Decreased Retail Margins Cancel Out Growth In Polished Wholesale Prices
November 18, 04Recently released data relate to growth in retail demand for diamonds and diamond jewelry. However, this growth is not matched with an increase in diamond prices for consumers. Any increase of polished prices that may have been recorded in the wholesale markets over the last year or so has been cancelled out by a significant reduction in the margins made by the retailer in America.
Over the years, we have followed the sales growth of specific items in jewelry retail stores in the United States. For the year 2000, in the annual Jewelers of America Cost of Doing Business Survey, retail store members reported a 1.4% escalation in sales growth of loose diamonds (growth over 1999) and a 0.8% increase for diamond jewelry. These rates of growth were substantially below those of colored stone jewelry at 2.7%, cultured pearls at 8.8%, and fashion jewelry at 8.2%. Another parameter - the share of diamonds and diamond jewelry sales in the retailers total business - was 16% for loose diamonds and 30% for diamond jewelry (together representing 46% of total retail sales).
If these same parameters are examined for the year 2003, we see that retailers reported an increase of 7.9% in loose diamond sales and 8.3% in diamond jewelry sales as compared to 2002. What is highly significant is that, within jewelry stores, the diamond growth was far higher than that of colored stone jewelry (0.5% growth), fashion jewelry (4.7% growth), cultured pearls (reporting a negative growth of -3.1%) in 2002. The share of loose diamonds in the total retail business declined to 12% (from 16% in 2000), but the share of diamond jewelry increased to a hefty 35% (from 30% in 2000), thus the total diamond share in jewelry retail has grown to 47%.
If we look separately at Independent high-end firms, where the more expensive jewelry tends to be sold, we see similar rates – loose diamonds sales rose in this sector by some 12.3%.
The substantial growth rates of diamonds in the jewelry stores (not only in real numbers, but also in comparison to other items in the store) shows that the marketing, the advertising, the promotions, the new programs, the branding, all encouraged by some of the demand driving policies of the producers, has paid off in terms of increasing market shares.
However, it is also clear that the diamond prices for the consumer have declined. There is no clear retail price for diamonds, with one exception: loose diamond sales to the consumer at the retail level. In the abovementioned studies, the jewelers also provide their gross margins on each product sector. For all practical purposes, the gross margin is the excess over the retailers buying price of loose diamonds, i.e. it is the sales margin over polished wholesale prices (pwp). In 2000, the survey reported a gross margin of 40.2% on loose diamond sales. In 2003 the gross margin has been reduced to 34.7%. That represents a 15% decline.
We can see a similar trend in diamond jewelry sales. In 2000, the gross margin was 50.0%, although by 2003 this had declined to 45.1%, representing a margin decline of 10%. Compared to other items sold in the jewelry stores, the gross margin made on diamond jewelry has become rather competitive with other items. If these margins declined further, the jeweler might be inclined to try to sell higher-margin items to clients.
The foregoing must be clarified as follows: Retailers selling diamond brands (for example, the Leo brand) have been able to secure substantially better selling prices for branded products than for non-branded diamonds or diamond jewelry. The branding strategy certainly seems to be working – at least for the successful brands.
While succeeding in triggering a meaningful increase in consumer demand, it is our opinion that the diamond price paid by the end consumer may well have come down. This “loss” of value in the value chain has come mostly – if not entirely – at the expense of the retailer and partly at the expense of the manufacturers and traders. With the current economic fundamentals there is no real reason to expect that the situation will change.
Have a nice weekend.