everyone up and down the value chain should abide by best practices, the fact remains that the opportunities for fraud are everywhere.  It's a game of whack-a-mole!  Right at the session, some importers noted privately that the problem is out of control in Asia, and becoming almost laughingly so.  One technology company told me that a simple test run at a few stores of an important retailer promptly turned up MMDs mixed in with naturals in low-priced jewelry.

So, yes, we have major retailers like Sterling and others that have the scale and dedication to strictly enforce proper protocols.  But that does not account for the significant portion of the worldwide market.

We can all agree that the efforts being made by the major laboratories and marketers of diamond jewelry are important contributions to the maintenance of an ethical business.  But what I had expected at the conference was an open discussion about the impact of MMDs on diamond retailing, and how to handle it, quite aside of detection.  I wrote at length, in three blogs in May and June of 2015, about the potential impact of large scale introduction of MMDs in the market.  The consequences, even if all of it is done above board, can be severe.  So thorough presentations and discussions on the subject are the least that should be done.  We see none of that, only attempts to suppress the use of MMDs, to keep them out of the bourses, and to claim that they are worthless.  This is ostrichism of the worst sort.  MMDs are a reality that will be a solid part of the jewelry business.

On balance, both these sessions were appropriate and worthwhile.  But both fell far short of leading the industry into the future that is coming at us full speed.




Tuesday, April 11, 2017

Kimberley Process, aka Swiss Cheese

A little dust up lately about the Kimberley Process.  A noted market observer called it BS, and others responded by saying it has value.  We have been hearing this give and take since the KP was instituted a couple of decades ago, so it comes as no surprise.

Does it have a future, and does it serve a purpose?  Yes and no on both points.  Perhaps it is time to look at it again.

The KP was developed with significant De Beers encouragement and participation when the "conflict/blood diamond" scare first came up.  There was good reason to be concerned, as the association of diamonds with the financing of brutal human abuses and chaotic warfare in Africa.  Conceptually, there was no argument about its objectives - stop or intercept conflict diamonds from reaching the markets.  The carefully built image of diamonds could be destroyed if the public took on this association.

No intent here to be cynical, but the industry was looking to protect itself.  Gem quality diamonds (or, at least, those diamonds that end up being used in jewelry) are a discretionary purchase, enough so to be called a whimsical purchase.  Industrial applications, which have real life uses, can be satisfied with lab grown diamonds that have been around for 60-70 years.  This is quite different from essential natural assets, such as oil, that have produced far worse abuses than diamonds, but the world shades its eyes in order to avoid that problem.  But diamonds are an easy target, with some of its associations - cartel, luxury, ostentation, wealth, capitalism - working against it.

Right from the outset, it was clear that it is way too easy to get around the KP standards.  Anyone having even passing knowledge in the acquisition and distribution of diamonds could see that the KP was more like Swiss cheese - full of holes.  Some countries refused to sign on to KP, a condition that still exists today.  Even among signors, there are cases of human abuse.  Diamonds are passed across borders, and mixed into legitimate extractions.  Illegal goods are transported to countries that issue KP certificates, and then export to other countries. Counterfeit certificates can be purchased in some places.  A couple of years ago, I received a call from someone who would fly me into Sierra Leone on a private plane, arrange a purchase, then fly me back home.  Some NGOs, badly frustrated, have bailed out of any involvement in the process.

Should we be surprised by all this?  Of course not.  Any time there is an opportunity to make big money by circumventing controls, there are people happy to do it.  Just think of arms sales and African ivory as two of many examples. And in the diamond business, in addition to the KP issues, we have been dealing with lab grown diamonds being mixed into natural productions, something that has been going on since long before the conflict diamond issue came up.

Enough said.  But how about the future?  Due diligence is the newest thing, asking for proof of custody all the way from the mine to the store counter.  OK, that can work, but my contention is that all that serves to make honest people even more "pure."  We should not delude ourselves, however, into thinking this will solve the problem.

It is, after all, an issue that, in the end of the chain, primarily confronts retailers and consumers.  How diligent are they going to be, or able to be, in unequivocally verifying that a KP certificate or chain of custody is correct.  Add that to getting total assurance that the grading certificate is accurate, or that no man-made diamonds are not mixed in.  Frankly, I'm glad I do not have to face that issue.

Still, KP should not be abandoned.  The industry must continue to do whatever it can to offer and provide a clean path, in spite of the fact that there are crooks out there.  The least we can do is to make it as difficult as possible for them.  Yes, in time, maybe not more than a decade or so, the issue will fade anyway as diamonds mining fades away.  In the meantime, trudge on.