REPORT:Retail jewelry sales declined again
New York—If there is any solace to be drawn from Jewelers of America's (JA) 2010 Cost of Doing Business Report, it is this: Last year's sales results were not positive, but last year's sales results were also not shocking.
The report, based upon a survey that JA conducts annually as an industry benchmarking tool, showed that retail jewelry sales declined again in 2009, as retailers battling to sell luxury put on a brave face before an economy scarred by unemployment, foreclosures and general uncertainty. The median sales decline was 4.5 percent, worse than the 3.5 percent slide recorded in 2008 and worse than the 0.3 percent dip noted in 2007, which was, incidentally, the first recorded sales drop in the survey's two-decade history. To put last year in perspective, a typical independent mid-range store that netted $788,094 in 2006 saw its sales shrink by 8.3 percent to $727,696 in 2009, just three years later.
It's a grim but not surprising trend, with JA noting in the report that 2009 was "a year in which the national economic crisis left no industry unscathed."
From the high-end retailers on Worth Avenue in Florida's Palm Beach to the chain stores in the malls around Pittsburgh, very few jewelers will look back upon 2009 fondly.
Sales at mid-range independents fell 0.9 percent while the median sales decline for chain stores was 13.6 percent. Hit particularly hard, however, were independent high-end stores, whose owners watched sales plummet 7.5 percent after falling only 1.3 percent in 2008.
Asked to explain what went wrong in their business over the past year, jewelers around the country have been pinpointing two of the usual suspects: unemployment and a general lack of consumer confidence, particularly among luxury consumers whose fortunes are tethered to the stock market.
For Exhibit A of this phenomenon, head to the South, where Lowell Kronowitz, president of Levy Jewelers, operates three stores in Savannah, Ga., and a new location in Jacksonville, Fla. The stores were rolling along prior to 2009, enjoying the prosperity brought on by the city's growth and resulting real estate boom, he says. But when that boom turned to bust, clients who were in the real estate development business watched their jobs evaporate and were forced to curtail spending, leading to stalled sales at Levy Jewelers.
"Their business was demolished, so there was a dramatic shift in their spending habits," Kronowitz says.
The same feverish frugality among consumers plagued Erik Runyan of Erik Runyan Jewelers in Vancouver, Wash., where the high jobless rate has taken a toll on businesses.
"It's been tough," Runyan says, noting that his sales were down in both 2008 and 2009. "Unemployment is a strong factor. In our area, the jobless rate is higher than the national average."
Meanwhile, in other parts of the country, economic uncertainty seemed to freeze some
consumers in place, including those who remained employed and financially stable.
B.J. Nichols, president and owner of high-end independent Reis-Nichols Jewelers in Indianapolis and Greenwood, Ind., says the recession provided a hard and fast lesson on how tightly the spending habits of luxury consumers are tied to the tides of the stock market. As stocks sank in 2009, so did his company's jewelry sales.
"What I think came out of this is [the realization that] business is more related to the stock market than any of us realized," Nichols says. "It wasn't that they couldn't afford to buy fine jewelry, but they cut back because of the drop in the stock market."
The only retailers who weren't counting down the days until fiscal year 2009 ended were designer/ artist/custom shops, which experienced a median sales increase of 3.1 percent compared to a 0.8 percent decline in sales in 2008.
But why custom shops? Industry analyst Jeff Taraschi, president of Interactive Group Ltd., notes that in 2009, the popularity of members-only sale sites such as Rue La La, Gilt Groupe and Editor's Closet exploded. These sites offer designer duds—and fine jewelry—at deeply discounted prices.
While the rise in popularity of these sale sites hurt high-end independents to a degree, it had the opposite effect on custom jewelers, who provided an elite haven for consumers who did not want to purchase the same heavily discounted pieces that everyone else was snatching up online.
"This is clearly the opposite emotion, of people being drawn to places where things are exclusive," Taraschi says of custom shops' success. "They have things which are unique and distinctive, and their customer has enough money to want to engage in those relationships."
One line at a time
In addition to breaking down sales by store type, the report contrasts the operations of high-profit firms with those of low-profit firms. High-profit firms are defined as those in the upper 50 percent of all companies, as ranked by the ratio of earnings before interest and taxes (EBIT) to total assets.
The report suggests that small factors, not large ones, separate the successful jewelers from those who are struggling.
"Managing any business requires attention to detail," JA states in the report. "This is true for retail jewelers as well. Inattention to operations resulting in small cost increases in a number of areas appears to explain much of the difference between being very profitable and not profitable. Low profit does not mean low sales volume."
A look at the comparative income statements of high-profit and low-profit firms corroborates this assertion. High-profit firms spend 18.4 percent of net sales on payroll while low-profit firms spend 23.4 percent. The money-makers also spend less on occupancy, 5.9 percent versus low-profit firms' 8.5 percent, and less on advertising and promotion, 4 percent versus 6.2 percent for low-profit firms.
Overall, high-profit firms' total operating expenses accounted for 39.2 percent of the firms' total income. For low-profit firms, the price tag was significantly higher: 48.6 percent.
At Levy Jewelers, a 110-year-old Savannah institution that is still family owned and operated, Kronowitz grasps this. He hunkered down in his office in 2009 and performed major surgery on his company's balance sheets, re-examining every expense, line by line.
"It's very simple: expense control, inventory and expense control," he says. "This business was not going to fail on my watch, not now, in the fourth generation."
The company cut back on "luxuries," such as regularly ordering in lunches for employees, and Kronowitz personally placed phone calls to renegotiate hundreds of contracts, from store leases and security company costs to the price of regular elevator maintenance.
The Savannah jeweler later held store meetings to let employees know that things weren't going to be easy as long as the economy was rough.
"You can control your revenue only to some point when you are in an economic freefall," he says. "I cut expenses. People who worked for us were very unsettled with some of the things we had to do, but at the end of the day, we all had our jobs."
Kronowitz takes a bottom-line approach to running his fleet of stores. He is not overly enamored with the inventory and isn't afraid to jettison slow-moving merchandise or make other key changes, as necessary.
Interestingly, when respondents were asked for their "view of themselves," Kronowitz was among only 10.3 percent of retailers who checked off the description "business person." The majority of respondents, more than 46 percent, chose this description: "a retailer [who] likes jewelry."
Nichols says product-loving jewelers may not cut it anymore. Retailers need to take a step back from the product and figure out how to keep inventory and margins in line and how to incentivize staffers.
"You really have to run your store like a business," Nichols says. "I think that's the No. 1 issue where jewelry stores run into problems. They fall in love with their merchandise. The most successful stores today are the guys who are running their jewelry stores like a business."
While sales continued to slide, margins made a comeback in 2009 as jewelers eked out profits by adding a little extra room between the cost of goods and selling price.
Margins were up across the board for all four store types that were included in the survey: Independent high-end stores were the front-runners on the road to margin recovery, with their margins jumping from 43.5 percent in 2008 to 47.6 percent in 2009. Margins for mid-range stores saw a more modest increase, rising from 50.4 percent to 51.2 percent.
Jewelry chains' margins climbed to 47.3 percent, up from 46 percent in 2009, while designer/artist/custom shops experienced only a small increase in margins, from 49.1 percent in 2008 to 50 percent in 2009.
The overall gross margin was 49.4 percent, up from 48.6 percent in 2008.
In the report, JA attributes the margin uptick to an increase in the number of mid-range independent jewelers taking the survey, 57.9 percent as compared to 44.2 percent last year. In addition, high-end independent retailers, who generally operate with slimmer margins, made up only 25.8 percent of participants as compared to 30.7 percent last year.
Another possibility for the extreme margin makeover: the growing presence of price-point friendly sterling silver jewelry in stores today.
Survey results show that gross margins rose in every single jewelry category included in the report except for platinum jewelry, for which margins held fast at 50 percent from 2008 to 2009.
Above: While sterling silver jewelry has been a savior for many retailers during the downturn, Erik Runyan, owner of Erik Runyan Jewelers, is sticking mostly to gold, diamonds and platinum. "I don't want to wake up one day and have a store full of sterling silver," the Vancouver, Wash., jeweler says.
The biggest margin-gainers were estate and antique jewelry, with margins climbing from 49.6 percent in 2008 to 54.1 percent in 2009, and a category called "all other new fine jewelry." Margins in this category jumped from 50 percent to 56.3 percent year over year.
At A.B. Milkins Jewelers in Wyandotte, Mich., Doug Milkins says he has made a "significant shift" toward sterling silver in his store, adding lines such as Lovelinks and the Elle Jewelry Collection. The silver shift helped boost margins in 2009. "And 2010 is improving even more," he says.
He adds that in 2008, the store was liquidating a lot of aged merchandise in order to generate cash, which brought down margins. In 2009, the jeweler maintained just one display case of on-sale items, a practice that the business has continued throughout the recession.
"We did not do as much discounting in 2009," Milkins says.
Above: A.B. Milkins Jewelers opened in 1905 and has occupied the same spot in downtown Wyandotte, Mich., since 1917. The greatest percentage of jewelers surveyed, 32.1 percent, said their stores were in a downtown location. This represents a shift from years past, when retailers with free-standing stores represented the largest group of respondents.
This year's Cost of Doing Business Report was the second to be conducted in conjunction with National Jeweler magazine and its America's Best Jewelers benchmarking program. A total of 331 companies responded to the survey, including independent mid-range stores (which made up 57.9 percent of respondents), independent high-end stores (25.8 percent), designer/artist/custom shops (13.2 percent) and chain jewelry stores (9.1 percent).
That total represents less than half of the 687 firms that filled out the survey last year. According to JA, fewer firms provided detailed financial information this year. It was also the first year that JA did not mail a printed questionnaire to all of its members. Instead, 99 percent of participants completed the survey online.
Will retailers be more inclined to participate next year, especially if sales improve? It is difficult to predict. As of press time, unemployment still hovered around 10 percent while U.S. home foreclosures showed no signs of slowing down.
In Indiana, Nichols says he has seen a double-digit improvement in his business and has spoken with other jewelers who have experienced similar gains.
"It's definitely a lot better this year in 2010," he says. "Every jeweler I talked to ... most of them are up double digits."
Other retailers, however, say business in 2010 has been flat so far.
Howard Wilshire of Wilshire Jewelers in New Hampton, Iowa, says his 2009 sales were down 10 to 15 percent and have not yet recovered. He blames the decline on a lack of consumer confidence, adding that the upcoming November mid-term elections are just adding to the sense of uncertainty.
"We're still kind of just even, flat," he says. "I think things [with the economy] are fairly good but people are scared to spend money."
About this report
Jewelers of America produced the 2010 Cost of Doing Business Report through a partnership with National Jeweler magazine and its America's Best Jewelers program. The report is a benchmarking tool that allows retail jewelers to view results of peers, evaluate their own companies, pinpoint strengths and weaknesses and improve competitiveness. To order the 103-page report on CD or via e-mail, contact JA's Member Services department at (800) 223-0673 or send an e-mail to firstname.lastname@example.org. The price of the report is $24.95 for JA members and $150 for non-members.
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