Randy Pearson

The View from Main Street: Introducing Randy Pearson

Isaac Mostovicz writes...

I’m delighted to welcome Randy Pearson as a guest blogger to Janus Thinking!

In these times of uncertainty, Randy brings more than 21 years of jewellery trade experience to this conversation about industry direction – most of it in retail, talking to customers over the counter.

Randy is currently CEO of Allied Diamonds – a registered diamond supplier to the American Gem Society.

While Randy and I agree on many of the challenges facing the industry, I am confident he will add his own distinctive financial and operational observations to my brand marketing and consumer psychology insights…

I am grateful that he has chosen to express his own clearsighted views in this forum at such a critical time.

Isaac

You say of this article...

Bookmark and Share

The diamond bubble: an email conversation (Part 6)

Isaac Mostovicz writes...

This is the final post in our mini-series documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Isaac Mostovicz
Sent: 09 October 2006 20:39
To: Randy Pearson

Dear Randy,

Here are my comments:

You raise a classical point as companies under a pressure to produce short-term successful results, act against their long-term goals. There is no doubt that the act of the DTC was brilliant in the short-term and the SoC is only four years old. They managed to get rid of their stockpile and turn it into money. However, what happened in the last years shows that they did not take into consideration long-term consequences and as a result, they are unable to sell their entire intake and, effectively they build a second stockpile, they have a problem with their profitability and in spite of an increase of volume and price, their profits raised only marginally (I think that the figures for 2005 were 3%).

In regarding the Millennium experience, I have several observations to make. While we advocated high prices (we sold at +30% or more), other participants did not even thought that these prices are possible. Together with this, we advocated top make and had to fight with the other participants (mainly Americans) who wanted a much more lenient standard. To add insult to injury, the level of rejection by us was 3-4% and I knew beforehand most of which will be rejected. On the other hand, the rate of rejection by others was 30-40%! Last, but not least, to become a Millennium distributor we had to submit a marketing plan. When all participants met in April 2000, the DTC introduced them to the 4Ps which was considered by many as a brilliant novelty. My question is how exactly looked the marketing plan of the other participants? Taking into consideration that the DTC was not involved in the marketing of the product, it is not a surprise that the program crashed. Give a F1 to someone who does not know how to drive and he’ll crash it in no time.

Your last question is excellent. I must say that my imagination is limited and not every diamond is appealing to me or can be considered a luxury. Thus, I do not exclude Indian junk as long as it is presented properly. Rolex is a junk of a watch, unless you use it as a calendar but it is the finest example of what luxury is. The legendary Jaguar E Type is of the same league. However, when you treat cheap diamonds as junk, that’s what happens.

Isaac


We hope you have enjoyed this mini-series; do let us know what you think – the comments field is open!

You say of this article...

Bookmark and Share

The diamond bubble: an email conversation (Part 5)

Isaac Mostovicz writes...

This is the fifth of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Randy Pearson
Sent: Monday, October 09, 2006 8:55 PM
To: Isaac Mostovicz

To extend this a bit more, I see this point as one example of how SoC has worked as intended. DTC had a problem of stock that was unsuitable. Their existing sightholder base was not equipped to produce and distribute these type of goods that they had stockpiled. By bringing in “new sightholders” they were able to move out these goods and leave it to the banks and these clients to find a way to cash these goods. The banks took the sightholder status as collateral for the loans based on the experiences of the past and now they have a problem. These goods were consumed into the marketplace via the sightholder transfer of ownership from DTC to the SOC, but then we have a bottleneck as there was low demand at the consumer level for this article (that’s why they stockpiled them in the first place – remember there was no reason for them to stockpile other than low demand back in 1999 as markets were healthy). In one viewpoint, their tactic was brilliant as they did this on the backs of these “new SOC sightholders”, but on the other the banks that support the industry will suffer.

Of course, I do not have privy to how gets which box and assortment of goods, but you can get a clue based on who the new players are and who was eliminated. New Indian companies and new firms that polish in Africa. If they divert this unsuitable rough to these firms then they satisfy the political problems while liquidating dead assets.

Yes the standard of what is jewelry quality has slipped greatly. There is no doubt of this point. It has opened markets to the masses, but I would argue has greatly damaged the diamond dream and the symbolic value of diamond. On one hand you can argue that everyone should share in this dream and I tend to agree, but at what cost and where do you draw the line. Recall the decision of DTC in 1999 regarding the Millennium Diamond. They set a standard of rarity that was far higher than their average production. Do you imagine they did this without research to indicate that if you place the range too low it would not appeal to certain demographics or targets? Why did they not select smaller goods in promotional quality range? Were they concerned about the image of diamond as a symbol?

These are just thoughts, but it may very well come to pass that we have further segmentation in the industry when the dust settles. I would much prefer to be selling our range of goods than bags full of promotional goods selling on a volume basis during the next few years.

One question to explore is, “what is the definition of a diamond that represents the symbolic diamond dream?” Where is that line and how do we know if it is crossed?

Randy Pearson
S. Muller & Sons


Don’t forget to check back at the same time tomorrow for the final installment.

You say of this article...

Bookmark and Share

The diamond bubble: an email conversation (Part 4)

Isaac Mostovicz writes...

This is the fourth of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Isaac Mostovicz
Sent: 10/9/2006 6:24:12 PM
To: Randy Pearson

I think that Randy raises a point that needs a further exploration. Until the 60s the range of what were considered diamonds suitable for jewellery was much more restricted. The Indians learned how to produce rough that was previously considered unsuitable for jewellery. I raise the following question: is it possible that the market became too large in the sense that many of the goods that are offered are unsuitable for consumption? In other words, the production of real diamonds is very limited and if we manage to market only these goods, the offer will be limited but we will be able to raise prices to very high levels as the availability will not be there.

One of the reasons for the SoC was the unsold stockpile of $5bn (US). The claim of the shareholders was that the worth of this stockpile is nil, something that the DTC tried to prove wrong by selling the stockpile for the price they wanted. However, selling the stockpile was not an indication that the need for these goods exists. To take an analogy from what we have on hand, we, at Allied, have plenty of goods but if we want to be faithful to our program, only a limited part of this stockpile is suitable as need satisfiers. Nevertheless, it is our responsibility to find ways for using these goods for satisfying clear and existing needs.

Another example is Patek Phillipe that produces only 18000 watches per year regardless to more markets that open. It is very tempting to try and to cater to the entire world but there are other ways for making money and mass marketing may not be suitable for diamonds.

The last point that Randy raises is interesting. Good manufacturers burned their fingers in the last years by manufacturing. It is possible that people will try to slow down manufacturing as keep prices of rough at bay and gain from selling his existing stock, effectively lowering the level of stock. I am not sure that all will follow but as a different policy is the way of those manufacturers who might suffer and even close down, we are facing an interesting period.

Isaac


Once again, check back at the same time tomorrow for the next installment.

You say of this article...

Bookmark and Share

The diamond bubble: an email conversation (Part 3)

Isaac Mostovicz writes...

This is the third of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Randy Pearson
Sent: Monday, October 09, 2006 5:22 PM
To: Isaac Mostovicz

Is this trend leading to a “new diamond market” where diamonds become once again unobtainable to the masses? At the end of the day, there is little room for efficiency gains, so prices must go up. If indeed the market forces operating on De Beers are such that once they pay for African empowerment, government taxes, extraction costs, exploration costs, stockholder demands, etc. that they simply can not afford to produce on such a large scale, then maybe their future is a smaller scale profitable business that charges what is necessary to make profit. The same is true all through the food chain from the rough dealer to the retailer. Maybe the world should consider that diamonds may be forever, but maybe not for everyone.

Is it healthier in the end to have a much smaller, but healthier industry that supports presenting diamonds to those who can afford to buy them? I know it sounds simplistic, but for the past 40 years the industry has been extending the definition of what diamonds should be accepted by the jewelry buying public and the status of diamond as a luxury statement has eroded by the same magnitude. When Wal-Mart is the world’s largest purveyor of diamonds then we all can smell that something is wrong.

Anyway, this is one of many outcomes possible; emerging markets will play a big role as China is an untapped market and many more exist. De Beers may be able to hold things together, but in my opinion they will need to make some big moves. When SoC began, they needed to find sightholders who could move the type of rough that they were producing. So far, this type of diamond has not performed at the consumer level which is the unspoken problem. This under performance has lead to high debts and many of the current problems. It may be that consumers simply do not want these goods.

As for higher level goods, I see the problem as more short term. At some point the balance will tip and people will decide that it is better to produce less and sit and wait for a price where they can make profit. For those supporting programs, they will be forced to evaluate each individual client and make sure they are profitable on each one and eliminate those who fail. Only then can they justify the investment required to support the initiative.

Anyway, just thoughts from the street level.

Randy Pearson
S. Muller & Sons


Once again, check back at the same time tomorrow for the next installment.

You say of this article...

Bookmark and Share

The diamond bubble: an email conversation (Part 2)

Isaac Mostovicz writes...

This is the second of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Isaac Mostovicz
Sent: 10/8/2006 5:08:29 PM
To: Randy Pearson

Randy,

It is very difficult to give such an estimate, as you know and comment. Some take 1ct or 0.5ct as a benchmark but this is not better either. Therefore, I preferred to rely on Even-Zohar as a source. He is honest enough to know the complexity of the market and provide these numbers as an illustration only. There are so many factors in building such a graph: the type of diamond (size and quality), the geographical market, the type of outlet, the time that the data was collected (now the situation is worse) and more. However, this complexity is more pronounced at the retail level.

You are correct about the squeeze at both ends, or throughout the pipeline. In the past, people were ready to suffer blows as they knew that in the long run they will win. This was the case with sightholders who were ready to overpay for their boxes, knowing that the DTC will pay back its loyal customers for the losses by offering special goods. Unfortunately, I believe that the DTC is not making money either, even when their mining operations are considered to be the most efficient in the market. De Beers is now a private company but did they stay a public company we’d see a hostile takeover. This article in IDEX confirms this squeezing trend.

Isaac


Once again, check back at the same time tomorrow for the next installment.

You say of this article...

Bookmark and Share

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…

You say of this article...

Bookmark and Share