Publicly Traded Jewelers Lose Market Share to Smaller Chains and Independents.

Implications: Large publicly traded jewelry chains, department stores, and discounters are losing sales to smaller jewelry chains and independent jewelers.  Here's why.

Analysis: The Commerce Department reported that jewelry sales had increased about 1.0% for March 2008.  That was about three times the growth rate of all retail sales.  March jewelry sales growth was in contrast to earlier results in the quarter.  For instance jewelry sales grew at about 2.1% in both January and February, while all retail sales grew at 4.0% and 7.0% respectively.  

As usual, BLS numbers may be revised.  One has to wonder about growth numbers that are identical two months in a row such as the 2.1% growth rate that was reported for both January and February jewelry sales. Nonetheless, the more significant fact that should worry investors is the steep decline of all retail sales in March as compared to the previous two months.  Remember, Easter was in earlier this year; falling on March 23rd.  In fact, it won’t be that early again until 2228.  That trivia aside, consumers had more reasons to buy this March than last year, but the sales didn’t happen.

Moving forward, April numbers aren’t available yet and the only thing we know about May was that Mother’s Day likely disappointed jewelers.  According to the Jewelry Consumer Opinion Council, Mother’s Day jewelry sales were weak.  That assessment was based on a significant decline in the Weekly Jewelry Purchase Index which dropped to 83 versus 126 for the previous period last year.  Any number greater than 100 indicates increased buying, while a lower number, for instance 83, suggests a decline.  June will close out the second quarter.  It’s a five week month in which both Father’s Day and graduation usually drives incremental jewelry and gift business.  By then, most of the stimulus checks should have been distributed, but it’s problematic whether sales gains, if any, will reverse weak April and May sales, especially in jewelry   

There are several other trends affecting jewelry retailing.  For instance, jewelry sales are much stronger in specialty stores than in mass merchants, discounters, and department stores.  For instance, specialty jewelry store sales increased 4.2%, 2.8%, and 4.0% in January, February, and March respectively, while overall jewelry sales increased about 1.7% for the quarter.  In part, the reason may be attributed to Zale’s aggressive liquidation of about $200 million in inventory and the sell off of about $400 million in fine jewelry through the closure of the Friedman stores.  However, quarterly sales results don’t fully support that explanation.  Granted Zale’s sales increased about 5.8% during the first quarter.  However, Signet’s US sales declined by about (4.7%) which would more than offset specialty retail’s growth versus that of general merchandise retailers.    

The reason for the consumer’s change in buying behavior is probably more complex.  For instance, both Signet Group and Zale increased the price of their gold, silver, and platinum jewelry after Valentine’s Day.  That would give a competitive price advantage to small chains and independent specialty jewelers which traditionally have been much slower to change prices.  Also small specialty jewelers have been the beneficiaries of millions of dollars of gold melted by consumers as bullion prices rose above $800/toz.  Some jewelers have bought gold for 25% to 50% on the fine gold dollar, others have helped their customers sell old gold jewelry; the proceeds of which were often used to fund new jewelry purchases.  One indicator of the amount of gold consumers are selling comes from the refiners.  A leader in the refining industry said their company had a back log of more than 600 boxes of gold to be refined.  That was in addition to the company’s usual business.  Another is the time to refine and pay for the metal which has nearly tripled as more and more consumers sell their gold for a portion of its melt value.  That’s a trend which is likely to continue as gasoline and food prices escalate during the second half of 2008.  

Another reason why small specialty retailers may be gaining market share on bigger chains and mass merchants is product and service.  While many low end consumers may have vacated the jewelry sector altogether, middle end and aspirational consumers are still buying.   But now, they are more discriminating when they purchase.  Simply put.  They’re willing to buy, but only if the product quality, design, and utility meets their exact standards. That’s why custom made jewelry, items that are unique, and designer name pieces are among the best selling products in specialty stores today.  That defines a product and service offer that uniquely fits the capabilities of many smaller jewelry chains and independent specialty jewelers. 

For whatever the reasons, Middle-American consumers are patronizing independent and local specialty jewelers to the detriment of large jewelry chains and big box retailers.  That’s especially bad news for most of the publicly traded jewelers.  For example, Whitehall Jewelers recently announced that its fourth quarter sales, including January and February 2008, had decline by (13.8%).  Whitehall is the same company that just purchased 78 of the Friedman locations just prior to its store closure sale.  Similarly, Finlay Enterprizes which operates about 687 jewelry lease departments in 40 host department stores and 105 specialty retail stores announced first quarter sales declined about (4.5%).  Excluding specialty store sales, department store jewelry sales probably decreased about (5.4%); again illustrating the consumer’s current preference for specialty stores.  Then there’s Signet Group which posted a decline in their US stores for the first quarter of 2008.  Thus far, only Zale has posted an increase, but that was due to clearance sales driven by a substantial decline in margin rate, a tactic which isn’t sustainable in the second half.   

This trend will also impact big box retailers too.  Fine jewelry sales frequently account for between 3% and 5% of the sales of a typical department store and even a larger percentage of total store profits.  Specialty jewelry store sales increases could put even more pressure on profit margins for brands like Macys which is struggling with higher costs and declining top line sales growth.   

Overall, some analysts think 2008 US jewelry sales could grow about 3.0%.  That’s better than the 2.6% increase in 2007.  Unfortunately, it doesn’t appear publicly traded companies will be the big winners in 2008 which begs the question:  Is this buying pattern short term or does it reflect a long term change in jewelry buying behavior?  I believe it’s the latter.  The consumer has changed and the macroeconomics responsible for it is a permanent; at last in the foreseeable future.  If true, large chains must change what they are selling and how they sell it or lose more market share to their highly fragmented competition.