Professional Jeweler Archive: Diamonds as Dinosaurs?

May 2000

Managing/The Future

Diamonds as Dinosaurs?

Diamonds could go the way of silver in the jewelry stores of tomorrow if they’re allowed to become commodities

What does the future hold for the jewelry business, especially diamonds? It’s a question on every retailer’s mind. The jewelry business is much more than diamonds, of course, so it may be time to consider how you can remain profitable if all diamonds become commodities.

Diamond’s Traditional Role

De Beers and the Diamond Promotion Service teach us selling jewelry is all about communicating a feeling. Diane Warga-Arias, speaking for the DPS, teaches that when people buy an engagement ring, they want “The Experience.”

The Experience is what you provide when you help a couple select the best symbol of their relationship. For the woman, a diamond validates she’s so important to the man that nothing less will do. For the man, it validates he can afford this symbol and that he’s attractive enough to get and keep her. It’s a symbol of their belief in love, lust and permanence.

Jeweler’s Role

U.S. jewelers play a key role in ensuring couples have The Experience and continue to want diamonds. In fact, it’s a major reason why we sell the most diamonds worldwide. I once asked a De Beers spokeswoman why the company continues to spend so much on advertising in the U.S. while sometimes abandoning other markets. My interpretation of her answer is that U.S. jewelers support De Beers’ advertising with our own efforts while jewelers in some other markets do not.

To put it another way: De Beers is so well-known in the U.S. because of the synergy between its advertising and jewelers’ own promotional efforts. These efforts by individual jewelers used to be well worth it when diamond margins were healthy. But if diamonds continue to become commodities, will it still be worth it?

Lessons of Silver

U.S. jewelers used to have the same synergy with the great silver companies as they now have with De Beers. In fact, silver service and china once accounted for 50% of jewelers’ merchandise mix. Then along came the Hunt brothers, who cornered the silver market in the 1970s. Silver prices rose from the single digits to $50 per ounce, and sterling table service started a quick demise as a result – or so most jewelers think.

I suggest a different scenario. By the time silver price speculation began, silver table service was no longer fashionable. Price speculation merely put the last of many nails in the coffin. What caused silverware to go out of fashion? Silverware is one of the true luxuries, and true luxuries are always in style! It’s true more informal eating arrangements became popular. But my research indicates there also was a paradigm shift that changed the idea of what was fashionable and what to buy in a jewelry store.

The paradigm shift: silver companies discovered mass merchandisers. Jewelers, meanwhile, watched the mass merchandisers mark up silver just to mark it down to “sale” prices that were the same as jewelers’ regular prices. The mass merchandisers’ “sales” eventually attracted most silver customers, so jewelers closed out their silver departments and put that money into jewelry and watches. Son of a gun, they started to make more money! They also started to discourage the purchase of silver as a luxury product. The result? They created the notion silver isn’t fashionable.

Jeweler as Adviser

Jewelers are in a position that most mass merchandisers can’t match. Jewelers see their customers in church or temple, support their Little League teams, patronize their businesses and are trusted members of their communities. If jewelers have done their jobs correctly, they occupy positions as trusted advisers.

I realized how important that position can be when we carried Concord watches. A potential watch sale came down to one question: “Bob, is this a good watch?” Concord ran an unprecedented ad campaign that year, but my customer had missed it. The sale happened because of my validation when I said “It’s not a good watch, it’s a great watch!”

Diamonds as Dinosaurs?

How does all this relate to diamonds? If Martin Rapaport is correct, the Internet is causing another paradigm shift in the consumer purchase patterns. If the Internet becomes the favored way for suppliers to sell diamonds to consumers, several things are likely to happen:

  • Internet retailers will increase the impression diamonds are a commodity because they can be bought sight unseen with documentation.
  • Depressed diamond margins will get even tighter as competition increases to sell at the lowest price.
  • With a tight margin, a seller is less inclined to hold inventory and more likely to use memo. Memo will tighten margins even more.
  • If diamond profitability is squeezed further for bricks-and-mortar jewelers, they’ll likely recommend products that make more money when trusted customers seek advice.

What You Can Do

If these scenarios occur and diamonds are stocked and advertised less, their visibility will decrease against the plethora of other luxury products that vie for consumers’ attention. Even the millions of dollars De Beers and others pour into advertising couldn’t come close to overcoming the situation if jewelers turn against diamonds.

Assume for a moment the commodity mentality now governs the diamond business. A customer says he want to buy a special anniversary gift and he’s thinking of spending about $5,000 on a 1-ct. diamond, not including the mounting.

Further assume he’s sitting in front of a diamond with a $5,200 price tag and next to the diamond is a gorgeous 1.3-ct. ruby that is $5,250.

The diamond will produce a gross margin of $520 minus your overhead, advertising, shipping and certificate expenses, for a net of about $100 before tax. The ruby will produce $2,000 gross margin with similar costs, for a net of $1,500.

“You know, Herb, that’s one of the most beautiful diamonds you could buy for Harriet,” you tell him. “There probably aren’t more than 10,000 or 20,000 better-looking 1-ct. diamonds in the world. But just about all Harriet’s girlfriends have a diamond, and this is a really special anniversary. Herb, may I show you a couple of pictures?

“See this Burmese fellow?” you continue. “He’s a ruby miner in the Mogok valley of Burma. He worked unbelievably hard, got lucky and found the ruby crystal shown in this other picture. My friend, Smedley Smith, one of the greatest living gem traders, bought the crystal and cut a great-looking ruby. I bought the ruby and took it to another friend, Larry Lapidary, who’s the finest ruby cutter in the world. He and I studied the ruby and argued about it for six weeks before we came up with a plan to recut it. Larry went to work and look at this – doesn’t the color of this ruby make your tummy warm?

“You know what’s even better? This ruby is only $50 more than that diamond, and none of Harriet’s friends will have anything this special. This really tells her how much you love her.”

Which one will he buy?

– by Robert A. Lynn, Lynn’s Jewelry, Ventura, CA

Bob Lynn is vice president of Lynn’s Manufacturing Inc., a jewelry company that retails (Lynn’s Jewelry), manufactures, designs, imports, exports, runs its own tool-and-die shop, teaches seminars and provides consulting services. He’s an American Gem Society Certified Gemologist-Appraiser and sits on a number of committees and boards in the jewelry industry. The retail operation was founded in 1970 with $20 worth of sheet silver and a borrowed propane torch. It now employs 11 people and boasts an annual sales volume in the millions of dollars.

Copyright © 2001 by Bond Communications