This Just In: Jewelry Retail Sales Are Improving

This Just In: Jewelry Retail Sales Are Improving
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The most pressing fundamental issue for the global diamond industry today is the decline in consumer demand. Hopefully, this is changing, as US retail sales of fine jewelry have posted several consecutive rises recently, signaling a turn for the better.

In August of this year, fine jewelry sales increased 2.4% year-over-year, the fourth consecutive month of increases. Fine jewelry sales totaled an estimated $4.9 billion and overall jewelry and watch sales an estimated $5.5 billion.

This Just In: Jewelry Retail Sales Are Improving - Year-over-year monthly US jewelry sales - January 2014-August 2015 - Edahn Golan

Jewelry Retail Sales Break Records

This level of sales is significant in a number of ways: first, because it is already a clear trend. When sales increased year-over-year in May for the first time in five months, it might have been a fluke. When trade figures are first published, they are preliminary and tend to be later revised. However, unless there is a major revision that updates figures a few years back, these figures are final and very solid.

Another reason these figures are significant is the month-over-month trend. It is in sync with buying trends of past years showing that even if the figures are revised a little up or down, they are still in line with consumer behavior.

This trend shows a decline in January versus December (after the holiday season), a rise in February versus January because of Valentine’s Day, a sharp rise in May versus April due to Mother’s Day, a decline in June and July, with a pick up in August. In September, a decline in jewelry sales is expected, as consumers hold back before the holiday discounts.

This Just In: Jewelry Retail Sales Are Improving - Month-over-month monthly US jewelry sales - 2011-2015 - Edahn Golan

In addition, $4.9 billion means record sales during August, as were sales in May ($6.1 billion), June ($4.8 billion) and July ($4.6 billion). Finally, the rate of increased sales rose from 2.0% in June, to 2.2% in July, to the 2.4% rate of increase in August.

We must not ignore a few other indicators. Last year, for example, August sales increased at a much higher 4.5% year-over-year. Also, in the past few years, series of monthly declines tended to start in September, so we might just see this series of increases end soon, although that would be surprising.

Reasons for Cautious Optimism

One of the outcomes of the current crisis in the diamond pipeline is that every segment of it is sitting on large inventories. This is true for diamond miners, diamond manufacturers, wholesalers (to a lesser extent) and retailers.

This may explain why those in the midstream of the diamond pipeline – manufacturers and wholesalers – are not seeing signs of improvement. Their clients are still working their current inventories and limiting their replenishment purchases. During a visit I made last week to India, manufacturers I met with said they are not seeing any significant increase in business from the US, not from large chains or from independents.

Year to date, prices of 5-10 ct rough diamonds are down 15%, 2.5-4 cts fell 30% and smaller goods lost at least 35% of their price. Prices may sink further.
So with good news for jewelry retailers in the US, and possibly good news for wholesalers just around the corner, there is reason for optimism, right? Maybe. Not only has the diamond industry taken a beating, the global economy is taking its fair share of a beating too.

The stock markets are falling, the value of mining companies is dropping, prices of precious metals – the usual go-to safe haven during downturns – are sliding and there seems no end to this in sight.

This is no reason for panic, but it is enough of a reason to worry that consumers may decide to hold back on their luxury expenditures during the upcoming November-December holiday season.

So, let’s be content at this point with cautious optimism (especially considering last year’s decline in jewelry spending).

Consumer Prices Sliding

One possible explanation for consumers’ renewed interest in jewelry may lie with the prices they are paying. The Jewelry Consumer Price Index (JCPI) has been declining on a year-over-year basis for nearly two years, ever since December 2013.

Currently at 162.8, it has been rising and declining in the past year, opposite to direction of sales: Up in January and February, down in March, April and May, up again in June and July, and down in August.

This Just In: Jewelry Retail Sales Are Improving - January 2011-August 2015 Jewelry Consumer Price Index (JCPI)

With a general downward trend that has lasted a couple of years, retailers may have finally found the spot that brings consumers back into the store.

Not an Issue of How Much Discretionary Spending Consumers Can Afford

Yet, there is possibly another explanation: Consumers are not as interested in big ticket items as they were before, and so the average price point is slowly slipping down and the JCPI, which reflects what consumers are paying (cash through the register), is not tracking decreasing prices as much as decreasing expenditure.

I recommend that you read Ben Janowski’s excellent piece on the new consumer, especially point #4, casual dress code (although all 12 points are on the mark). Thus, casual jewelry is a natural fit for a casual dress code, much more than a very fancy or elaborate jewelry item.

With this in mind, clearly it’s not as much an issue of how much discretionary spending consumers can afford, but rather what share of this spending is funneled to jewelry.

Less Rough for A Lot Less

Next week is De Beers’ Sight 8. After the very small previous Sight of ~$300 million, Sight 8 is expected to be a bit larger, $350-$380 million, according to early estimations.

The market expects the October Sight to offer $350-$380 million worth of rough
There are three more Sights this year, with Sight 9 falling near Diwali in November, when the Indian manufacturers are on vacation, which means that supply will be small at that Sight.

Sightholders have to get 50% of their remaining ITO supply in 2015 (and the rest in the first three months of 2016). With the market still very slow, whatever goods can be delayed from Sights 8 and 9 to Sight 10 in December are being put off. This means that a rather larger allocation is expected in December.

109.40 ct rough diamond . Photo: Lucara

109.40 ct rough diamond . Photo: Lucara

At that point, the success of the holiday season will still be somewhat unknown. Traditionally, Sightholders had the option to defer a large part of their December allocation to January, and this year Sightholders are likely to take full advantage of this option – given, of course, news about consumer demand.

For now, there is hardly any news about ex-plan requests, and specials, which were deemed very expensive lately, are a big unknown.

So far this year (January to September, inclusive), rough diamond prices have fell hard. Larger goods, 5-10 carats, are down an estimated 15%, 2.5-4 carats fell 30% and smaller goods lost at least 35% of their price. Prices may sink further.

The news that De Beers sold a large amount of goods to Sightholders outside the Sight (and below list prices according to several people), is still reverberating through the industry. De Beers needed the cash flow, that is understood, but the result was further rough price declines.

Currently Sightholders are wondering if this action will repeat itself in the coming weeks and months, and what impact it will have on prices.

Many state that this is not good for the market, while others view this positively: If there is an understanding that rough prices need to be even lower to become economically attractive, then the industry is on the right path to recovery. Signs of cautious optimism abound…

 

About the Author:

Edahn Golan
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Edahn Golan has 20 years of experience as a diamond industry analyst. He has a unique ability to provide a global view with context to the exclusive granular data he shares. The New York Times, Wall Street Journal, Business Insider, and other leading publications quote him regularly.

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