Diamond Business Undergoing Change

The diamond business is undergoing tremendous change, and every company will have to find their own strategies to deal with it, said industry consultant and JCK columnist Ben Janowski in a seminar on “The Five Big Issues Facing the Diamond Business” (although he gave a “top 10”).
 
“We all know that this will be a very different industry in the next few years, and no one has all the answers,” he said.
The first issue Janowski talked about was distribution. He noted that the number of independent stores is declining, and having salespeople on the road has become dangerous and expensive. But what will really change distribution is rough diamond tenders and auctions, he said, noting that miner BHP is considering that option for next year. “We can be sure that distribution of diamonds in the years to come will be overhauled,” he said. “In a world of shortages, do producers need sights?’

Another factor is price volatility. With no more “buffer stocks,” prices will become more volatile. “Prices will move as the retail market demands,” he said. “That may be downwards. That does not necessarily work against the interest of the miners, because a lower price means moving into the lower income brackets.”

He noted that price volatility may cause the public to change their opinion on diamond’s value.
 
The next factor Janowski addressed was man-made diamonds. “Man-made diamonds are a sleeping giant that could replace expensive and environmentally damaging mining,” he said. “So far there have been relatively few problems in selling the small productions. De Beers could move into man-made diamonds when its output declines and deals get too tough.”

Better-quality diamonds could “become an easier choice for the consumer,” and he predicted the industry would move away from grading larger diamonds. “With man-made diamonds, will it really make a difference if a stone is a VS1 or VVS?” he asked.
Janowski said it is “understandable” that natural-diamond associations want to disallow the term cultured. “In the 1950s, with the advent of cultured pearls, the price of naturals collapsed,” he said, noting that “pearls never carried the burden of blood diamonds or environmental impact.”

Another factor is supply. “New exploration is down,” Janowski said. “Financing for exploration and mining has become very difficult. Meanwhile, demand is now exceeding supply in the most desirable grades.”
Because of this, he said, “U.S. retailers will have to rethink how they buy and sell. This is a perfect storm for the development of man-made diamonds.”

Another factor was channel conflict. He noted that Costo was selling diamonds, despite being the “antithesis” of the traditional diamond-selling experience. “As one top retailer recently opined to me, service may be worth 5 percent more, but not 15 percent,” he said.

He noted that Internet sellers were “impacting the day-in, day-out, generic diamond business where most jewelers live.” He added, “In-store sales will continue, but with more informed consumers. Don’t think just because a customer comes into your store you are not competing with the Internet.”

The industry is also dealing with squeezed margins. “Larger stones are hot,” he said. “But the mid market and low-end market will have a very rough year or two. That means vendors across the pipeline will cut prices to raise cash.”
Janowski also discussed competition with other luxury goods. “Other industries are far better positioned to take advantage of disposable income and dollars,” he said. “We have only to open any fashion magazine to see where we stand. The ads for clothes, vacations, and handbags swamp jewelry ads, which are mostly dull and unimaginative product shots. The pie has gotten bigger, but our slice keeps shrinking.”

He added that diamond branding hasn’t worked. “Diamonds are still a component, not a finished product,” he said.
He also addressed banking. “Credit levels are too high, partly due to the result of the old mode of supply-driven financing,” he said. “In the next year or so, we will see banks drop marginal accounts and restrict credit.” He hoped this would get the industry off its “addiction to bank debt.”

He noted that “banks love the Internet model,” with its low inventories and high turnover. “Bankers are going to be far more selective of the business models they support,” he said. “Retailers who want to stay in the diamond business will have problems if they do not have an Internet presence. Retailers may have to start owning a lot more inventory, or work out a better alliance with suppliers.”

Another factor was education. “Far too many people today know too little about the products they are selling, including many owners,” Janowski said. “It does not take much to undermine the already fragile confidence consumers have when entering a jewelry store. This issue causes us untold grief.”

The No. 1 factor was maintaining the diamond’s mystique. “Will diamonds be able to maintain their image?” he asked. “For now, big dollar sales, prominent auctions, and celebrity appearances all help. But have several decades of aggressive promotions hurt perceived value?”

He wondered if we are entering a “post-luxury era,” where environmental, humanistic, and geopolitical issues take their toll on the image of diamonds. “Jewelry will not disappear as a popular purchase, but how we fare depends on how we protect our franchise,” he said.