From the miners that produce the rough stones, to the companies that manufacture the goods. From the traders in polished to the jewelry firms that buy the finished product. We travel down the diamond and jewelry pipeline, stopping at every facet to ask some of the leading players just how they determine the price they’re willing to buy (or sell) diamonds. Whether it’s the impact of the Internet, the transformation into a vertically integrated industry or the issues of price forecasting, miners to jewelry manufacturers speak their mind:

 

The Miner - De Beers

1. How do you determine the price of your goods?

 

DE BEERS: We keep our prices under regular review and analyze them very carefully to ensure that they at all times take into account what is happening within the market. We also give on-going consideration of our pricing levels to ensure that they remain proportionate and competitive.

 

In reaching any decision on the pricing of our rough, it is essential for the DTC to understand pipeline dynamics. Firstly, we take a view of what is happening in diamond jewelry sales worldwide and the growth that is expected. We have built analytical models that convert assumptions about diamond jewelry demand in diamond jewelry consuming countries into polished demand i.e. pipeline call for polished, and we then compare this to our estimates of goods available to supply this i.e. worldwide rough production and stocks plus polished stocks.

 

This macro approach is used in longer term planning. In the short term we also use a micro approach, analyzing what appears to be playing out week by week in the rough and polished markets. This helps us to get a relatively good feel for polished demand and likely value.  We gather publicly available data and feedback from a wide range of sources and then we collate it to try and build as realistic an impression of overall demand and values as possible. Our sources range from trade publications to industry bodies and diamond banks. We also get high level feedback from our clients concerning their general views on demand levels for polished goods on the market.  De Beers also has a Polished Division which conducts rough to polished experiments and trades the resultant polished. It is essential for the DTC to understand the polished profile of its rough boxes and this unit provides us with very useful feedback, and helps us to analyze whether our goods assortments and our prices reflect prevailing market conditions. There are also a number of price lists in circulation which enable us to carefully consider the range of prices being offered for a particular item. It is the DTC’s intention to sell rough at a price that will enable our clients to sell the resultant polished profitably.

 

2. In the past few years, the industry has undergone a historic transformation leading to greater transparency and vertical integration, with manufacturers selling direct to consumers. How can manufacturers achieve a viable margin in this shifting environment?

 

DB: There has indeed been a transformation in the last few years and we anticipate that this is likely to continue as the industry continues to modernize and aims to compete even more effectively with other luxury products for a share of consumers’ discretionary spending.

 

As in any industry, any successful business needs a clear strategy in order to know how it is going to compete and achieve a satisfactory return on capital. In recent years diamond businesses of all types of model have tended to put a stronger focus on efficient distribution and marketing in order to differentiate themselves.  We strongly believe there are many opportunities for all diamond business models, not just those focused primarily on manufacturing. 

 

3. What impact is the Internet having on the buying process of diamonds in terms of pricing?

 

DB: On the basis of our observations, the Internet seems to have the effect of consumers being more educated and better prepared in making their diamond purchase so, as with anything that brings greater transparency and confidence, this is a positive development. Some businesses might perhaps find that pricing is impacted by, for example, savings to overheads.

 

 

The Diamond Manufacturers

Dilip Mehta: Rosy Blue CEO

 

Daniel Horowitz: IDH Diamonds, Principal

 

Shmuel Schnitzer: Schnitzer Diamonds, President of the World Federation of Diamond Bourses (WFDB), President of the Israel Diamond Exchange (IDE)

 

Jeff Fischer: Fischer Diamonds President, President of the International Diamond Manufacturers Association (IDMA)

 

Meir Dalumi: Dalumi, Managing Director

 

Serge Fischler: Fischler Diamonds, President

 

1. In today's market, how do you determine the price you're willing to pay for goods?

 

Dilip Mehta: The diamond market is now very much a demand driven one. For companies this means if you need the goods you simply pay the price. For most this is a difference between 3-4% of trading levels. Simply speaking if a company is anxious for the goods, they may end up paying up to 4% over market price (and vice-versa).

 

Daniel Horowitz: Consistent with market economy fundamentals, sellers tend to test the upper limit of what they can obtain, and buyers do the opposite. The outcome of this polarization is what determines the price. What has changed though is that price points are widely available through media claiming to be well informed. However, one must keep in mind that the ultimate source of information remains real life transactions, and not the other way round. Buyers seeking to purchase diamonds based upon public domain price points will succeed only if the information is sourced from genuine transactions. No vendor in his right mind sells at conditions conflicting with his own daily assessment on the ground. Nothing new under the sun.

 

Shmuel Schnitzer: We buy according to our estimation of how much our customers are willing to pay, taking into account the desired margin. Cost-wise we determine the price of larger stones according to the Rapaport price list and smaller stones based on market price. This situation hasn’t really changed much over the past several years.

 

Jeff Fischer: We buy polished for two specific purposes:  The first is to complete a client’s order. This is generally done under prior agreement with the client. In this situation the selling price has been agreed to and puts a clear finite cap on what we can afford to pay. We do what we have to do to finish the order as promised. The second reason we buy (or sell) polished on the markets is for inventory balancing as there is only limited control over what our rough productions yield in terms of specific sizes and grades. If we are heavy in a particular category we might be inclined to sell it down. Conversely, if we are light in an area we want covered, we will buy for stock.  For a desirable, difficult to find item, we conceivably might pay as much as we believe we can reasonably ask for it (no real difference between cost and selling price at time of purchase!). We will not pay more. We take certain risks to have such items for our clients’ requests but we do not buy “futures” or speculate on a rising market.

 

Meir Dalumi: Twice a year we reevaluate the situation regarding pricing in order to commit to programs. To determine the price, we base our decision on certain parameters including the level of stock held, quantity of incoming production filtering down the pipeline and increases upstream. Once we have analyzed these parameters we are then able to determine the price ahead for a six-month period. We do this at the beginning of the year, in January, and again in June.

 

Serge Fischler: Today’s market is so wild that it’s quite difficult to determine what we’re willing to pay in a very accurate manner. We take into consideration factors such as lower dollar value, higher cost of mining, emergence of new markets, and so forth. If the increase is within reason we need to move ahead, but if the rough diamonds are so outrageously priced that we will have to lose money, we will pass on these goods. I love the diamond business, but I am in it to make some money after all is said and done.

 

2. In the past few years, the industry has undergone a historic transformation leading to greater transparency and vertical integration, with manufacturers selling direct to consumers. How can you maintain a viable margin in this shifting environment?

 

DM: Probably less than 5% of diamond manufacturers sell directly to consumers. It is not as big a number as many believe. The situation of full vertical integration throughout the pipeline is though increasing: miners for example in venture with retailers. I do believe very little is sold direct by wholesalers to retailers, and whatever is sold, is selling at retail price, not wholesale price.

 

DH: The channel through which loose diamonds reach consumers is becoming irrelevant, and vertical integration is likely to stop short of including retail. The involvement of manufacturers at the retail level was driven by a paradigm whereby vertically chained organizations would be more efficient than constellations of small, scattered and competing players.  This debate is somewhat outdated now because the retail sales of diamonds altogether are in danger of extinction due to diamond commoditization, amplified by electronic sales technologies. This should drive many diamantaires to revert to their core business of dealing, cutting and polishing, which are the real areas of competence that enables them to generate margins.

 

SS: De Beers’ Supplier of Choice initiative has had a great impact. Everyone is trying to maximize profit and one way to do this, is to go downstream. At the moment profitability in the market is so low that companies must offer an extra edge and one way to do this is to partner with retailers. As long as profitability is shrinking, we will unfortunately have to continue to take this route.

 

JF: To put it simply, it is not easy and it’s only going to get tougher. In the past, success, or at least survival, might have been dependent on working hard, working smart, or just being lucky. Today’s formula requires a generous amount of all three ingredients. We add value to our product for our customers in a variety of ways including flexible, creative approaches to mounted goods available for immediate delivery and recently we partnered with an established designer jewelry manufacturer, Jane Taylor.

 

MD: Diamond manufacturers are probably the most vulnerable section of the diamond pipeline in regards to the financing burden. A manufacturer must be able to pay the producer, the source of rough, immediately, and then manufacture the goods with no assurance of the price that can be achieved. Downstream we have to bear in mind that the retailer may not be willing to pay any price increase borne by the manufacturer. It is vital to give clients added services beyond that of price. We provide a package to our clients including marketing support, point of sale material, promotional assistance of lines etc. and it is this value added service which enables us to maintain any margin. We have to remember that unless a company is offering a unique product or unsurpassed service, the client will simply go to where the goods are the cheapest.

 

SF: That’s the million dollar question! We recently added a line of finished jewelry, our ‘Ravish’ collection, to our inventory. We provide a finished product with all the service and support it entails.

 

3. What impact is the Internet having on the buying process of diamonds in terms of pricing?

 

DM: Consumers, notably those in the 27+ year age bracket are extremely Internet savvy. We are seeing for example more and more bridal jewelry bought on the Internet. Definitely the Internet is taking some business away from retailers, but saying that, buying diamonds is still more about the buying experience it’s very much a case of romancing the stone. Looking back, there was a time when the industry thought for example that catalogues were going to take over. That didn’t happen. The Internet though is impacting, and will continue to have an impact, on our business.

 

DH: The Internet allows for price volatility to occur in shorter cycles than before, but its most dramatic effect is that it is accelerating the process of commoditization. Markets have a natural inclination to become more efficient and take advantage of opportunities as they occur. The Internet puts in place conditions that pave the way for markets to develop better and faster than ever before. If worldwide diamond prices can be synchronized regardless of their physical location, then this means that transactions are quicker, safer and more cost-effective, which is beneficial for the trade as a whole.

 

SS: The influence of the Internet is increasingly being felt, with every small buyer able to determine the price manufacturers are willing to sell their goods for. The impact is not necessarily a positive one, but not all goods are sold directly to consumers, there is still a role for the people in between. But, the impact of the Internet is a problem the industry must face.

 

JF:  The Internet is probably the greatest single factor restraining polished price increases. The chilling, competitive impact of the Internet is certainly not limited to the diamond industry, but that is cold comfort. A typical conversation between two diamond dealers today might go something like this:

- “I need a 3 1/3 carat G VS2 fine-make round stone. Do you have one?”

- “Nothing close.”

- “How much do you figure such a stone today?”

- “Buying or selling?”

- “Is there a difference?”

 

I will be the last one to advocate consumers buying diamonds over the Internet. I still love the nuance of each individual diamond and understand that a professional jeweler is best suited to convey these distinctions - and to “romance the stone”. However, to ignore the influence and the value of the wealth of information readily available to all over the Internet is absurd - and very dangerous. The collection of information and actual sales of diamonds over the Internet will only continue to rise. For some time, and perhaps even today, a determined consumer could conceivably find loose diamonds on the Internet, that, at least at face value, appear to compete strongly with the cost to replace-or produce- the same item, at wholesaler/manufacturer/dealer level. Certainly, without having a truly professional understanding of the product, it is difficult for a consumer to appreciate subtle differences in actual beauty and value.

 

MD: The Internet has had a huge influence on consumer behavior. This phenomenon is becoming deeper and deeper set into the mind of the consumer. There has to be full transparency. Buying a diamond is still though an emotional purchase, it is this aspect that diamonds represent - love, foreveness that is at the forefront of the buying process. Most purchasers at the end of the day still want the buying experience when it comes to buying such an emotionally linked product. As such, many turn to their local store, the jeweler they know which offers the physical purchasing process, which is an integral part of the entire diamond buying process.

 

SF: The Internet is definitely having a major impact on the business, and it is here to stay. Customers are more knowledgeable than they used to be, and I find that to be a good thing for a company like Fischler Diamonds. Pricing has clearly changed as well. It’s a much more competitive environment, and every dollar counts. When you couple that with the high rough diamond prices, it’s not making our job any easier.

 

 

The Jewelry Manufacturers

1. In today's market, how do you determine the price you're willing to pay for polished goods? 

 

Andin Intl: As we always do.  We shop for the goods we need in the different centers in which we have offices and distill the best price we can get for the qualities and quantities we need. The difference, however, between now and a couple years ago is that this is clearly a seller’s market and none of our options are favorable.

 

Stuller Inc: First and foremost we analyze the cost of the polished diamonds we produce from rough. Additionally, the answer would be market research - Stuller does extensive research in both foreign and domestic markets. Our Israeli office has an active presence in the diamond buying arena in Israel, and along with our Global Headquarters in Lafayette, our buyers keep their fingers on the pulse of various markets throughout the world including India, Russia and Belgium.

 

2. In the past few years, the diamond industry has undergone a historic transformation leading to greater transparency and vertical integration, with manufacturers selling direct to consumers. How can you maintain a viable margin in this shifting environment?

 

Andin: Andin has always been vertically integrated, having direct ownership or partnering in factories in India, China, Thailand, Israel and The Dominican Republic. Our Jewelry.com division has helped us establish a relationship with the consumer. Our focus now is on ‘upstreaming’ to secure the rough needed for our production. So, while margins are indeed shrinking, adding value along the supply chain helps restore them to an acceptable level.

 

Stuller: We feel it is imperative to provide the independent retail jeweler with key benefits and services that will set them apart and allow them to provide value to their customers - building loyalty and retention among consumers. Such items include guarantees of quality and grading, free protection against loss, laser inscribed identification numbers, the ability to provide full-value trade-ups, and more.

 

3. What impact is the Internet having on the buying process of diamonds in terms of pricing? 

 

Andin: The Internet is yet just another technological advancement that makes the market more competitive.  Andin owns and operates Jewelry.com, the most visited jewelry site on the Internet.  While not selling directly to the consumer, the site helps us educate them and direct them to our retail partners.

 

Stuller: Our customers have told us that in order to maintain their margin they need to re-focus their selling strategies on value-added products and personalized services - building a unique and personal relationship with their clients that goes beyond the price focus.