Most readers will remember the look of happy consumers circa 2009; however, there have been less of those in the years since and this article will explain why as well as how local and international trends have come together to impact the jewellery industry.
I started tracking Australian jewellery and watch sales in 1982 and Figure 1 shows the period from 1982 to 2009.
In 2002, I noticed there had been an increase in real income for the average Australian and the industry was on a path of growth. At that point there was a tremendous opportunity for jewellers to increase the sales of luxury goods, particularly diamond sales. As Figure 1 indicates, the average jeweller from about 2002 onwards achieved very good growth and much of that was due to increased diamond sales.
Then of course the global financial crisis (GFC) hit in 2010 and I predicted the industry would need strategies to survive in a ‘slowing’ economy. I expected that the economy would for some time be quite slow; that prediction was correct but it was also for a lot longer than I had anticipated.
Tracking jewellery and watch sales after this period, Figure 2 shows that sales dropped slightly to about $3 billion by 2012; however, were back above $3 billion by 2016.
In the financial year just ended, which is not shown in Figure 2, there will be a 6-8 per cent drop in jewellery sales. Seven years of static sales, and now a drop is putting a lot of pressure on the industry.
Reasons for the fall
International gross domestic product (GDP) growth has halved since the GFC, which means the whole world has been affected to some extent. This is because of lower population figures, the retirement of Baby Boomers, a decline in labour force participation and the fact that technology/innovation has been primarily used to steal market share, rather than drive growth in jobs and thus not adding wealth to the world economies.
When putting my analysis together in June this year, Australia had the third highest household debt to GDP, as seen in Figure 3. It was twice that of the G20 (20 largest economies), twice as bad as Europe and 50 per cent worse than the US. Since Figure 3 was produced, Australia has moved into second place.
Unemployment rate in Australia is 5.7 per cent; however, the more important figure is that 26 per cent of people are ‘under’ employed – they’ve got part-time or casual jobs and they’re not getting the sufficient number of hours they need in a week to cover their living costs.
Interest rates have been low for many years and everyone is concerned what will happen when they start to increase, which they inevitably will at some point. An interest rate increase from 4 per cent to 5 per cent might not seem much – it’s only 1 per cent – but that means a 10 per cent increase in repayments to the bank each month.
Online retail sales is an influence as well, with Australian online sales in the year ended 2015/2016 being about $20 billion or representing 6.7 per cent of total retail sales.
We’re also currently going through another revolution. We’ve had the agricultural revolution, the first industrial revolution, the digital revolution and now the technological – or fourth industrial – revolution. This one is affecting or disrupting almost every industry around the world and there are more changes in the years ahead with artificial intelligence, robotics, autonomous vehicles and 3D printing.
The impact of 3D printing is going to be huge – many things purchased in a few years won’t require anyone to physically visit a store to make a purchase; they’ll simply download a program and print a product using their own 3D printer.
Australia’s national accounts indicate that roughly 80 per cent of the average spending by population is on essentials – rent, loan repayments, food, health, power and so on. That leaves about 20 per cent for non-essentials like expensive clothing and jewellery.
Now in the past four or five years, there’s been negative wage growth in real terms. Wages haven’t gone up enough and so the average person has had a 1-2 per cent decrease in their income in real terms and they’ve come from $100 down to $98 – these numbers are for the purpose of making a simple comparison in the calculations.
Figure 4 shows that consumers still have to spend the same amount of money on essentials, which means they’re $2 short or 2 per cent short on their spending for non-essentials. In this example, the consumer’s non-essential spending falls from $20 to $18, which is a 10 per cent reduction. That small decrease in real income has a more profound effect on discretional spending.
What’s currently happening is that at the same time that the cost of essentials has increased, the real income has dropped by about 1-2 per cent and the amount of money spent or available to spend on non-essentials has decreased by about 15 per cent.
In addition to pressures in the local economy, the consumer is also stressed because of world unrest and globalisation.
Five megatrends
This leads to the five megatrends driving the disruption and which will be in full force by 2025.
The first is ‘rapid urbanisation’ – 60 per cent of the world’s population will live in one of 60 ‘mega cities’ around the world by 2025, including Sydney, Melbourne and Brisbane.
At the same time there will be 80 billion communication devices in the world and it’s said that the average person will own as many as five, which means that shopping is going to be influenced even more by digital means than it is now – welcome to the ‘digital age’.
‘Resource scarcity’ is another megatrend, where energy prices will increase. There will be a ‘shift in economic power’ as India will be the next country to grow rapidly with the third largest GDP. Asia and Africa will also expand rapidly.
A ‘demographic change’ is at play as well. People will live longer and have fewer children. A few years ago in Australia, there were four employees for every retiree but by 2050 there is going to be 1.5 employees per retiree.
Globalisation has brought challenges and opportunities. While reduced transportation barriers and communication costs have resulted in new markets, there’s been a disruption of labour-based markets – evident in the Australian car manufacturing industry, which has moved offshore.
Then we come to the retail disrupters. Companies entering Australia, like Amazon and Alibaba, are agile, innovative competitors finding clever ways to launch into the market, and the jewellery industry has to do the same – it has to be smarter.
Interestingly, 40 per cent of people still consider shopping a chore because of difficulty in finding a product, long checkout lines, inability to locate items and poor service. While 93 per cent still buy from bricks-and-mortar stores, 7 per cent are buying online. That’s a lot of trips that people aren’t making to a shopping centre because they’ve already bought something online. This is one of the reasons why shopping centre foot traffic has been falling for the past few years and why many jewellery stores have been able to renew leases this year for equal or lower rates.
Amazon issued a statement in the Sydney Morning Herald in April that stated: “We’re going to destroy the retail environment in Australia.”
Before launching its operation in Australia, it’s understood that Amazon will study the market, collecting price-points on the products it will sell, and then set prices at 30 per cent less.
The retail giant is all about gaining market share; however, once it achieves huge worldwide market share, prices will inevitably increase.
While Amazon sells jewellery in several regions, it is understood that it won’t initially introduce the category in Australia … but one has to assume it’s only a matter of time before it will.
A recent jewellery search on the company’s US site showed 52,000 bracelets, 54,000 pairs of earrings, 54,000 necklaces and the list of offerings goes on. The choice is enormous and I think this retail behemoth is going to cause considerable concern for chain stores or any jewellery store selling what I call a more generic product.
Now looking at the poor old jewellery store with its stressed customers.
For a typical independent jewellery business profile, based on an average of the figures I’ve looked at, sales are about $500,000, with profit before tax usually averaging about 5 per cent or 7 per cent of sales.
If all the market changes and disrupters previously discussed affect the average store by just 10 per cent of sales, provided expenses remain the same, then it will basically break even. A 15 per cent drop in sales would put most jewellery stores at a loss. Jewellers can’t afford to lose even 10 per cent of sales; they have to find a way to maintain and possibly increase sales.
A look to the future
Here is an overview of the main changes that will occur in retail.
There’s going to be even more cross-border business-to-consumer commerce. According to Amazon, this business structure will increase 34 per cent in the next five years.
Several years ago, there used to be manufacturers in Asia and an agent and then there was a local importer and a wholesaler and a retailer and a consumer. That’s flattening right out. More businesses producing products are trying to find ways to sell directly to consumers and cut out the middleman, and it’s only going to increase.
There’s also more global competition coming: a number of global retail chains, particularly in fashion, have already entered the market but more are on their way from various industries.
What many people don’t realise is that bricks-and-mortar store sales are more profitable than online sales. It’s not good business sense to transfer a profitable sale from a bricks-and- mortar store to an unprofitable sale, or a less profitable sale, on an online environment.
As previously mentioned, the prevalence of 3D printing is going to increase.
Another big factor is social proofing – social media reviews and third-party ratings that influence buying decisions. This is going to be much more powerful than traditional mainstream media, which reaches less than half of the people it did 10 or 15 years ago.
The good news is that bricks-and-mortar stores still have a big advantage over online retailers as they can provide more effective personal advice.
The opportunities for bricks-and-mortar storeowners is that they will attract a lot of customers if they can offer a really well presented store, really well trained staff and a great experience.
Retail ‘101’ for tough times
There are four areas that retailers should concentrate on during a downturn: basics and controls; costs; cash conservation; and maintain/ increase sales.
Let’s start with complete financial control. Jewellers need to be very aware of their gross profit (GP) percentage rate, particularly if they have a workshop.
Most costs are okay for many small businesses in this industry; however, it’s important to make sure that particularly labour and rent are within the industry benchmarks. The average rent for a jewellery store should represent about 13.7 per cent of sales. If rent is above that, which it could be if the store is at a Westfield shopping centre for example, then the business would need to spend less in advertising with labour costs being about 18-22 per cent of sales.
I mentioned GP because a lot of stores have workshops (manufacturing bench) and if the storeowner has jewellers working for them or if they’re the jeweller then they need to make sure they know the workshop’s GP. The workshop needs to recover the full labour and running costs plus a wholesale margin of 25 per cent.
The next point is to conserve cash. In tough times, retailers must conserve cash so always accept interest-free financing if available.
Conserving cash also means managing stock even better than before. In other words, look at the stock-turn rate of the major product categories and find a way to improve them if they’re outside industry benchmarks.
Once all of that is in place the focus is to maintain or better still, try and increase sales.
The whole focus in tough times has to be marketing in order to maintain and increase sales. Marketing must be the focus given jewellery is an industry with a higher margin and very low stock-turn rate.
Addressing challenges
With less foot traffic, retailers have to find a way to increase their hit rate for the customers that do visit the store. If the business is getting four sales out of 10, then it needs to increase that to five out of 10 or more.
Customers are seeking custom-made merchandise, in a greater proportion to off-the-shelf product, and/or greater personalisation of products. This trend actually started about seven years ago but it’s going to increase a lot in the years ahead and jewellers have to gear themselves up to allow for more custom work.
International management consultants McKinsey & Co issued this statement in April: “The future is handmade. Younger consumers are embracing handmade crafts, including jewellery, like no time since the advent of mass production. As jewellery is fundamentally a form of self-expression, the segment is ripe for bespoke disruption.”
The firm studied the retail jewellery industry worldwide and that’s what they believe the sector should be embracing – the growth in handmade, designed jewellery.
Reduced discretionary spending forces retailers to address what is in the cabinets and windows. Jewellers must always carry some lower-priced items to make the stock look affordable, and thus get people in the door. This doesn’t mean lowering the price for everything or bringing in cheaper stock but it does mean finding some focal areas with lower price points to make people realise they can shop in the store.
As 83 per cent of people do research online before they buy from bricks-and-mortar stores, it’s essential that every jeweller has a good website and that it’s mobile friendly.
Stores also probably need to reduce their diamond jewellery inventory. The average stock-turn rate in diamonds for most people in this industry is pretty poor – it’s probably closer to 0.3 or 0.4 and it really needs to be about 0.8.
Consumers have been driven by a need for convenience but they also want or appreciate a more differentiated and seamless experience offline and online.
Today’s consumers want what they want, when they want it.
Jewellers will need to be so much better at whatever they do now than they were even one year ago because we are going through what I call a transformation of discretionary retail. This is not just in Australia but also around the world and everyone will have to make themselves fit.
Sadly, some businesses won’t get through the next 12 to 18 months; however, those that do will probably come out the other end a lot stronger. Welcome to the New Normal.