Shock and Awe

When bombs start to fall, people run for a shelter. In our industry, it seems that people are in the shelter, mentally, when there’s still time to prevent the bombing.

I recently attended the Rapaport-sponsored conference in New York. It seems to be the only occasion during the year when people gather to discuss diamond issues for a day. I expected fireworks. I got barely a fizzle. I did get shock and awe, but not the sort I expected.

Not once was there a mention of De Beers or the DTC. It seems De Beers has marginalized itself. Supplier of Choice has faded to little more than an abusive application process every few years. The DTC cannot fulfill the original intent, which is to offer its clients the selections they need and want. The surcharge on sights, meant to finance expert marketing assistance, has become a cash handout to clients to support their internally developed marketing efforts. And De Beers’ own marketing and advertising budget has been slashed everywhere in the world, as it deals with lower profits, rising producer independence, and the nascent Forevermark campaign. Still, DTC is the leading distributor of diamonds in the world, and its actions, or lack thereof, require scrutiny.

The most interesting speaker was Victor Van Der Kwast, CEO of ABN AMRO Bank’s International Diamond and Jewelry Group. He detailed the changes in the diamond business: declining sales because of a worldwide economic slowdown, volatile prices, and excessive levels of bank loans. In the next year, he expects many diamond companies to close or merge. There will be more demand for money than the banks have to lend, especially after suffering the worst write-offs of bad loans ever. New lending standards are being developed and applied, which will demand greater operational efficiency and transparency, application of technologies, and strict control of inventories. Profit will be more important than volume (as it always should have been), and every company should be applying its resources where the opportunities for profit are greatest.

These last points are most important. Kwast knows that the United States was a net exporter, for the first time, of polished diamonds over the last year. Dealers are pulling stocks out of the U.S. market because foreign markets are producing the best margins. Kwast is looking for companies that are “shortening the chain,” i.e., operating with the most efficient paths from rough to final sale of polished. He expects that terms will shorten as suppliers look for cash flow, not inventories. Does that not present problems for the DTC, Rio Tinto, and BHP? Will sightholders resist taking in stocks that are not in line with sales? The day of the sightholder “process” may be drawing to a close, but does that not require an examination of the implications of an open and volatile market?

What was not discussed was the possibility of a price decline, even if it’s not as drastic as the one in the early 1980s. Kwast, Rajiv Mehta (of Dimexon), and Rahul Kadakia(of Christie’s) all said prices on premium stones have faltered. Is the boom fading? Has the market been too “exuberant”? What does Kwast think about the excessive levels of debt in such a circumstance?

Gerald Celente, founder of The Trends Research Institute, provided shock. He thinks we’re headed for a depression of the magnitude of the 1930s, probably worse. Agree or not, he gave us great pause.

On the plus side, Neal Goldberg, the new president and CEO of Zales, offered an encour-aging review of his clean-sweep program. They have cut the number of vendors by two-thirds, reduced SKUs by 40 percent, and reduced instore signage by 50 percent. Clean up and differ-entiate the in-store image, improve quality (mission No. 1), become more important to vendors, and sell emotion—not discounts. We are awed by his bravery and wish him success.

Most shocking was the audience response. Only four or five people came to the microphones, and they offered meager comments. Where were the big questions? There was no real exchange of ideas and no one to venture solutions. Many important diamantaires were absent (they must already know all the answers), but many prominent industry people were present. All kept quiet, and most left after lunch. Maybe they were right. Why hang around if there is not a single new idea propounded? But then again, should that not be coming from them, from the heart of the business, from those with the greatest stake?

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