Summary
Finlay's demise is just one more signal that the power of the large mass merchandised jewelry chains is declining. Here's more.
Analysis
Final’s Liquidation Continues
According to Finlay, the company is soliciting bids from interested parties for all or part of its remaining assets. In a vaguely worded update, the company said that it was pursuing a “parallel work effort…whereby parties may indicate their interest in the Company’s business or assets.”
While not in formal liquidation, the company has been exiting its department store business and selling off inventory to pay down bank debt in preparation to repay bond holders. Simultaneously, the company has terminated much of its home office staff and closed its free standing distribution facility in Connecticut. Subsequently, Finlay announced that it was liquidating inventory in a number of its specialty stores prior to selling or closing them.
Now the company may be using “previously received unsolicited interests” in parts of the business, from other parties, as sort of staking horse bids in its efforts to monetize the company’s assets to repay secured credits including a number of jewelry vendors. They agreed to periodic payments for merchandise bought in 2008 in exchange for a final payment in August 2009 and a security interest in the remainder of the company’s assets third behind the banks and certain other secured creditors.
In a separate action, the company is in litigation regarding its decision not to relocate its downtown Portland Zell Brother store into its new location in Pacific First Center leased from Harsch Investment Properties. Zell’s current lease for its temporary location expires June 2009.
Meanwhile, the company still says it’s preparing to “consolidate certain of its underperforming specialty stores and reorganize around its better performing specialty stores.” Just what such a reorganized jewelry company would look like is uncertain, while rumors persist that the company will eventually close or sell all of its Florida stores, J. E. Caldwell, numerous BB & B stores, selected Carlyle stores, and Zell Brothers located in Portland, OR.
Jewelry Chain Dominance Declining
Finlay’s demise as the largest jewelry operator for department stores is just another example of how large, mass market chains stores have fallen out of favor with consumers. According to a National Jeweler article, the top 50 North American jewelry chains closed about 891 doors this year, a 13 percent decrease and the store closures continue. During its 3rd quarter earnings conference call, Zale said it was closing more stores in 2009 without giving details. Clearly, one reason for the big chains problems is the recession.
But many of the top jewelry chains that have been recently liquidated such as Whitehall, Friedman, and Fortunoff were having problems much earlier, as were chains like Samuel Jewelers, which was subsequently reorganized after filling Chapter 11. Other large chains like Helzberg, bought by Berkshire Hathaway, and Zale were having problems a half decade before the recession too. What’s the underlying cause?
Management is one reason. In some of the situations companies couldn't’t transition from family to professional management. All too often those chosen to lead were good retail administrators, but little else. In more than one instance, new management was so far behind the experience curve; they never got a head of the business. Jewelry
Industry Gets Smaller
In an Internet post on the National Jeweler website, Whitney Sielaff said that “Warren Buffet is forecasting that 25 percent of all fine jewelry companies, across the distribution pipeline, will be out of business within 12 months.” Sielaff said that he had “received the information on deep background from a very trustworthy source.” Buffet, who owns three specialty jewelers brands and jewelry manufacturers as a part of the Richline Group, is clearly betting that his companies will be able to increase earnings as the industry get smaller in size, but also because consumers are choosing smaller sized jewelers more frequently too.
Recent research indicates that while customers continue to name large national brand jewelry chains and department stores among the top three or four places they would first shop for fine jewelry, follow up research of actual buyers reveals nearly two in three actually bought at local or regional jewelry stores and there is every reason to believe the recession is just accelerating that trend. Why?
First, consumers are lot more discerning now that money is scarce. Whether they decide to spend the same or trade down, customers aren’t will to accept any thing less than exactly what they want when buying fine jewelry today. Another reason is they believe they are getting more and paying less when they buy at local jewelry stores. The “more” includes higher quality product and better service, which uniquely distinguishes many small jewelers from the large chains.
Lastly, personal relationships are playing a larger role in the consumer’s decision-making process. That’s where the large chains really stumble. Part-time help and the ever changing store manager that characterizes large retail chains today are the antithesis of today’s trend toward one on one, personal, communications. That’s what driving Facebook, YouTube, and Twitter. It’s also what is driving many of the consumers buying decisions today, especially for high value, infrequently purchased items like diamonds and fine jewelry.
While the jewelry industry has been one of the retail segments hardest hit by the recession, underlying changes in buying behavior that started earlier are also driving changes in the industry that are only being accelerated by the down turn. In its Special Report: The State of the Majors 2009, the National Jeweler pointed out that “This was the first time in many years that [jewelry] retailers operating fewer than 10 units made the Top 50 list.” The point, smaller jewelry companies are beating the large chains for the consumer’s heart, mind, soul, and their jewelry dollars too. So those betting large companies like Kay and Zale will be the biggest winner when pre-recession demand returns, may find Warren Buffet was right as knowledgeable, small, customer centric jewelers steal the momentum.
