leaving retailers less wiggle room
“They’re in a Catch-22 – they have to raise prices to maintain respectable margins,” said tiffany jewelleryAlixPartners Director Joel Bines. “Retailers are either going to have to sacrifice gross margins or have to raise their prices to a group of consumers simply unable to afford those prices.”
Silver prices are up 47% this year, while gold has risen 25% and platinum is up 12%, leaving retailers less wiggle room.
Jewellers are likely to find out just how much leeway they have to raise prices this holiday season. The weeks leading up to Christmas comprise their single biggest sales period, accounting for about one-third of annual revenue.
Blue Nile Inc reported earlier this month that diamond prices were up about 9% from a year earlier during the most recent quarter, and the online jeweller hinted that the going could get tough.
“The industry is looking at the holiday season with caution,” said Blue Nile Chief Executive Officer Diane Irvine.
While consumers more closely associate names such as Zales, Kay and Tiffany with jewellery, discounters such Wal-Mart Stores Inc and Costco make up just as large a percentage of industrywide sales.
“Those customers are less able to afford (tiffany charms),” AlixPartners’ Bines said.
Higher prices for early 2011
Because gold, diamond and silver are sourced far in advance, few analysts expect price hikes before the holidays or, in some cases, before Valentine’s Day. Outgoing Signet CEO Terry Burman said in August that he expected no additional selling price increases in 2010.
But retailers will only be able to hold off raising prices for so long, analysts warned.
“They will need to re-price before engagement season” in the spring, Bines predicted.
Signet, Zale and Tiffany may update investors on their pricing plans when they report quarterly earnings next week.
Even Tiffany, which has been on a tear in recent quarters thanks to US luxury’s rebound and a growing presence in China, is not shielded from the risks of raising prices.
In August, the company reported weak quarterly sales of items priced below USD 500, such as its sterling silver Tiffany Keys lockets, suggesting it will have to be careful in how much it raises prices if it decides to.
“They don’t have as much pricing power with that merchandise,” said Nomura Securities International analyst Paul Lejuez, who in a note last week said he expects Tiffany’s gross margins to be under pressure next year. He also expressed doubts that the company can offload all cost increases to its customers.
While Tiffany is better known for pricey diamond engagement rings, silver jewellery in the USD 200 range accounts for about a third of sales.
“They still haven’t gotten their more aspirational consumer back,” said Jennifer Milan, a Sterne Agee & Leach analyst. “What’s driving the business right now is the higher end.”
Signet gets help from its upscale Jared chain, whose prices average USD 741, more than twice those at Kay. Same-store sales at Jared were up 14% last quarter.
At the more affordable level, Zale, which operates its namesake chain in the United States and People’s Jewellers in Canada, mostly focuses on mid-tier shoppers but has steadily lost market share to Signet while suffering several quarters of same-store sales declines.
In the last holiday season, Zale contended with severe liquidity problems that forced it to cancel orders and cut back on advertising.
Adding to the pressure, Zales overlaps with Kay stores in many markets, so competition will make both chains think twice before jacking up prices.
“You can go to any mall in any city in America,” Bines said, “and find three jewellery stores within spitting distance of one another.
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