The Indian Reserve Bank recently set up a task force to look into “distress arising on account of problems faced by diamond industry.” While there is still demand for goods from the diamond industry, nobody really know what exactly the demand is. In addition, once workers leave the diamond industry, they will not come back so easily, especially if they find work elsewhere. I believe that growing the industry again after the downturn will be problematic. Since India controls about 60% of the market, a serious reduction in production there will have a great effect on the producing companies: they’ll soon suffer from cash flow issues.

My colleague Randy believes that it’s good that the Indian industry is at least acting. He says:

One sure way to correct is to cut off the new inputs of polish into the pipeline. It is painful, but necessary. Attitude change is also a necessary step–I now see this as a major impediment at the retail end. The jeweler is still arrogantly treating the supplier like a banker with free interest. This is driving me crazy, and the shift is coming around the bend: I’m starting to hear cries from jewellers of not being able to get their hands on merchandise.  My wish would be that all suppliers would pull back and only release goods to people who are truly credit worthy.

I agree with Randy’s assessment–the jewellers’ attitude is what concerns me most. This is not arrogance though; rather, it’s a problem of responsibility. Since jewellers were educated by their suppliers that they do not have to take any responsibility for their actions (as long as they pay at the end of the day), they would not like to have to start acting responsibly now. This is actually the reason for the current economic crisis, when actors did not have to take any responsibility for their actions. We had lenders who did not check the risk, risk controllers who never met the borrower and the entire industry that hid behind regulations and rules. Lack of responsibility leads always to unethical behaviour.

Recently Martin Rappaport likened the diamond industry’s current trouble to flying a plane in freefall: a knee-jerk reaction to pull the nose up (fighting external forces) will inevitably fail, whereas pushing the nose down and eventually getting lift (going with the flow) will allow you to recover.

My problem with this analogy is that it’s already too late. What do you do when you are too close to the ground and there is no air left to lift you up? That is unfortunately the case with the diamond trade; there is no cash left and many companies are de-facto bankrupt.

Even for companies that can afford it, I don’t think slashing prices will help. It is a well known phenomenon in luxury that when prices go below a certain level, demand shrinks. Lower your prices and you will send away the few who are still willing to buy a diamond.

It seems that we are dealing with an autistic industry that is totally disconnected from the reality out there. The real market for diamonds, consumer and otherwise, is not running by the theories that many experts are putting out right now. If the industry really wants to start doing something that works, they’ll need to examine their consumer base and rethink their marketing.

As participants in today’s diamond industry we are all caught in a belonging paradox, torn between a desire for personal coherence and autonomy and our actual situation of near total dependency on others.

Typically, we respond to this belonging paradox through repression.  We assert that “I am right” but “they” are wrong. I am no exception to this.  None of us is immune.

This false belief that we “know” best leads to very real tensions once the results of our decisions fail to show up – when we start to realise that the others are right as well, in their own way and on their own terms.

The diamond industry is de facto, bankrupt.  But the answer to its future is not to be found in economics, but in psychology.  Psychological forces are more important than economic ones.  While economic forces keep on changing over time, psychological forces are stable; what we see today could be identified yesterday and will still true be tomorrow.

More importantly, as the recent economic events taught us, there are economic factors that we do not have control of or cannot change. Psychological factors are within our reach and once we understand them we can certainly try to cope with them.

A typical reaction to this ‘belonging paradox’ is through projection – the transferring of the conflicted feeling onto a scapegoat or a repository of bad feeling.  Martin Rappaport is one, the economic situation is another and maybe I, with my statements of doom will be seen as another.

But I must stick to my guns, even while acknowledging others’ opinions.  The fact is that the old engagement “dream” identified with diamonds has steadily declined. The socio-demographic fabric has been changed since this “dream” was conceived sixty years ago. Instead this universal dream has been replaced with technical marketing approaches which have commoditised diamonds and eroded their luxury status. From the moment we started to ’sell’ diamonds rather than dreams, the market has been in decline.

The way out of the belonging paradox (and a return the glory days to the diamond market), is to transcend our dependency on ‘them’, by discovering a new message, a new form of leadership and a new diamond dream.

We need: New independent market research, based on solid principles of luxury marketing

We need: New dreams, based on modern society’s aspirations and challenges and desires, not on nostalgia.

We need: New, more intimate channels of communications need to be considered with each new “dream” conceived.

We need: Proper metrics should be put in place to measure success step by step, to provide diamond producers with actionable information.

None of this is impossible.  And none of this is costly compared to the billions that have been spent in overseeing decline.  The key lies in human psychology not market economics.

Our future is in our own hands if only we can transcend the belonging paradox.

500 diamond industry insiders gathered over the weekend at in Antwerp, forming workgroups and discussion groups to discuss the way forward for the industry – prior to the industry’s emergency Diamond Summit on Monday.

The Chair of that meeting, industry guru Chaim Evan Zohar, predicted a 10% downturn in diamond sales…

He said:

“This crisis…

…will translate to a decrease in demand for loose polished diamonds at wholesale of about 20 percent, and a 35 percent fall in the amount of rough diamonds required. [But] Let us keep things in perspective …under current circumstances, a 10 percent fall in demand at retail is not the end of the world.

He’s is right of course.  When the car industry is imploding and being bailed by government, 10% sounds pretty good.  Even so a market shrinking by an optimistic 10% is still going to be the end of the road for many cash-strapped jewellers and over-leveraged wholesalers.  And let’s face it, no government is going to bail out the diamond industry. We have to find our own solution..  As Chaim has previously said in his memo at diamondintelligence:

A review of major industry bankruptcies in recent years shows that these were triggered by a combination of mismanagement of assets (money, stocks) and the resultant cash flow problems – exacerbated often by a bank that tries to be the first to put hands on collateral. Too many diamonds – too little cash.

The Antwerp council was productive on many fronts, but the most positive thing to emerge from this session was the debate prior to the event.  It was clear to me that there is a groundswell of desire among participants to return to marketing generic diamonds, something I have long-advocated.

And this in turn, creates a necessity for new forms of collective and collaborative leadership.

We cannot simply ignore the reality of the situation.  As I wrote in Strategic Change magazine…

It is vital for the industry to rally around a new breed of leader, and a new self aware and confident style of engagement. The diamond industry must find a leader who is able to guide the industry’s actors to examine and share their appreciation of these paradoxes, rather than merely cope with, or suppress them.

Looking into ‘09 I remain optimistic that we can climb out of this mess.  But not by pretending it doesn’t exist.  We must take a blank sheet of paper and draw ourselves a better future…

This was a good, constructive and hopeful event for the industry.  I am off to buy a new, and brighter-coloured pencil.

At the ‘virtual’ centre of our industry, Martin Rappaport has reduced the prices on his price list across the board signalling the need for a major price-cut (perhaps 25-30%) across the market.

Industry insiders will argue that Martin’s prices are based on the nonexistent “New York market approximate high cash asking price.” While Martin is a market expert, his prices reflects baseless assumptions, not consumer reality.  They are hunches and beliefs in the market.  They are, ultimately, arbitrary. 

Meanwhile the collapse they foretell is being artificially accelerated.  What Martin did to the future market for polished diamonds, BHP has done to today’s rough, offloading its stock at prices 30-50% below what used to be the market price just months ago…

For the diamond industry, the writing is been on the wall.  But then it always has been. The message was  clear: if we do not change course, we are heading for a crash. The longer we wait, the faster the downward spiral and the more painful this crash is going to be…

Those who know me can testify that this has been my mantra for the last ten years.  When my message finally appeared last year (see the abstract in this recent Gem and Gemmology), it was the product of several years of research…

My message to the industry a simple one: we have been living in a bubble.

As an  industry we never took the time to stand behind the counter, to speak to the diamond consumer and to listen to his or her needs, wants and aspirations.

Instead of listening, we have spent our time looking to educate the consumer.  But we forgot to educate ourselves! If we had cared for the consumer, we would have realised that they didn’t need or even care for our education. In fact our attempts at education have backfired — so we now see fewer and fewer diamond consumers in the shops.

As a direct consequence the diamond market has been in constant decline relative to other luxury goods. The current demise (although accelerated by a falling dollar and a credit crunch and barely propped up by far-Eastern demand) is not a temporary shock, but a long-term critical illness. 

So, my dear friends and colleagues, it is time to wake up and realise what we have done to our industry with our 4Cs marketing pitch.  We have sowed doubt, not trust.

The DTC already admitted to this terrible failure three years ago. But instead of stopping this ‘ongoing malpractice’ — we intensified it, borrowing ideas from marketing literature without having the slightest idea what they meant.

Among those ideas was the call for branding. I pride myself to be personally trained by one of the world’s leading branding experts, Prof. Leslie de Chernatony of the Birmingham Business School. Leslie was diplomatic enough to call this branding drive “rubbish.”  I say ‘diplomatic’ the market shrank by about $5BN (in relative terms) due to these marketing iniquities, without even counting goods that went unsold.

Unrelated to this marketing shortcoming, and oblivious to actual level of demand, the marketplace kept raising prices without any justification in market demand.  To finance this increase in prices without a complementary increase in demand, those in the middle of the value-chain put their hands deeper into their pockets.  The more sophisticated ones even found ways to convince our generous bankers to finance this illusionary bonanza. Consequently, the market grew – but only on the back of increasing debt to the banks.

So will the present crisis really have any effect on the retail market? I doubt it.  And if it has, is only in the short term. Even with this unprecedented crisis, analysts predict that the luxury market will return to normal in 2009.  Luxury goods, but more especially diamonds are relatively inflexible to mainstream economic trends; demand for them neither brakes in a recession, nor accelerates in a boom. 

Unfortunately, while this may be true for the larger luxury market, I fear this recovery simply won’t come to pass for the diamond market.  The relative value of the diamond market, or what will be left of it, will continue to decline at an even faster pace. 

Now consider the debt, which finances these escalated and unjustified foundations.  When the diamond banks will have to finance the coming sights (De Beers’ sales of rough diamonds), on what basis are they going to estimate their risk? Are they going to finance the real trade prices of the rough, sending their customers to look for impossible extra credit, and thereby preventing them from purchasing their quota? If they do the collapse of the cash-hungry diamond producers is imminent.

Or, will they choose to honour their relationships, finance at inflated levels and take the risk of a wider meltdown.  Maybe the banks will just keep on nurturing the ailing industry without really helping healing it

Would this so bad?

After all, the diamond industry has lived on borrowed time (and money) for a decade.

But the fact is, cannot support such high levels of debt and does not have enough assets to guarantee payoff of all this debt, especially when these assets are in the form of overvalued diamonds. The industry is, de facto, bankrupt.

As long as this state of insolvency is not officially declared, there always a window of opportunity that might allow us to change course. This change must start with a new approach to marketing, led, and financed by the retailers. Once done properly, will prove far cheaper than the amount of money currently being thrown away on empty trade-branding and commoditisation, for naught.  Preparation for this recovery process must start immediately.  It’s now or never.

We face, I believe, the imminent collapse of the entire industry.  While many good people will get hurt, this is not so bad for the industry in the long-term.  After all, there is only one group who are able to pick up the pieces and rebuild the industry – us, the diamond people.

Personally, I would prefer not to wait for a phoenix rising from the ashes. We can still change course.  We must take our medicine and redirect our marketing to the self-esteem that our customers are crying out for.

Sales of diamonds, at least from the consumer’s point of view, are almost uninfluenced by the world’s economy. After all, the global diamond jewelley market is very small – $60 -70Bn and it is a drop in the bucket when compared with the size of the world economy. Say it differently, there will be always wealthy people who will buy these diamonds.

Speaking about the price of a diamond, the question is what is really its price? Let us ask even a more fundamental question: why do people buy diamond in the first place or what need does a possession of a diamond satisfy? Unfortunately, it seems as if nobody in the industry bothered to find an answer for these questions.

It took me several years of research to find out that the reason for buying diamonds is the enhancement of self-esteem. This is a complicated issue that needs to be studied in detail as to understand the role of price in marketing of diamonds and other luxury. It is enough to say that selling luxury in a discounted price is an oxymoron or shooting in the seller’s leg. Luxury has to be expensive or it will lose its attractiveness.

I have to add here two notes: first, one needs a bit of Chutzpah when asking a high price and not giving up. Second, while people will ask for a discount, they do not want it. What they say is not what they mean. They need the bargaining as they feel respected, an activity that enhanced their self-esteem but, paradoxically, they want to pay the full price for the very reason that when paying more their self-esteem increases. Unfortunately, once the jeweler imagines that the buyer might ask for a discount he is offering it immediately.

As this discounting backfires when the luxuriousness of the diamond disappears, its value declines. The decline in price is a clear indication that the industry fails to understand what it markets. While an entire generation lacks a proper education in marketing of diamonds, causing the industry to shrink in the last 25 years, the last few years were disastrous.

Organizational

The main point is that there is no leadership and the market does not know how to cope with paradoxes. You have more than enough there.

Financial

Idem. The key is that people try to close the sable when the horses are away. There is no money available and people try to raise funds even when they have to assume losses with the hope that tomorrow will be a better day. It is looking at the past, trying to fix things instead of looking at the facts, as bad as they are and ask: “what can we do now with these lousy facts?”

I would finish with two comments:

First, what surprises me is the resilience of the market. While the diamond industry is unique and cannot be comparable, I would anticipate a total collapse and low morality to happen long time ago. I am proud to be part of such an industry that show that robustness and morality are rooted deeper than the level of the balance sheet.

Second, we should be able to assess the facts without fear. The facts are there and hiding from them is useless. Trying to change them, or “fixing” them is impossible as the problems are more fundamental. Thus, it is important to face clearly the facts and ask: what can we do? There is always an alternative for those who have the courage to face reality.

The diamond industry is billions of pounds in debt, with both prices and demand largely static. Despite the industry’s best efforts to reverse this trend, it’s possible that only a dramatic reform of the market can remedy these problems. In this article, I argue that learning lessons from the coffee industry could make the diamond market shine again—but only if retailers are prepared to transform the way they work.

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