Source: JCK Online
What is the most critical issue facing the jewelry industry in the next couple of years, and how can we deal with it? That’s the question JCK posed for its 2007 State of the Industry report. To answer it, we went to experts and leaders, including retailers, manufacturers, suppliers, consultants, educators, and association executives, all seasoned observers of the jewelry business. The resulting opinions offer acute insights and practical solutions.

Responding to Changing Buying Patterns
Joel Schechter, chief executive officer, Honora

The Internet, and how it affects traditional distribution channels, will have a growing impact in each coming year. Some high-end jewelry brands are partnering with larger, more visible retailers to make the buying experience as easy as possible for the consumer. That is what it’s all about, instead of frustrating consumers, who are quickly getting used to buying all sorts of products online and are enjoying wonderful delivery systems with premium packaging, generous return privileges, and high-end customer service.

Like global warming, the buying-pattern changes in our industry started slowly, but the cumulative effect can be devastating to the independent retailer. A small retailer can look big with a fully developed site, and the right bells and whistles. Most, however, can’t afford to stock a wide assortment of a brand. Most can’t afford partnership positions on AOL, Google, and many of the significant online portals that field traffic and ultimately attract consumer sales. Most don’t have world-class distribution systems at their disposal.

As a brand, how we handle our presence on the Web is one of our most important decisions. We need to be sure online discounting doesn’t “un-level” the playing field. We suppliers need to protect and embrace brick-and-mortar jewelers who year-round display, stock, and promote our lines. But we need to simultaneously cater to the consumer who demands a convenient online buying experience. In 1999, Honora, along with 20 or so retail and wholesale leaders, tried to create a joint distribution system to solve the problem. That entity, Enjewel, was ahead of its time and didn’t survive. But the industry needs an answer. Now that the realities and potential of the Web are better understood, a new group can create a system that will marry the local benefits of better independent jewelers with the technologies that make shopping more convenient. The next generation will demand it.

Survival
Ben Janowski, president, The Janos Group Ltd.

We all know that first-half 2007 sales have been slow. The government reported a paltry 0.5 percent growth over 2006. Considering that gold and diamond prices are up, we also know that means a real dip in unit sales.

It would be easy to blame the poor performance on a stressed economy, and the likely downturn we’ll see in the coming months. That may be true, but it avoids greater underlying problems for many U.S. jewelers, with survival at stake.

The diamond business has evolved over 30 years into the bedrock on which many retail businesses rest. A portion of that, from 0.25 ct. and up, has seen significant erosion in profit margins, in good part because of the rapid growth in Internet sales. With cut grading becoming common, price competition will become fiercer. Even if a sale ends up being made at the retail counter, the Internet has become the de facto price list for graded stones. If futures trading (as is now being proposed) becomes a reality, prices will become the equivalent of looking up a stock on the Nasdaq.

The loss of margin in this critical area has slimmed profits to the point where cash flow is used for operating costs instead of paying vendors. That means curtailing buying, which can begin an unstoppable downward spiral. Retailers may lean more on suppliers for terms and memo, but unless inventory turn is increased, that is a dead end, too.

Unit sales may be affected (as they are this year) by increasing prices on precious metals. The public will adapt to jewelry using silver, steel, palladium, and titanium. But will retailers do the same? Major gold miners are de-hedging lately (Newmont de-hedged entirely), which means they’re confident gold is going in only one direction: up. These companies see weakness in the dollar for the next few years, and with metals and diamonds dollar denominated, that means higher prices for everything. So, every retailer needs to develop scenarios to deal with gold going to $1,000 and higher and better-diamond prices holding their high levels or going higher.

The continuing 20-year decline in the number of U.S retailers doesn’t spell the end of jewelry retailing. Instead, it shows a process whereby the business is becoming more segmented. Mall chains and discounters have captured the low-end market and a good part of the mid-market. Specialty stores and wholesale clubs have captured a good part of the mid-market and the upper market. The Internet has captured a good part of the price-conscious buying public.

It is the independent retail channel that is most diverse in response to market trends. Stores located in very affluent neighborhoods continue to accrue business, as incomes for the rich have risen. They have become, in a sense, diamond destinations. Others stress fashion and designer lines.

But many independents are floundering. Few have accepted that the future means differentiation, a robust online presence, superior services, and close relationships with the right suppliers.

Do We Sell Diamonds or Carbon?
Joseph Schlussel, president, The Diamond Registry Inc.

The biggest threat to our industry is not synthetics manufacturers who turn carbon into diamonds. It’s commoditizers who want to turn diamonds back into carbon.

For centuries, diamonds were revered as the ultimate expression of love. Then, in the mid-1970s, the investment community began selling diamonds as a standardized commodity. Every Monday, price lists would appear in the Wall Street Journal showing prices heading to the sky. At the market’s peak, a 1.00 ct. D Flawless reached $65,000/ct. Shortly afterward, the bottom fell out, and the price plummeted to less than $10,000/ct. The investors went looking for the next fast buck. In the end, nobody gained, certainly not the industry the investors left in ruins.

WSJ stopped printing price lists, but the legacy of treating diamonds like pork bellies is still with us. Now there are new proposals to sell diamond futures and derivatives to the public.

People who have devoted their lives to diamonds know they can never be a true commodity. All VS diamonds aren’t equal. Inclusions can vary in size, color, and location. People don’t even agree on what the Ideal cut is. Would a narrow range of sizes and grades represent all diamonds?

We must get back to selling precious gems, not standardized sorted and graded pieces of coal. Let us educate the consumer about not only the steak but also the sizzle—the beauty, fire, brilliance, and scintillation of nature’s masterpiece. Some people say it’s OK if diamonds are commoditized; you can make money on the mounting. That’s like saying forget about the steak, the real action is in the ketchup! The carbon market is hot at the moment, but coals can turn into ashes. Diamonds are forever.

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