Rapaport Magazine

High hopes for the high end

Jewelry retail is looking good for 2022, part of an overall upturn in the luxury sector, according to recent market forecasts — though it’s hard to say how the Russian conflict and sanctions will affect this optimistic view.

By Lara Ewen

Image: Shutterstock

Like many high-end categories, diamond and fine-jewelry retail has been flourishing of late — and at least as of this writing, luxury analysts expect it to keep growing. While the Ukraine crisis has made it difficult to predict where the market will go (see box), recent reports from research firms have shown a rosy outlook.

“The luxury sector was among the stronger performers in brick-and-mortar retail in 2021,” says Ethan Chernofsky, vice president of marketing at retail analytics company Placer.ai. And despite a dip in in-person traffic at the start of 2022, he believes it will be a strong year for the sector.

Although his firm’s Luxury Retail Index found that Covid-19 Omicron cases had slightly impacted in-store visits in February — which were down 18% from the same month in 2020 — the report suggested that the downturn would not last. “The sector was already seeing visits recover, indicating that the spring could see a rapid return,” elaborates Chernofsky.

The index tracks over 120 high-end businesses across the US, including brands like Louis Vuitton and Tiffany & Co. But it’s not just stateside that luxury has been booming; the market is on the upswing worldwide, reports Michelle Kluz, a partner in consulting firm Kearney’s consumer and retail practice.

“Overall, I’ve seen estimates of the luxury market up between 5% and 15% globally,” she says. “There is a lot of optimism.”

Discussing the jewelry industry in particular, Bain & Company predicts that the trade will continue to do well. The consulting firm’s Global Diamond Industry 2021-22 report says the most likely scenario is “continued growth across all [luxury] segments,” adding that the “2022 market is expected to demonstrate growth higher than the pre-pandemic period and return to historic growth pace by 2023-24.”

One of the reasons for this buoyancy is that consumers see diamond jewelry as a desirable gift and a key element of marriage proposals, says Bain partner Federica Levato, who leads the fashion and luxury vertical for Europe, the Middle East and Africa. “In Bain’s 2020 survey of customer sentiment, US consumers said jewelry and watches were among the top four gifts they would like to receive,” she relates, adding that the jewelry sector has historically been more resilient during disruptions and market downturns.

“Despite the increase in online sales and a strong preference for online research...90% to 95% of consumers still prefer to buy diamonds in brick-and-mortar stores”

Digital versus in-person channels

Online purchases and younger consumers’ spending are key drivers of the luxury market’s future growth, says Levato; Generation Y and Generation Z “together are set to make up 70% of the market by 2025.”

Meanwhile, she continues, Covid-19 has accelerated the merging of online and offline channels, forcing retailers to adapt. “Since this trend is unlikely to fully reverse after the pandemic, retailers invested a lot in digital capabilities, online shopping experiences such as virtual try-on, and seamless omni-channel interactions. [Yet] despite the increase in online sales and a strong preference for online research before making purchases, 90% to 95% of consumers still prefer to buy diamonds in brick-and-mortar stores.”

One upside for physical stores over the last year was that luxury shoppers who decided to visit in person often did so with the specific intent to buy rather than just browse, says Chernofsky. “Even when visits were lower, the transaction sizes were higher, and the intent was higher.”

Tracking the big firms

The numbers from some of jewelry’s biggest players tell an optimistic story as well, says Kluz. “Both Signet Jewelers and Pandora just reported incredible financial results above target. Signet was able to slim down its physical store network during Covid-19 and is [now] left with its higher-performing locations.”

As for Pandora, Kluz says it has overcome recent problems and is on the upswing. “They’re outperforming, particularly driven by the US, and just reported their best year ever. They’re offering new stock, have slimmed down their points of sale, and have invested more heavily in marketing. It seems to be working.”

On the higher end, Tiffany — which joined the LVMH family in 2021 — is putting a lot of resources toward making the brand cooler, younger and relevant, and has been focusing more on its luxury jewelry offerings, according to Kluz. As the last few years have been fairly flat, it’s hard to say whether the strategy is working, especially since the LVMH results aren’t broken down by company and therefore don’t include specific information on Tiffany, she says. Still, she observes, LVMH’s jewelry division is strong and has reported increased demand, while Cartier — part of Richemont — enjoyed a 30% uplift in sales during the last three months of 2021.

“It appears that now is a good time to be a luxury jewelry brand,” she says.

Riding the waves

For entry-level luxury buyers, spending may shift from tangible goods back to intangible ones as international travel continues to open back up, predicts Kluz. However, “on the flip side, many weddings had been put on hold during Covid-19. We’re now already seeing engagement- and wedding-related jewelry lift dramatically in the past year, [and there is] likely still some additional pent-up demand.”

She also warns that the fluctuating costs of raw materials like gold and diamonds could push up jewelry prices across the board, leaving consumers more inclined to invest in timeless pieces that they know will hold value long-term. “Luxury brands tend to increase their jewelry prices on their classic styles somewhat regularly, but increased [prices for] raw materials will hit all fine jewelers and may make customers wary of the more trend- or fashion-driven styles versus classics.”

While a return to travel might reduce some luxury spending, Chernofsky says it will also bring in new luxury customers for businesses in popular travel destinations. “You’ll have wealthy tourists coming in and spending in major cities. That will help to lead the luxury sector in the longer term.”

There’s also the resale market, which he says has helped keep the sector afloat. “There’s the idea that I’m not stuck with an item forever. I can put it back on the market and get a fair degree of value from it. That actually helps high-end luxury more than anything else.”

The Ukraine factor
Russia’s invasion of Ukraine, and the ensuing sanctions on Russian goods, have thrown a monkey wrench in analysts’ ability to predict the future of the luxury sector with any certainty. Optimism about the sector’s growth “was the picture for the luxury markets just before the conflict in Ukraine,” says Bain & Company’s Federica Levato. “Now we are facing a very challenging situation. We estimate Russian luxury customers to account for about 2% to 3% of the total luxury-goods market.”

The extent of the conflict’s impact on that market will depend on how long the fighting goes on and what its economic consequences are. The “rapid evolution of events and the high uncertainty of the situation,” Levato observes, “make predictions and estimates complex and constantly under review.” However, Bain considers it likely that there will be an “immediate and relevant impact on Russians’ personal luxury spending locally, strongly driven by local currency devaluation and [the] restrictions in place.”

Europe and the US may feel the effects as well if the crisis escalates or persists, she adds, noting the potential for stock-market volatility. “American consumer confidence, [which is] highly linked to stock fluctuations, could potentially decline, and eventually also [US] luxury spending.”

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

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Tags: Lara Ewen