Tuesday, July 31, 2018

De Beers, Lightbox and the Impact on the Diamond Industry

De Beers has announced the formation of a new company, Lightbox, that will be selling man-made diamonds (MMDs), mounted in earrings, pendants and bracelets - no rings.

I will assume everyone has read the details, and heard their rationale for claiming that this move will have little or no impact in the natural diamond industry.  Briefly, they will be selling MMDs in finished jewelry with total weights up to one carat, mounted in silver or gold, and with simple pricing - $800 per carat.  There is no grading of the stones, which are white, yellow, blue or pink; the jewelry is meant for “moments” not “milestones” (like weddings).

De Beers has arrived at this moment after a few decades of seeing their business transformed from a monopoly into a commercial venture facing all the pressures of a competitive market.  

At the turn of the century, Rio Tinto, with their major mine at Argyle in Western Australia, went their own way, sensing that they would do much better by selling directly to cutters, especially Indian companies, than by contracting to sell productions through De Beers.  Then came the EU, forcing Russia to cease selling their productions through De Beers.  Then Botswana started to take a larger and larger share of the profits in their major mines.  De Beers, in what seemed like an appropriate response, liquidated most of their $5 billion stockpile, as its function as a market buffer was coming to an end.

De Beers initiated or supported a variety of actions aimed at maintaining their market position.  That included Supplier of Choice; CSR; the Kimberley Process; beacon programs; the co-venture with LVMH to open De Beers stores (now fully owned by De Beers); and developing a brand, Forevermark.  Beneficiation became the new word in Africa, as De Beers was induced to yield more profits and control in Botswana, South Africa and Namibia.  It would be fair to say that all these efforts, aimed at maintaining industry leadership, have met with mixed success.

All of this occurred during a period in which diamond prices became more volatile and many mines began to approach end of life.  Major productions of diamonds are in decline, not only for De Beers but for all producing nations, and it will continue that way in the future.  Some mines have already closed, others will be closing almost annually.

None of this was lost on anyone in the industry, and De Beers, having always planned well ahead, must have gone through continuing reevaluations of their position and what their future might be, or could be.

De Beers had been very successful over many years in nurturing their sightholders, with three main objectives in mind, aside from maintaining their monopoly.  See to it that sightholders made money, but not too much.  Get diamonds downstream with the lowest possible intermediate markups, partially by generating competition between the sightholders.  See to it that diamond supply stayed close to demand so that prices could rise, achieved most of the time by controlling stock levels and mine productions.  And, of course, all that would work as long as De Beers was a monopoly.

Now, all of that is essentially out the window.  

So the thinking had to turn to imagining the company’s business in the future.  For one thing, very early on, start producing MMDs if mining did not have long term viability and profitability.  GE and Sumitomo had already been doing it for decades, and supplying industrial grades would keep De Beers in that business.  And, unlike GE and Sumitomo, De Beers would also have the additional objective of acquiring the skills to produce gem quality diamonds.  Selling diamonds for $800 a carat is a lot better than $1 a carat for industrial bort.  It must have been clear that the historical core business, mining gem quality diamonds, would hit a wall some day.  That wall is now in view.

This led De Beers into a new four-part structure: produce MMDs, own retail stores, develop an international brand, and manufacture jewelry.  And, of course, work the mines as long as they remain viable.

Those internal discussions must be continuing daily, as none of this comes easily. But the tilt is clear.  The miners at De Beers are steadily being edged out by the marketers.  What better evidence is there of the evolution from the old De Beers than the Oppenheimer family selling their interests and stepping away?

The decision to develop Lightbox is, by far, the most momentous move the company has made since the creation of the cartel, one that many observers in the industry have long been expecting.  De Beers has the skills in the Element Six division to mass produce gem quality MMDs.  So here is how I guess the decision process might have gone in developing a 10-point program.

  1. OK, we have a decade or two to convert the business from mining naturals to producing MMDs and essentially becoming once again the major producer of “diamonds.” 
  2. We have advanced the technology to the point where we have an edge, but if we wait too long, other producers will catch up.
  3. We need to protect our sightholders because they need to be there for at least another ten to 20 years.  And we need to sell mine productions as fast as possible, and at the highest prices bearable.
  4. Some sightholders are already developing MMD capability, wholesalers and retailers are not hesitating selling MMDs, so that wave has started.  We need to act to try and kill that  kind of competition.
  5. We need to make a dramatic start, but in such a way as to damage the competition but keep our sightholders from screaming.
  6. This will not be easy.  To minimize the damage, let’s keep the price points down; do no grading, as that is done only for “real” diamonds; do not make rings, as that is the big driver of the natural diamond business.
  7. We cannot say that Lightbox will impact sales of naturals, which of course it will.  No, that’s no good. 
  8. We cannot say that we do not know what impact it will have, because that will really drive the market nuts.  No, that’s no good. 
  9. Let’s conduct a survey on how this range of jewelry will sell.  It should be fairly direct to show that we are addressing a big piece of the market, under $1,000 retail, with a sort of upgraded costume jewelry. State that this market sector that has been poorly serviced, and that the new lines will only act to enhance "real" jewelry sales. 
  10. Moreover, to demonstrate that this is a “new” business, lets disintermediate our entire established distribution and go directly to the consumer (DTC).
This survey, which I have not seen, gave them what they wanted - an indication that the major impact will be on costume and Moissonite.  Given a choice, will a consumer not pick MMDs over wannabe simulants like Moissonite or CZs?  That’s an easy one.  

The reality is that retail price points up to $1,000 are critical to all jewelry retailers.  It represents the bulk of the traffic for all mass and mid-market retailers.   The range is important for establishing relationships with consumers.  This is not an underdeveloped range in the market, but a good deal of it has been taken over by silver, lower karat gold, and non-precious materials, especially with gold prices staying high.  And diamonds have very much been in this range.  So I do not buy the claims by De Beers based on their survey at all.

So far, De Beers cannot be faulted in what they have done.  This is straightforward business planning for a company that is feeling the obsolescence of its business model.

The question remains, what else are they planning, and what will be the real impact on the industry?

It seems very unlikely that De Beers would be taking this direction, plunging into a product that has been attacked by many diamond people, just to pursue this very limited range of fashion jewelry.  That would leave them a minor player in the future diamond business.  Also, spending about $100 million to build a new factory in Oregon could not be justified to sell “moments” jewelry.  Nobody can reasonably think that is their short or long term objective.

I have long thought of MMDs as the logical product to fill what will be a growing hole in the supply of diamonds as mines expire, the earnings gap grows, and a large, new middle class rises in Asia.  We already see retailers hastening to add MMDs to their selections, a trend that will accelerate and force competitors to feel obligated to follow suit.  The timing of such a trend really booming is hard to predict, but it is approaching quickly.  If De Beers wants to position itself to be the key supplier when that trend matures, it cannot wait until it happens and then try to plunge into the market with MMDs.  It needs to start now with this innocuous effort and work to establish its position well in advance.  And clearly, it is willing to do so knowing that it will potentially create chaos and disrupt the natural diamond business.  This is a calculated risk, but one that De Beers almost has to take if it will remain a major factor in the business over the long term.  And long term is what De Beers has always focused on.

No one should underestimate the effects that Lightbox will have.  It is going to disrupt the natural business to a far greater degree than has already occurred.  Lightbox has made MMDs a totally acceptable product.  It will incentivize those already producing MMDs to ride this new coattail and to increase production and pursue technological advancement.  It will force many retailers to seriously consider carrying MMDs from Lightbox, and undoubtedly from many other companies.

It may also accelerate the decline in natural productions because MMDs, in the most popular sizes, will be of far better quality than naturals and available at far lower prices.  Exploration and development of new diamond mines may slow considerably as companies will seek near assurance that the productions will have high value.  Existing mines may become unprofitable, and some may alter their extraction processes in order to avoid the costs involved in producing low quality diamonds.  The recycling of existing diamond stocks will boom further.  Most importantly, there will be little reason for naturals and MMDs not to be mixed in the manufacture of popular jewelry, and be fully disclosed as such.

There are many other aspects of this evolutionary and revolutionary moment that occur to me, perhaps a subject for future posts.  To believe that De Beers will not expand the range of this line to include rings and more expensive products is foolish.  The same is already true for many other manufacturers using MMDs - and De Beers will have to be there eventually if they are in fact going to be the big dog.

The attempts by various institutions in the industry to fight the expansion of MMDs, even punish dealers who would dare to carry MMDs, is not only counterproductive, but will also guarantee that the disruption to come will be even more painful than it needs to be.

Friday, June 8, 2018

The New De Beers

This past week we saw De Beers introduce Lightbox Jewelry, a full-bore, direct to consumer (DTC) retailer that will exclusively use man-made diamonds (MMDs) produced by their Element 6 division.  The concept is neatly packaged to offer a basic selection of body jewelry at moderate prices.  The DTC approach is intended to circumvent the entire traditional channels of distribution established by De Beers over the last century, in an effort to demonstrate that this is just a low-end, low-value product aimed at an under-served public.  De Beers claims that it will only benefit its existing clients by demonstrating how much more valuable "real" diamonds are.

This move cam as no surprise at all to me.

There are many gaps and holes in this plan, and I will try to outline them in future blog posts.

To begin with, I posted three times in 2015 with my views on the subject.  Here are the links to those blog posts, as it would save me time repeating the points I made back then!

http://janosconsultants.blogspot.com/2015/05/the-top-10-issues-for-2015-1-three.html
http://janosconsultants.blogspot.com/2015/06/the-top-10-issues-for-2015-2-second-of.html
http://janosconsultants.blogspot.com/2015/06/the-top-10-issues-for-2015-3-third-of.html

Though I did not say it directly, my contention at the time, when I noted that we were facing a "paradigm shift" in the very nature of the diamond business, was that it was inevitable, logical and unavoidable.  De Beers, among all the diamond mining companies, was the only one with a developed marketing division, and an apparent wish to survive the end of large scale diamond mining.  Rio Tinto, currently the third largest source, will step out of the business within 10 years.  Alrosa, Botswana and Namibia are a bit further away from exhausting their resources.  None of them apparently seek to have a position in the diamond business once their mines are played out.

In that regard, De Beers stands alone.  At the better end of the diamond market, it has wholly owned stores under its name; a brand in Forevermark; an effort to capture diamonds being recycled; and now a first entry into the mass market with the only product that could replace declining supplies of natural diamonds with something that is close.  No, Moissonite and CZs will not do.  In sum, we could look at all of this as a three-pronged offensive aimed at becoming the dominant power, once again, in the diamond business.

Anyone who thinks that De Beers' objective in using MMDs starts and stops at fun body jewelry is, in my opinion, very mistaken.  Barring disastrous geo-political catastrophes, the world's population will grow and will continue the expansion of newly affluent and rich publics.  As demand for jewelry grows along with stronger demographics, the need for greater supplies of "diamonds", however we define them, will mean that well-established suppliers and manufacturers of MMDs and MMD jewelry will have the biggest market opportunities.  De Beers wants to be number one in that situation, and if that requires expanding it selection into larger diamonds, even into engagement rings, it will do so in a timely manner - and with little hesitation.

De Beers is building for the future - its own future.  We cannot blame them for that.  It is the very nature of commerce.  For those in the industry that still believe that De Beers should be protecting its traditional clients, I say it is time to realize that that position is untenable and completely unrealistic.  Yes, De Beers will, of course, continue to do whatever it can to sustain the natural diamond business as it still has huge investments and interests to protect.  DPA is a good example of that.  And it will continue to seek the highest prices it can get, with sights or not, and at the fastest rate possible.

But this is a new day, one in which the legitimacy of MMDs as a viable product is here.  However it turns out, the New De Beers will be, in time, very much unlike the old one.

I have many observations on the impact of Lightbox, and on the possible repercussions. I'll save those for next time, as there are too many to cover here.  Feel free to contact me if you want to see early drafts.



Friday, May 18, 2018

Fine Jewelry in 2018 - Suppliers in Transition

Suppliers are regularly in turmoil over how to respond to the significant shifts in distribution and consumption.  It should be noted that many suppliers are far upstream, and feel the realities of the front lines last.

We already see that upcoming technological and demographic changes are causing distress at the retail counter, and we covered some of that in the last blog.  Suppliers have been forced to make changes in their modalities, sometimes painfully.  What factors are at work:

  • The number of retail operations is shrinking, and so are the number of outlets.  That means fewer retailers as customers available.
  • The market has been forced to adapt fully to the fact that the US is a very mature market, and has been way over-stored for a long time.
  • What might have been a more gradual adjustment to supply and demand (fewer stores to serve a stable, slow-growth market) has been radically accelerated by Internet marketing.
  • Internet marketing puts everyone on a service-oriented platform.  You need to be quick, efficient and fully responsive.  Low-cost producers win, notably in the mass market, but even very high-end jewelers need to provide good access and flexible service.
  • Many retailers have adapted to higher priced jewelry - an aspect driven by high material costs - by buying less, closely managing inventories, and asking for more support.
  • Many retailers have shifted emphatically from precious metal jewelry to costume and hybrid products in a desire to maintain important price points.  That leaves manufacturers of precious jewelry with thinner slices of the pie.
  • Many designers and manufacturers have essentially given up relying on selling retailers as the core of their business.  They have gone direct to consumer (DTC) after struggling for years with the demands of retailers.
  • Diversification has become a key word among retailers and suppliers, but basic merchandise continues to be the bedrock of the business.  That means that everyone competes on stud earrings, solitaires, line bracelets, etc, and diversification ends up, at best, on a back burner.
  • Suppliers are confronted with some hard choices because the middle market is weak.  As the so-called middle class has declined over the decades due to stagnating wages, job insecurity, automation, etc, suppliers have sought to either move into true luxury products or into low-end costume lines.  Both choices can represent huge structural and economic challenges.
There was a time when the rapid expansion of shopping malls and urban sprawl provided a near ideal environment for growth and the establishment of new businesses.  We are not ever going back to such halcyon days, and are probably better off for it in many ways.  The intensity of competition for the business that is there today will result in better value and service for consumers.  The key question for suppliers is how they can play a key role in that process.

I recall a chat I had with a long-dominant supplier of colored stones, and he described the problem well.  Historically, he had large manufacturers as customers who bought from him in bulk and in a predictable pattern.  Most of those businesses have deconstructed, especially in the US, and now he gets many requests from designers seeking specialized selections in small quantities.  The business is still there, but radically changed, and he is confronted with trying to revise and upgrade his systems optimized for dealing with a very different customer base.

In the diamond business, dealers have adapted to the vicissitudes of fluctuating prices by buying closer to their needs  - many retailers don't even bother stocking much loose goods any more!  While the days of the De Beers monopoly and reasonably stable pricing are gone, the on-line data bases have arrived in strength, offering far more efficient ways of meeting consumer needs.  The old hands may not wish to invest in the needed skills in communication and distribution that comes with these changes, and so they will fade away, replaced by those with full involvement in these new realities. 

There are, of course, countless variations on how suppliers used to work, and how they now work, as they try to feed an industry that has gone from a quite hierarchical and specialized structure that was regional and local, to one that is mostly flattened and international.  And new variations will rise to meet specialized needs.  

There is no doubt that we will be dealing with these changes for years to come.  There is also no doubt that the business will continue, though the path from source to consumer will be much more efficient and far more responsive.  


Thursday, March 15, 2018

Fine Jewelry in 2018 - In Trouble and Drifting

This year has been, if anything, disorienting.  We keep thinking that things should happen in the same way that they have happened in the past, even given the business cycles.  But somehow, they have not, even though the US economy, and the low unemployment figures, keep telling us that things are all moving in the right direction.  GDP is up, the stock market has hit record highs almost every day until recently, consumers are spending and credit card debt is rising (though that may not be that good!), and so forth.  And yet, the diamond and jewelry business seems stuck in a rut.

If we are to develop progressive business policies, we need to look closely at market realities, especially those that we should accept as fundamental, not cyclical, trends.  So here are some thoughts.

  • Retail as we have known it is rapidly disappearing.  We have lived through countless revolutions and evolutions in retailing over the last decades.  This one is different in scale and impact.  Large chains are closing stores at a rapid rate, and some are disappearing altogether.  In jewelry, the pressure is across the board; independents are closing, chains are hitting walls, and global brands are no longer growing significantly.
    We can blame it on the Internet, but that is too simple.  Yes, we will probably see overall retail sales that shift even more heavily to Internet sites - some expect that sales via the Internet will go over 50% this season, though that may not be the case in jewelry.  But many people search on line and then come into stores educated and price aware.
    But it is more than that.  All stores now compete with all stores.  The Internet has allowed everyone to reach into everyone else's pocket.  In total, we have far too much retail space (including cyberspace) for the business that is done, huge as that is.  The pie slices are getting to be too small for many firms to survive.  What we are seeing in the way of closings is an effort to scale back enough on brick and mortar stores to restore reasonable profitability.  We just don't know how much cutting will be needed.  It may be a lot more than we can imagine.
      
  • Retail formats have gone stale.  Closing unprofitable stores is an obvious thing.  Sears keeps closing them but that does not seem to make a difference.  They are not cutting fat, they are cutting muscle at this point, and we can probably guess that they will be gone relatively soon.  The essential problem is that the format - big stores, very low service and assistance, and abysmal merchandising and stocking processes - is boring beyond belief.  As everyone now knows, the store is not needed for the bulk of the merchandise.  The public has gotten totally used to ordering on line and having it delivered.  It isn't as if we need to go to a mall to pick it up.
    Speaking of malls, what better indication of massive changes in retailing do we need to see than hundreds of malls failing or being converted to a wide range service establishments.  It used to be accepted by some that consolidation brings the benefits of scale.  Signet went on that track, absorbing dozens of smaller store chains over the years.  But now Signet is planning many changes, including far greater emphasis on Internet sales, personnel changes, etc.  Being the Big Gorilla, as we have seen elsewhere (e.g., the apparent total closing of all Toys-R-Us stores), may not be salvation, but more like a millstone.
  • Retailing will focus on four important skills.  Those would be service, speed, well-informed salesmanship and innovative customization.  Retail will rely on sharply priced staples (think food, soap, apparel, stud earrings, etc) with a range of choices not possible in a brick and mortar store.  And a seamless operation blending the Internet and physical stores.  Store sizes will shrink, carrying selections that need personal involvement or produce high turnover.  We will see chains close stores that overcrowd a market area, or are too large to fit these schemes.  We already know that many retailers are ill-suited to convert to this new world, and, as in the past, whole ranges of them will disappear.
    I think of department stores (again, they consolidated and now struggle), who have huge spaces that carry anything one might want. But turnover stinks, and merchandise imbalances are eating them up.  The real estate is worth more than the business.
    I was in an Orvis store here in New York, looking for a particular item that was in their catalog.  Sorry, not in the store.  Orvis sends catalogs frequently, sometimes a few a week.  The selection in print is far greater than the store can carry, and I asked about that.  I got a good response.  The sales person opined that in the future in-store people will assist in making purchases by knowing a great deal more about the products, and their applicability to one's needs and desires.  The store format will become smaller.  He then went online for me and ordered the item I wanted, sent directly to me at home.  These are not minor changes to how retail will work.
    I also saw a column about a new movie theater in New York.  Imagine that!  But they show only older classics; they have actors, directors and producers come in to talk about the films they made.  They have a library, a bar and restaurant, a place for people to sit and chat.  I'm ready for that.
  • The question is - can we do something similar to that in jewelry? That's a head scratcher.  We can all quickly line up lots of issues that limit what we might be able to do.  Negativity is easy.
    I recently attended a panel discussion that included, besides the moderator, an estate buyer, a designer and a social media expert.  Not one of them could articulate a cogent rationale for what they do, or what the future means to them.  The estate dealer loves classic pieces with great provenance (he showed some and they were wonderful!).  He believed strongly in buying pieces with proven longevity.  Very sensible, I think.  The designer also showed beautifully executed pieces (all high end, great for big events) but then went on to say that the future will contain far more non-precious materials  than are used now.  That suggests concern about price points, but that was not mentioned.  The social media expert, essentially, said that Instagram is great, and it is so much fun to find and shoot wonderful jewelry.
    So that session, for me, was a flop.  This actually could have been an exciting occasion to dig hard, ask good questions, and make sure that the panelists prepared well.  A Blue Sky moment.  But, as I have seen so many times, people in the jewelry business are anchored in the past.  We have lots of creativity in design.  What we lack is creativity in business.
Next time, some thoughts on the supply side.

Tuesday, September 12, 2017

All you need is Love

It is fair to say that the last year or so has left us at a loss trying to understand where the business is headed.  There are the obvious changes, which I have noted in the past - a steady stream of store closings, the continuing growth of on-line sales, and a real weakness in diamond prices.  We know that some retailers are doing well, but many are struggling, trying to figure out just what to do to stimulate sales.

By now, nobody thinks we are simply going through a slow period, and sales will rise as the economy continues to grow, even though it is at a slow pace.

For starters, jewelry will continue to be an important expression of love, status, and achievement for many years to come.  But is not alone in satisfying those psychic needs, and the competition is growing.

We read a great deal of commentary on what needs to be done, most of it focused on much better marketing, creating experiential environments, wooing millennials, and becoming far more innovative and creative in merchandising.  I think that those thoughts are not new, but seem so because the tools for implementing all of that have changed and expanded so radically.  These are, after all, the basic aspects for all successful retailing.

I think it takes a macro view to begin to grasp the size of this storm.  For a change, a look at the forest instead of individual trees.

Society and economics are not just different from where we were a decade ago.  It is profoundly changing and the old formats are dying, never to come back.  We recall wholesalers, catalog showrooms, cataloguers (think Wards, and now Sears and Penney as they fade), discounters (too many to count), department stores (the entire format has collapsed into a few operations), and discounters (two or three now beyond Walmart and Target).  And, of course, mall jewelers, who disappeared by the dozens.

Was this a healthy consolidation?  Maybe for some retail categories, but in jewelry it resulted in a homogenization of most of the market, one that runs counter to the very heart of what jewelry is really all about.  And that is wonderful, innovative variety and personalization.

How did this happen?  And what does it say about where we are today?

Without going into an economic treatise (not my specialty anyway), here are some mile markers:

  • After World War II, the US owned the world.  Not only was it the biggest economy, but the rest of the world was a shambles.  Business boomed for us, and the middle class rose with a vengeance - something we believed would never end.  A chicken in every pot, two cars in every garage.
  • With that came rapid development of infrastructure.  The interstate highway system, air conditioning, and an acquisitive, newly moneyed public led to 25 years of rapid growth.  Main Street yielded to the mall.  Sleepy parts of the country boomed.
  • By the early 90s, it started to dawn on people that we were stalling, though the Y2K phenomenon masked what was happening.  Wages stalled as the rest of the world fully rebuilt and began to compete with our domestic manufacturing.  Big business built factories overseas, the only way they could compete in the world market, and that led to satisfying our domestic demands as well.
  • The American middle class started to collapse.  Millions of jobs disappeared as automation and foreign manufacturing became the major solutions for lowering costs and raising productivity.  (Jewelry is the best example for us.  It only took a few years for American jewelry manufacturing to largely evaporate.  Today, most American based manufacturing is at the high end, or in commoditized products.)
  • By 2006, the last of the malls was built in the US.  Now, over 50% of those built during the boom are closed or converted to other uses.  The only truly viable ones are the top luxury malls.
  • The US had way overdone retail expansion, but added to the woes was sharply increased competition fostered by the Internet and social media, student debt that went from practically nothing to a trillion dollars in barely a decade, and, maybe most damning, a public that has turned to disposable or shared products (e.g., costume jewelry and Uber), a sense that they own enough "stuff", and a realization that relationships and experiences are more important anyway.
We are now at a moment in which the country's very spirit is being challenged.  The two benchmark moments of our day are the near catastrophic collapse of the economy in 2008, which shocked and frightened all of us, and the election of Donald Trump.  The economy has recovered, but it now seems a very good bet that growth will be slow and fragile.  And the fears of many people that the future is shaky has led in part to Trump's election.

In all industries, and certainly in the jewelry business, companies are heavily invested in established modus operandi.  They are fearful of restructuring and rethinking their businesses, and so many will sink.  We are already seeing the devastation in retail, but it is occurring throughout the value chain.

Two hurricanes have just shown that we still react well and together when facing major disasters.  The spirit of innovation and improving our lives is very much alive.  But the middle class will never be what it was, wage gaps will get bigger, and the costs of renewal and modernization will be huge.  Still, the transformation will occur whether we like it or not, and we could very well have a new boom in the US.

With such a New Age will come the need for people to seek reward, recognition and, as I started out saying, expressions of love.  We will still be here, but the landscape will be very different.


Wednesday, June 21, 2017

Where is retail headed?

Nobody knows for sure.  Present trends show that retailers of all sorts are working hard to adapt to a marketplace that is shifting dramatically.  Jewelry retailers are not exempt from this paradigm shift, but their issues are not quite the same as for other retailers, and that holds true for most of their suppliers.

Stated quickly, what are the specific issues confronting traditional jewelry retailers?
  • The low end of the market continues to move steadily towards Internet retailers.
  • The low end of any store's business is the traffic builder, and important opportunities to build long term relationships.
  • The low end of the market, now significantly composed of non-precious materials, is appearing in many non-jewelry environments, further diluting the business.
  • The mid-market has been suffering for decades now, but will still serve a substantial part of the public.  It is increasingly owned by larger chains, but faces daunting prospects due to buyer burnout, a very mature market, high priced materials, and effective promotion of alternative luxury products who have the scale to spend heavily on marketing.
  • People are now far less inclined to "own" and collect; regardless of age, they are far more into sharing, borrowing, experiencing; that leads the mid-market consumers to either step up (if they can!) into the upper market, or step down into the fashion area.  Again, that is a trend we have all observed for years.
  • The top end of the market is alive and kicking.  The rapid growth in the number or rich and super-rich households has produced extravagant luxuries and flamboyant products.  Even so, the luxury market seems to be stalling.  The rich will only buy so much.
  • Location means everything.  It used to be that neighborhoods evolved and changed slowly and maintained their character.  Now we read about a luxury boom on one street coming and going in barely five years. Jewelry retailers have a hard time reacting to demographic changes.  Their brand and merchandising have distinct targets, and such changes can bankrupt the business quickly and easily.  So move, change or die.
  • For all channels, not having an effective web site is now becoming a sure path to failure.  Shoppers are checking the web before shopping, and checking it after shopping.  
OK, one can say that there is actually nothing new in all that, except that the pace and pressure keeps building, and that many of the traditional modes of selling jewelry are fading further and further.  And we know that in many cases, retailers selling discretionary products have a hard time recasting their brand image.

Most impressive lately has been how major luxury brands (mostly in apparel) have closed hundreds of stores, maybe thousands by now.  Some have shifted to Internet only sales.  These are not easy moves, as each location involved high setup costs, so these closing essentially acknowledge that these chains do not view current conditions as temporary.  We have entered a period of profound adjustment to new retail rules.  Clearly, the country was, and still is, over-stored, a leftover in many cases from the period of exuberant mall construction and urban renewal.

Add to that the double-digit growth rate of Internet-based retailers.  The Internet has, it seems, countless ways of seeking and reaching potential customers, and that means invading everybody's back yard.  Think you have geographic exclusivity from a brand?  Forget it.  "Local" retailers are now nationwide, if not worldwide.  That means that even in a time when there is a steady decline in the number of jewelry retailers, which we would assume benefits those still in business, we find that everyone is competing with everyone - more competition, not less.

It might not seem so, but I am not trying to be negative!  I only point out what we all should be seeing, and dealing with.  The jewelry business will not disappear.  Nor will brick and mortar stores, which will continue to be the primary means for moving merchandise.  There are a good number of retailers who have reacted to all these issues (and there are many more I did not list) and are doing well.  Some are doing very well.  

What is unfortunate is the loss we see in diversity and experience.  When we see so many high quality independent jewelers closing, usually for perfectly good reasons, we lose some of the industry's reach into local communities, and we lose their years of knowing just how to merchandise and sell better jewelry.  The reality is that starting and building that kind of store these days is really tough.  

Can the industry find its way through all this without us ending up with a few mass market super chains, a few global brands, on-line and multi-channel retailers, and a handful of fortunate independents sitting in great locations?  I sure hope there are ways to re-energize the creativity and personality of the business.  A very good independent retailer recently complained that there is nowhere near enough creativity and fresh styling ideas.  Too many companies rushing to copy whatever seems to be trending, hunkering down in this difficult time.  We don't want boring, do we?

Central to a re-thinking of what we do should be an oft-repeated but poorly promoted aspect of jewelry.  Buying jewelry, regardless of price or content, is always an emotional act.  It inevitably involves a judgment on the part of the buyer about personal statement, psychic satisfaction, reward, a gift of love to another person, and pure pleasure.  All of these aspects are far more important than the claim that a consumer "needs t try it on."  That is a mechanical or technical aspect, the piece's fit and feel, that can contribute to all the aspects just noted, but isn't itself the driver of a sale.  On-line retailers, for all their efficiency and reach, will be striving to take on that emotional element. We saw such an effort recently with one site that has a very attractive and knowledgable person walk through a decision making process with a potential buyer, all done face-to-face on Face Time.  A good start, I think, towards bringing real diversity back into jewelry.



Wednesday, April 26, 2017

Protecting the Image of Diamonds

Late last year there were two events in New York about the diamond business.  I'd call them bookends to the business, in that they address two real concerns - the image of diamonds, and the growing presence of man-made diamonds (MMDs).

The first was the presentation by DPA (Diamond Producers Association) on the new advertising and promotional program for natural diamonds, "Rare is Real."  This was, finally, an attempt by the leading mining companies to rebuild the natural diamond image in the minds of consumers.  Two ads were shown (you have probably seen them by now) and I liked them both, if that means anything, while other people were very dubious.  Both were appeals to the millennials, with different approaches, though both skated around the classic themes of commitment and happiness.  As I think further about it, both reflect lifestyles that most Trump supporters, and even many Clinton supporters, probably disapprove of.  In introducing "real life" stories, filled with doubt and adventure, the DPA seems to be trying to equate real life with real diamonds.

One question here is whether the DPA at this point is deliberately not reaching for Boomers and Trumpers, and plain old-fashioned thinkers.  It seems so, though I was told a whole range of ads have been prepared targeting other demographics.  Another question is money.  The DPA reportedly has put in some $15 million, to get this rolling, but getting money from the trade over an extended period is a real question.  It will take a lot more than that to reinvigorate the image of diamonds, I'd say at least ten times as much.  In the New America, I suspect, people will be keeping their wallets closed.  Money goes further in these days of social networking, but will this new message carry?

Here we are, months later, and I sense no impact from the DPA initiative.  And when the subject is raised at various industry get-togethers, I see eyes glaze over.  People involved in the program made a point of saying this is not a short term blast, and that it will take time, maybe a couple of years, before the effort is full-blown and showing results.  OK, we are patient, and we will wait and see.  But frankly, I can't seem get very energized by this program.

For one thing, the message is so subtle as to beg explanation.  Rarity in diamonds starts at stones of a few carats.  But jewelry is composed overwhelmingly of small stones, of which there is tonnage.  Of course that factoid will not be publicized.  So is the message that rarity is the important aspect, or that "real" is the important aspect?  (I needn't add that an MMD of eight or ten carats is also rare, at least for now, and some say it is real.)  I guess DPA is pitching both, not an easy chore.

I do not watch much TV, or dabble much in social media, but I have not seen anything from DPA so far.  Nor have I heard of any retailers, wholesalers, manufacturers, diamond dealers, cutters or traders getting on the bandwagon and putting money into the program, though I imagine there are some.  Could it be that everyone is already working on very thin margins, and image programs have no budget lines for them?  Or is everyone taking a wait and see attitude?

Diamond producers fully understand the importance of protecting the diamond image, as does everyone else involved in the business, even those now expanding production of MMDs.  Mines will still be producing for a decade or two, and anything resembling a decline in public interest will be damaging, if not destructive.  We do need to remember that diamonds are still a huge draw, with spectacular prices still being paid for unusual stones and beautifully made jewelry.  But, again, is "real" and "rare" the message, or is beauty, excitement, love and life events the message?  Real and rare no doubt applies in the auctioning of multi-million dollar stones, but can the same motivation be applied in the local store?

The other "bookend" was a special session held in New York to discuss MMDs.  The speakers concentrated on the dangers MMDs present, and the need for all parties to expend every effort possible to assure themselves that they are dealing only in natural stones.  This was followed by presentations on a range of equipment that will make it possible to check all diamonds, loose or mounted for MMDs.  An important sponsor of the event, Sterling Jewelers, has more recently offered to pre-check all diamonds to be used by their vendors.  A good move, as it makes vendors responsible if any MMDs slip through.

I noted to an attendee here that the whole session is a tribute to the creativity, dedication and genius of the criminal mind!  For all our efforts and pleas that everyone up and down the value chain should abide by best practices, the fact remains that the opportunities for fraud are everywhere.  It's a game of whack-a-mole!  Right at the session, some importers noted privately that the problem is out of control in Asia, and becoming almost laughingly so.  One technology company told me that a simple test run at a few stores of an important retailer promptly turned up MMDs mixed in with naturals in low-priced jewelry.

So, yes, we have major retailers like Sterling and others that have the scale and dedication to strictly enforce proper protocols.  But that does not account for the significant portion of the worldwide market.

We can all agree that the efforts being made by the major laboratories and marketers of diamond jewelry are important contributions to the maintenance of an ethical business.  But what I had expected at the conference was an open discussion about the impact of MMDs on diamond retailing, and how to handle it, quite aside of detection.  I wrote at length, in three blogs in May and June of 2015, about the potential impact of large scale introduction of MMDs in the market.  The consequences, even if all of it is done above board, can be severe.  So thorough presentations and discussions on the subject are the least that should be done.  We see none of that, only attempts to suppress the use of MMDs, to keep them out of the bourses, and to claim that they are worthless.  This is ostrichism of the worst sort.  MMDs are a reality that will be a solid part of the jewelry business.

On balance, both these sessions were appropriate and worthwhile.  But both fell far short of leading the industry into the future that is coming at us full speed.