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Holiday Dazzle or Fizzle?

Will the holidays ring in the bling, or leave retailers coal?

By Karolyn Schuster
When the final 2013 holiday sales numbers are tallied in early 2014, don’t be surprised if the federal government is cast as the Grinch who stole Christmas. Early expectations were that this year’s holiday season would be the best in recent years for retailers, signaling an end — finally! — to the recession and a return of consumers to the stores. One could almost hear the cash registers ka-chinging.
   That optimism was based on encouraging economic indicators leading into the fourth quarter. During the summer, The Conference Board reported the strongest consumer confidence numbers in five years. The stock market ping-ponged from record high to record high in a surge of trading across the board. The housing market had rebounded and employment numbers had stopped their slide.
   The seasonal euphoria was not to last. Just as retailers were stocking their shelves, filling their display cases and fine-tuning their holiday promotions, the federal government collapsed in October in a paralyzing stalemate over national health care and the debt ceiling that shut down the government for 16 days. Consumer confidence reacted by staging its own collapse.

Luxury Could Shine
   Still, there is some optimism that the luxury market just might sparkle a little more than the rest of retail this holiday. That’s because, while consumer confidence is more of a determining force in mass retail, the performance of the stock market is of greater consequence in the spending of the wealthier. And the stock market has been on a roar, setting record highs in October even as confidence tumbled and then breaking those records to set a series of successive new highs in November.
   “High-end spending is more resilient because it is generally tied to stock market performance. The mid-tier is more dependent on consumer confidence,” said David Wu, luxury analyst for Telsey Advisory Group (TAG), a New York City–based research and brokerage firm that focuses on the consumer market.
   The other factor driving jewelry sales is the industry’s creativity in product development, branding exclusive lines and hitting the right price points. “Product innovation is absolutely driving the luxury market this year,” Wu said. He cited such new products as an updated Atlas Collection at Tiffany & Co., Signet’s Open Hearts Waves line and Artistry colored diamonds, exclusive at Kay Jewelers, and Vivid colored diamonds, exclusive at Jared. In addition, Zale’s has recently extended its popular Vera Wang LOVE bridal franchise into the fashion jewelry category.
   Colored diamonds remain one of the hottest jewelry trends this holiday and there’s been more partnering with individual designers to strengthen the brand positioning of the jewelers and attract new customers, Wu said, pointing to Monique Lhuiller at Blue Nile and Vera Wang at Zale.

Where the Numbers Lead
   In the U.S., Wu expects jewelry to post mid-single-digit gains for the holiday, led by engagement rings, fashion jewelry and watches. In high-end jewelry, he forecasts high-single-digit to low teens in constant currency gains from the major players.
   “Encouragingly, we had a pickup in the third quarter with Richemont and LVMH’s watches and jewelry division witnessing accelerating sales trends, helped by solid demand for jewelry, which jumped double-digits at constant currency,” said Wu. Americas sales represent about 15 percent of Richemont’s revenues and 23 percent of LVMH.
   At Van Cleef & Arpels, Between the Finger rings and the Alhambra jewelry lines and high-end Pierres de Caractère line also did well, according to Wu. Richemont’s high-end watch portfolio — which includes Jaeger-LeCoultre, Panerai and IWC — is performing well. The wholesale performance of Cartier watches was hampered by tight inventory controls at the third-party retailers and a pull-back of distribution points.
   Wu conceded that brick-and mortar stores retain an advantage with an emotional purchase such as jewelry because of their hand-holding and touch-and-feel environment. But he said the stabilization of diamond prices has helped propel strong gains in engagement ring sales for online retailers like Blue Nile because of their strong value proposition.
 

The Big Picture
   For retail as a whole, the early forecasts for traffic and sales during the all-important year-end — which account for an estimated 40 percent of many retailers’ annual revenues — are not disastrous, they’re just disappointing (see Holiday In-Store Retail Forecasts chart). The fact is they could have, should have, been so much better.
   Projected increases from holiday 2012 range from Morgan Stanley’s 1.6 percent to the 4 percent numbers posted by AlixPartners and Deloitte. The problem is that final numbers for the 2012 holiday — when consumers were reeling from Hurricane Sandy, the shooting at Sandy Hook and a federal fiscal cliff — came in much lower than originally predicted.

Cautions Attached
   The concern is not so much with the forecasts as with all the cautions the forecasters are attaching to their projections. One problem is the timing. With the shopping season generally considered to be November and December, the government shutdown in October set the tone for the entire period through the end of the year. Second, the temporary solution hammered out to reopen the government in October only extends to January 15 and raised the debt ceiling only to February 7.
   Morgan Stanley pulled no punches, headlining its forecast “Count on Coal: We Predict the Weakest Holiday Since 2008.” In issuing its prediction for a modest 2.5 percent to 3 percent increase, Bain & Company noted the public’s “uncertainty over long-term solutions.” The Conference Board’s October Consumer Confidence Index (CCI) numbers represented a precipitous drop of more than 10 points since two months earlier and an 8.5 point drop just since September. The CCI dropped another two points in November.
   Lynn Franco, director of economic indicators at The Conference Board, admitted that “Consumer confidence deteriorated considerably as the federal government shutdown and debt-ceiling crisis took a particularly large toll on consumers’ expectations. Similar declines in confidence were experienced during the payroll tax hike earlier this year, the fiscal cliff discussions in late 2012 and the government shutdown in 1995/1996. However, given the temporary nature of the current resolution, confidence is likely to remain volatile for the next several months.”Franco didn’t have to add that by then, the holiday season will be over.

Assessing the Damage
   In a public letter to Congress in early October, when the government shutdown had just started, Matthew Shay, chief executive officer (CEO) of the National Retail Federation (NRF), said the action had far-reaching consequences for retailers, adding that “only the collapse of Lehman Brothers….has done more damage to consumer confidence in such a short period of time.”
   Still, the NRF was releasing one of the more optimistic forecasts — 3.9 percent — for the 2013 holiday. “Our forecast is a realistic look at where we are right now in this economy — balancing continued uncertainty in Washington and an economy that has been teetering on incremental growth for years,” said Shay. “Overall, retailers are optimistic for the 2013 holiday season, hoping political debates over government spending and the debt ceiling do not erase any economic progress we’ve already made.”
      Shay further cautioned in a release dated October 3 that “Our forecast is also somewhat hinging on Congress and the Administration’s actions.... Without action, we face the potential of losing the faith Americans have in their leaders, and the pursuant decrease in consumer confidence.”
   Just as the feds were reopening, Standard & Poor’s credit rating agency warned that “If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks. That points to another humbug holiday season.”
 

Why Aren’t We Spending?
   Noting the strengths of the economy, Bain said, “Measures of consumer wealth and financial stability, including the S&P 500 Index, the housing market and employment data are up across the board. Consumers have more wealth and income to draw on this holiday season.” And then came the caution. “Although consumers are on better financial footing, that may not translate directly into higher holiday sales growth,” the company warned.
   Not only consumer confidence levels have dropped. According to the Thomson Reuters/University of Michigan survey, other economic gauges also plummeted. Consumers’ expectations that business conditions will improve fell 4.6 points to 16 percent and those expecting business conditions to worsen increased by 7.2 percent to 17.5 percent. It was the worst reading since November 2011. The same survey’s consumer sentiment reading was the lowest since December 2012.
   “When asked to describe in their own words what they had heard about recent economic developments, the number of consumers that negatively mentioned the federal government in October was the highest in more than a half-century history” of the Thomson Reuters/University of Michigan surveys, Richard Curtin, survey director, said in a statement.
   Prosper Insight & Analytics, an Ohio-based consulting firm, said its surveys showed that consumer sentiment in October suffered a 24 percent decline from the previous month. It was the lowest reading since December 2011, when the federal debt ceiling crisis led to a lackluster holiday season for retail. The company described the new numbers as “a dangerous drop in confidence headed into the all-important holiday season” and warned that a continuation of that sentiment “could stir up recession-era spending habits among consumers for the holiday.”

Changed Spending Patterns
   One in three Americans told the Prosper surveyors that the government shutdown is likely to impact their holiday spending, with Gen X-ers and Boomers most likely to be affected. That is of special concern because those two generational groups represented two-thirds of all consumer spending for the holidays in 2012.
   Nor did a continued spending focus by the Prosper respondents on practicality — 46.2 percent of the respondents — and necessities — 51.7 percent — in selecting gifts augur well for the luxury market.
   So who is buying that high-end jewelry? The “2013 Survey of Affluence and Wealth in America,” from American Express Publishing and Harrison Group, a YouGov market research and strategy consulting firm headquartered in Waterbury, Connecticut, would seem to indicate it is the population segment it terms “Core Affluent,” those with $150,000 of disposable income to $450,000 of household wealth.
   “The group to really watch is the Core Affluent,” said Dr. Jim Taylor, vice chairman of Harrison Group and the study’s director. “They are growing in size, boosting their spend and getting more and more comfortable with luxury brands as they do so.”
   The Core Affluents appear to be the most enthusiastic holiday shoppers this year. They told surveyors they plan to increase their holiday spending by 32.7 percent over 2012. The income segments directly above and below them, the Top 1 Percent and Upper Middle Class, respectively, reported they were going to spend less on gifts this holiday compared to 2012.
   The recession revolutionized the way America shops. Across all income and demographic segments, consumers report their spending patterns and gifting preferences are different than they were before 2008. Not only are they spending less but they are spending it on more conservative, practical things. A survey of the wealthiest 20 percent of U.S. households conducted by the American Affluence Research Center reported that the top item on both men’s and women’s wish lists was “some form of currency — gift cards, certificates, cash or a check.” And these are the people who can most afford gifts of jewelry and bling. 

Article from the Rapaport Magazine - December 2013. To subscribe click here.

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