Chaim Even-Zohar’s latest memo reveals the diamond industry in despair. At the moment Diamonds are not being sold to the market of consumer and what we see is inter-trading only. Banks do not see new money coming in, and while they hail the fact that debt went down by 20%, how much was due to real sales and how much was due to squeezing the empty pockets of the industry? The cancer has reached the producers, who act irresponsibly and pour billions of dollars into the market with the only short-term goal of survival. Alrosa lost half a billion dollars this year and De Beers struggles to finance its debt. All in all, somewhere along the line the industry forgot the consumer.

We all know the truth about diamonds for investment (short answer: they’re not), but the new trend that big players want to establish just shows their level of despair, trying to play on the world’s ignorance. This is not the first time that the trade, championed by De Beers, has done so. The world has believed that “all diamonds come from De Beers” and if you do not have a De Beers diamond, something is wrong with your diamond. I do not blame De Beers for not correcting this perception, but they were happy with this ignorance. What we see now, this attempt to attract investors, is something really dangerous. This raises some painful memories. During the heydays of the diamond boom before 1980, a Belgian worker decided to buy some diamonds for investment. When he came to us some ten years later with his parcel, we looked at it and literally had tears in our eyes. Here was a hard worker with a permanent layer of dirt under his nails and who had bought diamonds with full faith that his purchase was a good value that would appreciate. In actuality if he got 5% of his investment, he would have been lucky.

This was not an isolated case–I have a personal example: When my uncle left our company in 1975, he took, as part his compensation, a few parcels of polished goods that were estimated well below market price. When he tried to sell these goods twenty years later, he hardly recovered his investment even after repolishing and regrading many of the goods.

We also can’t forget the $1 trillion of goods at market price that are in the hands of consumers — these goods will be worth much less when consumers try to dispose of them. Jewellers pay about a third less on average for the same goods when going to their suppliers. When they buy from the consumer market, they pay a lot less for several reasons: they have to pay cash, the goods won’t always sell easily, and sourcing from the consumer market is not always steady.

On top of this, the jewellers’ market is very narrow and quite often they will try to move it up the supply chain to their supplier or supplier’s supplier, reducing the value they can offer even further. If the market tries to market diamonds for investment, they are literally cheating the market. Most of the goods that will be sold will fetch only a fraction of the investment when they are resold, even without any more mining. And even extraordinary large and special diamonds, which might have been a good investment in the past, won’t be a good investment if many of them are sold later on at lost or close to par.

Diamonds and chocolate both carry connotations of indulgence and luxury, although each in very different ways, and they are not usually consumed simultaneously. Mervis Diamond Importers is looking to change this by inviting their customers to an out of the ordinarily shopping experience on the 22nd of July. They offer an evening where customers can drizzle fresh fruit in a diamond topped chocolate fountain and sip chocolate martinis while pursuing a selection of diamonds at reduced prices.

This is an interesting gimmick, which should offer distinctiveness and help generate interest in a slow market. However, positioning an event as an upscale luxury experience, while simultaneously marketing it as a chance to bargain hunt at reduced prices might be counteractive due to the inconsistent messages it sends out.

Photo by *spud* via Flickr

Janusian Thinking is derived from the concept of paradox.

Janus, the Greek god of doors and gates and beginnings and endings, was most often depicted with as man with two heads, each facing in opposite directions.

The obvious benefit of such a dual perspective – and the underlying power of Janusian thinking – is that it provides the ability to consider multiple perspectives simultaneously. Failure to do this results in decision-making paralysis, depression or in wasted effort, pursuing false goals.

Variants of Janusian thinking are applied in contemporary contexts to military planning, corporate strategy, and academic analysis.

Janusian thinking can be a valuable tool in everyday life. Our modern existence requires us to weigh complex, competing phenomena concurrently and make decisions we can stick by, despite having incomplete information.

In this blog I often apply the concepts of Janusian thinking to luxury marketing and to the behaviour of the diamond industry, but it offers us many more valuable insights into human behaviour. Mastering Janusian thinking holds the key  to moving beyond personal and institutional blockages and becoming a committed, purposeful leader.

In my PhD I offered descriptions of two predominant ‘worldviews’, which I termed Theta and Lambda.

People tend to prefer one of these two Theta or Lambda worldviews in their pursuit of life purpose, and thus also in the pattern of their purchasing decisions.

The Theta-Lambda worldview is particularly applicable to one’s consumption of luxury products as this category of goods and services aims to tap into our desire to reflect externally what we see as our internally derived identity.

While we can only see the world from one perspective, we can strive to respect and understand that there may be a different perspective, thus also respecting the person who has adopted that viewpoint.

Handling this apparent paradox – of holding one view to be true while allowing for another valid perspective to exist – is the key to achieving a rich and full interpretation of the world.

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.

More discouraging news for the diamond industry:

While lower production will start building a floor under prices, we see little prospect of any significant improvement until well into 2009 and expect more juniors to cut back or leave the sector.

said Des Kilalea, analyst at RBC Capital Markets. 

He’s saying that pricing and demand will likely get worse for diamond producers before they get better. While certainly discouraging, we have to remember that the diamond industry is not in as dire straits as the financial sector or the American automakers. We know we can expect at least a 10% decline in demand for diamonds. Mining companies are claiming that the their costs of production are too high with current prices–and they certainly aren’t going to get a government bailout. Will this be enough to motivate the industry to truly embrace the changes I think it needs? I truly hope so.

De Beers new emphasis on “enduring value” is achieving widespread coverage.  Many in the trade, like JCK magazine, really WANT to believe the message!

Reading through the hopeful message of De Beers, it is easy to find many rational arguments that diamond prices are sound, but the truth is, the arguments are flawed.

The first of the arguments is that diamonds are of “enduring value”. I simply do not know what enduring value means here, given that we all know that diamonds are not a viable form of investment and never have been.

The second argument is that it is better to buy now because the supply of diamonds is limited – as existing mines are depleting or even depleted and no big mines are on the horizon.  The industry has been spinning this yarn for years when it wasn’t true.  So how can we expect consumers to believe us now?

It will be particularly interesting to see how this particular argument helps in convincing a retail customer who stands in front of display-case after display-case overflowing with diamond jewellery; not to mention the immensity of the diamond jewellery overhang, lying dormant in domestic jewellery boxes.

The final argument DTC makes is that among really affluent buyers, price is not an issue. I do not know who these affluent people are and what their weight might be among diamond buyers. Data shows that since the mid 1980’s the “sweet point” of diamond purchases simply did not change. In the US, with its social multi-layered demography, most of the diamonds sold are in the range between $2000-4000 while in Japan this “sweet point” still hovers around $2000.  For diamonds, sold as commodities, price does matter!

Of course this could all change if we reverse the tide of the 1980s and return to first principles.  Diamonds are luxury, pure and simple. They must be sold as such.

The one thing we know about luxury is that it is ultimately irrational (the subject of my PhD – thankfully now completed!).  Luxury is a fine example of the fact that that the value for money is NOT what we seek. When we ask people for a definition of luxury we usually get two answers.

First, we hear that luxury is expensiveness and second, we hear that luxury is unnecessary (or superfluous). In this sense, diamonds are, in principle, the pinnacle of luxury – as they are, quite literally of no use whatsoever.  When it comes to valuation, saying that luxury is unnecessary opens the door to premium and unbounded, personalised pricing – the antithesis of commodities.

Instead of recognising and embracing the irrational consumer, since the 1980s,  De Beers has adopted a rational line, looking to “educate the customer”.

This is still the producers’ strategy – at the expense of the industry , which simply has to follow the leader’s line.

However, as these ‘rational’ arguments will never convince any serious customer, we have seen and will continue to see a lower proportion of people interested in diamonds.  Other luxury offers, by contrast remains resolutely irrational – and many categories are indeed relatively resilient to economic considerations. Purchasing of luxury is ultimately an irrational activity.

Of course it is just possible that during the coming six weeks American customers will storm the jewellery stores and clear up everything still in their vaults delivering a knock-out blow to the recession.

My feeling, though, is that we are looking less at a boxing match and more at a game of Russian roulette that may well send the final blow to the de-facto bankrupt industry.  Doubling up the Christmas ad spend and pleading with consumers to value ‘their commodities’ at heavily inflated prices is a very big gamble indeed.

I propose the following short prescription for the diamond industry’s long-term recovery:

First and foremost:

A true leader must emerge from deep within the industry at the level of primary production.

(2) This leader must have the ability, confidence and commitment to squeeze supply when necessary.

(3) This leader must recognize and solve the question of “enduring value” at the retail jeweler level.

(4) Retail jewelers must be trained and retrained on true luxury and understand it inside and out. This goes far beyond anything attempted by the industry to date. It is the cornerstone to the health of the industry medium and long term. Isaac speaks to this when he mentions irrational purchases.

DeBeers had the formula right prior to the 1980’s, but steered off course…they need a map and they need to learn to read the signs

(5) The practice of ‘Memo’ing goods, except in the instance of a 10 days special request for an established client must be relegated to the past.

(6) Jewelers must gravitate to partner suppliers who can work effectively with them to eliminate bottlenecks in supply.

No diamond should sit in a jewelers inventory for extended periods of time.

(7) Primary polishers must invest their profits (which means they must first have some profits) into their business to improve infrastructure (equipment) and train a new generation of diamond polishers. If a business is profitable then good business practice will lead those who survive to take these steps independently. Those who refuse to move forward with innovation will eventually close their doors.

(8) Consumers should be allowed to rediscover the hidden value of diamonds – The essence of self expression. Being able to express in action what one can not express in words.

Forget the 4C’s. Forget about diamonds as an investment. Diamonds are a symbol of the irrational – LOVE.

(9) Bank debt must be reduced significantly. There will always be a necessity to work with others money, but it is out of control.

In my view the industry debt is most likely 5-7 times more than is healthy.

(10) Banks must be enabled regain confidence in the price of rough and the downstream distribution (this is once again a a function of strong leadership and even political guarantees by governments whose revenue depends on the diamond industry’s health).

I read the comments of DTC and confess my utter amazement…

Take a look at the Enduring Value Media Release.  Among many other things they argue that the medium and long term fundamentals of the diamond industry are strong (!?)

That’s rings about as true as John McCain stating that the fundamentals of the US economy are sound just days before the biggest meltdown of the US financial sector since the founding fathers walked the land.

I also take real issue with whatever data collection indicates that diamond jewelry is the #1 gift for holidays 2008 “by a wide margin”.  I can report to you, direct from Main Street USA, that the bigger decision is whether gifts will be exchanged at all.  It is all well and good that consumers desire “fewer, better things”, but the real pocketbook world is a bit more complex than that.

On the other hand, I do acknowledge that spending a gazillion dollars to market to consumers the idea that diamonds are a great long term store of wealth probably feels like only viable option available right now.  What other choice do they really have? Just run the ads and hope for the best.

There is a real risk that the old ‘kill the messenger theory’ will come into play here.  Being the bearer of bad tidings is never easy.

However, I think Isaac has a point.

Our industry is in a real mess. No doubt about it.

We have been looking for some time now for a new style of leader to step forward and help navigate the industry through this mess.  I’m sure DTC feels it’s acting in the best interests of the industry to protect the PRICE of diamonds, but I would urge a fundamental rethink to safeguard the VALUE of diamonds

The move of Martin Rapaport was a shot across our bows.  And it was definitely was heard around the world, but remember that it was just a warning shot.  It has had absolutely no impact at the consumer level and I have serious doubts that it has had any real impact at the jeweler level.  However, the killer shot is being loaded into the cannon – and it may be unleashed unless someone steps into the leadership role, changes the industry heading, and puts the ship on a path to safer waters.

Here is my idea – If DTC wants to really boost demand they should invest directly into the local retail jeweler.

It is the DTC, not consumers, who have lost confidence in the ‘enduring value’ of diamonds.  They are the ones who do not own any diamonds of their own.  They only borrow diamonds, sell them to consumers, and eventually pay off these diamonds when the risk has reduced to zero.

Protecting this ‘enduring value’ is the marketing question that should been receiving the undivided attention of DeBeers. Given where we are the answer of how to fix this problem is best left to the highly paid consultants. But from the street level, it seems like a matter of incentives (or disincentives) for consumers to purchase.

In an attempt to push product down the pipeline for the past 20 years, the industry has eroded and destroyed this enduring value in the eyes of the retail jeweler.  ’Enduring Value’ looks like a return to basics. And about time too.  But is it leadership?  Not in my view.

Yours, Randy Pearson,
Registered Supplier, AGS

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.

Economic difficulties are hitting the diamond market. Will there be a holiday slowdown? Let’s look at some recent industry news:

DeBeers production of rough diamonds is slowing slightly, down 4.3% in the 3rd quarter of 2008 compared to the 3rd quarter of 2008. However, the prices they’ve been able to achieve for their rough diamonds at auction recently have held up (unlike BHP Billiton, whose prices have dropped 35-40%).

An industry trade group (India’s Gem & Jewellery Export Promotion Council [GJEPC]), a large producer (Alrosa) and a whole country (Botswana) have all said that the economic crisis is affecting them. GJEPC asked producers to offer fewer rough diamonds over the next few weeks so that the market could stabolize; similarly Alrosa said it would cut its supplies. Botswana has also said that the economic crisis has affected its diamond exports; the country is solvent for now but could be hurt if the recession lasts for a long time.

What does this mean for the holiday season? RBC Capital Markets is predicting disappointing diamond jewelry sales in the US for the holidays. The International Council of Shopping Centers predicts that chain store holiday sales will grow, but the focus will be on basic goods.

All this news suggests to me that a holiday slowdown is on the horizon, though DeBeers being able to hold its prices suggests that those companies with the right offerings will be able to weather the storm.