Escalating Gold Prices Means Less Shine for All Jewelers, Especially Zale

 

 One reason for the decline is the recession, but there were structural problems in the industry long before the onset of the “Great Recession”. For instance, jewelers had been losing market share to non-jewelry luxury products since the mid 1990’s. Once considered the quintessential gift to memorialize special events and special relationships in life; the consumer’s emotional connection with fine jewelry has been weakening over the last decade. Why?

Part of the reason is because less advertising has been devoted to defending the diamond market against non-jewelry challengers.  Another reason is the decline in quality of many jewelry products and lastly, escalating precious metal and diamond prices has made many gold products overpriced in comparison to substitute luxury items. Historically, DeBeers was the leading company promoting market growth for diamonds in the US. However, since DeBeers went private in 2001 the company decreased both the magnitude of its advertising expenditure in the U. S. and the purpose.  Some analysts attribute part of the segments lost market share to DeBeers’ change in strategy.

 

Another factor in the decrease in the size of the jewelry market is quality. Again, historically, there was a clear line differentiation of gem quality and non-gem quality diamonds. Now that line has become very blurred. The sad fact is much of the diamond jewelry sold by general merchandisers and jewelry stores today market is of such low quality that it flies in the face of any practical definition of luxury, much less fine jewelry. Add that the quality of many of the gold mountings is so poor that much of it is unwearable soon after  purchase and it’s little surprise consumers are choosing more non-jewelry products as gifts for those special events in life.

 

Notwithstanding, Americans still bought $60 billion in jewelry according to the revised Commerce Department figures. However, higher gold prices, in combination with less advertising and poor quality will probably further erode the segments size. Clearly, decreased demand was one consequence of the increase in the price of gold from $287/toz on September 11, 2001 to about $865/toz at the end of 2009. Now, the market price for gold has increased another 15.7% at a time when jewelers are beginning to buy stock for Christmas.   What’s worse, many jewelers have delayed purchases because of the volatility of demand, meaning they may have to buy relatively more stock at the higher price.

 

Frankly, this couldn’t have come at a worse time for the industry. The question is what to do about it? Short term, operating margins are already razor thin from declining sales and higher discounting. Realistically, absorbing the higher costs isn’t a viable alternative, but passing the cost on to consumers will probably mean even a steeper sales decline this fall. Nevertheless, that’s only half the story. The other half is how jewelers decide to position themselves in the future for growth and profitability.

 

Whether gold prices continue to escalate above $1,000 remains to be seen. Driven in part by speculation, part by investor’s hedge against future inflation, and part by higher growth forecasts for emerging markets like China, there seems to be a lot more upward pressure on the price of gold than downward. At least, that’s may take on the subject. If true, jewelers can’t expect declining commodity prices to stimulate demand any time in the future. Moreover, if consumers, including the low-end ones, have become more discerning, manufacturers and jewelers, alike, must rethink their historical strategy of lowering quality to maintain margins and price points. Otherwise, even more consumers will be driven to non-jewelry luxury substitutes.

 

That eventuality is a big problem for all jewelers, but most especially Zale Corporation, which stock analysts expect to report a loss of $0.77 and $0.87 per share on Wednesday, September 9. Once, characterized by an analyst as the McDonalds of the U. S. jewelry business, her remarks may have been prophetic. Clearly, no other national jewelry has done more to equate fine jewelry prestige and value with the transient attributes of fast foods as Zale has. Now synonymous with low quality and everyday discounting, it remains to be seen whether Zale jewelry can ever meet the “new consumers” demand for quality, functionality, and value, at least under the leadership of its current management team.  That fact will become even more evident if gold prices continue to escalate.