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RAPAPORT... There is somewhat of a dichotomy present in the high-end diamond sector. While the European luxury jewelry and watch companies continue to post strong growth, suppliers of diamonds used by this sector have noted a sharp slowdown in demand.
In fact, they point out that the slump in demand for small, high-quality diamonds used in the watch industry has been a unique feature of the current downturn. The luxury market, after all, has enjoyed an unprecedented boom in the past few years as new wealthy consumers in the Far East, Asia and Eastern Europe have splurged on bling.
Now, the prolonged European economic crisis is taking its toll.
“After unprecedented polished price hikes in 2011, the global economic slowdown in 2012 is affecting the watch sales forecasts, resulting in a sudden slowdown in demand for high-end polished diamonds below 195 millimeters in size,” said Laurent Grossman of Antwerp-based Grossman Diamond Manufacturing.
Grossman noted that diamond suppliers are currently focused on manufacturing specific millimeter sizes, which are still in demand, either in full cuts or eight cuts. He stressed that current market volatility requires the utmost flexibility in order to adapt to the prevailing prices and specific demands, as well as to preempt future price changes.
Abraham Fluk, chairman of Yoshfe Diamonds International (YDI), a leading manufacturer of small and medium-size, fine-make round diamonds that supplies many of the high-end luxury brands, agreed and stressed that the prolonged economic crisis in Europe has started to have a deeper impact on the diamond market.
He noted that while the Swiss watch industry – as well as the French luxury brands – had been an island of growth in the past two years, demand from these sectors has slowed in 2012 as they have started to feel the effect of the economic crisis.
“Both these segments are suffering because there is a slowdown in the Far East, especially in China, and to a lesser extent in Russia, as these countries have been the biggest customers of luxury products,” Fluk said. “During 2011, which was a boom year for them, the luxury brands bought large quantities of small, top-quality diamonds to avoid shortages in supply and now their buying has slowed due to an overall economic slowdown and in order to reduce their inventory.”
The change was sudden. Diamond suppliers noted that demand was strong in the first quarter and reported an upbeat market at the Baselworld show in March. Since then, however, demand has gradually softened and then suddenly stopped, explained one supplier, who asked to remain anonymous. “We’ve never seen such a situation,” he said. “Even in 2009, there was still business, but now everyone seems to just be waiting around.”
Swatch Group stressed in its recent interim report that there has been a certain weakening in the high-end segment in parts of greater China. Similarly, Goldman Sachs noted in its 14th annual Watch Retailer Survey, published in June, that it expects to see a softening in retail sales from Hong Kong and China, especially because the comparative base in the year 2011 was so strong.
Swatch also noted that high gold and diamond prices and the overvalued Swiss franc continue to put pressure on margins for its brands. Goldman Sachs added that it expects to see a continued tightening of margins, tight supply and strong demand in the very high-end watches.
Still, the numbers are staggering. Swatch reported record profits in the first half of 2012 with its watch and jewelry unit – which includes the high-end Breguet, Blancpain and Omega brands – posting sales growth of 18 percent year on year. Similarly, LVMH Moët Hennessy Louis Vuitton reported organic growth of 13 percent at its watches and jewelry segment, which includes TAG Heuer, Zenith and Hublot.
Other companies are expected to follow suit. Goldman Sachs found that 77 percent of the 130 retailers questioned worldwide in its survey expect sales to grow in 2012 and foresee that momentum in the watch industry continuing.
Certainly, the industry remains an important one to Switzerland. Swiss watch exports grew 16 percent year on year to $10.38 billion (CHF 10.14 billion) in the first half of 2012, according to the Fedaration of the Swiss Watch Industry. This total was 39 percent higher than the one recorded for the same period of 2010.
But while retailers are predicting continued growth, they are also keeping lower-than-average inventory levels. Goldman Sachs reasoned that brands are increasingly taking control of their distribution by opening more mono-brand stores and reducing the number of third-party retailers.
"The significant de-stocking in the multi-brand retail channels seen in 2008-09 accelerated this change," Goldman Sachs analysts wrote. "The implication is that we believe that inventory across the fragmented retail networks in Europe and the U.S. are much lower than in 2008. Hence, we believe the risk of major de-stocking of the scale of 2008-09 is lower today.”
Most significantly, however, Goldman Sachs reported that retailers expect a slowing down of precious metals watches, while the technical brands are projected to see more strength. As Swatch noted, high gold and diamond prices are pressuring profit margins.
In addition, as we have witnessed before, while wealthy consumers don’t necessary curb their spending in tough times, they do tend to opt for more modest purchases while their peers struggle.
It is little wonder then that luxury watch companies are limiting their diamond buying. They’re indicating that they have enough diamonds in stock to satisfy their short-term watch and jewelry manufacturing needs.
Some in the diamond industry are preparing for an upsurge in demand when these inventories run out. Others note that watchmakers’ recent cautious approach to managing their inventory signals a long-term trend and strategy.
Either way, working with lower inventories has been the reality across the pipeline since the crash of 2008 and has certainly been a feature in the diamond market throughout 2012. And that has now caught up with the high-end watch segment.
Not that they were buying loosely before. But their high level diamond purchases over the past two years served as a positive forecast for the sector – even through the first quarter of 2012.
As high-end watch sales continue to outpace the rest of the jewelry market, the watch sector’s sudden restraint in buying diamonds represents a change in outlook. The watch industry may be projecting that its own sales growth momentum will continue, but it is also sending a strong, and possibly harsh, message of caution to the diamond industry.
The writer can be contacted at avi@diamonds.net.
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Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
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