diamond bubble

The diamond bubble: an email conversation (Part 1)

Isaac Mostovicz writes...

This is the first of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking. Randy raises a question about an assumption made in Isaac’s PhD thesis:

Marking up by retailers varies and it depends on the location of the shop, its prestige, the type of diamonds sold and its geographic location. A high end jewellery shop in main luxury shopping European cities might mark up its diamond by about 300% whereas a cheap outlet in the US will mark up only by 40% or less (Even-Zohar, 2002). On average, it is estimated that the markup is about 200%, and the cost of the diamond to the consumer is about 370%, based on the index of rough cost at the beginning of the diamond pipeline.

And so the email exchange begins:

From: Randy Pearson
Sent: Friday, October 06, 2006 5:13 PM
To: Isaac Mostovicz

Dear Isaac,

I did want to ask a question about the diamond bubble piece. You made an assumption in your writing that I’m a little concerned about which was the mark up from wholesale to retail that is captured by the retailer of 200% average. I’m not sure how this skews the analysis, but my instinct is that this number is too high. On the small, melee type items I’m sure this is realistic as it is sold as promotional and in huge quantity, but for the type of shops I have contact with, this is on average much too high.

What I see happening is a squeeze from both ends. That’s the real problem as it’s a sort of implosion. The polisher can not survive losing money on each diamond he cuts and at the other end we through experience know how financially weak the retailer is in this market. A once healthy margin on a 1ct G,VS of 65 to 80% is now 20-40% in most cases and less in some. The current squeeze can only go so far and people will simply quit the fight and move over to another venture.

Anyway, the logic of the article is solid. If I had a criticism it would be that this piece covers too much ground but for a professional publication the total view is important.

Randy Pearson
S. Muller & Sons

Check back at the same time tomorrow for the next installment…

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