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.