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  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?

Tuesday, June 16, 2015

The Top 10 issues for 2015 - #3: The Third of Three Tipping Points of Man-made Diamonds

The last two posts covered scenarios that I think are totally possible, even probable, as we move further into a time of declining production of diamonds and increasing production of MMDs - man-made diamonds.

Until relatively recently, MMDs were too often the means for people to realize extra profits by deceiving buyers.  Even experts cannot detect MMDs without special equipment, and for years no such equipment was available.  Yes, labs could detect MMDs, but it is very safe to assume that only a tiny percent ever got that far - most MMDs are smaller stones.  In addition, productions were so small, that finding them was more by accident then by a directed search.

I recall being told years ago that a New York based lab found MMDs because a major auction house checked all diamonds being auctioned, mounted or loose, as a matter of course.  I have never heard of any other company doing that.

Of course, diamond "imitations" have been around a long time.  There was always glass, but also yags and CZ's.  CZ has found its own place in the jewelry business. But none of them, or for that matter stones like white sapphires or moissanite, have been viewed as replacements for diamonds. But all of these had the same objective - offering the public a much cheaper alternative to diamonds, and/or precious metals, that have a diamond look.

The public understood all that at the same time that it understood that there were very different virtues and benefits to owning "the real thing."  There is the lasting value of the piece, and there are the many psychic lifts that "real" jewelry offered.

Even so, with rising metal and stone costs (not just diamonds, but colored stones as well), many designers and jewelry manufacturers have opted over the last few years to bridge the two worlds of fashion and fine jewelry.  We have seen a boom in diamonds set in silver, for example, something that I am sure the diamond producers were not too unhappy to see.  After all, that allowed more value to go into stones instead of metal, and gave them some room, supposedly, to raise prices.  No sense leaving too much profit on the table for others.

Innovation is everywhere!  In the battle to control costs we see the use of brass, diamond coated CZ's, and metal plating of every sort, and now full bore collections of MMDs, many using a mix of natural stones and MMDs.

The caveat I extend is that while the scenarios I described in the last two posts seem highly plausible, timing is harder to predict.  As I noted, these market forces, disruptive as they are, may gather momentum more slowly than expected.  Our industry has persistent inertia, even in the face of obvious changes in the business.  We know the quote: "This industry never misses an opportunity to miss an opportunity."  But there are thousands of businesses deeply invested in the natural diamond pipeline, and most will fight to sustain the existing business models.  So it goes.

Even not knowing how and when these changes will progress, the question arises; what is the end game?  Fair enough, and without laying out every possible outcome, let's look at Tipping Point #3.

We start with the condition I last described, which is a general and broad use of both naturals and MMDs.  The public will largely accept the situation, I believe, and we probably will see a fairly stable market.  The question is, who will be the suppliers?

If we make a reasonable prediction that diamond prices, both MMDs and naturals, will be set by MMDs, even if there is some spread between the two.  (I exclude larger stones, for which there will probably be a distinct market, especially for stones with known provenance.)

But here we have a real split in possibilities.  If manufacturing of MMDs is widespread and production capacity climbs well beyond the needs of the market, then we would expect prices to fall, possibly precipitously.  This would presume that the cost of equipment and supplies for production of MMDs will go low enough to warrant widespread use.  If that happens, the image of diamonds could be severely impaired.  The attributes of rarity and "investment" could be destroyed.  Jewelry sales would continue, but the historical emotional content we have come to associate with diamonds might fade.

If that seems scary, a different outcome might be worse.   Should the cost of equipment and supplies remain relatively high, then companies that are now producing MMDs, when prices on the stones are still high, will have strong competitive advantages when stone prices decline.  Many installations today are growing rapidly because the high prices of MMDs (which only need to trail naturals by 30% or so to make them attractive) allows machinery to be amortized in 18 months or less.  Once such a base is established, new entrants would not be able to justify the cost vs the returns.  And the production of MMD's could be controlled by a handful of companies.

I am reminded of plain gold bands - another commodity.  Nobody can consider entering that business today.  The cost of new equipment can only be absorbed by those few companies that already own that business and possess long established production capability.

The bottom line in this case will be who owns the business?  In one recent conversation, a person considering entering the retailing of MMDs worried most about assuring consistent supply, about not finding at some future date that the producers only want to feed their own channel.  Does that sound familiar?  It should.  That is how De Beers ran their sales and distribution for decades.  Might we end up with another cartel?  A cartel could see that prices are high enough to maintain the perceived value of diamonds, but low enough to fend off competitors.  At best, that will be a difficult balance.

Or we will see diamonds acquire a much larger base of consumers as low prices puts diamond jewelry into the reach of many more people.  But with what image?

My purpose here is not to frighten people or predict doom.  I have no ax to grind.  But technology plays no favorites, and reasonable people need to look ahead and consider the disruptive possibilities that MMDs could bring to the industry.  Some progressive thinking and planning is in order.

All of this, of course, is looking far down the road.  Or maybe not.

Wednesday, June 3, 2015

The Top 10 issues for 2015 - #2: The Second of Three Tipping Points of Man-made Diamonds

Last week I posted a blog covering the first of the three tipping points for man-made diamonds (MMD's), moments when MMD's will have dramatic effects on the diamond business.  (If you have not read it, I suggest doing so before going on with this blog.)

No sooner had I posted tipping point 1, when news came out that a very high quality 10-carat diamond was produced by New Diamond Technology, a Russian company claiming that they possess a new process that is far more efficient.  They claim it took them 300 hours to create this stone, which was cut from a much larger piece of rough, over 30 carats.  Let's see, 300 hours is 12.5 days for a 10-carat diamond.  Whether is was a promotional effort of regular production, most miners would love to have a finished 10-carat high quality stone every ten days.

Then I read that both Helzberg's and Sam's Club, each of whom address somewhat different market segments, are both offering larger diamonds in pink, yellow and white, priced in the thousands.

So the first tipping point may already be arriving - sooner than I thought.

There are some good reasons for retailers to make the move to MMD's, aside of the price differential.  The major producers of naturals, De Beers, Alrosa, Rio Tinto, etc, know what's coming, essentially the end of the road.  So they have three strong motivations.  Sell as much as possible as fast as possible and at the highest price possible, because the rules of the game may change abruptly.  So keep up the marketing (I see that "A Diamond is Forever" is being re-launched), pooh-pooh those diamonds that did not take millions of years to make (only 300 hours...) and squeeze out every dime they can from sightholders.  Martin Rapaport, at his heavily attended annual breakfast at the JCK Show in Las Vegas, says that the producers need to see to it that the entire production and distribution chain, all the way to the consumer, needs to be protected.  It isn't likely at all that this is on their minds.  Their futures are too short.

This has had the deleterious effect of overloading the pipeline with diamonds (Rapaport states that his RapNet lists over one million stones), crushing margins for cutters, and scaring away bankers from such low-margin businesses.  But producers have few options.  They cannot really cut back production in an effort to create scarcity because they will never come to agreement between them to do that (even OPEC is failing at that) and because that might not even create the desired effect!  Recycled goods and MMD's might fill that hole and at a lower price, thereby undermining the producers' business even further.

So we will see a continuation of a push to raise prices, ex-plan special deals, and sight sizes and prices only backing off at the last moment, when sightholder rebellion is evident.

This is not normal commercial business. In every other commodity, when demand is down, prices drop and mining is curtailed. The buyers' needs drive production and prices. 

The advent of MMD's introduces other hazards for producers.  De Beers did a great job of building the image of diamonds as a scarce, expensive gift from mother earth.  The thought of diamonds being produced like widgets has to be a scary prospect, especially when you don't end up with imperfect cheap diamonds, but mostly higher quality cheap diamonds.  That factor alone could eventually undo the viability of many mines that produce mostly low quality diamonds.

All the more reason why all producers today are full steam ahead.

Under these conditions, the temptation to shift to MMD's (and quit sights, perhaps) is compelling, and apparently under way.  A major aspect facing jewelry manufacturers is throughput.  Keeping a factory busy is important, which is why we have seen so many shift to alternative materials and stones.  And volume is much more important to them than moving diamonds.  The consumer buys finished jewelry.  The diamond may be an important component, but that is what it is - a component.

This brings us to tipping point number 2.

It is a reasonable assumption that the production and sale of MMD's under all these factors will expand far faster than we might imagine. We already see pieces that combine MMD's and naturals, some for centers, some for side stones.  The moment will arrive - actually must arrive - when manufacturers will need certain assortments and quantities of diamonds to meet orders, and the only way to achieve that is by using both naturals and/or MMD's as available to get the job done.  I'd venture to say that is already been happening for quite a while, but without disclosure.  (There are known cases, and both manufacturers and retailers are livid over being overcharged, never mind being deceived.)

We know, of course, of all the efforts being made to develop scanners and testers that would allow easy, mass detection.  Good try, I say, but the likelihood of fast, cheap, broadly distributed detection devices is very faint.  And even if it did miraculously happen, it does not solve the problem of availability of a steady, reliable supply, at a workable price, that all jewelry manufacturers would like to see.  Not in a world with rising demand and declining production of naturals (especially middle to better quality stones).

So tipping point number 2 will occur when MMD's are ubiquitous, and the wholesalers and retailers will not want to, or be able to, deal with the job of guaranteeing use of natural stones.  That will become next to impossible.  So everyone will revert to saying that all these stones are "diamonds" and that some or all are natural, some or all are MMD's.

The diamond world, at that moment, will change profoundly.  A paradigm shift we will call it, and one with many implications that I will cover next time before suggesting tipping point #3.

Tuesday, May 26, 2015

The Top 10 issues for 2015 - #1: The Three Tipping Points of Man-made Diamonds

First off, my apologies to readers of this blog, for not having written for a while.  No, I have not disappeared, just had a busy time for a few months.  But here we are running into the Summer trade shows, so it's time to offer some perspectives!

In thinking over the cross-currents pummeling our business these days, I realize that we are but one cork bobbing around in heavy seas.  True, we have issues that are peculiar to the business, but economic, technological and political upheavals occurring world-wide are also making it very difficult to get clarity on where we might be heading.

Still, some developments warrant a close look, even if the effects will not be fully felt for a few years.  One that I have written about before is the rise of man-made diamonds (MMD's) in the trade.  In my view, there will be three moments in time when MMD's will reach tipping points, moments when their presence in the marketplace will force us to adapt.  I'll cover tipping point #1 here, and write of the other two in future blogs.

First, some indisputable facts about where we are today.  Production of MMD's continues to ramp up.  I have long stated that a good percentage of the consuming public will have no problem in buying MMD's, and that appears to be proving true.  Retailers today are beginning to use MMD's as alternative lower-priced "diamonds."  The machinery is improving, and the cost of equipment is declining.  It now only takes about 18 months or less to fully amortize the cost of a machine.  (I am talking about the CVD process, but it applies to HPHT as well.)  And we can only expect costs to decline even further.

At the present cost differential between naturals and MMD's, which can be 30-40%, retailers can hit much more attractive price points while improving margin.  (Never mind using SI or VS quality instead of I2 or I3.)  That alone will become a bigger and bigger factor, especially for so many retailers that are located in areas that have not seen real improvement in the economy.  As we know, the US economy is showing slow but steady growth, but that is not true everywhere.  Retail sales in general have seen declines for the last six months.

That is only one side of the situation.  Two other factors are at work that retailers are watching; diamond producers (De Beers and others) are pushing to raise prices as high as possible; and recycling is offering retailers the ability to acquire diamonds well below wholesale prices.   

So what will be tipping point number 1?  Independent retailers will be the first channel of traditional jewelers to expand merchandising of MMD's.  (Other non-traditional channels, such as apparel, resort, accessory, gift, etc., will also readily get into MMD's, as they do not have the same stake in the diamond business as do traditional stores.)  Major chains will hold back, understandably, as they are unsure of the effect MMD's will have on the viability of millions of dollars of inventory in natural diamonds.

But at some point, it will be obvious to everyone that a significant piece of business, one with higher margins, is being pulled away from core jewelry retailers, and they will be forced to make a change.  How, and when, is a different question.  It will not be tomorrow, but when it happens, it will be sudden and broad, as no chain in the mass market will want to be left behind.  My guess is that the first one to jump will do so in order to obtain first mover advantage over the competition.

This will be the moment when MMD's will attain credibility and market acceptance.  To some degree the change will be forced, as production of naturals will continue to decline steadily; as marketing of MMD's as non-abuse products will take stronger hold; and as the price differential grows larger and larger.

The context here is important.  The impact on engagement rings of, say, one carat and larger will be less affected - though I recently saw a new program of engagement rings with MMD centers that was excellent.  The major effect will be in body jewelry, an area that is giving many retailers problems. 

We will then see tipping point #2.  That's for next time.