As I write this, I’m sitting on a morning flight from Miami to Philadelphia. The aircraft originated in Santiago, Chile as a red eye, so the first class cabin is replete with lay flat beds, and the galley was evidently catered for that flight with sufficient extra champagne such that the crew has been doling out Mimosas all around as we await gate departure. What a delightful way to start the day, on a homeward bound journey after a surprisingly successful CBG Show. But I am growing increasingly concerned about rapidly evolving events that may produce a challenging environment, so I’m using this month’s column to warn you about a Perfect Storm that may be just around the corner. Here are the facts:
- The precipitous decline in Bridal Average Unit Retail continues, with an aggregated twelve month drop of 30 percent impacting the most important revenue stream in your store. This is partly due to the recent immense change in lab prices, but may also be early evidence of the first wave of Gen Z buyers’ sense that engagement rings don’t deserve the same high purchase price as their Millennial counterparts, an unfortunate generational shift that may prove to be pretty durable.
- Bridal unit sales are also crashing. Signet’s research shows that their average engagement ring purchasers met 3 years and 2 months prior to selecting their ring, and if you reel back the clock, guess who wasn’t meeting whom 3 years and two months ago in a Covid-induced isolation environment.
- Inflation has significantly reduced mainstream consumer discretionary spending capacity. The majors are already sensing this, and as we rotate into the 4th quarter, I suspect you will see the most intense discounting we have experienced since 2008/9. CEO’s can survive missing margin targets in order to hit revenue forecasts, but a combination of significantly reduced transaction counts coupled with unexpectedly high post-Christmas inventory levels may prove fatal, and they know it, and as their self-preservation impulse kicks in, we may see 8 weeks of black Friday level discounting. You can also expect massive returns to suppliers in 2024 Q1, as the big boxes place the burden of a poor Christmas selling season squarely on the shoulders of their vendors.
- The period required to sell a loose mined diamond in the average Independent jewelry store has increased, in just one year, from thirteen to nineteen months. And with rapidly plunging unit sales, many of you now have at least a five year supply of mined diamonds, and some of you may have a lifetime supply. If you’re a loose mined diamond dealer, the current scenario is the equivalent of a nuclear detonation.
All of this was bad enough for me to change the title of my seminar at the August Atlanta Jewelry Show Education Series to “The Perfect Storm”. But now it’s becoming ever clearer that at a fundamental level, the situation is becoming even more dire, because mined diamond prices are now in the first stages of a significant collapse.
As just one anecdote, I recently learned that the largest supplier of loose diamonds to independent jewelers is now experiencing a loss on every new transaction, as prices have declined to a point where his cost in is higher than the prices he can now charge. His particular scenario is still survivable, because his profitability in the Covid-driven profit fest of the past three years allowed him to prepare for a major downturn. But for the loose diamond dealer population at large, we may now witness a Darwinian extinction event of epic proportions. And as the race to the exits becomes a stampede, we may experience the first loose diamond market in generations that, at least for a time, may have no price bottom.
There are several economic forces at play here, but the biggest is also the most fundamental: Supply and Demand. It’s simply a fact that as LGD prices have fallen, the resulting ‘equivalence’ between mined and lab has created a condition of oversupply, and given the evident American consumer preference for lab in mainstream price points, we will now inevitably see a series of new, ever lower price equilibrium points that will be dramatically below prior levels. On paper, the equity reduction for the entire industry, from sightholders all the way down to small neighborhood jewelry stores, may be unlike anything that we – or the banks that make loans to companies based on inventories and receivables – have seen before, with chilling financial consequences.
I am writing all of this not to scare you, but to motivate you to up your game. I hope I’m wrong, but all of this points to a series of unsatisfactory outcomes before the dust finally clears. Make the most of every selling opportunity, reduce your debt load immediately, and don’t miss the chance to swoop in with cash if things become especially unstable. As Warren Buffet famously noted, you should get scared when people get greedy, and greedy when people get scared.
Yes, it’s a sunny day, and life is good, but that’s exactly what the dinosaur thought, right before the asteroid landed. You have been warned.
Class Dismissed!
