RESTORING THE DEMAND
The Challenge of the Diamond Consumer
Over the last five years, Ehud often discussed the need for the diamond industry to act in unison to address some of its most pressing challenges. As a first step, there is the need to ask the right question, starting with what explains the decline in consumer demand.
This past February, right after Valentine’s Day, he stated: “Consider the following: diamond jewelry sales are not as good as they used to be. The decent margins wholesalers and retailers used to have on diamonds have withered. While luxury sales are growing, diamond jewelry sales are losing market share in the category. Consumers are losing interest in traditional diamond jewelry, opting instead for alternatives such as lab-grown. Considering all this, my question to the industry is ‘what are we doing to turn this around?”
Ehud sought to enlist the diamond industry to examine the steps that brought us to this point, from the decline in marketing to the limited attention to evolving consumer needs. These trends, which Ehud explored in depth, led to a decline in consumer demand for diamond jewelry and a rise in interest in alternatives. From other luxury items such as vacations and handbags to different stones to set in jewelry, including precious stones and lab-grown. According to Ehud, our diamond industry partly brought the decline on itself.
On the positive side, he always believed that the diamond industry could change its course and generate renewed consumer interest in diamonds. In the coming weeks, we will examine that idea in light of his publications.
A Vision: Three Diamond Venues
Ehud always believed that the diamond industry could change its course and generate renewed consumer interest in diamonds. Ehud envisaged three demand directions for polished diamonds, each fulfilling a certain need, each addressing different budgets, and each fitting different economic approaches to buying diamonds.
In Ehud's words: "The future vision of diamond consumption should have three parts: The traditional market of diamond jewelry. With a popular price point and made from the cheaper part of diamond production, can compete with other gifts in the shops. The second is that of fine and high-end diamond jewelry. These niche market items are expertly designed and are fit for the bridal and the luxury sector. The third venue, and the one with a growing importance, is diamonds for wealth perseveration - a tool to store value. These diamonds will be bought and treated specifically for that purpose and with a new methodology that is based on the economy of rarity."
This vision builds on the existing diamond markets to create a new one, to continue strengthening the current offering of diamonds as a component in jewelry, while taking diamonds beyond that point. Ehud believed that as only a component of the jewelry industry, the diamond market was not taking advantage of other opportunities. He firmly believed that the diamond industry must carve out its own destiny.
Ehud's vision for three venues was driven by his belief that their fundamental characteristics which have possessed people's admiration such as their rarity, have not changed, but have perhaps gotten somewhat lost along the way. It was also grounded deep in the co-existence of multiple venues found in other commodities, such as gold and art, which are used both as adornment and for wealth preservation.
To deliver this vision, he believed the diamond industry needed to tackle a number of issues that prevent it from reaching its full potential. These issues will be discussed in upcoming articles.
Marketing the Case for Rarity
A lot of work is required to create and sustain demand for polished diamonds. As in every industry, it is a task for product makers. Unlike other industries, it was a single producer that took it upon itself. But if De Beers relinquishes this task, who will market diamonds and diamond jewelry?
"By the early 21st century, diamond marketing quickly became the responsibility of individual firms from midstream diamond manufacturers to diamond jewelry retailers.Ultimately this strategy fell far short of expectations, as diamond companies focused mainly on the marketing of their own brands, and failed to establish or maintain demand for diamonds generally in the minds of consumers," Ehud wrote in an October 2015 post.
"It seems that as an industry, we might not be loud enough when compared to other luxury sectors," he noted, adding that another issue was "whether our industry is unified around a clear and compelling central message to win the hearts and minds of consumers, especially of the new generation of buyers who has been less exposed to De Beers' "a Diamond is Forever" industry-wide campaign."
In Ehud's mind, an essential component in promoting diamonds should be brought forward more prominently. "One key differentiator of diamonds is their ability to maintain their value due to the economy of rarity," he stated in May 2015.
"When we talk of the rarity of diamonds, we are not just talking about the finite and declining supply of diamonds found in the earth," he argued."We are also talking of the increasing rarity of diamonds in the light of increasing demand for diamonds and what happens to diamonds once they are polished. All these factors combine to make diamonds even rarer."
This led Ehud to the conclusion: "If the public can understand the rarity of high quality 1-carat and larger natural diamonds, I believe such items will become an asset and not an expense, which is how they are perceived today."
Ehud was convinced that the diamond industry possesses strong messages upon which to base a solid marketing campaign for the future. The question to then consider is which producers will lead on delivering such a campaign for the sector as a whole, especially now that the diamond sector is more fragmented than ever. Ehud explored some options drawing from the experience of other sectors, which will be explored next.
Together We Are Stronger - Branding Alliances
Ehud welcomed the generic diamond marketing campaigns that emphasized the rarity of diamonds. In July 2016, he wrote "The return of a relevant generic diamond marketing campaign is a blessing. 'Real is rare. A diamond is real' is a step forward to changing the current consumer mindset and is naturally inspired by 'A diamond is forever'".
At the same time, Ehud realized that in the current market structure, allocating sufficient funds to invest in an impactful marketing initiative is not simple, and suggested a possible solution, "In view of our fragmented sector, diamond players should consider branding alliances to jointly invest in promoting diamonds".
Such a joint effort should not be limited to smaller companies. According to his vision, the leading companies must play a key role. "Branding alliances must be well organized and funded to achieve the possible, yet ambitious objective, of promoting the inherent value of diamonds in the hearts and minds of consumers.
This requires the involvement and contribution from the industry as a whole, from De Beers and Alrosa to the more fragmented midstream and downstream markets.
Could we envisage for example diamond exchanges and the other trade bodies mentioned above creating a large common marketing fund with pro-rata contribution from players across the sector?
If a fraction of our industry's $22 bn wholesale and $78 bn retail turnover was set aside such that a marketing fund of say $100 m p.a. could be created, this would go a long way in promoting diamonds as a unique product, complementing the marketing efforts of individual brands."
Working together towards a common goal, developing a joint strategy, and executing it was a worthy cause in Ehud's eyes. Especially as it had clear benefits for every single industry stakeholder and others as well.
Strategic alliances as one way to address excess fragmentation in the diamond industry
The Three Keys to Diamond Brand Power
Champagne, Cognac, Chocolate and Brandy: How the Industry Markets Brown Diamonds
Pricing is at the heart of making the case for rarity of diamonds, which in turn is key for restoring consumer demand. Pricing, however, has also been the Achilles' heel of the diamond industry, especially in a context of increased consumer knowledge.
"Technology is changing our industry in an immense way. Buyers are better informed than ever and internet jewelers have opened up a new world that allows buyers to educate themselves and to shop around while they cut costs and overheads," Ehud said in a February 2016 interview.
"A completely new approach has to be based on a fully transparent market to gain the trust and understanding of the marketplace," he expanded.
This means everything from disclosing everything about the characteristics of the diamond, through how it was priced, to continuous and always available information on its current value. Consumer education about every parameter of a diamond and how each component of the diamond pushes the price up or down must be created and offered smartly so all understand the premise and the promise."
Ehud challenged the belief that the asymmetry of information between diamond sellers and buyers was an advantage over time. Instead, he believed that pricing transparency was essential to drive and sustain consumer demand. He stated, "I believe that if consumers were more educated about diamond prices and if they had access to information on diamond prices, we'd all be selling more diamonds and more jewelry."
Detailed information about diamonds should not be a trade secret, but a way to drive interest in diamonds. "Let's make all information known, and let's make diamond prices clear and accurate, once and for all," he concluded. To help demonstrate how pricing transparency can be realized in practice, Ehud shared the key principles of the diamond pricing system he pioneered and used for 40 years. These principles will be shared in the next few articles.
Ehud's case for pricing transparency in the diamond industry was made clear in the previous Insight blog. This means making every piece of information about a diamond available to consumers. To help demonstrate how this can be put into practice, Ehud shared his own diamond pricing model, which he used for decades to price both rough and polished diamonds.
"Mercury Crystal Clear™ is an innovative methodology for valuing rough and polished diamonds, which I have been developing as principal of Mercury– a rough and polished diamond pricing consultancy", Ehud recounted in October 2015. "Mercury Crystal Clear™ is about making diamonds' value known and transparent, based on the conviction that diamond buyers today lack sufficient clarity about what they are paying for."
It was a serious effort on Ehud's part and a burning desire. "I strongly believe that two complimentary processes – full disclosure of price components to consumers along with accurately translating polished diamond prices into rough diamond prices – are part of what I like to call a CRYSTAL CLEAR philosophy".
Ehud had a detailed plan for the market, and his Crystal Clear philosophy embodied it. In the following Insight blogs, we will describe key components of this method.
A key component of Mercury Crystal Clear™, the diamond pricing system which Ehud founded, is expanding consumer knowledge of diamond characteristics beyond the 4Cs (Carat, Color, Clarity and Cut) known to the ordinary buyer.
"The importance of a transparent and easily understood pricing system for diamonds cannot be stressed enough. For many years, the general press and many consumers have been stating that the misunderstood differences in diamond prices are a turn-off."
The missing link is the realization that beyond the 4Cs there are various other characteristics called "irregularities," which should be included when evaluating the price of a diamond. These can create significant differences in price between two similarly graded diamonds with the same 4C characteristics.
"Irregularities are all those extra features of a diamond that are not reflected in the 4Cs, but are stated in a grading report: comments, type of inclusions, location of inclusions, etc.," Ehud explained in a blog post. He then added, "Several weeks ago, I unveiled Mercury Crystal Clear™ and a transaction-based price list. This is a transparent system that tracks transaction prices throughout the diamond pipeline, taking into account the type of transaction (retail/wholesale), size of transaction, and includes full details of each irregularity the sold diamond may exhibit."
In another blog post on the topic, Ehud shared the following, "I am passionate about pulling back the veil on the issue of irregularities. It is information that is well known to diamond industry insiders, but to few others. Anyone buying a diamond needs to know this, because comments and irregularities are crucial to determining the value of a diamond. They provide precious information that may not impact the 4Cs of a diamond, but could still impact the price."
"I believe in helping diamond buyers with their decision-making by spreading information about irregularities and their role in determining the prices of polished diamonds, assessing the rarity of particular diamonds," he added.
Related articles:Today's diamond buying public needs clarity on pricing that is Crystal Clear
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My Secret to Setting Record Prices for Diamonds
Crystal Clear – The Need for Transaction Prices
As yet another key pillar of Mercury Crystal Clear™, Ehud emphasized the need to improve pricing systems by using actual transaction prices rather than benchmark pricing, which has traditionally been more common in the diamond industry.
"Existing benchmark lists do not provide accurate polished diamond prices, because this is not what they were established to do. Instead, they were developed to provide some form of benchmark for polished diamond prices to be used as a reference point for negotiation between sellers and buyers."
"This should come as no surprise considering that these lists are not derived from actual transaction prices. Benchmark lists appear to be based largely on asking prices, some more data-driven than others. But, as we know, there can be large differences between asking prices and real transaction prices."
In addition, Ehud stressed that a transaction-based diamond pricelist, together with a pricing system that factors in all diamond characteristics found on a diamond certificate, is necessary to understand the true price movements of a category of diamonds.
In contrast, benchmark lists, which are usually based on the 4Cs alone, could wrongly indicate price movements as a result of comparing over a period two diamonds that have the same 4Cs, but have different irregularities, thereby not comparing apples to apples.
"Moreover, these lists do not take into account additional factors which affect diamond pricing beyond the 4Cs, namely comments and other irregularities. As we know, these factors can significantly affect diamond prices," he added.
Ehud also explained in the following passage, published in March 2017, the wider benefits of disclosing transaction prices: "Transaction price lists have many advantages, first and foremost being disclosure. We have nothing to be afraid of in giving our clients transaction prices, because anyone who adds value over the average transaction price can and should ask for the appropriate price.
Having knowledge of the transaction prices will eliminate any feeling among our clients, the retailers, that we are preventing them from knowing something of importance, that we are hiding something.
Disclosing transaction prices will also allow retailers to talk with confidence about the value proposition of diamonds, without worries that they are being cheated in any way, a sentiment that is growing in the consumer market, mostly in the US and in Europe.
Having this information available to the general public won't hurt the diamond industry any more than publishing wholesale prices of cotton has hurt the sales of the textile industry. Publicly-available transaction prices won't hurt the allure of diamonds; all they will do is give consumers an extra layer of confidence in the product we are selling."
A more detailed and technical explanation of how Ehud's polished pricing system can be used in practice, can found here.
The next blog will cover how Mercury Crystal Clear™ can be used to price rough diamonds through reverse engineering.
Related articles:The case for Transaction Price
Today's diamond buying public needs clarity on pricing that is Crystal Clear
Mercury Crystal Clear™: Gaining Transparency in the Diamond Market
The introduction of a transaction-based polished diamond price list is possible. The Mercury Diamond™ Price List which Ehud founded, provides wholesale polished diamond prices based on transaction prices in the wholesale market.
"In doing so, I aimed to highlight the potential benefits to the diamond industry that using price lists backed by actual diamond transactions can have. This is because these lists, such as that produced by Mercury Diamond, provide, in my opinion, a better reflection of market prices than benchmark lists, which are based on asking prices."
- We developed a system that collects transaction prices from a wide range of manufacturers, traders, and retailers, all of which reflect wholesale polished diamond prices as they are bought and sold around the world.
- These many monthly transactions are augmented by constant market research that backs, double-checks, verifies and completes the transaction data.
- The system covers over 18,000 polished diamond categories across the 4Cs, covering polished diamonds weighing up to 30 carats with clarities ranging from Flawless to I3, in colors from D to P and in the various shapes.
- The price list provides a price for a top stone without any irregularities.
- A separate table lists all diamond irregularities and provides the discount or premium to be applied to the base price to find the exact current price of any polished diamond, regardless of its characteristics.
- The polished diamond pricing system was reviewed and validated by one of the Big 4 accounting firms.
- Traders will not only find the current transaction price of each diamond, but by applying their manufacturing costs, they can also "reverse engineer" to calculate the cost of rough diamonds.
With this data in hand, Mercury Diamond™ also developed the Mercury Price Calculator™ (The MPC™), a tool that automatically calculates the price of a diamond based on the information contained in a diamond's certificate, computing every possible combination of 4Cs and irregularities.
Upon receipt of the certificate of a diamond, a person wants to know its wholesale price. Mercury Diamond™ automatically retrieves all its information, including the 4Cs and irregularities.
Once this information is retrieved, the MPC™:
- Calculates the value of the diamond as a "top stone" (i.e. without comments or other irregularities) according to the 4Cs, based on the Mercury Diamond Price List™.
- It then factors in discounts or premiums based on any comments or irregularities found on that particular stone.
- In some cases, it may need to account for additional information on the physical characteristics of the diamond not found on the certificate (e.g. presence of a tinge).
First, it is based on real transaction prices and other hard market data. It thereby avoids the possible disconnect that can occur between asking prices and other information supplied by diamond players, and the actual prices at which diamonds are traded.
Second, the Mercury Diamond™ proprietary table of discounts and premiums for irregularities means that when it collects transaction data for individual stones, it can factor in the impact of irregularities and net it off the price of a top stone shown on the Mercury Diamond Price List.
Third, it can complement any lack of market data through a proprietary process of association, based on the established industry principle that price changes of certain diamonds are closely linked to price changes of similar stones.
The Mercury Diamond Price List™ is fully independent and has been validated by one of the Big Four accounting firms, which is the pricing system for both rough and polished diamonds from which this list is derived and currently has a patent pending in the United States.
Improving the pricing transparency of polished diamonds is the first part of the two main components of the Crystal Clear philosophy. The other part, driven by the first, is the ability to then determine the prices of rough diamonds.
The rationale that Ehud used here was that, ultimately, it is consumers who determine the price of a rough diamond based on how much they are willing to pay for its polished output.
"I've always felt that the only way to determine the value of rough diamonds is by the value of the polished diamond outcome from that rough diamond, minus the manufacturing costs and profit. Why start from the price of polished diamonds? Because the power to set the price of polished diamonds is in the hands of consumers. The average price consumers pay for a particular polished diamond sets its value."
The Crystal Clear philosophy for calculating rough diamond prices out of their polished value was not theoretical. He shared a practical methodology with the diamond community in this article, Why are Rough and Polished Prices Disconnected? , Where he provided a series of examples to his approach to pricing rough diamonds.
Ehud also discussed the risk of loss when the price of rough diamonds is determined by a miner and disconnected from retail prices.
"The importance and necessity of the role of the gatekeeper are no longer open to question. The current manner of pricing rough diamonds is out of touch with the product that this raw material is yielding. A change is needed now, before the market improves and the mining sector once again pushes $16.5 billion of rough that is not supported by real transaction prices on the wholesale level. Will they rise to the occasion? "
Once again, Ehud emphasized the benefits from this more transparent approach at setting rough diamond prices."I believe that if consumers were more educated about diamond prices and if they had access to information on diamond prices, we'd all be selling more diamonds and more jewelry. If the way diamond prices are determined became openly known and clear to consumers, then the prices themselves would be clear and publicly known. If that were the case, the way the market works to reverse engineer prices - with the price of polished diamonds translating back to impact the price of rough diamonds – the result would be accurate pricing that reflects real changes in value".
In addition to improving pricing transparency, Ehud believed that the diamond industry should also tackle the other issues that have led to a decrease in trust in the sector as a whole.
With trust being so important to the livelihood of the diamond industry, Ehud reminded us of the Power of Mazal:
"Our industry is known for its ability to close multi-million diamond trades based on Mazal, a single word verbally agreed between parties, which is worth more than a thousand words in a contract. Mazal succeeded for so long largely thanks to the strong trust between companies in our industry.
Whilst we are therefore best placed to understand the importance of trust, we have somehow gradually placed ourselves in a more vulnerable position when it comes to consumer trust. Consumers need to trust the diamonds we sell them are natural, are correctly graded and carry long-lasting value. Trust is the goodwill of our industry, it is our lifeline."
Sometimes, just choosing the right staff can make a huge difference: "Just as in any other type of sale, gaining the trust of a customer is top priority. […] For anyone who has ever shopped for diamond jewelry, the difference between a professional salesperson and someone who 'just needs a job' is immediately obvious."
This is a path the industry has walked and overcome before. For example: "Buyers also needed to place their trust in the retailer. The average local diamond jeweler was often recommended by a relative who bought their diamonds from the same retailer. He was trusted to provide a good recommendation and a nice diamond at a fair price. Over the years, the role of the local neighborhood jeweler declined, and the modern grading system was developed in its wake to support trust and fair trading."
Yet, Ehud pointed to some outstanding areas of trust to improve. "The diamond industry has great potential. We need to turn that potential into reality. This requires a new vision for diamonds. A completely new approach has to be based on a fully transparent market to gain the trust and understanding of the marketplace. This means everything from disclosing everything about the characteristics of the diamond, through how it was priced, to continuous and always available information on its current value. Consumer education about every parameter of a diamond and how each component of the diamond pushes the price up or down must be created and offered smartly so all understand the premise and the promise."
In late December 2014, just as the year was about to end and members of the diamond industry left for their winter vacations, Ehud shared a few points to consider for the year ahead, "Transparency will also open us to new outlets for our product. We need the full trust of consumers to increase our businesses. The buyers' appetite for diamonds should never dwindle: nurturing and enhancing it is of the utmost importance if we want to maintain or even increase demand."