As some retailers fall out of the market, the stalwarts wait contentedly for the next sales surge.

Will the retail jewelry industry retain its luster in 1998? Has the consolidation wave that has engulfed the industry over the past few years run its course, or will even more jewelry companies enter a new section in their corporate histories -- Chapter 11?

"The outlook continues to be very positive for jewelry's trends," says Harry Ikenson, analyst for Rodman & Renshaw, New York. "It's largely driven by demographic factors. The consumer expenditure age statistical information from the government clearly shows the two highest spending age groups are from 45 to 54 years old and 55 to 64. Baby boomers have entered the market and are moving to the highest expenditure per category."

Ikenson notes that the jewelry industry lost much of its sparkle during the last recession, but the situation has changed. "Generally, the strong players have gotten stronger and improved their management techniques with good demographics," he says.

The 'must have' factor There are many factors poised to affect jewelry sales negatively -- analysts cite changes in local economies, corporate downsizing, interest rates, consumer debt, the stock market and even the weather. Nevertheless, the jewelry industry is enjoying growth, boosted by a few positive consumer trends.

"The jewelry industry has not been immune to the vicissitudes of consumer tastes and fashions," says David Leibowitz, managing director for New York-based Burnham Securities. "When a new trend does develop, such as tennis bracelets some time back, the demand factor goes through the roof, and merchants in the retail fraternity reap the rewards," he explains. "Right now, for instance, the fashion watch business is enjoying a renaissance."

"People in the industry are looking for the next tennis bracelet," says Todd Wolleman, vice president of the American Gem Trade Association and president of Leo Wolleman Inc., New York, a wholesale jeweler. "Have they found it? No, not yet. But jewelry stores are trying to develop new products -- and they're still selling a lot of tennis bracelets."

Although jewelers are searching for the next "must have" product, their sales have solidified around traditional items such as gold, platinum and pearls, which are enjoying renewed popularity. "With gold at a low [price] level, it will have a meritorious impact on the industry," Leibowitz says.

Platinum is very hot, Wolleman adds, "because it's extremely durable and holds its shine and luster for a lifetime. Consumers get lot of value for the money." Furthermore, he says, diamonds remain a girl's -- and the jewelry industry's -- best friend, thanks in part to heavy advertising by DeBeers, the diamond conglomerate.

"Today the consumer wants something that has some investment appeal, some potential to appreciate in value in the longer term, rather than just buying a bracelet," explains Michael Exstein, retail analyst for CS First Boston in New York. "Still, the industry has basically had a rapid run, a combination of the wealth effect and better execution by many of the players."

Crowned jewelers During the last three to four years, the retail jewelry market has changed dramatically. "The jewelry industry has gone through some tough times with bankruptcies and some others in trouble," says Kenneth Gassman, an industry analyst with Davenport & Co., Richmond, Va. "Now what we're seeing over the last couple of years is the jewelry industry's sales and profits come back fairly sharply."

The result, he adds, is that there are fewer -- and stronger -- players. "Companies have done well because they've reorganized and are becoming more focused on mall-based business," he says. "Zale is strong; Reid's and Friedman's are doing okay."

Irving, Texas-based Zale Corp. is "the biggest player in the industry," says Exstein, noting that the company has transformed since its 1995 bankruptcy. The revitalized company emphasizes back-to-basics retailing, catering to customer needs, offering quality merchandise at affordable prices and creating effective marketing, he says.

The company has fine tuned its operations, analysts agree. It has focused its retail efforts on a core of "must have" best sellers -- dubbed the "Key 100" -- including tennis bracelets, diamond anniversary rings, basic solitaires and stud earrings. The company's strategy has changed from "What does this cost me, and how much margin can I get" to "What does the customer want, and what will he pay."

"Zale is intent on leveraging its leading position, setting the tone for others to compete with," Exstein says. "They're the ones who decided on more national advertising, and everyone else rolled in. They had an aggressive gift with purchase program. They've cut back on the use of financing as a driver to business and tried to emphasize content and price points."

Just as Exstein names Zale as the benchmark within its price point, Leibowitz and Gassman share a positive outlook for the venerable Tiffany & Co. "Tiffany has been outstripping the competition," says Gassman, noting that the retailer's earnings are up sharply.

This year, Tiffany & Co.'s first quarter profits surged 75 percent; sales advanced 9 percent; and comparable store sales climbed 7 percent. Strong sales, says Gassman, are "reflective of the upscale customer who is less affected by economic cycles."

"Upscale labels are very important right now, and that goes to branded merchandise as well," says Leibowitz. "Certainly there are a large number of consumers, in many instances foreign tourists, who prefer to shop at upscale establishments. There is no reason to suspect that will stop. The only caution is the strength of the dollar against specific currencies and whether it will have a deleterious effect on some foreign consumption."

A tarnished few Although analysts appear to be confident about the retail jewelry outlook and are enthusiastic about the market's top performers, they are quick to note that there remain a number of jewelers that are struggling. "Barry's Jewelers is having its problems," Gassman says. "Little Switzerland, which has lagged the rest of the industry, is turning around -- sales are up, and it's showing a smaller loss -- but it's still suffering."

Barry's Jewelers, based in Monrovia, Calif., filed for Chapter 11 protection last May (the second such filing for the company in five years). For the first half of fiscal 1997, the company reported a net loss of $12.4 mill ion and a decline in comparable store sales of almost 11 percent. The company attributed the results to tighter credit requirements, lower than expected unit sales and an inventory imbalance.

"It may not be endemic just to the jewelry industry, but there are a number of companies in the field that are perceived as being a bit overextended, where financing is a bit tight, and this is probably part of the reason the trend toward consolidation is accelerating," says Leibowitz. "Many companies in the trade have not been unaware of Chapter 11."

Whether because of bankruptcies or well-conceived growth plans, industry consolidation is expected to continue within the jewelry industry, in both retail and manufac- turing. "One suspects that if current trends continue over the next 18 to 36 months, there will be a meaningful drop in the number of retailers and the consolidation among manufacturers," Leibowitz notes.

Analysts also predict that some mom-and-pop jewelers will fall out. "The major jewelry chains can go to India or Israel or whatever country they want to buy their stones directly," says Gassman. "Mom-and-pop dealers are going to get squeezed."

Squeezed, yes, but endangered? No, according to Wolleman. "The demise of the Best Products of the world has created an opportunity for mom-and-pop stores to be revitalized," he says. "And I think the industry trend is for added value at the point of sale. People want to deal with a professional jeweler on the other side of counter. Clients want to have an explanation along with their purchase versus buying from a warehouse club."

Outside influences As existing players fight for position within the retail jewelry industry, they can expect to be joined by an influx of international companies, says Wolleman. "Multi-national firms are trying to cut out the historic middle men," he notes.

Home shopping may affect market share as well, says Leibowitz, adding that the impact is not significant now. "At this juncture, the bulk of sales from television are lower priced items, frequently with non-precious gemstones and a very large amount of synthetic stuff, such as zirconia," he explains. "Going forward, if demand continues to hold, [the merchandise] could change. The concern, though, is quality of stones; it's hard to sell a diamond [to someone who is not] actually seeing it."

Finally, says Gassman, consumer debt could play a role in retail jewelers' performances. "Over the past few months, we've seen same store sales soften," he says, attributing the dip to the fact that jewelry is often a financed purchase. "With consumer debt at very high levels, consumers appear unwilling to take on any new debt," he says.

Despite some decline in jewelry sales, Gassman and others remain optimistic about the segment. Going into 1998, Gassman expects a continuation of the current economic climate of moderate growth, low inflation and stable interest rates. On the trail of the next big seller, jewelers have time to enjoy the spoils of consumer confidence.

Mike Sheridan is a Houston-based freelance writer.