Is the End Game in Sight?

In February I wrote about the Fabrikant bankruptcy and touched on a subject I would like to explore further—the domination of the mall diamond business by Indian suppliers.

In some ways the growth of large mall chains and the development of large Indian diamond and jewelry companies have run in parallel. The mall chains merged and consolidated over a period of some 30 years (I can easily think of 40 or more mall operations that have disappeared in one way or another). These chains became more sophisticated in their operations and they learned and perfected policies that maximize return on investment and keep inventories flexible. They accomplished most of this by leaning on suppliers—squeezing down costs and utilizing memo and right of return as important tools in managing overstocks and nonsellers.

Over that time, there was robust competition among suppliers to capture business from major accounts—not only Indian firms but also a substantial number of American suppliers (Fabrikant prominently among them), who leveraged their market knowledge and relationships with retailers to stay in the game. American suppliers inevitably had to rely on Indian and Chinese manufacturers to produce the goods, and in the process they taught those manufacturers what the business was all about.

For some years there was no lack of newcomers to the business—especially Indian companies—anxious to do whatever was necessary to capture major-chain business. Established companies had to follow suit to hold on to their share, and that has led to the shrunken margins we see today. One supplier recently noted that a major chain said it would “allow” the supplier to make 12 percent margin.

Chinese suppliers have been less receptive to this kind of no-profit business. One large company relates that its business used to be 70 percent to majors and 30 percent to independents. Today it’s exactly the opposite. These days we no longer see a line of companies anxious to throw money at the major chains.

The news lately also seems to indicate shifting winds. That is always the case when we see venture capitalists show up. Whitehall Jewellers narrowly averted bankruptcy when financiers bought the chain, and recently we saw Samuels bought out by Gitanjali (an Indian sightholder), backed by venture capital. That company already has extensive retail experience in India. Then we hear that Zale is seeking to sell its Bailey Banks & Biddle division—the guild division—and that Warren Buffett reportedly is looking to sell Helzberg Diamonds. Judging by Buffett’s keen sense of opportunity, the timing must be right.

Gitanjali’s move is particularly intriguing. Indian and Chinese manufacturers are based in booming economies that offer huge opportunities, something akin to the United States in the 1950s and ’60s. Indian suppliers are quickly migrating to retail operations and are learning the trade. That did not happen in the United States, because the power has been held by established retailers in this country, a situation that does not exist in India or China.

I can imagine Indian suppliers now saying, “If we’re going to get beaten up by major retailers in the United States, we might

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