The value of diamonds lies on their physical properties that make them suitable for many applications. Natural diamonds are only of high value if they are scarce in nature. Realizing this, De Beers Consolidated Mines was formed to control the supply of diamonds from mines across the world. The diamond market is influenced by mine production, rough diamond distribution, preparation/cutting, and retail markets. The project will be concentrating on the retail markets for diamonds and other high end jewelry.
Jewelry purchases are highly discretionary because they are heavily affected by adverse trends in the general economy and are measured by disposable consumer income. The first half of fiscal 2003 can be described with a lackluster economy, lower consumer confidence and an unstable geopolitical environment. However, general economic conditions and consumer confidence improved in the second half of fiscal 2003, resulting with increased sales. Since the economy has taken some major strides towards recovery, the jewelry industry represents a bullish market.
Large and small retailers are evaluating expansion opportunities outside of the traditional regional mall venue. With this in mind, it is the intention of this paper to assess the comprehensive strategies of the cyclical retail jewelry industry. In this highly competitive industry which is extremely sensitive to the level of discretionary consumer income and the subsequent impact of the type of good purchased, competitors include foreign and domestic guild and premier luxury jewelers, specialty stores, national and regional jewelry chains, and department stores.
To a lesser extent there exist catalog showrooms, discounters, direct mail suppliers, televised home shopping networks, and jewelry retailers who make sales through internet sites. It is a highly fragmented US market estimated at approximately 54 billion dollars. The breakup of the industry is accordingly: mass merchants representing 10%, chain jewelers with 100+ stores as 14%, chain department stores representing 12%, TV home shopping with 4%, independent jewelers taking the largest share at 36% and other (general, misc. ) accounting for 24%.
(Please refer to exhibit E) The specialty retailers with the highest sales are Zale Corp ($2.2Bn), Signet US($1. 7Bn), Tiffany ($. 8Bn) other players include Friedman's ($. 4Bn) Whitehall ($. 3Bn), and Samuels ($. 1Bn). (Please refer to exhibit D) In terms of long term industry growth there has been a 5. 7% increase since the 1980s. (Please refer to exhibit C) The success retailers in this industry depend on various factors. This includes general economic and business conditions. In 2001, as US retail sales as a whole across all markets took a steep hit so did the jewelry market. This market of luxury goods is highly dependent on consumer spending.
It is crucial to find a balance with the performance of a retailer's operations and the acceptance by consumers of the merchandise and marketing programs. Industry competition is expected to increase with the consolidation of the retail industry that is occurring. Competition with other general and specialty retailers is based primarily on trust, quality craftsmanship, product design and exclusivity, product selection, service excellence and, to a certain extent, price. In 2000, the consumer market for fine and costume jewelry rose 5% over 1999 levels to total $39. 8 billion.
Contributing to the growth in the jewelry market is the expanding availability of jewelry at the retail level. Nevertheless, there seems to be an interesting organic growth trend in this cyclical market. According to the National Jeweler, top 50 retailers plan to open 263 stores in 2004 vs. 292 stores in 2003, a decrease of 11%. These jewelers do not plan to add new units, but instead, aim to work on improving sales, margins and operating efficiencies within their existing stores. The following Porter's five forces analysis will shed light to the market conditions present in the industry today.
Porter's 5 Forces SUPPLIER POWER The industry setup is quite different from most since the commodity good that is utilized to produce jewelry; rough diamonds is under monopoly control through DeBeers. Even though recently, their supply hold has decreased from 90% to 60% of overall diamond production, they still command exorbitant amounts of power. Downstream of the cartel, there are diamond and jewelry manufacturers in addition to traders. The industry does not have a direct supply line like most and it is said a diamond can be sold on the same street block five times in one day and double its value by sunset.
Exhibit A shows how the industry is evolving and the supply chain is becoming more efficient. Manufacturers do not exert pressure on retailers due to products being highly similar and to a degree get squeezed from both suppliers (DeBeers) and buyers (retailers). Only if manufacturers are able to gain brand recognition such as Scott Kay and David Yurman have companies been successful in exercising power. Furthermore, there is a bevy of suppliers for retailers to choose from. Extensive financing and consignment terms have become the norm for wholesalers to extend to their retail partners.
A good proportion of the inventory costs are transferred to wholesalers through these consignment purchases. Since jewelry is not a perishable good such as the garments and shoe industries, it still works as an asset even if the retailer returns the merchandise back to the wholesaler. The amount of power that a retailer has is directly correlated to the size of their operation. Only a few companies command extensive volumes. To fill the capacity present in most factories owned by wholesalers they require these volumes to remain profitable.
Due to these factors, the major chain stores are able to leverage better financing, costs, and payment terms than the rest of the industry. The largest percentage of jewelers can be categorized as independent jewelers accounting for 36% of the overall market. Their ability to leverage power comes from their financial credibility in the market. Jewelry, being a luxury good and furthermore having high costs leads to great losses in the cases of defaults. Thus, the financial strength of these companies dictates the amount of power they have in the industry.