A Small Trader’s Swan Song?

Small polished traders in the cutting centers are finally waking up to reality – they are discovering that the speed by which many of them are racing towards their own inevitable business demise is accelerating. Sadly – and we have said it before - quite a few companies will be toast within a few years. Yesterday, our office received an anxious phone call from Antwerp that went as follows: “My clients in America and in the Far East are offering polished diamonds by my very own local suppliers at lower prices than they charge me in Antwerp. That shouldn’t be possible. We must protest. We must do something!!” I queried what he wanted to do; his response: “Polished dealers should get together; confront our suppliers… ”

Our caller was a respected honorable polished dealer – a lifetime spent in the business. He mostly provides a boutique service to overseas clients, some of whom may occasionally require only a few stones. He operates on the assumption that the mega players in the industry will never be able to serve that specific market niche and that his business should therefore be safe.

He bitterly lamented that the large players were undercutting their own local clientele and prophesized that they will ultimately hurt themselves. It seems that our Antwerp friend is deluding himself. The current marketing policies of the main rough suppliers don’t really consider the polished trader operating in the cutting centers as providing added value to the product. Regretfully – and one may argue about that – the fact is that they are not seen (any more) as contributing to efficiency or streamlining the pipeline. Even joining the chorus of complainants to the European Commission would be an exercise in futility: the EC encourages greater efficiencies in the distribution system, as, in the final analysis, this leads to lower consumer prices.

At the New Year presentations at De Beers, Gareth Penny reviewed the progress that has been made in Supplier of Choice. He showed a graph depicting how the DTC has been dramatically successful in the distribution of rough through more efficient channels.

“In 2001,” Penny said, “only 7.5% of our sales went through efficient channels. This increased to 23% in 2002 and to 33% in 2003.” This implies that more and more sales are made to rough clients who have efficient downstream marketing for the resultant polished. The polished manufacturers make great efforts to prefer selling polished through an efficient and transparent downstream pipeline to recognizable jewelry manufacturers or retailers. Not locally.

Though it is not fully a zero-sum game, this efficiency progress in polished distribution undoubtedly has come largely, if not totally, at the expense of polished traders. It is not just De Beers. The other major rough producers follow similar policies – though there are variations. But the result is the same: the manufacturer is increasingly reluctant to sell polished to the local market in the cutting centers. It is believed that local sales reduce his “score card” with the supplier.

Moreover, a polished manufacturer who is part of a vertical downstream structure can take his profits also more downstream. He can afford to sell his polished at more reasonable terms to his overseas partners. A sale to the local market in the cutting center therefore justifies – from his perspective – charging a premium.

It’s not just an Antwerp problem. An American polished buyer, sitting next to me on a plane journey, told me that he could buy polished from an Israeli manufacturer cheaper from the manufacturer’s New York office than what he would pay for the purchase on the Tel Aviv market, or even in the office of the same Israeli supplier.

I want to be extremely cautious and refrain from drawing conclusions from anecdotal evidence, but the phenomenon that large polished manufacturers are willing to sell to their overseas clients at more attractive prices than they charge domestically seems to be more and more the case. There are undoubtedly very valid commercial reasons – the large and mega players in our industry are sophisticated; they know what they are doing. The overseas relationship may involve larger quantities, may be part of programs, and attractive prices may be mostly for long-term continuing clients. The trade to local dealers in cutting centers is often on an occasional or smaller basis.

I reminded my caller of the well-known DTC spaghetti chart depicting an irrational non-efficient diamond distribution model. The spaghetti is gradually transformed into fast food -- probably as planned.

Some readers might say that this isn’t shocking news – this has gone on for quite a while. Indeed. What really surprised me from the phone call is where was this gentleman two or three years ago? Nothing that is happening today should come either as a surprise or was unpredictable. It is only happening faster than some had foreseen.

I suggested to our caller that he should take a week vacation, call in some of his advisors, and ask himself how he sees his business realistically five years down the road - and explore what he should do to ensure that he will actually get there. He protested that this type of strategic planning is only needed, or affordable, by the larger companies. I respectfully disagreed.

The half-an-hour phone call ended without conclusions. It only makes one once more aware of the pain the industry’s marketing revolution is causing to those who will not be part of tomorrow.