The Real Disruption Needed In The Diamond Industry; Hint: It Is Not The Lab Grown Diamond!

In the 2019 Bain & Co. report about the diamond industry it is mentioned that there are 3 disruptive elements in the diamond industry; Online Sales, Lab Grown Diamonds and consumers’ growing demand for environmental and social responsibility. I believe that the 3 elements mentioned are also mentioned in the order of earliest to latest interruption. 

Lab Grown Diamonds

Even though Lab Grown diamonds have been around for well over 50 years in various formats, it is only in the last 4-5 years that this “sub-industry” has been gaining traction. Many manufacturers and suppliers have become more organised and in 2016 The International Grown Diamond Association (IGDA) was born. Prices of Lab Grown Diamonds have also come down significantly in the last few years until DeBeers decided to come into this “sub-industry” with Lightbox and kind of did an internal disruption at the Lab Grown Diamond level, with much lower sales price points. This further decreased Lab Grown Diamonds costs and selling price and further increased the price difference between “Earth Made” Diamonds and “Lab Grown” Diamonds (LGD). The cost decrease has caused LGD to increase market share from 15% to 20%. Is it really a disruptive element? can it be considered a competitive product to Earth Made Diamonds?

Lab Grown Diamonds mixed with Earth Made Diamonds

Online Sales

We all know that the internet has changed completely how businesses are run (not to mention our lives), how companies sales online have increased overall sales by reaching those that cannot come to a store. I will not get into all the details of online sales, but will rather concentrate on the diamond industry. The first company that comes to mind is Blue Nile, which has been a private company  just a few years ago, after being a public company for many years. Their competitive edge was all about prices. At times you can buy something on their website which was competitive in prices to some suppliers and traders, rather than retailers. On the other hand, online sales still account for only 10% (or close to) of overall jewlery sales. So is it really a disruptive element or another sales channel, since total sales of the industry may have remained the same if those 10% sales would have gone to see their desired items in the stores.

Online Sales will be an important growth factor for the diamond industry

Social and Environmental Responsibility

These are sophisticated words for some, and are simply followed blindly at times. There is a distinctive difference between social responsibility and environmental responsibility. In the diamond industry, mostly in the mining area, there are many heavy machinery being used, much more than in polishing, and jewelry setting. I remember when I visited the Cullinan mine, owned by Petra Diamonds, in South Africa back at the end of 2015. I was quite impressed with the machinery and the scale of such an operation. The idea of Social responsibility is simply ensuring that the local community can benefit of such activities, either by directly working in that mine, or using a portion of proceeds of sales/profits and invest back in the community like building schools and hospitals. On the other hand, Environmental responsibility is minimising the negative effect of using large machines and harming the environment (I am not going into all the details). If we would compare Earth made diamonds with its own machines and environmental affect to those activities done by Lab Grown Diamonds, and its negative effects on the environment, which will be worse? it reminds me the comparative analysis between bags that are continually produced from raw material to those recycled kind, and how it was promoted that recycled bags are more “environmentally friendly”. Well guess what! the energy used to recycle bags was higher than the energy used to create new bags.

Going back to diamonds, if we only produce Lab Grown diamonds ( and that is the assumption that Lab Grown Diamonds consume less energy or more environmentally safer), what about Social responsibility? what about all those currently employed by the sector in mining? schools and hospitals built with proceeds. There has to be a balance between the two. But are Lab Grown Diamonds really a disruptive element? or another product?

How do we protect our environment?

The real Disruption

Since the Coronavirus had started, the stress of the uncertainty of the diamond wholesale market has increased with Rapaport decreasing prices on the majority of diamonds, without any transparency on how the company came to those decreases. It is not simply to say that since there is a closure then prices should normally be down. Is that so? how can it be if there are simply not enough transactions to justify any kind of measurement of price shifting? (again, I will not go into too much details for now). This triggered an exodus of suppliers and they removed their inventory from the Rapnet system, and moved their inventory into several other platforms, like IDEX and Get-Diamonds. This was in the making for many years, and as we say, this is the straw that broke the camel’s back.

What have suppliers really done? all they did was switch a platform, switch a tool. Will that really affect their business and sales? or simply give them an illusion that their inventory may be worth more? or less…Since all these platforms are really internal to the wholesale market, how will it increase sales? I know that when I visit all the trade shows that the industry has, and see inventories and certain items moving from one booth to another from one trade show to another, all it shows me is that the inventory (or goods in the industry vocabulary), remains within the same area of the value chain; supplier/dealer/trader level.

The real disruption is really changing the way they do business. Up to now, the industry was working at a vertical pyramid where the top is the mining companies, below that was polishers, then traders and suppliers, then retailers and finally the private buyers, consumers. (that walk into a store and buy from the retailer). Well, that structure no longer works, or at least not to the extent it used to. The introduction of the internet, has made as such that certain suppliers and manufacturers started selling on the internet, and their buyers were most of the time, private individuals. The internet became a tool to trigger the real disruption.

The current Value Chain in the Diamond Industry

The current situation should be taken advantage of to create a complete disruption, by switching from a pyramid style of value chain to a circle type, where there are simply 2 actors for any given transaction; buyer and seller. We see many in the value chain “skipping levels” and interacting with others. Suppliers and dealers selling online to private individuals, mining companies making deals with major chain stores (Argyle mine with Chow Tai Fook), mining companies opening stores (DeBeers opened stores), other companies creating vertically integrated supply chain from mining to individuals (Graff Diamonds).

The disruption would be for the diamond industry in the wholesale level to start selling to individuals directly on all platforms. Selling to each other does not grow the industry or sales. It is an illusion. Dealer A sells from his inventory to dealer B, which then sells inventory to dealer C, which then sells inventory to dealer A….

The objective is for the inventories to move down the pipeline and into consumer hands, this is the only way to grow sales, and move goods along the value chain. Instead, the wholesale level is just inflating prices (or selling at a loss), and not really moving the goods along the value chain. They are simply keeping it in the same circle.

On the other hand, we also know that the majority of dealers and suppliers are already strained financially, and they would fear it too much to start something on their own in terms of selling directly to consumers. A large portion of suppliers have no experience in the selling approach or cycle when it comes to consumers. The more sustaining solution for the time being would be for those industry platforms such as IDEX and Get-Diamonds to open up their platforms to consumers and have suppliers and dealers pay a fixed marketing fee for those platforms to promote and advertise the generic sale of diamonds. The fee would be minimal compared to financial requirements for individual suppliers. Even if you have a $50,000 per month advertising budget for online generic sales by these platforms (which is nothing compared to the current budget of the DPA), it would be a minimum cost if 100 suppliers and traders be a part of this initiative. Suppliers and dealers will have to understand that it is at least a year worth of investment before seeing any type of results, but results will happen. Prices for consumers can be slightly higher than their selling prices to each other, it is paid up front and the platform guarantees the product and money to both consumer and supplier (currently IDEX gives that guarantee internally). Consumers will greatly benefit from a price break from suppliers, and this will push retailers to become more creative to attract consumers to their stores. Suppliers and dealers can also do cooperations with retailers where the supplier will ship the diamond to a retailer and the consumer can come see the diamond physically and the retailer can enjoy some sort of cross selling (currently already being used by a supplier and seeing fantastic sales results). Another key here is transparency. The supplier/retailer/consumer know who is involved in the transaction. This will increase confidence in the industry and in the product.

Change the way we do business

I have many more thoughts and ideas to share but we will keep it for another article. Let me know your thoughts as a consumer, as a dealer, as a retailer. Another objective is how do we, as a society, help each other and we all benefit (This is one thing Coronavirus is teaching us).

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