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What’s in the Cards for Credit?

The old no-money-down, take-two-years-to-pay model of jewelry consumption financing is likely a thing of the past. What will debt-dependent jewelers do to coax spending in a credit-starved economy?

By Jordan Clary

Jewelry shops, like retail stores everywhere, are scrambling to come to terms with the plunging economy and slackening sales. How will the jewelry industry rise to the challenges the current economy presents?

One way will very likely be a change in credit practices. The jewelry industry has been strongly dependent on the use of credit cards with introductory offers of little or no interest for the first year or two, after which time, a high interest rate is tacked on. Jim Bilotta, a former chief financial officer in the banking business says this type of credit is “definitely threatened.” There will be fewer offers for these types of cards and the spending limits may very likely be decreased. He also believes that credit cards already in existence may be adjusted according to a person’s spending habits, with previously high limits lowered significantly.

“Most of the wealth perception was based on housing,” says Bilotta, referring to the variable-interest loans on homes given to people who were not going to be able to afford them once the interest rose. “People were buying large homes which made them feel affluent. In turn, they spent more on luxury items like jewelry and travel,” he says. Now banks have gone back to pre-binge lending habits and people are tightening their pocketbooks. “Credit was too easy and it became abused,” says Bilotta. “I think we’re moving into a more realistic lending scenario where a portion may be lent, but not the whole amount.”

As foreclosures mount and real estate values implode, another deep well of credit—home equity—dries up. “All the credit geysers stop at once,” says Jeremy Woods, a Philadelphia-based financial planner.

The Domino Effect

With all the usual spigots for credit turned off completely or down to a drip, the economy soon goes into massive recession. Work starts to become as scarce as credit. “With unemployment on the rise and no ability to pay off credit card debt with mortgage refinancing,” says Robert Jones, a Washington D.C. business analyst and expert, “I would expect a steep rise in credit card defaults and caution on the part of the companies to issue new cards or raise limits.”

Of course, many banks don’t even have the luxury of choking off credit. Some of the country’s largest financial institutions have gone under. Houses around the country go into foreclosure daily while their owners move into smaller homes in less prosperous neighborhoods. As major stores go out of business, more and more people are out of work. We’re just now beginning to feel the effects of the surge of job losses throughout the country, according to Bilotta, who says it’s going to get worse before it gets better.

A Great Chain of Distress

Bilotta’s prediction is especially true for the jewelry industry which without fail in times of recession is the first to hurt and the last to heal. Mike Romanella of Commercial Mineral Company, Inc. of Scottsdale, Arizona, says they are seeing the effects of the economic slump “across the board” from their suppliers in Bangkok to companies needing to lay off employees. Commercial Mineral Company distributes Arizona amethyst direct from Arizona’s famous Four Peaks Mine. It’s a niche market that has generally been fairly stable, but Romanella says there has been a crimp in those sales this year.

Consumers are responding to sudden, slap-in-the-face economic crisis in various ways. While many people are walking around in a state of mild shock, others seem to be living in denial. Zillow, a Seattle-based company that provides data on home values, recently released the results of a study conducted during the worst week of the stock market (October 7-9) that indicated that nearly half of U.S. homeowners think their homes are essentially worth the same amount as a year ago, a perception that Mortgage News Daily calls “wildly out of touch with reality.”

For those who are more in touch with reality, organizations like Debtor’s Anonymous (contact information below) are seeing an increase in numbers. “From what I’m hearing from other members, there are a number of new people coming in because of credit card debt,” says “Kathy,” DA Media Contact. “I see and hear a lot of fear, but people are also hopeful. Our creed is based on the idea that you didn’t get into this spot overnight, and you’re not going to get out of it overnight. This holds true for the country as well.”

This raises serious questions for the future. Will people receiving treatment for debt addiction and training in credit abstinence cling to their new spending discipline when normalcy returns? Will going cold turkey on overspending today lead to permanent debt withdrawal tomorrow?

The New Spending Creeds

It isn’t just the spending habits of the middle class that will change. After the Madoff scandal, involving a $50 billion Ponzi scheme, even the rich and super-rich are vulnerable. Some people believe that spending habits will change for them, too, because it can no longer be assumed they have been less affected by the plummeting economy than the everyday consumer.

Besides, as dedicated followers of fashion, the rich may observe the new protocols of conspicuous frugality. “After AIG was taken over by the government, there was a huge public outcry over the decadence of the luxury vacations the executives took,” says Karen Steiner, a financial consultant in San Diego. “I think it’s going to go out of vogue for rich people to flaunt their wealth. People will be buying less and buying more discriminately. We may be seeing the end of bling fashion.”

To Fear or Not to Fear

Not everyone is in a state of panic over the economy. Some advise staying calm and waiting for the economy to eventually swing back.

Dr. James Wilcox of the Haas School of Business at U.C. Berkeley contrasts the current U.S. economy with Japan’s during the 1990s in what became known as Japan’s “lost decade.” In a working paper, he writes that, although there are similarities between today’s U.S. housing and financial markets and Japan at that time, “The odds are extremely low that the U.S. will suffer a ‘lost decade’ of low growth, high unemployment, banking and business weakness, and ineffective public policies as Japan did in the 1990s.” He states that the “consensus of forecasters is that, despite the recent financial disruptions, the U.S. economy will have slow growth over 2008 and faster growth in 2009 and thereafter.”

Not everyone is doing poorly either. Even in the jewelry and gemstone business some companies are keeping their heads above water. Monty Nichols, president of Sleeping Beauty Turquoise Mine in Globe, Arizona, says that he still has a strong European market for his turquoise and “is selling everything that we pull out.”

For retail shops, creative marketing is more essential than ever. One recent online article by marketing expert Robb Weinberg, aka Mr. Marketing, says that marketing is even more important in tough times than tranquil ones. He says that, in spite of the hard economic climate, “Some businesses are doing well.” Those doing well tend to share such traits as strong market presence, emphasis on value and over-delivering on services. In these crucial regards, independent jewelry stores with faithful local followings may have an edge over chain stores.

Stephenie Bjorkman, vice president of Sami Fine Jewelry, a jewelry store that carries the work of Arizona gem cutters and local jewelry artisans, doesn’t pay attention to the fluctuating economy and doesn’t allow her staff to discuss it with customers. “We must get asked 20 times a day how we’re doing,” she says. “If you act like the world is falling apart around you, that’s the world you create for your customers. You can also create the opposite. It’s the law of attraction.” Bjorkman’s creative advertising has helped to give Sami a strong community presence. A recent Ladies Night had patrons lined up outside, and during a gold-buying event, the staff dressed up as pirates with the logo “We want your booty.” Bjorkman says that even if the customers ultimately decided not to sell, “No one was ever offended. Everyone left having fun.”

Life in the Mine’s Eye

Not all is storm and stress. Those who work closest to sources of gems and minerals seem the most philosophically composed. Every January, the small town of Quartzite, Arizona fills up with buyers and sellers in a kind of “pre-Tucson” event. In mid-November, however, the town is quiet, but already a few vendors have already started moving in to augment business done by the handful of local shops that are open all year. “It’s going to be a great year. The best year ever,” enthuses Steve Hardies whose Hardies Bead and Jewelry shop is one of the regular establishments. He states that election years, especially election years that bring in a new president, are always economically hard. Like Bjorkman, Hardies mentions the law of attraction and advises against watching too much news on TV. “It’s full of negativity,” he says which influences how we think.

Isabella Roth who works at T-Rocks, which specializes in rough and slab, agrees that the news creates its own downward spiral. She says that a lot of people are talking about what kind of draw the shows will bring in. “Who knows? It may be quiet,” she says. “But then again, maybe not. Whatever happens, the ancient rocks I sell remind me that none of this lasts anyway.”

Helpful Links:

Hyperlink for James Wilcox working paper, Why the US Won't Have a Lost Decade

Debtors Anonymous
PO Box 920888
Needham, MA 02492-0009
800-421-2383 - US Only
781-453-2743-outside U.S.

Mr. Marketing Newsletter article, “It’s not all Doom and Gloom.”

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