AUCTION COMPETITION

I want to compliment you for the attention you have brought in the April magazine to probably the two most important issues facing high-end (and medium-end) independent jewelers. The first is the reprint of Glenn Rothman’s discussion in his Di Star Report of the impact of the Rapaport Diamond Report on all levels of diamond sale profitability — from the Central Selling Organization to the retail merchant. [See “Shrinking Profitability in the Diamond Business,” JCK, April 1996, p. 33.]

I hope this subject will be developed and discussed at great length in your own editorial pages. It is very important that there is a continuing dialogue about this potentially catastrophic situation.

The article that addresses the other most important factor facing the independent jeweler is Russell Shor’s “Auctions Bid for Private Jewelry Buyers.” This article handles the situation fairly objectively but with “kid gloves.”

The auction houses are selling hundreds of millions of dollars of jewelry yearly to private people. They are aggressively marketing jewelry to any and all who are potential buyers or show an interest. The impact of this on the important jewelers in major cities is almost to the devastating stage. I suggest you develop some more articles that will contain interviews with the top executives of some of your major retailers in, say, New York City. However, all retailers know what the impact of one or two good jewelry sales can mean for the profitability of their company for the whole year. These life-saving sales are openly being threatened by the new retailer on the block: the auction house.

There are a number of issues that should be addressed in further discussions of this situation. My estimate is that 70%-80% of the merchandise appearing in the major auctions is submitted by dealers, manufacturers and retailers. The impression is given to the public that these are recirculated jewelry pieces from estates, private sources, banks, etc. … In fact, there are some manufacturers who never offer their merchandise through normal trade distribution but only through auction sales.

Although jewelry by the famous international jewelers (Cartier, Van Cleef, etc.) draw the most attention, the auction houses have not properly addressed the problem of bogus stamps, substitution of original center stones and manipulated jewelry. In many instances, they know the facts but don’t disclose them.

We should question the advisability of telling customers they should submit their jewelry “for resale” directly to the auction houses. By doing so, isn’t the jeweler setting up the auction house to be his direct competitor or competitor to one of his fellow retail jewelers?

There are other issues the industry, through JCK, should address, e.g. the reserve system, “off the chandelier” bids, etc.

There is a lot to be thought about on these two extremely important issues: The Rapaport Diamond Report and the “auction house as retail merchant.” The purpose of this letter is not to discuss all the points, but to encourage a continuing editorial treatment. The issues are critical to the health and survival of many retail jewelers.

Joseph H. Samuel Jr., President J.&S.S. DeYoung Inc. Boston, Mass.

RAPAPORT LIST ‘DEVALUES EXPERTISE’

In response to Glenn Rothman’s letter to the editor laying the blame for squeezed profit margins in the diamond industry at the doorstep of the Rapaport List, Martin Rapaport blames declining profits on the failure of dealers and retailers to add value along the pipeline and thereby increase their profit margins [“Another Look at Diamond Profit,” JCK, June 1996, p. 30]. He also continues his on-going attack on De Beers. Many times over the last several months as rough prices have increased, Mr. Rapaport has claimed that polished diamond demand is not great enough to support higher polished prices. At the same time, he has reported severe shortages of certain sizes and qualities of diamonds while the Rapaport List price on these qualities has remained the same.

The answers to these conflicting points of view are not as complex as Mr. Rapaport would like to make them seem. In fact, anyone who is in the business of buying and selling diamonds, as opposed to magazines, which is what Mr. Rapaport sells, knows that the answer is simple. Our current problems are caused by the Rapaport List.

I believe Mr. Rothman is correct in attributing the blame for our current profit squeeze to Mr. Rapaport and his list. The list has set a cap on the ability of dealers to make a profit by devaluing expertise in the buying and selling of diamonds. There is no other industry where someone who is not expert in his field is as insulated from loss as in our industry. Anyone who can get a laboratory certificate and a price list thinks he is qualified to buy and sell diamonds. The only thing that counts to this businessman is how big a discount he can get on a certain grade of diamond (I use the term “grade” pointedly instead of the word “quality”). In this businessman’s view, diamonds are a commodity, as Mr. Rapaport has been trying to convince the world.

But diamonds are not a commodity. If they were, each quality of diamond would always sell at a fixed price or percentage of the list. And the list would move lockstep with the market so the discount would always be the same. In addition, diamond manufacturers would always manufacture the same cut of stone (most likely a poor cut), which would maximize their profit margin at the standardized discount from list that they could sell for.

The reality of the marketplace is quite different. Try to find an experienced diamantaire who buys diamonds from certificates alone. You can’t. A true diamantaire evaluates a diamond on all the factors that make it unique, not just color and clarity. Diamond importers who try to buy well-made stones find they must pay more for them. But they can’t pass along the extra cost because the list restricts their freedom to price. Retailers say the diamond is too expensive without even looking at it! The only reason retailers say this is because they are looking at the list.

Without the list, retailers and their customers would have to go back to evaluating a diamond itself, not just the grade and price, to determine value. With the list, consumers look for the deepest discount and can’t evaluate whether they are receiving a good value since they don’t truly understand diamond values. It is not their fault that most retailers are not expert. They just don’t have the market or finances which give them the opportunity to regularly buy diamonds and become expert through trail and error. They believe the list protects them.

The fact is that diamonds don’t sell at discounts or other percentage from a list — they sell for dollars. That is why better made diamonds sell for more dollars and poorly made diamonds sell for fewer dollars, at least in the dealer market. Demand does exist for better-made diamonds; that is why they are manufactured and sold. But when a dealer tries to get a higher price for a better made diamond than a poorly made one, he has a problem because the list sets a cap on the price. In effect, the expertise of the diamantaire has been devalued. To say the list does not limit profits is disingenuous.

Another erroneous point Mr. Rapaport makes is that polished diamond demand is not great enough to support higher polished and rough prices. That is why he gives warnings that “Rough Prices are Too High.” Again, it is the list that has stifled demand and higher polished prices. When rough prices go up and manufacturers raise their prices (by lowering their discount from the list) and the list does not go up to reflect this, dealers can’t buy at those higher prices. They can’t afford to hold goods for calls and make a profit that will keep them in business.

Mr. Rapaport may describe himself simply as the “weatherman” reporting on the weather. But if the weatherman tells me it is going to rain, I take an umbrella with me. If Mr. Rapaport were only reporting market conditions, he would limit his comments to those aspects of the market where he can be accurate, such as the direction of price movements, oversupply or shortages of certain qualities or sizes of goods, etc. He would let the marketplace determine prices. After all, does anyone truly believe that on a weekly or monthly basis, Mr. Rapaport can accurately report on the “high cash asking prices” of 2,960 categories of diamonds?

It is time Mr. Rapaport went back to doing what he does best — reporting — and left the diamond experts alone to do what we do best — buying and selling diamonds based on expertise developed over many years of putting our money at risk.

Josh Fishman, President A. Fishman & Son New York, N.Y.

PRICE LISTS AND COMMODITIZATION

I am writing in response to Glenn Rothman’s letter, in which he blames the Rapaport List as the major cause of shrinking profitability in the diamond business. The real problem is not necessarily the list itself, but the way the industry commoditizes the diamond both from the industry’s viewpoint and in the eyes of the public. I am of the opinion that if Mr. Rapaport stopped publishing his list, someone else would step in with a new list.

The real problem in the industry is the commoditization of the diamond. If there were no list, the public would still continue its inane search for the cheapest G-VS1. The answer is to decommoditize the diamond as perceived by the public. This can be done only en masse through advertising. We must ask J. Walter Thompson [De Beers’ advertising agency] to help us promote decommoditization by adding to its advertising a statement such as “Two diamonds of the same color and clarity can vary widely in price and quality due to cutting and other gemological factors used in evaluating a diamond. Consult your professional jeweler/gemologist.” (I wrote to JWT on this subject but received no reply.)

If we can educate consumers this way, perhaps they once again will rely on the advice and expertise of their jeweler and not just on numbers printed on a certificate. If they realize that not every G-VS1 is the same, the numbers on the Rapaport List then would be useless except to the professional jeweler who knows how to interpret them.

In the meantime, perhaps Mr. Rapaport will start to help the industry that many accuse him of destroying. First, the list should be kept out of the hands of the public. This will require the cooperation of Mr. Rapaport and every jeweler in the industry. Knowing that this might be impractical, I suggest finding a way to encode the list to make it more difficult for the public to interpret. Perhaps each number on the list could be changed by a secret multiplier that would be available only to the trade and would change every month. A price of $5,000 per carat now written as “50” might be written as 125 in one month (using a multiplier of 2.5) and 135 the next (using a multiplier of 2.7).

We must once again put the “beauty” of the diamond back into the appraisal equation. When the public realizes that not every G-VS1 is the same, they may once again look to the professional for guidance. If the diamond is not a commodity in the eyes of the public, jewelers will see their profit margins increase, and the industry will no doubt be healthier.

Steven R. Martin,President M. Martin and Co. Chicago, Ill.

RAPAPORT LIST CREATES ‘STALEMATE’

As a long-standing diamond dealer, I have witnessed the transformation of the business from one based on supply and demand to one based on the “Rap Sheet” [Rapaport Diamond Report price list].

No longer is it enough to know that someone will want to buy a diamond simply because of its intrinsic beauty and perceived value. Today, it is unfortunate that the discount from the Rap Sheet is perhaps the most important aspect of our business.

Even more disturbing to me is the irresponsibility to our business that Mr. Rapaport has demonstrated in his list.

As a buyer of polished diamonds in foreign markets, and with close ties to a few cutters and rough dealers, I have seen the costs of rough and polished soar. Over the past 12 months, I estimate polished prices have increased 10%-20% for desirable goods (FGH/VSI-SI). This does not even take into consideration that there seems to be a shortage of rough goods and that some people are paying 10%-15% premiums for rough boxes over and above “official” box prices.

Through Mr. Rapaport has increased the prices in his report over the past few months, the discount to this list has become firmer and has, in fact, decreased by as much as 5%-10%.

If the intended purpose of his price list is to reflect the market, it should be his list that changes with the market, not the market’s discount to his list. Just as the Dow Jones or the Standard & Poor indexes are a true and accurate gauge of the movement of the stock market, the Rapaport List should be true to our market and should better reflect the market without the need to change the discount.

The fact that Rapaport List prices may be higher than actual transaction prices is irrelevant. What is relevant is that the “float” at which the list is higher than the market has been declining because Mr. Rapaport has not kept up with the market.

This presents a problem because there are significant diamond buyers who may not have access to other information and rely on the Rapaport List for a “picture” of the market. They base their buying decisions on the discount they have come to expect. They do not understand why they should now pay 15%-25% below the list for a desirable stone when they were able to get 25%-30% before.

These buyers are not wrong. It is difficult to understand that prices are higher when the report they have relied on doesn’t indicate this has occurred.

Perhaps Mr. Rapaport would like to think his list reflects the prices the market is willing to pay for diamonds. I believe he thinks that if he holds down his list, the market will be forced to come down to his list prices. I believe he underestimates the power of market forces, particularly the CSO.

The unfortunate result is a stalemate. As long as customers look to get the discount they have come to expect from the list, and as long as cutters and dealers have to pay more than the discount level, the Rapaport List is more of an obstacle than the guide it once was.

After all, the Rapaport List isn’t just for dealers and retailers anymore. It’s now in the hands of retail customers. How do you explain to the retail customer that the list has changed when the copy of the list in his hand hasn’t?

Neil D. Reiff N.D. Reiff Co. Ltd. Philadelphia, Pa.

WHO KILLED THE GOOSE THAT LAID THE GOLDEN EGG?

I’ve heard more conversation than ever about what it is that has eroded the confidence and profitability of the jewelry industry. The culprits range from misrepresentation of grades to the grading report, from false discounts to wholesalers competing with retailers, and of course Rapaport and Fed Ex.

I will make the case that most of our problems are common to most other retail industries and that the retail climate in general is a battlefield between the Davids and Goliaths, with the edge going to the Philistines. I have talked to many of my fellow merchants in Glencoe, all of whom are independent luxury, or at least upscale, stores. They are all struggling to find identities that will be competitive with the big guys.

The fact of the matter is that large chains have access to a lot of money and, thus, inventory. They don’t open a 5,000-sq.-ft. store with the goal of building inventory. They open with a full complement of everything. They have unbelievable buying power and can squeeze concessions from willing vendors that allow them to sell for 20% above an independent’s cost while still making keystone. Return privileges are also an advantage. Their vendors are jobbing out the large orders overseas for very cheap labor.

The large retailer carries only the top producing merchandise for quicker inventory turn. If a category has 100 items, they will stock only the top 50. This is why all the merchandise looks the same at the mall. The other 50 items are the scraps left for the independent to sell, but they are the bottom 50 sellers. The chains also have very little customer service, which keeps costs down.

The small retailers have two options. They can try to be a small big store and stock a little of everything. This strategy is a losing one since they will typically have less merchandise, higher prices and less budget for promotion and advertising. Or they can concentrate on the strengths a small business has — such as customer service and the ability to operate within a niche. This is also a tricky strategy, since customer service is very labor-intensive and, thus, expensive.

A prime example is Parkway Drugs down the street. The store does a big delivery service on prescriptions, something Walgreens doesn’t do, and goes out of its way for special requests. The owner told me he will close the doors when he retires because it is almost impossible to survive on only that business. He needs to sell bread-and butter items such as Listerine, but he has to charge $7.85 while Walgreens charges $6.50. Customers are smart enough to use him where he is strong and use Walgreens where it is strong. This works well for Walgreens, but not for Parkway.

We all hope our service will instill some feeling of commitment among our customers. But people look out for their own best interests: prescriptions from Parkway, Listerine from Walgreens. Loose diamonds from wholesale-type outlets, custom mounting from small independents, fashion jewelry from the mall.

This brings up a final point. The industry is being segmented into two distinct markets. Large companies gain great economies of scale. Few companies can compete on price with Wal-Mart, Service Merchandise and Home Shopping Network. The other market, the service-oriented market, is becoming decentralized as anyone and everyone enters and tells their neighbors, “I can get it for you wholesale.”

What is the answer? There isn’t much room to maneuver. The key is to be strong in what you do well and get out of peripheral markets. You also must decide if you have the staying power to ride out the impending shakeout of both markets. Once equilibrium is established, the hot investment money will go elsewhere. We will not make as much as we used to and they (big finance companies posing as retailers) will not be able to profit excessively off the goodwill that our parents built up.

Steven Pollack, President The Missing Link Jewelers Glencoe, Ill.