Cecilia L. Gardner, Esq.

President and CEO, Jewelers Vigilance Committee

Government and public scrutiny of the jewelry industry and its practices has never been more intense. There is no reason to believe this will diminish in the next three years, and every reason to believe it will intensify.

Under the microscope are practices at the source of our products, our advertising practices, our compliance with legal obligations, and much more. Our industry is subject to numerous government regulatory requirements, including new anti-money-laundering program requirements for dealers in precious metals, stones, and jewels. The public is increasingly aware of consumer confidence issues such as conflict diamonds, synthetics, treatment disclosure, and advertising practices.

These twin challenges—government regulations and consumer confidence issues—will act to change the industry. To meet these challenges, industry members must focus more of their activity on legal compliance and risk prevention to ensure that the industry’s reputation for integrity remains intact. Proactive quality control, active legal compliance programs, supply side integrity programs, and more should become a part of everyday business activity in all sectors of the industry. Each industry member should ensure they are fully aware of their legal obligations and take affirmative steps to comply.

It is important that business partners and consumers alike become aware of what is being done by industry members to promote the integrity of the jewelry industry through legal compliance and how we address the consumer confidence issues that impact our industry. The public must be educated about the industry’s active participation in compliance and consumer confidence programs.

Dione Kenyon

President, Jewelers Board of Trade

Major changes impacting the jewelry industry include globalization, consolidation, the Internet’s increasing importance as an information and distribution channel, the rise of branding as a point of differentiation, increasing government regulation, volatile raw material prices, and reputation risk.

Consolidation at the retail level drives back through the supply chain to manufacturers and wholesalers. They must adapt to fewer customers, who demand more credit, just-in-time deliveries of just the right merchandise, and marketing support at the most competitive pricing. Survivors both at retail and supply levels will be a combination of scale players and niche players with a unique value proposition.

I also think there needs to be a new retail model that provides for jewelry the kind of nurturing shopping experience that Starbucks and Whole Foods have created. Jewelry retailers should rethink their stores’ features and layouts to create a more attractive shopping environment.

Jewelry seems to have lagged in the branding arena, and this may be part of the reason jewelry sales have lost ground to other types of purchases. Branding is expensive; requires time to build; and has to be backed up by quality, service, and selective distribution. When done right, however, it commands a premium margin and draws consumers.

The Internet is both a challenge and an opportunity, because it competes with traditional brick-and-mortar channels, yet complements them by allowing consumers to window-shop before making a purchase. Our industry should be able to manage this challenge. Consumers love multiple channels through which to do business and—while there may be some cannibalization of other channels due to the Internet—there should be more business done overall.

On the globalization front, foreign competition (primarily from India and China) for U.S. jewelry suppliers is an enormous challenge. Their quality and quantity of production have increased a great deal in the past decade. But U.S. suppliers still have advantages they need to exploit.

First, they’re close to the U.S. jewelry market. While large retailers increasingly source overseas, smaller retailers face a number of difficult risks and issues, including delivery issues and quality issues that are difficult to resolve from such a distance. The close proximity of U.S. suppliers works to their benefit.

U.S. suppliers also have the opportunity to sell to the very countries that compete for the U.S. market. India and China alone represent a third of world gold consumption. As these populations become more affluent, they’re likely to want more unusual/branded products, many of which are developed and marketed from the U.S.

I see no end to the volatility and increase in raw material costs (especially precious metals), and firms in our industry need to hedge these costs and adjust their pricing or risk going out of business.

Economically, there are some reasons to be concerned about the impact of a flattening housing market and rising oil prices on consumer spending. However, I think the consumer has demonstrated a resiliency that makes me worry less about this than the other factors discussed above.

The jewelry industry has unique advantages. Its product has intrinsic value and eternal demand based on emotional connections with it. It also has strong demographics for the next decade, including lots of wealthy baby boomers as well as emerging “nontraditional” markets such Hispanic, gay/lesbian, African-American, Asian, men, etc., to sell to.

Success will depend on an innovative, market-driven approach to business instead of the pricing-driven model so prevalent today. That will require managers who are willing to change ways of doing things and adopt business models that are driven by customers’ needs. Companies also must develop a unique value proposition and focused execution. They should consider strategies to differentiate themselves, leverage the Internet as an information channel, and carry branded merchandise to build traffic for the basics and possibly brand their stores.

Helene Fortunoff

Chairman, Gemological Institute of America board of governors; veteran retail jewelry businesswoman

As I see it, one of the biggest changes will be the opening of new markets, especially for consumer diamond product. Both China and India are already awakening as end users, and other countries will join in this globalization as they respond to effective advertising campaigns presenting product that caters to their desires.

To serve this growing demand there will be an increased need for education for both the jewelry professional and the consumer. The momentum in branding will continue, and it is here that GIA will emerge as the definitive brand for confidence and integrity. GIA is planning substantial investment in research and education to be able to serve this growing number of interested consumers.

Matthew A. Runci

President and CEO, Jewelers of America

The biggest change we face is the public’s increasing skepticism about jewelers’ trustworthiness.

Jewelers were once trusted implicitly to source, judge, and sell diamonds and gold jewelry. It was a world without diamond-grading reports, Kimberley Process systems, or anti-money-laundering regulations.

Times have changed, however. Now consumers ask jewelers for diamond-grading reports to “back up” retailer expertise. Widespread publicity about diamond treatments and synthetics causes buyers to ask for additional proof that their diamonds are natural and untreated.

News reports about conflict diamonds and gold mining practices have led an increasing number of consumers to begin worrying about how their jewelry is sourced and made. Consumers may wonder: Do the mining and production of gems and gold harm workers in poor countries, leak dangerous chemicals into the environment, or cause conflict?

Many jewelers feel frustration when trying to address such issues. They may think: “What can I do to affect practices so far removed from my store?” or “Why is society holding me accountable for bad actors over whom I have little control?” Be assured that we are not alone in being challenged on these issues—consumers want to know more about all the products they buy—and jewelers are the face of the industry to them.

Here are some actions that the industry—and individuals—can take to reassert trust among consumers in our products and our integrity:

• Promote your membership in industry associations that advocate for responsible business practices. Groups that do so include Jewelers of America, the American Gem Society, and the Jewelers Vigilance Committee. Members of Jewelers of America, for example, can tell customers that they are required annually to renew their commitment to the JA Code of Ethics and Standards of Professional Conduct. JA members also require that their suppliers comply with the JA Supplier Code of Conduct, which addresses a variety of workers’ rights, including those connected to health and safety, collective bargaining, discrimination, child labor, and other issues. You can see all these documents at www.jewelers.org, by clicking on the About JA button, then Corporate Responsibility.

• Ask each of your suppliers if they will provide a written warranty statement on their invoices affirming that they buy only diamonds that have been traded through the Kimberley Process Certification Scheme. You can find a model letter to suppliers for this purpose at the JA Web site, by clicking on the Public Affairs button, then Consumer Confidence. You can then tell your customers you require these warranties from all your diamond suppliers.

• Consider membership in the Council for Responsible Jewellery Practices, a supply-chain initiative that is working on a code of practices for the diamond and gold jewelry supply chain worldwide, from mine to retail. When the CRJP system is introduced in 2008, it will be monitored by impartial, third-party companies that certify CRJP members are, in fact, living up to the responsible practices they’ve promised to follow. You can find out more about CRJP by going to www.responsiblejewellery.com.

Frank Dallahan

President, Manufacturing Jewelers and Suppliers of America

In the next three to five years the jewelry industry will continue to undergo evolutionary change. The industry at every level is largely entrepreneurial, and the jewelry entrepreneurs will continue to address change and take advantage of opportunities change offers.

At retail, the growth of the national and regional chain stores will continue both in number of units and revenues. Economies of scale provide the Sterlings, Zales, Helzbergs, and Ben Bridges of the world with increased opportunities. These stores will continue to grow at a rate of 4 percent to 7 percent per year. Slow, steady growth is their objective. Zale will once again refine its direction trying to find its way back to the No. 1 retail position. As a group, the better independents will show above-average market growth. This group of stores is well positioned to attract a local demographic that has money and the desire to spend it. Retail jewelers between the national and regional chains that are not upscale oriented will continue to struggle. These stores seem unable to create a point of difference in the local marketplace other than location utility. Developing a branding strategy and a well-thought-out and -executed communication plan is vital to their continued existence. The branding strategy needs to address a local perspective and differentiate the “jeweler” from the competition. It is crucial that this be done on a regular and frequent basis.

Also at retail, paying real attention to customer service and the changing demographics of the customer population will be required. Training staff on people skills and product knowledge will swing more to people skills. Finally, making shopping in a jewelry store more interesting and fun will become more important.

At the wholesale and manufacturing levels, at the volume end of the business production will likely continue to move to China and India unless the U.S. industry focuses more on technological improvements and adopts more of a lean manufacturing philosophy. It is logical to expect the U.S. manufacturing community to focus increasingly on niche markets where specialized knowledge and experience are key. The upper tier of the market will result in more manufacturers moving to the higher end of the scale and more competition for the upper tier of the retail community. New product will become increasingly more important at every level, but for U.S. manufacturers, investing in new product is just as important as investing in new technologies. Like it or not, U.S. manufacturers are being forced into the upper tier markets. Wholesalers per se will continue to decline and become product development specialists using foreign sources and a greater reliance on “designer names.”

Trade branding as opposed to national branding is key to domestic manufacturers’ success. As the national and regional chain stores grow and the middle segment of the independents decline, there is only one opportunity left for the domestic suppliers to go. Developing a unique selling proposition and promoting that will be essential.

Jeff E. Pfeffer

Senior vice president, diamonds and jewelry, HSBC Bank USA N.A.

The industry as we know it will change dramatically. These changes will fall into the categories of “consolidation” and “economic Darwinism.”

Consolidation is occurring at all levels of the industry, which has seen upstream and downstream integration as well as new business models. Examples include Tiffany starting a joint venture with a sightholder, Sterling beginning to manufacture rough in India via a DTC sight broker, and a mining company (Aber) acquiring control of Harry Winston. These are clear-cut examples of vertical consolidation.

There are many examples of wholesalers acquiring or merging with other wholesalers and/or retailers. There have been many joint ventures between sightholders and others in the jewelry chain. Some are born of economic necessity, others of strategic planning. The message to the trade is adapt or die. We are now living in an era of economic Darwinism. Tried and true business models are changing. No longer does the American retailer want to be serviced by the American wholesaler. The person or group in front of the retailer—that is, the supplier or wholesaler—who makes timely deliveries of a quality product at the right price will win the business, regardless of nationality.

Relationships, which once dominated the playing field, no longer do. The American trade must get used to the fact that the Indian business model and the new Chinese business model are beginning to take hold. Low-cost, quality production is being requested at all levels in the supply chain.

The industry must be open to change. Companies must continue to do what they do well. Expansion into new niches or business models is not preferred. Maintain what you do within your sphere of influence. Branching out without adequate resources is a recipe for disaster. The industry must be open to change initiated by the large players with the financial resources, or the niche players who dominate their space. The average U.S.-based American jewelry company will either be acquired or go out of business within 10 years, unless they adapt.

The most practical suggestion is to assess where you are today and determine where you want to be in three to five years. Then determine who occupies the space. Then decide if now is the time to merge. If so, just do it, as Nike says.

Branding, which was the DTC buzzword several years ago, has not gone away. After millions of dollars have been spent, there are very few “true jewelry brands.” Branding has created demand for larger players to investigate the smaller players. This has prompted merger and acquisition activity. Every year in Las Vegas, we instruct sightholders to “go shopping” in the designer section. This will be the next area of growth as consolidation further takes hold.

Overall, change is not bad. The industry just needs to deal with it better. No longer do foreign entities not understand the U.S. marketplace. These barriers are gradually being brought down. The American part of the industry must be receptive to change or be overrun by it.

Terry Burman

Group chief executive, Signet Group PLC, whose U.S. division is Sterling Inc.

There are three topics that I see as important. The first is consumer confidence issues, like dirty gold or blood diamonds. The only effective way to address these is as an industry. The Council for Responsible Jewellery Practices was formed to enable all segments of the supply chain to address issues of consumer confidence. No single company or group is big enough to do it themselves. We must all work to improve the supply chain, whether it be environmental, human rights, or health and safety issues.

It’s important for everyone in the industry to participate in CRJP, to influence and help fund it. If consumers lose confidence in our products, the impact could be damaging for decades. You need only look at the fur industry to see an example. Whether it’s one store or a multinational company that’s being challenged on these issues, the extent to which it’s in the press and creating questions in consumers’ minds damages all of us. So, it’s imperative that all of us act together as an industry to address these issues.

Another issue is e-commerce and its effects. This is especially apparent in the commoditization of our products and the impact on gross margins. For example, when any single stone is identifiable by quality and an in-depth description with certification, a consumer can simply go online and find the best price. This will force prices and margins down for retailers, who in turn will force margins down for their vendors. Further, commoditization could force consolidation at all levels of the supply chain because of the lower margins it creates.

Retailers need to be sure their sourcing is the most efficient it can be (in terms of pricing, availability, delivery, and terms). They also need to do everything possible to keep sales robust through customer service, marketing, and merchandising. They must be sure, too, that their store location, store environment, and merchandise sections are at their best, or they will get consolidated out of business.

A final critical issue is synthetics, especially lab-created diamonds and GIA’s recent decision to issue grading reports. I’m not saying this is good or bad, but it’s an issue we must face, because by issuing the reports GIA is legitimizing lab-created diamonds.

The best way to face it is with staff training. Whether or not a retailer decides to carry the product, the staff must be trained in how to present synthetics (if they carry them) and how to talk to consumers about them. Retail staffs must be knowledgeable and able to explain differences between natural and synthetic stones and cost differences between the two.