Here is the list of issues we have been covering — we are up to number 10, our last.
- The Gig Economy
- Millennials
- Climate Change
- Consolidation and/or Decline
- Natural Diamonds vs Lab-Grown
- Banking
- Image
- Demographics
- Retail Evolution
- Industry Structure
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I come now to the last of the posts covering ten aspects of the jewelry business that I see as important for us to consider. Of course, I started all of this over a year ago, well before we knew the word Covid. All trends move along- that is part of the definition of that word. But I took my time, being well immersed in this business, one which rarely moves along faster than a snail.
The jewelry business has been around for thousands of years. Some technologies have remained essentially the same. Other technologies have enhanced and broadened manufacturing, and, in the process, have made the distribution and selling of jewelry more complex, more inter-reliant, and more regional, if not global.
All of it has prevailed based on one consistent force - people want jewelry. This has been true in all societies, no matter how remote or insulated. Jewelry is intensely personal - it is worn on the body - and invariably evokes emotional associations unmatched by any other man-made product. That attraction will not fade even as we enter an epoch in world history that may bring change at a pace and depth that humanity has never seen.
All that considered, we plod along, a step at a time, dealing with what is at hand. Each of us sit at some point in the value chain, both contributing to and being affected by everything that happens between the material sources and the consumer. Those effects are now global in scope. Sometimes they benefit us individually, and sometimes they are severely destructive. Today, both effects have been greatly magnified by powerful natural, technologic and societal trends that are destabilizing established norms.
Some changes are already very evident. The Internet has now been with us for a couple of decades, so it isn't new. People in the business have long viewed it as being somehow unfair competition; that it fails to satisfy the most basic rules of selling jewelry. Almost in spite of that sentiment, it seems that the Internet has greatly scaled up most commercial skills to levels far beyond anything people have ever imagined. When the Apple store can effortlessly earn billions of dollars selling music one song at a time for 99 cents, we have to reassess how all forms of retailing are rapidly evolving.
It would be fair to say that some long term market forces have been driving change in the jewelry business for years, and will now be boosted. Here are four prominent ones.
Disintermediation.
We have been experiencing disintermediation for years. In my early years in the business, I saw that jewelry and/or jewelry components passed through a number of hands before reaching the consumer. Even though the variations could be many, the path could go from miners to processors, to importers, to manufacturers to wholesalers to retailers. In this example, importers and wholesalers are essentially gone; many manufacturers are now into retailing; and processors are into manufacturing and retailing.
This shortening of the string has been driven by constant pressure on margins all through the value chain. The jewelry business has been increasingly stressed by excessive competition, a direct result of a simple fact - the historic barriers of entry, especially in the mid-market, are low. The more the business has become global in nature, and the better communication has become, the more the margin pressure has built. When the world rebuilt and modernized following WWII, countries such as Italy, Belgium, India, China, Thailand, Israel - and to lesser degrees Turkey, France, Germany, Brazil - all brought significant added production into the market, and the pressure to cut out middlemen steadily mounted.
This aspect is especially telling in the core products. The grading of diamonds by the 4-Cs has largely commoditized diamonds, and the documentation has led to wide open international trading as well as the lowering of retail markups as online pricing became readily available. When it comes to core products such as solitaire rings and studs, there is now little hesitancy for diamond cutters (who are well-upstream) to sell directly to the consumer. DTC (direct to consumer) has hit all retail, not just jewelry.
Many such examples can be drawn, but the results are clear. In the mass market (which does include important retail price points up to at least $5,000), who makes the profit as the water gets squeezed out depends more and more on ancillary aspects - location, exposure, marketing, image and brand, expertise, salesmanship, even accreditation, history and social activism. But most critically, an online presence that covers all of that is an inescapable requirement.
And all of that applies to the now increasingly competitive high end of the market, and that extends down to well-established, historically successful local stores.
Access.
The reach of many companies is now global, and it is quickly getting more sophisticated. Virtual connections will make in-store experiences almost as easy and appealing as the real thing. With the advent of 5G speed, the range and creativity of what is possible will become stunning. I recently "walked" through a gallery exhibition of high end photographs for sale. It was easy, and I could look as long as I liked, saw all the prices and details. We already see sales professionals in jewelry chatting directly with a consumer, showing pieces close up and bringing up images of other pieces that are available. Just take a look at Instagram Live, to cite one developing example.
For the overwhelming market share, this kind of nationwide or worldwide access will take a real piece of the market. No, it does not eliminate the retail store, especially at the high end. A total integration of 'brick and click' is going to be an important format. By comparison to other luxury products, jewelry has done a poor job overall in this regard. Even homes, the highest cost purchase anyone makes, are now being sold based on virtual walk-throughs! Yes, the pandemic has killed open house events, but sales have boomed. It has also ended in-store jewelry trunk shows, but we see very few virtual trunk shows. Tiffany has already shown how important their online business can be, and all the important high-end global brands are rapidly building those abilities. None of this will disappear when the pandemic is conquered. Quite the contrary.
Business after the pandemic will surely include open house events, trunk shows and galas. But the enhanced technologies we are now utilizing will be a big part of that. An in-store event can draw dozens of people - maybe hundreds. A virtual event can draw thousands, and if one includes celebrities, hundreds of thousands. The scale of what can be achieved will explode. And nobody will even think of giving up the global reach - access - that new technologies are offering.
Obsolescence.
Retail stores will be with us forever, regardless of how the format will change. In the last post I covered how the formats we know are either getting crushed or are booming. The number of malls, department stores and independent stores will be reduced to a fraction of what they were at their peaks, and the way the survivors operate will be modified in innumerable ways. Consumers are quickly learning how to pre-qualify a visit to a store beforehand. Do they have they kind of products being sought? What are the prices and how do they compare with other stores? Is there someone immediately available to answer some questions? Are the pieces in stock, and if not, when can I see them?
I recently did something like this when I needed to buy LED replacements for old track lights that used halogens. No, the local Ace Hardware store did not have them, nor did Home Depot, nor Walgreens. And no, Amazon supplied replacements which, it turned out, were slightly too big. Even the fixture manufacturer could not help out. I found what I needed by dealing with a Texas store, where a well-informed sales person searched for replacements that fit perfectly.
OK, this is not jewelry. But if I needed to have a chipped stone recut, or an antique piece repaired, or a custom piece made from scratch, I would no longer wonder how to do it, nor would I be constrained as to where in the country, or in the world, I could have it done. Just look online.
This is not a minor change in how retailing will work. Almost any consumer, even those technologically challenged, fully understand that the very first thing they will do when even thinking of buying anything other than a quart of milk, will be to search online. And that is true, no matter how long a relationship that consumer has with a jewelry store. Viewed from the other side of the screen, any retailer that does not fully embrace the fact that survival now depends on how well they project themselves online is effectively obsolete. For them, the end is near.
If retailing is under the gun, so is wholesaling and/or manufacturing and/or being any kind of supplier.
Obsolescence comes in many flavors. I am reminded of a conversation I had with a very good long-time supplier of colored stones. His telling remark was that he built his business over many years by selling in quantity to jewelry manufacturers who used to stock stones a season at a time, even a year's supply at a time. That allowed him to buy in bulk at the mines, and to operate fairly efficiently, offering his customers a good price. Now, he said, his large customers, those that are left, buy small quantities, at short intervals, and based on careful assessments of what is happening at retailers. All of this, of course, occurring at a time when the volume of colored stone jewelry is produced in Asia, where manufacturers are capable of dealing directly with local cutters, even with the mines.
While his traditional base has declined severely, his business with the designer class has risen sharply. These designers have gone through an evolution of their own. For decades, designers (whom we could generally define as small artisans reliant on selling unique lines of high quality jewelry) attempted to place their product in retail stores, inevitably local independents. For almost all of them, such efforts failed. They were faced with slow sales, demands for memo goods, slow or non-payment. The biggest problem was probably the inability of the retailers' sales people to properly display and convey the essence of the lines, the designers' "stories", if they even understood them at all.
But now, the Internet has allowed designers to fully build their own "store" and to fully exhibit according to their own image. So now, such a supplier is faced with dealing with much higher volume of very low quantity sales. Yes, the margins, of necessity, are higher, but so are the managerial problems. Is it his business for the future? Is it the business he wants to be in? Or is he in the midst of being disintermediated?
There are much bigger examples of obsolescence. That would not be the word that springs to mind in the case of De Beers. But is it inappropriate? Maybe not when it comes to their core business, mining and distributing diamonds. After all, that part of their business is still huge by diamond industry standards, perhaps a third of the world's production of diamonds. Still, there are two inescapable facts. One is that diamond mining is set to decline over the next decade or two, as the major mines expire. Second is that the heart of De Beers' business is in the highly productive mines in Botswana. Over the years the Botswana government had taken over a major part of the benefits of those mines. And they now own 25% of De Beers. The partnership between De Beers and Botswana, now tentatively continues for the next year, a reflection, no doubt, of the impact of the pandemic. But beyond that, who knows?
I have posted often over the years in this blog about the implications of these movements (they are all still up, so please do read them!) and how De Beers has adapted to these long term realities. I believe they have assessed the issues well, as they are long-term planners, though it is still to be seen how well it all turns out. The pandemic has caused dents, no doubt, as in almost any business.
But the point I wish to make here, is that while De Beers is juggling its traditional mining business concurrently with several downstream efforts, the industry has not. In the many decades that De Beers was a monopoly it built a distribution network that fit well. There were numerous sightholders that, by design or effect, served two key purposes. First, the ability to absorb and distribute a very wide range of diamond qualities. Secondly, to do so in a manner that allowed the sightholders to grow their wealth and financial power (thereby allowing De Beers to expand production) while still keeping the bulk of the profits in De Beers' hands and keeping prices relatively stable. That allowed for the overall business to grow, especially in Belgium, Israel and India. (Not in the US, the biggest market, as De Beers was kept out of direct business in the US due to anti-trust regulations.)
But now, all of that structure is essentially obsolete. De Beers is no longer a monopoly, but the key centers have continued to act as if the old structure is necessary, even as they watch it steadily being taken apart. As the monopoly disappeared, so did the ability of De Beers to maintain price stability. Now we see swings in diamond prices that by the very nature of commerce cannot sustain the full pipeline that was possible under the monopoly. The banking industry has fully understood that, and have essentially stopped financing inventories as they did for so long. Furthermore, many mid-market companies, many of whom were part of the old De Beers distribution structure, have fought to stay in business. That has made margins even thinner, and that in turn has driven banks to largely give up any financing of the diamond business.
Where is this all this headed? The diamond business (and for that matter, the fine jewelry business) will continue to flow. As I have stated earlier, jewelry remains a perfect product for adornment, for shows of commitment, love and status. That is not going away.
Nobody can properly foresee what these forces will produce in the years to come. Technology will have a major effect, as will environmental, political and social forces that are immeasurable right now. Never mind the lasting impact of the pandemic on our lives and on all economies. But, with that caveat, let's take a shot.
In the future, and especially as output from mines drop below demand, we could see definable channels develop. The higher end will still be managed by specialized dealers and retailers catering to the top 10% of earners worldwide, or maybe only the top 5%. We are breeding billionaires like rabbits these days, so that kind of personalized service will continue.
The mid-market, which in the US might be a third of the public, will be well supplied by the production of middle qualities from 2 carat, say, down to smalls. But the supply of stones will come from recycled diamonds, MMDs (man-made diamonds) as well as mine production, however diminished that might be. Much of these goods might reach the market through auctions, not the traditional controlled sightholder process.
I include MMDs because that might be the only way, some day, to meet all the demand. It is totally conceivable that the differentiation between natural diamonds and MMDs will disappear in small goods as such distinctions could become immaterial in low-priced or even mid-priced jewelry. I know that for many in the trade this is heresy. But it is already happening.
The third channel, the low end market, is problematic for miners. That would be the use of heavily imperfect diamonds, especially in small sizes. The broad marketing of promotional diamonds has been going on for many years now. The problem might be that the cost of mining and processing these goods might become readily outdone by MMDs. The promotional market may have very little problem using a steady supply of cheap VS MMDs instead of poor naturals. And that could lead to some mines simply becoming unsustainable, thereby reinforcing the trend.
The automated cutting and grading of diamonds could well spell the end of concentrated trading centers that exist today, not because the expertise in those centers are useless, but rather because it will be difficult to make a living where those skills have been disintermediated. We are back to that word. And the cutting may well get very dispersed.
For some people this may all sound scary, even tragic. Or will it be a really good new beginning, a business in which people can actually make a good living, unencumbered by a structure built by monopolies reigning from ivory towers.
Diversity and branding.
An outstanding aspect of jewelry is its diversity. It is also largely responsible for the lack of large scale branding. It is difficult to brand an item or a line, that is so easy to copy, imitate or emulate. Apple is a successful brand because it sells hundreds of millions of a very small number of products. Jewelry sells tiny numbers of millions of products. Even the most popular core products, think stud earrings, are produced by thousands of companies, and not in the millions, but mostly in the hundreds.
Even so, companies downstream keep working on branding. Yes, there are recognized names (Yurman, Heyman, Pandora, umm...) that have built their names and survived for many years. It is not for lack of effort that more do not exist. There have been innumerable flash successes, but a moment of creativity, or some inspirational product, does not make a brand. A fad is just that, a fad, so there has to be something more.
Maybe too many companies have been barking up the wrong tree. I mentioned studs. Yes, there need to be some companies that can bang out thousands of pairs for chain stores. But there is zero room for branding in those cases, as the margins are razor thin. And branding on those products belong to the stores. They are the ones that need to build a reputation. And local retailers will mount up a pair themselves for a customer, a pair meeting all the specifics worked out with the customer. And that is an excellent example of branding, one that is service oriented, not product oriented.
We know that the mass market is a different animal. But all stores, in some way, seek "branding", and I include Internet stores as well. The branding in those cases are composed of many elements. Here are a few: personality of the owner; selection of designer lines - or only one; custom work; repairs and revisions; well trained and educated personnel; highly efficient and responsive systems and customer service; totally integrated online and in-store sales, marketing and, most critically, service. I bet we could add even more.
Of course, the question remains why we see so little of all of that. It is a combination of the money needed and the willingness to risk high costs; a lack of creativity and innovation; and a lack of the needed skills. Even the big brands - especially retailer brands - spend lavishly at times trying to build a compelling identity, a brand, that the public can quickly absorb and be excited about. It is truly difficult. And an early question should always be should I brand at all? JAR never sought branding, did not advertising or use PR. But he grew an impressive brand, and wealthy followers, slowly and steadily through extraordinary skill and creativity. It landed him, after many years, with a special showing at the Metropolitan Museum in New York.
That is just one path. The paths we can imagine can be as diverse as the nature of jewelry itself.
In the process of accomplishing all of that, a truly unique brand is built. The fine jewelry business does not scale well. It takes great attention to detail, which can, and does, vary almost piece by piece. That does not lend itself to mass anything.
I have often heard people relate how they found a wonderful designer online. And then I hear about how the designer failed to do such and such. How many companies do destructive testing of their own businesses, just to confirm that they can deliver?
For all I can see, this should be the future. A business, from top to bottom, that relishes its diversity and applies all means to built a sustainable, technologically advanced, efficient suite of distinct brands!
Final Thoughts.
I started on this journey of writing about "The Future of Jewelry" a year and a half ago, and it took over 15,000 words to get here. Did I cover everything important? Of course not! I hope I kicked up some dust, got readers to stop, think, agree, and disagree. And think of lots more that we could discuss.
Please do comment, publicly if possible, so that we can open a real discussion!
Thank you, readers.
Comments
Peace my friend and stay safe.
Jeff