In my last article, I looked at the revolutionary role technology plays in the manufacturing sector of the diamond industry. Cutters are now more efficient than ever, employing state-of-the-art technology to extract the maximum beauty and value from each rough stone. Moreover, the manner in which cutters sell their finished products has also changed over the years. While technology has played an important role in this shift, it is not the only factor responsible for the newly observed dynamic in polished diamond sales.
I want to take a closer look here at the how manufacturers are marketing and selling their polished goods to the wholesale and retail markets. Much like manufacturing, polished diamond selling is a unique blend of modern commerce and old world tradition. Cutters have, for some time now, struggled to sell their polished goods at the same pace at which they have are expected to purchase rough. When analyzing the health of the industry, looking at how polished diamonds are sold is a good place to start.
Diamond manufacturers come in all shapes and sizes. This can have important ramifications on how they sell their polished stones. Many of the largest companies can establish long term relationships with large retailers that guarantee quantities and prices of sales. Meanwhile, the smallest manufacturers have to hit the ground running and find their buyers directly. However, today diamond sellers can choose from myriad options that did not exist even a decade or so ago.
In the not-so-distant past, polished diamonds were primarily sold in bourses, another name for a trading floor where buyers and sellers negotiate face to face. These bourses were prevalent in the major diamond centers of the world, where deals were often concluded with a handshake and the uttering of the Yiddish phrase “mazel und broche,” meaning “luck and blessing.”
Diamonds were often traded in large quantities. These would eventually filter down through several layers of wholesalers before reaching retailers and consumers. This setup was important, as it allowed for an expansive network of wholesalers to service smaller local and regional markets, as well as the retailers that operated in these locations. Because there were many diamond jewelry retailers, which were mostly smaller independent family-owned businesses, the range of services and flexibility that only a wholesaler could provide were crucial.
For many small retailers, this level of service remains vital today. As such, wholesalers still play a key role in the sales pipeline. However, sales channels have flattened over the years, mostly in an effort to excise the various layers of middlemen that drive up prices at the retail level. Wholesalers have grown in scope, and many have been consolidated.
While bourses remain relevant and still play an important role in the industry, they are no longer the dominant outlets for polished stone sales. It is not unusual to walk past a diamond bourse in Antwerp that sits empty for many hours of the day. Certainly, the bourses’ fading is partly due to the Internet, which has overcome some of the challenges inherent in the face-to-face negotiation process.
Like so many other industries and facets of modern life, the sale of diamonds has been transformed by the Internet. The new online marketplace allows sellers to reach buyers anywhere in the world. It gives buyers access to every conceivable type of polished stone available. The two major online players in the industry are Rapnet and IDEX, each of which has established trading platforms where manufactures and traders can post diamonds for sale to a global audience online.
These sites allow both buyers and sellers to compare diamonds against one another from many competing firms. They support the posting of grading certificates, pictures of the stones, and other selling features, which give the buyer better information to help make informed purchases. They also permit search filtering that helps narrow the buyer’s search parameters to find only stones they are interested in. It is no surprise that the web has become one of the dominant avenues for selling diamonds, and that as much as billions of dollars’ worth of inventory can be found on these trading sites at any given time. Additionally, each individual manufacturer often publishes its own specific inventory lists. These are made available on company websites and are often widely distributed via email to others in the industry.
Online trading has had the impact of reducing inventories among downstream wholesalers and retailers. Because diamonds can now be purchased quickly and easily online, companies have significantly less of a need to hold large stocks to meet future demand. Diamonds purchased online will often arrive the following day. This has shifted the burden of holding inventory onto manufacturers. The entire world of diamond financing is an issue for another article, but it is important to note that the midstream has required significant capital from lending institutions to finance this increase in polished inventory.
I have talked in the past about the trend towards selling diamonds at trade show events. Like the Internet, these shows offer buyers an array of choice and selection. Nearly all types and sizes of diamonds can be found at the largest shows, and brokers have a strong presence to help bring specific buyers and sellers together. The major shows, like the JCK show in Las Vegas and the Hong Kong Jewelry and Gem Fair, have become important barometers for the health of the industry.
For manufacturers, these shows are important selling events and can represent a sizable portion of a company’s annual turnover. They also provide an opportunity for players to establish important contacts in all areas of the diamond pipeline. The Hong Kong show had more than 57,000 visitors in 2015 and 3,750 exhibitors, according to the organizers. However the show’s size can be both a blessing and a curse. In recent years, many sellers have complained that buyers have so much choice that they can push prices down below the point of profitability. These shows provide manufacturers with ample customers to sell to, but they must often be prepared to sell at the lowest possible price or risk losing the business to a neighboring seller.
For years I have questioned the wisdom of our industry moving towards selling our products in this way. Every diamond is a special and unique gift, and I believe that large trade shows have a tendency to de-value that exclusivity. These events showcase many millions of dollars’ worth of polished diamonds and it is not uncommon to see diamonds piled up in display cases, much the same as potatoes in a supermarket. Is it a coincidence that polished prices are languishing when so much selling activity is driven in this way?
I have talked a lot about the consolidation taking place in the specialty jewelry retail world. Small independent jewelers are slowly closing, replaced by larger chain stores. For manufacturers this has opened up new opportunities to create contractual sales relationships with retail chains – an arrangement that has become very popular. Such contracts can help establish both the price and volume of diamond demand in advance, sometimes up to a year ahead of time. This aids manufacturers in planning their production schedules and budgets.
However, much like the diminishing role of wholesalers, contracts have again shifted the financial burden back onto manufacturers. These contractual relationships described above often require them to maintain generous return policies for retailers who might fail to sell on their entire purchases. Prices are often driven down such that margins are small and profits dependent on volume, over which the manufacturer has less control. However, for many cutters this type of contract has been beneficial, as it has provided them with a long-term outlet for selling their goods.
The push towards diamond branding has been underway for many years and takes different forms throughout the diamond pipeline. For manufacturers, branding often takes the form of a proprietary diamond cut or brand name. This allows manufacturers to develop relationships with retailers who agree to sell and market their proprietary diamond cut. Such a relationship has many advantages for the manufacturer.
First, the retailer often requires a modest investment in marketing materials, in-store advertising and signage, and staff training. This helps establish a longer-term relationship that is more difficult to dissolve. Second, these branded diamonds can often be sold at higher margins for both the manufacturer and the retailer due to some unique quality or attribute of the cut. Lastly, these types of relationships tend to align both companies’ goals more than a typical sales relationship, which leads the two firms to work together in tandem to promote the brand to their mutual benefit.
There is no doubt that the traditional diamond trading centers are quieter than they have been in the past, especially as selling diamonds has taken on new forms over the years. However, manufacturers can now easily reach large numbers of potential buyers, in ways and volumes never seen before. Although polished sales have struggled lately, it is certainly not because manufacturers are unable to locate interested buyers. On the contrary, manufactures now have the tools to do so quickly, and efficiently, should interested buyers exist. We are sure to see more changes in the coming years, as we continue to witness a shift away from the old and into the new.
The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.
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Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.