Diamonds May Be Forever, But How They Are Sold Is Not

Retailers like to discuss the issues of how their diamond business is being affected by treatments and synthetics, price changes and availability, certificates and appraisals. As important as these are, there’s a more fundamental change: a restructuring of the industry that calls into question whether jewelers will be able to sustain their diamond business.

Retailers started to voice concern a number of years ago when more and more consumers showed up with diamond price lists – the Rapaport Diamond Report and others – asking for discounts. Diamond offices began to open in office buildings, selling at big discounts and educating consumers about price lists. As one retailer said at the time, “I can’t sell diamonds at a decent profit anymore.”

This situation has grown, confronting jewelers with a dilemma. If they hold prices, the public may perceive their diamonds as being overpriced, thereby undermining the rest of their business. If they lower prices, they hamper profits and could impair their ability to finance and stock diamonds.

Independent jewelers have long recognized they hold some strong cards in this game. Mass marketers and chain stores are no match for competent, one-on-one diamond selling. And affluent buyers do seek out reputable merchants with longstanding in the community before spending thousands of dollars on an important diamond. Despite lower profits, many jewelers feel their diamond business is secure from big-time competitors.

Is it?

Falling barriers

As a nation, we are slowly being attuned to buying in new ways. We must ask ourselves if some of these new habits will spill over into our protected niche. Small pharmacies and hardware stores are being replaced by Rite-Aid and Home Depot. Customers can benefit from informed guidance on medications or help with serious plumbing problems these merchants also offer. But megachains have succeeded because so much of the public is unwilling to pay a premium on merchandise every day just to ensure the experts are available every couple of years.

It may be easy to say that diamonds are a different product, a more expensive one, and that selling them requires knowledgeable romancing. But just look at the success of some new retailing formats. The Home Shopping Network, QVC, Price Club, Sam’s, WalMart and American Express have demonstrated how to get billions of dollars in jewelry business. And not all this money came from new customers. Most of that business was lost by traditional retailers who couldn’t hold onto it.

Causes of change

Several trends have combined to change the way we do business:

  • Sociological and economic restructuring.

  • Retail consolidation.

  • Lower margins.

  • An information explosion.

We all know of the profound demographic changes occurring in America. The combined effect of a disappearing middle class, 25 years of falling buying power, the elimination of millions of jobs and pensions, huge consumer credit card debt, even the fact that a third of all U.S. births are now out of wedlock add up to a world that operates differently.

As we’ve seen in the past two Christmas seasons, consumers are spending more carefully. We can expect to see more of the same for a number of years. As the nation transforms further into a service-based economy, we will see a new class of labor – independent contractors who will be in high-income brackets but will buy with a different set of priorities. Romance is going to acquire a very practical edge.

Retail channels are consolidating, and the process is accelerating. Make no mistake, consolidation is occurring at every level of the business. The jewelry industry is not safe. Even at the independent level, the number of guild operations has declined in many cities. Where there were four or five a number of years ago, there are one or two today. I recently asked a group of professionals from Pittsburgh where they would go to buy an expensive piece of jewelry. They couldn’t think of one jeweler, but they did mention “upstairs” operations downtown.

This makes the traditional store a competitive target. There is added pressure to maintain deep inventories because consumers invariably look for choice when making a big purchase. In a town with only a couple of high-end stores, consumers might feel there is not enough of a choice.

Competition vs. margins

Every time some new way to market jewelry or diamonds comes along, we see broader competition and declining margins. This is not a new phenomenon. Sears Roebuck & Co. started it over 100 years ago with its catalog. Later we learned how to make sales via telephone, telegraph, radio, TV, fax machines, telemarketing, e-mail and CD-ROMs. Now the Internet, video-conferencing and high-resolution interactive TV are arriving.

But the process is not lateral or arithmetic. It progresses geometrically, and we’re on the verge of a quantum leap in our ability to conduct commerce across city, state and national borders. Each tool has taken time to attain critical mass – the level of public acceptance that creates a new mode of commerce. The Internet will cause a tidal wave when it matures, and we are perhaps only a few years away from that moment.

We should not underestimate the power of global information. A diamond dealer on a trip to Hong Kong showed a wide selection of certified diamonds to another dealer and quoted prices at a discount from the Rapaport list. To check the prices, the Hong Kong dealer group-faxed dealers in different countries asking for prices on their certified goods of equal specifications. Within half an hour, the Hong Kong dealer had quotes and copies of certificates from half a dozen dealers.

In response to this growing pressure, the wholesale diamond community has worked hard to create added-value benefits to their offerings. Mostly this has meant getting into the jewelry business, but with mixed results. Their problem is a long way from being solved.

Powerful new modes of retailing

All technologies are moving ahead faster, putting the evolution of retail distribution on a very fast track. It took about 30 years for the catalog showroom business to germinate, boom and decline to near extinction. But TV shopping and wholesale clubs are hitting the wall much more quickly. Department stores continue to reinvent their operations in a rush to stay ahead, and their numbers have dropped precipitously.

The battle is over one word: credibility. Jewelers, in particular, know the critical value of image. All around us we see companies fighting to establish their credibility. Airlines, specialty stores, manufacturers of automobiles, electronics, clothing and other goods want consumers to believe they offer value, quality and service. These companies are committed to the value of good marketing because they know that if consumers believe in a company, they will buy its products.

Imagine if Tiffany & Co. were to offer products over the World Wide Web. Instant credibility. You can bet that when the Web is used widely, whether by computer or on a TV set, we will see such iconographic retailers electronically knocking on every door in America. Cyberspace or electronic retailing in any of its forms – let’s call it “communishopping” – offers incredibly cheap real estate.

Nobody would suggest that retail stores will disappear. People will still seek the “shopping experience” and the personal attention that can be given only in a store. The key will be that stores depending on walk-in business will not compete well with retailers who “set up” their customers in other ways. The simplest illustration is to compare stores that mail fliers and catalogs with those that do not. Now they are slowly migrating from paper to direct communication.

Surf and turf

The new retail modes we see on the streets are invariably specialists and category-killer stores. Consumers highly value time, as best demonstrated by the dramatic drop in the frequency and length of mall visits in recent years. The dramatic successes in retailing over the past decade have been to offer ultimate selection in one retail category. In addition to those mentioned earlier, there are Staples, CompUSA, Bed Bath & Beyond, The Gap, Toys “R” Us and Borsheim’s. The identity in people’s minds is very clear – they can find absolutely anything in that category in those stores.

I included Borsheim’s, the Omaha, Neb., jewelry superstore, because it proved that even before the electronic era, a store didn’t have to be in a major city to make it big all across the U.S. What is remarkable is that we haven’t seen a lot more like Borsheim’s. Success in Omaha came from tenacious pursuit, cool nerves and great salesmanship. A tough combination to find in any field, but particularly in jewelry.

Even the management of Borsheim’s probably would have to admit those days are gone. One big reason might be that shrinking diamond margin. Another big reason is stiffening nationwide competition.

To dominate from here on will mean holding your turf and learning to surf. Having the right combination of retail space and visibility in the communishop will be a powerful tool.

Open minds and new thinking

Proposing scenarios for the future is guesswork. But it helps because trends and opportunities become more easily identified. Let’s take a closer look at what this could mean to independent jewelers:

  • Jewelers will need to become “diamond destinations.” Efforts to dominate markets have been happening for a few years. Mall chains such as Helzberg, Sterling and Friedman’s have been opening superstores outside major malls. These have been reasonably successful attempts to deepen selection, broaden service and capture market share by using lower-cost locations. Small chains and independents have made moves as well, with specialized formats for watches, price-pointed jewelry, gold and diamonds. In the Los Angeles area, Robbins Bros. has converted from a mall-based promotional operation (using the name William Pitt) to heavily stocked bridal stores in freestanding and strip center locations. The success has surprised the company. Public recognition has come quickly, and volume has been sustained with 40% fewer stores.

  • Jewelers will not be able to afford the needed diamond inventories. Obtaining public recognition as a diamond destination will require excellent selection and targeted marketing. In any community, the retailer managing to project this image first could very well grab a dominant position. The problem will come in getting those stocks. With today’s tight margins, paying for them will be difficult. And getting them on traditional memo only passes the margin problem on to the suppliers.

  • Strong alliances will create non-traditional retail operations. Some retailers have given little more than lip service to their espousal of “partnerships” with suppliers, but the time will come when true alliances will have to be built. Suppliers will need to work out well-priced memo programs with retailers. For example:

  1. The supplier will need to be the exclusive diamond source, at least in a certain range of goods.

  2. The retailer will need to make substantial payments, but stocks will be flexible, with slower items cycling back.

  3. Payments will be applied to sold goods, but reporting will have to be efficient and prompt.

  4. The retailer will want assurance of “killer” stocks and availability.

  5. Performance on both sides will be critical. A retailer will need to prove the professionalism of the sales staff, be willing to promote heavily and produce results for the supplier. The supplier will need to help make the retailer the local diamond power through quick supply and support for events.

An essential part of this process will entail managing retail pricing and profits, based on volume and who carries the load. The techniques are varied and, while outside our scope here, are workable given the open cooperation between the parties. On a large scale, such an arrangement was devised between LID, an Israeli diamond company, and Friedman’s Inc., the Savannah, Ga.-based chain.

Deals between independents and diamond suppliers will involve careful judgments by both sides. Jewelers will seek companies with the ability to deliver the goods and the marketing muscle. Suppliers will seek to build a national “chain” of independent jewelers that will secure important markets for them and enable their version of the communishop to attract a big public.

Jewelers who ally themselves with competent diamond suppliers will reap the benefits of a strong diamond identity, one that will carry over into a general jewelry business. Suppliers who make good decisions in forging alliances, geographically and demographically, will not need to fight for the next order, as they do now.

Qualifying a partner, and doing so in the next couple of years, will be the trick. One certainty is that being a part of the communishop will be a prerequisite. Another is that we can begin to say goodbye to the old ways of selling diamonds.

Ben Janowski is a consultant who specializes in the U.S. jewelry industry. Contact him at Janos Consultants in New York City, (212) 288-1155.