Mega Jewelry Chains May Lose Price Leverage Over Vendors

The Zales, Wal-Marts and Sterlings of this world are “losing” somewhat of their power over their polished suppliers - and they may not realize that the pendulum is swinging back to the large mega-polished suppliers, the Rosy Blues and the Schachter Namdars of this world. The greater efficiencies in the diamond value chain, driven by Supplier of Choice, or more precisely the diamond manufacturers dedicated production of polished for specific customers, is reducing the mega-power of the mega-jewelry chains over the vendors.

The typical Sterlings and Cartiers (and we don’t refer to these companies specifically but rather to the categories) have reduced in the last decade the number of vendors who are “allowed” to sell diamonds to them and they have developed ranges of sometimes erratic and unreasonable demands, including getting the rights of first refusal on certain sizes and makes, extensive credit and consignment terms, etc. The power of the mega-buyers was largely derived from their ability to play out the Rosy Blues against the Schachter Namdars (and, again, we don’t refer to specific companies).

Watching the market in this Christmas season, one can detect a shift in the “balance of terror” – if I may use this term to characterize the behavior of the megas towards their polished supplier. What characterized this Christmas season was the feeling, the perception, of polished shortages. Publications (Rapaport and others) stressed that one of the more difficult challenges of the jewelers this year was simply to find the right goods, at the right price.

A feeling, a perception, of “it is hard to get the goods you need” was very much prevalent throughout the market. Was there a real shortage of goods? No, there wasn’t. What changed is that the pipeline has become more efficient, leaner and the increased vertical integration of the pipeline, has created more “dedicated polished” – goods manufactured with a predestined final jewelry retail destination.

How does this effect the Wal-Marts and the Sterlings? In previous years, they could more effectively play out their vendors against each other. Let me illustrate this more concretely. Assume that Sterling needs 2000 carats of three-grainers at specific colors and clarity. Each and every of its suppliers would be able to deliver part of the order from its own production and complement the order fulfillment by purchasing polished on the market. Hypothetically, let’s say that 25% comes from own production (let’s call that OP) and 75% is purchased from other manufacturers or polished dealers (let’s call the Open Market Purchases – OMP).

The half a dozen or so vendors would all have access to the very same open market sources. So the megas were exerting price pressures on vendors who, for a part of their sales, depend on the very same open market availability. In essence, when the mega buyers review the offers it received from its competing vendors, part of the goods (i.e. the OMP’s) may well be part of the price quote - and availability - by each of the vendors.

Supplier of Choice and verticalization, however, is gradually causing a contraction of the OMP availability, the open market for polished is shrinking. So if a mega-manufacturer used to source his sales with 75% from open market sources, today his sales may well come from mostly his own production and his reliance on the open market may have been reduced to half or even less. In the past, when ten vendors made offers to the megas, essentially all these offers were characterized by a reliance on a certain OMP availability. That very same availability constituted part of each and every quote – thus, technically, the very same stone may actually be offered by each of the vendors. This had the effect of getting a feeling that the market is really huge, that there is ample availability, that the megas have ample power to press their vendors on terms and prices.

Now the OMP share in the sales to the megas is declining – and, with it, the ability to pressure. The megas can still get what they need, but not any more at any price. The total market offering has not declined – but the ease to complement one’s own production has. The megas are forced to review their buying strategies – and the nature of the relationship with their suppliers – if they want to assure themselves of continued availability.

As De Beers will more and more concentrate its rough sales to customers that control their vertical supply chains, the mega-clients of De Beers will also be less positioned to bid low on those large program opportunities for which they may not have neither the assured rough supplies, nor the assured outside market. With the decreasing leverage by the megas on their polished suppliers, there are greater opportunities for both the polished manufacturer and rough supplier to adjust margins upwards.

From a cutting center perspective – and that’s our viewing angle – every time I read or hear that retailers find it “difficult” to find the goods they need, I can’t help but smile. The goods are out there, but are not available any more with the “ease” they were previously available. And this trend will also impact prices. The more efficient pipeline, the verticalization, the Supplier of Choice approach to manufacturing polished for specific clients, is limiting the ability of the megas to exert pressure. This is only one tiny aspect of all the changes in the marketing fabric – but something that gives a good feeling in the Holiday Season. A Happy New Year to you all.