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diamond market reportsQ: I am preparing a small report and was wondering how I can
acquire accurate facts on the demand broken down by cut and polish and
whole sale vs. retial through out the world.
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Third
Quarter 2006 Sales Trends Source: Dept of Commerce |
The table below summarizes sales gains for the jewelry industry as well as for specific publicly held U.S. jewelers.
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Third
Quarter Jewelry Sales |
Sales were driven by the following factors:
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Journey – The surprise
of the season has been the strength of the latest DTC promotion: Journey
diamonds. With the experience of Right Hand Rings still echoing in their
minds, many retailers opted to tiptoe into Journey diamonds. Journey
diamonds were strong right out of the starting gate, and appear headed
higher in 2007.
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Circle Diamonds – Circle
diamond jewelry has been strong all year, despite worries by jewelers that
demand of this relatively mature product line might be about to slow.
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Big Diamonds – Diamonds
appear to be the strongest jewelry category, with big diamonds – two
carats and larger – showing particularly large sales gains. Consumers
appear to want “flash for cash,” and the only way to get it is with
either a single large diamond or with many diamonds that Journey and
circle jewelry offer.
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Alternative metals –
Some jewelers reported that alternative metals are strong. Tiffany has a
stainless steel collection that is showing solid sales gains. A few
jewelers have introduced palladium jewelry as an alternative for platinum;
initial demand appears to be strong. In addition, jewelry with mixed
metals appears to be strong.
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Diamonds and colored
gemstones – Consumers are buying diamond fashion jewelry with colored
gemstone accents.
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Luxury watches – Almost
every jeweler mentioned that branded luxury watch sales were very strong.
Consumers apparently are willing to pay for the high-priced brands such as
Rolex and others.
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Expensive jewelry –
Nearly every jeweler reported that sales were strongest among their
highest priced goods. Tiffany says jewelry that sells for $20,000 and
higher is its strongest category. Other jewelers report that while the
number of sales transactions is either flat or down modestly, the average
ticket has risen sharply.
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Moissanite – It seems
moissanite ads are everywhere. Between Finlay’s department store
moissanite sales efforts and J.C. Penney’s major moissanite promotional
push, consumers apparently have begun to embrace moissanite in a big way.
When it is properly positioned and sold, it can be a significant source of
additional business for retail jewelers.
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Designer goods – Even if
the designer is unknown, there is a certain allure that has captured
consumers’ attention: they want “designer” goods.
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Collections – Tiffany is
the king of collections, and the company continues to roll out
enhancements to its major jewelry collections. Movado has also discovered
that watch collections sell well, too. Gordon’s has introduced its new
“Love” collection which appears to be selling well.
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Silver – This
inexpensive metal is in demand, both at the high end in designer goods as
well as at the lower end at stores like Piercing Pagoda which sell starter
goods.
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CZ – At the low end, CZ
appears to be enjoying somewhat of a renaissance. Piercing Pagoda reports
that CZ jewelry represents about 30 percent of its sales.
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Most jewelers reported that their gross margins were under pressure. This reflects continuing margin pressure due to a number of factors, including the following:
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Higher materials costs –
Virtually every commodity used in jewelry – diamonds, precious metals,
etc. – have risen in price over the past two years. Retail jewelers say
they haven’t been able to pass along those costs fully to their
customers. The following table illustrates recent commodity cost
increases.
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Commodity Cost
Increases
Souce: Market Prices
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Higher LIFO charges –
Reflecting higher procurement costs for jewelry, most retail jewelers
report that their LIFO charges – which reflect the higher costs
associated with new merchandise – rose sharply in the third quarter.
Some jewelers’ LIFO costs doubled in the quarter.
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Discontinued merchandise
– Jewelers recognize that they need to keep their retail assortments
fresh. As a result, many have increased their allowances for discontinued
merchandise. They are melting jewelry sooner, and they are selling it off
at huge discounts or selling it to a liquidator, if it does not sell.
While this depresses jewelers’ margins, it helps boost inventory turns.
Jewelers are learning that it may be better to take a shorter margin, but
achieve higher inventory turns, in their quest for overall profitability.
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Direct sourcing – Zale
is the latest to embrace direct sourcing, and it is having a significant
positive impact on its margins. In addition, apparently the threat of
direct sourcing has caused some of its vendors to revise their pricing of
goods to Zale.
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Operating costs are climbing faster than sales are increasing for most jewelers. Thus, their operating expenses had a negative impact on pretax margins during the October quarter.
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Payroll, benefits, and
professional fees – This is the usual list of culprits which pushed up
retailers’ operating expense ratios. Jewelers’ lament: “everyone is
getting a salary increase except the owners.”
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Bad debt – Only one
retail jeweler reported bad debt – Sterling. Management said that bad
debt in its U.S. stores dropped significantly from the same period last
year – from 3.2 percent of sales to 2.9 percent of sales this year. On
the other hand, Movado increased its reserve for bad debt in its
manufacturing division; management was not forthcoming with a full
explanation about this non-cash accounting charge.
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Holiday
advertising and marketing – As jewelers compete increasingly with
non-traditional channels of distribution – discounters, mass merchants, online
retailers, and others – their advertising has become more aggressive. Most of
the major chains plan to increase their spending on national network television.
They also said that ad spending during the week prior to Christmas would be
heavier than in past years.
Proprietary
brands and merchandise – Most jewelers talked about increasing their sales mix
of proprietary merchandise, including exclusive brands as well as brands with
their store name. This is one method of boosting margins.
Full
retail price – Jewelers, like used car dealers, have traditionally played
“pricing roulette.” However, we’ve heard more jewelers claim that they are
selling merchandise for the full price, and trying to cut back on store-level
discounting.
Expansion
– Other than Sterling jewelers which is opening new store square footage at a
rate of 8-10 percent annually, no other major publicly held jeweler is
generating significant net expansion. Zale has ramped up its new store openings
somewhat, but it has recently closed a large number of big Bailey Banks &
Biddle stores, so its square footage gains are virtually nil.
Gold
leasing arrangements – Finlay is one of the last among major retail jewelers
to close out its gold leasing program. Gold leasing works best when prices are
stable or declining. But when gold prices rise, the costs can be devastating.
Forward
hedge contracts – Zale has begun to utilize forward hedge contracts in an
effort to smooth cash flow and fix its gold and silver costs. However, because
of accounting rules, these contracts can introduce significant swings in
quarterly financial results.
Other
new promotions – Zale has rolled out its Lifetime Extended Service Agreements
across all of its brands.
At
the end of the third quarter, there were three “pure plays” in online
jewelry retailing: Blue Nile, Odimo, and Abazias.
Since
the end of the third quarter, Odimo has announced that it has ceased online
retailing. Further, by the end of the year, it will be a shell company looking
for a business. The stock, which came public for $9 per share in early 2005, was
selling for pennies per share recently.
Abazias
is posting dramatic sales gains, but its revenue base is still extremely small
by comparison to any of the other publicly held online jewelers or store-based
specialty jewelry merchants.
The
following table summarizes sales and profits for the third quarter ended
September 2006 for the pure-play online jewelers.
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 Source:Company Reports |
The only other online merchant to report jewelry sales for the third quarter was Amazon.com. Amazon’s management reported that engagement ring and gemstone sales grew by 108 percent versus the same period a year ago. Watch sales were up 122 percent over last year’s third quarter. Amazon does not provide the actual dollar value of its jewelry and watch sales, so it is unclear how much sales volume these categories generate for the company.
We wish you a
brilliant day.
Danny Diamonds.
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