Independent fine jewelry brands are being hit by an epidemic of bankruptcies and closings.
The credit crunch at banks, highlighted by the crisis at CIT Group Inc., and investors hard hit by the recession have helped trigger cutbacks in what had been one of the hottest markets in fashion, but is now considered by many consumers as an extravagance out of tune with the times.
Many independent brands said they have been damaged by consignment. The practice, known as “memo” in the industry, allows retailers to select pieces and pay when goods are sold. The system allows for easy remerchandising and shuffling out stagnant product to bring in new items. But jewelry firms are being squeezed because they overextended, borrowing too much cash from banks to fill orders that weren’t wholly secured.
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The shakeout is likely to fundamentally alter the fine jewelry market as weaker firms succumb to the realities of the economy and others develop strategies to survive.
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“It is more difficult to manage those high-end businesses because of the need to keep diamonds [and other precious stones] and metals in inventory,” said Philippe Faraut, director at investment banking firm The Sage Group.
Companies that have fallen by the wayside include: David Webb, which filed for Chapter 11 in June; Michael Beaudry Inc., which declared bankruptcy in Los Angeles in April; Doris Panos Designs Ltd., which also filed in April in Central Islip, N.Y., and Penny Preville, which filed in October under the name JPPS Inc., also in Central Islip.
One of fine jewelry’s venerable names, Henry Dunay Designs Inc., which launched more than 50 years ago, filed for Chapter 11 bankruptcy protection last month, a development that sent shock and disappointment through the industry.
Dunay sold his pieces, which start at about $4,000 and reach as much as $500,000, to Bergdorf Goodman, Neiman Marcus and independent retailers around the world.
Acknowledging the impact of current market forces, Dunay said his business was primarily upended by consignment. About 20 years ago he went from five Neiman Marcus doors to 38 and the luxury retailer became his top customer. As Neiman’s expanded during the go-go years, the arrangement worked. But during the recession, “they were selling some, but it was all on consignment,” he said.
Neiman Marcus received bankruptcy court approval to provide debtor-in-possession financing, allowing Dunay to continue business operations. In turn, Neiman Marcus was granted first lien, mortgage and security interest on Dunay’s assets.
Court papers said the bankruptcy was “precipitated by various events including a decline in jewelry sales corresponding with the national economic downturn, the decision of Neiman Marcus Group Inc. to take setoffs [generally deductions from money owed to satisfy past claims] and not remit approximately $3 million in funds owed for goods, and bank termination of credit lines necessary to fund ongoing operations.”
A spokeswoman for Neiman Marcus declined to comment.
The issues facing fine jewelry are part of broader changes in lifestyle and the choices consumers are making. According to a report from the investment bank Financo Inc. on the new luxury paradigm, consumers are rejecting merchandise perceived to be overpriced as compared with goods offering “value.”
“Even the wealthiest of shoppers need a reason to purchase the highest-priced item at full price.”
Anthony Nak, the 10-year-old CFDA Award-winning jewelry brand based in Austin, Tex., didn’t file Chapter 11, but closed its Austin flagship in January and stopped wholesaling to stores. Several months ago, Anthony Camargo, who founded Anthony Nak with women’s wear designer Nak Armstrong, said the designers will make special commissions for good customers and stores, but will primarily focus on their business with QVC, which offers low-ticket items in silver with semiprecious stones and other projects, such as a recent collaboration with Swarovski.
“We closed because our lease was up and we looked at the whole economic picture,” Camargo said. “We thought, ‘Let’s wait a while…and focus on the things that we enjoy working on.’”
The difficulties Nak and others encountered raise the question of how smaller independents can compete for sales with megabrands like Cartier and David Yurman.
Charles M. Jayson, president of Judith Ripka, said retailers and consumers are seeking a better price value relationship, as well as newness.
“Retailers have been asking for newness, better value and more marketing to drive sales,” Jayson said. “They’ve been asking specifically to provide bolder silver pieces, inspired by our 18-karat [gold] collection.”
Jayson said Ripka has streamlined price points, offering “tasteful discounts” at the cost of margins to drive sales.
“It’s challenging, as consumers have really stopped shopping for a period at the beginning of the year,” said Jayson, who added that sales have picked up a bit since then.
But new product can lead to overstock, which is why so many brands, including Ippolita, Ivanka Trump, Loree Rodkin, John Hardy, Kwiat and Judith Ripka, have turned to discount shopping Web sites such as Gilt Groupe, the by-invitation, password-protected Web Site, to sell their stagnant inventory.
Alexandra Wilkis Wilson, chief merchandising officer and founder of Gilt Groupe, said jewelry is an important part of the Gilt business model. The firm also often sells clothes by designers such as Alexander McQueen, Marc Jacobs and Jil Sander.
“We are featuring more and more fine jewelry and luxury timepieces,” said Wilkis Wilson. “Our customers respond very well to the product category, despite the fact that we don’t take returns on [fine jewelry].” Wilkis Wilson said most of the fine jewelry on Gilt is on consignment.
Some retailers have lamented discounting jewelry can only hurt the market in the long run, as fine jewelry is not a market accustomed to markdowns.
“Putting jewelry on sale and the discounts that some retailers are doing are hurting designers and the retailers,” said a retailer of a high-end jewelry boutique in the U.S, who declined to be named.
Candy Udell, president of London Jewelers, the fine jewelry and watch chain in the Northeast, said she is keen to bring in new designers to energize the assortment in the company’s stores, but some brands just don’t have what it takes.
“When people come into a store, they want to see many brands; they want selection,” she said. “Some of the smaller brands don’t have the line extensions to keep it fresh, and some just don’t keep up with the times.”
Suzanne Hader, principal of 400twin luxury brand consulting, believes times will eventually get better for the independents.
“The last year has just been a bit of a disaster for any company that wasn’t sitting on a mountain of cash,” she said. “Cash flow, of course, is the biggest problem for independents. They don’t have a huge multinational superstructure to absorb the blow when the entire market shrinks rapidly, as it has over the past six months. However, that said, there’s also the issue of marketing. Cartier can continue to advertise, put on events and sustain consumer attention. With a cash flow pinch, smaller companies are forced to cancel marketing initiatives, which means they can’t attract new customers.”
Carolyn Kelly, owner of jewelry consulting firm Old World Chain, said, “The biggest problem right now is everyone is looking for classics and value.”
She said consumers prefer to buy a non-branded solitaire diamond where they believe they get better value and higher quality for the same price that they would have had to pay for a branded stone with marketing expenses built into the costs.
However, she believes the high-end brands can and should survive.
“What makes the business is the creativity of the designer,” Kelly said. “The business needs them to create interest in the jewelry category. The designers do that by creating something new [each season].”
Mark Udell, owner of London Jewelers and Candy Udell’s husband, said many of the independent jewelry brands hit with a hot design or look, but haven’t been able to translate the trend into a long-term business.
“A lot of these companies have a great look for the moment, but they don’t have the legs to be a long-lasting business,” Udell said. “When there’s a lot of free spending money out there, it could work, but with the economy the way it is, it becomes challenging for these companies to make it.”
Sharon Silberstein, vice president and creative director at bankrupt David Webb, said the bank with which the firm worked wanted out of the jewelry business.
“Business dropped off somewhat,” said Silberstein, whose firm has stores in New York and Los Angeles. “But we should have been able to adjust to the change in sales numbers had the banks wanted to stay in the jewelry business. It was nefarious, actually. It was the bank and the landlord that wouldn’t renegotiate.”
Silberstein said June was one of the firm’s strongest months in sales and since the Chapter 11 filing customers have called to order important pieces costing six-digits to either support the brand or get last licks on the collectable jewelry. Webb is in negotiations with potential investors.
Many brands aren’t investing in new collections because they cannot afford the development costs. But some companies, such as Ippolita, Penny Preville and Judith Ripka, are putting their dollars into new product.
“It’s always about having the right product at the right price,” said Lauren Sharfman, chief executive officer of Ippolita, which has diversified its 18-karat gold assortment in recent years with its silver and Ippolita Rose line, which uses a metal that combines silver and rose gold.
Sharfman said Ippolita doesn’t operate on consignment with its retailers, which include Neiman’s, Saks Fifth Avenue and Bergdorf Goodman, because it keeps prices in check, with most pieces less than $10,000. Ippolita prices go as low as $500.
“One of the reasons that we’re not caught in the consignment trap is that we don’t make jewelry that crosses that [price] threshold,” Sharfman said.