This year, JCK is taking a different approach to our annual state of the industry report. Instead of interviewing individuals and then writing an article based on notes from the interviews, we asked some key industry leaders to speak for themselves. We identified critical issues in various sectors and posed a question or two to each leader. Though their views are diverse, one theme repeatedly came through: Above all else, this industry is still about relationships.

Question: How has the role of trade shows changed in the industry, and where is it going?

Howard Hauben, President and CEO, H2 Events: Since many stores realize that time spent on the floor with customers is critical, they use shows to meet with suppliers rather than having long meetings in the store. Shows also present an opportunity to take a break from day-to-day operations yet remain productive. The threat of robberies on the road has also caused many suppliers to see a decent show as a conservative means of reaching their customers without losing their line.

Quality of personal interaction is another issue. A show gives everyone the chance to take a dip in the pool of collective knowledge and collective brainstorming. Relationships, friendships, and alliances are formed over the course of a few days that can last months and years. It’s difficult to accomplish the number of interactions from the store or office that can be made at a show. While this benefit has always been there, the fast pace of business has made it more evident.

Question: Is the jewelry industry more or less dangerous in the post-9/11 world?

John J. Kennedy, President, Jewelers’ Security Alliance: In terms of being a victim of crime, being in the jewelry business in the U.S. is less dangerous.

Jewelers’ Security Alliance statistics show certain crimes have declined drastically since 9/11. For example, in 2004 the U.S. jewelry industry suffered three homicides, by far the lowest number in a generation. The average annual number of homicides over the last 25 years has been 21. Traveling-salesperson losses were also the lowest in over 10 years, with the number of losses in the U.S. declining to about half of what they were in the late 1990s.

Other important types of crime haven’t declined or have even become more frequent since 9/11, including retail burglaries and robberies. However, trends are under way that will promote improvements in those, too, to match the decline in homicides and traveling-salesperson losses.

Factors since 9/11 making the jewelry business less dangerous today include an all-time high level of FBI and local-law-enforcement interest in jewelry crime and the operation of task forces focusing on jewelry crime in many cities. As a result, arrests of jewelry criminals are soaring.

The FBI has shown increased interest in the jewelry industry partly because of prominent but unproven reports about diamonds and tanzanite being used by al Qaeda, and reports of terrorists in Colombia being partially funded by jewelry gangs in the United States. The idea has been planted that the global jewelry and gem industry should be watched more closely to make sure it doesn’t become a vehicle for terrorists to move value around the world. The terrorist issue has also had a spillover effect: The FBI is showing increased interest in traditional crime against the jewelry industry.

Networking and information-sharing between the jewelry industry and law-enforcement personnel regarding jewelry crime has improved dramatically, in large part because of e-mail, Web sites, and Internet communication.

Tightening of immigration policies since 9/11 has resulted in far fewer jewelry criminals from other countries and international gangs being able to operate here. Many more foreign criminals are being sent to prison for lengthy sentences before being deported, and many criminals who return illegally following deportation are being summarily sent to prison upon their return.

Greatly increased security at airports has resulted in a sharp drop in airport-related crimes for the jewelry industry.

Because of 9/11, law-enforcement personnel have become more vigilant. Police are now more likely to stop suspicious persons and pursue potential criminal behavior.

While jewelers will always work in a dangerous industry, the aftermath of the tragedy of 9/11 is making the jewelry industry safer from crime.

Ron Harder, CEO, Jewelers Mutual Insurance Company: In my opinion, 9/11 has not changed the danger level for most jewelry businesses. Professional criminals continue to attack jewelry businesses because the product is valuable, portable, and easy to fence.

Violent crime appeared to be on the downturn, according to the 2004 statistics from the Jewelers’ Security Alliance and Federal Bureau of Investigation. But look at the crimes in the first half of 2005: multiple murders, violent robberies, sophisticated burglaries, employees and customers threatened and forced to the floor, guns being brandished more frequently, showcases smashed—for these affected jewelry businesses, the crime trend isn’t abating. This is despite the FBI’s continued focus on crimes against the jewelry industry, increased arrests of suspects, and successful convictions.

Criminals continue to terrorize our industry, as they have for years. Law-enforcement officials appear to be somewhat more vigilant and responsive to our industry’s need for security. There are several reasons for this:

1. JSA continues to lobby for organized jewelry task forces to combat crime in specific hot spots and continues to support law-enforcement agencies nationwide in pursuing, arresting, and convicting criminals.

2. Jewelers are playing a more visible role in educating their local-law-enforcement agencies.

3. Jewelers are creating networks to share information about crime activity in their areas and are including local law-enforcement officials as members of the network.

Is the jewelry industry safer? I don’t think so.

Question: How is the growth of cheap labor centers outside the United States affecting the American jewelry manufacturer, and what can they do to effectively compete?

Fred Levinger, CEO, Colibri Group: There is no question that competitive price pressure is forcing more manufacturers to consider offshore sourcing. U.S. manufacturing can compete effectively only with:

• Very-high-quality branded products, whose labor cost isn’t a major factor but whose quality is most relevant. The products of David Yurman and Tiffany & Co. are examples.

• Products whose material-gold-content costs—achieved either through automation or progressive tooling—drive down the labor cost per piece to a point where it’s not a relevant percentage of the total cost.

• Niche markets where relatively low volume doesn’t make it worthwhile to go offshore or where the material needed isn’t available offshore, such as gold-filled stock, which can be bought only in the United States.

The final danger in offshore sourcing is the intangible loss of a manufacturer’s proprietary information and techniques. These can be discovered by or taught to offshore sources, who eventually become competitors themselves to the manufacturer. While control of the offshore factory helps, it’s not foolproof.

Question: What is the most critical issue the industry faces regarding professional education?

Terry Chandler, President/CEO, Diamond Council of America: The real issue is communicating through our organizations and the media that professional training and education is no longer an option, but a requirement. The Internet and the consumer’s ability to gain education and understanding through it have changed the face of the initial meeting between the consumer and the sales associate.

Consumers no longer rely on the expert “behind the counter” but come armed with information well beyond what they knew about our products 10 years ago—or even two years ago. The consumer’s experience is a negative one when they know more about the product than the experts behind the counter, leading to mistrust and confusion.

Many jewelers raise the cost of education as an issue. In the current environment and as far forward as one can see, jewelers—large or small—can ill afford not to invest in educating their associates.

Brook Ellis, Vice President, Education, Gemological Institute of America: The biggest challenge is meeting students’ expectations in an increasingly competitive environment. Educational offerings have to diversify to reflect the industry’s changing needs. For example, at GIA:

• We now update our graduate-gemologist course materials at every printing to keep them relevant.

• We target our Accredited Jewelry Professional program—which concentrates on relevant product knowledge, ethics, and sound sales technique—toward beginning sales associates.

• [We established] the GIA School of Business, which offers college-level courses in a variety of disciplines.

Question: What do you think is the most important thing chain stores can do to survive in a market that’s polarized between mass and class?

Terry Chandler: Most chains are addressing the situation by moving “up” rather than by fighting the price war. Many are attaching themselves to branded product, e.g., Sterling’s Leo Diamond. Also, I see an increased focus on fashion, better goods, and education and training.

The most important thing the chains can do, beyond education, training, and merchandising, is to move wholly into the business of building relationships and not simply taking orders. One can no longer be guaranteed a customer base just by locating in the mall. One must develop relationships, tend their clients well, and make the relationship with the customer personal.

The key issue in any jewelry store is the sales associates. For too long, many jewelers, especially the chains, have relied on merchandise, price, and location. Those who want to survive the polarization between mass and class must have effective, personable, and knowledgeable associates behind the counter. When the customer gets the same lack of service from two jewelers, one class, the other mass, they will revert to price to determine where to purchase. However, when a customer has a satisfying, personal relationship with an associate, he or she will try to deal with [that associate], if at all possible.

Dale Perelman, President, King’s Jewelry: There are causes for concern at the low and high ends. There are things in the high end that will squeeze the upper–middle retailers. The supply of diamonds is one cause for concern. With De Beers going into stores, will it get priority on the larger, top diamond goods? On the low end, retailers are being squeezed by the Internet, mass merchants like Wal-Mart, and the many more channels of information in the marketplace available to consumers.

What to do? The “four Ps”—product, price, placement, and promotion—are still integral to the marketing process, but the quality and training of one’s people are critical to success.

There can never be too much attention given to training and ensuring all your people are trained, like that part-time person who does your swing shift but isn’t trained like your full-time staff. That person may be your weakest link, and customers judge you by your weakest link. A lack of training can cost a sale, so you need to give attention to everyone.

Relationship marketing is critical. It’s a lot easier to sell a friend than a stranger, but it’s more than just greeting people at the door. It’s telephoning account customers, really caring about your customers, and seeking to solve their needs.

I see a lot of improvement by the chains versus a few years ago, but consumers today demand and expect it. So, the chains aren’t ahead of consumers’ demands and certainly not exceeding them. We’re just keeping up with them.

If given a choice, I would prefer the right person—one with energy, a degree of intelligence, the urge to succeed, and the desire to serve the customer—over any other variable in order to differentiate my store from the mass merchant.

Terry Burman, Chairman, Signet Group/Sterling Inc.: In order to survive and thrive, chain-store jewelers must do the same things as all retailers of every size and in every sector. That is, we must appeal to a broad range of consumers based on our total offering of merchandise selection, value, customer service, convenience, store environment, and marketing.

Question: What do you think is the biggest issue facing the diamond industry?

Ben Janowski, President, The Janos Group: Fear of risk. It continues to amaze me how differently [merchandise in] The JCK Show and most retail stores looks. I was admiring a beautiful collection of multicolored and diamond jewelry at one booth when I met an experienced buyer from a good chain. She volunteered that she loved the merchandise but was hesitant to buy it.

We’re seeing a long-term trend that drives most manufacturers and retailers into an ever-smaller range of products in an effort to spend money only on items that promise the best turnovers. A dozen years ago I wrote that mall demographics were going to force operators to look more alike even though most had migrated from diverse and personal Main Street businesses. We now see both chains and independents being careful not to wander too far from basic designs and generic products.

Sure, we see certain style trends arise, like micropavé. That’s a good example of a technique that was rapidly adopted by many companies as soon as it displayed a modicum of popularity—and we now see it everywhere.

We see at retail a fundamental lack of diversity and choice. A discriminating consumer wants value but also a feeling that his or her jewelry will not be seen everywhere. Jewelry is not jeans, in spite of the unique success of David Yurman.

Retailers have been talking to me for years about their need to differentiate themselves in their markets, but most do nothing about that. In part it’s because manufacturers also hew to the basics, and in part because nobody wants to assume the cost of diversity. Retailers want it on memo, and manufacturers rarely have the resources to do it.

We are steadily losing ground to alternate lifestyle purchases. Every day I see people of every income range enthusiastically buying clothes, shoes, and iPods. It always amazes me to see the way women buy shoes and handbags, and men buy BMW’s and plasma TVs, and into big numbers. Meanwhile, we visit jewelry stores in malls and elsewhere and yawn.

Question: Are popular and midprice watches losing the retail jeweler to luxury-watch brands?

Paul S. Sayegh, COO, Bulova Corp.: There have always been a percentage of jewelers who do not dedicate space to moderate- and popular-price watches, but we have no evidence that this percentage has increased.

Many jewelers recognize the value of carrying moderate watches to generate walk-in traffic. Selling and servicing watches and replacing batteries give the jeweler an opportunity to develop relationships with potential customers for higher-priced and occasion-driven jewelry purchases.

With the number of luxury-watch brands competing in the U.S. marketplace, it’s easy to overlook the actual size of this category in unit sales. One outside research source shows that more than 80 percent of typical American male and female consumers paid less than $150 for their last watch and fewer than 5 percent paid more than $500. These statistics explain why the turn on luxury watches in many parts of the country is often too slow to justify the case space.

Stacie Orloff, President, Corum USA.: My sales reps and I have noticed a shift in direction of watch sales at the fine-jewelry-store level. Because there is so much competition in the marketplace and consumers continue to grow more sophisticated, watches with price points under $2,000 aren’t exciting. And the less expensive, more accessible brands have so many points of distribution that they are not a “special” purchase from a jewelry store.

People still have the money [to spend] and as they become more knowledgeable, they want to trade up, so retailers are finding it easier to sell up. Today there are more consumers at the luxury level, and they want unique items as a testament to their ability to own special things.

I think another important factor is the amount of advertising and marketing the luxury brands are doing. It raises awareness of luxury and creates more demand.

Fine-jewelry retailers would rather sell one watch at $26,000 than 13 watches at $2,000.

Question: How is the role of jewelry trade associations changing?

Matthew Runci, President and CEO, Jewelers of America: Trade associations are being called upon to address an expanding array of issues, including issues associated with corporate social responsibility—involving both ethics and legal compliance—that require associations to reassess their responsibilities to their members and, where necessary, adjust their skill sets to ensure that they have the expertise to meet new challenges.

As all sectors of the industry continue to consolidate and vertical integration accelerates, the relevance of historically distinct perspectives on issues (“the retail perspective,” “the manufacturing perspective,” “the diamond-industry perspective,” etc.) is diminishing. The rapid convergence of formerly diverse outlooks requires more systematic collaboration between and among associations representing distinct industry segments. In some cases, particularly where association resources are limited, this may require a real division of labor between separate organizations to make the most of the resources that are available.

Further, some of the issues facing the industry will challenge associations to find ways to achieve greater inclusiveness in their ranks by reaching beyond business segments as they have been defined by association bylaws and tradition-bound industry perspectives. This poses a challenge to most associations, which are almost always chartered to “serve” a distinct clientele. New merchandising channels continue to grow, and production continues its worldwide migration—and these trends are likely to continue. Thus, associations may one day wake up to find that their traditional membership base constitutes a vastly reduced share of their respective commercial sectors.

Associations must draw from a broader base of support within the industry if they are to have the wherewithal to meet emerging challenges. This was illustrated very well in the case of conflict diamonds, in which a handful of large corporations—and a few associations—funded the creation of the World Diamond Council and the industry’s work in support of the Kimberley Process. While the entire industry benefited from the effort, a small segment funded the work for several years.

A parallel situation presents itself today as leading companies in the industry begin in earnest to address a broad agenda of corporate-social-responsibility issues that, if not managed effectively, have the potential to undermine consumer confidence in the industry and its products.

Question: What is the greatest threat to retail jewelers today?

William G. (Bill) Underwood, CGA, Underwood Jewelers: The Internet, not solely because of dollar sales, but for several other reasons:

1. There is a major shift in the way jewelry is distributed and sold. Diamond cutters and wholesalers are making inventories available to Internet sellers who promote the wholesaler’s goods on their Web sites. Most of these Internet sellers have little more than a Web site and credit card account. They never see the diamonds they offer and are not gemologists, so they don’t know (or care) whether or not the consumer gets good value. They simply add a percentage of profit, let the wholesaler carry the inventory, and walk away with a nice profit without any investment. If their Web site gets a bad reputation, they start over with a new one. Many wholesalers are eager to participate because they make more profit, have no credit loss, have much more exposure to the consumer, and can remain anonymous (they hope), so their retail customers will never know.

2. The local-sales-tax issue. Most states do not require the seller to collect sales tax if the seller doesn’t have a presence in the state of purchase. In our state, that’s 9 percent, so the brick-and-mortar retailer immediately has a 9 percent competitive disadvantage.

3. The advent of the AGS Diamond Quality Document (DQD), which offers a cut grade on the diamond, and the coming GIA Report, which will also offer a cut grade. Most Internet sellers claim such a document is the holy grail and contains all the information the buyer needs. Any knowledgeable gemologist knows that is not true and would never purchase a diamond based on the report alone, but the consumer wants to believe it, and many do. There are also incidents of counterfeit reports and of diamonds not matching the report.

4. The rise in the comfort level and ease of shopping on the Internet, especially among older shoppers.

5. More Internet sellers coming online. Amazon.com is opening a jewelry section.

6. The solution: Quit doing business with wholesalers that compete with you. And then differentiate. Deal with suppliers you can trust and offer credentials and merchandise not available to Internet sellers. Surveys show trust is the most important motivation to the diamond buyer. Tell your customers about your reputation and credentials.

Question: What is the most critical issue facing the gemstone industry?

Barbara Lipatapanlop, Executive Director, ICA: Gem traders and manufacturers used to stick to new finds, new shapes, new cuts, availability, price points. There were no clear indicators on what colors or stones would be in demand, and success was sometimes linked to luck or a feeling about where trends were heading. This has changed dramatically.

Gem traders and manufacturers need to be aware of trends by staying in touch with design and fashion. Years ago people in the gem trade never thought they’d need to care about what fabrics were coming up in the next season and what shades of colors were going to be promoted by the world of fashion. Everybody is now waking up and keeping an eye on fashion trends. Forecasting style and color and keeping abreast of all fashion trends is becoming a mainstay in the trade.

The industry also faces challenges in its structure; areas that were once well separated are now not so clearly defined. More gem producers, cutters, and even dealers have moved into producing jewelry. This is happening on a large scale in areas such as India and China. We also see more people in the trade selling directly to consumers. The Internet is part of the reason for this change, but it also stems from the educated consumer seeking ways to get closer to the source. Producing countries are also part of the change as they strive to set up their own cutting industries instead of merely supplying rough material to the market and even move more to jewelry manufacturing and direct export.