The saying is what goes up, must come down. However, in the diamond jewelry industry, the opposite is equally true: what goes down, must come up. A dive and a bounce back. So while 2020 was a challenging year, it recovered quickly, and all came together in the fourth quarter.
Retail Dive and Bounce
Total US jewelry sales soared to *$13.7 billion in December, bringing total 2020 retail sales to *$62.3 billion, according to the latest government data.
This annual figure is impressive considering that US retailers lost $4.76 billion in business between March and May. Jewelry consumer demand fully made up for that loss in the second half of the year.
Year over year, jewelry sales increased *1.6% – a better than expected result by all accounts.
At specialty jewelry retailers, the situation was challenging throughout the year. The dive was deep, and some did not recover. However, collectively, retailers did recover, and a splendid recovery it was.
For the collective of independents and chains small and large to do well required hard work. They had great client outreach and improved it further. They were online, available, flexible, focused, and smart about the situation. They remembered every fall is followed by a rise and prepared for it.
Their dive and bounce led to an incredible December. Usually, specialty jewelers’ December sales average 122% higher than in November. This year, they knocked that up to more than 160%.
Based on the sales of hundreds of specialty jewelers, December sales were up a robust 4% year over year – despite the pandemic. For the quarter, sales increased 3%.
Amazingly, the average cost and price of sold units rose 10% in December to $596.25 and $1,110.66, respectively. This proves that retailers, almost no matter what, will always protect their margins.
This leads us to an interesting finding. Based on our research, as the holiday season developed, retailers reduced prices and pressured wholesalers to do the same. Retailers were so successful at reducing costs that they successfully improved their gross margins.
Sales Peaked on Christmas Eve
Analyzing sales in December by day reveals that sales rose every day of the week, with Saturdays being the best sales day in December. Sundays were the slowest.
Another finding is that each week was busier than the previous one, until Christmas Eve. Sales peaked the day before, on December 23rd. While there was barely any business on Christmas Day, sales resumed at a decent volume on the following days.
Wholesalers’ Deep Dive and Bounce
The sector that typically suffers the most is the midstream. Manufacturers and wholesalers were forced to practically close shop for a period during 2020. However, following the bounce in retail sales in June, wholesale activity resumed as well.
This was a godsend for manufacturers. Balancing their inventory is always tricky. With no polishing activity and without a supply of rough diamonds, wholesalers just sold their polished diamonds.
The resumption of retail sales, first in China and then in the US, provided them with an opportunity to dry out their stock of goods. And they took advantage of the opportunity.
It should be stated that no part of the diamond pipeline came to a complete and absolute standstill. While some closed shop and others halted activities for a bit, most continued to work at a much reduced level. Manufacturers, for example, bought rough and polished it. Considering the circumstances, they purchased nothing but very specific items that fit their needs.
The V-Shaped Recovery
As consumer demand improved, wholesale transaction prices of polished diamonds started to rise. It was not a quick bounce back as in retail, but a paced one. After prices sunk for six months, reaching a low in July, they started to recover, posting a near full recovery by the end of December, as the diamond index shows. See more here.
Rough Diamonds’ Long Dive and Late Bounce
The most gradual return to full activity was that by mining companies. For them, it was a drawn-out dive. The bounce came much later. That said, they are back to ordinary activity.
How normal? Some are already concerned about another out-of-balance market with more rough diamonds than it actually needs.
Prices were not raised as wildly as some press reports have it, but more moderately. De Beers increased prices by a low single point on three grainers and up. ALROSA increased prices by a mid-single digit and did so pretty much across the board.
Lab-Grown Took a Surprising Turn
In terms of dive and bounce, lab-grown diamonds (LGDs) had it in their own unique way, behaving very differently than natural diamonds, as loose or set in jewelry.
From the perspective of wholesale prices, LGDs started 2020 strong. Wholesale transaction prices, as tracked by our lab-grown price list, increased overall by 5.3% in the first quarter. The few price decreases were in the smaller goods.
In the second quarter, prices started to decline, down overall 3.1%, as wholesale activity came to a near standstill. Exports from India to the US stopped in April, resuming to a more limited level of activity in May. During this period, and through the third quarter, prices of half-carat LGDs and smaller were steady or even improved. It was the prices of larger LGDs that declined.
Despite a return to activity and retailer purchases, prices declined sharply and across the board in the fourth quarter. A combination of an increasingly crowded and competitive wholesale market with a growing shift to HPHT goods sourced in India were the primary drivers. Together with LGD wholesalers’ urgent need for cash flow, wholesale prices were further pushed down.
While wholesale prices of loose lab-grown took a dive, retail jewelry sales did well at US specialty jewelers. The LGD industry owes a hearty thanks to one of the most prominent symbols of 2020 – video conferencing.
With most of us sitting in front of a camera, speaking with the world viewed mainly from the shoulders up, sales of LGD earrings surged.
On a year-over-year basis, sales of LGD-set earrings leaped more than 50%.
LGD Market Share
One question constantly asked by members of the diamond, LGD, and jewelry industries has to do with LGD penetration. Based on our panel of more than 780 specialty jewelry retailers, LGD market share in the US rose from 2% at the end of 2019 to 3.1% in 2020.
Diamond financing continued shrinking in 2020, although at a moderate pace. After a period of decreased leveraging, especially in 2019, banks felt somewhat more confident about their clients’ good standing upon entering 2020.
The decline in diamond activity in 2020 had a direct impact on banks. Traders proved exceptionally reliable in repaying their debts, on one hand, but had a decreased need for financing on the other. This meant banks had a good client base but less financing utilization.
In response, banks actively turned to this client base, primarily in Antwerp and Mumbai, actively offering money. They were joined by a couple of large funds and investment firms, but extended offers only to a limited group of traders.
The reduced activity in the diamond pipeline, coupled with deleveraging by many companies is leading to a continued decline in diamond industry debt to financial institutions.
Based on our estimates, this debt level fell below $10 billion, the lowest in 16 years.
After two complicated years, the dive and bounce is likely behind us. We are entering an era of implementing the lessons learned. The two largest threats are trying doing business as we did before, and a massive financial fallout in the US. After a year of pouring trillions of dollars into the economy, money that to a considerable degree fueled the stock market, some economic concerns linger.
The diamond and jewelry industry can and should up its game in 2021 based on its 2020 lessons. As for the US economy at large, that is up to the Biden administration to address.
*Figures updated post publication.
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