SHRINKING PROFITABILITY IN THE DIAMOND BUSINESS

The following editorial written by Glenn Rothman, president of Boston-based Di-Star Ltd., for his company’s Di-Star Report, provoked what the company calls an “overwhelming” number of calls and comments from readers of the newsletter. Because of this response, we are running the full editorial here with Di-Star’s permission.

Why is there little to no profit on every level of polished diamond trading today? Included in this financial and emotional question are sight holders, diamond manufacturers, importers and wholesalers of all types and levels, and retailers. The answer does not require scientific or statistical analysis. We do not need financial, economic or marketing consultants to work up case studies or complicated models of supply and demand to answer our question.

The answer is simple. The answer is on every diamond merchant’s desk. It’s staring you in the face. Every diamond dealer in the world who has traded for more than 15 years knows the answer. Yet, no one to my knowledge has discussed this crucial question and the potentially controversial answer in print. The simple answer to the difficult lack of profitability question is only three wordsŠThe Rapaport List.

I want to make my editorial absolutely clear. This is not a personal attack on Mr. Rapaport. I consider Mr. Rapaport a visionary, a man with enormous talents. He has made extraordinary contributions to an industry that did not always appreciate his timing, talents or ideas. The monthly expanded publication of Rapaport Diamond Report is always extremely informative and insightful. Specific articles by various authors keep the trade in touch with news and trends from every corner of the globe that might otherwise never reach our doors. The Rapaport Diamond Report and potentially more important “Rapnet” (electronic diamond market) bring the diamond world closer together. For all of his creative work stated above and contributions too numerous to mention in this short editorial, I applaud and admire him.

But Mr. Rapaport’s article, “The Big Squeeze” written in the October 6 [1995] issue of Rapaport Diamond Report pushed me over the edge emotionally. Throughout his article he repeatedly and clearly makes a case blaming De Beers for the lack of profitability in our industry. This is total nonsense.

De Beers’ Central Selling Organisation (CSO) controls the rough markets through its extensive financial commitments to mining, exploration, contract purchases and open market interventions. These daily activities prevent oversupply, creating a benevolent stability in a market that could otherwise be chaotic.

In addition, the CSO creates new diamond markets by investing its marketing and advertising activities in emerging economies. Simultaneously, with style and success, the CSO is vitally instrumental in growing diamond demand in existing markets. Why would a sophisticated international conglomerate with virtually unlimited intellectual and financial resources consciously look to squeeze the profitability out of its customers by raising prices?

The CSO market manipulation of polished diamond prices by controlling supply allocation is intended to give the distribution network an inventory profit, not loss. Merchants who displayed their faith in diamonds by holding inventories would be the obvious beneficiaries of a successful price rise.

Mr. Rapaport’s claim that diamond sales at retail are going to other luxury purchases because the CSO artificially keeps diamond prices too high is contrary to all market statistics. First, retail diamond sales are at an all-time-high worldwide, and have been on a healthy growth pattern for several years. These statistics are published regularly in trade publications such as JCK, National Jeweler and Diamond International.

Second, and more importantly, diamond prices in dollar terms are lower today compared to 15 years ago. Competing luxury items such as cars, designer clothing, watches, vacations, furniture and art have gone up dramatically during the same time period. Thereby, Mr. Rapaport’s argument that, “The more DeBeers squeezes supply, availability and price, the more it encourages buyers to shift demand to other products,” doesn’t hold up. Diamonds are less expensive today and more available worldwide than they have ever been in relationship to other luxury items. In fact, my evaluation of the market convinces me that consumers are ready to pay more for diamonds and in theory want to pay more because of the added perceived value.

Returning to the real question of profitability, Mr. Rapaport says very boldly, “By now everyone knows that diamond prices are demand dependent.” I propose that diamond prices are Rapaport List dependent and have been for over 10 years.

This is how it works. The CSO prices rough diamonds to its sightholders based on the Rapaport ListŠthe rough dealers and buyers price their sales and purchases on the Rapaport ListŠthe diamond manufacturers and dealers price their sales and purchases on the Rapaport ListŠthe dealers, wholesalers and retailers price their sales and purchases on the Rapaport ListŠand finally, in most major cities, consumers spending over $3,000 retail base their purchase on the Rapaport List.

What powerŠWhat influence… What control! This almighty List takes all the profit out of the business. Any diamantaire who remembers the 1950s, ’60s, ’70s and even the start of the ’80s knew it was his or her expertise that set the price of diamonds – not the Rapaport List or the day-to-day control of the CSO.

Before the List our industry was the absolute epitome of trading. It was conducted in an atmosphere of expertise and trust between willing buyer and willing seller. Today, the Rapaport List has commoditized our industry and taken all the profit margins out of each level of distribution. Every buyer, at every level, in every transaction, wants toŠ needs toŠ purchase or memo at some deep discount off the List. “How much back off the List?” has become the reality of diamond prices today.

Mr. Rapaport should not blame the CSO for squeezing people out of the industry, for shrinking margins, for high rough prices and low polished prices. Even if the CSO lowered rough prices and increased supply of the “right” goods, profit margins would not increase. Discounts off the Rapaport List would float to these new levels and continue the profit squeeze.

The argument one could make in support of the industry list is that it benefits the industry by reporting and compiling information about actual trades (does anyone actually give the list this confidential information?). Diamond sales transactions are unique in that they encompass several variables (terms, make, quantity, selection) and selective reporting could be both misleading and self-fulfilling.

A second argument in support of the Rapaport List is that the end consumer is the direct beneficiary by keeping margins of the distribution chain low. This is a great benefit, but at what cost? The financial health of the entire industry is being threatened by the Rapaport List. Would consumers be best served if in the future they have to buy their diamond from a computer, or outlet of some giant international diamond mining/manufacturing facility (Russians) that sells direct to the public at 40% off the List?

That’s the future staring at us if retailers (40%-60% of sales in diamond product), wholesalers and diamond manufacturers can’t restore margins.

What is the answer to the profitability question? Stop publishing the Rapaport List!! Yes, Mr. Rapaport, the trade will pledge its support to your outstanding newsletter by maintaining our subscriptions to your monthly in-depth Rapaport Diamond Report without a price list.

The challenge to the diamond industry is to go 36 months without the addiction of the Rapaport List, which I propose is the basis of all other lists. If profitability and margins are not obviously restored along the entire distribution chain, then we as an industry are not capable of conducting the fine art of trading and deserve whatever the future may bring us.

Mr. Rapaport closes his article, “The Big Squeeze,” with the following paragraph:

“Hopefully the CSO will leave the diamond industry a little breathing room. This can best be accomplished by letting the markets find their own equilibrium. The role of the CSO should include insuring that there are sufficient supplies of diamonds to meet demand, that diamond demand is promoted and that the distribution of diamonds is free and fair. Attempts by the CSO to set artificial price levels or push the market are not only dangerous and unwarranted, they do not work.”

I wish to close the profitability question editorial with a challenge to Mr. Rapaport. I am intentionally echoing Mr. Rapaport’s words with a modification of the preceding quoted paragraph…

Hopefully the Rapaport Diamond Report will leave the diamond industry a little breathing room. This can best be accomplished by letting the markets find their own equilibrium. The role of the Rapaport Diamond Report should include insuring that there is sufficient reporting on diamond news to meet demand, and that the diamond industry is promoted to encourage free and fair international trading. Attempts by the Rapaport Diamond Report to set artificial price levels or push the market are not only dangerous and unwarranted, they destroy market profitability.

HERB LEWIS, JEWELRY’S ENERGIZER BUNNY

In the December issue, we saluted California’s Herb Lewis as one of those who continues to make great contributions to the industry even though he’s passed his 80th birthday. As always with Herb, we had a reply:

Thank you for including me with “the big boys” in your December editorial, which is most appreciated.

Yes, I had a good November at Dodgertown as my team played seven games and won all seven. As for myself, I wound up with a .311 batting average and played a good second base, as I had many chances and no bobbles. As long as I can hold my own with the younger guys, I will be returning.

Herb Lewis

CARIBBEAN BARGAINS?

We are writing to express our concern about a growing industry problem.

In the last several years we have encountered an increasing number of customers who have purchased fine Swiss watches in the Caribbean at extraordinarily low prices. It has not been unusual to meet someone who has purchased a watch at 35% or more off retail. In some instances, we’ve even seen receipts for watches purchased at or below cost. Brands have included the best known – Rolex, Cartier, Ebel, Baume & Mercier, Raymond Weil, Tag-Heuer and many others.

The irony of the situation is obvious. While the watch companies are working diligently to control discounting in the United States by changing margins, closing doors and monitoring transhipping, authorized dealers close to shore are making life difficult.

Furthermore, we’ve seen numerous instances of quality control and service problems with watches sold in the Caribbean. This raises the question of whether an equivalent quality product to that sold domestically is being sold in the islands. The local independent jeweler is burdened with these service problems from which the out-of-country jeweler is absolved.

We’d like to hear from others who are experiencing this problem. Most of all, we’d like to know what the watch companies plan to do to address this problem.

William P. Nichols Jr., President Paul D. White, Director Watch Division Reis-Nichols Indianapolis, Ind.

A BANKRUPTCY PLAGUE

Lately, a plague of bankruptcies is threatening the whole jewelry business.

Unlike the stigma a bankruptcy created a few years ago, which prevented many marginal businesses from declaring a Chapter XI, now it has become a priority to declare bankruptcy. Many companies continue paying the high salaries of their owners or presidents during the bankruptcy proceedings while they hurt the small jewelry artisan or designer who delivered merchandise he created with his last pennies – and loses during the bankruptcy proceedings.

I would like to suggest that we should apply the Megan’s Law for 10 years to anyone who declares bankruptcy. A rating in Dun & Bradstreet or the Jewelers Board of Trade should have a prefix or a symbol indicating that this company or the owner of the company has ever declared bankruptcy. Maybe this will act as a deterrent and will make some people think twice before they go bankrupt.

Hirsch Chitrik, President Citra Trading Corp. New York, N.Y.

WHAT DO YOU THINK?

Earlier this year, during the Jewelers of America show in New York, Matt Runci, JA’s new executive director, said that the association is going to take various steps to be more user-friendly for its members and to play a more “healing” and leadership role in the industry. Please tell us what you think are a couple of the most important things JA should do in pursuit of these goals. Send your letters or faxes to JCK Comment, 1 Chilton Way, Radnor, Pa. 19089 or fax to (610) 964-4481.