When DeBeers launched their “Diamonds are Forever” marketing campaign in 1952, the industry followed a traditional method of distributing their product to the public which looked something like this: DeBeers operated a mining group which sold uncut diamond rough to Diamond Cutters, who cut the diamonds and sold them to Diamond Wholesalers, who sold the diamonds to traditional brick and mortar jewelry stores, who sold them to the public. There are many factors which have contributed to the demise of the tiers of distribution within the diamond industry, however it is most popular to blame internet diamond dealers for falling diamond prices and profits.
Is the Internet to Blame for Falling Diamond Prices?
I spent the first few days of this month attending the JCK Diamond & Jewelry Trade Show in Las Vegas, Nevada. While standing in line for a cup of much needed and overpriced coffee at Starbucks, I struck up a conversation with the attendee who was standing behind me… The conversation was going great, right up until the point where he reached down and grabbed my badge, so that he could flip it over and see which company I represented… it’s an innocent move, we all do it, because the badges are designed in such a way that they are always flipping over while we walk, and there it was staring him right in the face: Todd Gray, Diamond Buyer for NiceIce.com
From the look on his face, you’d have thought that he had come face-to-face with Saddam Hussein or Satan himself, after taking a moment to consider what I imagine to be the consequences for aggravated assault or possibly even murder, the guy begins to spout off some nonsensical nonsense about falling diamond prices being my fault.
I openly admit that this is probably not going to be a popular opinion with retail jewelers, but the idea that diamond prices are falling is simply bullshit. When I started in the industry, back in 1986, a one carat, G-color, VS-2 clarity, round brilliant cut diamond was selling for around one thousand dollars, and today a comparable diamond, like this 1.013 carat, G-color, VS-2 clarity, diamond from the Brian Gavin Blue collection is selling for around $9,300.00 U.S.D.
So don’t tell me that diamond prices are falling “Chicken Little”, but rather pull your head out of the sand, and take a look at the surface of the sand, which is shifting under the weight of the tiers which support the foundation of the diamond business. You can blame me for being an internet diamond dealer, but the reality is that I envisioned the ice age coming a long time ago, and simply migrated my business model in order to adapt to modern times.
And it’s not like you didn’t have advance notice that things were changing… For some reason, I feel compelled to point out that it’s presently the year 2013 A.D., there was plenty of speculation about what effect the internet was going to have upon your existence as far back as 1997, when I was sued by 50 members of a trade organization called Polygon for “disclosure of proprietary information to the public” and “disparagement of an entire industry” whatever that means, the “entire industry” ~ really?!?! I never imagined that I was that influential. I’m truly flattered. Would you like me to autograph your JCK badge?
To refresh your memory, the lawsuit was filed shortly after a major trade publication featured a headline on the front cover of their magazine which read something like “Due to the emergence of diamond dealers on the internet, the retail jeweler will be extinct by the year 2000”. That article and the perception that internet diamond dealers were killing the diamond industry by “prostituting diamonds via the internet” made me a pretty popular guy at the JCK Diamond & Jewelry Trade Show that year also… For awhile I was Public Enemy #1, there were even rumors that a few retail jewelers had put a bounty on my head and that I would be boiled in snot if I had the audacity to show my face at the JCK Show ~ which of course I did attend. Thankfully Blue Nile entered the scene in 1999 and we walked around the show proudly showing off the bright Red A‘s which you had painted upon our chests.
Of course this is really all a matter of perception, the reality is that we weren’t selling diamonds for any less online as NiceIce.com than we were selling to our in-store customers, we were merely working smaller margins than the majority of our retail competitors. Our business methodology revolved on a system designed to create volume by being the low price leader for high quality merchandise, we moved more diamonds in a month than most Mom & Pop jewelry stores sell in a year, but made significantly less profit on each diamond than most retailers who double and triple the price of their merchandise in order to be profitable. There were at least three jewelry stores in our area who operated from a similar pricing structure at the time… the only difference between us and them is that we created an online presence.
The fact that some retail jewelers believe that “diamond prices are falling” is evidence of how out of touch they are with the state of the global economy and the value of the U.S. Dollar… Diamond prices are not dropping any more than the price of gold or gasoline, and they’re not really going up either, everything is in relationship to the dollar and this little thing called inflation. If you bothered to pick up a trade magazine and actually read the articles from time to time, you might understand this.
The internet has not had all that much effect upon diamond prices, but it has changed how diamonds and pretty much everything else on the planet is marketed… You can keep glaring at me with those glowing red eyes Chicken Little, but here’s a simple lesson in distribution that I think you’ll benefit from.
Traditional Methods of Distribution vs. the Internet:
Since you seem incapable of calmly discussing the state of the diamond industry, imagine for a moment that the only discernible difference between a Ferrari and a Lamborghini was the name and symbol which identifies the car…
For the sake of argument, let’s say that both companies produced a car which looked the same and shared the exact same specs, there isn’t even a difference in color or interior, side-by-side they look the same and they drive the same…
Now imagine that the board of directors for Ferrari or Lamborghini woke up one day and decided to change how they distribute their production, without changing their quality or profit structure, from the traditional method of distribution which looks like this:
Manufacturer ====> Wholesaler ====> Authorized Dealer ====> Consumer
To this more modern method of distribution:
Manufacturer ====> Authorized Dealer ====> Consumer:
Or perhaps this ultra modern method of distribution:
Manufacturer ====> Consumer
Would there be a measurable difference in the price which consumers pay for their car if they purchased it via one method or the other? I’ll assume that you’re smart enough to say “Yes”.
And if there was a measurable difference in price, would some people still be inclined to purchase from one company or the other based on a difference in the presentation and marketing? “Yes” is also the correct answer in this case…
And would their customers be inclined to adamantly defend their decision to purchase from one company over the other by saying that this one is better than that one because… “whatever” and both groups of consumers would be correct because their position is based upon their belief structure. Here again, the answer is “Yes” and proof of this can be found within my article which reflects my experience secret shopping Tiffany & Company.
Now imagine that something like this happened in the world of diamonds… largely because the internet provides companies with a cost effective platform to grow their brand on a global scale.
Distribution Methods Effect Diamond Prices:
Prior to the existence of the internet, back in the days when dinosaurs roamed the earth and children actually used their imaginations to entertain themselves, companies relied on networks of authorized dealers, and print advertising to grow a brand, and promote their products. People actually had to leave their houses to buy things, they were forced to interact with pushy sales people, and wait for special promotions to be able to purchase luxury items at a discount. Can you imagine? The horror…
Brick and Mortar Jewelry Stores were able to mark-up diamonds and jewelry three and four times, simply because there was very little competition in their local area. But along came the internet, and the internet changed all of that… Instead of competing in just our local market, we were competing with jewelers and diamond dealers all over the world (and just for the record, I’m 99.999999% positive that I am not the inventor of internet marketing, I’m just one of the first people who dared to sell diamonds online) but thankfully I never had to compete on price, because the diamonds which we were selling were cut so precisely that there was virtually no competition, because very few jewelry stores at the time even understood what a “Hearts and Arrows Diamond” was, let alone had one to offer their local clientele – which is part of the reason why we were so successful selling diamonds online!
However this window of success was short lived, as stories of our online success selling diamonds spread, more and more companies began to sell diamonds online, and they too began to sell Hearts and Arrows Diamonds and zero ideal cut diamonds via the internet. Eventually competition became fierce and as almost always happens, the tiers of the diamond industry began to collapse and the methods of distribution shifted. Why? Well I could get into a three hour long explanation of how the diamond cutter who was supplying the wholesalers who we were working with, reached down one day and cut them out of the equation by offering to sell to us directly because they weren’t paying their bills on time… And how prior to this occurring, we caught some of our wholesaler’s selling direct to the public, so we no longer felt a sense of loyalty to them.
Or we could simply choose to agree on the fact that the nature of how business is conducted changes with time, and that the internet enables companies like Brian Gavin Diamonds to sell their Signature Hearts & Arrows Diamonds direct to consumers without the additional mark-up that was required in the past by working with retail partners in the form of jewelry stores. Other companies like Crafted by Infinity have chosen to encourage the growth of both markets by working with internet vendors like High Performance Diamonds and a handful of retail jewelry stores who are willing to accept slightly lower profits in exchange for sales support.
Other companies like James Allen Diamonds have morphed via the internet, from being “diamond brokers” to becoming the public face for a diamond manufacturing company, selling both the production of that specific company as their True Hearts Diamonds, while continuing to sell diamonds sourced from various diamond wholesalers. One of the diamond manufacturers who we worked with made me a similar offer for Nice Ice, back in 2006… might I suggest that you celebrate the fact that I did not accept that offer.
My Prediction for the Future of the Diamond Business:
DeBeers is right… “A Diamond is Forever” but the method by which diamonds are marketed and sold is ever changing. I suspect that over the next few years, we will continue to see a collapse of the traditional tiers by which diamonds are distributed. While there will probably always be 47 Levels of Diamonds Wholesale via 47th Avenue in New York and the Diamond Centers of the World, like Antwerp, Belgium and Ramit Gan / Tel Aviv, Israel, the reality is that the Indian and Asian influence upon the markets and production will continue to morph the nature of the industry with as much, if not more, influence as the internet.
Consumer demand for diamonds of exceptional cut quality, driven by advanced diamond grading tutorials, and the wealth of information which is now available to people via the internet, will continue to grow by leaps and bounds. Traditional brick and mortar retail jewelry stores can choose to align themselves with the not-so-new breed of customer, which takes the time to educate themselves about diamonds via the internet, and which use their smart phones and tablets to compare characteristics and prices of diamonds online, while they shop for them in your store… by becoming competitive and equally versed in the language of diamonds, or you can continue to lose market share and sales to the internet, and blame internet diamond dealers like me for your failing business. The choice is yours and I’m confident that you’ll choose incorrectly.
In summary my dear friend Chicken Little, the Sky is Falling, but you didn’t even bother to buy the domain name… I checked, it’s taken, and it’s not owned by a retail jeweler, and while I was there, I bought TheSkyIsFalling.info and set it to forward to this article in case you’re interested in reading about The State of the Falling Sky. Please allow 72 hours from the date of publication for this link to become active, contrary to popular opinion, the internet doesn’t change everything quite that fast.