To Bank or Not to Bank, That Is the Question

As even bankers sometimes will admit, banks are fair-weather friends. The weather these days is not too good. Besides some unsavory actions banks discovered among their clients and besides some high-visibility bankruptcies, closings, and mergers among many others, banks face some genuine issues.

Credit levels are too high, partly because of big mining companies force-feeding sights. It’s a bit like pâté de foie gras, only the industry is the goose, and the banks are concerned that their goose is cooked. Still, as occurred in the 1980s when some banks bailed out wholesale, solid companies are suddenly finding that their banks are hesitant to renew lines of credit.

This might be subtle (or not so subtle) pressure to manage inventories better and unload or break out some dead stock. In this regard, retailers and suppliers might see only moderate or no pain as they recover metal and diamonds at current prices. Banks will see a reduction in their exposure, a benefit at a time when the economy is staggering a bit, and prices on goods will be volatile. In the near term, a year or two, we will see banks drop marginal accounts, restrict lines of credit, and monitor performance closely. Rates will be higher as banks look to recoup some of the losses they’ve taken in the credit markets.

If this constitutes getting the trade off its addiction to bank debt, it also will set adrift many companies to fend for themselves. There will be some winners, too—those retailers and suppliers that long ago learned that this is a capital-intensive business, but that it has to be their own capital. Those who have essentially eliminated reliance on bank lines—who own their inventories outright—will manage fine in this weather. In the meantime, there will be an inventory squeeze. Nobody all the way down the pipeline will want to hold inventory, at least not for the bulk of mine productions.

In a global sense, this could negatively affect sales. Diamonds are not fungible, and historically the possession of diverse inventories has been a plus, allowing a company to meet specific requests. That worked best when De Beers ran the business and largely saw to it that diamonds held value and slowly advanced (a lesson harshly relearned in the investment bust nearly 30 years ago). It also worked well when retail trade was strictly local.

That business model does not work well anymore. Not when Polygon has 350,000 diamonds listed, Amazon 40,000, and Blue Nile 60,000. The Internet permits global trade. Banks love this. There are limited or no inventories, high turnover on short margins, big cash flow, low overhead, and high sales per employee. Suppliers are already on that track, whether retailers like it or not, and for some, survival will come with specialization that generates good sales by targeting the entire country or the world.

Retailers who want to stay in the better-diamond business face some tough decisions, especially if they don’t have a robust Internet presence. Outsiders, including nontraditional retailers like Costco, will pick off sales in their area. Costco sold over 100,000 carats of loose diamonds last year, and three sales were in the $200,000 range.

Call stones will be harder to get. Some suppliers have dropped out of that service altogether because of low success, too much handling, and rising costs for shipping and insurance. Retailers have opted to ask for call stones over the last number of years, especially as the public has traded up to bigger stones and the dollars involved have grown geometrically. They call a few vendors to try and make a sale. But the odds of success for any vendor have declined with retailers at the same time that success with 30-day-pay Internet vendors has boomed.

The issue is complex, mostly because too many retailers continue to use dated business models. That is not to say that the right retail philosophy in the right location run professionally will not continue to prosper. Those stores will do well. For many others, though, the rewriting of banking policy by the industry’s lenders may force painful changes for both suppliers and retailers.

benjanow@gmail.com

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