Veteran Philadelphia, Pennsylvania jeweler Neil Reiff last month published the following commentary on LinkedIn. With “Insanity of the Diamond Industry”*, the president of N.D. Reiff Company Ltd. raises a number of compelling concerns and questions for our industry. The article is reposted here with Reiff’s permission.
It has been stated repeatedly that the cost of rough diamonds is too high with the result being lack of profitability in the diamond industry. It is my position, as one who has spent a lifetime in the trade, that it is the retail pricing of diamonds that is too low.
Diamonds are not an “elastic commodity” of which demand increases with increased supply or lower price. Diamonds are not a disposable or consumable product that someone needs to buy repeatedly. The purchase of a diamond is, to many, a once-in-a -lifetime event. A lower price will not stimulate more diamond sales. At best, a lower price simply saves the consumer money or increases the carat weight of his purchase.
As a former business student at a well-regarded University, I learned that the purpose of a business enterprise is the creation of profits. Profit is essential to the success of any business enterprise for without it and the positive cash flow that it creates, a business model is not sustainable. Profit is the excess of revenues minus the cost of goods sold and the many other expenses that are incurred in operating the business enterprise.
Gross profit is the measure of revenues in excess of cost of goods sold. It is from this excess of revenue minus CGS that profit flows to the bottom line. It has been said by many astute business people that gross profit margin is the key to assessing the financial health and future of any business. With few exceptions (ie, Amazon.com), revenue growth is meaningless if the business model does not generate positive cash flows. Such a business is not sustainable over time.
I had a recent encounter in business that led me to author this discussion. The situation was this:
A wholesale customer was attempting to sell a 3-carat PSH diamond to a long-time valued retail client with whom he has established a professional and trusting relationship. He quoted a fair retail price to the client who was excited at the prospect of having a beautiful new diamond for his wife of many years. The wholesale customer/retailer was astounded when his customer telephoned him to tell him that he could buy the same diamond for less money on the Internet.
I cannot say how much less because I do not know the retail price that my customer quoted. I do know that the Internet seller was quoting a price of $24,996.00 for the same diamond that I own and am wholesaling for $24,575.00! This represents a gross profit of $421.00 on a $25,000.00 diamond – a gross profit margin of less than 1.7%!
To this, my customer and I both said, “This is Insanity! . . What is the point?”. There is no point and no purpose in selling anything at a profit margin of 1.7% over cost. No matter how efficiently one may run a business. No matter how much one may grow revenues.
Picture Tiffany and Co.