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The Outlook For Diamonds And Jewellery Stocks In 2018

Summary

Interest in diamonds and luxury jewellery has seemingly been falling.

Millennials are increasingly looking for experiences rather than luxury items.

But, diamond producers are still seeing boosts in profits showing there is room for growth for retailers.

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The jewellery industry has seemingly lost its luster. Interest overall in diamonds and luxury jewellery has been falling, and so sales are declining, and retail traffic is sluggish. Stock prices of diamonds and jewellery companies have also reflected this decline.

Some factors that have been attributed for this decline include fewer people getting married and people flocking to synthetic imitations. According to Pew Research Center, less than 50% of U.S. adults are married compared to 72% in 1960.  

Rise Of The Millennials

The rise of the millennials (who are considered practical and rather indifferent to luxuries like jewellery) has also contributed to the demise of the diamond and other jewellery demand. Brian Yarbough, an analyst at Edward Jones & Co., said, “Jewellery has been tough, and millennials are shifting their spending to experience. That limits your ability to show a lot of growth.”

Jewellery Market Slump

According to Euromonitor figures, the jewellery market became smaller by 6.3% in 2017 and is forecasted to continue its slump. The Jewellers Board of Trade noted that the number of jewellery stores closing radically increased by 53% last year. Signet Jewelers Ltd, holding the company for the brands of Kay, Jared and Zales are closing as much as 170 mall-based stores.

Tiffany’s Situation

For Tiffany, the situation has been anemic. Sales have been dropping for five of its last six quarters, and it has been unable to crack the millennial market segment. The goal of Tiffany’s new CEO, Alessandro Bogliolo, is to give life to the brand and capture the younger market segment by innovating and store redesigning.

Tiffany also has the challenge of promoting its business ethics in ensuring that the diamonds they source are not blood diamonds. This is because consumers are not just concerned about the aesthetics but also responsible sourcing.

Their online store has also shown promise, and their product offerings are also expanding to include watches, especially female watches market which has huge potential.

Diamonds And Emotional Appeal

Purchasing jewellery has a myriad of emotions attached to it, and an industry veteran notes the loss of this emotional connection in this industry. Jean-Marc Lieberherr, CEO of the Diamond Producers Association, said, “The industry has become so impersonal in many ways. We have lost the emotion.”

He believes that jewellers need to get people stoked and falling in love with romance once again. He also believes more emotional and creative advertising can help reverse the dry spell. Consulting giant, Bain & Company notes that in the 2000s, rough diamond producers spent less on generic marketing from 5% of total sales of rough diamonds to 1%.

Rough Diamond Market To Recover

Consulting giant, Bain & Company, noted that despite industry pressures demand for rough diamonds actually grew in 2016. Looking from a global perspective, sales of diamond jewellery were relatively stable last year. There was growth in the Japanese market while other markets struggled or remained flat.

This bodes well for companies like Tiffany on a longer term horizon especially considering the relatively weak performance of the stock in recent years.

But investing in diamonds goes beyond retail firms like Tiffany and there are a whole industry worth of producers and polishers to consider.

Despite retail weakness, diamond producers have been able to boost their profits. It is the retail side that is truly struggling, especially the luxury market. Bain is optimistic that renewed efforts to marketing diamonds in light of changes in the market will spur demand and growth. For 2017, marketing budget has been set to $150 million, and this represents a 50% increase compared to previous years.

Olya Linde, a partner in Bain & Company, notes, “Increasing demand for diamonds, is a high stakes game for the entire diamond value chain. Retailers are of course focused on making diamonds more attractive for consumers, but that is only part of the story.”

The consulting giant notes that growth in the industry hinges on two key factors: continued demand for diamond jewellery and limited switch by consumers to lab-grown diamonds. If these factors remain positive, stock prices of Tiffany and other jewellery or diamond companies will recover and eventually return to previous highs.

Outlook For Midstream Segment

The polishing segment in the diamond industry (midstream) showed that its profitability improved last year. Linde said, “The midstream segment’s future health will depend on the interplay of rough and polished prices as well as the segment’s ability to make continued operational improvements.” Linde notes that the midstream sector is using advanced technologies to shorten the operational cycle so that it could optimize yields.

Overall, the diamond and jewellery industry certainly paints a mixed picture going into 2018. But in the current market with many overbought sectors like tech, healthcare and financials, this is an industry that may be a reasonable 'catch up' play given the relative underperformance of the sector on a global scale.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.