Ouch! The Middleman Squeeze Begins to Hurt

Things haven’t looked good for diamond industry middlemen for the last decade or so. But they have rarely seemed as bleak as they do now.

Diamond industry middlemen complain that certain goods are impossible to get, and the ones they find are so highly priced that they produce only minimal margins. Some big retailers are starting to favor big suppliers because they’re worried smaller ones may not have access to goods, or even be around in a few years … all of which leaves dealers and other middlemen getting squeezed.

To be sure, compared with other industries, the diamond business still has a substantial number of middlemen. And some smaller and “middle” companies are doing well, particularly those that specialize in certain products or have something unique to offer.

But observers warn that the diamond industry’s vast middle faces a rough road ahead.

“The reason we are talking about this now is that the economy is better and some companies are [still] not doing well,” says industry consultant Ben Janowski. “It’s not an across-the-board recovery. The middle people are vulnerable.”

Supplier of Choice. Reasons for this situation include the Internet, retail consolidation, and natural economic evolution. But most dealers’ culprit of choice is the Diamond Trading Company.

Under its Supplier of Choice program, the company has encouraged clients to move downstream and sell directly to retailers, cutting out middlemen along the way.

David Marcus, president of the Diamond Club West Coast, says sightholders have become “suddenly reluctant” to sell to small dealers.

“And when they do, it’s at high prices,” he says, arguing that De Beers’ policy is shortsighted. “Nobody appreciates the added value contributed by the small dealer in the United States.”

Derek Parsons, head of the Miami Bourse, takes a similar view. “How would the ‘buy-shy’ jeweler in the United States function without the critical support of the local dealer?” he asked in an editorial in the World Federation of Diamond Bourses newsletter. “What greater ‘value adding’ can you have than a small dealer helping a group of jewelers compete in a very difficult market?”

The middleman’s last stand. Parsons, Marcus, and others have pressed their case by striking at the DTC’s Achilles heel—the courts. Their bourses have written to the European Commission and the U.S. Justice Department regarding their problems with the Supplier of Choice policy.

It’s a sign of how insecure people are feeling that this issue has caused rifts inside the major diamond organizations. The Miami and Los Angeles bourses’ move did not endear them to the leaders of the World Federation of Diamond Bourses, who favor a policy of working with the DTC to increase sales through Diamdel (see sidebar above).

“The Miami and Los Angeles clubs did what they did without the approval of the Federation, but we live in a democracy,” says WFDB president Shmuel Schnitzer.

There was a similar rift at the Diamond Manufacturers and Importers Association, the U.S. trade group. Last year the group voted to send a letter to government officials expressing their frustration at the current state of the diamond industry and asking for help. But the letter was deliberately not signed by then-president Leon Cohen, a principal in sightholder Codiam.

The group’s new president, Ronald Friedman, is a non-sightholder—and some prefer it that way. They question whether sightholders can fairly represent the industry with the DTC’s ax hanging over their heads.

Critical times. If the politics are getting dicey, it’s because the trade is entering a critical period, with some companies’ very existence at stake. Many wonder if, in a generation or two, there will still be diamond traders, brokers, or even bourses.

Some fear the trade is turning into an industry of big players (based out of India), with “getting big or getting out” as the only options. Forecasts at recent diamond conferences have painted a bleak picture of a future filled with bankruptcies and business failures.

David Selove, of Bank Leumi’s diamond and jewelry division, expects considerable consolidation, but less drastic than some fear.

“Short of a crash, most economic change proceeds in an orderly fashion,” he says. “The industry has been consolidating for the last 10 years. It’s picked up a bit of steam because of Supplier of Choice, but it’s a function of economic efficiency.

“I am 99% sure that there will always be middlemen,” he adds. “There just won’t be that many.”

Janowski says much the same thing, though he thinks dealers will endure for reasons that are as much personal as economic.

“There are some stubborn people in this business,” he says. “They will stay in business even if it makes no sense. What else are they going to do?