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Mass-market consumers may not trade up in 2008
By Glen A. Beres
January 06, 2008
As the economy sputters and mall retailers continue to lose market share to other distribution channels, industry experts expect to see a range of factors impacting the high-volume jewelry sector this year, including consolidation and a move away from the "luxury for the masses" phenomenon.
Experts say the majors were hoping a strong Christmas 2007 season would get them off to a strong start in 2008, but given lackluster sales through mid December for many big retailers, analysts did not seem overly optimistic.
"It's really tough out there," says David Norman, former jewelry-chain executive and president of Retail Jewelry Consultants in Grand Rapids, Mich. "We're hearing from a lot of majors who are struggling. The ones who are doing well are either upscale chains or retailers who are trying to offer every service they can to distinguish themselves the way independents have done."
The economic uncertainties of 2007 are expected to continue this year, with higher gasoline and commodities prices, plummeting home values and tighter credit among the factors prompting cutbacks in luxury spending, analysts say.
Mid-market retailers that "traded up" to grab a slice of the aspirational middle market, often termed the "affordable luxury" customer, are particularly vulnerable to a drop in the economy, experts note. According to one analyst, when consumers get nervous about their economic situation, and their discretionary income drops, many will not buy luxury purchases such as jewelry, while others might "trade down" from a Zale to a Wal-Mart. This has further fueled a polarization of the market, where the upper and lower ends of the jewelry business are flourishing at the expense of middle-market jewelers such as mall-based chains and department stores.
Recent financial results for the major public jewelry retailers bear out this trend. While upscale companies such as Tiffany and Co., Neiman Marcus and Saks posted strong recent sales increases, mid-market players such as Zale Corp., Macy's and Finlay Fine Jewelry Corp. have struggled with flat sales or decreases.
In Unity Marketing's third-quarter 2007 Luxury Tracking Survey of 1,000 affluent consumers (with an average income of $150,200 and an average age of 43.6 years), average spending during the period fell 21 percent—registering just $12,142 per consumer during the period compared with average spending of $15,283 in the second quarter, with jewelry, watches and luxury fashion accessories especially weak. Those with household incomes ranging from $75,000 to $149,999 cut back their luxury spending during the third quarter, while those in the $150,000 and up bracket spent about the same as in the second quarter.
"If consumer confidence continues to weaken among the affluent, it will be a testing time for luxury marketers and their brands," Unity Marketing President Pam Danziger predicts. "Many luxury brands are going to discover just how dependent they have become upon consumers' penchant to 'trade up' to more luxurious offerings than they otherwise could afford. On the other hand, luxury brands that have built their business on the super-affluent market will likely be immune to this trend."
Meanwhile, experts say the sharp rise in the price of gold to more than $800 per ounce has not had a big impact on jewelry sales at the mass-market level thus far because large retailers buy product months in advance and "lock in" inventory prices from manufacturers. This could change, however, if gold prices remain high or surge even higher in 2008, forcing major retailers to raise retail prices to cope with steadily eroding margins—or adjust their merchandising mix to include less gold content, experts warn.
Consolidation is another ongoing trend in the volume retail sector that experts believe will continue in 2008—especially if the economy does not rebound quickly.
 | | Mid-market players such as Zale Corp. struggled with flat sales or decreases in 2007, and this year's forecast looks challenging too. |
The biggest consolidation activity within the sector in recent months included Zale's $200 million sale of its upscale, 70-store Bailey Banks and Biddle division to Finlay, and India-based Gitanjali Gems' $20 million acquisition of 46-store U.S. jewelry chain Rogers Ltd.—only a year after Gitanjali purchased the Samuels Jewelers chain.
Industry experts expect to see more consolidation among the major jewelry chains as economic conditions force companies to struggle with sales and profits, and acquisition targets become available at a bargain compared with their value in stronger economic times.
"We hear from our sources that there are several major jewelry chains on the selling block," Norman notes. "In this economy, there are a lot of people talking about selling."
On a related note, analysts also expect to see the majors continue to tinker with their business models in 2008 to gain an edge in the market. Recent examples include Zale selling the Bailey Banks and Biddle division to refocus on its core middle-market customer; Finlay buying Bailey to add to its growing upscale portfolio of stores (which includes Carlyle and Co. and Congress Jewelers) and to further reduce its reliance on its stagnant leased department store business; and Tiffany's recent announcement to significantly expand its U.S. store base through a new, smaller format that occupies 2,000 gross square feet (compared with 5,000 gross square feet in traditional Tiffany stores) and excludes engagement jewelry.
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