Indecent Proposals?

Last week’s Memo elicited many reactions. One U.S. industry player pointed out that the “impact of the Internet is not limited to the market share that it captures from the traditional retail outlets or the business it takes away from the wholesalers. It's not the loss of a couple of percentage points of market share that is the real challenge. Of much greater significance is the effect on the existing price structure in the diamond pipeline.” Though we did note that the consumer prices paid for diamonds have remained constant for quite a while and that higher wholesale prices have been neutralized by reduced retail margins, the reactions we received suggest we didn’t “go far enough”. Says the very astute U.S. diamantaire: “You rightly point out that the commoditization of diamonds that was made possible by standardized terminology and certification has also made it possible for consumers, and indeed retailers, to instantaneously ferret out the absolute lowest wholesale price of any diamond. In this environment, it's not only the wholesalers who are in peril, but also retailers, who will find it difficult to justify almost any kind of margin to their customers.

“The net effect is going to be severe resistance to maintaining even current pricing levels at the retail level, never mind increases to reflect the higher cost of rough,” observes the U.S. player. “This resistance has been keenly felt in these last six months when rough price increases were almost impossible to pass along the pipeline and were essentially absorbed by the trade. Ironically, the very same Internet that has allowed the retailer to squeeze the margins of wholesalers is now allowing the consumer to squeeze the margins of retailers. The only difference is that the retailer needs a much higher margin to exist.”

It is suggested that the time is rapidly approaching in which a retailer will not be able to sell a diamond above the wholesale price, since the consumer – getting more and more used to shopping around – will come to the retailer and say “I can get this stone for $X”. Will the retailer be able to sell such a stone at $X-plus? There is a much larger issue at stake here: retailers don’t only sell loose diamonds or diamond jewelry. They sell other jewelry, watches and ornaments – a range of other products made of precious metals or set with other precious or semi-precious stones. Traditionally, diamond jewelry sales rewarded the retailer with the higher (or highest) mark-ups and/or gross margins. If the Internet-wise consumer forces down the retail price of the diamond to a marginal margin, why should the retailer continue to bother? Will he not convince the consumer to buy a Rolex watch or a Swarovsky piece?

The U.S. letter writer disagreed with our assertion that providing meaningful added value will protect the wholesale sector. “I also don't think there's much salvation to be found by the bulk of our industry in the concepts of 'niche' and 'added value'. By definition, a niche can only be occupied by a small number of players and there just aren't enough of them to go around for the protection of most of the industry. And while you do point out that wholesale distributors add value by providing service, credit, etc, I am skeptical whether this is going to be enough to counter-balance the perception that they inject an unnecessary layer of added cost into the price structure. If you need an analogy, look at the electronics and computer industry where comparative pricing has become destructively hyper-competitive. The only thing keeping electronics retailers afloat is the constant development of newer technologies and newer models, which keeps the consumer guessing and helps prevent a totally transparent pricing structure. Needless to say, our industry deals in a static product and cannot hide behind constant new developments. Remember that diamonds are forever.”

And then my friend simultaneously hits the bottom and the bottom-line. “Unfortunately, if you follow these trends to their logical conclusion, a great many of the people in this industry, wholesalers and retailers alike, are destined for redundancy. Indeed, many of them no longer have a viable business but are hanging in there because they have nowhere else to go. If you need further proof of this rather grim prognosis, note how many principals of heretofore strong firms are hesitating to take their children into this business. This is not a sign of strength.”

A new year is before us – and so are the expectations of more rough diamond price increases in the making. If this happens, the main “victims” will probably be the retailers again – and their margins will be most under pressure. If we were living in a different day and age – something called the good old days – one might be tempted to suggest that diamond manufacturers and exporters from the cutting centers and the wholesalers overseas ought to reach some kind of “pax Americanus”, some kind of tacit understanding preventing the self-destructive practice of making ex-cutting center prices available to anyone “just for the asking”. But in our present environment this would be viewed as highly illegal collusive behavior – almost as an “indecent proposal”. That is also the very last thing we want to suggest.

I guess that this is one issue on which I can only conclude “time will tell’. Maybe diamantaires will end up selling only finished jewelry – and the diamond price may lose its separate identity. Maybe we are now in the final years of the manufacturing and trade in polished diamonds. This goes beyond issues like Supplier of Choice, etc. This is all about an industry re-inventing itself. This may be only one of the many challenges which lie ahead.

Happy New Year.