Following up on my last post, here’s Pam Danziger from Unity Marketing discussing the Luxury Consumption Index, trends in the luxury market, and what jewelers can do to capture market share in tough retail conditions:

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.

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.

Photo by Armel*

With uncertainty facing the economy around the world, it’s difficult to forecast where diamond prices will go in the near (and far) future. On Friday Rapaport issued a warning that speculative prices for large diamonds may not be sustainable because of a lack of interdealer demand. On the very same day, Mining Weekly reported that “there is no reason for the markets to soften” and prices would continue to increase, especially in the rare and larger diamond section of the market. Who will prove correct? All we can say for certain is that the outlook for diamond prices is uncertain.

Having recently spotted a diamond-encrusted skull (Damien Hirst’s For the Love of God) and a diamond-encrusted Mercedes-Benz (with diamond-encrusted gear shift), this Swarovski crystal-encrusted toilet seems almost common. Almost.

With 50,000 hand-set crystals, it’s one way to bring a little (rather a lot of) sparkle and shine into your bathroom. But the creation, from Jemal Wright’s Isis Collection, “only” costs $75,000. It isn’t as though this thing is covered with diamonds. But what if it were?

Recently Rapaport held an auction of certified diamonds, with prices per diamond ranging from under $4,000 to $12,000. If we to cover such a commode with 50,000 diamonds costing an average of $6,000, we’d have a toilet costing $300 million in diamonds alone. Damien Hirst’s skull only sold (reportedly) for $100 million.

If ‘For the Love of God’ juxtaposes mortality and eternity, what would a diamond-encrusted toilet mean?

[via Born Rich via This Old House]

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.

(more…)

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…

Martin Rapaport is urging industry professionals to join his new fair trade jewellery association.

We are also establishing a non-profit organization — The Fair Trade Diamond and Jewelry Association — that will work to ensure fair compensation and beneficiation to the poorest members of our industry.

The Rapaport Group is establishing a non-profit fund for the education of the children of artisanal diamond diggers in Sierra Leone.

Rapaport will be donating $100,000 to kick off this program. We have asked and hope that others will work with us so that we may do something powerfully good for the people of Sierra Leone.

This action is a proper response to the public perception.

According to Rapaport, the availability of rough diamonds will be less during the first half of 2007 due to several reasons.

Lynette (Hori) Gould of De Beers said:

There will be fewer Russian goods in the mix ($100 million less in 2007) as a result of formal commitments agreed with the European Commission.

Gould added that De Beers Canada production would not yet be available yet, and Botswana producer forecasts are slightly lower. He adds:

In addition, the DTC is committed to supporting the intentions of the southern African governments, with whom we work, to develop their diamond cutting industries, so we are selling a greater volume of rough (that is suitable for processing in local beneficiation enterprises) in southern Africa

Is this plausible?

The fact is that 98% of the world production are diamonds less than .7 CT. My feeling is that the Russian and the Canadian have relatively larger goods and to feed SA polishers you need larger goods as well…

There is a need to wash the excess supply of the tiny and cheap goods somehow and this, if you see this week’s comments on Rappaport, is not easy, the only way to sell these less desirable goods is to bundle them with more demanded goods that the DTC is increasingly being deprived of.

I suspect that we see here a growing stockpile in 2007.

Hiding the problem from the public is an acceptable tactic as long as the industry does not start to believe in that the stockpile does not exist…