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The Changing Market
May 21, 1996 12:52 PM
By Martin Rapaport
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RAPAPORT...
The polished diamond market is going through a period of great
change and opportunity. While overall consumer demand is healthy
and the long term outlook is promising, changes in the
structure of the distribution pipeline, increased
competition among the cutting centers, and the development of
new consumer markets are forcing a restructuring of the
industry. Firms in the cutting and wholesale sectors of the
trade will have to adapt to the new environment if they are to
take advantage of opportunities for expansion. Smaller firms are
going to have to specialize and provide unique added
value services if they are to survive in the new era.
Overall the diamond industry is expanding. International
trade statistics and consumer research indicate increased
polished diamond exports from all the cutting centers and
according to De Beers overall consumer purchases of diamond
jewelry grew by about 6 percent in 1995. While the diamond
industry is growing, it is important to recognize that profit
levels in the cutting and wholesale distribution centers have
deteriorated. There is growing anxiety in the trade concerning
the high volume - low margin nature of the developing market.
The wholesale distribution pipeline is restructuring as
competitive forces push out intermediate levels of wholesalers
and dealers. Large cutting firms are increasing market share by
directly marketing to consumer centers. Polished diamond
buyers are bypassing regional wholesale markets and buying
direct from diamond cutting factories.
Large Firms Takeover
The trend towards direct marketing that eliminates middlemen
and intermediate dealers is the result of numerous factors. For
example, in the Far East a number of regional markets have
become more sophisticated and better connected with the cutting
centers. Firms in developing countries such as Korea, Taiwan,
Thailand and Indonesia have developed the expertise,
financial resources and trade connections to buy direct from
the cutting centers. They no longer feel the need to use
Hong Kong as an intermediate market for their diamond purchases.
Significantly higher rough costs also play a role in the
restructuring of the distribution networks. Cutting firms are
pressured to maximize the price they get for polished so
they maintain viable profit margins. Instead of quickly
selling polished to local dealers in the cutting centers, many
firms have directed sales efforts to consuming markets in
order to capture the highest possible prices. Smaller cutting
firms that cannot afford expanded international marketing
efforts are being forced out of the business as they cannot
compete with the larger firms that are integrating extensive
marketing skills with sophisticated just-in-time production
strategies. In some instances, large cutters are pre-selling
production to large retailers and they can therefore afford to
pay more for the rough because they have reduced market risk.
Smaller firms that rely on the availability of attractively
priced rough to produce mixed qualities of polished for the
local dealers are at a severe disadvantage. They are often
unable to find the necessary rough in the current tight
market and unable to pay the higher prices that large firms can
afford.
At the retail level there is fierce competition among sellers in
the mature U.S. and Japanese markets. Discounting and
price-point marketing have become standard operating procedures
for the sale of inexpensive jewelry items. Large retail chains
and catalog houses have been taking market share from smaller
independent retail jewelry outlets. In some instances mass
merchandisers such as Wal-Mart in the U.S. have become the market
leader for the sale of inexpensive jewelry items that used to be
sold by smaller traditional jewelry retailers.
As larger firms take over a greater share of the market, there
are fewer smaller buyers for the intermediate wholesalers
to serve. Competition among wholesalers for the limited
customer base has reduced dealer profit margins to
intolerable levels. Furthermore, super wholesalers such as M.
Fabrikant & Sons in the U.S. provide a broad menu of dealer
services including attractive credit terms, memo availability of
large stones, and even diamond jewelry programs. There is an
increasing trend towards larger firms selling larger firms with
less room for smaller firms in the middle.
The Quality Solution
One primary solution to the problem of increasing market
concentration is the development of specialized
manufacturing and marketing by smaller firms. For example,
smaller independent jewelers in the U.S. and Japan have
found a niche selling better quality, higher priced excellent
cut diamonds. These high value diamonds require a more
sophisticated, educated and personalized sales force. Larger
retail chain stores or mass merchandisers are ill suited to
sell these products. At the diamond manufacturing and
wholesaling level there is room and opportunity for firms that
wish to service these smaller to intermediate sized retailers
with high quality products that larger manufacturers do not have
the ability or discipline to produce. Cutters that
produce excellent cuts are often able to capture
significantly higher profit margins. Similarly, retailers that
provide a high degree of design and craftsmanship in their
products are enjoying very healthy growth. The trick is to find a
successful market niche that appeals to upscale consumers.
In essence, two parallel diamond markets are developing. One is a
high volume mass market that is extremely price sensitive and
competitive. This market offers a high degree of a size scale
advantages for large firms. The other is a specialized
market that is extremely quality sensitive and requires a high
degree of personalized service best provided by smaller
firms. The quality oriented market offers opportunities for
much better profit margins. The challenge for the trade is
to expand the market segment for higher margin quality
diamond products and thereby improve overall profit margins and
assure the long term viability of the smaller firms in the
diamond industry. There is a great need for the diamond industry
to promote the concept of quality in diamond production and
marketing through trade and consumer education.
Indian Competition
Recent developments in India have highlighted the growing
competition among the diamond cutting centers. India has
long been the major supplier of smaller less expensive diamonds
due to favorable labor rates and a well established cottage
cutting industry. During the past few years, Indian diamond
cutting factories have upgraded equipment and cutting
technologies and have begun manufacturing a greater
assortment of larger stones. They have become a dominant factor
in the production of fancy shapes up to 0.50 carat in size. Over
the past few months Indian cutters have successfully competed
with Israeli cutters for control of larger rough diamonds
suitable for the production of better quality 0.50 carat and
larger polished. One of the reasons that prices for CSO rough
have reached high premium levels is that India is fighting to
enter and/or even take over the production of larger size
diamonds.
The short term result of this inter-market competition is lower
profit margins in both markets due to higher rough costs. Over
time we would hope that some equilibrium is established and that
the CSO plays a positive role moderating the struggle over
market share. Israel has cause for concern and must find ways to
insure that its productivity and added value economies of scale
are optimized.
The Outlook
The short term outlook is complicated by severe price
competition at all levels of the market due to the
restructuring of the diamond distribution pipeline and
competition among the cutting centers. CSO rough price
increases that have not yet translated to significantly higher
prices for polished diamonds have also reduced trade
profitability to intolerable levels. Hopefully, in a matter of
months, as the U.S. and other major markets enter the strong
selling season, polished prices should increase and ease
the pressure on profits. Similarly, over time the surplus of
intermediate dealers will decrease allowing those that are
specialized and/or offer efficient added value service to
prosper.
The medium to long-term outlook for the diamond industry is
very positive due to the continued expansion of the global
economy. The development of new diamond markets in the Far East
during the late development of the international diamond
market. New consumer markets in South America, Eastern
Europe, China and Russia will undoubtedly come alive as we enter
the next century. These new developing consumer markets will
insure the continued expansion and development of the diamond
trade throughout the next century.
The challenge for the diamond industry is to find effective
ways to develop markets optimally. This requires the
introduction of added value and high quality concepts that
take full advantage of the marketing potential of diamonds
as a unique luxury product. The promotion of fine cut
diamonds, new shapes, and designer jewelry are steps in the
right direction. The more the trade invests in selling the
concept of diamond quality as an integral component of the
diamond product, the greater opportunity it will have to
maximize profit potential. Ultimately, the optimal solution for
the diamond industry is to stop selling price and to start
selling quality.
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Tags:
China, Consumers, De Beers, Economy, Hong Kong, India, Israel, Japan, Jewelry, Manufacturing, Martin Rapaport, Production, Russia, Trade Statistics
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