Friday, June 26, 2020

The Future of Jewelry, Part 7: Image - In the Age of COVID-19

Here is the list of issues we have been covering — we are up to number 7.
  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
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I have been writing about these "issues" for a while.  I did not start out trying to put them in any particular order, but here we are addressing the first of the last four, and all are bound to be particularly affected by the pandemic, no doubt in ways that none of us could have conceived of just months ago.  

The definition of image, and how that definition is being forcefully altered, is one we ponder carefully these days.  The word itself is in many ways more powerful than an alternate that some people use - brand.  Some brands, say Coca Cola, have instant global recognition, but what we retain is sensory - what it tastes like, what the classic bottle looks like.  Such images are far more powerful than any words, though it is the word or words that evoke the images.

Images, and brands, are very hard to develop.  I once heard a highly successful couturier (can't remember the name!) say "My brand hangs by a thread."  Aside of it being a good pun, he was saying that brands are hard to build and maintain but are so easily destroyed.  How true.

In jewelry, we have always seen a parade of companies or individuals proclaim their brands as if they were done deals.  Almost all of them go past us unnoticed and unremembered. Why?  Because there is too often no compelling images associated with them.  A successful brand need not be global or even national.  It only needs to be instantly known by some group of cognoscenti who truly value the story, the design element, the creativity, the extraordinary skills - the image.  

We can call up only a few brands in jewelry that instantly evoke a response - good or bad.  JAR never advertised, but built a brand worthy of special museum shows.  Verdura lives on well past the life of the creator.  We know exactly how Yurman built his brand, and what his image is about.  The global retailers, such as Tiffany, Cartier, Van Cleef & Arpel, and Chanel, have distinct images.  So do some retailers in local markets.  How about Pandora?

But all brands have now been swept up in a storm that has been building for decades.  We first saw that in the diamond business with the reactions to the horrors of African wars and uprisings, funded in part with illicit diamonds, and culminating with the Blood Diamond movie in 2006.  De Beers immediately responded to that film, knowing full well that the diamond "brand hangs by a thread".  

At the time, the public barely reacted, though the Great Recession hitting shortly thereafter, diverting attention away from such concerns.  Since then we have seen an ever-growing   wave of issues accruing social awareness - climate change, sustainability, equal pay, equal access, minority rights, social justice, and personal responsibility.  We witnessed how social media exploded, which contributed to seeing celebrities of all sorts quickly condemned and fired for everything from sexual harassment to racist comments.  There goes their brands.

Now, image/brand has taken on new dimensions that were rarely addressed in the past.  The pandemic has only intensified and accelerated the spread of the nation's structural problems.  We feel the weight of the responsibility we have for each other, and for the need to reinforce ethical standards.  People say that we have politicized our social relations, but I say we have socialized our politics.  People and companies, and their images/brands, are now viewed on where they stand in the spectrum of environmental and social behavior.  Neutrality is out.  A company can no longer say that it stands aside of social or political issues.  

How a company or individual sources components, employs people, and plays a role in the community all count as never before.  A company's policies on a range of issues are as much a part of its image as are the products it sells.

So, perhaps we have a new four C's, those critical to building an image - Competence, Compliance, Content and Character. 








Friday, June 5, 2020

Trade Shows Post-Pandemic

Trade shows have been an essential part of the jewelry business in the US for the last half century or more.  We have seen transitions, expansions, contractions, and evolution over those years, but we now confront unfamiliar, highly disruptive forces. Pandemic and social distress.

The pandemic will leave us with an altered retail environment, but it is one that was coming slowly anyway.  Department stores have not been able to counter the efficiencies and range of cyber-retail, and have been shrinking and fading for years now.  Independent stores of all sorts, not just jewelry, have also been disappearing at a rapid rate, though mostly because the country became badly over-stored in the boom years of the malls, and for many other reasons.

So something had to change.  We didn't know into what, but we did know that retail formats were not keeping up with how people lived, worked, and shopped.

What I recall so clearly are the halcyon days when there were dozens of expanding jewelry chains and working at trade shows meant appointments from opening day to the last hours of the show.  For a few years now a few chains dominated, with many dozens of others either closed or merged.  There went the endless appointments.

It was also a time when there were nearly three times as many independent jewelers in the country then there are now.

Some trade shows used to have vendor waiting lists.  Trade shows used to have aisles crowded with buyers.  Trade shows used to be big party times.  Much of that is gone now, pandemic or not.

Does that mean trade shows should disappear?  Not at all.  I listened in today on a CIBJO event on the subject, where the speakers were from four major shows - Basel, JCK, Hong Kong and Vicenza.  It was informative and confirmation of the problems. All the participants fully acknowledged that the shows will be back, but not as we have known them.

There are the obvious new issues to deal with, principally procedures to protect visitors from Covid-19, and dealing with what will probably be a slow return of both buyers and vendors.  There was a consensus that any show going forward will need to be virtual as well as actual, though nobody is sure what that will look like or how effective it will be.  No doubt, plans are being developed that were not revealed during the session.

This is going to be tough, and many questions remain open.  Will the shows shrink to match turnout, and if so, how will the costs be carried?  Will vendors and buyers pay more to attend?  At least as far as we can see, air travel will be resisted, and may not be available.  Will hotels and restaurants be set up to deal safely with conventions?  And how will merchandise be sanitized and handled as they go from one person to another, a problem confronting retailers as well?  And will the shows survive if 2021 does not work?  If an effective way is developed to promote lines on virtual shows, will that in turn produce more actual shows, perhaps more focused and smaller, but more expensive?

If we dig into the issue, the questions and possible solutions are almost endless.  No doubt that the efforts will be made, and 2021 will be the first test of new show models.

However it turns out, shows have real value in this business.  There is serendipity - the chance discovery of a previously unknown line that suits a retailer's business.  There is the importance of working on and deepening partnerships between retailers and vendors, on how to handle product that does not turn well, for example.  There is the maintenance of industry relationships - we are, after all, a small industry - that help in learning about new ways to promote and sell, in hearing of trends, and in general education.

The path will be found, because jewelry has timeless attraction.  It isn't going away!  But shows will need to be relevant, accessible, affordable, and fun!

Tuesday, June 2, 2020

The Future of Jewelry, Part 6: Banking - In the Age of COVID-19

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Here is the list of issues we have been covering — we are up to number 6.
  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
_______________________________________

Have you been wondering where I am?  So have I.  We have all, it seems, been wandering in a wilderness with no milestones, road signs, or even taco carts.  I started out months ago offering some thoughts about an industry that was having a bumpy ride, and found that when I was half way through, everything was turned on its head.  So I paused, just to see what we might see as we look ahead that is not a mirage.

But now, as we observe worldwide assaults on the status quo, ailing as it is, we need to stand back, take a deep breath, and prepare to dive into very unfamiliar seas.

Our case in point in this post - banking.  Answer - what banking?  There isn't any that we recognize in the jewelry business, and understandably so, as banks have no idea where they are heading themselves, except into uncharted waters.  Double that issue when considering the specialized needs of the gem and jewelry business, further complicated by regulations on money laundering and terrorism.  Further, jewelry is not, by any measure, an "essential" service, so it falls down the list, far down the list, of economic priorities.

In defense of the importance and relevancy of the business for mankind, we make a point, for example, that there are perhaps 10 millions of people involved in the diamond business.    That's a very small percentage of the world's population, and a tiny part of the American economy.  So we do not stand out either for the essential aspect of what we do, nor as a big employer.  In the age of Covid-19, there is not much of an argument we can make.

That is not to say that banks or other financing entities as simply going to throw in the towel.  Their first priority, surely, will be to see what can be salvaged, or sustained, even in short term increments.  But over the last decade or more, many banks have abandoned the business altogether, and especially in the case of major lenders in the diamond business. Unfortunately, major frauds have proved over and over again that the diamond business in particular is risky.  

A few months ago, I watched a series of videos covering a diamond-oriented conference held in Dubai.  I found it quite interesting because many of the panelists were quite open with their views on the state of the business.  In one case, I was particularly struck by the comments made by an investor who helped finance a company that was manufacturing and marketing man-made diamonds.  The investment of millions made total sense to him as the business was growing by solid double digits.  

My immediate thought was how unusual it was to see a major investor in our specialized business.  Here he was sitting at a conference filled with big-time natural diamond mining companies and their clients.  It seemed apparent that he did not consider going with any of them.  Deep trouble?  Very narrow growth potential?  A decline in natural diamond production?  Limited future in a business with far too many competitors?  I don't know, of course, but maybe all of that.

Still, we need to look at the issue of banking for the jewelry business prospectively.  No matter the nature of the end products, the public will continue to desire jewelry.  By its nature, jewelry is endlessly diverse, and that requires financing during the extended time frames required for design, production, distribution and selling.  In fine jewelry in particular, turnovers are slow, and that takes patience - and money.  But these processes are being rapidly transformed in the tech age, sharply reducing the need for financing and the risks involved for both parties.

It is helpful to look at banking in the context of the diamond business, central to the issue.  The business model used by De Beers over many decades worked very well, by and large.  Their core objectives were to protect the value of diamonds by acting as a buffer against changing economic conditions; to see sightholders make some profits (though not too much!) by cycling goods through ten times a year; and by protecting the producers, the mid-market - and the banks, by managing supply.

This all worked fine until Rio Tinto, owners of the Argyle mine, went their own way, followed by the EU requiring Russia to stop selling to De Beers, and Angola selling directly. Botswana and South Africa pressed for more control and beneficiation, and everyone started worrying about conflict diamonds.  Suddenly, diamond prices started to fluctuate like any other core product.  Dealers saw margins shrink to near nothing.  De Beers edged further and further away from their own rules, especially after they got rid of most of a $5 billion inventory.  And the Oppenheimers sold all their interest in the company.  What more need be added to all that?  That man-made diamonds came on the market, including Lightbox, De Beers' own effort?

The old structure is keeling over fast and has been given a big shove by Covid-19.  We know the months and years ahead will be a period in which companies will find new ways to find customers, eliminate intermediaries, and sell jewelry as directly as possible.  Banks will be back when they see daylight.  So will new non-bank entities that will provide financing under new arrangements.    

The times are uncertain, but we can be fairly certain that in a period of profound change, the opportunities will be big.  




Friday, December 20, 2019

The Future of Jewelry, Part 5: Man-Made Diamonds

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Here is the list of issues we have been covering — we are up to number 5.
  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
_______________________________________

Natural Diamonds vs Lab-Grown

Not a day passes where we don't read news about the steady expansion of the production, distribution, marketing and retailing of man-made diamonds (I have called them MMDs for years, even though the popular term these days is lab-grown, or LGDs).  The issue is topmost in the minds of anyone in the diamond business.

I have been cautioning diamond dealers about this disruptive technology for over twenty years.  (I have posted on this blog for years about the subject - see "The three tipping points of man-made diamonds"; and the post on De Beers announcing their jewelry venture using MMDs - Lightbox.)  Production of MMDs started with GE and Sumitomo some 70 years ago, but until relatively recently it was primarily for industrial uses.

Over the last 20 years, most people reacted negatively to my stating a conviction that MMDs will find a willing market.  De Beers had done a remarkable job of building the image of diamonds over a century, endowing diamonds with great value, and supporting that value by dominating the sourcing of diamonds and controlling its distribution.  People have seen how synthetics of all kinds - CZs, YAGs, Moissonite, emeralds, rubies, amethysts, etc, have all failed to have any significant impact on the sale of the genuine item.  That fact led people to believe that the same would be true for diamonds.  But some agreed early on that this time the effect may be different.

Rather than repeating the views I expressed in my posts from years ago, I will assume that everyone, by now, sees what is happening these days is very different, and grasps that this case is unlike anything we saw with the advent of simulants in the past.  Some quick points:
  • Just recently, Harrod's of London, announced they will be carrying a line using MMDs.  One can visit super high end Place Vendome in Paris and see a store carrying only jewelry using MMDs.
  • A while back, Rolls-Royce showed the dash of a car with the clock surrounded by MMDs.
  • Independent jewelers have led the way in adopting MMDs, with some reporting, with surprise, that as much as 75% of their engagement ring business is with MMDs.  I have long felt that independent jewelers will be the first adopters, as they can react quickly, and they do not possess the deep natural diamond inventories held by large chains.  But, over the last year or two, even the chains have jumped in. Recently, Signet announced that MMDs will be sold in all their stores.
  • Just as an example, I checked to see what the three retailers owned by Berkshire Hathaway, Borsheim's, Helzberg's and Ben Bridge were doing.  The first two have a ready selection of MMDs, and they are listed together with natural diamonds, if the choice made by a visitor is to see both types of diamonds.  No big deal is made to distinguish them.  MMDs are roughly 60% under the price of naturals (no perfect comparison was available).  Ben Bridge offers no MMDs, but does offer a choice of CZ centers in their process of creating a customized engagement ring.  I was able to assemble a solitaire with a platinum ring, a CZ center of about a 1.50 carat size, and a few small side diamonds, for $2,000.  Wow.  I never cease to be surprised by what companies will do to reach a needed price point.  Everybody, in their way, is fighting the battle.
  • I observed an informal survey of diamond dealers and manufacturers - midstream companies - that found about 70% of them are considering entering the MMD business at some level.  De Beers is not making any effort to deter the sightholders from entering the business (how could they when they are in that business themselves?), as long as they do not promote those lines as environmentally and socially preferable.  More about that later.
  • Even a casual search of web sites selling MMDs finds a large number.  Here is a good-looking one I stumbled over that does a straightforward job of selling engagement rings.  Vrai.com.  This site, like others, talks briefly about "sustainability."  But the big point is the pricing and the super basic selection of mountings. (full disclosure - I have no interest or involvement at all with this site.)
OK, we could go on and on about the explosion that is happening.  So what does it mean now, and what does it mean for the future?  Some comments:

Competition from MMDs has been building for years, but everyone ignored it because there were minimum productions; the technology was difficult and still in early development; and there was little, if any, marketing behind it.  But the disruption was evident for anyone who realistically assessed it.  I always felt that many consumers looking at cleaner, cheaper diamonds would have little problem opting for MMDs.  

The "Real is Rare" program being run by DPA (the association of De Beers and other mining companies created to promote diamonds) emphasizes the unique rarity and value of natural diamonds.  We know that rarity applies almost entirely to larger diamonds, say two carat and larger.  But 90% or more of all jewelry manufactured uses small stones.  People looking to sell their ordinary diamond jewelry find that those small diamonds have practically no value to speak of, certainly when one gets down to imperfect qualities that have been used so widely.  

Not only does the "rarity" pitch completely fail at such levels, but the advent of MMDs in small sizes, say under a third or half a carat, is slowly replacing low quality diamonds, and with each passing day that is happening faster and faster.  Imagine the impact on mines producing a high percentage of low quality stones.  The viability of such mines may fade well before the final extraction of their assets.  I have no way of knowing, but I would guess that this trend played a role in Rio Tinto's decision to close their huge Argyle mine in Australia next year.  

MMDs may be getting a boost in a way that may be hard to divert.  Some observers have been steadily looking to debase MMDs by proposing that over-expansion - so typical of an exploding consumer focused technology - will eventually make MMDs worthless.  That is possible, but unlikely.  But we have all seen the price of diamonds decline over the last couple of years.  Is it that MMDs are pulling down the price of naturals?  Doubtful, maybe excepting low quality smalls, where competitive price pressure has already been recognized.  We do know that decades of stunted wage growth has played a role.  We do know that Boomers were spenders and acquirers, but are now unloading personal jewelry as they plan retirement.  We do know that Millennials, and even Gen-Zers, prefer experiential activities rather than accumulating property.  We also think that miners see the coming tsunami of MMDs as a threat to natural diamond prices, and are pushing sightholders to buy.  Unfortunately, too many sightholders still suffer from FOMO - fear of missing out - and buy goods they don't imminently need.

But the problem runs much deeper.  The diamond business grew up with De Beers fully managing it with three important principals in mind.  First, dominate sourcing.  Secondly, prices have to be stable and supply balanced if prices are to slowly rise.  That leads to growing profits, especially for them.  Thirdly, sell to many sightholders, as this builds mid-level competition, which in turn shortens markups, which in turn gets diamonds to the consumer at a better price.  In effect, controlled release of diamonds into the world market raised prices, and generally allowed dealers and cutters to grow in size and worth, spite of the low margins.  That worked so long as diamonds were cut and passed downstream at a steady pace with each sight, ten times a year.  Simply put, five percent gross profit turned ten times a year yielded 50% ROI.

This process fell apart once the monopoly was gone, which started its slide over 20 years ago.  Prices now react to market conditions.  But the industry structure has remained, and many companies fought to maintain their businesses with lowering turnovers and shrinking margins.  The many companies that grew under De Beers market control are now out there fighting to survive.  This is leading to profound changes in the industry, and part of the answer for many is turning to MMDs, where margins are available now, even though that may not be the case in the future. 

The potential danger of ever-lower MMD prices, as production expands and exceeds demand, is real.  There are more and more companies getting into manufacturing both CVD and HPHT diamonds, and the momentum is only building.  I think the bottom will be reached in a couple of years, probably at a level where production costs approach market prices.  It will not be zero.

De Beers, in my opinion, made their jump for good reasons (see my post!) but it isn't for the stated reason - turning MMDs into disposable fashion, and selling finished jewelry at a cheap price. No, they must see that this may be the future of the diamond business, especially after mines continue to close.

The big marketing push that miners are making is that a) natural diamonds are real, b) only natural diamonds retain value, and c) the environmental impact is no worse, maybe better, that MMDs.  As I noted, does a .03 carat imperfect brown diamond have value?  No.  Is it rare?  Of course not.  Further, it is already common that jewelers are selling jewelry mounted with a mix of both naturals and MMDs.  I saw lines several years ago that were set with MMD centers and natural side stones. This will inevitable lead to jewelers and consumers equating the value of both.  As for environmental impact, an important consideration, MMDs have a chance to attain sustainability as the world switches away from fossil fuels, and as technology keeps improving the process.  Mining could make some advances, but not ultimately.

A personal view on naturals: De Beers has consistently promoted their value as being born in the depths of the earth billions of years ago.  Certainly true that naturals are old.  So is a lump of iron. But is this what people really think whenever they are asked about their diamond pieces?  Not ever in my experience.  They talk about the high felt at the moment when that piece was bought, given or received as a gift. They vividly recall where and when it happened, with whom and for what event.  People are excited about and love their jewelry.  But the age of a diamond fades when compared to those memorable personal moments we all have.

So, let's be real about MMDs.  where are we?
  • MMDs are, and will continue to be, very much part of the diamond business.  Period.
  • Every time an MMD is sold, it is a sale not made of natural diamonds.  This is definitely nibbling away at natural diamond sales.
  • The prophets of doom, saying that MMDs are worthless, just have no basis for saying that.  Are they dropping in price?  Yes, as would be expected with so many companies jumping into the business.  But they miss the point.  They are filling a real consumer need, and expanding the diamond business at. time when it is struggling to capture luxury dollars.  So a better approach would be to help the diamond business survive.  Bashing MMDs, which is a reality, only does harm without any benefit for anyone.
  • The time will come sooner than we think when most mines will be closed.  It would be wise to have a healthy business which will look primarily to two sources for diamonds - recycled diamonds, and MMDs.
  • It may be convenient to just consider the top of the market, where naturals will continue to sell in fabulous pieces of jewelry.  But the business as a whole needs broad distribution and acceptance.
Every week I hear from people who are trying to decide how to adapt to MMDs.  They never worried in the past about so-called competitors like CZs.  Now they wonder if the diamond world is entering a strange new paradigm.  It is.  




Monday, October 14, 2019

The Future of Jewelry, Part 4: 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.
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Here is the list of issues we have been covering — we 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

The Future of Jewelry, Part 3: 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.
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Here is the list of issues we have been covering — we 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
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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

The Future of Jewelry, Part 2: 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.