Last month I experienced an epiphany. It happened when, for the first time in many years, I had a chance to buy Signet stock for 50 dollars a share. Having watched the inexorable rise in Signet’s sales, profits, and stock price over the years, under normal circumstances, I would have rushed to buy shares at such a heavily discounted price relative to historical earnings. But these are no longer “normal” times, and as I contemplated the likely trajectory of Signet’s future sales - in fact, the likely future trajectory of the majors in general - it suddenly occurred to me that for the first time in my life, I actually see a window opening that favors the independent jeweler.
My perception of the generational market share struggle between the majors and independents was shaped in large part by my experiences as a sales representative working with independent jewelers during the ‘80s at Town and Country Jewelry manufacturers, at one time the largest supplier of jewelry to both retail sectors. I was only a mediocre performer during my tenure there (it’s actually more than a little embarrassing thinking about how clueless I was then), but I had demonstrated a special talent for flyer sales that put me on the flyer merchandising committee, which provided an inside look into what T&C was doing with the majors. And from the standpoint of a salesman selling to independents, what I saw was more than a little scary.
First, there was an incredible difference between what the majors were paying for jewelry, and what we were charging the independents. Partly this was because T&C had to pay a relatively high commission rate to the sales reps who serviced the independents, whereas the majors were typically serviced by lower-paid staff whose lesser incomes were also a much smaller portion of cost of sales, because they were responsible for much higher volume levels. In addition, the majors generally paid in 30 days, whereas the independents took seasonal terms (and even then, stretched out their payments), which necessitated a higher price. But there was more to the cost differential than these factors. The majors had leverage as a consequence of their extraordinary buying power, which they used successfully to grind down the price, so that in many cases independents were paying 30-40 percent more for the same jewelry.
Even worse, I was really impressed by the majors’ buyers’ incredible thirst for knowledge. I learned that Town and Country’s national accounts division was constantly engaged in memo tests, as the majors’ buyers introduced thousands of skus on memo on an ongoing basis to determine actual consumer preferences. They then rolled out successful skus region wide, and then ultimately chain wide, whenever they found winners, and the very best of class went into their flyers. So they were not only stocking the right skus, they were advertising the very best sellers, while my independent customers had absolutely no rational basis for what to stock and advertise. Indeed, my independent jewelry store buyers had no way of gaining this kind of knowledge, and actually didn’t seem to care. None of them ever even bothered to go to the mall to see what was selling. Their method for product selection seemed haphazard at best, and their stock selections often appeared almost totally random to me.
On the technology front, the majors were busy launching something called EDI (Electronic Data Interface), which allowed their computers to report sales to T&C’s computers every night, automatically generating purchase orders to replenish sold items, so they could turn their inventory much faster, and always had what customers wanted in stock. My independent customers, on the other hand, were generally buying only twice a year, so once an item sold, it remained out of stock for the balance of the season.
Even worse, as I was allowed to sometimes sit in on presentations to the majors, I was struck most by the fact that they clearly had a detailed plan, and they were constantly measuring the performance of every sku to achieve maximum turn and profitability. In contrast, as I made my sales calls on my own customers, there was no escaping the fact that my customers generally seemed to lack both an overall strategy, as well as a specific marketing game plan.
And yes, while the T&C sales team servicing the majors always seemed to have very specific plans for working with their customers, I really didn’t have a plan either. Which meant that while the T&C national accounts sales team had a plan, and their buyers had a plan, I didn’t really have a plan, nor did the reps from the other companies that called on my customers, and my customers didn’t seem to have a plan either. I was just there to sell stuff, as were my customers, as we took shots in the dark with an incoherent, chaotic merchandising/marketing gun.
So as I rationally evaluated the independent jewelry distribution pathway, I was forced to conclude that we were at a huge operational disadvantage, and it was no wonder that year after year, the majors’ market share was increasing, while my beloved independent’s share was decreasing. And since my own financial future was inextricably linked to the independent side, I found myself wondering if the retail sector to which I had hitched my personal economic wagon would last long enough for me to get to a successful retirement.
But then, in 1994, I discovered a small company (GDM) that did have a plan, and I left a pretty easy sales job at Town and Country to see if I could learn from a company that actively helped progressive-minded independents to challenge the majors, from a marketing and merchandising standpoint. I not only learned, I started to create programs myself, and as I became a compulsive planner (yes, it finally occurred to me that in order to excel, I needed to start having a plan), I learned that there were actually some pretty sharp independents who similarly wanted a plan that made sense, and was executable, reproducible, and sustainable.
In addition, I became an extremely attentive student of all things retail. I attended seminars, became an avid reader of business books on retail and consumer behavior, and I started to listen pretty carefully to wisdom from successful jewelers in order to derive models for their success that I could replicate elsewhere. My effectiveness soared, as did my customers’ profits from the marketing platforms that I was helping them create, and as I discovered new ways of providing value to my customers, I actually started enjoying my job more and more (and became a workaholic).
Yet I still watched as independent market shares dwindled, and Signet set one record after another. But then, I saw changes, starting about the time of the great recession, that were compelling. First, recognize that I spend a lot of time actually shopping with the majors (as a student of Sun Tzu, I have always been keen on industrial espionage, as “one can best defeat one’s enemy only by coming to know him”). And while there had once been a time when I could learn from the selling scripts being employed by the major’s sales associates, I was increasingly noticing that the buying experience in the chain stores was getting pretty awful.
In addition, while I had once been especially alarmed by the Jared model, as it seemed ideally suited to extract market share from my independent customers, it stared to become clear that the gap between Jared and Kay was closing, not because Kay was getting better, but rather because each Jared I visited was turning into nothing more than a big Kay store. I was also hearing that Signet’s management team, at every level, weren’t actually managers anymore. They were increasingly becoming nothing more than compliance officers, essentially in charge of enforcing company policies with subordinates, with a corresponding loss in capacity to improvise on the battlefield, as well as corrupting their capacity to lead.
Changes were taking place at the other Majors as well, in ways that were clearly detrimental to their self-interest. Helzberg, in particular, had historically been a big step above Kay, Zales and Fred Meyer, but massive changes in Helzberg’s merchandising strategy were resulting in a surprisingly poor product assortment that looked a lot more like low end department store merchandise than what had once been the nicest store in the mall. In general, what had once seemed a group of omnipotent retail competitors, began to look thoroughly beatable.
But the final change - the one that now has stock portfolio managers shorting retail stocks across the board - is the ongoing” de-Mallification” of America. Partly driven by genuine changes in shopping trends, and partly the result of market share predation by Amazon of the department store mall anchors, consumers just aren’t going to the malls like in the past. So the automatic traffic that the majors used to obtain, simply through mall rent, isn’t happening anymore.
All of this is leading to a horrendous retail train wreck, and I am increasingly persuaded that sharp independents stand to benefit dramatically. Yes, the Internet is there, grinding down margins, and slowly capturing market share. And yes, Millennials seem to lack brand fidelity, and the generation that follows will be even tougher to acquire as customers. But as I survey the retail landscape, I think I like the odds for the independent jewelry distribution channel, more than at any prior time in my career.
I occasionally joke that the easiest way to leave the jewelry business with a million dollars is to enter it with two million. And for those whose heads aren’t fully in the game, or who are unprepared to adapt to rapidly changing conditions, that’s still true. But I can now honestly say that I like what I see happening. So yes, it is entirely possible that we are now entering the Age of the Independent. What a refreshing thought! Prepare yourself, at last, for a challenging, but potentially highly profitable ride.