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The current downturn has impacted all sectors of the business, JCK senior editor Rob Bates noted in his presentation on “The Top Five Issues in the Diamond Industry” at the JCK Las Vegas show.
The first major issue, he said, was the downturn, which he noted the U.S. has been in since December 2007, but turned particularly serious last fall. He noted that the downturn has surprised people by impacting Internet sellers and high-end stores.
“The old adage that the wealthy will always have money is no longer true,” he said. “This recession has hurt wealthy people’s businesses, their investments, their real estate holdings,” He added that, according to recent surveys, some 52% of wealthy consumers are worried about “losing it all.”
He noted that the recession will likely cause the industry to become further consolidated, and has led to a “lack of liquidity” in the market, as banks exit the industry and new ones shy away.
He noted that although consumers were very frugal, there were ways retailers could counter this, by stressing the value of jewelry components, moving away from “ostentatious” pieces that “are no longer suitable in this environment,” and stressing classics.
JCK Senior Diamond Editor, Rob Bates, talks about top issues in the diamond industry in his Thursday morning seminar.
“People are looking for practical ways to spend their money,” he said. “They want earrings you can wear every day, not something that you wear once a year at a fancy affair.”
On the bright side, he said that all indications are that the recession was beginning to end. And he said that Christmas 2009 will likely be better than holiday 2008, if only by comparison.
He said that while many people seized upon Sterling’s 2.7% same store sale drop as “an encouraging sign,” he said that Zale’s results had not kept pace, showing a 20% sales drop.
He said that bridal remains the “backbone” of the business, and we are getting back to the message that “jewelry equals emotion.”
He cited Sterling’s success with its Jane Seymour “Open Hearts” line, which people are buying “because they like the philosophy behind it.”
On the other bright side, all indications are that the “people who survive this will become stronger. A lot of companies have gone bankrupt, and when we recover, the survivors will get their market share.”
He also noted that this was the first “post-cartel” crisis.
“In the past, there was just one response – De Beers would stockpile diamonds,” Bates said. “Now there are a variety of producers, and they have a variety of responses.”
For instance, De Beers is prohibited legally from stockpiling, and so it temporarily halted production at some of its mines. This production halt means that, at least temporarily, De Beers was no longer the world’s leading diamond producer.
“That’s stunning for those of us who have been in the industry a while,” he said.
Russian producer Alrosa, he noted, is “acting like De Beers used to, continuing to produce but stockpiling their production, to sell it at a later date.” While other producers tender their production and “let the market set the price,” he said.
He said all indications were that the rough market was improving, although he was concerned this was speculative, based on perceived shortages rather than an increase in polished demand.
“Bankruptcies,” his third issue, had made suppliers far more skittish, he said. Now a growing number are having retailers sign security agreements and filing UCCs for their consignment goods.
“In several recent bankruptcies, banks and the people who came in laid claim to consignment goods,” he noted.
“How we increase demand in the jewelry industry” was his fourth issue. He noted that jewelry was one of the worst performing categories last year, according to Mastercard. He said too much of the industry’s product was “commoditized” and “not differentiated.”
He noted that, in the “post-cartel age,” De Beers feels it should no longer shoulder the burden of underwriting the industry’s advertising, so it is exploring other options, such as working with other producers to sponsor generic ads, and talking with mass merchants to continue to promote its “beacons.”
“The industry’s image,” Bates’ fifth issue, was actually more important in a recession, he said, because people “look for excuses not to buy things.”
He said a recent ABC miniseries that was very negative towards the industry “bombed,” but was still seen by four million people.
He said some retailers were trying to “reframe the issue” by selling things like Botswana diamonds and looking at initiatives like Fair Trade diamonds.
“That gets you out of a defensive stance, so instead of saying just ‘these are non-conflict,’ you have a positive story to tell,” he said.
He said that there were still problems with artisanal mining, which produces about ten percent of the world’s diamond production. He said the free-lance miners in countries like Sierra Leone are still paid low wages, faces health risks, and aren’t paid full value for their diamonds.
Lab-grown diamonds, his first “bonus issue,” were something the industry may have to contend with in five to ten years, he said. For now, they are detectable by grading labs and are available mostly as colored diamonds.
He said there was still debate over “nomenclature,” with the manufacturers preferring “cultured” but some industry groups favoring “synthetic.” He said he preferred “lab grown” and “man-made,” which better communicate what the product is.
He said that lab-grown stones could be competition for the mined sector, and may eventually force it to lower prices. But he said that the “mined” sector will rely on their product’s “mystique” to differentiate themselves.
His second “bonus issue,” “beneficiation,” refers to the desire among diamond producing African countries to have cutting industries in their countries.
“These countries have 25%, 30% unemployment,” he said. “The leaders there want to know why their diamonds providing all these jobs in India.”
But he noted that “beneficiation” was still “unproven” because of the difference in labor costs in Africa and low wage countries like India and China. And the recession had largely put it “on hold.”