In this article we provide an update to our previous jewelry market report issued in early 2021, including an examination of the macroeconomic forces that are influencing jewelry industry performance overall at this time. We also provide our thoughts on recommended lender monitoring and considerations relative to procurement, inventories and net orderly liquidation value (NOLV) in the current market.
When examining last year’s cumulative jewelry market results, it is important to first look at the comparable period in the year prior, 2020. At the start of the COVID pandemic, the jewelry sector, like most industries, initially experienced a period of great uncertainty. Concerned about their personal economic situations and general health, the vast majority of consumers transitioned their focus away from discretionary spending in favor of bolstering savings accounts. At the same time, they also shifted their shopping habits away from traditional brick-and-mortar retail in favor of online purchasing. This, understandably, had a significantly negative impact on many jewelers given the higher price point and discretionary nature of the items they sell, coupled with the historic higher concentration of brick and- mortar sales for this industry in general. During this period, jewelers that had a greater ecommerce presence prior to the pandemic benefitted as compared with their traditional brick and- mortar peers. It is also important to note that the second half of 2020 had several favorable shifts for jewelers. Falling unemployment levels, increased savings levels, low interest rates, a stock market that was beginning its dramatic rebound from the March 2020 lows, and government stimulus initiatives all created additional spending capacity for consumers in many sectors, including jewelry. This jewelry revenue growth was further aided by a redirection of consumer spending away from pandemic-restricted areas (e.g., travel and entertainment) in favor of merchandise, including jewelry.
Moving forward to last year, the first half of 2021 year-over-year sales comparison benefitted from a low bar set in the onset of the pandemic, while the second half of 2021 sales had a more challenging hurdle due to sales gains achieved in the latter half of 2020. Overall, the 12-month 2021 performance was strong as the stock market continued its climb back from the lows set in March 2020. The rising stock market throughout 2021 benefited consumers, notably those in the higher economic brackets. Historically low interest rates and a redhot housing market provided additional disproportional benefits to those concentrated in the higher economic brackets. These factors, coupled with low unemployment and a higher-than historical- average wage growth, led to a rise in consumer confidence throughout 2021. Jewelry sales also benefitted during this period, with higher-end jewelry sales outpacing more entry-level price points.
SUGGESTED LENDER MONITORING & DISCUSSION POINTS
With the first quarter of 2022 now closed, a period of general economic uncertainty has swept over the nation and the rest of the world driven by international conflict, inflationary pressures at historic levels, and a declining stock market. These trends in turn have an impact on borrower performance and appraised liquidation values. In light of this, Hilco has prepared a list of key areas of consideration for lenders to review and discuss with their borrowers/appraisers.
Higher end jewelers
Customers in this segment are less affected by inflationary pressure in commodities such as food and fuel. Attention should be paid to areas such as stock market performance, the CBOE Volatility Index (VIX), general consumer sentiment, and interest rates/housing market trends. Unfavorable movement in these areas can create a distraction for customers and subsequently create volatility in financial performance for the borrower.
Lower price point jewelers
This segment should focus more on how changes in everyday living costs — including inflationary pressure in areas such as rent, food, and energy costs combined with changes in personal savings rates — affect discretionary spending.
The impact of the pandemic continues to evolve with ever-changing mandates in place around the globe. Industries such as travel and entertainment have rebounded as compared with 2020 levels, which may affect share-of-wallet spend by consumers away from discretionary items, including jewelry. Continued lockdowns in areas such as Shanghai, China, have more recently affected customer buying behavior in that part of the world.
• As jewelry begins to compete further for share of wallet with other high-ticket items, the corresponding impact on jewelry sales should be monitored.
•Any continued COVID-19 outbreaks should be monitored in different parts of the world. For example, beyond China, key semi-precious and precious stone supplier regions such as India (loose diamonds) and Thailand (gemstones) should also be monitored.
The Russian invasion of Ukraine beginning on February 24, 2022, has created a period of general uncertainty for the global economy.
•Sanctions on Russian products/lending should be monitored by the lender. Russian-owned diamond-powerhouse Alrosa, which operates in 10 countries on three continents, is the largest diamond volume producer in the world and accounts for approximately 25% of global diamond output. The lender should understand if there has been any known historical purchasing from Russia by the borrower, and if so, whether there has been a recent change to procurement strategy. Even if the borrower has not historically purchased from Russia it is probable that sanction impacts will influence overall diamond pricing in the latter half of 2022 (regardless of whether the conflict ends in the near term). The lender should monitor changes in diamond pricing, both rough and polished, along with the borrower’s strategy regarding customer pricing.
•The lender should also discuss with the borrower any changes in customer inquiries regarding diamond traceability as it relates to diamond product from Russia. Consumers have avoided conflict “blood” diamonds in the past and it is possible that consumers may begin to reject Russian-sourced stones. Sourcing traceability may become an increased focus of companies in the future.
Jewelry, particularly diamonds, are low cube and high value. Therefore, unlike many industries that have been negatively affected by rising import freight costs and supply chain disruption, jewelry is more insulated. Imported diamonds are air freighted as opposed to transported by vessel and while all transportation modes have experienced increases in costs, the low cube, low weight, and high value of jewelry items creates greater freight expense absorption compared to other product types.
•While jewelry finished goods generally may not be materially affected by supply chain disruption and rising costs, the lender should understand the procurement approach by the borrower of jewelry presentation boxes and pouches, as well as other packaging material, if applicable. This product is more likely to be an import product transported by vessel and purchased in large quantities. Changes in lead times, transit costs, and general packaging availability should all be monitored. The absence of the appropriate presentation box on hand may influence an end customer’s purchase experience as well as recovery value. Beyond packaging, if the jeweler is opening new store fronts, delays in receipts of showroom fixturing driven by supply chain disruption (e.g. display cases and lighting) should also be monitored.