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Credit crunch puts squeeze on jewelry chains
By Glen A. Beres
January 22, 2009
New York--For a growing number of consumers, paying for jewelry on credit isn't as easy as swipe, sign and smile anymore.
The credit squeeze that has been plaguing a U.S. economy in the midst of a recession is now having a significant impact on jewelry chains and their customers, industry experts say. Not only are the chains dealing with increases in bad-debt levels from strapped customers struggling to make payments, they are also seeing sales shrink as plastic becomes more elusive to consumers who were previously deemed credit-worthy.
The third-quarter report filed by Signet--which operates Sterling Jewelers in the United States--provides a case in point. The chain's net bad-debt charge for U.S. operations for the 39 weeks ended Nov. 3, 2008, was 4.8 percent of total sales, up from 3.3 percent for the same period in 2007.
"Obviously, Zale and Signet have been hit hard by the credit crunch; you can see it in their sales numbers," says industry analyst Ken Gassman, president of the Jewelry Industry Research Institute in Glen Allen, Va. "Ninety-day delinquencies are up significantly at Signet. Many [public jewelry chains] don't report bad debt because they use third-party credit providers. But all jewelers are saying that more credit applications are being rejected now [than was the case before the economic downturn]."
Gassman estimates that as much as 50 percent of all fine jewelry sold in the United States is financed through some type of in-house, monthly payment credit plan, making the industry extremely vulnerable to any type of credit squeeze.
"The biggest problem with the credit squeeze is that customers coming in to use our private-label credit card are finding that their credit limit has been lowered or their account has been closed," says Donald Weinberg, vice president of 16-store chain C.R. Jewelers, based in Boca Raton, Fla. "The worst part about that is, we find out the account is closed after our associates have helped a client for an hour or so. A big waste of time, frustration from our associates who work partly on commission, and infuriation from our customer who might never come back."
Gitanjali USA, an Austin, Texas-based chain of some 150 stores that includes the Samuels and Rogers Jewelers banners, has a third-party credit provider that handles its primary credit business, and a second-tier company, Salt Lake City-based Retail Credit Solutions (RCS), that deals with private-label credit decisions.
Bret Levy of RCS says the goal for the private-label credit decisions is to "capture any good sales that the banks are not approving for one reason or another."
RCS looks at the 52 percent of credit applicants that were turned down and approves about 34 percent of them, Levy says. Write-offs in 2007 totaled 5.6 percent of sales, and they were expected to increase to 6.2 to 6.3 percent in 2008--but that's still dramatically lower than the bad-debt levels the banks are seeing, Levy says.
"We're seeing more mid-level or even better deals coming to us because the banks are tightening up so much on both approvals and credit lines," he says.
Gitanjali's best customers have reduced or even cut out jewelry purchases altogether this year while mid-level and lower-level credit would-be customers are having tremendous trouble getting credit, setting the stage for one of the "toughest Christmases in our lifetime," Levy predicted in an interview before the holidays.
For Jensen Jewelers, a 15-store chain based in Twin Falls, Idaho, that manages its own in-house credit, bad-debt levels in 2008 were in line with the company's historical average of about 4 percent of total sales.
"Doing our own credit has been a big advantage for us, because it helps us produce cash flow in the spring when business slacks off and bills are due from the holiday season," says Tony Prater, chief executive officer.
Jensen might have been hit harder by the credit crunch if not for its aggressive credit promotion program, strong collection efforts and the chain's location in a fairly stable region where unemployment is relatively low and housing values are relatively stable, Prater says.
However, Jensen hasn't dodged the credit squeeze altogether. Prater acknowledges that bad economic news has customers pulling back on luxury items, including jewelry, even if their income has remained stable. He also notes that because many credit cards and third-party lenders have tightened credit, customers are finding that their available credit for jewelry purchases has shrunk.
Goldenwest Diamond Corp., a 17-unit chain based in Tustin, Calif., faces a similar dilemma. While the company does not issue any in-house credit on its own, it has seen an increase in chargebacks from customers trying to reverse sales transactions, says Sylvia Trujillo, Goldenwest's chief financial officer. The company is also struggling to get many customers through its third-party credit provider approval requirements.
"Customers with credit scores of 700 are being turned down," Trujillo says. "Also, larger transactions are not being approved by the customer's credit card provider."
Goldenwest is trying to help ease the credit crunch for customers by accepting as many payment options as possible, including national credit cards, PayPal, Google Checkout, layaway, private-label credit cards and "Bill Me Later" options. To reduce chargebacks, the company is working more closely with customers on settlements, payment plans, discounts and even returns in extreme cases.
Highlighting the tightrope that jewelers are walking between the need to tighten credit in the current poor economy and the need to keep sales growing, Gassman says credit is simply too important for jewelers to just cut off the spigot.
"However, they have gotten more particular about who is offered credit, how much is offered and at what interest rate," he says. "And the lack of credit availability has really hurt industry sales."
Editor's Note: This story first appeared in the January 2009 print edition of National Jeweler.
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