News that two gems of the jewelry world — Signet Jewelers (SIG) and Zale (ZLC) — will soon become one will certainly impact its closest competitors in Tiffany’s (TIF) and Blue Nile (NILE). But how will each fare as the acquisition plays out in the months to come?
Once Signet officially absorbs Zale for a reported $1.4 billion, the combination will no doubt put pressure on high-end Tiffany and online retailer Blue Nile to make other waves in the sector. After the merger, Signet and Zale are expected to generate more than $6 billion in annual sales and operate more than 3,600 store locations under the names Kay Jewelers, Jared the Galleria of Jewelry, H.Samuel, Ernest Jones, Peoples, and Zales.
The announcement alone last week sent shares of Zale soaring 40%, while Signet enjoyed an 18.1% rise during trading hours the same day. Tiffany shares were flat and Blue Nile stock rose 1.7%.
But the effects on competitors are yet to play out. After all, Tiffany and Blue Nile really do set themselves apart by customer base, products and marketing.
Tiffany’s market is high-end consumers who want to go into a posh store and spend a good chunk of money on gold or diamonds, silver gifts or another gemstone of the month, delivered in the iconic blue box. Despite an average markup of 57% in prices, the luxury retailer’s earnings have increased steadily since 2007.
Rising discretionary income
Tiffany’s earnings gain will likely be even stronger in 2014 as the U.S. economy strengthens and more people find jobs. Jewelry industry revenue, consumer confidence and the number of households earning more than $100,000 will all rise in 2014, along with discretionary income.
Tiffany’s will certainly be a beneficiary. But international markets are also key to Tiffany’s success. Sales in the Asia-Pacific region increased 18% in 2013 from a year ago and same-store sales there rose 11% over the same time frame—due to rising demand in China and India.
India is currently the world’s largest market for jewelry, creating half of global demand for gold. The Asian country was also named the key driver of the global market for jewelry in 2014—with a projected compounded annual growth rate of nearly 15%—by a Research and Markets report called “Gems and Jewelry Market in India 2012-2016.”
According to Reuters, China’s market for jewelry is growing more quickly than any other market of this type on earth. In fact, the demand for gold jewelry from China and India should be roughly four or five times as large as the purchases made in the U.S. Platinum demand from China is also expected to be high.
Blue Nile has carved out a niche on the Internet, attracting the attention of tech-savvy consumers who aren’t afraid to make big-ticket purchases online. Operating exclusively on the web, its $519 million market cap pales in comparison to Tiffany’s $10.2 billion.
The Seattle company was established in 1999 as an online retailer of fine jewelry, specializing in diamonds. It went public in 2004 at $20.50 per share and the stock now stands at nearly double its IPO price.
Blue Nile has attained $400 million in annual sales, just a tenth this size of Tiffany’s $3.79 billion. However, with a low margin of 18.8%, Blue Nile may eventually force Tiffany into lowering prices and profits.
In the short term, the competition among the stalwarts of retail jewelry will remain healthy. Each has its strengths and appeals to specifics buyers. All of them will benefit from a strengthening economy and increased demand from China and India. Plus, if gold prices continue to fall, investors—not necessarily lovers of fine jewelry—will come calling to take advantage of lower prices.
If anything, the merger between Signet and Zales may give the remaining retailers reason to tweak their business models or try to appeal to even broader customer bases. Or, it might even get Tiffany and Blue Nile thinking about tying the knot, too.