state of the jewelry industry-022008

1

State of the Jewelry Industry

February 21, 2008

2

Table of Content

Executive Summary p.3

Overall Economic Outlook p.5

Diamond Market Outlook p.5

Jewelry Industry Outlook p.6

Jewelry Sales Trend p.7

Sales by Type of Merchandise

The Watch Market

Seasonality

Merchandise Profile p.14

Bridal

Luxury Pieces

Designer Fine Jewelry

Economic Selection

Advertising Efforts

Challenges p.17

Industrial Trends and Opportunities p.21

Competitive Landscape p.23

Specialty Jewelry Stores

Single-Brand Jewelry Stores

Department Stores

Mass Merchants

3

Executive Summary

Impact of the Downturn in the Economy

Mass affluent and super-rich consumers expected to increase spending while middle class is cutting

back.

Steep cost increases from mining, polishing, and importing will continue to squeeze profit margins, yet

market conditions prevent jewelers from sharply raising retail prices. Sales are expected to increase

mildly due to inflation yet unit sales are expected to drop by 4-5% in 2008.

Numbers of specialty jewelry stores and jewelry wholesalers continue to drop and are expected to

continue to decrease in 2008.

Competitive Landscape

There are over 30,000 jewelry stores in the U.S. with average sales between $1-2 million. The top 50

jewelry chains hold less than half of the market.

Specialty jewelry stores face challenges from online jewelers, television shopping channels, big box

discounters, high-end single-brand stores, and department stores, most with sizeable marketing budgets.

Specialty jewelry stores indicate that they plan to improve their in-store experience, including customer

service and visual appeal as a hedge against online competition.

Sales Trends

Mass advertising seems to have had a positive impact on the sale of right-hand rings, journey pendants,

and gemstone cocktail rings.

o Designer fine jewelry brands such as David Yurman and Scott Kay gain popularity: 44%

jewelers reported holiday sales for designer jewelry sales were up.

o Branded diamond jewelry such as Hearts on Fire and De Beers increase their brand recognition

and preference among core consumers.

o Diamond right-hand rings ranked as the most popular style of diamond jewelry among women

who bought jewelry for themselves.

Demand for high-end watches remains strong.

o Watches accounted for 11.5% of total jewelry sales in 2007 – the strongest increase was in

men’s watches in the $5K - $10K price range at 42%.

Platinum and diamonds are still the favorite for engagement rings, despite the high prices.

Palladium starts gaining notice and popularity in engagement settings as well as in other fine jewelry and

timepieces design.

4

Consumers appear to be looking for something new and different, as evidenced by the overall drop in

estate jewelry sales and increasing demand for non-mainstream designer pieces.

Jewelry, although still preferred by women, is not the top choice of holiday gifts.

o Trends show a growing interest in “experiential gifts” for Valentines Day; jewelry stores

competing with pricy electronics for holiday gifts.

o An estimated 40% of proposals take place during Valentine’s Day, Thanksgiving, Christmas and

New Year’s Eve.

Price point for a diamond engagement ring (DER) for the second marriage is significantly higher than for

the first marriage. The average cost for DER is $3,200 for specialty jewelry stores; $5,600 on

BlueNile.com

Challenges

Economic downturn causing core market to cut back on non-essential spending.

Rising cost on raw material and manufacturing overseas leading to cost inflation and negative impact on

profit margin.

The fragmented industry makes adjusting retail price a challenge because no retail has enough power to

take the initiative.

Online jewelers keep gaining ground due to competitive pricing, no sales tax, extensive education, no

sales pressure, fast service and large merchandise selection.

5

Overall Economic Outlook

Jewelry sales have always been strongly correlated with economic growth, and the U.S. economy is not in

the best shape. The combination of a poor housing market, tightened credit and high fuel costs along with an

unpromising job market has convinced most economists that the U.S. economy is slipping into recession.

The lower Consumer Confidence Index reveals that consumers have mentally prepared for recession.

- According to the Labor Department, non-farm payrolls fell by 17,000 in January 2008, the first drop

since August 2003. Responding to the economic downturn, the Fed has lowered the interest rate by

1.25% within 8 days in January. It is expected the Fed will further lower the Fed funds rate to boost

the economy.1

- Deterioration in the housing and credit markets has caused widespread instability in both the

domestic and world equity markets and raised fears that the U.S. economy may slip into a recession.

According to the Conference Board, its Consumer Confidence Index fell to 87.9, down from 90.6 in

December; the Expectation Index declined to 69.6 from 75.8. Consumers claiming business

conditions are “bad” rose to 20.0% from 18.8%.2

- The weakening dollar position affects U.S. trading in various ways. On the one hand it helps reduce

the huge trade deficits facing the U.S. On the other hand it makes imports less affordable. Combined

with the strong tendency of recession, goods and services that heavily rely on imports are expected to

experience some hardship in 2008.

- Despite the economy, 80% of high net-worth consumers expect to increase spending in 2008. The

Elite Traveler Affluent Consumer Survey reveals 34% of Mass Affluent (with net-worth over $1

million) would spend more time making a luxury purchase, 80.3% of Super Rich (net-worth over

$30 million) will increase their spending on luxury goods and services in 2008. The Super Rich are

expected to offset the cutbacks in buying by less wealthy consumers: they spent $236,200 per

household on jewelry over the holidays, compared with $4,600 for the Mass Affluent.3

Diamond Market Outlook

In 2007, De Beers announced 3% drop in rough diamond sales to $6.8 billion, and yet consumer sales of

diamond jewelry increased by around 3%, with strong sales growth in China, India and Middle East, but a

disappointing holiday season in the U.S.4 While the U.S. jewelry market experienced a soft 2007 holiday

selling season, demand in other regions of the world for diamond jewelry remains strong, especially for

larger carat and high quality goods. As long as the demand for diamonds and diamond jewelry stays high,

especially in emerging markets, prices will likely rise. Further, since rough diamond prices are rising faster

than polished diamond prices, the pressure for passing along those price increases continues.

On a yearly basis, global polished diamond prices rose by an exceptionally strong 4.7% in January 2008,

compared to the same month a year earlier. If diamond prices continue to increase at this rate, it would be

one of the larger annual price increases in the past 20 years. The demand for larger, higher quality diamonds

1 Payrolls unexpectedly decline, increasing odds of recession, WSJ.com, Feb 1 2008.

2 Consumer confidence falls in January, CNNMoney.com, Jan 29 2008.

3 Despite economy, Super Rich still spending, NationalJewelerNetwork.com, Feb 4 2008.

4 De Beers full year 2007 sales dip, Israeli Diamond, Feb 10 2008

6

is strong, which reflects on the dramatic price increase above 2 carats; diamond prices in the 2 carats and

below held steady whereas diamonds under ½ carat have seen a slight decline in prices.5

Based on the traditional relationship between economic growth and diamond demand, it is expected that

diamond prices will not rise as sharply in 2008 as they did in 2007. The steep price hike in raw diamonds

will keep polished diamond price from falling, yet it is expected the growth will be moderate.6

Jewelry Industry Outlook

In 2007, the jewelry industry reported a net loss of 349 specialty jewelry stores, compared to 855 in 2006.

The number of jewelry manufacturers that have their production operation in the U.S. also declined from

3,386 in 2006 to 3,290 in 2007. It is believed that the number of manufacturers who actually have significant

production facilities remaining in the U.S. is far fewer than reported. IDEX forecasts that net loss of

independent specialty jewelry stores could reach 600 or more in both 2008 and 2009, based on historical

trends.7

While the number of jewelers is declining, direct selling through the Internet and TV shopping channels is on

the rise. In the U.S., QVC is the largest single distributor for Italian gold. The dynamic on gold jewelry

distribution has also changed: In March 2007, Berkshire Hathaway announced merging of the industry’s two

largest gold importers and distributors, Bel-Oro and Aurafin, into an uber gold jewelry distributor—Richline

Group.8

The blooming online jewelers keep gaining ground in jewelry sales. With much higher inventory turnover

rate and low overheads, online jewelers are able to provide large selection with lower price. In 2007, both

Blue Nile and Amazon.com reported record-high increase on diamond sales. According to IDEX, online

jewelers’ sales mix is about 80% diamonds and diamond jewelry, whereas a typical specialty jeweler

5 January global diamond prices continue to rise, IDEX Online Research, Feb 4 2008

6 January global diamond prices continue to rise, IDEX Online Research, Feb 4 2008

7 Net decline of specialty in the U.S. slows in 2007, IDEX Research, Jan 30 2008

8 The man in the middle, ModernJeweler.com, Mar 14 2007

Source: IDEX Online Research

Polished diamond prices were nearly 5% higher in January 2008 than they were a year ago

7

generates 40%-48% of sales from diamonds and diamond jewelry.9 The superior financial model of online

jewelers is expected to continue the competitive advantage over specialty jewelers. Although IDEX predicts

the growth of online jewelry sales will eventually slow down, online jewelers still are the major competition

to specialty jewelers in the perceivable future. Facing the strong challenge online, more jewelry stores

emphasize in-store experience, customer service, customized design and repair service as their competitive

advantages toward online jewelers.

Even with the forecast of the economy, total jewelry sales are still expected to grow in 2008. First Research

reports 2007 average sales per jewelry retailer were nearly $2.7 million,10

including retailers with multiple

locations. Sundale Research indicates average jewelry store sales of $1,021,211, a mild growth of 2.5%

compared to 2006.11

With an estimated average of 7-8% inflation caused by rising price in raw materials and

the depreciation of U.S. dollar, industry-wide jewelry sales by value is predicted to grow by 3%; however,

the economic turmoil is more likely to reduce the overall units sold by 4-5% in 2008.12

E-commerce provides an easy entry for the market, leading to the decline of jewelry wholesalers. In 2007,

the number of jewelry wholesalers in the U.S. declined to the lowest level over the past 12 years.13

9 Online jewelers are poised to create major challenges for the industry, IDEX Online research, Feb 21 2008

10 First Research Industry Profiles: Jewelry Retail, Jan 7 2008

11 Sundale Research 2007

12 State of jewelry industry, IDEX Online Research, Jan 28 2008

13 Net decline of specialty jewelers in the U.S. slows in 2007, IDEX Online Research, Jan 30 2008

Source: Department of Commerce & IDEX Online Research

Growth of online jewelry sales is expected to slow down, but still higher than the specialty jewelry stores

8

Jewelry Sales Trend

In 2007, U.S. retail jewelry store sales increased an estimated 3.7% to $31.2 billion, compared to a 6.7%

growth ($30.1 billion) in 2006. The slower growth rate is a reflection of poorer economic conditions, a trend

that is perceived to continue through 2009.14

The core market for jewelry is women between 25 and 54 with high household income.15

The primary

segment is 50+ women with household income over $100,000, known as the Boomers. IDEX research

indicates that a high income household will spend as much as 15 times more on jewelry annually than a

household with lower income. The next favorable market is young, tech-savvy, working women with six-

figure income, known as the Millennials. The Millennials are the core of bridal market and are likely to

spend heavily on bridal jewelry. In addition, jewelry for gay Americans is the next growing market, along

with minority markets such as Asian Americans and Hispanic Americans.16

14

Sundale Research 2007 15

Sundale Research 2007 16

IDEX Research 2007

Source: Jewelers Board of Trade

The number of jewelry wholesalers dropped to the lowest level since 1996

9


According to survey conducted by Jewelry Consumer Opinion Council's (JCOC), rings, for the second

consecutive year, led the most-popular list yearlong, most likely due to the extensive coverage of diamond

right-hand rings and big, bold gemstone cocktail rings that have become fashion favorites. They were the

most sought-after item purchased monthly for about one-third of respondents, with diamond-set jewelry

favored. Colored-stone jewelry ranked a close second in the months of March, May through July, September

and October, with semi-precious gems in particular beating out diamonds in August. Watches showed

strength during key gift-giving months, including May, June and September through December.17

Style-wise, watches remained popular among gift-givers with 30% of them purchasing watches as gifts in

2007, followed by necklace (23%) and earring (21%). The success of the right-hand ring campaign has not

only made it the most desirable item among self-purchasers but also increased the demand for fashion rings

as gifts by 5% in 2007. An interesting survey finding reveals that while the most popular Mother’s Day

jewelry items are earrings and necklaces, for the second year, moms preferred a fashion ring. It is worth

noting that purchases of pendants also grew by 6%, partially due to the success of Journey diamond styles.18

Data from U.S. Department of Commerce reveals a slight change in consumer preference on jewelry.

Despite the high cost, consumers still prefer platinum for engagement ring, which caused sales on platinum

jewelry to increase by 9.8% in 2007.19

On the other hand, the sharp rising price of platinum has created a

17

Despite economy, jewelry shoppers ambivalent in ’07, National Jeweler Network, Feb 6 2008 18

JCOC 2007 year in review, Jan 2008 19

Sundale Research 2007

Retail Jewelry Store Sales

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$ M

illio

n

Retail Sales $24,988 23,728 24,816 25,543 27,543 28,216 30,096 31,198 32,291 33,572 35,730 37,528

2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009* 2010* 2011*

Source: U.S. Dept. of Commerce

6.7% increase in 2006



10

new wave of demand for palladium, which is rapidly gaining popularity among fine jewelry designers and

manufacturers such as Scott Kay and Cartier.20

Fueled by the price of gold, another white precious metal,

silver, is also becoming highly desirable, especially among men and young women. To create higher margin

and to bring in a fashion-forward look, more and more fine jewelry designers introduced jewelry made with

both silver and gold, or increased silver in their jewelry mix.21

The Wall Street Journal also reported pearl

jewelry sales spikes after Speaker Nancy Pelosi wearing it on C-Span,22

a total of a 9.9% increase to

estimated sales of $1.09 billion.23

In the meantime, sales on estate jewelry slipped 5.8%, which confirms the

fact that consumers want something new and different.

20

This Valentine’s Day, discriminating jewelry shoppers overlook gemstones and designer names in favor or the new

metal: This is the year. Palladium is now, PR Newswire, Feb 13 2008 21


Women in power: Finding balance in the wardrobe, WSJ, Jan 24 2008 23

Sundale Research 2007


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Diamon

d Je

welry

Pearl

Jewelr

y

Other

Gem

stone

Jewelr

y - A

ll Jew

elry I

tems i

...

Loos

e Gem

stone

s, inc

l. Diam

onds

Karat

Gold

Jewelr

y

Watc

hes

Estate

/Ant

ique J

ewelr

y

Platinu

m Jewelr

y

All Othe

r Jew

elry

All Non

mer

chan

dise R

eceip

ts, in

cl. P

arts

Insta

l...

$M

illi

on

2006

2007

Platinum increased by 9.8%

Pearl increased by 9.9%

Estate decreased by 5.8%

Source: U.S. Dept. of Commerce

11

The Watch Market

Even under economic uncertainty, jewelry retailers reported good sales in watch category, especially in

luxury timepieces. In 2007, watch sales generated $3.5 billion, accounting for 11% of total jewelry sales, a

2.7% increase compared to the prior year.24

According to National Jeweler year-end sales survey, 24% of

jewelry retailers reported watch sales were up, whereas 30% reported down. However, the percentage

reversed among jewelers with revenue above $1.5 million: 32.8% reported the watch sales up versus 26.5%

reported down.25

In February, Luxury brand LVMH reported an 8% increase in revenue, including a 13% increase in watches

and jewelry sector for the year 2007. The company credited the increase to TAG Heuer’s upscale

positioning and continued innovation, including its concept watches and the popular ambassador program.26

Among all jewelry items, watches remain the top choice for holiday gifts. The 2008 Affluent Consumer

Spending Survey reports that 88.9% of the Super Rich spent $121,700 per household on watches for the

holidays, compared with 16% of the Mass Affluent, who spent $2,300 on watches.27

According to Europa

Star, luxury watch shoppers are moving towards individuality and less mainstream branding. The consensus

is that consumers want to be different and more exclusive. Recognizing people want things that other people

cannot have, manufacturers are releasing models in limited numbers to increase desirability.28

The greatest growth in 2007 occurred in men’s watches with price range between $5,000 and $10,000, a 42%

increase from 2006. Although the same price range showed strength in women’s watches, most growth in

women’s watches remained at the under $1,000 level. Distribution-wise, chains and department stores

accounted for more than 1/3 of all watch sales, with strong sales in entry-level (under $1,000) and just above

entry-level ($1,000-$3,000) watches.29

Although the U.S. market continues to stay influential, watch sales in Asian market are growing strong. To

increase its global market share in luxury watch category, Tiffany partners with Swatch Group in design and

distribution of the Tiffany watch collection with retail price between $1,500 and $10,000, comparable to

Cartier and Bvlgari. Under the current agreement, Swatch will be responsible for marketing outside the U.S.

and Tiffany will sell the watches at the Tiffany stores within the U.S. market30

On the supply side, the Swiss watch industry reported a 16.2% increase in export value in 2007. The U.S.,

after Hong Kong, represented the second largest market with $184.1 million in Swiss watch imports.31

The

increasing demand in high-end mechanical watches raises a major concern regarding the availability of parts,

which are generally produced with traditional methods.32

All the indications have shown that, despite the turmoil in the overall U.S. economy, watch industry insiders

expect consumer demand high-end watches to remain strong in 2008.

24

U.S. Department of Commerce 25

National Jeweler year-end sales survey 2007 26

LVMH achieves record results in 2007, National Jeweler Network, Feb 6 2008 27

Despite economy, Super Rich still spending, Feb 4 2008 28

Europa star, Jan 2008 29

Guilds, department stores move in on higher-priced watches, National Jeweler, Jan 2008 30

Swatch Group, Tiffany alliance expected to pay off in time, National Jeweler Network, Jan 20 2008 31

Swiss watch exports see record growth, National Jeweler Network, Jan 30 2008 32

Europa star, Jan 2008

12

Seasonality

Jewelry sales are highly seasonal with 40% of revenue generated in the 4th

quarter. December has always

accounted for the largest share of jewelry sales, followed by November. In 2007, 22.5% of the U.S. jewelry

store sales were generated in December, compared to 22.4% in 2006 and 23.5% in 2005. The percentage of

sales generated in May has increased over time from 7.9% in 2005, 8.5% in 2006 to 8.7% in 2007. In the

meantime, the sales generated in February, fueled by Valentine’s Day, have slightly decreased from 8.6% in

2006 to 8.1% in 2007.33

According to a survey conducted by JCOC, the main reason for not getting jewelry as a Valentine’s Day gift

is “unsure what to get.” The same research also shows that among all jewelry items, watches were the most

popular gift item for Valentine’s Day, followed by necklaces and earrings. In addition, 32% of parents

purchased jewelry and watches for their children for Valentine’s Day.34

According to a National Retail Federation survey earlier this year, the average consumer planned to spend

$122.98 on Valentine’s Day, a slight increase from last year’s $119.67. Total spending on Valentine’s Day

was expected to reach $17.02 billion. Among people who celebrate Valentine’s Day, adults aged 25-34

planned to spend the most, an average of $160.37 per person, followed by 18-24 with $145.59, 45-54 with

$117.91, and 35-44 with $116.35.35

Despite the economy, National Jeweler reported encouraging Valentine’s Day sales. According to an

exclusive report, 2008 Valentine’s Day sales exceeded the expectation with high demand on branded jewelry

and sterling silver such as Scott Kay and David Yurman.36

33

U.S. Department of Commerce; Sundale Research 2007 34


Jewelry to fall slightly as Valentine’s Day gift, JCK, Jan 29 2008

Exclusive: Retailers report stable V-Day sales,36

National H=Jeweler Network, Feb 15 2008

(Source: JIRI)

Jewelry and watch sales are projected to have modest growth in 2008

13

The holidays are not only big gift seasons but also big for proposing as well. According to

WeddingChannel.com, an estimated 40% of proposals take place during Valentine’s Day, Thanksgiving,

Christmas and New Year’s Eve.37

Forbes survey indicates that 9% of the weddings are proposed on

Valentine’s Day, with the average of $4,435 for a ring.38

37

When just handing over a ring won’t do, The New York Times, Feb 2 2008 38

The cost of showing you care, Forbes, Feb 6 2008

% Sales by Month

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

January

February

Marc

hApril

May

JuneJuly

August

Septem

ber

Octo

ber

Novem

ber

Decem

ber

2005

2006

2007*

(Source: U.S. Department of Commerce; Sundale Research)

Mother’s Day sales increased 0.6% in 2006 and another 0.1% in 2007

Valentine’s Day sales dropped by 0.5% in 2007

Holiday season sales dropped by 1.4% in 2006 and increased only by 0.1% in 2007

% of Sales by Channels

0%

10%

20%

30%

40%

50%

60%

Jan Feb Mar Ari May Jun Jul Aug Sep Oct Nov Dec

Retail

Online

TV

Mail Order

(Source: JCOC 2007)

Retail sales peaked around holidays: Feb, May, and Dec., indicated major gift purchases

14

Merchandise Profile

There are many ways to segment jewelry merchandise: by material, by product type, or by value/purchase

occasion. From consumer’s point of view, there are at least four categories: bridal, luxury, designer fine

jewelry, and economic selection.

Bridal

The bridal jewelry business is crucial for most jewelry stores. According to a survey conducted by JCK,

bridal jewelry accounts for 36% of total sales of jewelry stores, with an average $809,433 in annual revenue.

The average center stone size for an engagement ring is 1.1 carats with an average price of $3,200. The

same research also shows that white gold and platinum are the most popular metals for the setting, and the

colored center stones and palladium are growing in popularity.39

It is worth noting that the price point of

diamond engagement rings in second marriages ($8,425) is significantly higher than the first ($5,241), which

means consumers are generally willing to pay more for their second marriage.40

Brand-name settings such as

Tiffany & Co., A. Jaffe, Stuller, Martin Flyer, Tacori, Hearts on Fire, Jeff Cooper, Art Carved, Simon G.

Ritani, Verragio nd Me’moire are heavily promoted via bridal magazines and in store displays.

Target:

- First marriage: The Millenials. They are more likely to get married and spend heavily on bridal

jewelry.41

According to Simmons Consumer Survey, over 30% of people who get married for the

first time are between the ages of 25-34.42

U.S. Census 2004 reported the median age of first

marriage is 24.2 for men and 21.9 for women, with Asian American being significantly older (27.8

for men and 24.9 for women).43

- Second marriage: The Boomers. Simmons Survey shows over 40% of people who got remarried are

ages 55 and above.44

U.S. Census 2004 reported the median age of second marriage is 35.3 for men

and 32.6 for women, with Asian men being almost three years older but no major difference in Asian

women.45

Luxury Pieces ($8,000+)

Designer pieces (including luxury timepieces) and fine diamond jewelry made with precious metals and

sizable stones. Graff, Cartier, Harry Winston, Jack Kelege, Chopard, Charriol, and Bvlgari are commonly

seen in fashion-related publications as well as publications target affluent readers such as the Wall Street

Journal and Forbes. In addition to advertising, their designs are often seen on celebrities, resulting in free

39

This Valentine’s Day, discriminating jewelry shoppers overlook gemstones and designer names in favor or the new

metal: This is the year. Palladium is now, PR Newswire, Feb 13 2008 40

Bridal by the numbers, JCK Jewelers, Jan 1 2008 41

State of jewelry industry, IDEX Online Research, Jan 28 2008 42

Simmons Consumer Survey 2007 43

U.S. Census Bureau 2004 44

Simmons Consumer Survey 2007 45

U.S. Census Bureau 2004

15

publicity for product placement. The exclusivity and fine quality make jewelry in this category popular

among upper income customers who are less vulnerable to recession than the general population.

Target:

- Upper income boomers. They are the highest income segment of the population, which means they

are less vulnerable to economic downturns; in addition, they appreciate fine quality goods in life and

have high brand awareness.

Designer Fine Jewelry ($300-8,000)

Traditionally, fashion jewelry has been a sideline of designer brands. Traditional high-end fashion brands

such as Bvlgari, Chanel and Gucci have always had presence in fashion designer jewelry category, along

with outfits and other accessories.

The difference in the past couple of years is the rise of designer fine jewelry brands. Even with the sluggish

economy and price hike, the designer brand jewelry section is on the rise. Jewelry designers such as David

Yurman, John Hardy, Di Modolo, Roberto Coin, Marco Bicego, Jude Frances, Gregg Ruth, Charles Garnier,

and Scott Kay with their wide range of merchandise and high visibility have gained name recognition and

brand preference among fashion-conscious customers. According to a survey by National Jeweler, out of all

jewelers who sell designer jewelry, 44% reported that designer jewelry sales were up for holiday 2007.46

In specialty jewelry stores and high-end department stores, designer fine jewelry dominates fashion category

with brand names such as David Yurman, Roberto Coin, John Hardy, Marco Bicego, Scott Kay and Simon

G. Most the brands have wide range of design from under $200 silver pieces to couture jewelry. However,

majority of the designer fashion lines are falling into the price range. With extensive marketing efforts,

designer fashion jewelry has created high name recognition and broad appeal to the mass market.

Target:

- Young female professionals: According to JCOC 2007 research, on average, at least 11% of

consumers purchased jewelry in any given month, with a higher percentage occurring in February,

April through June, November and December. The same research also indicates that most jewelry

purchases are for the purchasers themselves.47

In addition, jewelry.com’s annual survey reports 30%

women stated they have bought themselves gifts for Valentine’s Day.48

- Boomers: High discretionary income, tendency to spend money on self, with appreciation of fine

quality products.

Economic Selection (Under $300)

This price category is popular among mass merchants, mass discounters, and economic chain stores. This

category includes a large portion of gift jewelry and some custom jewelry for young customers. It is worth

46



Women still want jewelry for Valentine’s Day, Jan 29 2008

16

noting that “personalized jewelry” such as Pandora is gaining market share, especially among younger

customers for its highly versatile, personalized touch.

Target:

- Young women: Highly self-expressive, fashion-conscious customers who cannot afford high fashion

products.

- Parents/grandparents: Purchase jewelry for children/ grandchildren as birthday, graduation, or

holiday gifts.

- Middle to lower-middle income couple who purchase jewelry for special occasions.

Advertising Efforts

Independent jewelry stores have high tendency to use co-op ads and tag along with brand name campaigns.

In the meantime, designer brands place image ads in national magazines to increase brand awareness and

stimulate desire. Compare to the year before when GUCCI, Le Vian, CHANEL and Tiffany & Co. were

seen in most fashion magazines, more brand diamonds such as Hearts on Fire and De Beers as well as

designer fashion brand such as David Yurman, Roberto Coin and Simon G were heavily advertised in 2007

and expected to continue in 2008.

To encourage post-holiday sales and promote “Journey” diamond jewelry, the Diamond Promotion Service

(DPS) contributed $250,000 to a co-op fund for retail jewelers’ television commercials during last week of

December and the first two weeks of January.49

In addition, bridal jewelry A. Jaffe is scheduled to launch a new advertising campaign, new packaging and

retail displays, all to be rolled out in June. The new advertising campaign will focus on the concept of

“intimate relationships” and seek to capture the essence of the real emotions shared in relationships. The

campaign includes print, outdoor and interactive components.50

49

More TV Co-op dollars from DPS, Online Marketing, Nov 29 2007 50

A. Jaffe to focus on change, JCK, Feb 11 2008

17

Challenges

In 2008, jewelry stores are facing serious challenges including economic downturn, cost inflation, online

competition, and the rapid changes of consumers’ preference in jewelry and gift items.

- Economy downturn

Jewelry business has always moved with economic condition, and U.S. is in the middle of economic

downturn caused by poor housing market, tighten credit, uncertain job market and high fuel costs.

o Anticipating a slow market, Diamond Trading Company (DTC—De Beer Group’s

marketing arm) is cutting its marketing budget by 50%.

o According to National Jeweler Network (NJN), Zale last quarter sales down 7.3%, and

Signet same store sales down 6.7%.51

- Rising cost of raw materials

o Gold price has risen sharply for the past year and is expected to remain high, so have other

precious metals.

o Fueled by sharply rising prices for gemstones three carats and larger, global polished

diamond prices increased nearly 5% in January 2008 than a year ago.

o The shortage in the raw material supply has caused a steep price hike in both manufacturing

and retail markets. As a result, the growth of sales is expected to slow down to an estimated

4.6% annually, compared to an average of 5.2% since 2000.52

o IDEX online research points out the spikes of wholesale jewelry price in 2006 and 2007, yet

the price surge has not completely reflected on the retail level. It is expected that most

jewelers will have to increase the prices eventually. However, the industry is too fragmented

for any single jeweler to take the first step.53

o The U.S. government is expected to ban imports of Burmese gemstones. Burma produces an

estimate 90% of the world’s rubies, fine blue sapphire, spinel, peridot, and almost all the

world’s jadeite. Over 11,000 jewelry retailers have voluntarily stop trading Burmese

gemstones, including Tiffany & Co, Cartier, and Bvlgari; Sterling has its no-Burma policy

posted on its Kay Jewelers website. In addition, the European Union banned trading of

gemstones with Burma on October 15 2007.54

51

National Jeweler Network, Feb 7 2008 52

Fashion Jewelry, FashionProducts.com, Jan 31 2008 53

Cost inflation rages; retail prices must rise, IDEX Online Research, Feb 7 2008 54

Burma ban likely, ModernJeweler.com, Dec 20 2007

18

- Online competition

Online jewelry outlets provide competitive price, infinite product selection and intensive product/

category information along with the benefit of convenience. Customers are able to compare quality

and price online through numerous sites, which makes diamond more of a commodity. According

the IDEX research, online jewelry merchants have far more market share than online merchants in

most other retail categories.55

o GemFind, owner of business-to-business wholesale-jewelry website Gemfind.net,

announced the launch of a new business-to-consumer website, Gemfind.com, where

shoppers will be able to search for and purchase diamonds and jewelry directly from local

stores. In addition to showcasing its intensive inventory, it allows customers to visit a local

store then decide whether to buy it online or at the store. GemFind also offers members

access to their worldwide diamond database, which includes listings for more than 50,000

diamonds.56

o Blue Nile, the leading online jeweler with an established reputation and low price on high-

end merchandise, has gained huge market share from traditional jewelry retailers. It reported

24% growth in the fourth quarter of 2007 over the prior year.57

In addition to its expansion

of 12 new international markets, it also reported record-high 2007 sales of $17.2 million, an

over 100% increase over a year.58

o Due to adding 2,269 new styles of diamond jewelry to its collection, including popular

“create your own engagement ring” and 14-karat white gold “Journey” pendant, Amazon

reports a 75% increase in diamond sales in the 3rd

quarter of 2007, 59

and more than 100% in

the 4th

quarter, 60

compared to the same period in prior year.

55

Net decline of specialty in the U.S. slows in 2007, IDEX Research, Jan 30 2008 56

GemFind launches consumer website, National Jeweler Network, Feb 5 2008 57

Blue Nile announces Q4 revenue growth of 24%, PR Newswire, Jan 14 2008 58

Blue Nile expands global reach, National Jeweler Network, Feb 4 2008 59

Research industry profiles: jewelry retail, Jan 7 2008 60

Amazon.com 4Q diamond sales top 100 percent growth, National Jeweler Network, Feb 12 2008

(Source: U.S. Dept. of Commerce)

http://www.gemfind.net/

http://www.gemfind.com/

19

o Online jewelry retailers placed more emphasis on Cyber Monday, and it paid off in 2007. A

study by ComScore reports that online traffic on Cyber Monday increased 38% and sales

were up 21% to $733 million in 2007.61

o According to Modern Jeweler, 46% of buyers of luxury fashion, fashion accessories, jewelry

and watches used the Internet in support of their recent luxury purchase, and spent 12.5%

more on average.62

o Knowing the strong challenges online, most jewelers are slow to react: 47% of jewelers do

not budget for online retail operations; 51% of jewelers do not use email marketing; 42%

jewelers do not use their websites differently during holidays, according to National

Jeweler’s annual survey.63

- Consumers are unimpressed with their in-store jewelry shopping experience

o A Retail Landscape Study done by J. Walter Thompson shows that consumers only rated jewelry

shopping experience as “average” with comments like “jewelry merchandise seems too similar

from store to store” and “traditional jewelry stores are boring.”64

61

Cyber Monday sales up 21%, Modernjeweler.com, Jan 31 2008 62

MyLuxury: Affluent use social sites too, Modern Jeweler, Nov 16 2007 63


Jewelry shopping a dull in-store experience, IDEX, Feb 14 2008

Online sales shows constant growth year after year

Online sales surge 2 weeks before holiday and remain strong during the holiday week, indicating

consumers take full advantage of its timeliness

20

- Competition from other categories for gift sales

Jewelry is no longer the predominating gift option for holidays. More and more consumers choose

“experiential gift” such as vacation, special dinner, and electronics instead of jewelry.

o According to BIG Research, 22.2% of consumers planned to buy jewelry over the past

holiday, down from 26.4% in 2006. Furthermore, JCOC reported only 16% of survey

respondents purchased fine jewelry or watches as a holiday gift, down fro 20% in 2006.65

o A separate study done by JCOC reports only 14% of respondents gifted jewelry for

Valentine’s Day.66

o ComScore reported a decline in holiday jewelry sales online whereas video games, consoles

and accessories grew 129% in 2007.67

o Jewelry.com’s annual survey reveals an interesting finding: While the most popular

Valentine’s Day gift among gift-givers is a special dinner (74% men and 62% women), more

than half of women stated that they would like to receive a piece of diamond jewelry for

Valentine’s Day.68

- Other impact on fashion and jewelry awareness

Less buzz on fashion and jewelry caused by canceled events in entertainment industry.

o The writers’ strike had forced the Golden Globe Awards and People’s Choice Awards to

cancel their extravagant red-carpet events, where jewelry designers traditionally use the

opportunity to gain brand awareness and celebrity placement. The fashion industry is

hoping to gain the benefit on the Grammy Awards and the Academy Awards.69

65

Signs of the season, MoneyCNN.com, Dec 17 2007 66

Despite economy, jewelry shoppers ambivalent in ’07, Feb 6 2008 67

ComeScore.com Jan 7 2008 68

Women still want jewelry for Valentine’s Day, IDEX Online Research, Jan 29 2008 69

Red-carpet ripped out from jewelry designers, Feb 5 2008

21

Industrial Trends and Opportunities

Bridal Market

- Extravagant proposal, especially in the second marriage market

o The growing business of proposal planning becomes popular among affluent males in their

30s to 40s. The average cost of a proposal is between $5,000 and $15,000.70

Bifurcation of Demand

- While the middle-market and lower-end jewelers are expecting continued decline in sales, upper-

end jewelers are likely to report strong gain.

New Market Segments:

- Male jewelry with concentration in gay Americans

Merchandise Development

- High-end watches with large case and mixed metals

- Palladium gain popularity among fine jewelry designers and consumers

- Functional jewelry with technological or medical alert benefit

- Jewelry with alternative metal or less gold design

- Color gemstones continue to be popular, blue hue is the color of choice for 2008; large

gemstones, shorter earrings and cocktail rings take center stage in fashion.71

o The National Color Diamond Association (NCDIA) launches its new MarketScope program

in Feb 2008, which provides qualified customers for natural colored diamonds to retail

members. Members also have access to turnkey direct-mail programs to reach these profiled

customers, as a result of its partnership with The Nielsen Co.72

- Luxury customers care where their products are manufactured; a recent survey shows they prefer

goods made in the USA, Italy, France and Germany.73

- Consumers want something “new and unique”74

which either leads to higher-priced designer

pieces or innovative, personalized, jewelry design.

o Customized jewelry gives personal touch, gaining popularity among young consumers.

Marketing

- Branding: To increase consumer confidence and profit margin, gemstone sellers, especially

diamond, are trying to establish brand names such as Hearts on Fire and Christopher Designs’

Crisscut.

70

When just handing over a ring won’t do, The New York Times, Feb 2 2008 71

Red-carpet ripped out from jewelry designers, Feb 5 2008 72

NCDIA launches MarketScope program, National Jeweler Network, Feb 14 2008 73

Italian goldsmith facing troubling times, luxist.com, Feb 19 2008 74

State of jewelry industry, IDEX Online Research, Jan 28 2008

22

- Socially responsible jewelry.

o “No dirty gold” campaign and the new pledge to shun gold from Alaska mine near salmon

stream.75

o “No blood diamond” pledge.

o Ptak launched the Conscience Collection, a line of colored-diamond jewelry that utilizes

recycled metals and lab-grown diamonds and gemstones as being more socially and

environmentally aware.76

o Simmons Jewelry Co.’s “Green Initiative” collection donates part of its proceeds to the

Simmons-founded Diamond Empowerment Fund (DEF), which supports education initiative

in African nations.77

- Working women express independence by buying jewelry for self.

o 75% of QVC shoppers purchased jewelry for themselves, as did 60% of online jewelry

shoppers. 56% of jewelry store and department store jewelry purchasers were buying for

themselves.78

o A recent JCOC survey shows that nearly 70% of customers have purchased fine jewelry for

themselves; the most popular price range was $500-$1,000, and 12% of self-purchasers

spent between $1,000 and $2,500 on a piece of fine jewelry.79

30% of women admit that they have bought a Valentine’s Day gift for themselves.80

66% self-purchasers find right-hand ring most desirable, followed by 54% for three-

stone rings.81

When women buy jewelry for themselves, it is about fashion, personal style, and

emotion. 71% of women choose one store over another based on how they are

treated.82

75

Jewelers shun gold from Alaska mine, Associate Press, Feb 12 2008 76

Ptak introduces eco-conscious collection, National Jeweler Network, Feb 5 2008 77

Pretty is as pretty does, National Jeweler, Dec 2007 78



Women still want jewelry for Valentine’s Day, IDEX Online Research, Jan 29 2008 81


JCOC 2007 year in review, Jan 2008

23

Competitive Landscape

The U.S. jewelry industry generates annual revenue of $25 billion from over 30,000 stores. The average

annual sales per jeweler are nearly $2.7 million. Large chains like Zale and Sterling Jewelers have presence

in almost every shopping center in the U.S. However, the industry is fragmented: no retailer claims more

than 6% market share, and the top 50 jewelry chains hold less than half of the market.83

Performance-wise, national and regional jewelry chain stores began the year as the most popular shopping

destination for fine jewelry and watches; department stores took the lead from April through June, and then

led again in September, November and December. Mass discounter stores led in August, revealing the

demographic hurt the most by the weakened economy. Independent retail jewelers were the top choice for

Valentine’s Day shoppers, and remained important throughout the year, capturing the lead in October.84

E-commerce increased in importance throughout 2007. Blue Nile, Bidz.com and eBay were among the top

destinations where approximately 60% of customers purchased jewelry for themselves. In TV shopping,

QVC was preferred, especially among self-purchase shoppers.85

Specialty Jewelry Stores

Specialty jewelry stores are facing challenges from economic downturn and competition from mass

merchants, particularly from discount stores. The chain jewelry stores can be categorized into three tiers:

High-end chains such Bailey, Banks & Biddle; mid-range chains like Jared, Helzberg and Littman; economic

chains such as Zales, Kay, Gordon’s, Shaw’s and Whitehall. In addition, there are independent local

jewelers comparable to all three tiers. Consumers who shop at jewelry stores expect service and expertise,

which generally is associated with reputable chain or well-known local stores.

Facing the challenges from slipping economy and online competition, most specialty jewelry stores try to

create more positive in-store experience by improving service and increasing visual appeal. A survey

regarding visual merchandising reveals that 38% of the jewelers want to improve lighting at the store,

followed by 26% to replace the showcases and 25% to jazz up the display accessories inside the showcases,

according to National Jeweler.86

High-end Single-Brand Jewelry Stores

Most specialty jewelry stores carry merchandise from multiple manufacturers, very few stores are single-

brand jewelers. Single-brand jewelers such as Cartier, Graff, Harry Winston, Tiffany and Movado, with

long-established reputation and limited retail locations, generally are considered more exclusive and

prestigious. However, to generate revenue from mass luxury, Tiffany & Co. plans to open 70 new mid-

market concept locations called “Tiffany & Co. Collections.” The stores will not carry bridal jewelry, but

offer only fashion-focused designs with price range $100 to $15,000.87

83




Keys to the store, National Jeweler, Jan 2008 87

Tiffany expands U.S. presence via luxury-for-the-masses store concept, National Jeweler, Dec 2007

24

Department Stores

High-end department stores such as Neiman Marcus, Saks Fifth Avenue and Nordstrom provide large

selection of designer fashion jewelry. The joint marketing efforts help promote designers’ brand image and

generate traffic to the stores.

Although high-end department stores are more resistant to economic downturn than the mass chain stores,

the weakened economy’s impact has started to show. For January 2008, Nordstrom reported a 6.6% decline

in same-store sales, along with a total sales decrease of 20.3%, or $124 million; Saks Inc. and Neiman

Marcus both posted modest gains of 4.1% and 3.3%.88

Mass Merchants

Mass merchants include department stores such as Macy’s, Lord & Taylor, J. C. Penny, and discount stores

such as Filenes Basement, TJ Maxx, and Wal-Mart (the largest jewelry retailer in the U.S. with 4.6% market

share89

). Because the gross margins are high, mass merchants are able to cut price on a regular basis. They

tend to have limited selection in brands and design; as a result, they are more likely to appeal to customers

who value cost over design and quality.90

Stores in this category are hit by the economic downturn harder than the luxury department stores. Macy’s

Inc. reported a 7.1% drop in same-store sales; Wal-Mart reported a below expectation 0.2% rise in same

store sales in January 2008.91

88

January worst on record for retailers, AdAge.com, Feb 7 2008 89

US jewelry marketplace, National Jeweler 90


January worst on record for retailers, AdAge.com, Feb 7 2008

state of the jewelry industry-022008

Documents