Thursday, November 10, 2016

The New America!

I'll say the obvious to start.  This has been a disorienting, and at times ugly, presidential campaign.  The outcome for almost everyone is a totally unexpected result.  We now face months of uncertainty as we watch to see what Mr. Trump actually formulates as policy.  He has a Congress that is fully Republican, so unknowable change is a certainty (is any change a certainty anymore?).  And uncertainty of that kind is destructive to business.  Or even to a sense of balance and normalcy in our daily lives.

The election has taken some acknowledged problems in our country - notably the decline of the middle class, the deep-rooted disaffection with Washington, the widening income gap, and an angry working class that feels ignored and exploited - and made them the main direction of the country.  In the process, business interests here and abroad are now at a loss of how to measure anything, as both political parties have been left in a shambles.  Enough said.

So, if anyone has been wondering why business has been so rocky over the last year or so, we could, erroneously in my opinion, simply attribute it to the bizarre primaries and election.  I have presumed for a while that the changes in the nature of business are not temporary, but based on fundamental changes in the population and in our common priorities going forward.  Despite the pledges we have heard from President-elect Trump, we are not bringing back high paying, high employment manufacturing jobs, and we are not going back to those halcyon days, if there ever were any.  Nor is there any way of reversing the deepening chasm between the highly skilled and educated tech-oriented classes and the rest of the country.  Jobs will continue to be extinguished by automation, not just here but all over the world, China included. 

What can we (possibly) say at this point about the jewelry business, which is like going from macro problems to micro problems.  I'll take a shot at it, but please remember that we are only one day into the New America!

 - The commitments of marital engagement will continue, and might even increase.  In a time of stress, two people being mutually supportive is a plus.

 - The diamond business as a whole, and especially in non-bridal, will become tougher.

 - The public has been taught that costume is OK, that alternative materials are OK, that spending a lot less money to accessorize is OK.  Unit sales may still not go up, but dollars and bottom line will go down.  Retailer profits will be under increasing pressure.  Suppliers will feel even more pressure.

 - As a result, consolidation and business discontinuation will continue, especially among independents.  Chains will reduce store count, and push the use of their web sites to drive customers to stores.  That will be true at all levels of business, including the high-end luxury chains.

 - Merchandising will narrow.  SKU's will be cut.  Retailers will further limit the number of vendors they use.

 - Diamond prices may decline, and the legitimate use of MMDs (man-made diamonds) will accelerate.  Gold may become more expensive if currency exchange rates become more volatile.

 - Christmas 2016 may just have been dealt a serious blow.  Any economic prognostications for 2017 are out the window for now.

This may all sound like relatively mild changes, and it does presume that Donald Trump will temper his proposed actions.  We hear reconciliation in the first speeches after the election, but the rancor runs deep, and we may see a level of governmental malfunction unseen in our history.  The undoing of open world trade will be a disaster matching the Great Depression.  Imagine for a moment the effect we will see from high tariffs on all the jewelry we import from Asia and elsewhere.  Should such things actually happen, all bets are off.  All our retail, not just jewelry, is mostly built on imports.  The prospect is truly frightening.






Wednesday, August 31, 2016

Diamond Dreams and Diamond Daydreams

Diamonds have been around for a long time, but it has only been in recent decades that the public's feelings about diamonds have become greatly enhanced.  We have had, for example, Marilyn Monroe and Elizabeth Taylor to thank for raising our aspirations and encouraging women to become diamond lovers.  We have had De Beers and Tiffany and Winston and Graff and Hollywood to help us along to diamond heaven.

But now, it seems, our angels have mostly disappeared.  Hollywood stars rarely buy diamonds - they mostly borrow them for the Oscars.  I could not name a modern Taylor.  De Beers gave up diamond promotions years ago, and now only spends money when tied to Forevermark.  (Would anyone even suggest that Forevermark is a respectable replacement for Taylor?)  Winston, now owned by Swatch, is not even a ghost of old Harry.  Graff focuses on the 1/2%, not even on the 1%, so that's not much help for us there.  Tiffany stands out among the global brands as a strong diamond merchant, but does not see itself as carrying the diamond torch.

For the last forty years, the middle class has slowly seen its buying power fade away as wages have stagnated while inflation slowly had its effect.  In jewelry, the problem has been exacerbated by rising prices for diamonds, colored stones and precious metals.  Unlike t-shirts, we can't just import a cheaper product from Bangladesh.  Clearly, retailers of all stripes recognize all this as a long term problem, not one that we can see reverse anytime soon, and they are starting to close stores - or go out of business.  We were, in any case, way over-stored, and the adjustment was past due. 

In spite of all this, the diamond dream stays alive.  The engagement ring still symbolizes love and commitment, something men willingly pay a high price for.  It publicly acknowledges all that for everyone to see.  It is unlikely, barring totally bizarre events, for that to change in the coming years.  Yes, the technology to produce man-made diamonds could suddenly burgeon to the point where diamonds would become dirt cheap, but that possibility is, for now, as remote as the earth being hit by a massive meteorite. 

That is not to say that we should go blithely on as if nothing has really changed.  The Dream is not impervious to all downturns in the economy or the mindset of the public.  I think it was Georgio Armani who once said, in a perfect pun, that his "brand hangs by a thread." One bad mistake and it is gone.  De Beers did an historic job of creating the Diamond Dream, but that is not to say it can't be undone.

We are in the midst of a distinct decline in jewelry sales, including diamonds.  And how has the trade reacted?  With diamond daydreams.  One blogger says that the industry needs to step up and spend the money to build (or rebuild) the diamond image.  This is a pure fantasy.  De Beers was able to do that when it was a true monopoly, but even they had to step back because the cost is prohibitive unless all sources are on board.  That is not possible, not just because some major sources (Alrosa, Rio Tinto) will be reticent; not just because diamond prices are now too volatile; and not just because the major sources can already begin to count the years before their mines will become uneconomic.  It is also because there are huge stocks held by the public that will be an ever growing, uncontrolled source of diamonds.  It is also because profit margins for diamond cutters and dealers are razor thin, essentially making contributions to an image campaign a non-starter.  It is also because no one wants to pitch in unless every one of the other thousands of diamond companies also pitch in. 

Another daydream is that the development and marketing of man-made diamonds (MMD's) needs to be stopped or discredited.  That's like opening Pandora's box, as it invites a counteraction that will point out all the well-known depredations and frauds that exist in the natural diamond business.  Need I list them?  Martin Rapaport wants MMD's stopped because it endangers the livelihood of diamond miners.  That's a bit like saying that we should reverse all the technologies and robotics that have cost tens of millions of workers all over the world their jobs.  Somehow, Rapaport thinks that the diamond business should be exempt from the forces of commerce, bad as many of them are.  Child labor, as an important example, exists in too many places in Asia and Africa.  We need to fight to stop the abuses, to level the playing field, but also to give all legitimate businesses a chance to flourish. 

In the diamond and jewelry business, protecting the future will take an open and inclusive effort to coordinate the very diverse interests of large and small companies.  Major financial institutions (like Morgan Stanley) are issuing reports warning of the dangers ahead in the diamond business.  Important publications, like The New York Times, The Guardian, the Wall Street Journal and the New Yorker have covered the subject.  They all sense a parameter shift, and think a major story is brewing.  It is already the case that major banks will no longer finance the business.  And if fair-weather friends are no longer with us, then maybe the weather is not so good.

It is incumbent on the broad-based industry organizations all over the world to set aside defending their fiefdoms and reorient the industry towards a workable future.

Monday, March 28, 2016

Diamonds and Robots

I have not written in a while, so please forgive that.  I have been occupied with some real work, thankfully, and fitfully absorbed by a political process that is telling us there are some profound changes occurring in America.  We are seeing the tip of the iceberg, but it is that mass below the waterline that is causing the real damage.

Rather than mention everyone's shoot-from-the-hip reactions to the race for the presidency, is there a way we can suss out what it means for the jewelry industry.  How is this insanity we are watching related to our business, or even more generally, to the economy as a whole.

On the surface, the likely economic scenario is not that troubling.  Regardless of who wins the election, Washington will no doubt continue to be a battleground that will preclude Congress causing real harm.  Some people view a divided Washington as a benefit, even as the public is giving Congress historic low marks.

But that is not the underlying case.  It is not considering the the danger out of view underwater.  For all our voiced concerns about the income gap, terrorism, faltering economies all over the world, the state of our educational standards and infrastructure, we see the US economy continue to recover, albeit slowly, from the battering it took during the Great Recession.  The President considers climate change our greatest challenge, one that might cause us, and the whole world, disruptions of immense proportions.

OK, I guess I should not try to be too down about the future.  I am often surprised and impressed by the young.  They show real awareness of the problems, and, at times, unbounded optimism that we will confront and overcome them all.


Well, getting back to our subject, what about jewelry.  We already know that an important base of the business in the US is the middle class.  Historically, that has been the support of the mass market jewelry business that blossomed in the mid-twentieth century.  The substantial decline of the middle class, abetted by the economy's shift from manufacturing to services, has stalled the US jewelry business.  For some 20 years or so, US jewelry business has stayed at about $30 billion a year, in spite of steadily rising material costs.  So we sell fewer units, year by year, even as we struggle to create product at affordable prices.

Meanwhile, technology is advancing, and is now accelerating its impact on how we live.  There are the obvious impacts.  Swiss watch exports last year dropped by 8%, at the same time that Apple sold millions of Smart Watches.  Jewelry design is increasingly computer designed and produced.  Maybe good, maybe not.  But how about robots?  What impact will they have?  

I recently watched Bill Gates being interviewed by Charlie Rose.  Gates is a very thoughtful man, and we all know about his, and his wife Melinda's, remarkable devotion to solving human problems.  The conversation turned to AI, artificial intelligence, and what that might mean to us.  We already know that technology in all its manifestations has already wiped out many jobs.  At every turn, we see where the interaction with people is no longer needed to get something done. Just think secretaries, assembly line workers, and meter maids, and countless other jobs.

Yes, we know those jobs are not coming back, and many more are fading away.  Even China is automating, thereby creating unemployment is some industries.  Rose asked Gates where does it go from here, as machines get smarter.  Gates responded by saying that in the short term, maybe five to ten years at most, machines will be developed that are as smart as us in many ways.  The range of jobs they will be able to assume will grow exponentially. 

But beyond that, he said, in the next 40 to 100 years, machine will become three or four times smarter than us.  He did not mean, I would think, in a creative sense, but rather in their ability to solve problems by cranking masses of data, by figuring out how to improve on processes and even redesign themselves.  Think of IBM's Watson, which beats the world's best chess players and wins at Jeopardy, and extend that into every aspect of our lives.  Self-driving cars, coming soon to your neighborhood, will eliminate cab drivers, will park themselves and come to your front door when you call them.  Call your robot about dinner, and it will be ready when you get home in that car.  You like that suit you just saw on TV?  Robbie knows your exact measurements, suggests colors, fabrics and design tweaks, and you have it delivered in two days, maybe the next day.

But Gates in not sanguine about all this.  He knows that every step forward in automation is a step away from needing people to get something done.  When Rose asked him if it worries him, he said yes, that he is very concerned about automated production and massive unemployment.  He says that the social upheavals are unimaginable.  And he worries about who will control those machines.  (Note: if you want to watch this interview go to https://www.youtube.com/watch?v=L52dgChT3uk.  It a a version that was broadcast on Bloomberg, so ignore the market data.  The part I refer to starts at about 26:50 minutes into to interview, though it is interesting to watch it all.)

I think we are already seeing the first signs, as reflected in a worried youth championing Bernie Sanders' call for universal health and free education, two basic needs that seem to be slipping out of our grasp.  And we see it in Donald Trump's boastful, arrogant, bullying call to rip up political correctness.  His supporters are losing hope, are sinking economically in a world composed more and more of have's and have-nots.  The more they feel they have nothing to lose, the more revolutionary they will become, to everyone's peril.

So, to come back to my point, how will this affect our tiny piece of this huge economy, this huge problem?  These are complex issues, requiring far more study and discussion than I have done, but here are my bullet points:

  • People already sense that they need to become savers (witness the decline in outstanding credit card debt).
  • The return of high paying jobs for the masses, say $25/hour or better, has no chance of occurring.  It's a pipe dream, with politicians offering false hope to struggling people.
  • Robots, or robotics, will be the only way the US economy stays well ahead of most of the world.  We may not like that it kills jobs, and we may even fear it, but it is coming fast.
  • Jewelry will not fade as a desirable product.  How it is manufactured, what it is made of, and where it is sold will rapidly change.  More robotics, more non-precious stones and metals, and far more multi-channel marketing - a mix of stores and Internet.
  • Engagement rings will remain a staple, for both married and unmarried couples.  But jewelry will not live by the solitaire alone.
  • The number of retail stores in the country will continue to decline.  But destination stores will become much bigger and stronger.
  • Customization will become king.  Think fast design, 3-D printing, automated setting and finishing, fast service, and large service providers backing up retailers of all sorts - not just jewelers but many fashion oriented retailers, on-line and not.
  • Serving the rich and super-rich will be dominated by brands and global retailers who will essentially own the category.  
I am sure that I underestimate the changes to come.


Thursday, December 24, 2015

Diamond marketing - fantasy and self-delusion

On this day before Christmas 2015, I am cogitating over the seeming mountains of flyers that have arrived in the mail, the paper kind, in the last few weeks.  I do not recall it ever having been that intense, and I can only attribute it to a soft season that pushed so many retailers to offer big discounts so early in December, even in November.  I recall that years ago, no discounts showed up until January.  Long gone, those days.

In all of it, jewelry was almost entirely missing.  Yes, I received flyers from Macy's that included jewelry, but they do that all year round.  Signet had plenty of ads on TV for Jared and Kay Jewelers.  And there were a few promos via e-mail.  After that, zip, at least as I can recall.  Worse yet, as I have noted before, the big fashion magazine issues were nearly devoid of jewelry.  The apparel ads were great, but almost none showed a model wearing jewelry.

Oh yes, and Forevermark showed up in some magazines and newspapers with full page ads.  But those, as was the pattern in the past, did not promote a particular retailer of even a new product.  It was De Beers' effort to do image advertising, as they said they would, using their classic line, 'A Diamond is Forever.'  More on that shortly.

Within the trade, by contrast, I read in many posts about how important it is for everyone to join an industry-wide diamond image building effort; how essential it is for diamonds to be front of mind among consumers; how we need to compete aggressively for the luxury dollar, etc, etc.  Apparently not this year.  At the same time, there is nearly endless hand-wringing, not unfounded, over a constant run of publicized abuses within the trade.  Fake and doctored grading reports, continued mixing in of man-made diamonds with naturals, evading KP requirements, tax evasion, human abuse, environmental depredation, manipulated transfer prices, and straight out fraudulent business dealings, all seem to be daily occurrences.  People are looking around, talking about how we can stop all of it (not easy at all), and wondering who they can comfortably do business with.  Then add in that profits have become razor thin, or have disappeared.

So we are attacked from three sides.  Poor marketing is being blamed for tough sales, which in turn means that competition has badly eroded profits, which in turn leaves everyone reluctant, or unable, to spend on image marketing.  And hanging overhead is the prospect of the whole business getting a serious black eye.

All of these issues are addressable.  What is lacking is an open and realistic discussion of conditions and what industry associations can and cannot do, and what individual companies can do, or are even capable of doing.  There are complaints everywhere, with great descriptions of the problems. I am not privy to what is said privately, but I almost do not need to be.  Publicly, the proposals I see are flat as pancakes, or latkes in this season.

But let's talk frankly about 'diamond marketing.'  A real plan to promote diamonds in the leading markets would take hundreds of millions of dollars to execute.  And it would have to be pressed all year long, and year in and year out.  A flurry in the last month or so of the year is truly a waste of money.  It will need a dedicated paid staff to run it, and first class brand building consultants to create the program.

The chances of this happening are nearly nil, at least in the way it is being pursued.  Why?  Because those with the money upstream, primarily the producers and the handful of large diamond companies are not unified in their objectives and never will be.  The producers are already acknowledging that their futures are limited because their assets will be played out over the next decade or two.  They are concentrating on maximizing profits and thinking about their next life, if there is one.  The large diamond companies primarily deal with majors, and have to deal with extremely thin margins.  Why would they contribute to marketing that benefits other channels?  One cannot expect a good plan to be developed at that level.

As for the retailers, they already know what they have to do, and the good ones, the successful ones, do it well.  They market to their targets, be it local, national or global; be it Graff or Tiffany or a local guild jeweler.  They would have to be shown how a plan would benefit them, and that would mean actually putting the horse before the cart - somebody expending the time and effort to develop a plan that would be compelling enough for those people to join in.

As for jewelry manufacturers, designers, wholesalers, dealers, contractors, etc, we have handfuls again that are capable of it, and they would need to be convinced by a great program.

I have probably only stated here what everyone knows anyway.  Maybe it's a waste of my time.  But so are the calls to arms by various entities and people who then go home and essentially, I imagine, forget about it, because they do not take the time to think it through creatively.

So is there hope?  I believe that leaning on the producers to lead the way and put up much of the money is the wrong way to go.  A plan must come from those without an ax to grind, and that means the institutions that have (or should have) broad membership, even those that have seen declining membership.  If all the bourses, retailer groups, diamond groups, manufacturing groups, got together - and there are lots of them - and put up the money to develop a plan, we would have a great starting point.  It would, in total, cost each member of all those organizations a tiny amount of money, as this would be to see what kind of a plan could be developed.  And even just to see if a reasonable one could be developed.  It makes sense to spend very little, relatively speaking, to assess feasibility.  Much better that then mindless, pointless, ineffective, shortsighted and short-lived advertising.

To close, a thought about Forevermark ads.  When I saw them, my immediate thought was how out of date they were.  (Never mind the video, which I found to be bizarre.  These frantic people racing across some desolate rain-swept landscape, desperate, it seemed, to escape some tsunami or other disaster.  All of it transformed into a dream diamond in a man's hand. Desperation leading to romance. Really?)  When De Beers ran those successful product programs decades ago, which everyone coat-tailed, the format was effective.  But now, with only a season's greeting from Forevermark included, and no call to action of any kind, it seems very out of tune with today's focus on offering people immediate means for action.  Has ADIF seen its day?  Perhaps, and it makes me a bit nostalgic. 

Friday, September 18, 2015

Top 10 Issues for 2015 - #5. The New Consumer

Well, the summer break is over, and we are facing a Fall season that does not seem to have much momentum.  Last time, I wrote about retailers' issues, though there is much more one can say on that subject. Now, let's think about the consumers.  Where are they?  Who are they? And will they show up this season?

There is plenty of evidence that the public we have grown so accustomed to in the Consumer Age has evolved, or is evolving, into a very different public, one that has reset some values and taken a hard look what it takes to earn a dollar, and just how to spend that dollar.

Maybe the best way to begin to describe this transforming mindset of the public is to make a list of what we see.

  1. Keeping up with the Jones's is dead.  Acquisition for its own sake, and to show off what we own is no more, though personal satisfaction is still there.  So that means that what you own means less than what you've done and where you've been.  (I exclude the super-rich, who still buy 100-foot yachts.)
  2. In turn, that means, for many affluent families, that experientialism is in, big time.  Cruise ships are getting bigger and bigger (ugh!).  Rafting on the Amazon River, climbing Mt. Kilimanjaro, and hiking the entire Appalachian Trail is in. 
  3. Casual dress is now universal.  Gourmet restaurants have trouble getting men to wear jackets, never mind ties.  Getting dressed up is now for weddings and opening night at the Metropolitan Opera.  And, I should add, at weddings, where the diamond still plays a big role.
  4. Casual attire translates into accessories being cheap and essentially disposable - or, at least, convertible.  Rings and earrings can be hung on a neck chain.  And necklaces can be worn as bracelets.  A woman can use that when the outfit for the day is heels, tights and a t-shirt.  The recent growth of the costume jewelry business, and a decline in what is being spent on the average jewelry purchase, bears this out. 
  5. That, naturally, translates into lower average tickets for retailers.  Even with higher margins on lower-priced pieces, getting to an operating break even is harder than ever.
  6. Only about 60% of working age Americans now have jobs, and many of those are either part time or well below historic hourly wages for many people.  Moreover, average wages have actually declined in the last five years, adjusted for inflation, after stagnating for about 30 years.  And, of course, among the working population many have had to move to lower paying jobs.
  7. As has been going on for decades, the middle class (where the jewelry industry really lives) has been in steady decline.  Either people have managed to climb up, or have seen their standard of living decline substantially, which is the predominant case.  These are not free-spending buyers of luxury products.  $15 minimum wages are a great idea, long past due, but those kinds of wages mean people can survive, not splurge.
  8. This change is not necessarily the result of greed, or of ridiculously high executive salaries, in spite of the political issue that has become. It is the result of booming technology that has steadily extinguished jobs, and the need for people.  Companies constantly look for ways to reduce "head count."  Robotics is how the US will remain a high tech, low labor manufacturing society, while high tech startups hire handfuls of people as compared to assembly line factories. Expect this issue to only get bigger.
  9. As for those people that have jobs, many have learned a bitter lesson living through the Great Recession, which still lurks about everywhere.  They have seen families crushed by job losses, or experienced unemployment themselves.  The financial and legal industries, two instances where people earned big wages in the past, have seen steep drops in employment.  In both examples, technology and outsourcing have had a hand.  What better sign is there of a basic restructuring of labor and productivity than the Fed's reluctance to raise interest rates in spite of years of economic stimulus? 
  10. If anything, those still earning good wages now consider money in the bank and avoiding debt as priorities.  Jewelry or a weekend house in the country are further down the list.  A fascinating study conducted by MasterCard, which has access to deep knowledge of how people spend money, revealed that spending habits have radically changed, even as banks continue to believe that consumers continue to shop as they have before.
    This study, to give one example, showed that the number of credit cards carried by a consumer or family, has declined since the advent of the recession, from seven to four.  Those four are typically a loyalty card (like a department store), a cash-back or points card, and a cash management card.  Consumer debt has fallen a great deal as people have deleveraged, and now  use cards to extend payments for short periods.  MasterCard calls these buyers "Transactors" who manage their cash flow, rather than becoming long term borrowers.  There are far fewer long term, high interest, maxed out cards.  That is where banks really made their money in the past.  The credit card business is about to undergo big changes and far more competition.
    The public is thinking save first, then spend.  So what might have been a $5,000 sale in jewelry some years ago, might now be $2,000.  It would be foolish to think that these changes in consumer mindset are going to revert to what it used to be.
  11. Millennials (and now the upcoming Gen Z!) are the customers of the future, and already have an important impact on our economy.  But they carry a burden that was practically non-existent in the Boomer years, educational debt.  It now comes to over $1 trillion.  What the Millennials are learning is that paying interest can be managed, as persistent as it may be, but paying off principal is really tough.  And even though most of the debt keeps being paid off, everyone - including friends and family - sees how a debt burden can hurt.
  12. Finally, we have to add that the cost of materials needed for fine jewelry puts too much of it out of reach for too large a percentage of the public, hence the rise of costume or near-costume jewelry.  This is educating the public that alternatives are OK, that we can accessorize perfectly well without breaking the bank.  It will, in my opinion, lead to a greater shift to man-made materials in the coming years, as I wrote about earlier this year. 
When we consider all these factors (and more) we inevitably come to the conclusion that we are undergoing a societal change that has begun to alter how the economy works.  In jewelry we saw an explosive expansion during the Age of Acquisition, roughly from the early '60s to the mid-'80s.  There was a rapid expansion of malls and strip centers, and the supply side expanded accordingly. That expansion halted and reversed starting a dozen years ago, and continues today.  The US is a fully mature market and as retailing continues to evolve in response to the demographic changes just described, we will see new winners emerge at the same time that many traditional retail formats fade away.

As I have often said, jewelry isn't going away.  The signature transaction, the engagement ring, is  still there and strong, though it needs to be nurtured as more and more affordable "alternatives" rise.

This coming season, maybe next year's as well, will be pivotal for many people.

Thursday, July 30, 2015

The Diamond Crisis

I was prepared to write my next big issue for 2015, number 5, but this week's news in the diamond business has diverted my attention.  Conditions have reached the boiling point, and the future is foggier than ever.

Without repeating all the details that I assume most concerned people have already learned, let's look at the upshot.  (A well done update is this week's column by Edahn Golan, issued just before the latest twist.  Look at his column at http://edahngolan.com/how-sightholders-take-care-of-business-a-market-report/)  In essence, the pipeline is stuffed with diamonds.  Some sightholders have been borrowing to buy goods, but using cash flow from under-priced sales to fund investments in other, more profitable ventures.  But many of those ventures have turned sour, and there have been some bankruptcies.  Apparently, there are many dealers under great pressure, and the market is seizing up as there is fear about selling anyone.  While I do not know the details, there have been a couple of suicides.  The banks have moved further away from financing the industry, if that is possible at this point.  Sales are down everywhere in the world, and there has to be some concern now about panic selling.

De Beers announced publicly that sightholder may defer purchases as long as to the end of the year, and maybe further.  The majority of the July sight was refused by sightholders, as they were overstocked and no doubt under severe financial pressure.  Part of the thinking, I am sure, was in response to the sudden collapse of the Shanghai stock market, with many stock falling by the maximum allowed, 10%.  Diamond sales in China have been down for some time, but this might mean a further downturn as Chinese consumers pull back.

I think I understate the severity of the current crisis.  There has been a lot of pain, and it is certain that the business will be seeing a lot more in the weeks and months to come.

If we take a macro view, the current mess does not come as a shock.  Let's look at some key aspects of the diamond market.

  • Everyone wants to see prices stay stable, and rise, even if slowly.  This is unique to diamonds, and is a legacy of the De Beers monopoly.  For over 100 years, De Beers had worked to create and maintain the image of value in diamonds, even though diamonds have no particularly inherent quality that makes them exempt from the normal variances that come with economic cycles.  Nevertheless, as it became an established fact, all stakeholders relied on that to expand and build the business.  De Beers no longer leads in that way.
  • That worked out fine, so long as the monopoly continued.  With the exception of the scare in the late 1970s, when even De Beers took advantage of skyrocketing prices until the bubble burst, the elite club of sightholders became wealthy.  De Beers did great, the banks supported the concept of controlled growth, and worldwide sales and inventories expanded.
  • The threat of expulsion kept the pipeline full.  De Beers made sure to politely remind their sightholders that failure to abide by their rules could mean expulsion from the club.  As the major sightholders developed global business, they too needed to be assured that every five weeks they would be getting their allocation, even if that meant buying and flipping boxes when sales slowed and they did not need all the goods.  The banks obliged.
  • Then the deal changed.  De Beers stuck to their process even as they could no longer dominate the world diamond business.  It worked for a while, as other producers rode De Beers' coattails and mimicked the sightholder process.  Producers understood the rationale for sights - you need to move all the goods - run of mine - to maintain profits, if not viability, at the mines.  This thinking was extended by making the process for getting approved as a sightholder far more onerous.  It instilled fear of losing allocations, but the producers introduced tenders to move more goods, and the whole process was undermined.
  • The Great Recession brought problems, but also low interest rates and the BRICS!  It was a party for a while, and greed kicked in full bore.  Volume in Asia rose steadily, as the economies of China and India boomed.  Many companies overbought rough in order to ride prices higher.  Sales to Russians, Chinese, Middle Easterners, and Brazilians boomed.  
  • Suddenly, the party has ended.  Every emerging market has turned down, the banks have bailed out (there is not a single major bank financing the industry in New York today, for example), and the sightholders have hit a wall.
Everyone is to blame here.  De Beers' objective now is to move as much goods as possible at ever higher prices.  The sightholder process has continued, even though they are no longer a monopoly, because the sightholders bent to the rules, believing that it all still works.  It doesn't.

Today, while there are no absolutes, the dangers are clear.  De Beers made a calculated move in allowing deferments.  They know that lowering prices might stimulate some sales, but will also lower the value of huge inventories held downstream.  Polished prices might (probably would) decline further, only making the problem worse.  Pricing may be less the problem than there simply being too much merchandise available.  The hope is that with severely curtailed sights, supply will come more into balance with demand by year end.

If that happens, all to the good.  But the reality is that the sightholder process is unsuited in a multi-polar world that is undergoing profound societal and commercial changes.  Sightholders will have to change their buying methods if they are to survive.  

Friday, July 3, 2015

Top 10 issues for 2015 - #4: American jewelry retailing. What's the problem?

Everywhere we turn these days, we read about the weakness in jewelry retailing in the US.  The numbers are down vs last year, every month for the last six months, and there does not seem to be any reason to think the summer will be any better.

We can, of course, see all this as the "canary in the mine."  Jewelry has frequently been described as the first to get hurt in a downturn, and the last to recover, being that such purchases are discretionary and remain low on a list of priorities, excepting in most cases for the purchase of an engagement ring.

All that does not seem to ring true at this point.  Back in 2007, I began to hear many retailer say that there was something wrong.  After a few great years (2006 being the best) they saw business drop off sharply in mid-year.  I took that as a real warning, an early warning, and echoing the declines we saw with the recessions in the 1980's and again in 2001.

This time, though, the country has been out of the steep decline of 2008-9 for five years, with the recession officially ended in 2009, and all indicators have been in general positive territory for years.  Home buying is up, car sales are booming, and employment is up.  Moreover, jewelers had a couple of good years.  So why the stall now?

Answers to these kinds of questions are never easy.  It sometimes takes an outsider, someone not in the business, to give us a clue.

A couple of years back, I attended a session of the Luxury Marketing Council, here in New York, where American Express, and The Harrison Group, presented a study on affluence and wealth.  They predicted that the US would make steady progress out of the recession, and that the wealthiest top 10% were sitting on a great deal of cash.  They predicted that within a year, once it appeared that the world financial sector would recover, cash would come pouring out for a wide range of acquisitions.  They had a long list luxuries that this public would spend money on, which included vacations, cars, electronics, homes, apparel, etc.  Dead last, and the only two categories that they said would decline in sales, were watches and jewelry.

While they did not elaborate on all the reasons for that (I asked!), their focus was on the superior branding, advertising and image building of other luxuries, and a real shift in public sentiment.  Intuitively, I had to agree with them.


I recall an incident that occurred many years ago when I visited a then well-known men's clothing store in New York, Wallach's, to buy a couple of suits.  I asked the sales person how things were going, and he said business was not so good.  I remarked that there seemed to be plenty of customers, and he said yes, but everyone, like me, was buying two suits, while a couple of years earlier they were buying three.  "That's a third less business with the same customers."  Wallach's, and many other men's stores, went out of business in the years that followed.  Nowadays, when I go to a ballgame, people come in shorts and tee shirts.  But I remember those old photos when it was almost all men that went to a game, and they all wore suits, ties and a fedora.  Bought any hats lately?

Whether we like it or not, from a business point of view, men's clothing went from suits to sport clothes; from suits every day to casual Fridays; and from casual Fridays to casual all the time.  These days, neckties are in trouble.

Social mores do evolve and change.  So do value judgements and life priorities.  Quite aside of those natural forces that have gone on for countless centuries, we are in a time where the range of ways we can spend discretionary dollars has boomed, and the competition for those dollars is fierce.  But, as I wrote about last year, some people now foresee the end of anything more than organic growth, or, for that matter, that consumerism in an age of climatic distress is less than desirable.

Without much effort, I came up with at least twenty "reasons" why retailing faces stressful times under current conditions.  I am sure, readers, that you all can come up with such a list.  That is a discussion worth having, as is a forum for devising new approaches that satisfy many needs - profits, sustainability, environmentalism, and an individual's psychic needs.

Anyone interested?