Industry Analysis

Season’s Sales: US Up 4% to 5%, But China Continues to Lag


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US diamond and jewellery sales increased for the 2018 holiday season, but sales in Hong Kong and China saw a decline because of fears of a trade war with the US and the very volatile stock market. Photo Eric Welch/GIA

The US holiday season saw strong sales all the way through to the New Year, despite stock market turmoil and the government shutdown. Increases were seen in both bricks-and-mortar stores and on e-commerce sites.

By all accounts, 2018 was a strong year. De Beers’ surveys showed an increase of 4.4% for the season in diamond jewellery sales over last year, and the National Retail Federation forecast overall retail sales growth of 4% to 5% over 2017.

In early November, Tiffany’s announced that same store sales were up 5% for the year in North America and 7% worldwide for the first three-quarters of the year. The company expected holiday sales to continue in line with this number. Signet Group, which operates Kay Jewelers, Zale Corp and Jared Stores, was predicting a flat holiday season as the company recovers from management turnover, difficulties with its credit operations and retooling from its shopping centre reorientation.

Independents seemed to outperform large chains. The Centurion survey of luxury retail jewellers found that 34% of independent retailers experienced sales gains of 10% or more during the week before Christmas compared to 2017, while an additional 24% saw increases of between 6% and 10%. These increases were consistent with the full month between Black Friday and Christmas. Two-thirds of the jewellers surveyed reported that sales were up for the entire year compared to 2017, and slightly more than half of those had rung up increases of over 10%.

While one-third of jewellers in the Centurion survey reported sales declines for the final week of the season, only 18% were down for the entire year. 

One potentially worrying trend: While the majority of sales were below $2,500 (£1,900), millennials accounted for only a quarter of their sales on average. Most jewellers surveyed, however, made only a small percentage of their sales online.

This dichotomy in retail sales – some retailers growing while others are slowing – will only widen, according to a report from McKinsey & Co. It cites the numerous store closures and the possible dissolution of the once too-big-to-fail Sears. The obvious disruptor, of course, is online sales, but it goes deeper than that.

Beyond the obvious, that most retail sales growth will be online and that retailers must embrace “omnichannel” selling, there are a number of other, equally important trends going on. For example, millennials and Generation Z consumers are skeptical of large corporations and established brand names and are opting for newer, “fun” brands that appear to be transparent, approachable and socially responsible.

In addition, some e-commerce sites link consumers directly with manufacturers of luxury goods, while other apps can automate the online search and purchase process. In short, purchasing decisions will increasingly be accomplished with help from artificial intelligence and automation.

The retail business in China has been hit by the trade war with the US and the world stock market gyrations. Chow Tai Fook, which accounts for nearly 10% of jewellery sales in Hong Kong and China, reported its same store sales fell by 7% on the mainland and 6% in Hong Kong and Macau during the final quarter of the calendar year. “Gem set” jewellery sales fell by 5% and 8%, respectively.

November retail jewellery, watch and clock sales in all sales outlets fell by 3.9% in Hong Kong, said the Hong Kong Trade Development Council.

DIAMONDS

De Beers will probably return to the market with a large 21-24 Jan rough diamond allocation after a successful season.

Russia’s Alrosa announced it sold $4.41 billion (£3.41 billion) worth of rough diamond in 2018, a 6% increase over 2017. Sales slowed, however, in the final quarter of the year because of a glut of smaller diamonds in stocks and a continuing tightening of bank credit to diamond manufacturers. Alrosa has scheduled its January sales for 14-15 Jan.

The trade will be watching these sales because, while retail demand is good, there are still significant challenges in the middle of the diamond pipeline – continued oversupplies of small diamonds and an ongoing credit shortfall that has pushed a number of firms to the brink of bankruptcy.

Ronnie Vanderlinden, president of the International Diamond Manufacturers Association, said these problems will carry on well into the new year.

“We've just seen another bank close its Antwerp branch and other banks are continuing to raise collateral requirements,” he explained. “The problem is that banks raising collateral requirements or alternative financers who hold portions of stock as collateral make it difficult for a company to do business. The goods are no longer theirs.”

One reason getting credit will not be getting any easier despite improved market conditions is that international banking regulations have not eased up. “There are a lot of regulations and the penalties for violating them are very high, so a lot of banking officials say ‘why bother?’” Vanderlinden said. 

LAB-GROWN DIAMONDS

Production costs for a one-carat lab-grown diamond have plunged from about $4,000 (£3,100) in 2008 to $300 (£230) to $500 (£390) today, according to a recent Financial Times report. This makes it possible for De Beers’ Lightbox one carat diamonds, priced at $800 (£620), to be made and sold at a significant profit.

The report also said that lab-grown diamonds comprise about 2% of the market (by volume), but this is expanding by 15% to 20% yearly. It also noted that the average lab-grown/natural discount is about 43%, compared to 29% at the beginning of 2018.

De Beers’ CEO Bruce Cleaver noted in the report that margins for lab-grown diamonds have been unsustainably high. De Beers said it will spend about $100 million (£77 million) making and marketing Lightbox lab-grown diamonds over the next four years, compared to $10 billion (£7.7 billion) on capital spending and marketing for natural diamonds.

Citing shortages in supply, the Diamond Foundry announced it was raising wholesale prices on its lab-grown diamonds by 15% in January. The company sells stones of less than one carat for $1,000 (£775) or less per carat, but larger lab-grown diamonds, which is calls certified-unique, are priced at about half the cost of comparable natural stones.

Both De Beers and Diamond Foundry expect to have new production facilities open by the year’s end to meet the growing demand.

Russell Shor is a senior industry analyst at GIA in Carlsbad.