ROLLING STONES

Retailer consolidation makes its way toward the jewelry sector

By Rodger Brown

A diamond may be forever, but the same cannot be said for a marketing plan in the jewelry business.

Retailers in the $54 billion industry have been reworking brand campaigns, bringing out fresh product lines and mapping out new locations to adapt to wrenching changes in everything from technology to consumer shopping trends. The market forces that have been reshaping other retail sectors have finally caught up with this most ancient of trades — the shaping of metals and gems into bangles, baubles and belly rings — transforming an industry that has, according to one analyst, displayed a chronic aversion to change.

“The jewelry industry is lagging every other retail category by 25 years,” said Ken Gassman, a former Wall Street analyst, now president of the Jewelry Industry Research Institute. Where other retail sectors have already gone through shakeouts that reduced the field to a set of “duopolies” — defined as two retailers owning overwhelming market share in their sector, à la Barnes & Noble-Borders, Home Depot-Lowe’s and Target-Wal-Mart — “the question now is, who will be the duopoly in the jewelry industry?” according to Gassman.

Having just completed a study of trends in the jewelry industry at the end of last summer, Gassman says his findings indicate that the consolidation that has taken place in hardware, bookstores and consumer electronics over the past two decades is happening now to jewelry stores.

“The No. 1 trend in the jewelry industry today is consolidation,” Gassman said. “In general, for every chain jeweler that opens a new store, an independent closes a store. That’s the way it’s been for the past few years.”

The numbers back him up. In 1999 independents controlled 44 percent of the market and department stores 22 percent. By 2003 the independents had dropped to 36 percent and department stores to 12 percent. Their lost customers were claimed by mass merchants, wholesalers, online vendors and national chains.

Consolidation has also reduced the overall number of jewelry retailers in the U.S., to 24,765 at the end of April from 28,497 in 1995, says the Jewelers Board of Trade.

But beyond consolidation, what the future will look like is hazy.

The top six jewelry-only “specialty jewelers” control only about 14 percent of overall jewelry sales, according to a report by KeyBanc Capital Markets, with the vast majority of merchandise sold through a diversity of outlets such as television, the Internet, general merchandise and department stores, and discount retailers such as Wal-Mart, considered the largest jewelry retailer.

With so many competing players marshaled for what is predicted to be a global showdown, it is little wonder that a study released last year by investment banking firm Financo presented its conclusions in language befitting the Lord of the Rings saga: “The U.S. jewelry industry is on the precipice of a major restructuring at both the retail and wholesale manufacturing level. Companies need to move quickly to ensure their long-term viability.”

The good news is that the demographics are “extremely favorable” for the jewelry industry, at least for the next 10 years, Gassman says.

“We know that more jewelry is purchased by consumers age 45 to 54 than any other group, with the sweet spot being age 50,” Gassman says. “And between now and 2016, 11,850 baby boomers turn age 50 every day. There is a huge customer base coming into the market.”

With such opportunity beckoning, success will depend on adaptability in merchandise, marketing and store selection. First among the contenders for the duopoly crowns are Zale Corp., the top jewelry-only chain in terms of market share, and Sterling Jewelers, the American arm of U.K.-based Signet, whose main U.S. brand, Kay Jewelers, is sector leader in sales. For the near term, Zale and Sterling have the middle market practically to themselves. One competitor, Friedman’s, is working its way out of bankruptcy while another, Whitehall Jewelers, struggles under some very public troubles among its managers, including a CEO who quit before she even started the job.

Kay’s strength is in the strategic thinking behind its store location plans. Last summer Kay opened its first store in the New York City borough of Manhattan. In a press release at the time, CEO Terry Burman said: “Investing in quality real estate … is one of the factors that have contributed to our industry-leading growth. … We believe that the quality of our prime store portfolio, together with our regular investment in mall store openings, refurbishments and relocations, merchandising and marketing, clearly gives us a competitive advantage.”

David Bouffard, a Sterling spokesman, says one strategic shift has been to locate new Kay stores beyond the company’s traditional enclosed mall sites. Two years ago Sterling began opening stores in lifestyle and power centers, at a rate of 10 per year, with another 10 planned for this year. “Strict criteria are followed when evaluating real estate investments, and management believes that the quality of its store portfolio is superior to that of its competitors,” Bouffard said. “The expansion of Kay in these new locations presents a potential opportunity to reach new customers currently not served and gain further leverage.”

Though Zale also seeks off-mall locations, it is putting additional emphasis on “versioning,” a new merchandising and branding strategy launched by the company in March. Zale CEO Mary Forte described versioning to an audience of investors in August as “tailoring merchandise assortments to each store.” Versioning, she said, is “a more targeted merchandising and marketing strategy by brand. We will capitalize on our increased knowledge from analyzing customer demographics and transaction history to customizing a greater portion of our merchandise assortments by specific location to meet each customer’s needs and desires.”

Forte says it is too early to evaluate the success of versioning, but in 2006 has begun the process of closing about 35 Bailey Banks & Biddle stores, its high-end luxury brand, in order to remove underperforming stores from malls whose demographic has slid downscale.

Thinking outside the mall, Zale has secured an online advantage in the wedding market through a partnership with The Knot, which gives Zale brands a presence on TheKnot.com, the Web’s most trafficked wedding site, as well as The Knot TV, a new streaming video network.

Zale is not the only jeweler who sees continuing promise in engagements and weddings. Tiffany & Co. is leveraging its strength in that area to power its push into midsize markets, those it has traditionally avoided to protect its high-end luxury brand.

“Whenever we venture into a new market anywhere in the world, [wedding and engagement jewelry] has always provided the economic foundation for that new market penetration,” Tiffany CEO Michael J. Kowalski said in September, explaining to investors the company’s plan to take luxury to the masses and open stores in such secondary markets as Indianapolis, San Antonio and Nashville, Tenn. “For us it is a very easy way to take market share very quickly from local competitors. Even in mid-size markets across the U.S., there is a huge opportunity for classic fine and engagement jewelry.”

Gassman concurs, noting that his recent survey of the industry revealed surprising strength in that market. “If there’s one area of jewelry doing particularly well, it’s the luxury end, the high end. They’re the ones that have posted surprisingly strong sales. What we found is that while the economy does whatever it does, the luxury consumer doesn’t miss a beat. They’re out there spending every day.”

To extend its reach into that luxury market, Tiffany launched Iridesse, a concept focused exclusively on pearl jewelry. But to protect the substantial equity it has in its blue-box brand, Tiffany has meticulously policed the marketing of its fledgling project to eliminate any public linkage between the two and hedge against the failure of the new venture. When Robert Cepek, president of Iridesse, details his plan to open at least 20 stores over the next five years, his comments are all perfectly strung strands of PR positioning, with not so much as a mention of Tiffany.

“Iridesse was created to explore the depth and breadth of cultured pearls,” he told SCT when asked about the branding strategy for Iridesse in relation to Tiffany. “In the retail world, where pearls are often misunderstood and poorly presented, Iridesse stores focus exclusively on celebrating the beauty, rarity and extraordinary variety of cultured pearls.”

Staying on message as Cepek does is undoubtedly more critical than ever. In today’s fragmented jewelry market, where the same diamonds and gems can be bought at Wal-Mart, in a mall, over the Web, on a cable TV shopping channel or in a Fifth Avenue temple of splendor, leveraging brand is everything.

When Kowalski boasted to investors of how Tiffany’s brand strength yielded the advantage in the challenge posed by De Beers, the long-time diamond cartel that entered the luxury market this past July when it opened its first retail store in Manhattan, he also inadvertently highlighted brand as the main weapon with which the battle for consolidation will be fought.

“A lot of the competitive advertising, the explosion of brands … will work to our advantage because it has simply raised consumer awareness of the benefits of branding,” Kowalski said. “And I think we are just in such a naturally strong position to be the natural recipient of that heightened degree of consumer awareness of brands.”

And yet not even that calculation is as simple as it seems. With the jewels themselves becoming discounted commodities, more retailers are developing patented cuts and combinations and marketing those value-added distinctions, with the best known being Kay’s Leo Diamond.

“Do you brand the store, or do you brand the diamond?” Gassman asked rhetorically, replying to himself with a comment that might as well be printed on T-shirts for all of this year’s industry prognosticators: “The jury’s still out.”