Sometimes, connecting figures in ways in which they are not usually put together can highlight a great truth – a truth hiding in plain sight. Most people who follow the diamond industry are already familiar with the following figures. All were published in the past and have been discussed in many diamond industry circles to some extent, yet what they disclose in this context is perhaps new and may require rethinking the diamond model.
Ehud Laniado, a low-profile diamond trader who is probably the largest independent rough diamond supplier to the market, first put these figures together. Based on known and market accepted figures, he shows how small the average margin per company in the diamond industry actually is.
According to Bain & Co., diamond miners supply about $15.2 billion worth of rough diamonds annually (this figure is for 2012; however, Chaim Even Zohar in his 2013 pipeline states it as $15.25B). The wholesale value of polished diamonds sold by polishers has been around $22 billion per year for the past few years (Bain states $22.6B and Even Zohar, $21.6B), which translates to an added value of about $6.9 billion.
Added value is a pretty term for the difference between the cost of the raw material and the gross income from selling the resulting product, or in this case, the difference between the cost of rough diamonds and the wholesale price of polished diamonds. This ~$7 billion difference includes the cost of labor, financing, machinery, overhead, insurance, training new staff and R&D. In fact, nearly all of the “added value” is the cost of these items.
When subtracting these costs from the total revenue, diamond manufacturers and wholesalers are left with an estimated 2%-3% in gross margins (according to Bain). This is obviously very little, but the above figures help us understand exactly how little manufacturers earn, and how narrow is the window of error.
The math here is quite simple: $22.1 billion divided by 5,000 companies in the mid-section of the diamond pipeline (again, according to Bain) is an average annual turnover of about $4.42 million, or an annual gross margin of just $110,500 per company.
In terms of return on investment, this is a pitiful outcome at best.
What Happens when Margins are Chiseled Down?
These figures reflect a wider trend: Manufacturers are squeezed in most industries and, in this instance, a rethinking of the diamond model is needed.
With the cost of rough diamonds remaining high and the prices of polished sinking, the dismal margin is something many companies only hope for in the current market. Now, manufacturers are fighting for earning at least that much.
True, these figures are average, and there are companies that are doing much more business and earning much more too. They are benefiting from the economics of scale and generating better margins. However, these companies are not the norm. If you know the diamond industry well enough, you know there are about 30 companies, maybe 50, that generate a turnover of more than $100 million.
This is a rather long opening to make my point, but it provides the background to highlight that something in the fundamental mechanics of this economic model is not functioning properly.
Not Supplier Driven
Most jewelry retailers are independents that own one to five stores. In the US, they are the overwhelming majority of jewelers, some 80% of all stores. In such a fragmented market, massive marketing is nearly impossible, so there has been no drive to keep interest in diamond jewelry.
In such a landscape, trying to force a supplier-driven market is impractical, in fact, impossible. If consumers are losing interest, and retailers don’t have the marketing power to turn the tide around, polished prices will inevitably come down. Ignoring this trend was a mistake by miners that insisted not only on maintaining their prices, but also on supplying large quantities. The midstream of the pipeline simply choked.
A major change is needed to overcome the current situation, and it requires reconsidering the entire diamond pipeline:
- On the consumer level, more marketing is needed.
- Retailers must declutter their showcases and display well selected items.
- Millennials are the rising consumer, and jewelry offerings should accommodate that; variety, customization and differentiation in design are needed.
- Manufacturers, a squeezed sector in most industries, have no choice but to act more cautiously in rough purchases.
- Miners have the largest responsibility. The existing model of set allocations with no price negotiation has outlived itself. Greater flexibility is critically needed.
- Overall, it’s time to think outside the box, for example, by offering diamonds as an investment tool.
The diamond industry at large, from mining to jewelry retailing, is demand driven, and demand is currently weak. Mining needs to scale down supply and manufacturing needs to adjust to real consumer demand; designs must inspire, and marketing has to return in a large way. Without rethinking the model, popular interest in diamonds may keep shrinking.
Analysts in the Diamond sector all think,talk,write and sound the same way.
Change that,,,and we nay see a new paradigm shift.
Only the people who live the industry at street level really know and understand (somewhat),the evolving trends in the industry.
It is a mistake to categorize diamonds and diamantaires as an industry.
We always were and still are,,,the biggest outdoor market in tthe world with each booth just doing his thing to survive.
Threre is NO grand plan or direction.
It’s simply copy cat and sheep mentality run by semi-monopolistic commodity suppliers who must answer to shareholders,,,without regard to the consequences of their actions on the trade itself.
And all this is furthur fuelled by your local smiling back stabbing banker,,,who just loves to pull the rug under the industries’ feet because of his own precarious money supply realiy.
Just like the end user,,,the whole industry wants to get more by giving less.
So while we have smart phones,smart tablets,smart analysts and smart fortune tellers selling stories to a not-so-smart public,,,basically nothing has changed in the last two thousand years.
We just have a new delivery system for a very old weapon,,,,greed.
Sam, there is no doubt that retailers on the street are in the trenches. At the same time, in some circles a lot of thought is put forward to advancing sales on a broader scale. When this takes place, and it usually happens among miners and sometimes large manufacturers, it’s important that issues such as those that you raise are taken into account.
There is only ONE model that has to change in diamonds.
Only 5 sightholders can be awarded a size/quality allocation.
So,for example,if 5 sightholders recieve an allocation of 2.5-4 cts collection,or +9-3grns.
,,then the entire world will be getting either the rough or polished from them.
Keeping the supply corridor as narrow as possible will help keep prices steady because each category of rough will be more controlled.
It will also give sightholders courage to defend their rough purchases and even withhold goods from the broader market in order to create profit margins.
Technically,,,its the only praactical way out of the current mess.
It wil also help banks understand what they are
consolidation is a buzz word that has been circling around the diamond industry for a couple of decades at least, however it would appear that very limited if any at all has ever taken place. How many diamond offices including the one/two man band type are there in diamond buildings of Tel Aviv, Antwerp, Mumbai, Surat, etc etc all making a few % points here and there and making a living at the same time…..until that consolidation happens don’t expect it to happen elsewhere, even after some big name collapses over the years the diamond dream still runs strong in many diamantaires minds…..