As I write this, I’m seated in the Royal Hawaiian Hotel’s Surf Kanai Room at sunrise, having breakfast overlooking Waikiki Beach. It is an almost unimaginably pretty spot, and I can’t help but reflect on the celebrities, politicians, and merchant princes who must have sat in this very chair surveying this beautiful scene in days gone by. I am struck not only by the brilliance of the rising sun, but also the palpable afterglow of last night’s extraordinary Republican triumph, for today is Wednesday, November 5, 2014. So it’s a brand new day, not only for Hawaii, but for a new Republican controlled Senate.
I’ve actually been watching the election polls closely for months, and have developed quite a fondness for Nate Silver’s fivethirtyeight.com website, which during the past three election cycles has correctly predicted political outcomes with uncanny accuracy. Silver isn’t a political scientist; he’s a statistician, specializing in the use of complex math to arrive at possible election outcomes probabilistically. So he doesn’t say that so and so will win. Instead, he assigns a probability of a winning outcome based on 1500 daily simulations for each race, in which assorted hidden variables (like voter intensity, or prior voting predispositions) are systematically introduced into his algorithms to provide a variety of views on likely outcomes. Each polling model for each individual race auto-adjusts as new polls come in, resulting in new outcome probabilities with ever-increasing certainties. This elegant mathematical modeling approach is based on a fundamental principle called “Higher Order Functions”, of which the derivative in calculus is an example, because it maps one function to another. It’s extremely cool stuff, if you’re interested in statistical analysis, as I am.
On the evening of November 3rd, Fivethiryeight’s Model forecast that the Republican party had a 76.8 percent chance of winning the Senate, and accurately predicted the outcome of every Senatorial race. Silver’s results have become sufficiently reliable that ESPN has recently formed a partnership with him, since the same kinds of statistical analysis are potentially extremely valuable in predicting the likely outcome of sporting events. Unsurprisingly, math rules! So, in the context of statistical probabilities, let’s take a look at likely outcomes for your sales in December.
From a macro perspective, there are four numbers that I especially like to look at in forecasting jewelry sales. First, there’s the GDP (Gross Domestic Product) forecast, which economists use to estimate the overall productivity and health of the economy. It’s generally been my experience that when GDP rises two percent or less, retailers tell me that their traffic and sales have been disappointing. Fortunately, most forecasters are pegging GDP growth at around 3.5 percent for the fourth quarter, so I see that as a very positive indicator.
Second, there’s expected overall retail sales. Our industry’s little sliver of retail seems extremely sensitive to this number, such that when there’s little growth, we actually suffer, but when retail sales grow significantly, we benefit disproportionately. Again, respected forecasters like the NRF (National Retail Federation) anticipate an increase in the 4 percent range, a number which, if it occurs, is consistent with solid growth in jewelry sales.
Third, retail jewelry sales seem highly dependent on overall consumer confidence, and with recent reports of the highest confidence numbers in seven years, I take that as very nicely bullish.
Lastly, while I’ve not seen a strong historical correlation between gains in the Dow and jewelry sales, we have definitely witnessed affluent consumers shutting down when the stock market flounders, so with the Dow north of 17,000, I see a generally favorable set of economic conditions that suggest that jewelry sales - and traffic in your stores - should grow nicely in December.
In summary, I think there’s about a seventy percent chance that we’ll see an average sales increase in December somewhere in the 6 to 12 percent range for the independent jewelry sector. Seventy percent doesn’t represent a guarantee, of course. My forecast yields about a 1 in 5 chance that retail sales for independents will be flat or below last year’s results, and there is a small chance, perhaps one in twelve, that we could see damaging events at macro levels (e.g., a terrorist attack, major stock market correction, lame duck session shenanigans in Washington, etc.) that would cause sales to decline more dramatically. But overall, I like our chances for experiencing a much needed increase in December sales.
Recognize that the favorable environment we’re walking into also benefits non-traditional retail venues, and much of the sales increase may wind up in the hands of your internet competition. Consumers are going to be buying, but they may not be buying from you if you aren’t distributing advertising messages that show you have what they want. In what appears to be a pretty favorable environment, what will be selling? Two categories stand out for me.
First, of course, are the vibrating diamonds. We are now in the second year of a major fad (remember the second year of three stone?), and with extremely high levels of inventory in place, I expect Sterling to now focus a significant amount of their TV advertising on this category. Last year, we saw Early Adopters buying this product during the Christmas cycle, but this year I expect a much larger group of more conservative buyers to start participating in the trend, and with enough TV support, I suspect that most of you will sell out of whatever inventory you’ve put in place by December 15.
With generally insufficient shelf stock, this category could become a runaway freight train, such that by the 18th, only Sterling among the majors will be left with inventory. This will leave them in an enviable position, as they not only benefit from being the only stores in the mall with inventory; they’ll also be positioned to accomplish a more fundamental objective, which is to establish their “Diamonds in Rhythm” as a legacy brand. And remember, since we all have to rely on the owners of the patented mechanism to supply more “hangers”, the entire industry is going to see a serious shortage in this category in early 2015, so the secondary impact of Sterling’s strategy will be to create massive demand at Valentine’s Day, leaving most retailers stranded without access to replenishment. You can cash in on this foreknowledge by elevating your inventory immediately, while whoever is supplying you still has shelf stock. Don’t get caught short!
Second, I suspect that we’ll finally see a return of sales of higher ticket items outside the bridal category, as affluent consumers finally start treating themselves to luxury items again. The impact of the elections, in which Republicans will now control the Senate, may be enormous. Combine a newfound sense that implementation of a pro-business economic strategy will now occur with the Dow hitting record highs, and you may very well see the most favorable climate for bigger tickets since 2006. And since many stores have allowed their inventories to dwindle in higher price points, I think this may cause a reshuffling of market shares in areas that have multiple independents, as those stores that have adequate representation in higher price points will now obtain a preemptive advantage over their competitors who don’t.
December’s sales will also be profoundly impacted by an interesting change in consumer behavior that is reshaping the shopping timetable. The growth in use of cash and gift cards as Christmas presents (over 65 percent of Americans now receive cash for Christmas, and 70 percent receive gift cards) has created a new shopping imperative immediately after Christmas, to the extent that purchases made on the day after Christmas will now exceed Black Friday sales, and the week after Christmas is now forecast to be the third busiest shopping week of the year. I’m testing some interesting strategies to find ways for independents to take advantage of this huge sales opportunity, and I encourage you to deploy some marketing dollars towards it.
Cashing in on these trends will require effective marketing, and adequate funding using the right vehicles. As usual, strategy and execution will be critical for success, so you’ll definitely need to bring your “A” marketing game to the Christmas party to get the right results.
As I sit here looking out over Waikiki Beach, I notice there are now at least forty surfers waiting for the right wave, and some seem much better at predicting which waves to ride than others. Like the surfers here, if you’re riding the right wave, I suspect that December is going to give you a pretty good ride.