Martin Rapaport: One man’s destruction of our industry

Posing as a consumer, a dealer was able to buy a diamond from the Rapaport Corporation. But that’s only the beginning of the author’s criticism of one of the industry’s most controversial men.

By Neil D. Reiff -- JCK-Jewelers Circular Keystone, 7/1/1998

Why is the diamond industry beset by uncertainty and decay? One very important reason is the commoditization of diamonds. The beauty and romance once inherent in a diamond and in the diamond-buying experience have been replaced by the certification process and price lists. Another factor is the retailer’s willingness to sacrifice profit to make a sale. The retail price of a diamond has fallen to a level once considered wholesale, and in some cases even lower. It seems that in an effort to survive, the traditional levels of distribution – from De Beers down to the consumer – have collapsed.

For the past several years, many in our industry have placed blame on Martin Rapaport for this sorry state of things. His publication of the Rapaport Diamond Report, perhaps initiated as an attempt to accurately report and reflect the trading prices within the diamond market, has become the underlying basis of the market rather than a market monitor.

Does the Rapaport Diamond Report move with the market, or does the market move in response to it? I think the latter. No longer is the diamond market controlled by the forces of supply and demand, or by the guiding hand of De Beers’ Central Selling Organisation. It is instead within the control of a self-appointed czar.

Even more disturbing is the fact that consumers across the country, and perhaps around the world, are now armed with the Rapaport Diamond Report when they go out shopping for a diamond. No one wants to pay the list price. Just ask the local car dealer or appliance dealer. But at least they’re dealing with “retail” price lists or suggested list prices; in our industry, the wholesale price list has become the retail price list.

Whatever happened to keystone? The traditional retailer who once used a keystone or triple keystone markup has been forced to accept the difference between his “discount” and the Rapaport price as his profit. This, in many cases, represents a diminution of profit of 66.6% to the traditional keystone markup, and of 83.3% to the traditional triple keystone markup.

If you have any doubts about this equation, consider a hypothetical one-carat diamond that “lists” for $4,000 and is purchased by the retail jeweler for $3,000, or 25% off. By selling this diamond at the “list,” the jeweler is accepting a profit of $1,000, vs. $3,000 at keystone and $6,000 at triple keystone.

But more disturbing than the publication of his price list is Rapaport’s willingness to sell direct to the public at near-wholesale prices. I contacted the Rapaport Diamond Corporation as a consumer wanting to buy a diamond. (The phone number and e-mail address are listed in the Report.) The text of my April 24 e-mail correspondence was as follows:

“I would like to know what you have available in a 2.50 carat round diamond. I’m looking for “H” color – “VS2” clarity, preferably with a GIA certificate. I’ve gone shopping locally at the nearby malls and have been unable to find just what I’m looking for. I have been told they don’t have the size and quality that I want. Please let me know if you can help me, as I would like to make a purchase before May 15.

Thanking you in advance for your help,

Steven Markman [alias]

In sending this e-mail to the “Diamond Trading Desk” at diamonds.com, also known as the Internet Diamond Exchange, I had hoped my reference to the “nearby malls” would have alerted the folks at Rapaport to the likelihood that the e-mail had come from a consumer. I had hoped they would reply that they weren’t able to sell me a diamond and would instead refer me to a subscribing member of the Rapaport service.

But the reply, the next business day, was as follows:

“I have for you a round stone weighing 2.45 H VS2. The price is $7440-per carat. The stone is certified by the GIA with a very good make. Please let me know if you are interested in this diamond. Please supply me with your phone number, so that I can contact you on phone, or call me at 212-354-8575.”

Upon receiving my reply, I wanted to think that my diamond was not being sold by Rapaport Diamond Corporation but by someone whom they had referred my request to. I dialed the number, which was in fact Rapaport Diamond Corporation. They faxed me a copy of the GIA certificate along with a cover letter from Rapaport Diamond Corporation.

Later, I again reiterated that I was a retail consumer with questions about credit cards, guarantees, refunds, and so forth. It didn’t matter. But, on the other hand, the price quoted was about 10% higher than similar diamonds posted in the “Rapnet Diamonds for Sale” listing, so I assumed they welcomed my request as an opportunity to make more money on the diamond, although their offer was significantly below what the retail jeweler would consider retail. In fact, the offering price was 10% below the “new” retail, if we are to consider the published wholesale price list the new retail price.

I found the experience disturbing. It seemed like the final chapter in the demise of an industry.

A retail jeweler whose business failed once warned me that the death of our industry will come as a result of wholesalers selling directly to consumers. His point is valid for two reasons. One is that retail jewelers need retail consumers to survive. The other is that diamond cutters, dealers, and wholesalers, like me, need retail jewelers to survive.

Too much power in one man’s hands. There is no doubt that many people within our industry, including me, have in some way contributed to our current woes. But if our industry is to survive, we must restrain Martin Rapaport.

Many wholesalers and dealers are guilty of selling diamonds directly to consumers, and the Internet has changed and will continue to profoundly change the way diamonds are bought and sold. It is also true that competition is the essence of business and capitalism. But Martin Rapaport has been empowered by our colleagues with the recognition, power, and financial resources to destroy our industry, and he seems intent on doing so.

Rapaport has spoken of a future in which diamonds are traded like stocks on the NASDAQ. This is his ambition. Within this scenario, diamonds will pass through his brokerage operation from the manufacturing cutter to the retail consumer at what we now consider the wholesale price. This is in fact what I’ve documented here.

There can be only two beneficiaries of this kind of diamond exchange: the consumer and Rapaport. The ultimate consequence will be the loss of the industry as we know it today, for within this scenario there is no need and no place, and certainly no potential profit, for the retail jeweler.

For many years, our industry has supported and validated Rapaport by subscribing to his services, by respecting his price list, and by buying from and selling to his brokerage operations. He has been a spokesman, a leader, and a pioneer within our industry. But I ask: Is Rapaport leading us down the road we want to go, or is he leading us to our own destruction?

Neil D. Reiff is president of N.D. Reiff Company, Ltd., importers and manufacturers of diamond jewelry in Philadelphia.

Neil Reiff’s problem: He’s afraid of the future

When Neil Reiff’s letter criticizing Martin Rapaport arrived at JCK’s offices, we asked Rapaport to respond. Here’s what he wrote.

By Martin Raport

Neil Reiff’s letter raises a number of important market issues and includes a personal attack on my integrity and motives, claiming that I’m out to destroy the diamond industry. Before addressing the issues, I’ll respond to the personal aspects of Reiff’s letter and clarify current Rapaport policies regarding the sale of diamonds to consumers and the dissemination of price information.

First of all, I want to apologize for our trading department offering a stone to a private customer. Our policy is not to offer stones for sale to consumers. We made a mistake, and I have now issued firm, clear, and written instructions to all our staff to make sure that it never happens again.

Our policy is to refer consumers to retailers that are RapNet members, with priority given to firms that have a relationship with our trading department. We’re now in the process of establishing an exclusive priority network of retailers. These retailers will have preferential access both to diamonds from our supplier network and to consumers via referrals and our Consumer Information Center (CIC) on the Internet at www.diamonds.net. The CIC also maintains a free diamond forum open to the public and provides all retailers an opportunity to meet consumers visiting our site and develop business relations with them.

Giving consumers access to appraisers. Our policy is not to sell price sheets to consumers but rather to provide them with appraisal services and the detailed information they need to make informed decisions. We are also implementing a new program to provide consumers with access to a preferential list of qualified appraisers via the CIC, and we’ll be greatly expanding our own appraisal services department over the next year.

It pains me that so many otherwise honest people think nothing of providing their friends and customers with a copy of our price list. Please don’t do this. It’s ironic that while we don’t sell our price sheet to consumers, many dealers and retailers think nothing of making illegal copies for their customers and then complain that consumers have the list. If our price list has become the de facto retail price list for diamonds, it’s because retailers themselves are making it so.

It’s important to recognize the growing demand by consumers for verifiable third-party price information. However, we acknowledge the need for standardized price information to consumers and are carefully monitoring the proliferation of prices on the Internet. Firms are already providing price lists to consumers based on our price list and in some cases quoting prices below our levels. Furthermore, there’s an increasing tendency by retailers to refer to our price sheets in advertisements and in literature or books for consumers.

Given the fact that one of our core businesses is the development and provision of diamond price information, there’s absolutely no way we will abandon the consumer segment of the diamond price-information market. Therefore, it is highly likely that we’ll re-evaluate our policies with regard to the dissemination of price information to the public over the months ahead, with an eye to maintaining our role in this sector of the diamond industry. While we would prefer not to, we may very well offer price lists directly to consumers if the competitive nature of the information markets so requires.

Reiff’s charges. Frankly, it’s easy to understand Reiff’s grief. The diamond industry is undergoing a restructuring due to factors beyond his or our control. For example, the collapse of the Far East economies has created unprecedented competition in the American dealer markets as foreign diamond manufacturers crowd into the United States and undercut local diamond distributors. De Beers’ pricing and allocation policies are maintaining relatively high polished-diamond prices in spite of significantly weaker global demand, and consumers are using the Internet, certificates, and price sheets to obtain the best possible availability and price information. All of these factors are putting pressure on profit margins and destroying the traditional nature of the diamond business.

The fact is that our industry is adapting to a new market environment. While blaming me for difficult times may provide Reiff with a convenient scapegoat, it won’t change any of the disturbing underlying market conditions. Should I cease to exist, would the problems Reiff refers to go away? Would demand for price information go away? Would the trend toward commoditization and low-margin diamond trading on the Internet decline? Of course not. Some other firm would provide price information, and consumers would use it to restrict retailer profit margins.

Reiff’s first mistake is that he is confusing my cutting-edge reaction and adaptation to new market conditions with the underlying forces creating the changes. For example, just because we publish price sheets doesn’t mean we’ve created or even manage the demand for price information. The market forces creating that demand are beyond our control. More often than not, my firm is reacting to market opportunities rather than creating them. Sure, we create markets for diamonds on the Internet, but we don’t create the underlying demand for these markets. With or without us, eventually these markets will emerge. We are excellent at surfing the waves of change jarring our industry, but we don’t make the waves, we just ride them.

Reiff’s second mistake is that he’s afraid of the future and doesn’t quite understand how people make money in the diamond business. Just because the traditional distribution channels are under great pressure doesn’t mean that new channels with great profit potential aren’t developing. Just because the industry is changing doesn’t mean it’s being destroyed.

Commoditization is a good thing. Consider the commoditization issue. Profits on diamond sales can be broken down into two components. First, there’s the profit generated by adding value. Second, there’s the “blind-item” profit made because the customer doesn’t know the quality or the price of the diamond. Obviously, certificates and price sheets destroy “blind-item” profits. So why does the trade cert diamonds and use price sheets?

The problem with “blind-item” profits is that they undermine the foundation of the diamond business. An honest jeweler selling a diamond at a good price is faced with a competitor that lies to the consumer about quality and price. In a world without certs and price sheets, the biggest and best liar often gets the most business. In fact, the Gemological Institute of America was established to create a level playing field so that honest jewelers could defend themselves against misrepresentation by these unethical competitors. The trend toward commoditization isn’t something pushed on the industry by GIA or me; it’s a normal, positive reaction to the present needs of the marketplace.

Moreover, I strongly disagree that commoditization destroys the romance and beauty of a diamond. On the contrary, it enhances the value of a diamond by providing a high level of consumer confidence. Sure, this means firms that simply flip diamonds don’t make great profits, but why should they? The key to profits is the ability of the seller to add value.

Fortunately, there are many ways to add value, beauty, and romance to diamonds. Merchandising, select availability, customer service and education, jewelry design, and name-branding are some of the ways to add value and profits. Firms that add value to the diamonds they sell have nothing to fear from commoditization, certs, price sheets, or anything else.

All commoditization is doing is making the diamond markets more efficient. Traditional ways of making money based on market inefficiencies are disappearing. The only way to make money in the diamond market of the future will be to find new ways to add value. You must change to survive. Ironically, the Internet that Reiff is so afraid of probably represents one of the best new opportunities for making money and adding value to commoditized diamonds.

No one person sets diamond prices. Finally, regarding Reiff’s charges that the Rapaport price sheet leads markets: It’s important to understand that competition is the way of life in market-driven capitalistic societies. Diamond prices and profit levels are not set by any one person or firm but by real buyers in real markets reacting to supply and demand forces. Our price list is designed and used by the trade to provide an initial price from which buyers and sellers negotiate. The final transaction price is always the result of direct negotiations by buyers and sellers. The fact that diamonds are traded at varying discounts to our price list is proof that markets use the price list only as an indication and not as the absolute price. Sure, our price information affects the market, but everyone sets his own prices in his own markets at his own discount levels.

Reiff is totally out of line when he charges that I’m out to destroy the industry. On the contrary, I’m working night and day to create the diamond industry of the future. I love this industry and have invested my entire professional life in it. Through the past 25 years I’ve been guided by the principle that our industry is best served by an honest, open, free, and fair marketplace. I have done battle against those who sought to restrain trade and development because I believe that change brings progress and development created new opportunities. I have therefore devoted a part of my career to encourage our industry to understand, accept, and adapt to change rather than waste precious resources fighting progress. That is what leadership is all about.

Reiff, don’t be afraid of the future. Find new and better ways to add value to diamonds and you’ll prosper. The opportunities you seek are there, you simply have to find them. Remember this. Those that are afraid of the future most often have no place in it. Those that are not afraid of change and anticipate the future often end up owning it.

Martin Rapaport, based in New York, publishes a weekly guide to diamond prices and a monthly magazine, both of which are called Rapaport Diamond Report. Further readings on the issues discussed here can be found on his Internet site, www.diamonds.net.