IDEX Online Research: Jewelry Prices Higher at Wholesale, But Moderate at Retail in November

The big surprise, however, is that this price surge did not flow through to retail prices. Instead, the Jewelry Consumer Price Index increase moderated from October’s supercharged pace.

• Jewelry Producer Prices +5.6% in November – Jewelry producer prices surged by 5.6 percent in November 2007 versus the same month a year ago, as calculated by the U.S. Bureau of Labor Statistics (BLS). Here’s worse news: this increase came on top of a 6.2 percent increase in November 2006. When we say producer prices “surged,” we really mean it. Still, despite unusually large producer price increases over the past two months, the Jewelry Producer Price Index is up by only 2.4 percent for the year-to-date versus the same eleven months of 2006. Clearly, suppliers can no longer absorb rapidly and sharply rising prices of gold, silver, and platinum; they are passing them on to their retail merchant customers. In addition, prices of large diamonds – 3 carat and above – are also up sharply.

• Jewelry Consumer Prices +4.3% in November – Jewelry consumer prices – the retail price of jewelry in stores – rose by a robust 4.3 percent in November 2007 versus the same month a year ago, according to statistics released by the Bureau of Labor Statistics (BLS). Retail jewelry price inflation has been on a roller-coaster ride all year: up for a while, then moderating, followed by another surge. When this dizzying ride is smoothed, retail prices of jewelry are up by about 5 percent so far in 2007. However, while retail prices of all jewelry were up by just over 4 percent in November, the price of precious metal jewelry – gold jewelry represents more than 90 percent of the Precious Metals CPI – surged by 8.2 percent in November, the largest gain this year by far.
  
  Why haven’t retail prices risen along with producer price increases? There are five key reasons:

• Retail jewelers – and their suppliers – have been absorbing some of the price increases, rather than trying to push them downward through the distribution pipeline.
• Labor costs have declined as jewelry manufacturers have shifted production to low-labor cost regions of the world; this has helped to offset rising commodity prices.
• While retail prices are supposed to compare like-items, our sense is that it is difficult for the BLS to discriminate between sales of 14 karat gold jewelry and 10 karat gold jewelry. By reducing the karatage, jewelry retailers have been able to maintain key retail prices. The value of the material – gold, silver, platinum – in the jewelry remains the same, but there is less of the commodity material.
• Jewelry turns at about one time per year in a specialty retail jewelry store. Thus, much of the merchandise in most jewelers’ stores is up to a year old. The cost of that merchandise does not reflect sharply rising commodity prices in most of 2007. For example, at the beginning of 2006, gold was just over $500 per ounce; at the beginning of 2007, it was just over $600. Today, gold is over $800 per ounce. Much of the gold jewelry in merchants’ showcases was bought when gold was $600 or so. As jewelers replace this low cost gold, retail prices will rise.
• November is the beginning of the all-important holiday selling season. Prices for holiday promotions and flyers were set months ago. Most jewelers have not been able to reprice their goods to reflect their cost increases in recent months.

There is no question that jewelry suppliers and retailers are unwilling to continue to absorb sharply rising commodity prices. Kay Jewelers has announced that it will reprice its entire line of jewelry after Valentine’s Day 2008.

In short, while the inflation numbers on a year-to-date basis for both Jewelry Producer Prices and Jewelry Consumer Prices don’t loom large, recent cost increases have been substantial. Therefore, we look for significant price inflation at all levels of the jewelry distribution pipeline in 2008. It would not surprise us to see jewelry price inflation running at an 8-10 percent level for much of next year, both at the consumer and supplier level.

 
Jewelry Producer Price Inflation Surges in November

While the inflation rate for all jewelry at the producer level was up sharply in November, it was driven primarily by higher precious metal costs. The BLS provides some limited segment information which shows that producer prices for gold (and other precious metals) jewelry surged by 8.2 percent in November. Gold jewelry represents more than 90 percent of this Precious Metals index.

The graph below compares the inflation rate for “all jewelry” (red bar) versus the inflation rate for “gold and precious metals jewelry” (gold bar). It is clear that inflation of precious metal jewelry is a key component which is pushing up the inflation rate for all jewelry.

Jewelry Retail Price Inflation Continues Higher

Retail prices for jewelry have been on a roller coaster ride all year. Merchants have attempted to cap retail jewelry price inflation, but to no avail. Now that jewelry suppliers have opened the floodgates with sharply higher prices, retail jewelers will have no choice but to raise prices.

Sterling Jewelers, which operates Kay Jewelers, Jared, and a stable of regional brands, has announced that it plans to reprice its entire line of jewelry just after the Valentines selling period in 2008. The company said it had been years since it had repriced many key items, and that margins have deteriorated to the point that it is being forced to revamp its pricing structure. Management would not commit to raising prices to yield historical margin levels; we believe that many online competitors will force jewelers to operate with lower margins while increasing operating efficiencies. Otherwise, the demise of specialty jewelers will accelerate.

The graph below summarizes the percentage change in retail prices of jewelry and watches by month on a year-to-year basis since 2006. The percent change is based on a comparison of the same month a year ago.

Source: BLS