Rapaport Magazine

Turning a Bust into a Boost

By Milena Lazazzera

As a potential recession looms, jewelers can draw on the lessons of past downturns to weather the darkening economic climate.

With inflation at or near a two-digit figure in the US and Europe, disruptions in the global supply chain, and an energy crisis recently exacerbated by the closure of a major Russian gas pipeline, the bells of recession are tolling more loudly.

The US gross domestic product (GDP) for the second quarter was down 0.6% compared to the first, while Signet Jewelers — the country’s largest retail jeweler — saw revenue decline 1.9% in the three months that ended July 30.

Last year and the beginning of this one brought jewelers bumper sales, as many consumers who were unable to travel swapped the sun of exotic destinations for the sparkle of a jewel. But as the economy changes gears, are jewelers getting ready? And have the recent pandemic-induced economic shocks and 2008 global financial meltdown provided lessons on how to weather yet another storm?

Not immune to crisis

“Each crisis has its own peculiarities,” comments Sarah Willersdorf, global head of luxury at Boston Consulting Group. “The last global recession in 2008-09 reduced the size of the personal luxury goods market by 8% to 10%.”

For the jewelry industry, the current recession-in-the-making comes in the unpleasant company of high gold prices — $1,670 per ounce as of September 21 for the trade’s primary working metal, versus $1,501 in September 2019 — and a strong dollar, which cuts down American retailers’ revenues from foreign partners and makes gold even dearer for non-US jewelers. Further complicating the picture are the Western sanctions on Russian diamond giant Alrosa, which provided a third of the 116 million carats that made up last year’s global diamond supply. Traders have already reported difficulty sourcing non-Russian diamonds, and prices for those goods are poised to soar.

Despite the unexpected silver lining of its sales boom during the pandemic, “the jewelry industry is not recession-proof,” stresses Willersdorf. She recalls how it took the industry five years to recover after the 2008 recession.

“We are still very recently emerging from the effects of Covid-19, and shoppers are returning to work and social engagements, but we are already in a challenging moment. High inflation has driven up costs [and] reduced margins (where prices have not caught up), and consumers are beginning to [reduce their spending] on items that are mostly discretionary.”

The rich stay rich

Although the specifics of the predicted recession remain fuzzy, both analysts and jewelers expect it to be uneven.

“Lower-middle consumers will slow down purchasing of lower-price-point products. However, higher-end consumers will buy even more,” forecasts Eddie LeVian, CEO of jeweler Le Vian. “Our high-jewelry collections are doubling in sales for the third year in a row. A recession would give us the opportunity to [acquire] top gems and diamonds at affordable prices as we continue to maintain a long-term view.”

Willersdorf concurs about the spending patterns, observing that luxury consumers — especially those of high and ultra-high net worth — have emerged from the pandemic eager to shop, and have therefore shown little resistance in the face of notable price increases for luxury products. Nonetheless, there are some small high-end jewelers that have relied on affluent Russian clients, and these retailers will feel the effects of those clients’ absence now that the war in Ukraine has curbed Russian business.

Cash flow is king

As the horizon darkens, it is unsurprising that jewelry companies are investing in bridal. “Bridal jewelry tends to survive regardless of the economic environment,” observes Willersdorf.

London-based luxury jeweler Graff recently launched its first bridal-focused advertising movie — starring American supermodel Grace Elizabeth — and considerably expanded its bridal offering at various price points. Annoushka, the go-to jeweler of the newly anointed Princess of Wales, took a similar approach by introducing a line of engagement rings, including jackets to dress them up. After all, innovating is always preferable to raising prices.

“We have always been focused on being competitive in the market, and resist putting our prices up wherever possible,” states founder Annoushka Ducas. “As a brand that exclusively uses 18-karat gold, a material which has increased astronomically in recent months, we strive hard to take the hit on our margins rather than pass this on to the consumer.”

LeVian shares that sentiment. His brand “has been leery of how best-selling styles slow down when subjected to price increases. As such, we absorbed price increases and have been fighting to resist price changes as much as possible.” At the same time, he says, the company has been “doubling down on new product development” in style categories that can earn solid margins to help make up for any losses.

This approach is a common one in recessionary times; jewelers prefer to keep sales rolling even if it means the value of those sales is lower than they’d hoped. It’s an approach that often includes discounts and other promotional activities, as seen in the widespread price reductions at American retailers during the first lockdown.

Another option is to offer a “buy now, pay later” model, like online-first store 77 Diamonds and Signet Jewelers have done. The retailer partners with a financial-services company such as Klarna, which runs a credit check on the client and, on approval, pays the full sum to the retailer. The client can then pay the partner company back in installments.

What the numbers say

“Recessions are incredibly challenging for retailers,” says Willersdorf. “During economic shocks, as discretionary spending declines, retailers risk missing [their forecast targets] and accumulating excess inventory.”

Gathering and utilizing customer data can make a difference, potentially turning the recession into an opportunity for growth, according to a McKinsey & Company study that came out in June.

By identifying the categories that perform better, retailers can decide which products to promote. For instance, since consumers are traditionally less brand-loyal during inflationary periods, the retailer might pinpoint a successful branded product and offer an unbranded or cheaper alternative to appeal to cash-strapped customers. Having data also means retailers can compare notes with its brand partners and find ways to make the production and supply chain more cost-effective.

The resulting gains have long-term benefits, the study found. “Companies that achieve breakthrough performance during economic downturns tend to outperform their peers over the following decade,” it reported. “We saw this following the Great Recession of 2007 to 2009; the most resilient retailers were able to drive 11% annual growth in total return to shareholders, more than five times higher than their peers through 2018.”

Be flexible and get creative

Finding innovative marketing and selling methods is another good way to boost business during a bust period. Online retailer Auverture has included vintage jewelry among its wares and offers personalized try-at-home boxes with no commitment to buy. Fellow e-tailer Finematter offers its clients vouchers toward future purchases in exchange for recycling their unwanted gold jewelry. Vintage-focused website Omnēque, which launched at the beginning of the pandemic, champions customization and the sourcing of rare pieces for its clients.

These initiatives tap into other trends that Willersdorf identifies as defining turbulent times. “I expect secondhand jewelry, [as well as] ancillary services like repair and appraisal, to remain resilient as consumers seek value and longevity of products,” she says.

“When we reflect on past downturns, the challenges became our strengths,” asserts LeVian. During the pandemic, he introduced Le Vian TV — live shows on social media that gained a reach of 1 million in a month. His company also experimented with geo-fencing technology, which tailors promotions to a person’s immediate location — for instance, sending an alert if a customer is in physical proximity to a store.

Ducas got in touch with her customers via video calls, which she says reinforced their bonds, as it was a more personal and less promotional way of communicating.

Being nimble is critical. When the 2008 downturn made Finlay — a billion-dollar operator of department-store jewelry counters — file for bankruptcy, Le Vian had to find other ways of getting its jewelry in front of customers. It strengthened its ties with other retailers, including Signet.

Small brands with small resources got creative during the pandemic as well. Anissa Kermiche, for example, redesigned some collections to optimize the use of gold while boosting her nascent homeware business, as she’d spotted an opportunity in consumers’ eagerness to revive their homes during lockdown.

Iris de la Villardière and Thomas Montier Leboucher, the duo behind Paris-based jeweler Viltier, had to turn their strategic plan upside down when French President Emmanuel Macron announced the country’s first Covid-19 restrictions close to the jeweler’s March 2020 launch date. The pair had planned to introduce their brand to retailers first in order to gain credibility and visibility, but instead they opted for direct-to-consumer sales online and promoted their brand through social media. Their quick reflexes paid off: US clients who warmed to Viltier’s elegant aesthetics and positive vibes were the brand’s largest audience, spending between $4,000 and $12,000 each. A few months later, luxury e-commerce company Net-a-Porter took on Viltier, which continues to perform well.

A head start

Willersdorf believes the luxury industry is currently in a better position to weather an economic downturn than it was in 2008, partly because of the changes that companies have made over the last two years in response to the pandemic.

“Luxury companies, including jewelry, have invested in a number of key areas, including digital, advanced analytics, artificial intelligence, [clienteling efforts that tailor the offering to the customer], and supply chain agility,” she says.

Regardless, she feels we are living through a “transformative moment in the luxury business, with more challenges and opportunities than ever before.”

Today’s consumers are engaging with purpose-driven brands that are committed to giving back to society. As such, she says, while “there are always winners and losers amid any economic shock,” the winning camp will be the companies that can “make real progress toward sustainability; advance a diversity-equity-inclusivity agenda; build true capabilities in data, advanced analytics, and artificial intelligence; and attract, develop and maintain top talent.”

Image: Annoushka

Article from the Rapaport Magazine - October 2022. To subscribe click here.

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