Diamond Margins Growing Ever Tighter

It’s getting tougher to make a buck on a diamond. That’s not news to most jewelers. But a recent poll of JCK Retail Panel members shows just how tough.

Things are OK on loose and mounted diamonds that cost jewelers up to $1,000. Jewelers get a median keystone + 25 on these goods. But the markups fall rapidly as prices climb. By the time the cost hits five figures ($10,000), the markup has skidded to a median of 35%, with many jewelers making far less. Indeed, markups on loose stones range as low as 5%.

CHART #1

JEWELERS: MAKING LESS ON DIAMOND JEWELRY

Markups taken on diamond jewelry in 1991 and 1995 by JCK Retail Panelists

Jewelers’ cost Retail range 1991 Retail range 1995 Retail median 1991 Retail median 1995 % markup 1991 % markup 1995
$100 $165-$350 $119-$399 $250 $225 150.0% 125.0%
$200 330-600 219-1,100 475 450 137.5 125.0
$500 800-1,500 595-1,995 1,125 1,125 125.0 125.0
$1,000 1,500-3,000 1,200-3,000 2,100 2,250 110.0 125.0
$1,500 2,000-4,500 1,700-4,500 3,000 2,750 100.0 83.3
$3,000 3,800-8,400 3,500-7,500 5,700 5,250 90.0 75.0
$5,000 6,000-13,995 5,500-12,500 8,750 8,750 75.0 75.0
$7,500 8,400-17,500 8,500-19,750 12,000 10,625 60.0 41.7
$10,000 11,000-22,500 11,000-30,000 15,000 13,500 50.0 35.0

CHART #2

LOOSE DIAMONDS: TIGHTER MARGINS

Markups taken on loose diamonds in 1995 by JCK Retail Panelists

Jewelers’ cost Retail price range Retail median % markup
$100 $120-$399 $225 125.0%
$200 219-1,100 450 125.0
$500 595-1,690 1,125 125.0
$1,000 1,200-3,000 2,250 125.0
$1,500 1,700-4,500 2,625 75.0
$3,000 3,500-7,800 4,750 58.3
$5,000 5,500-10,250 7,250 45.0
$7,500 8,000-15,000 11,000 46.7
$10,000 10,500-20,000 13,500 35.0

These charts show how quickly profit margins tighten as diamond prices rise. JCK retail panelists say they can get a median 125% markup on goods that cost them up to $1,000. That’s generally down a bit from the margins reported four years ago for mounted goods (comparable figures for loose diamonds are not available). And the decline continues as costs rise. Thus jewelers now get a median markup of 75% on diamond jewelry costing $3,000 (down from 90% in 1991) and only 35% on diamond goods they bought for $10,000 (down from 50%).

A look at the 1995 price ranges also reveals some interesting patterns. On the low end, some jewelers are selling both mounted and loose diamonds at little over cost. On the high end, however, some are getting very healthy markups, indeed – in some cases even higher than were recorded in ’91.

DIAMOND MARGINS

The reason, of course, is competition. More than half (52%) of panelists say competition has affected margins for loose and mounted diamonds very much. Another 37% say there’s been some effect. The effect is strongest on the coasts. Thus 63% of panelists in the Northeast and 57% of those in the West say margins have been very much affected by competition, compared with only 48% in the Midwest and 44% in the South.

The type of competition may explain these differences. Overall, jewelers see other jewelers – especially independents – as their biggest rivals. But the diamond districts in New York and Los Angeles play a role on the coasts, as jewelers in the East and West rate upstairs diamond merchants and diamond dealers selling direct to consumers as major competitors.

Despite the fight for dollars, 12% of panelists still say diamond jewelry margins are very profitable and 63% call them reasonably profitable. Things are less rosy on the loose diamond side, where only 8% call margins very profitable and 54% reasonably profitable.

How are jewelers coping with sliding margins? They’ve tended to build diamond jewelry inventory, but cut their stock of loose stones. They are much more likely to use memo on loose goods, somewhat more likely to use it for diamond jewelry. And they’re becoming more selective, especially on jewelry.

While margins often are tight, diamonds still cost more than many customers expect. While half of panelists say their customers are reasonably aware of just how much diamond their money will buy, 39% say consumers are shocked at how much less than they expected it will buy. Only 11% say their customers are pleasantly surprised to learn they can buy a larger diamond than expected.

CHART #3

DIAMOND MARGINS: SLIPPING AWAY

Source: 1995 JCK Retail Jewelers Panel

Margins now vs. five years ago All Panelists % in Northeast % in South % in Midwest % in West
Diamond Jewelry
Higher 16.7% 7.5% 19.6% 28.6% 8.6%
Lower 55.4 72.5 45.1 50.0 57.1
About the same 28.0 20.0 35.3 21.4 34.3
Loose diamonds
Higher 10.2% 5.0% 14.0% 16.3% 2.9%
Lower 73.7 85.0 70.0 67.4 73.5
About the same 16.2 10.0 16.0 16.3 23.5

CHART #4

HOW PROFITABLE ARE DIAMONDS?

Source: 1995 JCK Retail Jewelers Panel

Profitability of margins All Panelists % in Northeast % in South % in Midwest % in West
On diamond jewelry
Very profitable 12.1% 8.3% 14.3% 16.3% 8.6%
Reasonably profitable 63.0 55.6 65.3 62.8 68.6
Not profitable enough 24.8 36.1 20.4 20.9 22.9
On loose diamonds
Very profitable 7.7% 10.0% 5.8% 12.2 2.8%
Reasonably profitable 53.8 42.5 61.5 56.1 52.8
Not profitable enough 38.5 47.5 32.7 31.7 44.4

Chart 3 adds to the evidence of eroding diamond margins offered in Charts 1 and 2. Here we see that more than half of JCK panelists say margins on diamond jewelry are lower now than they were five years ago; nearly three quarters say the same about margins on loose diamonds.

The hottest price competition occurs in the Northeast – where fully 85% of jewelers say margins on loose diamonds are lower and 73% say they’re lower on mounted goods – and in the West. Meanwhile, a lucky 29% of panelists in the Midwest say their margins on diamond jewelry actually are higher now than five years ago, while 16% of them say loose diamond margins are higher.

This explains why midwestern panelists are most likely to say margins on loose and mounted diamond are very profitable (see Chart 4). Conversely, more than a third of northeastern panelists say diamond jewelry margins aren’t profitable enough and nearly half say that about loose diamond margins.

CHART #5

THE JEWELER’S MAIN COMPETITORS

JCK Retail Panelists were asked to rate their competitors from 1 (little or no competition) to 10 (extreme competition).

Type of competitor Rating
Other independent jewelers 6.5
Regional jewelry chains 5.0
Upstairs diamond merchants 4.9
Diamond dealers selling direct to consumers 4.9
National jewelry chains 4.6
Discount mass merchants 4.4
Department stores 3.8
TV home shopping 3.4
Mass distribution catalogs 3.3

CHART #6

WHAT’S HAPPENING TO DIAMOND INVENTORY?

Source: 1995 JCK Retail Jewelers Panel

Inventory changes in response to changing margins All Panelists % in Northeast % in South % in Midwest % in West
Diamond Jewelry
Increased inventory 38.6% 32.5% 38.0% 51.2% 31.4%
Decreased inventory 25.9 22.5 32.0 19.5 28.6
Use memo more 28.9 32.5 30.0 24.4 28.6
Use memo less 8.4 7.5 10.0 9.8 5.7
More selective 54.2 52.5 54.0 51.2 60.0
No changes made 16.3 20.0 18.0 9.8 17.1
Loose diamonds
Increased inventory 28.9% 32.5% 28.0% 31.7% 22.9%
Decreased inventory 34.3 40.0 40.0 24.4 31.4
Use memo more 62.7 67.5 60.0 63.4 60.0
Use memo less 6.0 2.5 14.0 4.9 0.0
More selective 45.2 35.0 46.0 43.9 57.1
No changes made 10.8 7.5 14.0 7.3 14.3

Totals more than 100% due to multiple responses

When we asked jewelers who gives them the toughest competition when it comes to selling diamond jewelry and loose diamonds (Chart 5), most gave the nod to their fellow jewelers. Ranking other diamond sellers from 1 (little or no competition) to 10 (extreme competition), they gave other independent jewelers a median score of 6.5. Regional jewelry chains scored only 5 and national jewelry chains, 4.6. Trailing the field were TV home shopping and mass distribution catalogs – not at this time considered rivals for serious diamond sales. There are some regional differences. Jewelers in the South rank other independents especially high (7.3) as competition; jewelers in the West rate the chains a bit higher than average. And competition from upstairs diamond merchants or dealers selling direct seems especially troublesome in the West, where panelists give the former a rating of 6.1 and the latter 6.3.

Chart 6 shows some of the changes panelists have made in inventory as a result of changing margins. They’ve seemingly tried everything, but the most popular ploys have been to use more memo – especially on loose goods – and to become more selective.