Retailers Must Be Willing to Foot the Bill

The reoccurring debates of the past few years over the evolution of the Kimberley Process (KP) have tended to revolve around a limited number of points, and have somehow always resulted in stagnation. Mistakenly, many view this debate as one about ethics. It's not, this is a debate about cost. Repeatedly, the one issue that really kills the conversation is the economic one.

The debates between the sides are heated and at times less than cordial, to say the least. The components and drivers for changes to KP include an understanding that the framework of KP that addresses conflict only as rebels vs. legal governments is outdated, and does not address current human rights concerns as well as a political decision by the U.S. to use economic sanctions against Zimbabwe.

There is also a demand, mostly by the U.S., to change KP because of the aforementioned issues, which is met with resistance to change by African countries and trading centers.

KP is obviously a success. The global tracking of rough diamonds has contributed to stifling wars and minimizing illegal use of diamonds in other ways. Also obvious is the need to adapt the process to today's challenges. And here is where the problems begin.

The leadership of most diamond producing African countries does not find it obvious that change is needed. Those that don’t want to talk about change welcomed the transfer of the KP chairmanship to South Africa.

In India, Belgium and Israel, there is interest in change, and many industry leaders say they will cooperate with an initiative – that won't harm them. Is this an obstacle?

Pornography is a Matter of Geography
In a conversation I had last week with an important leader of the U.S. industry, the differences between the centers was apparent almost immediately. He spoke with passion about his need to comply with regulations that prohibit imports of Marange (Zimbabwe) goods into the U.S. He was concerned those goods were entering the U.S. as polished diamonds set in jewelry and that these goods are not tracked because current systems are limited solely to rough diamonds.

From his (American) perspective, KP falls short. When I brought up how KP looks from the trading/manufacturing centers’ perspective, there was a brief moment of silence. KP is very present in the life of a manufacturer who buys, imports and exports rough, unlike a jeweler in Ohio ‘who does not deal with rough diamonds at all.

The manufacturer based in India does not understand why KP is deemed ineffective, the American retailer does not understand why there is resistance to preventing involvement in possible human rights violations, and the African government official does not like the West telling him his or her goods are maybe not good enough (and feels, once again, under a familiar and distinctly unpleasant economic colonialist thumb!).

A situation that looks just fine in one place comes across very differently in another. What is legitimate behavior to one is nothing less than vile, exploitive and immoral to another; porn is a matter of geography.

Who Will Foot the Bill?
There is another difference between manufacturers and retailers – their margins: Manufacturers' gross margins are usually between three and four percent, retailers' gross margins are double digit, with some as low as 15 percent, but independent specialty jewelers average about 49 percent, and at majors like Sterling and Zale, gross margin is more than 50 percent.

The various proposals to update KP require a mechanism for tracking rough into polished and further downstream. Some point out that De Beers does that successfully, so why not everyone else?

First, De Beers is not a manufacturer, it tracks rough from its own mines, and then does the complete opposite of tracking every stone individually – it mixes the goods from all its mines together. After sorting them by size, color and model, no one can pick a diamond out of a DTC box and say with one hundred percent certainty where that diamond was mined.

Moreover, polished diamond traders spend their days mixing and sorting goods. To put in place a system to track every 0.1 carat stone (a diamond that weighs 0.000705479239 ounces), not to mention the endless quantity of 0.01-carat diamonds, would have a large and possibly prohibitive economic toll. This is at the heart of traders' resistance.

Manufacturers in every sector are always the first squeezed. To win their cooperation, they do not need to be pounded about morals and ethics – that is more than a little condescending. They need to be convinced that a tracking system won't drive them out of business.

This begs the question – if everyone agrees on the ethics aspect, and the issue boils down to cost – who should foot the bill? The manufacturer who is already operating under razor thin margins - or should it be the retailer who is demanding the changes and has a 50 percent margin?

The U.S. leader, very familiar with U.S. retailers, agreed that retailers, including the publicly-traded ones, would not be willing to pay more for their diamonds. They will not be willing to pay for a system they demand be put in place, and that attitude is simply wrong. To generate and protect their business, they need to pay – just as they pay for advertising and anything else that comes under the banner of the “cost of doing business.”

Failure is Not a Matter of Geography
If consumers walk away from diamonds because they do not know if they meet their ethical standards, the loss will not be limited to retailers or manufacturers, all will share it.

If we want to improve the salability of diamonds by making them an example of how something beautiful also helps the downtrodden in Africa, it has to make economic sense. It does not work for one group to spring a system on another group and then refuse to take responsibility.

If the ongoing debate can teach us anything, it is that the need to talk – internally, as well as externally – is necessary. If that means some will need to compromise, so be it. The goal is worthy; let's just ensure that the road to it won't be shameful.

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