Professional Jeweler Archive: Distribution Dilemma

August 2002

Diamonds/News


Distribution Dilemma

Changes in how diamonds reach you will affect pricing


The De Beers monopoly, when it was in full force, had an interesting effect in limiting intermediate profits. Because De Beers managed inventories essentially to eliminate price declines, cutting and distribution businesses could grow with relatively low mark-ups.

While it didn’t always work this way – and a speculative bubble disaster of the early 1980s was the perfect example – a De Beers sightholder could convert rough 10 times a year, move the polished into the market – either laterally or downstream – and make a nice profit even at low mark-ups. De Beers was there to protect his back at the same time it realized the bulk of the profits down to the retail level. De Beers also encouraged competition among sightholders, which kept retail prices relatively low and expanded the diamond flow downstream.

Retailers maintained good mark-ups primarily as a result of reasonably consistent pricing from upstream and for the lack of an effective way for consumers to shop prices.

Change Happens

The past 15 years have seen a steady erosion of this distribution model. The reasons: partly because of the rise of grading reports and the general acceptance of the Rapaport price list and partly because of the growth of alternative sources of rough diamonds. These changes became most apparent with the rising chorus of complaints from the cutting industry, and especially sightholders, that they were no longer able to make a profit. Why? New open-market sources, first in Australia then in leakages from Russia and Angola, pumped enough rough into the market that retailers could buy at prices below those from the De Beers channel.

This forced sightholders to sell diamonds at little or no markup just to maintain turnover. Most of them expanded open-market buying and, in some cases, made far better profits than with De Beers allocations. De Beers sopped up a lot of open-market goods. But that only worked to raise rough prices at a time when polished prices couldn’t be raised easily – as in the late 1980s and the recession of the early 1990s.

All of this, plus the steady growth of diamond exploration and mining by competitors, forced De Beers to accept that it could no longer monopolize the market. This led the company to restructure in the past few years. The days of single-channel marketing are passing as we watch.

End of a Monopoly

De Beers was competitive with open-market prices two or three years ago, but demand is lower now and the company is not able, or willing, to fully adjust to that reality. De Beers did adjust prices early in the year, but only after it was clear for months that its goods were relatively overpriced.

The restructuring left De Beers a private company with considerable debt. It can’t afford to buy in the open market, at least not the way it used to. Nor is that even feasible anymore. De Beers buys to meet its needs. Its main objective remains to reduce and manage inventory to meet its sightholders’ needs and to reduce debt incurred in taking the company private.

The only old tool left for De Beers is to reduce the size of sights (where it allocates diamonds to clients) to tighten the market and buoy prices. Because it still controls about 60% of rough distribution, this tool has some real effect.

New Volatility

As diamonds become more of a commodity that responds to market conditions, prices will be more volatile. Businesses will try to protect themselves from this higher risk of price increases and decreases by raising margins, but many companies fear facing this new truth.
The result may be slimmer inventories and fewer choices for consumers. This also will reduce the number of companies in the cutting and distribution business and may create greater urgency for the trade to distance itself from commodity-like activities, such as heavy reliance on the promotion of Ideal cuts. Marketing will become more product-oriented.

Is a Diamond Forever?

Good arguments can be made both ways. The attraction and desirability of diamonds has been with us for centuries and is likely to continue. The image of diamonds has been well-nurtured and has survived negative publicity from time to time, including conflict diamonds. But other issues lurk. On a simple level, for example, De Beers could decide it has to reduce advertising expenditures.

Synthetics may be another threat. There’s a distinct possibility the capacity to produce synthetics may expand, with enormous repercussions as some mines become uneconomical. The beauty of this magnificent mineral will remain. But execution will be more important. People are willing to spend more for the steel in a Mercedes, even more for the steel in a 1923 Stutz Bearcat, than for the steel in a Yugo. So it may be with well-executed diamond jewelry.

Changes for Retailers

Perhaps most important, as far as the diamond business is concerned, will be retail’s positioning in the pipeline. We’ve already seen Tiffany take an equity position in a Canadian mine, assuring itself of a flow of diamonds. De Beers is forcing the issue of downstream alliances and marketing with its sightholders; many have already aligned themselves with specific retailers and/or jewelry manufacturers.

Diamonds will have less mobility laterally as everyone reaches for bigger margins from consumers. So retailers of all stripes will need to protect their competitiveness and access to sources. They won’t have to be married to one source. But the sourcing of diamonds, especially larger ones, may well come from only a few companies. That will make that retailer important to a source, and that may make a big difference in boom years when supplies become tighter.

– by Ben Janowski

This article is excerpted from a speech Ben Janowski gave in February at the Tucson Diamond Symposium, Tucson Diamond Show. Janowski has been a business, marketing and product-development consultant for domestic and foreign companies in the gem and jewelry industry for 10 years, is a frequent contributor to trade magazines and speaks at many industry events. The author previously spent 20 years in management with large fine jewelry manufacturers in the U.S. Reach him at (212) 288-1155, ben@diavis.com.

Copyright © 2002 by Bond Communications