Industry Analysis

First Look at 2014 Season: Uneven Demand

Russell Shor, senior industry analyst
January 16, 2015
The world is watching the U.S. retail market as the economy rebounds and the U.S. dollar gets stronger. Photo by GIA
Diamond and jewelry demand in the U.S. rose an estimated 3% to 4% this past holiday season, but business was uneven.

Upscale jewelers did well in general, but large chain stores reported slower than expected sales. Business at high-end, well-established independents was strong, according to a Centurion survey. Ninety percent of the stores surveyed reported that sales were up for the year, with nearly half noting increases of 10% or more. For the season, 41% saw double digit increases, while another 20.6% found business up between 6% and 10%. Nearly 11% reported that sales were down for Christmas.

Anecdotally, business among middle market retailers seemed mixed, with many reporting down-trading in quality and a lot of demand shifting to silver and bead-type merchandise.

Among the chains that reported, Tiffany & Co.’s U.S. same store sales declined by 1%. The company’s European operations saw a 4% increase in same store sales (most likely from an increase in Asian tourists, because the local economies are not doing well), while Japan plunged 8% (13% in Yen terms). Sales in China and Singapore increased 7%.

Tiffany chairman Michael Kowalski called the results “disappointing” in a press release and noted that the rising U.S. dollar will cause “headwinds” for the company’s international business.

Signet Group/Zales was the first major retail jeweler to post seasonal figures, noting that same-store seasonal U.S. sales were up 2.5%, about half of the previous years’ growth. Zales, acquired by Sterling in 2014, posted a 3.5% increase in same store sales, which had been treading water for some years before the acquisition. Reading the statement, it appears that Zales’ holiday business was buoyed significantly through expanding its online channels. Signet Group/Zales noted that its combined ecommerce sales increased 90% for the season, but only by 20% when excluding the Zales division.

In China, business is reported very cautious heading into the Chinese New Year, when many workers receive substantial bonuses. Retail inventories of diamonds and gold jewelry remain high, while sales, though increasing, have continued to taper off from the heady growth years.

Chow Tai Fook reported that its same store sales fell 18% compared to the final quarter of 2013, and gem-set jewelry sales fell 12%. While the declines were most pronounced in Hong Kong and Macau, the company noted that high-end jewelry sales were weak overall. The company also noted that comparisons with 2013 were “difficult” because that year was marked by a rush for gold products after the metal price crashed.

Diamond demand was apparently not sufficient enough this past holiday season to cause a restocking rush that would enable the world’s diamond industry to escape the profit and credit squeeze that plagued it last year. Polished prices continue to soften while rough remains expensive.

Accordingly, De Beers will reportedly reinstate the provision to allow its sight clients to defer purchase of up to 25% of their allocations. In addition, the Jan. 19-23 sight may see small price reductions (De Beers calls them “adjustments”) for categories of rough diamonds.

Prices at De Beers’ sights, which still comprise the single largest source of rough diamonds, have not declined. And Alrosa, which produces about one-third of the world’s diamonds by volume, is under severe pressure to raise prices after the collapse of the rouble and the extremely significant loss in oil revenues for Russia’s treasury.

Because their own costs are rising, producers have resisted reducing prices that have left diamond manufacturers in an extreme profit squeeze at a time when the leading industry banks have severely cut their credit facilities. This has been well-reported for more than a year and the situation shows no sign of improving in 2015.

De Beers CEO Philippe Mellier, addressing U.S. jewelers in New York last week, said the rough/polished price squeeze will improve when polished and rough supplies move into balance.

Moving into 2015, much of the diamond and gemstone world will refocus on the U.S. market because of the gathering economic rebound, and the strengthening U.S. dollar, which raises the cost of most gemstones (except cultured pearls and jade) in other markets.

Goods priced in dollars will grow more expensive outside the U.S. (Hong Kong and China base their currencies, in part, on the dollar, so they fluctuate less), but the Euro and Yen have lost 20% in value, thus raising prices for diamonds and gold by that much in those markets. In addition, the high U.S. dollar may attract more overseas gemstone sellers to the Tucson shows as U.S. buying power grows.  

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