As gold prices level, lower margins linger

July 08, 2008

Roberto Coin's "Bold Gold" necklace and bracelet in 18-karat gold; suggested retail prices are $8,400 and $6,520, respectively. (800) 853-5958 or www.robertocoin.com

By Beth Braverman

New York—Despite a recent leveling off, the yearlong increase in gold prices has hit the bottom lines of both retailers and designers, who say they have had to increase prices and cut their margins to cope.

Most, however, say they have not changed the quality of their products.

"The cost of gold increasing has put some pressure on our commodity costs," says David Sternblitz, vice president and treasurer of Zale Corp. "We had some targeted price increases in the spring."

He declined to reveal the level of the increase, but said higher prices, which went into effect after Valentine's Day, have not harmed sales.

"Some customers come in and they see more value in gold product because of what they read about gold prices," Sternblitz says. "There is more perceived value there."

In addition to raising prices, the mass-market chain has tried to cut costs by working more with producers through a sourcing initiative, reducing the number of SKUs in stores and by planning purchases more carefully and further out.

The company has not opted for lighter-weight pieces or products made of lower-karat gold.

"Our customer tells us what they want," Sternblitz says. "They continue to want better quality and better value. We are not substituting product."

To reduce the SKUs in stores (part of a cost-cutting plan by new Chief Executive Officer Neal Goldberg), Zale has run a lot of clearances that have boosted gold sales for the company, Sternblitz says.

Same-store sales at Zale Corp. increased 5.8 percent for the third quarter ended April 30, while revenues grew 6.3 percent to $477 million amid an aggressive clearance strategy that liquidated $55 million of inventory.

In the 2007 Jewelers of America Cost of Doing Business Survey, gross margins on karat-gold jewelry were among the highest, at 55.1 percent, surpassed only by fashion jewelry and repairs, with margins of 56.2 percent and 60 percent, respectively.

"Manchette" cuff in 18-karat gold by Van Cleef & Arpels; suggested retail price is $20,100. (877) VANCLEEF or www.vancleef-arpels.com

Gold prices pushed beyond $1,000 per ounce in mid March, but a broad sell-off in commodities brought prices back to the mid $800s by May, still up 25 percent from the previous year. The rally in prices stems from increased activity among speculators, plus inflation and a weak dollar, as well as an expanding purchasing power among the middle class in developing countries.

Gold jewelry demand in the United States fell 14 percent in 2007 from the previous year, as jewelers and consumers grappled with a weak economy, a poor retail environment and record gold prices. Still, the metal has remained a focus among fashion designers, who continue to show apparel accessorized with gold.

Maintaining quality, if not margins Retailers say the high gold prices have augmented sales of jewelry made of more moderately priced metals, such as sterling silver and palladium. Some say they are trying to get suppliers to shrink delivery time as another way to cut costs and keep inventory lean.

At Huntington Jewelers in Las Vegas, customers understand why gold costs more these days, but some still balk, says owner Richard Huntington. Customers have taken a harder look at spending more for gold jewelry amid higher gas prices, plummeting home values and tighter credit.

"We're raising our prices, but we don't have the same margins that we used to have," Huntington says. "We had too much consumer resistance to protect our margins."

Huntington has also opted not to change to lighter-weight pieces, wishing to instead maintain a level of quality that is important to the store's reputation.

Retailers are not the only ones dealing with the effects of rising metal prices.

"Anything that is gold-related, we have had to increase the prices on that," says jewelry designer Scott Kay. "The more-precious 18-karat gold has gone up more exponentially then 14-karat gold."

Couture jeweler Van Cleef and Arpels has increased prices and cut its margins in response to growing metal prices, says Emmanuel Perrin, president and CEO of the company's North American subsidiary.

So far, the changes have not impaired sales, he adds.

"We are very careful in our pricing, so there is a perception of good value for the money," Perrin says. "The fact that commodity prices have been [covered] in the media has helped customers understand."

"Helen of Troy" necklace and cuff in 22-karat gold by Ilias Lalaounis. (212) 439-9400

Like other jewelers who spoke with National Jeweler, Perrin says that the company has not sacrificed quality to save costs.

"We don't change the way we sell our jewelry," he says. "Our quality is the forte of our house."

A few jewelers have been able to uphold their margins, despite the increased costs.

Daniel Gordon, the president of Samuel Gordon Jewelers in Oklahoma City, says high gas prices, which have hurt other retailers, have benefited his region, which has profited from its oil industry ties.

"The gold prices haven't slowed down our business at all," he says. "When gold goes up, oil goes up too. Our city is growing rapidly."

In addition, Samuel Gordon has a lot of inventory that it bought a few years ago, and the store has not raised prices on those goods, which have sold more often lately since they appear to be priced at a discount.

Gordon also says that the increased prices have helped raise the perceived value of gold jewelry.

John Calnon, U.S. managing director of the World Gold Council, says that the recent leveling off of gold prices will benefit retailers, many of whom put their purchases on hold as gold reached record prices earlier this year.

"I'm quite happy to have the gold price where it is as we go into [the Las Vegas market week] because there are so many important fourth-quarter decisions made in and around Vegas," he says. "We don't forecast prices, but our hope is that we don't have the extreme volatility that we saw in the first quarter."

-E-mail: beth.braverman@gmail.com

Editor's note: This story first appeared in the June 2008 print edition of National Jeweler.