Thinking Beyond Tomorrow

As 2006 was drawing to a close, I was asked to moderate a discussion at an industry breakfast that I regularly attend in New York. The attendees come from every corner of the trade on the supply side and are experienced and knowledgeable people. Our early morning roundtables are open and frank discussions of many important issues.

I opened by stating some facts and likely events, and followed with a series of questions for general discussion. Here are some of the opening points I made:

China now accounts for almost 50 percent of the U.S. trade deficit. As China begins to turn toward satisfying internal demand, which is just getting rolling, there will be less need to deal with low-profit American customers.

Internet sales are booming—up at least another 25–30 percent over a year ago—and jewelry is advancing even faster. The shift to online buying is far from mature, and the impact on popular-price jewelry will be deep and broad.

We see a continuing decline in the number of U.S. jewelry operators, both retail and wholesale. It has been going on for about 20 years, but the pace is picking up. The number of rooftops selling jewelry has not significantly declined, partly due to the new types of stores that have entered the market. But we have lost a measure of diversity and innovation.

Clearly, the next year or two will be a period in which many companies will close, merge, or sell. Some will get into new businesses, and many suppliers will attempt to become retailers.

Big companies (Mikimoto, Rolex, Yurman, and others) are dominating open-to-buy at independent stores. This limits opportunities and sharpens competition among other suppliers.

Gold prices have steadied in the low $600 range, but market analysts say it will drift upward. Some predictions are for $1,000 gold by end of 2007, and as high as $3,000 in three to five years.

Unit sales are declining at retail, even though overall sales dollars may be increasing. The dollar increase is due to higher material costs. Businesses thrive on increasing unit sales, not on a decrease. (Think of the opposite case—the electronics business, where sales in dollars are booming at the same time prices are dropping dramatically.)

Alternative products show easy acceptance by consumers (moissanite, synthetic diamonds, titanium, palladium, etc.). This can only be true because the consumer is seeing better value in those products. In retail, perceived value is everything.

Major suppliers are stuck in the major retailer category and are beginning to shift into other businesses. On one hand they need the volume offered by large retailers. On the other hand, a markup of about 12 percent is barely profitable for even the most cost-efficient suppliers—even Indian companies. (Fabrikant is a good example of a company, at least in part, that could not find a way to adapt.)

The industry is being confronted with a growing number of luxury products that have effective advertising and huge appeal.

These are some of the questions I posed:

Are you planning scenarios if gold prices do boom?

How can U.S. suppliers or retailers cooperate with each other to develop strong propositions for customers?

Will suppliers be forced into retail, and should it be mostly on the Internet?

Is Asian supply a plus? For which products? It is assumed to be unavoidable, but how do we make the most of these sources? What are the benefits and drawbacks?

How do you describe your unique selling/marketing advantages? Do you have an advantageous position? Can you hold onto it against competition?

The Diamond Trading Company’s Supplier of Choice program has had serious problems, and major clients are stepping back. Considering the countless millions that have been spent in this effort, is this proof that consumer branding is largely unworkable in our industry, and why?

Where is branding possible, and where is it not? Is it worthwhile?

Banking terms may profoundly change because of events like the Fabrikant bankruptcy and the introduction of new controls. Is your bank going to continue to support you?

If cut grading makes diamonds completely commoditized (as may be the case in goods over 0.50 cts. and in better colors and clarities), what options are there for increased profit and growth?

Building and maintaining industry and public reputations (meaning full disclosure, documentation, and internal tracking and controls) are essential but will make life more complicated. Are you ready, will it all be possible, and will the crooks profit while we struggle?

Each of us, in our own way, must address these issues in the near term. This is not a question of survival of the industry, only a question of who comes up with the right answers. We tend to think about the problems on our desks today, and maybe tomorrow’s. We need to think beyond tomorrow.

My breakfast friends had many thoughts, some of which I will discuss here over the coming months. But I invite readers to open a discussion and share it with us.

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