The Jewelry Retail Challenge: Think H&M

The Retail Challenge: Think H&M
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As we all know, the jewelry retail sector is struggling and facing many challenges: from declining consumer interest to limited marketing, from competing categories to unclear propositions, from confidence-eroding scandals to difficult pricing. Even benchmarking performance and prices is not widely available. And these are just internal issues.

The question is no longer if the jewelry retail landscape is challenging, but what can be done about it? What possible steps can be taken to turn the industry around? Over the course of the past few weeks, I had a chance to speak with many retailers and service providers to retailers, trying to understand what is bothering them, where the obstacles are and what is generally keeping them awake at night.

Many shared the same issues, for example, the role Blue Nile is playing in the industry – one that is viewed by many as destructive. Generic marketing was another concern. Let’s take a closer look at these two issues many believe are responsible for slowly killing diamond jewelry retailing in the US.

Blue Nile

Blue Nile was a rising star and the darling of Wall Street. The arrival of diamond retailing in the online arena should not have surprised anyone. But with the motto “disrupt” driving many startups, Blue Nile was true to that approach and did disrupt diamond retailing.

One such disruption was Blue Nile’s price combined with their mobile app. It is difficult to sell a high-priced item to a prospective customer standing, smartphone in hand, comparing you to the low-cost alternative. But let’s ask ourselves – is low cost what we are selling? Low cost is something that does not go hand-in-hand with luxury, low cost is for essentials: clothing, food, etc. Luxury as a discretionary expense comes in after the basics. Luxury is what gives life some “extra,” spice, more and beyond the ordinary.

Worse, Blue Nile became a price benchmark for many. I say worse because Blue Nile’s business model is different from most jewelry retailers – they are ubiquitous as an online operation, they sell diamonds, and they count on selling large volumes. For brick and mortar specialty retailers, store overhead is high, the focus is on selling jewelry, and there is a slow turn.

Trying to compete with Blue Nile’s prices is a losing battle. Consider the numbers: Blue Nile’s net sales in the first quarter of 2015 were $106.5 million, while their net profit was just $1.2 million. Blue Nile is operating on very low margins: their operating income for the quarter totaled $1.9 million, a margin of 1.8% of net sales. To really drive the point home, net profit was 1.1% of net sales. No brick and mortar retailer is able or interested in such margins – nor should they be.

With all the psychological space that Blue Nile occupies in the minds of brick and mortar storeowners, remember that jewelry sales in the US totaled $68.83 billion in 2014. Blue Nile’s US sales were $392.4 million – just 0.6% of fine jewelry sales, occupying a much smaller market share than most suspect.

I’m not undermining Blue Nile’s role in the market. They created change and are influencing consumer behavior. You may argue that Blue Nile’s prices are forcing you into a price war that you can only lose. So what if you focus your efforts on service and design? I’ve spoken with one designer/retailer that reduced diamond prices to bring them closer to Blue Nile’s, and his business has grown by more than 20% because of his focus on design, for which he charges a handsome sum. Isn’t that worth more than a passing thought?

Generic Marketing

Finally, after five or six years, generic marketing is about to return. At this stage, it seems that the budget is small, but let’s wait and see what happens when the diamond producers and others put forth their efforts and see the difference that makes.

And Now, for the Hidden Issues

Obviously, there is more on retailers’ plates than Blue Nile or marketing. Prices, for example, are perceived to be high. Setting sentiment aside, the price of gold, silver and diamonds have declined in the past couple of years, and manufacturers have reduced their prices accordingly. The Jewelry Producer Price Index shows that in April of this year prices have, on average, come full circle back to their December 2010 price levels.

These are some real issues that can be addressed. However, some issues remain hidden: inventories, for example. A comparison of inventories to sales reveals that they are not in sync. Many independent retailers have Princess and Marquise shaped diamonds that have been sitting in inventory for more than two years, sometimes much more than that. This is tying up financial resources. That inventory needs to go.

Perhaps you could hold a big sale and offer them at cost to free up that resource and to generate traffic with a loss leader. Or, If worried about the long-term impact of deep discounts, why not create small stud earrings or small pendants with these diamonds and offer them as a second item at an affordable price for every purchase of $XXX or above. This will help get them out of the safe, and free the cash for better purchases.

Too CrowdedThe retail challenge - crowded displays

When I first started out in the diamond industry, I made a point of walking into a few jewelry stores to get a feel of the market. The offerings were so varied and plentiful that I was lost in minutes. Very quickly all the diamond rings began to look the same. It’s not that retailers offered variety as much as they presented excess. There were too many items, and the differences between them was too small. This has been bothering me ever since. Just think about the kind of shopper experience we are offering consumers – is it an exciting one or an overwhelming one?

It’s okay to have great variety on hand to capture a client’s taste. Just don’t have it all on display! By reducing clutter and giving each jewelry item breathing space will give a walk-in an opportunity to appreciate each item. The whole selling process can be so much easier (at least for folks like me…)

The H&M Model

All this brings me to the new era of retailing. It used to be that if you bought a pair of Levi’s jeans, they lasted for many years, decades, really. It was great for my dad in the 60s when as a student he pumped gas to help make ends meet. He needed a few working pairs and they lasted forever, which worked just fine for him. My dad was not a Millennial.

There is a lot of talk about Millennials, differentiation, marketing and luxury. But maybe we need to approach this from a completely different direction. There are a number of successful retailing models that can serve as inspiration for the US jewelry industry.

I call it the H&M model, but there are many other such examples of retailers that do essentially the same: they offer products that are highly designed of passable quality at a very affordable cost. H&M and similar stores offer something that is great for the coming year. For next year, drop the old, come in and find great new designs at good enough quality and affordable prices. That is the business model.

The idea is simple: almost everyone wants something new, that looks great and that is priced so they won’t feel bad about not using it next year. This allows them to have a completely fresh and different look next season.

I have a friend that jokes that these clothing items are good for one laundering – they don’t last very long. I’m not advocating creating junk jewelry, on the contrary. This jewelry must be of good quality, and the design must be superb. Lighter items, with the appropriate diamonds, will result in price points that are affordable in the context of fine jewelry.

I believe that these items should be fun, easy to wear and if the jewelry owner leaves them in a jewelry box for a couple of years, no one feels bad about it – especially not manufacturers and retailers because the jewelry owner likely returned to the store and bought a new jewelry item – also well designed and affordable.

The “Gateway” Diamond Jewelry Items

Gitanjali introduced a similar idea in India with its Gili chain of stores: lightweight gold items set with diamonds with an emphasis on design. These are diamond jewelry items offered at affordable prices to young consumers buying their first diamond jewelry piece.

The model of “buy, use for a year, set aside and buy something new” fits with the consumers that specialty jewelry retailers are trying to attract to make their first diamond jewelry purchase – the “gateway” purchase.

If the first experience of buying diamond jewelry is fun, easy and accessible, and if the consumer receives compliments on the purchase – they’ll come back for more. That is a goal worth aiming for.

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Comments 8
  1. It is right! There were no tools to cost-effectively (time and often money) to find new models for displays. All retailers choose those suppliers who are closer. There was not tools until recently. A new b2b social network for diamonds/gemstones traders, jewellers and jewellry retailers has been launched 2 month ago. And that set a goal to solve these problems. It’s very interesting to get your feedbacks.

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      Victor, thanks. An online tool to “float” goods around between retailers (at the very least) is a very smart and practical solution. I heard of a similar initiative in development, which is to say, retailers are taking matters in their own hands. That is great news. Dead inventory can do a lot of harm to a retailer.

      1. Edahn, thank you for your kind words. We’re connected on Facebook. May I write to you to discuss this topic?

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  2. The biggest issue facing millennials is the $1 trillion dollars in combined student loans they have incurred. This is the ONE loan that you can’t forfeit; it must be paid back and the interest hovers around 6%. When it comes to single solitaires for engagement purposes, they simply don’t have the money. In today’s diamond market, you have Signet, online jewelers and independents. Another 1,000 independents will probably close shop this year like they did last year because the outlook is grim and these baby boom owners probably already have a solid retirement plan. To think about it, the diamond trade has a lot of common with agricultural trade. The children of jewelry owners, like those of small farms, simply don’t have an interest in pursing a career in a business model with a 4-6% operating margin, one that has lost its sparkle, one where their friends can’t relate with the meaning of diamonds(iphone is more important), and where it is impossible to compete against corporate – Signet & Bluenile.

    Do you have a breakdown of the $68B by market segment? Is it true that the top 50 brands make up more than half of all revenue?

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      Good points. Student loans were always there and probably not a major factor today more than in the past. Sadly, the retail experience has not changed with the times, and that has a negative impact. The introduction of Blue Nile is a good example.

  3. I agree with some of your points and enjoyed your article, but when it comes to the first time diamond buyer the “millennials” wanting to get engaged. What I find is that this age group wants to buy the 1.0-1.50 CT diamond in a mounting that has another 1.0ctwroth of diamonds. They want the best color the best clarity and excellent cut they want it all, but do not want to pay for quality. They will over look quality to get the size, over look service to get color, and settle for a diamond report online over actually seeing the diamond.

    After which the young man will Then come to me and ask “is this a good diamond? I bought it online”. Or” I bought my girl a 1.0ct it’s isn’t a certified diamond but I was told it’s a good color.” What do you think?

    I think this generation it’s more about look at me I just got engaged. As I post pics on Instagram, facebook, Google plus, youtube, tumbler and pintest. Looks it’s a 1.50 CT diamond smiley faces smiley faces oxox. Feeling loved.

    Lastly this age group are not as loyal as a customer as you think. For them it’s were can I get my jewelry the cheapest and will shop around and have stores bid against one another until they get the best price no matter how well you treated them and how great their experince. They don’t care, but there girlfriends has a 1.5 CT posted on facebook. Smiley face smiley face feeling loved.

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      Jennifer, you are describing a very price oriented customer that doesn’t have the knowledge that should come with that (such as the compromise between price and quality or the importance of certification). In a way, that is very much the H&M model – all about the look and the price, while quality is secondary. Do you find they are after a certain shopping experience?

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