Diamonds in Tough Times, Bates Says

The diamond industry is grappling with tough and complex issues that will likely mean dramatic change, Rob Bates, senior editor, JCK, said in a presentation on “The Top Five Diamond Topics.”

In the first topic, “The State of the Market,” Bates noted that in today’s market, “supply is king,” and that, before the show started, there was a “low-single-digit” price increase from De Beers that was likely weighted toward big stones. He said the mood in the market is pessimistic and anxious—especially after two recent bankruptcies—and many are hoping The JCK Show will turn the market around. Bates said consumers seem to be more interested in things like consumer electronics, which are now being sold for Valentine’s Day. A bright spot, however, is sales for “Journey” diamond jewelry, which did well last year and will likely do better in 2007. “It’s so far a mass-market product, but it certainly has opportunities for independents,” Bates said.

He also noted that the ABN AMRO merger may have a big impact on credit and availability of memo to retailers.

On the second topic, “The Internet and Blue Nile,” Bates noted that Blue Nile is becoming a major player. It sold $250 million this year and hopes to reach $1 billion eventually, and yet it holds only $14 million in inventory. It has lower margins than most jewelers—21 percent compared with the average 50 percent offered by jewelers—and doesn’t have to collect sales tax. But it needs greater name recognition to fend off better-known competitors like Amazon.

Bates said retailers are fighting back by stocking unique products, upgrading customer service and salesmanship, cutting margins, launching their own Internet sites, and matching what the sites have to offer—especially 30-day money-back guarantees.

Regarding the third “hot” topic, synthetic diamonds, Bates noted that there is “evidence” that synthetic manufacturers are “getting their act together”—Apollo Diamonds, which produces colorless diamonds (“which is really what frightens people,” Bates noted), says it’s ramping up production, and Gemesis, which produces fancy colored synthetics, recently hired De Beers veteran Joan Parker to handle publicity.

Bates expressed the feeling that synthetics could be a viable challenge to mined diamonds, but probably won’t be mass-produced for a decade, if not more. He added that most gemological experts think they’re distinguishable from mined diamonds, despite some claims to the contrary.

On the fourth subject—the “branding revolution” that was supposed to be fueled by De Beers’ Supplier of Choice strategy—Bates said it has largely failed. “A lot of good companies sell to Tiffany,” Bates noted, “but in the end the only thing that matters to consumers is they bought it from Tiffany.” Bates expects Supplier of Choice II not to emphasize branding as much.

He noted that De Beers’ market share is around 40 percent, and, because of this, it may cut from 20 to 40 sightholders when it updates its list later this year. But it’s also well on its way to settling its legal problems here, and Bates said he wouldn’t be surprised to see De Beers executives at next year’s JCK Show (although he added “he’s said that before.”)

Bates also noted that De Beers is under pressure from African governments to produce more diamonds locally. “These countries have 20 to 30 percent unemployment,” Bates said. “So they are asking why are diamonds providing jobs for people in India and Antwerp and not here?”
 
Because of these commitments, Bates noted, De Beers is likely to restructure—and possibly shut down—Diamdel, which is traditionally its vehicle for selling to the “middle market.” This could further hurt the middle market, which is “already in trouble,” Bates said.

On the fifth issue, conflict diamonds and other social issues, Bates noted that the movie Blood Diamond did not have much consumer impact, even if it led to an unprecedented amount of publicity about the conflict diamond issue. Bates argued that the publicity may have hurt the movie. “Not many people want to spend their Saturday nights watching a movie that said their ring killed people,” Bates said, quipping that the movie came across as “the feel-guilt movie of the year.”

He said that retailers have obligations under the Kimberley Process system, and that JCK surveys have found that many are not following them. “A lot of retailers say that, why do we have to ask for the warrants, they don’t mean anything,” he said. “By not participating you are actually making sure they mean even less and making the system far less effective.” Eventually, he said, if jewelers don’t comply, human rights groups may push to make the system mandatory.
 
But Bates noted that, overall, the Kimberley Process system is a good one, although only as good as the people who control and enforce it. He said the industry should be “proud” that in the four years it’s been live, there has not been one serious conflict diamond problem, and the amount of conflict diamonds has fallen to 0.1 or 0.2 percent.
 
He said the industry did have other social issues to grapple with, including the 1 million alluvial diggers in Africa and Central America who work in bad conditions for low wages. He noted an estimated 10 percent of the world’s diamonds are produced this way and said the industry is working with human rights groups in the Diamond Development Initiative to brainstorm possible solutions, and that Martin Rapaport was working on a plan for Fair Trade Diamonds.