Janus Thinking

Interesting article in yesterday’s Washington Post about the growing demand for “certified, pre-owned” luxury goods in the online space. Portero.com is a auction site that only offers luxury goods that are used but have been appraised and validated as authentic. According to the article:

Portero wants to appeal to buyers who appreciate the convenience of online shopping but who are more interested in getting their hands on a specific, genuine item than in getting a rock-bottom bargain.

The site aims to be the Sotheby’s or Christie’s online equivalent for jewelry, watches and handbags rather than an eBay-style flea market.

The items on the site come from individuals or dealers (where Portero makes an average 25% commission on sales) or from the site itself. All items pass through Portero’s offices to be validated, professionally photographed and listed, and then gift-boxed before being sent to buyers.

With eBay hosting the vast majority of online auctions, a certified used goods auction site is an interesting experiment. It’s likely the site lacks the high volume of traffic that eBay gets, but I’d bet the traffic it does get is very high quality with plenty of users serious about making purchases. That Portero handles the auction and provides a guarantee with every purchase surely eases the minds of people who aren’t experienced with online auctions.

Stephanie Phair, vice president of business development for Portero, believes that the site really fills a niche:

There is a market out there, call it an aspirational market, of people who really want that Chloe bag. With the pre-owned market . . . it’s okay to have last year’s. The breathless fashion customer is ours, but on the selling side.

I agree. Portero provides a market for connoisseurs to find the exact items they want to appreciate; they might not see the same items anywhere else, and if they do (on eBay for example) they might have difficulty verifying them. With more wealthy people going online, Portero could be quite a success.

When we mentioned fancy and expensive waters on Janus Thinking before, I hoped it was marking a trend (spending posh amounts on a common commodity) in decline, but this doesn’t seem to be the case. This week Luxist brought to my attention a luxury water bar in Chappaqua, New York. Via Genova is an ‘eclectic cafe and ultimate hydration station’ that offers over 50 different waters, with names like Apollinaris, Badoit, Speyside Glenlivet, and Vichy Catalan. They hold water tastings and do weddings, and if you spend over $2000 on a water event, you get ‘a free gift of bling!’.

There will always be people willing to spend more than others, but as in my previous post I question the extent to which one can be a connoisseur of water–yes, mineral contents and carbonation and will differ, but the base product remains essentially free and it’s difficult for the average person to discern the extremely subtle differences in waters. By offering a free gift of bling(!) for high rollers, Via Genova seems to be targeting conspicuous spenders more than water appreciators.

Are people getting fleeced (or in this case soaked) by operators like Via Genova? Luxury remains irrespective of price and can be anything that fulfills the needs of the consumer, but I do question the need to spend $55 for a bottle of crystal-covered ‘Bling h2o.’

If the volatility of a diamond investment fund is concerning (see my earlier posts), even more concerning for the industry is a diamond futures market
based on the price of monthly cash-tenders for brilliant-cut diamonds between 1.01 and 1.19 carats.

Martin Rappaport’s intended move goes beyond his speculative Rappaport Index, and produces real sale prices as the basis for derivatives trading. The futures market creates a floor where people can trade the goods and pay him a fee for using his facilities.

The industry at large has much to fear from a further increase in commoditisation and transparency.

If transaction-based prices become publicly available, what’s to stop consumers using these precedents to drive their high-street negotiations? What difference in value is there between Tiffany and versus eBay

The move (and that of others, are likely to accelerate the unbundling of the jewellery industry into separate processes of diamond purchase and jewellery assembly, and will also encourage the emergence diamond leasing as a hedged ownership strategy - both for businesses and higher-end consumers.

In the process, the notion that “a diamond is forever” will be further undermined, and the American trend of diamond ‘upgrades’ is likely to become more and more prominent as selected consumers and brokers start to arbitrage the market.

Without historic category-wide mystique, diamond differentiation will need to be on harder considerations such as sourcing history, country of origin or fair trade credentials. In the commoditised marketplace that Martin is creating, synthetics will feel like a very real choice.

The industry may be drowing in $12 billion of debt, but swallowing the water won’t help…

Poor Martin enjoys the dubious honour of being the only scapegoat for the industry failures. He alone is recognised by name (the rest of the scapegoats are companies, or industry quangos). But he is not the evil.

Martin has an excellent “nose” to smell opportunities and to exploit them. His price list that was supposed to be an estimate of the non-existent cash-based New York market became the industry’s bible. While pricing of diamonds in the past was an obscured art, they became now an open book.

His actions, then and now, are the symptomatic of an entire industry that forgot how to market its product. This trend is an old one and my research traces it back to 1980, although the trend has intensified many fold in the last five years.

Martin is honest enough to point out that good jewellers will not need this vehicle as they are able to create proper added value. In other words, those who understand how diamonds should be marketed will prevail.

But what is clear is that an internal crash in the industry is increasingly inevitable and largely self-inflicted. These commoditising practices are simply the final nails that are hammered into the industry’s coffin.

The only hope I have is that the new industry leader will emerge who will lead both the death and subsequent resuscitation of this beautiful industry in a way that will be least painful to my friends and colleagues.

Saviours can sometimes come in unlikely form…eh Martin?

Antwerp Facets newswire builds on the arguments I have outlined before in their post on on the advent of diamond derivatives.

Apparently Bankers are delighted that speculators will bear a stock-financing burden that has become too risky for them.

But I have other concerns too….

Introducing a futures market to enable speculation on something that has no material worth is a very dangerous game.

It is not just speculators who can lose out.

A spate of short selling on the futures market can have real world impact - not just on swanky jewellery firms and wealthy mining companies, but on the economies which rely on diamonds. Whereas Soros’s speculation against the pound merely hammered the UK economy, diamond speculators could impact fragile producer economies like Namibia.

Futures traders don’t care about the underlying value of assets; just in guessing right on market direction.

Any futures market based on a limited range is unlikely to be strong enough or liquid enough to avoid massive distortions.

We are living in dangerous times. The insurance companies must be rubbing their hands.

Read the rest of this entry »

Two critical diamond industry events have thus far passed under the radar of mainstream media. They deserve an airing here as they signal a shift to open-access, transparent, and globalised diamond trading - a far cry from the industry’s heritage in tight handshake-based relationships.

First: The creation of a $400m Diamond Circle Capital Fund, an investment fund which will invest in $1m+ high end diamond. The fund is the brainchild of commodity asset management specialist Diapason.

Second: The development of a diamond futures market by industry ‘wild child’ Martin Rappaport, based on ‘bread and butter’ brilliant diamonds - high quality rounds between 1.01 and 1.19 carats. The classic engagement ring ingredient.

Both measures aim to address fundamental weaknesses in the existing diamond trade: while consumer demand is solid (if not exactly strong) and extraction capacity is solid (if not exactly strong), the centre of the diamond pipeline is in deep trouble. The distribution arteries of the industry are clogged. Rough dealers, manufacturers and polished wholesalers are finding it hard to breathe. Both stock and debt levels are at record highs.

It’s the first move - the investment fund - that I want to address first.
According to industry commentator Chaim Evan-Zohar, these measures should attract much-needed external capital into the industry, and will enable manufacturers to shift goods which would otherwise get stuck in the distribution, or shifted on at a bargain rate; they need deep pockets to hold onto.

There are dozens of good diamond manufacturers who will not even try to compete for the truly large rough stones, because they cannot be sure that they have the right connections. The Diamond Circle Capital fund significantly widens opportunities for the trade to sell large polished stones.

As De Beers’s historic monopoly passes into history, a period of uncertainty emerged in which the industry needs new pathways to get goods to consumers.

After a long period in the dodrums, Chinese and Indian demand is on the rise for smaller goods, and oligarchs increasingly need something shiny to please their soon-to-be-ex-wives. The is now some hope that the industry may finally be emerging from its doldrums. This hope, and desparation at the status quo is encouraging a new wave of innovation.

Both these new measures rely upon the fact that diamonds can be traded as commodities. By picking narrowly defined segments - one highly volatile and one highly stable, the measures will introduce powerful, albeit potentially conflicting price signals into an opaque marketplace.

But the question is, who will this benefit. Does it really help manufacturers? Does it really help consumers? Critically, will it help investors?

For manufacturers there may well be be a one-time injection of funds as they sell difficult to shift of stock to the Diamond Circle fund, but thereafter, it’s unlikely the fund will have the sales capability to shift much stock. If it does, the potential for misleading transactions is immense. On the one hand it promises to set a benchmark by disclosing genuine sales figures rather than tax-cogniscent guesstimates. On the other hand, the integrity of these transactions will be very difficult to assure. What liquidity is there really in a rolling stock of 100 or 200 diamonds?

The proposed participants are actually rich rough dealers with little sales experience.
As one of the world’s leading retailers of large stone said to me:

Selling large diamonds is an art form, making the buyer feel like a queen. Manufacturers should stay well away.

Building on his observation, it’s not the business of a fund, or even, really, of an auction house to sell these diamonds. It’s quite possible that the fund may actually act to suppress value rather than enhance it.

Secondly, the fund is likely to have a disproportionate number of difficult to sell or ugly diamonds - if a dealer has a really quality large diamond he is likely to be able to find a more value-adding route for it.

The third point is that not all diamonds have value. Period. Some are just not saleable, at any price. Although the aggregation created by the fund is likely to smoothe out the risks of holding these diamonds, on average it will probably overvalue the diamonds it contains.

To conclude, and to challenge Chaim’s view, the simple truth is diamonds are NOT commodities. Treating them as such will not inflate value, it will only erode it…

The sooner the industry finds a way to step back from this abyss, the sooner it may regain a luxury premium.

I will comment on Martin Rappaport’s futures market in due course…wait for part II…