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The Street
Nov 3, 2000 10:02 AM
By Martin Rapaport
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By Martin Rapaport
The Street, our street, 47th Street, is a world of its own. To the outsider it is a mystical, magical place with shop windows sparkling with diamonds and unimaginable wealth. One sees Hassidic Jews, Asians, Indians and everyone else plying their secret trade, but you can’t really tell what is going on. It’s a mystery.
To the worldwide diamond industry, The Street is the gateway to America. It is the source of diamond buying power that turns diamonds into money. It’s the place where you make your connections with dealers that know the U.S. market and where you begin your own sales efforts into America. The Street is where you find the GIA stones and where you go to sell anything and everything.
To the insider, The Street is a warm community where everybody knows everybody. There is a sense of security based on mutual trust and a strong tradition of business ethics and values. It’s a comfortable place where the next deal is only a phone call or elevator ride away. It’s the center of the world’s diamond trade, because one way or another everything and everyone comes through New York.
The power of The Street comes from its diverse population of highly skilled and specialized diamond, gem and jewelry people as well as the instant availability of the world’s largest inventory of ready-to-go product. When it comes to the jewelry trade, you can get anything, make anything, buy anything or sell anything. Yes, The Street really is that powerful.
Markets
Some people think that markets are simply a way to set prices. But that is not true. Markets are places that concentrate a critical mass of people and product for the express purpose of adding value. In general, the more complex the product the greater opportunity markets have to add value.
The diamond markets are highly complex because diamonds are a very complicated product. Diamonds come out of the ground in a tremendous variety of shapes, sizes, and qualities. There is no one generic diamond product. How can you compare Indian melee going into Wal-Mart jewelry with five-carat GIA certified stones for sale on Fifth Avenue? There are literally hundreds of diamond product categories serving highly differentiated and diverse price-point specific consumer markets. Every one of these categories needs to be developed in its own way and requires very specific types of diamond product to fulfill consumer demand.
We must recognize that diamond demand is product specific and selective. Consumers and retailers don’t just want to buy diamonds. They want to buy specific types of diamonds at specific price points. They will only pay higher prices if you give them what they need and often they will buy only what they need. You can’t sell large retailers what they don’t need — even if your prices are great. As retail marketing and merchandising gets more sophisticated and program orientated, it also gets more specific.
So, lets look at the diamond markets. On the supply side, we have all types of diamonds coming out of the ground. One way or another these diamonds are polished and pour into the market. On the demand side we have many buyers for many specific qualities of diamonds. Obviously the key questions for the diamond industry is what is the most efficient way to get the right diamonds to the right customer? And, what do you do with the diamonds that don’t have the right customers just now?
Adding Value
The fundamental idea behind all diamond markets in that people are willing to pay more if you can give them exactly what they want. The market players add value to diamonds by sorting, selecting and merchandising specific types of diamonds to specific customers. Every time a diamond changes hands as it moves down the distribution system value is added because the buyer is getting a finer assortment of diamonds.
Here's how it works. The average retailer can never buy an "original" parcel from a cutter because it contains many stones that they can’t sell. In a simple system, the cutter sells to a dealer that provides specific assortments of polished to a diversified customer base of retailers and jewelry manufacturers. In some instances the dealer might sell to a polished wholesaler that holds inventory to meet calls from specific clients. In the end the retailer gets exactly what he wants and everybody in the market makes money in direct proportion to their ability to sell customers further down the distribution system and/or provide select diamonds that meet specific demand.
Since the polished markets are freely competitive and profits are based on the ability to sell selective assortments downstream there is a lot of incentive for diamond cutters to bypass dealers and wholesalers. In fact, large diamond cutters often make more money dealing and wholesaling diamonds then they do by cutting them. These diamond cutters open up their own diamond dealing divisions and directly market diamonds to retailers and sometimes even consumers. The cutters often meet downstream demand for diamonds they do not have by buying diamonds from smaller cutters. Many have gone into jewelry manufacturing.
Cutting out the Middleman
The trend towards the vertical integration of the diamond distribution pipeline, whereby diamond cutters assume the role of dealers, wholesalers, diamond manufacturers and even retailers is greatly intensifying due to the implementation of De Beers new strategic programs. De Beers is providing priority allocation of the best types of rough to cutters that implement well-defined downstream marketing programs. These programs are designed to move diamonds directly through retailers to consumers often bypassing the traditional intermediate dealer markets. The new mantra of the diamond industry has become "cut out the middleman."
On paper the new streamlined direct marketing theory looks good. Why shouldn’t diamond cutters increase their profits by eliminating unnecessary hands in the distribution system? Especially, if they can then plow these "extra" profits into sophisticated marketing programs that increase overall diamond demand, increase their market share and build customer loyalty.
The new theory implies that the synergy created by multiple buyers interacting with multiple sellers in a free market can be replaced with a new kind of synergy created by vertical integration and direct marketing from sightholder/cutter to retailer.
The theory raises these questions. Is The Street inefficient? What about the little guys — are they simply "extra little hands" that need to be eliminated in the new order of things? Does the diamond industry need The Street anymore?
Cutting in the Middleman
The problem with this theory is that it implies that all diamonds can be somehow directly program marketed from cutters to retailers. But that is simply not true. While cutters do get premium prices for selling select diamonds into retailer marketing programs, the real cost of these programs are all the goods that are left over. Pray tell, how and to whom will the big shots sell all their left over diamonds if they eliminate the middlemen? Do they really think that they can do everything themselves? If the big guys do too good a job of eliminating the little guys they will choke on their inventory. It will be their just dessert.
In fact, The Street and all the "extra little hands" on it are the major clearing-house for the world’s polished diamonds. These clearing-house services are going to be in increasing demand as the new focus on marketing fine-tunes and specializes diamond demand. The Street will not just be busy selling off excess goods, it will also be helping large firms buy the goods they need to fulfill their marketing program requirements.
Essentially, The Street is a very efficient freely competitive market distribution system that allocates diamonds to the best sellers. Diamonds go to people that pay the highest prices. They are able to pay the highest prices because they get the highest prices due to the optimal added value way that they distribute their diamonds.
It is important to note that The Street has no bias towards intermediate dealers. On The Street, large firms distribute diamonds directly to large retailers through selective marketing programs that bypass dealers. At the same time, and for the same people, sales to independent retailers are optimized through intermediate dealers.
The De Beers plan is a great idea because it focuses the diamond industry on downstream marketing opportunities. But lets not get carried away. There is no reason to assume that sightholders are, or will be, better added value distributors, wholesalers, or jewelry manufacturers than nonsightholders.
The real danger is that De Beers will damage the distribution system by over allocating rough to less efficient direct marketing programs and starving the legitimate already efficient market players from the product they need to do their jobs optimally. De Beers must be careful to implement its programs in such a way that it does not damage the legitimate market players. Yes, by all means De Beers should introduce change and replace price competition with marketing competition. That’s fine. But they must be careful not to eliminate the necessary little guys or damage the market power of The Street.
The New Game
The diamond markets and The Street are going to become increasingly competitive. The big guys are going downstream in a major way and the little guys are going to have to adjust. We will not only have to compete harder for customers, but we will also have to compete for supply. Some of us may not make it.
The Street is going to have to wake up to the fact that the trend towards selective demand has created severe shortages of specific diamond sizes and qualities. Simply put, there aren’t enough of the "right goods." Furthermore, given the first hand availability of rough to sightholder manufacturers and their ability to sell high demand diamonds directly to retailers, it is likely that shortages will get much worse. The message here is that cutters don’t need The Street to help them sell what they can easily sell themselves.
The real challenge for The Street is to develop new and innovative marketing skills to sell diamonds that are in over-supply. We must enhance the clearinghouse function that The Street already does so well. Flipping diamonds for a few percent is no longer the name of the game. Strategic target marketing is.
Small to medium-size firms are going to have to think strategically and find new and better ways to compete with larger firms that have size scale advantages. They must identify niche product areas and niche marketing opportunities that provide advantages to smaller firms. They must also develop strategic relationships with consistent sources of supply.
Retailers should not be surprised to find that some, if not many, of The Street players will be looking for downstream retail marketing opportunities. This may take the form of formal strategic partnerships with retailers, or even direct sales to consumers. The new hyper-competitive marketing system will spill over into the retail sector. It is interesting to note that some retailers get upset when middlemen sell directly to consumers. They charge that it is unethical. Yet the same retailers think nothing of cutting out middlemen and buying directly from diamond cutters. The bottom line is that everybody should get ready for more free market competition. He who markets best will win the new game.
Street Power
The diamond markets are entering a new phase of development, which will put severe competitive pressure on the traditional diamond distribution system. Large firms, particularly sightholders, are developing new target marketing programs that will move product directly to retailers bypassing the intermediate markets. While there is concern that some of the less efficient players will be forced out of the market the overall impact on The Street may be quite positive.
De Beers new strategic initiative is focusing the diamond distribution system on downstream target marketing programs that will require consistent supplies of finely assorted selections of diamonds. The Street will play an important role in helping these firms balance their inventory and obtain sufficient diamonds to fulfill program requirements. Furthermore, more often than not, downstream marketing initiatives by cutters will require the cooperation and the assistance of The Street. As increasing numbers of international cutters focus their downstream marketing efforts on the U.S. market they will draw upon the resources, market intelligence and well-established marketing channels available via The Street.
While it is natural for many firms to feel threatened by the new competitive direct marketing approach being advocated by De Beers and implemented by sightholders, it won’t be long before the overseas cutters realize that there is more to selling diamonds than shoving them at retailers. When it comes to selling and collecting, the overseas players will quickly come to recognize just how powerful The Street really is.
It may seem ironic, but in the view of this writer, the more that firms wish to implement direct downstream marketing the more reliant they will be on the Street. Once marketing, sales support and customer service become the key elements of the new diamond cutter distribution system, they will need us more than we need them.
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Tags:
Consumers, De Beers, GIA, Jewelry, Manufacturing, Sightholders
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