Understandably, many of our subscribers are interested in the outcome of Black Friday and what the results could mean for jewelry sales leading up to Christmas. This issue of Retail Jewelry Insights™ is focused on trends likely to influence post Thanksgiving Day jewelry sales and after Christmas strategy.
The holiday season began for jewelers on Friday with a blitz of big discounts from department stores, discounters, and consumer electronic stores designed to steal what remained of consumer’s few discretionary dollars. Whether jewelers didn’t get the consumer’s message after October sales crashed isn’t clear. But one thing is certain, big box retailers did as their new promotional tactics stole the day from specialty stores like jewelers this year.
Traditionally, Black Friday isn’t as important to the industry as it is to discounters and department stores. Jeweler’s biggest days are usually the last two days before Christmas, at least that is what history has taught us. But with the economy in a 21st Century recession and the financial markets in disarray, history could be wrong this year. Now, with insipid November sales as the measure, can jewelers afford to wait, hoping the last two days will turn around a year fraught with business surprises and disappointments every quarter since January? Simply put, probably not and here is why.
Consumers Want Real Deals
Black Friday bargains have become the norm. Last year, retailers, including jewelers, designed promotions to entice shoppers to buy early during Black Friday. But this year large retailers upped the ante, slashing prices to post Christmas sale levels during the Thanksgiving weekend. Results now suggest their “early clearance” strategies worked. According to ShopperTrak RCT, sales increased 3% on Black Friday over the previous year. However, while traffic increased on average by 17%, it declined about 2.5% in specialty stores according to the NRF. A spokes person for Taubman Centers echoed those findings saying “transactions at its facilities were [only] slightly higher than last year” which translates to mega-retailers stealing market share from jewelers.
In the last decade, specialty jewelers vacated lower price points. Powered by easy credit, buyers were encouraged to spend thousands of dollars on diamond jewelry. The fact that it was often 50% off a fictitious retail price was incidental so long as the buyer could finance it. In less than 6 months that selling paradigm has become obsolete. Now, tighter credit combined with the on-set of a recession means 50% off or 70% off for that matter isn’t compelling if it still implies financing last years $2,000 dollar selling price. Nevertheless that’s just what many jewelers offered on Black Friday.
If it wasn’t clear before Black Friday, it should be clear to most jewelers now. Consumers weren’t just looking for another 50% off sale this year. They wanted real value and lower price points too. According to Marshal Cohen, a retail analyst, “Shoppers definitely have a mission this year. They are serious about finding the best deals. They are very budget conscious [and] they've done their research.”
Sales Continue to Decline
Despite doing relatively better on Black Friday, October and November’s precipitous decline in sales indicates many retailers could be facing even larger sales declines in December. One solution is bigger discounts which are exactly what retail chains are planning. Major department stores like Kohls and bankrupt electronics retailer, Circuit City have already announced larger price cuts immediately after Black Friday promotions end. It’s almost certain other large retailers will follow the pack. Even Walmart has said it would match any competitor’s price on like product, including jewelry.
Whether jewelers will follow suit is problematic. With 95% to 100% of earnings dependent on December sales, jewelers are apprehensive about cutting price to levels necessary to compete with larger non-jewelry retailers. But the alternative is betting that consumers will eventually choose regular margin jewelry over deeply discounted luxury gifts like $700 plasma screen TV’s, $300 laptop computers, or low price point CD’s.
Another consideration for jewelers is the effect of jewelry business failures on present and future sales. Two of the top five jewelry chains were liquidated in 2008. Now, according to a JCK report, Finlay Enterprises which operates about 905 outlets in 40 states had to renegotiate a December 1st interest payment to prevent a cross default of its debt. Should Finlay default, worst case scenario, up to a billion dollars in fine jewelry and branded watches could be on sale at cost plus prices immediately before Christmas or early in 2009, pushing prices lower and simultaneously decreasing demand.
Demand Will Likely Decline
As bad as high inflation is, declining prices could be worse. During inflation demand often increases as consumers buy more now, expecting prices to be higher tomorrow. Deflation has the opposite effect. Consumers expecting prices to decline, postpone purchases not wanting to overpay. Clearly, early liquidation sales by bankrupt companies, along with the financial crisis, conditioned consumers to shop for real deals this season. Black Friday’s clearance pricing was big box retailers’ response to that expectation. But now, with the level of discounting set to rapidly increase as Christmas nears, December demand may actually decrease as consumers push purchases into next year, leaving retailers with a lot of unsold inventory.
Ending Inventory Escalating
Despite the deep discounts on Black Friday and bigger discount plans leading up to Christmas, insiders say many retailers will still have more inventory than they need. Where will that excess go? One answer is overstock and surplus buyers. Sources close to the problem say large buyers already have pallet loads of merchandise ranging from fine jewelry to branded luxury gift items in stock. E-commerce businesses like Overstock.com say they have an “avalanche” of product. According to one reporter “inventory has doubled from a year ago at Overstock.com”. Such levels of excess inventory means prices of fine jewelry and branded luxury products are only going to decline further in the new year, pushing demand even lower as consumers wait for prices to bottom out.
Jewelers Still Have Time to React
Caught off guard before Black Friday, many jewelers now find inventory accumulating faster as sales decline. While the circumstances of each jewelry retailer are different, it should become progressively clearer that the industry, on the whole, needs to eliminate as much excess inventory as possible. There are several reasons why:
1. With retail prices dropping and consumers likely to push purchases into the future, the time to sell off excess inventory will only get longer.
2. Styling will inevitably change as innovative jewelers remerchandise their stores with better value merchandise.
3. Best selling price points will change as consumer financing becomes more difficult to arrange.
4. The magnitude of asset based financing available will decline for both jewelers and manufacturers as financial institutions shift capital to less risky loans.
Accordingly, jewelers have to sell the inventory they own now and steal market share from non-jewelry competitors in order to reinvest in their business. That reinvestment will mean new business plans for many jewelers predicated on lower margins, higher inventory turns, and less costly operating structure.
