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Why is Diamond Profitability Paper Thin?

Why is Diamond Profitability Paper Thin?

Examine the diamond sector – especially the midstream where most of the skilled activity takes place – and you will find a sector with very narrow margins and near zero profitability. This state of affairs keeps the industry constantly on the verge of bankruptcy. How did things get to where they are now? 

How is it possible that an industry that manufactures luxury products is operating as though it provides low cost, price-point driven items? Why is the manufacturing sector of the diamond jewelry industry always looking for ways to further cut expenses, such as by seeking lower labor costs, lower taxation agreements, lower tariffs, free trade zones and reduced overheads?

How did this happen to an industry that produces luxury items and caters to upper middle-class clientele who have set aside money for expenditures? Will a 5% price difference really determine if a diamond is sold? Will cutting already low labor costs by a few percentage points really make diamonds more attractive?

Or, looking at it from a more positive angle, would paying a few more percentage points to laborers, a little more on taxes, and slightly raising the prices of diamonds to consumers, really make diamonds unsellable? Does this mean that it is impossible to polish diamonds in countries across the globe where wages and taxation are applied evenly across business sectors? How can this possibly be the case for a luxury item like diamonds?

The case for cost of manufacturing

Manufacturing has long been a tricky economic area. Ever since the industrial revolution, manufacturing has both carried economic growth forward and been under pressure to reduce costs. Henry Ford’s invention of the assembly line, for example, made vehicle manufacturing more efficient, reduced his cost-per-item, and made automobiles much more accessible for consumers.

The textile industry is under great pressure to provide lower-cost products at a greater scale than ever before, which has resulted in the migration of manufacturing to countries like Bangladesh. Is this where we want to take the diamond industry? Into a paper thin margin manufacturing zone just to satisfy desires for a low-cost, seasonal item? To me, this seems all wrong.

Look at all the financial effort that goes into bringing polished diamonds to the fingers of consumers. Billions of dollars are spent on exploration, development and licensing of diamonds. The value of rough diamonds sold by the mines is about $15 billion while the value of the resulting polished diamonds is about $21 billion. This may seem like a decent margin, but once you subtract the cost of machinery, labor, financing, upkeep, R&D and overheads, and after dividing that revenue between five thousand diamond manufacturers, very little remains in hand. Where should we cut next, in R&D? How will we ever develop if we do that? Labor? We are already operating in low labor cost regions. Give up on technology and give up on advancing into the future?

If anything, we need to invest more in R&D labor and technology for the sake of development, efficiency, and providing a better product to our customers. We must find our solution elsewhere.

Time to raise prices

During the past year, I have repeatedly advocated lowering the cost of rough diamonds and paying for rough based on the wholesale transaction prices of polished diamonds while all along taking into account a 5% cost of manufacturing and maintaining 10% gross profit. The assumption all along was that consumers are willing to pay a certain price for their diamond jewelry, but not more.

While advocating caution and thoughtfulness in buying rough diamonds, I have also called for greater education and investment in consumer marketing. These two steps will help consumers accept higher prices for polished diamonds. There are several reasons for such efforts. One of which is profitability, as mentioned above. The other is for positioning. Diamonds are a luxury product, and must be treated as such by the diamond industry as a whole.

It should be said that diamonds share something else in common with textiles besides the pressure put on its manufacturing sector. Many of the products are price point driven, while some are high-end. Some want to buy a t-shirt for as little as possible, but there is also a couture market. And in between these two extremes there is a whole range of luxury products that are priced higher to reflect their uniqueness. They are not sold primarily on the basis of a budget prices for the masses, they are sold primarily on value – design, enduring sentiment, quality and prestige.

So how do we create profitability?

If we aim to create profitability by demanding tax agreements, reducing labor costs and continuously cutting running costs, then something has gone terribly wrong along the way. Is it the oligopolistic mining sector or the fragmented manufacturing sector? Is it because this structure leads to stiff competition for rough that drives up prices? Is it a lack of professionalism in buying rough diamonds? Or is it maybe because the costs of certification are too high? Is it related to the cost of financing or maybe to excessive financing? Maybe the diamond industry is too old-fashioned and has not advanced with the times?

These are all important questions that the industry must ask itself. The industry is heavily populated by smart and resourceful people and we need to collectively think of the macro framework of the diamond industry and develop ways to transform it into a viable and profitable business just like any other.

 

For me, this means that we must act prudently with costs on one side of the equation while on the other side we must reposition diamonds as the ultimate luxury item. There is room for mass-produced items, but those should not be the heart of our activity, only an additional outlet. The heart of our activity must be creating a luxury item while distributing a significant portion of them for capital preservation purposes, positioning the polished diamond as such an item, and profiting from it the way it deserves.

The views expressed here are solely those of the author in his private capacity. None of the information made available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one should act upon any opinion or information in this website (including with respect to diamonds values) without consulting a professional qualified advise 

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