Monday, October 14, 2019

A Series, Part 4: What Does the Future of Jewelry Look Like? Consolidation and/or Decline

Last time, we concentrated on the effects climate change might have on the jewelry business.  This time, we cover a long lasting trend, the continuing consolidation of the business.  It has effects that are particular to our industry.

Here is the list of issues we have been covering — were are up to number 4.
  1. The Gig Economy
  2. Millennials
  3. Climate Change
  4. Consolidation and/or Decline
  5. Natural Diamonds vs Lab-Grown
  6. Banking
  7. Image 
  8. Demographics
  9. Retail Evolution
  10. Industry Structure

Consolidation and/or Decline

It’s not news to anyone that retail in the US has been consolidating and evolving for decades.  Think of what has happened in drug stores, books, software, electronics, and department stores.  In some cases it has been near total.  Macy’s, for example, has absorbed hundreds of operations — in some cases merging with or buying some firms that had in turn absorbed other operations themselves, many of whom were important jewelry retailers in their home communities.  Some formats, such as catalog showrooms, have disappeared entirely.  Others, such as discounters and wholesale clubs are down to two or three huge chains.

Jewelry falls into so many categories, and is carried by so many different channels, that no singular retail format encompasses all of it.  Still, consolidation is evident enough.  It gives us great pause, because in so many ways consolidation is antithetical to the very core of the jewelry business, which is based on broad diversity and artistic creativity.

The changes in jewelry has had a somewhat different pattern than other retail categories.  High on the list of affected channels are mall chains.  They have disappeared by the dozens at this point, but it has been a process that has run for decades.  I recall that some 30 years ago I was easily able to compile a list of nearly 50 operations that either merged with other chains, or closed.  There is no prospect at all these days for any new mall chains appearing.  For one thing, malls themselves have been in full retreat, with only the strongest surviving and remaining profitable.  For another, the mass market jewelry store has some inherent structural aspects, mainly the demographics of mall customers, that limit the range of product that can be profitably carried.  

The breadth of merchandise and services a good independent jeweler carries is typically far broader than in a mall store.  And yet, the number of independent jewelers in the US has been declining steadily for decades, from a peak of some 40,000 operations years ago, now down to under 18,000.  As these are the two most important channels for jewelry in the US, we may question whether jewelry is fading as an important product in the public's opinion, or is something else at work?  The causes are complex, different for the two groups, and more related to paradigmatic issues facing all retail, and not just jewelers. 

Mall chains and independents both feasted on basic products for years (think solitaires, studs, line bracelets, clusters, center color rings, etc) as did many suppliers.  But gradually, both channels began to struggle for different reasons.

There was an early period when chains were regional in nature and did build reputations in those regions.  They also tailgated on the boom in mall construction that was in turn greatly stimulated by the construction of the Interstate Highway system.  Inevitably, chains became super-regional or national in nature and the head to head competition soared.  When you are selling primarily basics, the competition can crush profits.  Then add on predatory landlords; pressure to take space in every mall that opened; suppliers that see their margins shrink to low single digits as mall chains pressure them to lower prices; and the inherent problem of personnel turnover that impedes the development of well-trained sales people capable of building effective, long term relationships with customers.  All of that just a part of the problems for chains as they fought to build a national presence.  

In part, it all begs the question as to how well mass marketing is suited to the jewelry business. It certainly led to the popularization of diamond jewelry, especially with the introduction of promotional qualities.  But was its own decline inherent in the effort?  Is a key element in jewelry sales being able to display knowledge and confidence across the counter to perspective customers the essential skill in selling more than low-priced trinkets?  Judging by recent history, we have cause to think so.  We see big retailers in various channels deeply reduce their jewelry efforts (e.g., Walmart, QVC)  The two biggest mall operators, Signet and Zale’s, have merged, and we see how tough a time Signet is having in coping with profound changes in the public's preferences.

For independent retailers, it is a very different story.  Yes, they clearly felt the competition from every new channel selling jewelry that popped up starting all the way back in the '50s.  After all, they pretty much had the business to themselves before that. Over the years they went from being the dominant channel, perhaps as much as 80% of all jewelry sold in the country, to around 40% today.  Their nature varied tremendously (one of the beauties of the jewelry business), from elaborate, large stores, to upstairs operations, to edgy designer stores, and even lessees operating in strong general retail stores.

For them, the edge was in local promotion, the personal involvement of the owners, the ability to customize pieces for customers, the ability to react quickly to new trends and stories, etc.  Service was, and still is, very important.

These retailers, over the years, mostly dispensed with giftware, tableware, silverware, even toasters, going way back, and turned heavily to the one category that was not easily invaded by the booming new retail formats, diamonds.  But as most independents did that, the competition between them grew.  And then came other factors - the quick rise in the price of gold; the standardizing in the price of diamonds and then their commoditization via broad acceptance of grading reports.  The result was the loss of important price points, and the resulting need to turn to non-precious materials.  Some held out against moving away from true precious jewelry.  Those in prime locations grew, especially with the great increase in the number of millionaires in the US.  They also benefitted from the closing of other independents who were not in prime locations, and could not successfully upgrade their merchandising.

One other important point here.  Many truly successful and profitable independent retailers have simply closed their doors.  On reaching retirement age, or other personal reasons (like not having a next generation interested in coming in) about the only thing and independent can do is run a GOB (going-out-of-business sale) and maybe plan to spend more time on the Riviera!

On the other hand, opening a new store is very difficult today.  It is expensive to build and stock, and very few people see that as a reasonable risk today.  So the total number of stores declines.

The real question is whether on-going bankruptcies, mergers and closings are just a sign of the country being overstored — the result of the construction booms of the 60s, 70s and 80s — or a reflection of a fundamental change in public sentiment.  Or both.  Clearly, there had to be a correction in the excess of stores - and malls that had lost their attraction as a place to hang out.  Consolidation eliminated some of the excess, and presumably reduced overhead and management costs.  Still, there are other factors at work.  Are we truly facing a sea change in the jewelry business as we have known it?  And if so, what are the implications?  Here are just a few thoughts to consider:
  • The jump in costs for precious materials drove many suppliers and retailers into alternative materials.  In itself, a logical move.  But lower prices on precious materials are very unlikely to return, and in the meantime the public has learned that it is perfectly OK to wear fine jewelry together with costume.  “High/low”, I think it is called.
  • For many retailers that means trading, say, a $1,000 sale for a $500 sale.  Not great if you can’t also drive up volume and margin.  In the mid-market that has been a particularly tough thing to accomplish.
  • Upscale retailers have benefitted from the rapid growth in the number of millionaires.  One $100,000 sale equals a hundred $1,000 sales.  Big dollar sales helps the overall growth of the market, in dollars, but creates an unhealthy imbalance in units.  There is plenty of evidence, however, that the rich starting to hold back these days - Sales at guild jewelers have declined this year, even with an economy that is reportedly doing well.
  • Moreover, the rich consumers are now looking at countless new ways to spend money.  Exotic cruises are booming.  And middle class consumers are opting to join a few thousand people on huge liners, spending the kind of money jewelers would love to capture. Luxury cars, like Tesla, are pre-sold by the thousands before one is even manufactured. Wouldn’t jewelers love that kind of response!
  • The day of collectors in many categories is largely over.  A magnificent piece of jewelry executed sometime in the past by a jeweler with great provenance (Tiffany, Cartier, Van Cleef, Webb, JAR, etc.) still readily sells at auction.  But auctioneers say that even well-made pieces without a name are getting tougher to sell for much more than their scrap value.   This issue is not unique to jewelry.  “Brown” furniture (wooden antiques of all sorts) have lost much of their value.  Art sales have shifted from fine artists of the distant past, to more recent edgy artists whose works may present much bigger opportunities for value accrual.  
  • There has been a rise in social activism on issues that impact our thinking, and especially the thinking of millennials and Gen-Z.  They are pro-active on environmental issues, especially with the steady rise in media coverage of worsening weather conditions.  This group is also carrying the burden of educational debt, which is approaching $2 trillion.  They see value in "sharing" over "owning."  They are clearly creating an altered retail reality that seeks authentic brands that satisfy a range of new social, economic and environmental standards.
  • There are systemic aspects to jewelry retailing that impede joining the digital world.  Store environments are unfriendly simply because of the valuable nature of the products.  This has always been off-putting to many people in the past, but is even more so in our times.  You just can't easily make a jewelry store look and feel and work like an Apple store, no matter how hard you try.  There isn't the traffic - how often I see jewelry stores that have not a single customer - and there isn't the excitement.  How can there be when nobody in the jewelry business has the R&D or marketing budget that Apple possesses. We see the effect of these problems more clearly as time goes by.
I could add more, but all this suffices to point to the fundamental inability of most companies up and down the entire value chain to respond to a steadily evolving market condition.  In many ways, it is not our fault directly.  There has always been far more supply than there is demand in our industry, primarily due to the fact that barriers of entry are so low.  Too many people think they have the magic formula for making a killing.  But the end result, unfortunately, is that too few companies have the profit margins and the skills needed to build, test, and implement a new direction.  And, they contribute to the erosion of margins across the whole market.

It will be a painful period coming in which the industry will be right-sized in order to serve various communities profitably and satisfactorily.  Who knows how long that will take.  People do resist just giving up and finding other work.  One thing is certain, as I have said before, is that people love jewelry, and will continue to buy.  Who inherits that business, and what it take to climb the wall - that is the question.  As this is a very varied and fragmented business, there will probably be a lot of good answers.

Wednesday, August 21, 2019

A Series, Part 3: What Does the Future of Jewelry Look Like? Climate Change.

Last time, we wrote about the Millennials, and how we might need to plan for the social environment they might be building.  Well, they and GenZ, the super-techies that follow hot on their heels, will be dealing full bore with that other environment, the Earth, that is about to throw another wrench into life as we know it.
Here is the list of issues we have been covering — were are up to number 3.
  1. The Gig Economy
  2. Millennials
  3. Climate Change
  4. Consolidation and/or Decline
  5. Natural Diamonds vs Lab-Grown
  6. Banking
  7. Image 
  8. Demographics
  9. Retail Evolution
  10. Industry Structure

Climate Change.  The subject is the undercurrent for everything we do today.  We do not know how to handle it personally, as it represents a huge looming threat to life as we know it, and that in itself leaves us feeling unmoored and anxious.  There is international agreement that the threats may be existential.  This is not a cyclic occurrence, unless we are dealing in eons.  The solutions, if attainable, may well be epic in scale. It appears that there will not be any aspect of human activity and life that will not be impacted, no matter what actions the nations of the world take.

As it is, recent United Nations reports already show nearly a billion people in the world dangerously exposed to water and food shortages.  Unlike the "green revolution" that averted great famines in the last century, we are not possessed at present of powerful new approaches that will adequately avert these rising catastrophes.  Many countries are having difficulty meeting the targets agreed to in the Paris Accords on environmental remediation, only demonstrating the magnitude of the issue.  In the US, quite aside of the current administration's rejection of the accord, many states and cities have started their own programs on minimizing the effects of fires, droughts, storms and rising seas.  At least that.

We have already seen the passion with which young people have come out in public to demand vigorous action to protect their future.  Is there any doubt that young people are fully aware of what the world is facing?  Is there any question that their actions are tempered by this awesome undercurrent in their lives?  No, certainly not.  It is their thinking and outlook that we need to understand and react to.

I believe that one aspect of people's psychological reaction to the potential for severe environmental degradation is to go and see as much of it as possible before it disappears or becomes unaccessible.  (Another might be to hide and look away.)  So there is an increase in travel, including expensive visits to Antartica, Easter Island, the jungles of Indonesia and Amazonia - Eco-tours.  Cruise travel is booming.  Not that such travel is not seriously polluting!

One investigator recently calculated that the energy consumed by a single person flying round trip between London and Cape Town is enough to heat an average home for a year.  We may be staggered by such factoids, but we are not modifying our behavior....yet.  Will the time come when we have to, or will be forced to?  Probably, but we do not know when, or how, or with what cumulative impact on our lives and our futures.

Still, it strikes one that people will spend many thousands on travel, but not consider that kind of expenditure for jewelry.  Could that be a telling valuation of what jewelry might mean under this clouded outlook?  We could make a similar comparison with other luxuries, and weigh whether it is the climate outlook that is a cause, or a simpler change in preferences, in views on categories, brands and images.

We can look back a hundred years or so, to a time when possessions were a mark of wealth and success.  In the intervening years we have found ways to expand that "privilege" to the greater public — thank you American Express for inventing the credit card.  Enjoy today by mortgaging the future.  Enjoy today, because tomorrow may never arrive.  We are, after all, a country with an economy that is about 70% driven by consumerism.  Wealth today is measured in money.  Possessions may be a hinderance when one has to move.  Welcome to the age of sharing and renting.  Who needs to buy an evening dress when you can go to Rent the Runway, a booming business; or maybe Rent a Riviera?  Some of that is already with us.

In itself, all of that is not bad if it indicates a strong economy that has allowed many people to enjoy the fruits of hard labor, and are serving a consuming public.  We are witnessing that phenomenon in China over the last year especially, where average income has risen about twenty times (admittedly over a low base) in the last two decades or so, while US wages have barely gone up by 3%.  The Chinese, in some ways have replicated the US boom in personal acquisition that we saw after WWII.  They may not have the good fortune of having as long a run.

By now, we are painfully discovering that our consumption of the Earth's output cannot go on much longer without paying a heavy price.  If we are lucky, we will turn the need to preserve, conserve and recycle into the big new businesses of the future, where repairing the Earth will make us heroes.  We can only hope.

That presents the possibility that the jewelry business will return with a vengeance as people reward themselves for escaping extinction.  Again, we can only hope.  In the meantime, we do face a transition of unknown scale, as I noted, that will include restraints on the business we have known.

In the short run, everyone will look to sustain the business we know.  We will all try to adapt to changing realities while also trying to apply evolving technologies wherever possible.  The availability of raw materials — most of which are mined — may be curtailed by governmental restraint, demographic changes, political upheaval, and the availability of resources such as fuel, food, and manufactured products.  This may seem obvious, but even minor changes in each could combine to have serious effect on a particular business.

In sum, we are facing a threat we cannot fully comprehend.  But that uncertainty is bound to have an effect on our thinking and spending.

Tuesday, July 23, 2019

A Series, Part 2: What Does the Future of Jewelry Look Like? Millennials

Last time, we wrote about the Gig economy, and now we move on to an important part of that movement, the Millennials, and, by extension GenZ.  It is most important to think about our youth carefully, not only out of concern for their future, but also because they now account for the biggest part of our economy.  And, in many ways, they will either accept or reject much of the extraordinarily complex world we are passing on to them. 

I restate the list issues covered in the series of posts:

  1. The Gig Economy
  2. Millennials
  3. Climate Change
  4. Consolidation and/or Decline
  5. Natural Diamonds vs Lab-Grown
  6. Banking
  7. Image 
  8. Demographics
  9. Retail Evolution
  10. Industry Structure

Millennials.   This generation is now fully into its prime working years, but does not have the sense of optimism felt by the Boomers and even GenX.  For those who are the children of the top 10%, there is some sense of entitlement, earned or not.  But for the rest, forget any sense of entitlement.  For them it may become a battle not seen in the US since the 1930s.  GenZ, now entering the world of work and (maybe) college, is even more skeptical about where we are headed, as exemplified by the worldwide marches they have organized protesting the lack of action on climate disaster, gun control, education.  It may be oddly appropriate that they are named GenZ, the end of the alphabet.  We could interpret that morbidly, or, in a positive way, say it suggests the need to start all over again for the next generation, as GenA.

For both groups, the opportunities for entering the middle class are barely there, and with it many of the long-touted benefits of expensive college educations.  College debt is rapidly approaching two trillion dollars, default rates are rising, and even our crippled Congress is trying to implement some form of debt forgiveness as a way to salvage some kind of future for many in these generations.  Consider for a moment that in 1990 student debt barely existed, around $24 billion according to the Federal Reserve.  

Pose this question:  What would you do if you left college today with $40,000 in debt (which is the mean debt today for graduating students who borrowed for their education) and poor prospects for well-paying jobs?  Go on a spending spree?

When, and if, aid for Millennials acquires some momentum; when wages rates and jobs truly grow in the digital age; when we might even see guaranteed annual income; when the coming boom in retrofitting our infrastructure to protect the environment kicks in; that's when we might see real growth in the economy and the ability of many people to responsibly spend on luxuries.  For now, their actions suggest shifting priorities and financial caution.

But will all the changes come in time to truly benefit these two generations?  Hopefully, yes.  In the meantime, we do see a part of this population truly rise in an age of VC-financed startups, hedge funds, and advancing economies, in the US and China in particular.  But the bulk of the millennials are struggling in an age when corporate policies are focused on expanding technologies that improve efficiencies and reduce head count.  By default, that means minimal loyalty to, and from, employees, and a steady erosion of confidence in long term career advancement.  To the degree that companies succeed in implementing advanced automation, the benefits will fall largely to the top managers, who have already been seeing huge increases in income (abetted by the recent tax cut).

At every turn we see where these efforts are impacting all our lives.  I can think of dozens of examples, but here are a few that I bump into daily.  Apple Pay, or Google Pay are going to eliminate the need for cashiers.  Amazon is already testing cashier-less stores.  Advanced ATM machines spit out cash in any denominations, and conduct all sorts of transactions.  My local bank branch has gone from four tellers to two and branches are closing everywhere.  Movie theater attendance is dropping.  Some performing arts are suffering a decline almost everywhere in the country, partially for the same reason as movies - excellent giant TV screens, and home theater transmissions.  And, of course, we see rising closings of stores, and entire chains.  The retail revolution is in full swing.

Yes, we have experienced much of this for a while.  We also know there is great reluctance on the part of government to interfere with the workings of capitalism.  They tinker with it, but do not essentially change the direction in which we are heading, at least so far, even as they acknowledge that the income gap is a serious problem.  Millennials, college educated or not, are fully aware that the globalization of commerce - undoubtedly a result of the rise of the communication age - does not favor the worker.  US unemployment rates are at historic lows, but the announcements fail to recognize that working age people who are no longer seeking jobs are not counted.  US employment of working age people now stands at about 60%, and the trend is for more people to quit trying to find a job.  Let’s just say this is a complicated and dangerous time for the country, and the world.

Both the millennials and GenZ sit at a crossroad.  On one hand, they know very well that higher education and developing modern skills are the keys to success.  On the other hand, they know that the risks are high.  Technological changes could blow right past them, even with a good education.  There is much discussion of not going to college, thereby avoiding a financial trap, and learning trades on the job.  Even with states turning to free education for those who cannot afford it, we still cannot see where all this will lead.

Millennials have seen the results of financial mismanagement.  The 2008 recession taught them early in life that outside forces can crush lifetimes of saving and careful planning.  They recognize now that brands better be genuine; that value needs to mean long term value; that experience outweighs possessions; and that commitment needs to be real.  For many, Uber is more valuable than two cars in every garage.  The future will be full of sharing, both experiences and objects.  Auction houses tell you that collectors are becoming rarer.

A recent study showed that jewelry placed next to last in a long list of categories that people spent money on last Christmas.  I first heard that expressed by American Express in a study they did after the Great Recession.  At that time, they felt that jewelry and watches were the only two important consumer categories that were going to suffer and decline.  It surprised me then - it does not today.

Millennials will not avoid buying jewelry.  Not at all.  Setting aside the inherent problems that the jewelry has in marketing, personal adornment and gift giving is not going away.  Millennials are still very much committed to engagement and wedding rings, as they are imbedded in an outstanding event in life, an experience that needs to be marked in a visible way each day.  

But beyond that, jewelry purchases are weighed far more carefully when it comes to value judgements.  A $20,000 engagement ring works fine with body jewelry that does not even need to made up entirely of precious materials.  Jewelry needs to take on aspects, at times, that has little to do with the product itself, like a memorable walk one evening on a Paris street.  Who made the piece, and what is their story?  In what country and under what conditions was it produced?  Is it unique?  Can it be customized?  Can you make a piece that I designed?

Most important, I guess, is that millennials will be more self-expressive than previous generations.  Yes, their development of large cohorts means that they share opinions, even contradictory opinions, when it comes to life style.  Increasingly, in all of that, is a rejection of some traditions, and establishing new ones.  Many will buy diamond engagement rings, but many will not, or will use a colored stone center.  

The jewelry industry will need to deal with that in new ways.  It will need to listen, to expect widely varying demands and requests, and to have developed the tools and skills needed to respond robustly.  It will need to be truly non-judgmental in what they see and hear.  Think of it as a reflection of the hyper-speed in which our world is changing.  Accept it, or not, at one’s peril.

Friday, July 12, 2019

A Series, Part 1: What Does the Future of Jewelry Look Like? The Gig Economy

It is about a year since I last posted to this blog.  Have you noticed any changes in the jewelry market?  I have been preoccupied with planning a possible book about the state of the jewelry business in the US.  I have no publication date - possibly because it seems that everything is changing faster than I can handle!  In any case, if you are interested in knowing about such a book, please do just drop me a quick note and I will e-mail you if and when it arrives.

We all know that our world is profoundly changing and at a pace that keeps us breathless.  As we move into new paradigms, people and companies that are in the vanguard are leaving most of us further and further behind.  We are in a moment now where a majority of the population lives in resistance and confusion, seeking to maintain the patterns and infrastructure built over the past century or more, even as we see that mode of life collapsing in front of us.

We only need to imagine for a moment for example, just how we would build our cities, roads and airports today, were we able to start from scratch.  Our populations are now struggling with the problems of concentration in big cities, a failing and outdated infrastructure, an agricultural and manufacturing base that has seen radical transformations and a steep decline in the level and opportunities for employment.  All of it is compounded by growing serious problems in our climate, a level of problem that will demand sacrifices we can barely understand and properly foresee.

We cannot for even a moment think that somehow all this will bypass the jewelry business, and we will be able to merrily go our way.

These days, we spend a lot of time looking for good news.  Yes, the US economy seems to be continuing the long, bumpy, slow growth it has experienced since 2009, and yet there is uncertainty and anxiety prevalent in most of the country.  Consumerism, the hard core of our economy, seems to be rolling along, put it seems to be doing it by reaching levels of debt, both public and private, that has to give us great pause.  And some undercurrents of how people spend, and on what they buy, has changed in a way that does not seem cyclic.  It seems permanent and deepening.  In one recent analysis I saw on ranking the popularity of different product ranges, jewelry came out to be 58th out of 60 categories of products.  Why that is so, and how we got there is a question we have to ask.

The issues are complicated and it would not be for me to even try and take a full shot at it here.  But there are prevalent factors at work that we can see pretty clearly and are worth noting as we think about the future.

This is the first in a series of posts that will cover these issues.  Some of these are long term problems that will be difficult to resolve.  Others are positive factors that could help the jewelry business.  Our business is very fragmented and stratified, but there are core aspects that effect everybody in some way. It is critical that we adapt, at our own pace and in our own way, to how we are affected.

Here is a short list of trends that are changing the face of our future.  Some are global, some are specific to the jewelry business.  None of them (or others I will touch on) are static, dying or fully comprehended and managed.  All of them will, in relatively short periods of time, affect how we think, live, work and survive.
  1. The Gig Economy
  2. Millennials
  3. Climate change
  4. Consolidation and/or decline
  5. Natural diamonds vs lab grown
  6. Banking
  7. Image 
  8. Demographics
  9. Retail evolution
  10. Industry structure
  11. etc, etc, etc...
*  The Gig economy.  The unbundling of labor has been going on for many years.  Think of the auto industry, which once manufactured the bulk of components. Now, much work is contracted out all over world, and with that has come the undoing of labor power and progressive wages.  Contractors now dominate many businesses, offering the possibility of greater income if one possesses strong skills, but also contains the uncertainly of very irregular income.  That has made people very careful about how they spend money.  This trend will intensify in the years to come.

Some thoughts on how this directly affects the jewelry business.  In the US, we have to acknowledge that we have a very mature business.  Growth is slow (this year we have seen declines according to the US Department of Commerce), and we feel lucky to see it rise at low single percentages.  But both suppliers and retailers tell the same story - business is tough and is requiring us to work much harder to maintain volume.

While there are many reasons for all this (as I will try and enumerate in later posts) the Gig economy has a role.  Companies are not adding payroll.  They want flexibility that allows them to respond more easily to the vagaries of business, and they want to avoid the ancillary costs (such as health) that comes with full time employees.  As a result, many people see that their working lives will be one of a series of temporary employment as contractors.  Contractors quickly learn that irregular income means great care in how they spend.  And that, in turn leads to tempering the purchase of luxuries, both in quantity and price points.

I recently watched the Gig at work.  I was a mentor here in New York at a session run annually by WJA (the Women's Jewelry Association) aimed at young aspirants in the jewelry business.  In past years, the conversations would most often focus on what to expect in the employment world and how to best be prepared to enter a job search.  This year, almost everyone came in presuming that jobs will be near impossible to find.  Instead mentees came in with plans, some very advanced, on how to develop their own businesses or services.

The Gig economy will only grow.  The days of long term employment are ending, and with it will go the sense of lifetime financial security and pensions, an aspect of American employment that has significantly receded already.  There is little loyalty between employers and employees any more, though we have say that if there is any it can usually be found in small family businesses like those found in the jewelry business!  Too often, though, in those cases the benefits are thin, and there is little or no room to advance in a family business.

If you are in retail, you will need a compelling pitch to sell a Gig-er when they show up in your store.  And that applies in both the Internet store and brick and mortar store.

Nevertheless, as our industry contracts, as it continues to do, the future will will need to increasingly deal with the inherent income gaps - and insecurities - that are an integral part of the Gig economy.

Tuesday, July 31, 2018

De Beers, Lightbox and the Impact on the Diamond Industry

De Beers has announced the formation of a new company, Lightbox, that will be selling man-made diamonds (MMDs), mounted in earrings, pendants and bracelets - no rings.

I will assume everyone has read the details, and heard their rationale for claiming that this move will have little or no impact in the natural diamond industry.  Briefly, they will be selling MMDs in finished jewelry with total weights up to one carat, mounted in silver or gold, and with simple pricing - $800 per carat.  There is no grading of the stones, which are white, yellow, blue or pink; the jewelry is meant for “moments” not “milestones” (like weddings).

De Beers has arrived at this moment after a few decades of seeing their business transformed from a monopoly into a commercial venture facing all the pressures of a competitive market.  

At the turn of the century, Rio Tinto, with their major mine at Argyle in Western Australia, went their own way, sensing that they would do much better by selling directly to cutters, especially Indian companies, than by contracting to sell productions through De Beers.  Then came the EU, forcing Russia to cease selling their productions through De Beers.  Then Botswana started to take a larger and larger share of the profits in their major mines.  De Beers, in what seemed like an appropriate response, liquidated most of their $5 billion stockpile, as its function as a market buffer was coming to an end.

De Beers initiated or supported a variety of actions aimed at maintaining their market position.  That included Supplier of Choice; CSR; the Kimberley Process; beacon programs; the co-venture with LVMH to open De Beers stores (now fully owned by De Beers); and developing a brand, Forevermark.  Beneficiation became the new word in Africa, as De Beers was induced to yield more profits and control in Botswana, South Africa and Namibia.  It would be fair to say that all these efforts, aimed at maintaining industry leadership, have met with mixed success.

All of this occurred during a period in which diamond prices became more volatile and many mines began to approach end of life.  Major productions of diamonds are in decline, not only for De Beers but for all producing nations, and it will continue that way in the future.  Some mines have already closed, others will be closing almost annually.

None of this was lost on anyone in the industry, and De Beers, having always planned well ahead, must have gone through continuing reevaluations of their position and what their future might be, or could be.

De Beers had been very successful over many years in nurturing their sightholders, with three main objectives in mind, aside from maintaining their monopoly.  See to it that sightholders made money, but not too much.  Get diamonds downstream with the lowest possible intermediate markups, partially by generating competition between the sightholders.  See to it that diamond supply stayed close to demand so that prices could rise, achieved most of the time by controlling stock levels and mine productions.  And, of course, all that would work as long as De Beers was a monopoly.

Now, all of that is essentially out the window.  

So the thinking had to turn to imagining the company’s business in the future.  For one thing, very early on, start producing MMDs if mining did not have long term viability and profitability.  GE and Sumitomo had already been doing it for decades, and supplying industrial grades would keep De Beers in that business.  And, unlike GE and Sumitomo, De Beers would also have the additional objective of acquiring the skills to produce gem quality diamonds.  Selling diamonds for $800 a carat is a lot better than $1 a carat for industrial bort.  It must have been clear that the historical core business, mining gem quality diamonds, would hit a wall some day.  That wall is now in view.

This led De Beers into a new four-part structure: produce MMDs, own retail stores, develop an international brand, and manufacture jewelry.  And, of course, work the mines as long as they remain viable.

Those internal discussions must be continuing daily, as none of this comes easily. But the tilt is clear.  The miners at De Beers are steadily being edged out by the marketers.  What better evidence is there of the evolution from the old De Beers than the Oppenheimer family selling their interests and stepping away?

The decision to develop Lightbox is, by far, the most momentous move the company has made since the creation of the cartel, one that many observers in the industry have long been expecting.  De Beers has the skills in the Element Six division to mass produce gem quality MMDs.  So here is how I guess the decision process might have gone in developing a 10-point program.

  1. OK, we have a decade or two to convert the business from mining naturals to producing MMDs and essentially becoming once again the major producer of “diamonds.” 
  2. We have advanced the technology to the point where we have an edge, but if we wait too long, other producers will catch up.
  3. We need to protect our sightholders because they need to be there for at least another ten to 20 years.  And we need to sell mine productions as fast as possible, and at the highest prices bearable.
  4. Some sightholders are already developing MMD capability, wholesalers and retailers are not hesitating selling MMDs, so that wave has started.  We need to act to try and kill that  kind of competition.
  5. We need to make a dramatic start, but in such a way as to damage the competition but keep our sightholders from screaming.
  6. This will not be easy.  To minimize the damage, let’s keep the price points down; do no grading, as that is done only for “real” diamonds; do not make rings, as that is the big driver of the natural diamond business.
  7. We cannot say that Lightbox will impact sales of naturals, which of course it will.  No, that’s no good. 
  8. We cannot say that we do not know what impact it will have, because that will really drive the market nuts.  No, that’s no good. 
  9. Let’s conduct a survey on how this range of jewelry will sell.  It should be fairly direct to show that we are addressing a big piece of the market, under $1,000 retail, with a sort of upgraded costume jewelry. State that this market sector that has been poorly serviced, and that the new lines will only act to enhance "real" jewelry sales. 
  10. Moreover, to demonstrate that this is a “new” business, lets disintermediate our entire established distribution and go directly to the consumer (DTC).
This survey, which I have not seen, gave them what they wanted - an indication that the major impact will be on costume and Moissonite.  Given a choice, will a consumer not pick MMDs over wannabe simulants like Moissonite or CZs?  That’s an easy one.  

The reality is that retail price points up to $1,000 are critical to all jewelry retailers.  It represents the bulk of the traffic for all mass and mid-market retailers.   The range is important for establishing relationships with consumers.  This is not an underdeveloped range in the market, but a good deal of it has been taken over by silver, lower karat gold, and non-precious materials, especially with gold prices staying high.  And diamonds have very much been in this range.  So I do not buy the claims by De Beers based on their survey at all.

So far, De Beers cannot be faulted in what they have done.  This is straightforward business planning for a company that is feeling the obsolescence of its business model.

The question remains, what else are they planning, and what will be the real impact on the industry?

It seems very unlikely that De Beers would be taking this direction, plunging into a product that has been attacked by many diamond people, just to pursue this very limited range of fashion jewelry.  That would leave them a minor player in the future diamond business.  Also, spending about $100 million to build a new factory in Oregon could not be justified to sell “moments” jewelry.  Nobody can reasonably think that is their short or long term objective.

I have long thought of MMDs as the logical product to fill what will be a growing hole in the supply of diamonds as mines expire, the earnings gap grows, and a large, new middle class rises in Asia.  We already see retailers hastening to add MMDs to their selections, a trend that will accelerate and force competitors to feel obligated to follow suit.  The timing of such a trend really booming is hard to predict, but it is approaching quickly.  If De Beers wants to position itself to be the key supplier when that trend matures, it cannot wait until it happens and then try to plunge into the market with MMDs.  It needs to start now with this innocuous effort and work to establish its position well in advance.  And clearly, it is willing to do so knowing that it will potentially create chaos and disrupt the natural diamond business.  This is a calculated risk, but one that De Beers almost has to take if it will remain a major factor in the business over the long term.  And long term is what De Beers has always focused on.

No one should underestimate the effects that Lightbox will have.  It is going to disrupt the natural business to a far greater degree than has already occurred.  Lightbox has made MMDs a totally acceptable product.  It will incentivize those already producing MMDs to ride this new coattail and to increase production and pursue technological advancement.  It will force many retailers to seriously consider carrying MMDs from Lightbox, and undoubtedly from many other companies.

It may also accelerate the decline in natural productions because MMDs, in the most popular sizes, will be of far better quality than naturals and available at far lower prices.  Exploration and development of new diamond mines may slow considerably as companies will seek near assurance that the productions will have high value.  Existing mines may become unprofitable, and some may alter their extraction processes in order to avoid the costs involved in producing low quality diamonds.  The recycling of existing diamond stocks will boom further.  Most importantly, there will be little reason for naturals and MMDs not to be mixed in the manufacture of popular jewelry, and be fully disclosed as such.

There are many other aspects of this evolutionary and revolutionary moment that occur to me, perhaps a subject for future posts.  To believe that De Beers will not expand the range of this line to include rings and more expensive products is foolish.  The same is already true for many other manufacturers using MMDs - and De Beers will have to be there eventually if they are in fact going to be the big dog.

The attempts by various institutions in the industry to fight the expansion of MMDs, even punish dealers who would dare to carry MMDs, is not only counterproductive, but will also guarantee that the disruption to come will be even more painful than it needs to be.

Friday, June 8, 2018

The New De Beers

This past week we saw De Beers introduce Lightbox Jewelry, a full-bore, direct to consumer (DTC) retailer that will exclusively use man-made diamonds (MMDs) produced by their Element 6 division.  The concept is neatly packaged to offer a basic selection of body jewelry at moderate prices.  The DTC approach is intended to circumvent the entire traditional channels of distribution established by De Beers over the last century, in an effort to demonstrate that this is just a low-end, low-value product aimed at an under-served public.  De Beers claims that it will only benefit its existing clients by demonstrating how much more valuable "real" diamonds are.

This move cam as no surprise at all to me.

There are many gaps and holes in this plan, and I will try to outline them in future blog posts.

To begin with, I posted three times in 2015 with my views on the subject.  Here are the links to those blog posts, as it would save me time repeating the points I made back then!

Though I did not say it directly, my contention at the time, when I noted that we were facing a "paradigm shift" in the very nature of the diamond business, was that it was inevitable, logical and unavoidable.  De Beers, among all the diamond mining companies, was the only one with a developed marketing division, and an apparent wish to survive the end of large scale diamond mining.  Rio Tinto, currently the third largest source, will step out of the business within 10 years.  Alrosa, Botswana and Namibia are a bit further away from exhausting their resources.  None of them apparently seek to have a position in the diamond business once their mines are played out.

In that regard, De Beers stands alone.  At the better end of the diamond market, it has wholly owned stores under its name; a brand in Forevermark; an effort to capture diamonds being recycled; and now a first entry into the mass market with the only product that could replace declining supplies of natural diamonds with something that is close.  No, Moissonite and CZs will not do.  In sum, we could look at all of this as a three-pronged offensive aimed at becoming the dominant power, once again, in the diamond business.

Anyone who thinks that De Beers' objective in using MMDs starts and stops at fun body jewelry is, in my opinion, very mistaken.  Barring disastrous geo-political catastrophes, the world's population will grow and will continue the expansion of newly affluent and rich publics.  As demand for jewelry grows along with stronger demographics, the need for greater supplies of "diamonds", however we define them, will mean that well-established suppliers and manufacturers of MMDs and MMD jewelry will have the biggest market opportunities.  De Beers wants to be number one in that situation, and if that requires expanding it selection into larger diamonds, even into engagement rings, it will do so in a timely manner - and with little hesitation.

De Beers is building for the future - its own future.  We cannot blame them for that.  It is the very nature of commerce.  For those in the industry that still believe that De Beers should be protecting its traditional clients, I say it is time to realize that that position is untenable and completely unrealistic.  Yes, De Beers will, of course, continue to do whatever it can to sustain the natural diamond business as it still has huge investments and interests to protect.  DPA is a good example of that.  And it will continue to seek the highest prices it can get, with sights or not, and at the fastest rate possible.

But this is a new day, one in which the legitimacy of MMDs as a viable product is here.  However it turns out, the New De Beers will be, in time, very much unlike the old one.

I have many observations on the impact of Lightbox, and on the possible repercussions. I'll save those for next time, as there are too many to cover here.  Feel free to contact me if you want to see early drafts.

Friday, May 18, 2018

Fine Jewelry in 2018 - Suppliers in Transition

Suppliers are regularly in turmoil over how to respond to the significant shifts in distribution and consumption.  It should be noted that many suppliers are far upstream, and feel the realities of the front lines last.

We already see that upcoming technological and demographic changes are causing distress at the retail counter, and we covered some of that in the last blog.  Suppliers have been forced to make changes in their modalities, sometimes painfully.  What factors are at work:

  • The number of retail operations is shrinking, and so are the number of outlets.  That means fewer retailers as customers available.
  • The market has been forced to adapt fully to the fact that the US is a very mature market, and has been way over-stored for a long time.
  • What might have been a more gradual adjustment to supply and demand (fewer stores to serve a stable, slow-growth market) has been radically accelerated by Internet marketing.
  • Internet marketing puts everyone on a service-oriented platform.  You need to be quick, efficient and fully responsive.  Low-cost producers win, notably in the mass market, but even very high-end jewelers need to provide good access and flexible service.
  • Many retailers have adapted to higher priced jewelry - an aspect driven by high material costs - by buying less, closely managing inventories, and asking for more support.
  • Many retailers have shifted emphatically from precious metal jewelry to costume and hybrid products in a desire to maintain important price points.  That leaves manufacturers of precious jewelry with thinner slices of the pie.
  • Many designers and manufacturers have essentially given up relying on selling retailers as the core of their business.  They have gone direct to consumer (DTC) after struggling for years with the demands of retailers.
  • Diversification has become a key word among retailers and suppliers, but basic merchandise continues to be the bedrock of the business.  That means that everyone competes on stud earrings, solitaires, line bracelets, etc, and diversification ends up, at best, on a back burner.
  • Suppliers are confronted with some hard choices because the middle market is weak.  As the so-called middle class has declined over the decades due to stagnating wages, job insecurity, automation, etc, suppliers have sought to either move into true luxury products or into low-end costume lines.  Both choices can represent huge structural and economic challenges.
There was a time when the rapid expansion of shopping malls and urban sprawl provided a near ideal environment for growth and the establishment of new businesses.  We are not ever going back to such halcyon days, and are probably better off for it in many ways.  The intensity of competition for the business that is there today will result in better value and service for consumers.  The key question for suppliers is how they can play a key role in that process.

I recall a chat I had with a long-dominant supplier of colored stones, and he described the problem well.  Historically, he had large manufacturers as customers who bought from him in bulk and in a predictable pattern.  Most of those businesses have deconstructed, especially in the US, and now he gets many requests from designers seeking specialized selections in small quantities.  The business is still there, but radically changed, and he is confronted with trying to revise and upgrade his systems optimized for dealing with a very different customer base.

In the diamond business, dealers have adapted to the vicissitudes of fluctuating prices by buying closer to their needs  - many retailers don't even bother stocking much loose goods any more!  While the days of the De Beers monopoly and reasonably stable pricing are gone, the on-line data bases have arrived in strength, offering far more efficient ways of meeting consumer needs.  The old hands may not wish to invest in the needed skills in communication and distribution that comes with these changes, and so they will fade away, replaced by those with full involvement in these new realities. 

There are, of course, countless variations on how suppliers used to work, and how they now work, as they try to feed an industry that has gone from a quite hierarchical and specialized structure that was regional and local, to one that is mostly flattened and international.  And new variations will rise to meet specialized needs.  

There is no doubt that we will be dealing with these changes for years to come.  There is also no doubt that the business will continue, though the path from source to consumer will be much more efficient and far more responsive.  

Thursday, March 15, 2018

Fine Jewelry in 2018 - In Trouble and Drifting

This year has been, if anything, disorienting.  We keep thinking that things should happen in the same way that they have happened in the past, even given the business cycles.  But somehow, they have not, even though the US economy, and the low unemployment figures, keep telling us that things are all moving in the right direction.  GDP is up, the stock market has hit record highs almost every day until recently, consumers are spending and credit card debt is rising (though that may not be that good!), and so forth.  And yet, the diamond and jewelry business seems stuck in a rut.

If we are to develop progressive business policies, we need to look closely at market realities, especially those that we should accept as fundamental, not cyclical, trends.  So here are some thoughts.

  • Retail as we have known it is rapidly disappearing.  We have lived through countless revolutions and evolutions in retailing over the last decades.  This one is different in scale and impact.  Large chains are closing stores at a rapid rate, and some are disappearing altogether.  In jewelry, the pressure is across the board; independents are closing, chains are hitting walls, and global brands are no longer growing significantly.
    We can blame it on the Internet, but that is too simple.  Yes, we will probably see overall retail sales that shift even more heavily to Internet sites - some expect that sales via the Internet will go over 50% this season, though that may not be the case in jewelry.  But many people search on line and then come into stores educated and price aware.
    But it is more than that.  All stores now compete with all stores.  The Internet has allowed everyone to reach into everyone else's pocket.  In total, we have far too much retail space (including cyberspace) for the business that is done, huge as that is.  The pie slices are getting to be too small for many firms to survive.  What we are seeing in the way of closings is an effort to scale back enough on brick and mortar stores to restore reasonable profitability.  We just don't know how much cutting will be needed.  It may be a lot more than we can imagine.
  • Retail formats have gone stale.  Closing unprofitable stores is an obvious thing.  Sears keeps closing them but that does not seem to make a difference.  They are not cutting fat, they are cutting muscle at this point, and we can probably guess that they will be gone relatively soon.  The essential problem is that the format - big stores, very low service and assistance, and abysmal merchandising and stocking processes - is boring beyond belief.  As everyone now knows, the store is not needed for the bulk of the merchandise.  The public has gotten totally used to ordering on line and having it delivered.  It isn't as if we need to go to a mall to pick it up.
    Speaking of malls, what better indication of massive changes in retailing do we need to see than hundreds of malls failing or being converted to a wide range service establishments.  It used to be accepted by some that consolidation brings the benefits of scale.  Signet went on that track, absorbing dozens of smaller store chains over the years.  But now Signet is planning many changes, including far greater emphasis on Internet sales, personnel changes, etc.  Being the Big Gorilla, as we have seen elsewhere (e.g., the apparent total closing of all Toys-R-Us stores), may not be salvation, but more like a millstone.
  • Retailing will focus on four important skills.  Those would be service, speed, well-informed salesmanship and innovative customization.  Retail will rely on sharply priced staples (think food, soap, apparel, stud earrings, etc) with a range of choices not possible in a brick and mortar store.  And a seamless operation blending the Internet and physical stores.  Store sizes will shrink, carrying selections that need personal involvement or produce high turnover.  We will see chains close stores that overcrowd a market area, or are too large to fit these schemes.  We already know that many retailers are ill-suited to convert to this new world, and, as in the past, whole ranges of them will disappear.
    I think of department stores (again, they consolidated and now struggle), who have huge spaces that carry anything one might want. But turnover stinks, and merchandise imbalances are eating them up.  The real estate is worth more than the business.
    I was in an Orvis store here in New York, looking for a particular item that was in their catalog.  Sorry, not in the store.  Orvis sends catalogs frequently, sometimes a few a week.  The selection in print is far greater than the store can carry, and I asked about that.  I got a good response.  The sales person opined that in the future in-store people will assist in making purchases by knowing a great deal more about the products, and their applicability to one's needs and desires.  The store format will become smaller.  He then went online for me and ordered the item I wanted, sent directly to me at home.  These are not minor changes to how retail will work.
    I also saw a column about a new movie theater in New York.  Imagine that!  But they show only older classics; they have actors, directors and producers come in to talk about the films they made.  They have a library, a bar and restaurant, a place for people to sit and chat.  I'm ready for that.
  • The question is - can we do something similar to that in jewelry? That's a head scratcher.  We can all quickly line up lots of issues that limit what we might be able to do.  Negativity is easy.
    I recently attended a panel discussion that included, besides the moderator, an estate buyer, a designer and a social media expert.  Not one of them could articulate a cogent rationale for what they do, or what the future means to them.  The estate dealer loves classic pieces with great provenance (he showed some and they were wonderful!).  He believed strongly in buying pieces with proven longevity.  Very sensible, I think.  The designer also showed beautifully executed pieces (all high end, great for big events) but then went on to say that the future will contain far more non-precious materials  than are used now.  That suggests concern about price points, but that was not mentioned.  The social media expert, essentially, said that Instagram is great, and it is so much fun to find and shoot wonderful jewelry.
    So that session, for me, was a flop.  This actually could have been an exciting occasion to dig hard, ask good questions, and make sure that the panelists prepared well.  A Blue Sky moment.  But, as I have seen so many times, people in the jewelry business are anchored in the past.  We have lots of creativity in design.  What we lack is creativity in business.
Next time, some thoughts on the supply side.