Here is a sampling of the diamond seminars at the recent JCK Show ~ Las Vegas.
Pipeline to Shrink
The diamond and jewelry pipeline is undergoing a tremendous squeeze, analyst Ken Gassman said in a seminar on “Changes in the Diamond and Jewelry Pipeline.”
Gassman explained that the classic view of the diamond and jewelry distribution chain starts with the manufacturer and ends with the retailer, with wholesalers and diamond and jewelry manufacturers in between. But that structure is in danger, and we should expect greater consolidation in the future.
He noted that the best margins in today’s market are held by diamond miners and specialty retailers—the two “bookends” of the market. Meanwhile, rough traders, cutters and polishers, and jewelry manufacturers—the people in the middle—have the smallest margins and are being squeezed. “Retailers add value,” Gassman said. “Miners add value. The rest of the guys, they won’t be gone, but they will be absorbed in the pipeline.”
But he pointed out that his statistics showed that polished prices are up only 2 percent, with the bigger rise in bigger goods: “If you have a 5.00 ct. stone, who knows what you are going to pay for it?” But in general, polished prices are stable. “If someone is telling you polished prices are rising rapidly, it’s just not true,” Gassman said.
Jewelry manufacturers have margins in the 15 percent to 20 percent range. The final link of the pipeline—specialty retailers— have 40 percent to 50 percent margins, but the specialty-jeweler niche is shrinking, with 500 independent jewelers going out of business every year.
He remarked that, according to government statistics, most jewelers have not raised prices over the last 10 years. “It’s because of a lack of pricing power,” he said. “You don’t have the power you need to raise prices.”
Gassman indicated that the industry is consolidating, and that jewelry-store employment is falling. In most industries, he said, there are “duopolies,” where two retailers dominate, like Circuit City and Best Buy for retail electronics. That’s not true in the jewelry industry, he said, but could be one day. “So who is going to win: Is it going to be Zale? Is it going to be Sterling? Helzberg?”
“Retail jewelers need to get out of bed and say, ‘How am I going to be different today? What am I going to do to convince people to buy from me and not from Blue Nile?’”
Gassman advised jewelers to partner with reliable vendors that listen to you and to form a buying group. “Buying groups are common in other industries,” he said. “I don’t understand why not in jewelry.”
He also recommended jewelers not cut salespeople. “Don’t cut salespeople when the going gets tough. That’s the last thing you should do. Sterling has added salespeople; that’s why they are doing well. You go into a Sterling store and they won’t let you out without buying something.”
India and China are “giant” markets that will have a huge impact on our industry, MVI Marketing’s Elizabeth Chatelain told attendees in a seminar called “India and China Become Global Forces.”
India is the largest producer of cut and polished diamonds by volume, but the third-largest by value. Its gem and jewelry exports soared from $14.8 billion in 2004 to over $17 billion in 2005.
“India used to produce just smalls,” she said. “Nothing substantial ever came out of India. That’s not true anymore. Their skill level has gone up; their manufacturing level has gone up. Now they are the dominant producers of 1.00 ct. stones and below, and that basically is the market.”
Chatelain noted that a lot of Indian companies presently sell direct to retailers—including independents. “Even if you buy a 1.00 ct. stone from an Israeli company, there is a good chance that diamond was produced in India,” she said.
The domestic market for jewelry in India is also growing, and eventually the Indian market will grow faster than America’s.
Hong Kong has become a trading center for jewelry and better polished diamonds, operating as a clearinghouse for jewelry manufactured in China. But Hong Kong’s jewelry manufacturing has moved to mainland China to save on labor costs.
Chatelain said businessmen in China are adept at learning. “When you don’t have to invent the wheel, but copy it, it’s very easy,” she said. “The Chinese are now learning and copying from all the examples from the generations that have gone before in Israel and India.”
China is still small in diamond processing compared with India, she said, with only 80,000 diamond cutters in mainland China. “But they are going to grow at a rapid rate,” she said.
India and China are also rapidly growing consumer markets. In the end, India and China are “going to be buying our diamonds,” she said. “They are going to use a hell of a lot of diamonds and a hell of a lot of gold.”
“There is a shortage of diamonds coming,” Chatelain said. “Within the next five years, there will be a diamond shortage that will impact the whole pipeline including the independent retailer.”
Where does this leave U.S. manufacturers? Some “know it’s their last generation in the business,” Chatelain said. Others are forming joint ventures with Indian firms. “We get calls every week from manufacturers who say they want a joint venture with an Indian firm, because they know that’s who makes the jewelry these days,” she said. “U.S. companies are becoming more global. It’s a small world after all, and it’s getting smaller. Every other industry knows this, and so do we now.”
The Natural Color Diamond Association has undergone a major face-lift over the past year, with a new nonprofit corporate structure, new officers, extensive consumer research at its disposal, expanded consumer and trade marketing programs, and a comprehensive Web site scheduled to launch this summer.
To enhance the visibility of natural-color diamonds, the group has co-sponsored a fashion show with Vogue at this year’s AGS Conclave and accessorized stars for the red carpet at the 78th Academy Awards.
—Additional reporting by Glen A. Beres