Monday, August 18, 2014

Diamonds: A brilliant future

I am finally able to return to this blog, and write again.  Normally, summer is slow-paced and a good time to think about what I've heard over the spring.  This summer was different.  Some brief time off (though we are off again tomorrow for two weeks of travel), but also a convergence of personal and business matters.

I mention all this because now, as I sit back for a spell and think about the leading issue that has bubbled up again and again over the past months, even in the midst of all the diversions of my own activity, it is the chatter about diamonds.  Colored stones are steadily selling, maybe even going up a bit.  Gold prices have pretty much stalled, which is a good thing, as it allows everyone down to the consumer to acclimate to its present level.

But it is diamonds that are a boil.  Retailers are not moving diamonds in volumes that would be indicated by an apparently improving economy.  Retailers are generally reporting very sluggish business.  Blue Nile seems to have hit a wall, though I suspect that the Internet retailer might be reaching its probable market share.  Anna Martin, a long-time top loan officer at ABN Amro and Standard Chartered banks, and a leading industry advocate, has resigned to join GIA.  Even top quality diamonds in 2-carat to 5-carat sizes have seen prices slip.  We thought that the 1% were still spending freely.

So how do we reasonably assess all this, and where is it leading us.  For one thing, it is not the hubbub caused by man-made diamonds (MMD's, I call them).  Yes, there will be a place for them and there will be a time when they serve to satisfy important parts of the market.  But productions are still not big, and there is no indication that the public is shying away from diamonds because they are not sure of what they are buying.

It does seem that the consumer baton is being passed on to the Millennials.  The boomer generation is retiring in large numbers now, and their attention is turning to dealing with retirement.  The Millennials are bringing a different attitude towards buying luxuries and it is one we are not used to.  One report I saw stated that on-line sale of jewelry is now nearly 20% of total jewelry sales.  Speaking from personal knowledge, these sales are largely under $1,000 retail, but plenty of bigger pieces are selling. 

These sales are often going to firms outside the recognized range of jewelry retail channels, and it is causing disruptions.  These lower priced items are low-hanging fruit, the easiest sales to make.  But traditional retailers have lived on a lot of that traffic.  It is how they have built traffic and consumer loyalty.  It is how they have earned the confidence of their customers and allowed them to upgrade them into diamond buyers.  The diamond sale, and especially the bridal sale, is the bedrock of many jewelers' business.

Another factor might be the competition for the luxury dollar.  We have had many conversations with friends and acquaintances about what is exciting in their lives.  Once we get past kids, it is travel, especially to exotic places - Florida does not come up.  Occasionally, it is about cars, or fashion shows.  The Metropolitan Museum in New York keeps putting on shows of famous designers - though they also mounted a show of JAR pieces.  I find it almost amusing to go through a very thick September issue of Vanity Fair, and find only a couple of jewelry ads amidst hundred of fashion clothing ads that have models wearing no jewelry.  In  a word, the competition for luxury dollars is eating our lunch.

Worst, perhaps, is that the vast majority of diamond dealers, and even diamond retailers, have not the slightest idea of how to enhance the product.  With them, it is still a candy store business.  And many will be departing the business as a result.

OK.  I could go on with more indications of how the diamond business is changing.  But, in spite of this not insignificant restructuring that has started and will accelerate, the future is not dull. 

Diamond adornment, love, and the status that diamond jewelry presents is well-entrenched in Western culture, has been aggressively taken on by oil-rich sheikdoms.  The aura is already enhanced by Russian oligarchs and Chinese millionaires.  Make that billionaires.  The more they buy, the more they are invested in the magic of diamonds, and the more the rest of the world sees the afterglow.  The US market is mature and saturated, but the question here is not if the business continues to flourish, because it will.  The question is rather who will own it.

Of course, we all know (or should know) that worldwide production will steadily decline over the coming years, and with that will come ever greater reluctance on the part of the major producers to spend heavily in marketing diamonds.  They are already not doing much.  So the strength in the future will go to those who know how to handle new productions, who systematically acquire recycled diamonds, who know jewelry production, can meet the needs of retailing and are first class marketers who can compete effectively for disposable dollars. 

My guess is that such entities, which can be small, niche specialists or large companies, will find success by acquiring or merging these talents. 

But diamonds are not going away.  Their future is still brilliant!