07_07_MR.qxp:testing 7/6/07 2:49 PM Page 1 RA PAPORT DIAMOND REPORT COMMODITIZATION The diamond industry must establish fair, open, efficient, competitive diamond markets. BY MARTIN RAPAPORT ommoditization: the transforma - tion of a product into a commod - City is often seen as undesirable. Sellers believe that unique products can - not be effectively priced because they cannot be compared to similar products. The inability of consumers to compare or discover prices enables sellers to charge higher prices, resulting in higher profit margins. At the core of this thinking is the idea that the less consumers know about a product and/or its price, the greater the retailer’s profit margin. In the early 1930s, there were no dia - mond grading standards. Many retailers REUTERS /Mike Segar would call all their diamonds “perfect,” or “blue-white.” Honest retailers who grading standards as well as the Gemo - It would seem that the more honest fairly described their diamonds as less logical Institute of America (GIA) labo - and transparent retailers are, the less than perfect lost customers to dishonest ratory to grade diamonds objectively. money they make. While most retailers retailers who falsely described all dia - Ever since, the diamond industry has would never tell an outright lie, the ques - monds as “perfect.” Confusion about had a love-hate affair with standards. On tion of just how much to tell consumers grading standards created a situation the one hand, standards are necessary to is a big issue. Many ethical jewelers spend whereby big liars built big businesses and maintain a level playing field among hon - hours educating consumers about cut, honest retailers went out of business.The est firms and provide basic consumer and a few might even show a consumer situation got so bad that the U.S. Federal confidence. On the other hand, standards a Rapaport Price List. However, it is Trade Commission (FTC) outlawed the are communicated to consumers, who unlikely that any jeweler will ever pro - description of diamonds using terms use them to compare prices, resulting in vide consumers with competitive price such as “perfect” or “blue-white.” The lower retailer profit margins. (SeeTivol’s information or show a consumer an American Gem Society (AGS) established Dilemma, RDR, October 2, 1992.) (Continued on page 28) Diamond Commodity Market VEGAS SHOWS • JCK Show INSIDE • Couture 2007 • What Did Retailers Buy? 877.987.3400 • Show Costs www .RAPAPORT. com Journey Diamond Jewelry Awards info@ RAPAPORT .com 07_07_MR.qxp:testing 7/6/07 2:49 PM Page 2 Commoditization ing and banking sectors are all being shaken to their core. Old (Continued from page 1) distribution models that pamper retailers, provide unrealistic credit terms and absorb retailer inventory risk are bankrupt. internet price list.There is this great fear among retailers that While we acknowledge the tremendous added value retail - if consumers knew how much profit retailers were making, ers provide, we also encourage them to change. Business can - consumers would not buy diamonds from them. Jewelers lack not go on as it has in the past. Retailers need to recognize that self-confidence about the price they charge for their added as pricing transparency increases, their future profits will be value proposition. defined by the cost benefit of their added value and not by There is an “understanding” that it is okay to educate con - protection from the wholesale trade. sumers about the product, but not the price. In general, retail - ers provide enough partial information to convince consumers ADDED VALUE they are being educated and that the product being offered is As the diamond industry moves into the twenty-first cen - worthy of purchase. Competitive price information — some - tury, increased product standardization, internet communica - thing consumers really need — is never discussed or disclosed. tion and consumer integration of product and price information are facts of life. Consumers are staking their legit - ETHICS imate right to fair market information and they are obtaining Many retailers believe that it is unethical to disclose com - competitive price information from third-party sources. petitive price information to consumers.They feel that retail - In the new world of pricing transparency and product com - ers are entitled to interdealer price information, but that moditization, consumers often know the low internet price consumers are not. Furthermore, they expect the wholesale for certified diamonds and other commoditized products trade to “protect” them by not selling to consumers, or pro - before entering brick-and-mortar stores. Consumers know viding consumers with prices. they can get a better price on the internet, yet they visit stores In the early 1980s, when wholesale diamond prices were because they don’t just want the lowest price; they want the plummeting, I was thrown out of the NewYork Diamond Deal - right bundle of price, product and added value. Consumers ers Club because I dared to provide retailers with NewYork are shopping for the added value a store offers and weighing wholesale prices. Dealers at that time felt that retailers had no the cost benefit of the added value provided. right to interdealer prices. I believe that the democratization of The challenge for retailers is to identify the optimal added price information must be universal. If retailers have access to value package complementing the product and charge a fair price information they need, why shouldn’t consumers? More price for that added value. Retailer profit margins are no longer to the point, is it ethical to deny consumers the price informa - based on the cost and sales price of the product but more impor - tion they need to make informed decisions? Is it ethical to“pro - tantly on the cost and sales price of the added value components. tect” retailer profit margins at the expense of consumers? The real questions are: Can retailers justify the price they COMMODITIZING DIAMONDS are charging above the interdealer price by the added value To a large degree, GIA and other laboratory-graded certi - they provide? Can retailers survive in a transparent environ - fied diamonds are already highly commoditized. Third-party ment? Is an educated consumer our best customer? independent grading along with the Rapaport Price List and Amazingly, some retailers think that it is perfectly okay for unlimited internet price and availability information have cre - them to cut out their dealer/wholesaler suppliers and buy direct ated highly transparent B2B and B2C markets.When it comes from overseas manufacturers, but that it is unethical for whole - to pricing certified diamonds, the cat is out of the bag. Few salers to sell directly to consumers.What are 47th Street whole - cutters, wholesalers or dealers can make extra profits from cer - salers to do? Commit financial suicide to protect the retailers tificates based on their customer’s lack of price information. who are bypassing them after years of loyal service and credit? Profit margins are squeezed with little left to lose by commodi - Clearly some retailers have a skewed sense of ethics and reality. tization.While the diamond industry experiences what some It’s no use blaming each other.The fact is, the world is rap - consider the “disadvantages” of commoditization, it does not idly changing and all of us have to adapt and evolve to stay in enjoy the benefits that commoditization can bring.The battle the diamond business.The diamond manufacturing, wholesal - against the price transparency that commoditization brings has already been lost. As the De Beers monopolistic market structure disintegrates about us, the industry is at grave risk.Trade credit is maxed out Commoditize: at $12 billion — double the level of four years ago. Banks refuse To render a good or service widely available and greater credit limits and a liquidity crisis looms. Highly selective interchangeable with one provided by another rough diamond distribution schemes have destroyed the ability company (Merriam-Webster Dictionary). of the market to balance rough and polished prices. Too-high (Continued on page 30) 28 Rapaport Diamond Report July 6, 2007 07_07_MR.qxp:testing 7/6/07 2:49 PM Page 3 Commoditization Regulation. We will seek U.S. government regulatory (Continued from page 28) approval for all of our activities and establish best practices that ensure compliance and eliminate conflicts of interest. rough prices destroy industry profitability and liquidity.A plum - Transparency. We will disclose our plans and actions in a meting volatile dollar interacting with the globalization of dia - timely manner. Our methodology and mode of business will mond demand is creating extreme pricing uncertainty. Suppliers be transparent. who maintain large inventories and guarantee customers fixed Communication. We will communicate with all stake - pricing to meet seasonal demand are taking unacceptable risks. holders and seek their perspectives.We will work to eliminate Inexpensive smaller diamonds may undergo a period of the negative unintended consequences of our actions.We will decline as the ability of a saturated mature U.S. market to absorb add to and modify our best practice principles as necessary, polished may decline faster than the ability of India and China based on communication with stakeholders. to increase demand. At the same time, surging global wealth and a declining dollar are boosting demand for 3-carat-and- CREATING FUTURES MARKETS larger, better-quality diamonds. A speculative boom that will The creation of our diamond futures markets will, with G-d’s make the boom/bust cycle of the late 1970s look like child’s help, be a two-step process. First, we will establish a formal play is developing. monthly Spot Cash Auction market that will generate well- Let me be clear.The diamond industry is undergoing a com - defined cash transaction prices for finely selected diamonds.