RAPAPORT... There are a lot fewer independent jewelers than when I started talking about this stuff five years ago,” began Martin Rapaport, chairman of the Rapaport Group. He was kicking off his day of panel discussions at JCK Las Vegas with the “State of the Diamond Industry” breakfast. And he was talking about change.
FINDING OPPORTUNITY“How are we going to react to these changes?” Rapaport asked the packed room, displaying some recent media headlines, including “Inflation’s Back,” from the cover of The Economist and “The Post-American World,” from Newsweek. “It’s not just about change anymore; it’s about you people essentially getting left behind. It’s about risk. It’s about business moving away from you. It’s not about you, it’s not about how good your business is and it’s not about your customers. It’s about external economic forces — something well beyond your control.” Rapaport contended this is also a time to find new opportunities.
“I don’t think it’s so terrible, guys. But I just want you to think about it,” he explained. Stating, “This is not a normal time,” Rapaport compared the present economic conditions to what the U.S. experienced in 1978 and predicted “double-digit inflation pretty soon” — specifically, in the next 16 months or so.
WHERE AMERICA’S WEALTH WENT
“Unless you have oil wells, I don’t think you can just keep doing business in the same way,” Rapaport quipped. To illustrate, he walked everyone through “how American wealth got exported.” When the dollar was strong, he pointed out, India and China received money from Americans buying their products, and they began to form a new middle class. These hundreds of millions of new consumers are causing oil, food and commodity prices to rise through the roof as demand increases. Those higher expenses combined with the U.S. housing crisis add up, he pointed out, to the makings of an economic slowdown. Rapaport stressed that understanding market forces will help business owners come up with proactive survival strategies.
“Now we have to figure out how to surf that tsunami,” he said. If you are a global business, expansion into emerging markets is essential. But for U.S.-based jewelers, Rapaport stated, the first step is to think carefully.
SMALLER CAN BE BETTER
“When things are hopping and popping, the little guys do very well,” Rapaport observed. “Being small might even be an advantage in what I see coming.” Branding is also, he said, “fantastically important” because the ultrawealthy don’t care about price. And some good news to keep in mind during challenging times: “The emotional power behind the diamond has not diminished one iota.” Rapaport urged everyone in the industry to find their own way to add value to the diamonds and jewelry they sell, concluding that “The future will belong to those who have the best ideas.”
PRICE LISTWhen it was time for questions, many asked about recent increases in the Rapaport price list. Rapaport explained that when real diamond demand and prices increased above the Rap list over a period of time — beyond mere interdealer speculation — the guidelines were increased.
“I went up because the Rapaport price list should give you a benchmark that covers you like an umbrella, above the market. We are going to do our best to follow the market and not lead it. I don’t think it’s a coincidence that the recent Hong Kong show made record prices across the board. But understand that if prices go up, they might also come down,” Rapaport pointed out. When pressed about the effect of the increases on JCK business, he declared, “I couldn’t care less about suppliers. I couldn’t care less about buyers. My job is to tell prices the way I see them. Once I start introducing emotions into the price list, the thing goes down the toilet. So please understand that.”
With profits top of mind for so many JCK attendees, Rapaport presented a panel of six bankers who manage lending to jewelry retailers and wholesalers for a discussion of current financial and economic issues.
BASEL II BRINGS COSTS
The group agreed that Basel II, new minimum capital requirements that banks must meet to protect against credit risk, will affect pricing. Basel II attempts to safeguard the international financial system against the collapse of major banks and also provides increased transparency. Foreign banks must be compliant by 2009 and U.S. banks have to be compliant by 2010.
“As the fluctuations in product price go through the market and as Basel II and other problems confront us, we are going to have to make adjustments to pricing. We are going to have to account for client capital as well as bank capital. I think this will lead to a faster rate of consolidation in the U.S. and perhaps more pain out there,” conceded David Selove, vice president of Bank Leumi USA.
BANK BORROWING DECREASES
Some of the experts view increased caution positively. “The biggest mistake we can make as lenders is to put more money out in the marketplace than is really needed. We saw that in the subprime mortgages on the consumer side. Our credit line usage is down a little bit, which I think is good, in a way, at this time of year,” observed Gerry Attanasio, senior vice president of Valley National Bank.
“I would say if bank borrowings are down, it’s probably because of the borrowing base that a client has to live within. If the sales volume isn’t there, they cannot borrow,” countered Anna Martin, senior vice president of diamond/jewelry and precious metals at ABN AMRO, an international bank based in the Netherlands. She referred to signs of tough times ahead.
“I can tell you what I have started to feel in the past month or so. Other banks that have shared credit with me in the past have gone up 100 points or more. I think 2009 is going to be a difficult year for us all. It is happening,” Martin warned.
Selove asserted that sound financial decisions are the best defense against tough times. “When we look at our clients and they have soft years, we understand that. What we focus our attention on is the balance sheet. The key thing is the debt level. We can ride it out if customers focus on their debt levels and don’t incur too much debt and leverage themselves out. The key is we can ride this out. So there’s no reason to panic.”
FAIR TRADE GAINS TRACTIONThe sessions closed with an impassioned seminar about fair trade jewelry. While the definition of what constitutes fair trade varies and standards for gems and jewelry are still in their infancy, shoppers are showing increased interest in socially conscious products, and the profit potential looks promising. A recent survey of 4,000 consumers by MVI Marketing found that 29 percent would buy more jewelry if they knew it was fair trade and 28 percent would shop fair trade whenever possible, suggesting the niche could make an effective tool for differentiation from the competition.
“We’re really talking about paying a very small premium for this. Sometimes it costs more and sometimes it doesn’t,” stated Eric Braunwart, president and chief executive officer (CEO) of Columbia Gem House, a gemstone mining, cutting and marketing company in Vancouver, Washington.
SETTING STANDARDSThere are currently two organizations certifying all fair trade. The International Fair Trade Association (IFAT) gives a mark to producers and certifies craft jewelry, while the Fairtrade Labelling Organization International (FLO) certifies products. FLO has a pilot project for fair trade certified gold and is working on a feasibility study for fair trade certified diamonds. In the absence of third-party certification, panelists stated that producers and retailers should publish their fair trade standards for customers to review on their own.
Luckily, companies that sell fair trade jewelry have their own watchdog — the consumer. “If I make a claim that’s false, then my whole reputation is shot. In today’s climate, lying is such a huge risk,” noted Marc Choyt, president of Reflective Images, a designer jewelry company based in Santa Fe, New Mexico.
Peggy Jo Donahue, director of public affairs for Jewelers of America (JA), urged retailers and manufacturers interested in fair trade to join the Listserv at madisondialogue.org to discuss best practices and certification issues.
Article from the Rapaport Magazine - July 2008. To subscribe click here.