Summary
DeBeers' decision to double its advertising investment in the US market comes too late to help retail jewelers this year; especially the middle market ones like Zale and to a lesser degree Signet. However, leadership in rough diamond distribution and a renewed commitment to the US market could make a distinct difference in years to come. Here's why.
Analysis
DeBeers announced that they were doubling last year’s marketing budget in the face of declining diamonds sales in USA, their biggest market. The decision comes as diamond sales decline in the face of the worst retail recession since the 1960’s. The fact is diamond sales have been declining in America for the past two years even as jewelers were showing solid single digit growth.
The decline was due in part to an erosion of consumer’s emotional connection with diamonds as the quintessential gift and to competition from other luxury products such as consumer electronics, travel, even the burgeoning home market may have contributed to the decline. It also coincided with DeBeers reduction in its US marketing in favor of building diamond demand in emerging markets like China and India.
Still, the US accounted for about half the sale of polished diamond jewelry globally. It’s problematic whether a significant decrease in diamond sales in North America could be offset by sales in new markets, especially if the recession spilled over into world economy.
Now, that appears to be exactly what is happening. Signet Jewelers announced that its 3rd quarter like for like sales had declined about (7.9%) in its US market. Likewise, UK same store sales declined about (2.4%). However, more importantly, Signet said sales had deteriorated materially since the financial crisis began in both its US and UK markets. Specifically, comparable store sales declined by (11.4%) in Signet’s Kay and Jared stores in the US, while the UK’s brands H. Samuel and Ernest Jones decreased (8.0%) during the last 50 days. That’s pretty convincing evidence that the US banking crisis has spilled over into overseas markets.
Now, jewelry industry observers expect the 2008 fourth quarter to be the worst since at least 2001. Then specialty store sales dropped (1.0%) in November and (7.5%) in December. Given Signet’s latest results, 2008 numbers could be much worse. That is significant to DeBeers because Signet does about 70% of its business in diamonds. More importantly, most US jeweler's diamond sales account for between 30% and 50% of sales. A big decline in retail diamond sales would mean that wholesale diamond prices that were already, declining, could continue to decline through out 2009 as supply far exceeded demand. However, it remains to be seen if DeBeers increased advertising activity will make much of difference.
There are several reasons. First, their advertising is aspirational and second their message contradicts what is actually happening in the marketplace. DeBeers is probably one of the best at building a market. Certainly no one in the jewelry industry and only a few others in the consumer goods segment can match them at creating, developing, and implementing an advertising campaign. But aspirational campaigns don’t generate immediate results. The time to have invested in the US market was two years ago when diamond sales started slipping.
Another problem is DeBeers new message. The new campaign emphasizes two themes, a diamond’s “enduring value in rickety economic times” and “fewer, better things”. Both messages are strong and innovative, however, they contradict what is actually happening in the market. Diamonds are already declining in value, a fact that won’t escape consumers for long in an Internet information world. Buyers already know gold has significantly decreased in price just like a barrel of oil. It’s over simplistic, but they expect jewelry prices to fall also. That may be good value and lower price points which is what consumers want, but it certainly isn’t “enduring value”.
The “fewer, better, things” theme may resonate better with consumers this year, at least with luxury consumers. But many middle market jewelers and most discount department stores are stocked with billions of dollars of low quality, light weight, over priced diamond inventory. This jewelry is hardly better and it certainly isn't enduring as millions of broken rings, bracelets, pendants, and earring laying unworn in jewelry chests is testament to. Indeed, many think this kind of jewelry is partly responsible for diamonds dwindling appeal as that special gift.
Timing is also a critical issue. According to DeBeers its new campaign will be the strongest in the last two weeks before Christmas. It’s true, Tuesday the 23rd and Wednesday the 24th will be the biggest shopping days of the year for the jewelry industry. However, much of that spending is more form over substance. By that I mean the substantive decision to buy a diamond product will have already been made weeks, possibly months before.
Another factor in the timing is that the after Thanksgiving selling period will be five days shorter this year suggesting November will be more important in the decision making process. Lastly, there is the reality of the credit crisis suggesting consumers may actually buy earlier this year; that may be all the more true if the credit card bond markets seize up.
Nevertheless, DeBeers may be on the right track. Hindsight suggests it was a mistake for the DTC to facilitate the manufacturing and encourage the marketing of low price, marginal gem quality small diamonds in the mid 1990’s. Perhaps now they can help shift retailers attention away from unsustainable price points to as they say fewer, better things. That will take more than a single year’s investment. But, the question remains if DeBeers thinks the US market is worth the long term effort, both in terms of marketing investment and the change in the distribution of low quality rough through the DTC.
