The economic fallout in the US due to the spread of the coronavirus has been swift, deep and devastating. As of mid-April, more than 22 million Americans had filed for unemployment benefits in the space of a month, according to US Department of Labor data, and some media reports estimated the unemployment rate at nearly 18%. JPMorgan Chase has predicted the economy
will shrink by 40% in the second quarter (April through June).
To find a similar pattern, one would have to go back to the height of the Great Depression: In 1932, the country’s GDP dropped nearly 13%; in 1933, the unemployment rate was approximately 25%. However, what is happening now is unprecedented. Business in the US has ground to a halt as federal, state and local governments shut down much of the country — with the exception of essential services — to contain the spread of the virus.
As a non-essential industry, the business of jewelry has almost entirely stopped — not only in the US, but in much of the world. Here, we look at how different sectors of the trade are handling the crisis.
Manufacturing on hold
“Our office is closed, our factory [in India] is closed, and our customers are closed. I only have one customer open right now,” says Michael Lerche, president of Goldstar Jewellery LLC. The New York firm services the largest jewelry retailers in North America, totaling approximately 5,000 stores. It is the North American division of India-based diamond and jewelry manufacturer Goldstar Global, which produces more than 125 million jewels per year.
Lerche has furloughed about one-third of his 30-plus employees. The remaining two-thirds are working at reduced salaries, “doing work that doesn’t really get done on a regular basis,” he says.
Samuel Sandberg, chairman of jeweler A.Jaffe, tells a similar story. “Today’s challenges center around reopening manufacturing facilities in New York and overseas,” says Sandberg, whose company specializes in custom engagement rings for independent retailers. “We have manufactured all special orders placed before the government ordered shutdowns, but must [now] wait until we are permitted to open shipping facilities to deliver. Store closures and closures of customer receiving channels also block resumption of business operations. Once we are permitted to reopen, we are prepared to fill new special orders in 10-day lead times.”
He says his customer service department is working remotely, full-time, to meet May deliveries. The sales team is also working remotely, keeping in touch with customers via video conferencing apps such as Zoom. “We are taking orders from doors that are open and from online business secured by our brick-and-mortar retailers.”
However, he adds, “in-store demand is fractional, as almost all of our retail stores are shut. Demand from doors that are open and from online customers is minimal.”
Meanwhile, Steven Lagos — founder, chairman and creative director of the Lagos jewelry brand — is in his 40,000-square-foot headquarters in Philadelphia, Pennsylvania, with a skeleton staff. “We’re all legal with super-safe distancing. We’re checking with everyone, taking temperatures. Everyone has the option to be here or not.”
The company produces about 215,000 jewels per year and sells them through luxury department stores such as Neiman Marcus, Nordstrom and Bloomingdale’s, as well as independent jewelry retailers. In 2003, Lagos moved his production to Bangkok, Thailand, where more than 90% of his pieces are produced; the rest are manufactured in India and China. All of these facilities have been shut down.
Besides top executives and the pared-down Philadelphia staff, the rest of his more than 100 employees have been furloughed. The company paid the first two weeks of salaries and will continue to pay health benefits for the duration of their unemployment. Those who are working have taken temporary pay cuts.
“We took immediate action by design,” he says. “There’s nothing for them to do, so it didn’t make sense to keep everything going. We’re helping them with applying for government money [unemployment compensation], and looking to reopen as soon as we can.”
Even if he could manufacture, though, it wouldn’t matter, as overseas delivery of goods and distribution within the US have slowed to a crawl, and all retailers are closed anyway.
“Our forecast went from [a positive] number to zero,” he says. “It’s hard to imagine.”
Another thing that has changed for the company is its consumer marketing. “We had to shift our messaging,” Lagos says. “Now it has to be more about people wanting to have some sense of normalcy. Some sense of balance. That’s what’s so weird about this.”
He contrasts the situation with 9/11, which “was very New York-centric. It did not impact the entire world. This time, it doesn’t matter where you are or what you do. I would have never believed it.”
The only manufacturing activity at Lagos is of surgical masks and gloves. The company is donating them to the Cleveland Clinic, with which Lagos has a longtime philanthropic relationship. “The profits will come later,” he says. “Right now, it’s about people and doing the right things.”
Rough road for retail
Those interviewed for this article say their businesses are secure, but they worry that the jewelry industry landscape, particularly on the retail level, will be drastically different following the pandemic.
“We can weather this for six months if we have to,” says Lagos. “We’ve always been conservative with our borrowing, and it’s paying dividends. But I’m empathetic as hell for the little guys. The jewelry industry is a patchwork of big and little companies filled with people who work hard and are dedicated. It’s sad to see something like this. This is nobody’s fault, but if you bought the wrong thing at the wrong time, you’re going to have problems.”
Goldstar’s Lerche is also concerned about the pandemic’s effect on retail. “The margins are very small, and you have to carry a lot of high-value inventory. It’s going to be devastating to the industry. There’s going to be a lot of casualties. Those who remain are going to be stronger. It’s survival of the fittest.”
Like many jewelry manufacturers and brands, Lagos and Goldstar Jewellery count large department store chains among their clients.
But department stores have been struggling for years as consumer buying habits have changed. With the COVID-19 shutdown, some of these companies are in danger of closing for good, news reports speculate — among them mass-market retailers JCPenney and Sears, and high-end department store Neiman Marcus.
Independent retailers are also trying to navigate their way through this sudden business stoppage — even those who work in paradise. Bruce Bucky is president and CEO of Hildgund Jewelry, a five-store luxury jeweler in Hawaii. The stores are located on the islands of Oahu, Maui and Hawaii, and are all situated in resort hotels that attract tourists from around the world. His clientele is about 90% tourists and 10% locals, with prices ranging from $100 to well over $1 million.
“My inventory consists of one piece [in] each style,” he says. “Every store has different merchandise. Our inventory is about 75% memo and 25% owned. I don’t carry watches or bridal. I’m 100% fashion. I do not brand.”
About 10% of the stores’ inventory consists of one-of-a-kind items made in-house. The company also works with manufacturers in China, Thailand, the US and Italy, producing unique pieces and limited-edition jewels. As of this writing, the factories were all closed, with the exception of China, which had just started resuming operations.
Bucky says he closed his stores on March 22, the same day all the resorts shut down. “Hawaii tourism went from about 35,000 per day to 90. At the time of closure, the hotels were as low as 10% occupancy, versus a normal year, when they would be at more than 80%. Our business went to zero overnight.”
Still, he expects tourists to return quickly once the state lifts restrictions and flights begin again.
He says he has kept all his employees and is paying them at their 2019 earnings on a monthly basis, as well as covering their health insurance.
“I didn’t want any of my employees to have to deal with unemployment,” he states. “My employees are currently doing what they can by working from their homes. We are doing a lot of online training on our point-of-service system.”
E-commerce would seem to be a saving grace for most business-to-business (B2B) and business-to-consumer (B2C) companies, but among this article’s interviewees, it amounts to a small percentage of overall sales. Besides, workers are still necessary to fulfill orders and maintain websites — and companies need to be able to deliver.
“We’re selling online some,” Lagos says. “We have a team just shipping Neiman Marcus, Nordstrom and Bloomingdale’s orders. And we have three people working here from our IT team to keep the network up and running.”
Lerche says online orders account for about 5% of Goldstar Jewellery’s overall sales to retailers. “We’re closed, so I can’t ship,” he points out.
For Bucky, “the main challenge is trying not to spend too much time thinking about what could happen and only spend time [on] what is happening. React in the present. Right now, any idea you have for today is a good idea. Trying to predict what is going to happen and when it will stop can make you nuts. Stay in the present as a monk would do.”
Auctions: The online advantage
International auction houses have held online sales for years, and having this infrastructure in place has helped ease the economic fallout for them. They also have jewelry specialists meeting with customers through digital means that range from email to video conferences.
In March, Sotheby’s held two Jewels Online auctions, the second of which achieved a total of $739,375, surpassing its high estimate of $671,600. It also sold 97% of the lots — the best sell-through rate of any Sotheby’s online jewelry auction, according to Kendall Reed, the auction house’s global head of online jewels. Participants hailed from 32 countries, and half of the bids came via mobile devices.
Both of the March sales showed that buyers were increasingly comfortable with bidding via the web: Combined, they had a 92% sell-through rate.
“We saw a significant number of new collectors entering our sales, accounting for more than 20% of overall participants,” Reed adds. “This demonstrates the resilience of the market and, of course, the enduring appeal of jewelry across the generations.”
Christie’s, meanwhile, has added an online component to its private sales so clients can complete their shopping remotely. “A new viewing room for available jewels is among the enhanced offerings, with the ability to view available property remotely in close detail and confer directly with specialists,” says Daphne Lingon, the auction house’s head of jewelry for the Americas.
While the online sales have been successful, the jewels populating them are of lower value than those available during live auctions. For example, while the Christie’s online jewelry auction in February exceeded estimates with a total of $2.4 million and a 93% sell-through rate, top individual lots during live sales regularly achieve better prices. Lingon acknowledges that selling high-value items is a challenge in this climate.
“There will clearly be an impact on the whole of the luxury industry, here in New York and globally,” she says. “These are unprecedented times. Christie’s is fortunate in that we are well positioned to be nimble and adjust our sales activities across channels as needed, to leverage online and private sales while saleroom auctions and exhibitions are on pause.”
For Phillips, moving live auctions online has been “the biggest shift,” according to Graeme Thompson, the house’s worldwide head of jewelry. Phillips has already made that shift with a few sales, including an upcoming one in New York. “The biggest change we have is to conduct business in a way we never had to conduct business before.”
Thompson doesn’t expect Phillips to offer many big-ticket items online, though; he feels this is “the sensible thing and right advice to be giving to clients at the moment.”
He anticipates that live auctions will resume in the latter part of the year as each region of the world gradually returns to normal. “I’m cautiously optimistic at this time. I don’t think there is any need to panic right now. We’re pressing ahead with our plans.”
Thompson is based in Hong Kong, where he already sees the city and the jewelry market increasing activity daily. The auction house has rescheduled its May Hong Kong live sale to the first week of July as part of a weeklong series of auctions in multiple categories. This format is a first for Phillips. “A cross-category sale allows us to show a bit of everything to a lot of people,” Thompson explains.
One big issue for the auction house during the pandemic has been being receiving and shipping packages in a timely manner, since there are fewer flights and workers, he adds. Another challenge relates to virtual valuations: Proper certifications become even more important than usual when making assessments this way, he notes. “A seller doesn’t want you in their house, so we assess a jewel or watch through Zoom or WhatsApp. It’s very important to give the correct advice.”
Can trade shows be salvaged?
The pandemic has led to widespread cancellations and postponements of jewelry fairs, including JCK Las Vegas, Baselworld and the Hong Kong shows. In fact, as of this writing, Baselworld officials were considering whether the watch and jewelry trade fair should continue at all following the mid-April exodus of all its anchor watch brands.
But even before these events, some in the industry were questioning whether trade shows were still a viable means of doing business in a digital world. The mixture of answers seems to indicate that manufacturers and retailers do want to attend trade fairs, but only those that meet their specific needs.
Bucky of Hildgund Jewelry purchases loose gems but sees little use for most jewelry trade fairs these days. “For fashion jewelry, it’s not important at all. Everything could be seen on the internet,” he notes. “I think people go to shows so they can travel and write the trip off [as a business expense].”
Yet he’s a board member of the invitation-only Centurion jewelry show in Arizona, which he has attended every year since its inception. Other than Centurion, he finds fairs that offer gems most relevant to his needs. “The only shows I will continue to do are the gem shows in Bangkok and Hong Kong.”
Lerche, meanwhile, serves as president of the Plumb Club, a coalition of US suppliers that has a high-profile pavilion at JCK Las Vegas. As a leader of the organization, he says the show is very important to Plumb Club members; however,
as president of Goldstar Jewellery, he finds it has little value.
“I sell to the majors, so the show for me is mostly PR,” he says. “Among [the Plumb Club’s] 44 members, 54% sell to independents, making it important to those suppliers.”
Large and diverse trade shows such as JCK still serve as places to see industry peers, attend meetings and socialize, he believes. “I still think it’s important, but it is becoming less important.”
Lagos used to exhibit at JCK Las Vegas and then at the Couture show. When he reached a point where he wasn’t actively looking for new clients, however, he dropped out of those shows. He still attends trade fairs as a buyer, particularly the three annual fairs in Hong Kong and the Las Vegas shows.
“I buy in Hong Kong and go to Vegas because my suppliers are there,” he explains. “It’s important to see what’s going on in the industry. I look around to see trends and stay in touch with people. Trade shows could be more relevant than ever now.”
Gem labs: Striving for stability
One place where things are beginning to return to normalcy is the International Gemological Institute (IGI). The Antwerp-based certification lab has about 17 offices around the world, a few of which are operating at various levels, says CEO Roland Lorie. “Belgium is still active with fewer than half the people. Dubai is open with minimal staff. The funny thing is, the Hong Kong and Shanghai offices are open and working normally.”
For every week an office is closed, it takes about two to three weeks to get back to the same level of business, Lorie continues. “If we stop one month, it will take three months to get back to business on a decent level.”
In the US, the next few months will be like a roller coaster, predicts IGI North America president Avi Levy. “There are going to be ups and downs, but the important thing is to stay positive and see what we can do. Business trends are going to change. It’s going to be a new chapter in all of our lives.”
The industry, he adds, needs to understand the needs of new customers and be more focused on sustainability and social issues. “We’re being forced to be more efficient and to look at ourselves and take these issues more seriously.”
Image: ShutterstockArticle from the Rapaport Magazine - May 2020. To subscribe click here.