Tuesday, June 2, 2020

The Future of Jewelry, Part 6: Banking - In the Age of COVID-19


Here is the list of issues we have been covering — we are up to number 6.
  1. The Gig Economy
  2. Millennials
  3. Climate Change
  4. Consolidation and/or Decline
  5. Natural Diamonds vs Lab-Grown
  6. Banking
  7. Image 
  8. Demographics
  9. Retail Evolution
  10. Industry Structure

Have you been wondering where I am?  So have I.  We have all, it seems, been wandering in a wilderness with no milestones, road signs, or even taco carts.  I started out months ago offering some thoughts about an industry that was having a bumpy ride, and found that when I was half way through, everything was turned on its head.  So I paused, just to see what we might see as we look ahead that is not a mirage.

But now, as we observe worldwide assaults on the status quo, ailing as it is, we need to stand back, take a deep breath, and prepare to dive into very unfamiliar seas.

Our case in point in this post - banking.  Answer - what banking?  There isn't any that we recognize in the jewelry business, and understandably so, as banks have no idea where they are heading themselves, except into uncharted waters.  Double that issue when considering the specialized needs of the gem and jewelry business, further complicated by regulations on money laundering and terrorism.  Further, jewelry is not, by any measure, an "essential" service, so it falls down the list, far down the list, of economic priorities.

In defense of the importance and relevancy of the business for mankind, we make a point, for example, that there are perhaps 10 millions of people involved in the diamond business.    That's a very small percentage of the world's population, and a tiny part of the American economy.  So we do not stand out either for the essential aspect of what we do, nor as a big employer.  In the age of Covid-19, there is not much of an argument we can make.

That is not to say that banks or other financing entities as simply going to throw in the towel.  Their first priority, surely, will be to see what can be salvaged, or sustained, even in short term increments.  But over the last decade or more, many banks have abandoned the business altogether, and especially in the case of major lenders in the diamond business. Unfortunately, major frauds have proved over and over again that the diamond business in particular is risky.  

A few months ago, I watched a series of videos covering a diamond-oriented conference held in Dubai.  I found it quite interesting because many of the panelists were quite open with their views on the state of the business.  In one case, I was particularly struck by the comments made by an investor who helped finance a company that was manufacturing and marketing man-made diamonds.  The investment of millions made total sense to him as the business was growing by solid double digits.  

My immediate thought was how unusual it was to see a major investor in our specialized business.  Here he was sitting at a conference filled with big-time natural diamond mining companies and their clients.  It seemed apparent that he did not consider going with any of them.  Deep trouble?  Very narrow growth potential?  A decline in natural diamond production?  Limited future in a business with far too many competitors?  I don't know, of course, but maybe all of that.

Still, we need to look at the issue of banking for the jewelry business prospectively.  No matter the nature of the end products, the public will continue to desire jewelry.  By its nature, jewelry is endlessly diverse, and that requires financing during the extended time frames required for design, production, distribution and selling.  In fine jewelry in particular, turnovers are slow, and that takes patience - and money.  But these processes are being rapidly transformed in the tech age, sharply reducing the need for financing and the risks involved for both parties.

It is helpful to look at banking in the context of the diamond business, central to the issue.  The business model used by De Beers over many decades worked very well, by and large.  Their core objectives were to protect the value of diamonds by acting as a buffer against changing economic conditions; to see sightholders make some profits (though not too much!) by cycling goods through ten times a year; and by protecting the producers, the mid-market - and the banks, by managing supply.

This all worked fine until Rio Tinto, owners of the Argyle mine, went their own way, followed by the EU requiring Russia to stop selling to De Beers, and Angola selling directly. Botswana and South Africa pressed for more control and beneficiation, and everyone started worrying about conflict diamonds.  Suddenly, diamond prices started to fluctuate like any other core product.  Dealers saw margins shrink to near nothing.  De Beers edged further and further away from their own rules, especially after they got rid of most of a $5 billion inventory.  And the Oppenheimers sold all their interest in the company.  What more need be added to all that?  That man-made diamonds came on the market, including Lightbox, De Beers' own effort?

The old structure is keeling over fast and has been given a big shove by Covid-19.  We know the months and years ahead will be a period in which companies will find new ways to find customers, eliminate intermediaries, and sell jewelry as directly as possible.  Banks will be back when they see daylight.  So will new non-bank entities that will provide financing under new arrangements.    

The times are uncertain, but we can be fairly certain that in a period of profound change, the opportunities will be big.  

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