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Rosy Blue View - An Interview with Dilip Mehta
Dec 7, 2001 10:36 AM
By Martin Rapaport
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Dilip Mehta, founder and president of Rosy Blue, discusses the state of the diamond industry with Martin Rapaport. Rosy Blue, based in Antwerp, Belgium, is one of the world’s largest diamond firms with global operations in the U.S., Israel, India, Hong Kong and Tokyo, generating over $1 billion in sales and employing about 15,000 people.
Martin Rapaport:How do you assess the diamond marke following the attack on the United States?
Dilip Mehta: At first, it looked very worrisome with great uncertainty in the financial and stock markets. The situation has now stabilized. I’m not saying that we are going to see a very strong Christmas, but it’s looking reasonable at this stage.
MR: How important is the U.S. market?
DM: Everyone knows that about 50 percent of the diamond and diamond jewelry business is done in the U.S., so it is very important.
MR: What are your expectations for the U.S. Christmas season? How much will it be off from last year?
DM: Retail was estimated to be about 6 percent off going into September and we thought it might go down as much as 8 percent following September 11. But retailers are now making up for lost sales and things are looking better. I think we will probably finish the year between 6 and 8 percent below last year.
MR: Are there serious problems of oversupply of rough and polished diamonds in the market right now?
DM: I think the industry has been addressing this problem since last year. Early estimates of oversupply were about $1 billion. Whether it was $1 billion in rough or polished value still remains a question. In any case, quite a lot of goods were returned by retailers following Christmas 2000 and then pushed back into the distribution pipeline. I think the oversupply situation is being sorted out, but it’s not done yet.
MR: Are memo programs dangerous? Is there a large risk that these stones will all come back to the market?
DM: What’s the difference? Whether you have sold the goods outright or on memo, you’re still morally obligated to support your clients. I’m not saying that you have to break yourself and go bankrupt to do that. But, even if you sell goods to a good client, there’s an understanding that if the client runs into difficulties you have to accommodate him. So in the end, what’s the difference between memo and an outright sale? Nothing, because in either case you have to find a win-win situation with your customer.
MR: Are credit terms too long? What kind of credit terms do you see in the market?
DM: It all depends on the kind of deals you do, to whom you are selling, and the type businesses you have. By and large, yes, it’s been a difficult year and it has been difficult to collect money on time. I would say that for 80 percent of the retailers it hasn’t been such a problematic issue. There have, however, been more serious problems in the wholesale markets.
MR: Is the lack of liquidity in the diamond market a major concern?
DM: It is a serious issue. Wholesale activity probably decreased between 15 and 20 percent and the business being done was at extended credit terms and therefore credit has become a very important issue. This year, bank borrowings went up and the whole market almost came to a standstill from September until October.
MR: Are you afraid that people won’t get paid after Christmas?
DM: I don’t think we’re going to see a scenario similar to the early ‘80s when the wholesale markets fell dramatically, or the early ‘90s, when there were serious problems in the retail industry. You’re not going to see that. There will be certain problems that always come up as a result of a sudden slowdown, and the market will have to deal with those issues. But no, I do not see a catastrophic scenario coming in the next six to eight months.
MR: You don’t think that the banks are going to crack down on the industry and force people to sell inventory?
DM: Banks do have an issue with inventory levels and they are concerned about the goods that they have as collateral. While that is an issue, I don’t think it’s going to break the backbone of our industry. The banks have to put pressure on the trade or else people may get complacent and forget to sell. But the banks are not going to do anything detrimental to the health of the industry. The banks are very prudent thinkers and they are taking very careful steps.
MR: Has there been a collapse in rough prices?
DM: The direction of rough prices has been in line with what has happened in the polished markets. Due to excess inventory, polished prices went down and rough followed. It’s not just a simple independent decline in rough prices. And I would not call it a collapse; rough just devalued to corrected levels.
MR: Do you think that polished prices will fall because of lower rough prices?
DM: I don’t believe so. The fact of the matter is that in the past, rough determined the price of the polished and it worked very well. But now we have a change in market forces and it is the polished that is dictating the rough prices. The correction in rough prices during the year is allowing an operating margin for manufacturers. I do not see a further decline in polished prices as a result of the rough correction.
MR: Are the prices of De Beers’ rough higher than the price of rough on the general market?
DM: At this stage, yes. But at Rosy Blue we don’t look at one month or even six months. We look at our overall relationship over a number of years. By and large, De Beers’ prices have been reasonable; however, recent prices have been a little overvalued.
MR: When do you think things will stabilize?
DM: Hopefully, this is not wishful thinking. I believe that the recent news from Afghanistan indicates that we may be coming close to the end of the battle. The first battle of the war has been won and this will probably create a happy mood in America and that in turn will affect markets just about everywhere. If that happens, I think we’ll have a reasonable Christmas in spite of the fact that we’re in for another full quarter of economic slowdown or mild recession in America. Even with the slowdown, I think we’re still going to be okay. Going forward, I think we can expect a reasonable future starting the middle of next year. Business will stabilize probably as early as January or February of next year if we find bin Laden and the Afghanistan conflict comes to an end by year-end.
MR: What role does Belgium play in the diamond industry?
DM: Belgium is the biggest clearinghouse in the diamond business. There is a lot of liquidity in both polished and rough. Huge turnovers are taking place as Belgium is a major trading center for rough and polished. It is the diamond industry’s most important financial center. Antwerp is also a melting pot of communities that are active in the international diamond markets. Everyone, regardless of culture or background, feels comfortable living and working in Antwerp, as it is a neutral market. Therefore, Antwerp has become a major center and continues to play a very leading role in the diamond industry.
MR: Why is Belgium such an important rough center? After all, Belgium doesn’t mine any diamonds.
DM: No major center mines diamonds, so that is not a competitive issue. Antwerp is a place that has very old and historical connections with Africa and Russia. Because of this, many other rough diamonds come to Antwerp. The two newest major institutional players, BHP-Billiton and RTZ, understand this and therefore they set up their rough marketing operations in Belgium. So Belgium provides a critical mass that attracts more suppliers and buyers which then creates even more critical mass.
MR: Many Belgian firms manufacture diamonds outside of Belgium. Yet they bring their polished back to Belgium for sale. Is Antwerp’s strength the fact that it is a global marketplace?
DM: It certainly is. What’s important is that at the end of the day, the diamonds trade here in Belgium. It’s really not important where you manufacture them as long as people come to Antwerp to buy them. In some limited instances you have an issue because you can’t get certain qualities of diamonds that are a vailable elsewhere. Having said that, Antwerp specializes in manufacturing larger sizes in better quality cut. But gone are the days when we used to manufacture melees in Belgium. And now, I would say the middle sizes are a question mark. But the people are the same. You still have the same manufacturers now manufacturing in Southeast Asia, the Far East and even Africa. Therefore, quite a lot of diamonds are being traded here. So, it’s unimportant where you manufacture. The important thing is that you must have a critical mass of diamonds for sale in the market and Antwerp provides that.
MR: Are larger diamonds doing better than smaller diamonds?
DM: At the retail level it depends on which market you are looking at. In the American market for the past few years, bridal and solitaire jewelry has done better than fashion jewelry with smaller diamonds. I think the U.S. percentages may have therefore changed a bit in favor of the larger sizes. If you look at the Southeast Asian and Far Eastern markets, the situation is different. People are going for smaller sizes. Italy and Europe have also been focusing on the smaller sizes. I would say that demand keeps changing. There is not a situation where certain sizes or goods don’t sell anymore. If they do not sell for three, four or five months, then you bring them back with better marketing and new prices and the goods become very interesting again. So you can’t really say that larger goods are more in fashion compared to the smaller sizes. It is a matter of which countries you are selling to and the way the goods are being sold.
MR: Tell us a bit about Rosy Blue.
DM: Rosy Blue has operations in just about all the major centers and we believe that we have reasonably leading positions in all the centers that we are in. The focus of the company is working as a global company in the local environment. We think global and we act local.
MR: How large is Rosy Blue?
DM: More than numbers, what is important is that we are a very respected and trustworthy name in the diamond and jewelry industry and we take great pride in having achieved that.
MR: Do you trade in rough diamonds?
DM: We trade in just about everything — rough diamonds, polished diamonds, and we manufacture jewelry.
MR: Can you give us an over-all number as to the size of your turnover?
DM: Rosy Blue’s turnover exceeds $1 billion in sales.
MR: How many people does Rosy Blue employ?
DM: We employ close to 7,000 people directly and another 7,000 to 8,000 indirectly, for a total of about 15,000 people.
MR: You have established innovative financing arrangements and now issue your own bonds. Is this a more advantageous way to raise capital?
DM: Yes. There are a couple of issues here. One is to bring additional liquidity. Another is greater independence. We believe that we have become a name in the financial markets and therefore we can access those markets directly. Being established in the financial market helps grow your business because you can add liquidity anytime you like provided you have viable projects. Of course the cost of direct financing is lower compared to borrowing from local bankers.
MR: What are your thoughts about the changes taking place at De Beers?
DM: The process started quite a while ago and I’m happy they understood that they had to change. De Beers did not have to work in a competitive environment until the early ‘90s and like any other organization, if you have no competition, you work differently. The combination of major events — the leakage from Russia and Angola, and the severance of the Argyle/De Beers relationship — led to these major modifications in De Beers’ strategy. The changes at De Beers are a demonstration of their understanding of their position. I simply welcome it and think it’s necessary that they make those changes.
MR: What are your thoughts about Supplier of Choice and downstream marketing initiatives?
DM: I believe that people are probably reading too much into the downstream marketing initiative. The important message is for the trade to make sure that diamonds and diamond jewelry get sold. It is not just De Beers that has to spend $180 million to promote jewelry and diamonds. Today, all the stakeholders must apply additional funding to promote the sales and marketing of diamonds. If in order to achieve this, Supplier of Choice creates competition, then that’s fine. It will push a lot of people, including the major diamond producers, to get involved and promote their diamond product. Whether it is generic diamonds or their own branded diamonds — it is perfectly all right. That competitive environment will bring in more advertising spending to push the sale of diamond jewelry. The Supplier of Choice also cements the relationship between sightholders and De Beers, which promises consistency.
MR: Is Rosy Blue developing any special marketing programs at this time?
DM: We’re taking a bit longer than the rest of the trade because we believe that marketing and branding as understood by the diamond industry is actually quite different from what the experts describe as real marketing. We continue business as usual but we are adding cetain marketing initiatives. We are not changing our sales people into marketing people because this might hurt our business. We want our sales people to continue to do what they’ve been doing — there’s nothing wrong with that. But we are developing a different team that is creating new marketing initiatives and that will be added to our business in the future.
MR: Are you creating any special strategic alliances with large retailers?
DM: By and large we have de-facto strategic relationships with our large customers. We are “partners” with our retailers/customers. We are interested in sell-through rather than channel filling. Are we looking for any joint ventures or partnerships with retailers? The answer is no, because our business is not retailing. Our business really is to be a supplier to the retailers. We are giving a finished product to our retailers and along with whatever sales-related assistance they need. We are not into managing a retail business. That is not our game. It is a completely separate business and we understand our strengths.
MR: Will smaller firms be able to survive in the new competitive environment? What advice do you have for smaller firms? What should they do?
DM: They should be focused and very much into niche marketing. You can’t have a smaller business and offer a broad variety of items. You must understand where your strengths are. If you decide your strength lies with a certain quality, or a kind of diamond, or a specific size, you must stick to that area. If you change niches too often or if you try to do everything, it won’t work because you will not be able to develop a critical mass and therefore you will not be able to attract the right customers. If you’re not a meaningful vendor to your customer, then you don’t have a relationship at the same level as larger firms.
MR: So your advice to smaller firms is to specialize and focus on specific areas of goods and production.
DM: Yes. The biggest issue in our industry for the foreseeable future will remain inventories. If you do not control your inventory, you can literally lose your pants and go out of business.
MR: Aside from the United States, what other markets do you think will be developing strongly in the future?
DM: There is a lot of talk about India and China, but I think Europe is and will be a very important market. Another important market is Southeast Asia. While it has lost its luster over the past few years, this market will come back sooner or later. Japan is now out of fashion, but I believe that in a few years Japan will come back strongly. This cycling of markets is nothing new. The economic powers of the world keep changing and therefore our business keeps changing with them.
MR: Do you think the events of September 11 have encouaged people to buy diamonds as a store of value?
DM: Yes and no. We didn’t see any excitement in the gold market or at the recent major New York auctions for large gems, some of which had to be withdrawn. So I’m not so sure. Store of value is a part of demand, but the emotional aspect may be more important and is having a positive impact in America this season. Apart from that, in markets like India, China and all of Southeast Asia, the idea of diamonds as a store of value is an important element of demand.
MR: Is Rosy Blue doing anything special in the current environment? Are you changing the way you are doing business in the short term because of the September 11 attack?
DM: We practice what we preach. Our major concern is always to manage our inventory. Apart from that, nothing has changed. It is business as usual for us.
MR: What are your thoughts about the conflict diamond issue?
DM: The issue is really disturbing everyone. I think that the World Diamond Council (WDC), Eli Izhakoff and all the members of the WDC are doing an excellent job. I have been attending some of the WDC meetings and we’ve taken the issue on. The industry has a body that is doing the right job to protect consumers from getting involved with conflict diamonds.
MR: Is Rosy Blue doing anything special to make sure that it isn’t dealing in conflict diamonds?
DM: It has always been important for us to know our customers. Now we are putting the same emphasis on knowing our suppliers. We are being very careful where and with whom we do business. If we feel uncomfortable dealing with people that we don’t know, we avoid the business. So yes, we are defending our business. We are protecting our interest and I would say that by and large most of the companies in the diamond trade are doing that.
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Tags:
Angola, Argyle, Auctions, Banks, Belgium, BHP Billiton, China, Conflict Diamonds, Consumers, De Beers, Hong Kong, India, Israel, Japan, Jewelry, Manufacturing, Production, Russia, Sightholders, United States, World Diamond Council
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