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.

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.