Retail Diamantaires

Avi Krawitz

When it comes to profit margins, the middle man always gets squeezed. From a diamond ‎industry perspective, this is easily assessed with a quick look at the financial statements ‎of companies operating in the various sectors along the pipeline. Simply put, margins are ‎far stronger at the mining and retail ends of the market, while manufacturers have borne ‎the brunt of lower margins in their trading environment.   ‎

Therefore, reports that De Beers raised prices on certain items of rough at the May ‎Diamond Trading Company (DTC) sight was by no means met with enthusiasm by the ‎trade. Even as DTC adjusted prices downwards on other less popular goods, many argue ‎that any increase cannot be justified given the current state of the polished market.

Indeed, market feedback has indicated that polished trading has quieted in the past two ‎weeks, thus adding to the manufacturing profit margin concern. Indian liquidity is tight ‎and global buyer uncertainty is prevalent. ‎

By way of comparison, the RapNet Diamond Index (RAPI™) for 1-carat certified ‎diamonds fell 2.9 percent in the first four months of the year, according to the recently ‎released Rapaport April Research Report: “Conservative Markets.” During the same ‎period, rough diamond prices increased by approximately 7 percent to 9 percent, ‎according to Rapaport estimates.‎

The disparity between rough and polished prices is not unusual. Polished prices often lag ‎behind the pace of rough price increases. But the notion that high rough prices should ‎translate into higher polished is misguided. To repeat a point made by this column before, ‎the rough market should be taking its cues from the polished market and not the other ‎way round (see editorial “Rough Economies” published on April 20, 2012).‎

However, the rough client landscape has changed, which, to an extent, is enabling higher ‎rough prices. Today, among the largest purchasers of rough diamonds are in fact jewelry ‎retailers, who enjoy higher margins, sell their resulting product to the end consumer, and ‎are thus better able to absorb the higher rough costs. ‎

DTC supply to its retail clients is set to increase in the current contract period that started ‎on April 1. Gitanjali Gems gained a new sight and Chow Tai Fook received an additional ‎sight in Botswana. Other such sightholders include Tiffany & Co. (Laurelton Diamonds), ‎Graff Diamonds (SAFDICO), and Chow Sang Sang.  Chow Tai Fook, Tiffany & Co. and ‎Graff Diamonds each have multiple sights across DTC’s distribution centers. In addition, ‎many of the powerful Indian manufacturers such as Rosy Blue and Shrenuj & Co have ‎successfully ventured into the jewelry and retail space. Others have effectively formed ‎partnerships with retailers. ‎

Tiffany & Co. stated in its 2011 annual report that it expects to purchase approximately ‎‎$200 million worth of rough in 2012. In addition to purchasing through DTC and Rio Tinto, ‎Tiffany & Co. has penned various supply agreements with mining companies for defined ‎portions of their output. For example, the jeweler has an off-take agreement with Gem ‎Diamonds for yellow diamonds mined at the Ellendale mine. Tiffany & Co. also said it ‎intends to purchase rough diamonds from other suppliers where it has no contractual ‎obligation.‎

Chow Tai Fook, which is also a Rio Tinto Select Diamantaire, estimated that about 40 ‎percent of polished diamonds used in its vast jewelry retail empire are manufactured in-‎house. “The broad range of our activities provides us with firsthand knowledge of the ‎diamond market as we directly experience how supply and demand dynamics impact ‎our business,” Kent Wong, Chow Tai Fook’s managing director said in an interview with ‎Martin Rapaport published in the May 2012 issue of the Rapaport Magazine. ‎

For wholesale manufacturers, this means they are competing on an uneven playing field ‎and it appears that a two-tier system may have developed within the sightholder ‎community. On a more significant level, mining companies selling their goods on contract ‎may be basing their rough price hikes on how efficiently the resulting polished can be ‎sold at the retail rather than the wholesale level. ‎

This surely does not reflect the reality of the trade. It also makes it even more difficult for ‎the vast majority of manufacturers to profit on their rough purchases.‎

For its part, DTC maintains that it takes into account a number of factors in its pricing ‎policy, including the flow of information from De Beers Diamdel auctions, feedback from ‎the polished market, as well as retail and economic trends. The company has also stated ‎that it has become more flexible to make short-term price adjustments, up or down, than ‎it was in the past.‎

Still, the push toward branding will help maintain a price uptrend. For its part DTC has ‎been pushing sightholders to diversify further along the supply chain for a number of ‎years through its supplier of choice program. As one sightholder told Rapaport News, not ‎only do you have to show your brand value to get a sight, but today you need to have a ‎strong brand to make money off the sight. He explains that in contrast to generic ‎diamonds, branded products offer sufficient premiums to profit from current high rough ‎prices. ‎

Certainly the consumer penchant is rapidly moving toward branded products, and ‎tremendous branding opportunities are emerging, particularly in developing countries like ‎China and India. ‎

De Beers itself has been pushing its own brand for over a decade now. The company ‎continues to expand its retail footprint through its De Beers Diamond Jewellery stores, ‎and continues to ramp up development of the Forevermark brand. Having shelved its ‎own generic advertising spend, the company has encouraged branded advertising as the ‎preferred method to spur demand. As De Beers has moved downstream, so it has ‎expected sightholders to move upstream along the pipeline. ‎

By no means is the development of diamond brands a bad thing. However, the ability of ‎diamond cutters to effectively enter the brand landscape is questionable. Many have tried ‎and failed. Developing a brand requires considerable investment and know-how. ‎Ultimately, diamond manufacturers find themselves competing for attention among ‎retailers. In turn, retailers have a choice to effectively represent their supplier’s brand or ‎develop their own.  In a fiercely brand-focused world, it will always be the retailer who ‎has the upper hand given his access to the end consumer. And that puts added pressure ‎on the manufacturing sector. ‎

But for De Beers and others the concept has come full circle. With more branded ‎retailers sourcing rough diamonds at prices only they can afford, the market appears to ‎be working to coerce manufacturers into branding, enabling mining companies to ‎maintain higher rough prices in a soft polished trading environment. ‎

Whether diamond cutters are, or even should be up to the branding task, is questionable. ‎Certainly the vast majority will not be. To ease their burden and maintain a vibrant ‎manufacturing and rough trading sector requires a rough pricing policy that reflects the ‎generic, rather than branded diamond market. ‎

Source Rapaport