Rapaport Magazine

Boom and Bust

By Martin Rapaport
RAPAPORT... Is the diamond business booming or going bust? Is demand increasing or decreasing? Are diamond prices going up or down?

While it may sound unreasonable, the answer to all the above questions is yes. The diamond business is going up and down at the same time. The diamond market is not one homogeneous entity. It is a series of specialized markets differentiated by products, customers, price points, geography and a host of other factors. These submarkets can and do move in different directions at the same time.

One point of differentiation is the type of diamonds. It is easy to understand that expensive, large diamonds sold to superwealthy oil producers are not subject to the same laws of economic gravity as midquality, smaller diamonds sold to the average American whose disposable luxury income is plummeting due to skyrocketing energy and food costs. While Wal-Mart is not Winston, both might do well in the current environment — the rich buying expensive items from Winston and midincome Americans moving to Wal-Mart as they downgrade to more affordable price points.

In the current environment, the American market for midquality goods is bust. High bids at recent bankruptcy auctions have come in at less than 50 percent of cost. By now, it should be clear to everyone that American “bread-and-butter” goods are toast.

Another point of market differentiation is the geographic location of markets. While it is easy to understand that higher oil prices diminish U.S. consumer demand, how many of us consider where all that oil money is going and what it’s doing to consumer demand in foreign markets? The same higher oil prices destroying U.S. demand are creating an unprecedented boom in oil-rich markets such as Dubai, the Arab Gulf and Russia. Our bust is their boom.

Globalization will challenge U.S. jewelers as foreign markets eventually build up enough steam to replace U.S. demand. In the old days, when America dominated the global economy, a drop in U.S. demand forced suppliers to lower prices. After all, who would buy the goods if America did not? The lower cost prices enabled U.S. jewelers to lower price points and retain profit margins. U.S. demand and diamond supply prices were synchronized.

Not so today. America, with its plummeting dollar, does not dictate world prices. U.S. demand can plummet while diamond prices overseas skyrocket. The idea that global prosperity is dependent on U.S. consumption is outdated. While Indian and Chinese demand may be more or less reliant on U.S. demand in the short term, in the future, their hundreds of millions of consumers will replace the U.S. More to the point, trillions of dollars of newly generated oil wealth sloshing around the global economy will keep high- and low-end diamond prices higher than may be comfortable for U.S. jewelers and consumers.

Globalization has driven demand inflation to the point where relatively high oil and food prices are here to stay. Extreme double-digit inflation is right around the corner, with real interest rates already negative in Russia and China. Increasingly, 2008 is looking like 1978 as the global economy gets set to spin out of control.

Powerful and complex changes in the global economy are setting the stage for a perfect economic storm. External economic forces beyond our control are about to sweep through the diamond and jewelry industry. We are like a ping pong ball in a stormy ocean of change. The diamond industry must transcend linear “up OR down” thinking to multidimensional “up AND down” strategies.

We must evolve our thinking from “product and price” to “meeting key customer needs and maintaining profit margins.” We must become more dynamic and unafraid to quickly reinvent merchandising, sharply increase or decrease prices and rapidly expand our target markets. Most of all, we must transition from being reactive to proactive. We must anticipate and manage the great opportunities and challenges created by a world of change.

Article from the Rapaport Magazine - June 2008. To subscribe click here.

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