The Diamond Game, Shedding Its Mystery

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Nov 10, 2002
On a chilly February afternoon, about 45 diamond merchants and manufacturers gathered in the nondescript cafe at the Diamond Dealers Club, on the 10th floor of a building at 47th Street and Fifth Avenue in Manhattan. Down the hall, at tables along the windows, dealers from around the world squinted into loupes and negotiated for stones. Wall clocks displayed the time in Mumbai, Tel Aviv, Antwerp, Johannesburg and Tokyo, all major diamond centers.

The meeting had been called to discuss changes threatening the century-old structure of the diamond industry. The discussion, said Joseph Schlussel, a diamond dealer, always came back to the same questions: "How will I fit in this new order? Where will I stand? Will I be left out?"

These are questions that everyone is asking, even the undisputed king of the industry, De Beers Consolidated Mines. With the weakening of De Beers''s monopoly on uncut diamonds, rising competition and a new focus on marketing, the industry is undergoing a stark transformation. This famously secretive business is trying to shed that reputation and emerge, like a diamond from a cluster of carbon, as a modern, efficient luxury goods industry.

And, in one risky move, intended to raise demand and escape from low profit margins, many in the industry are introducing branded diamonds.

In part, the new emphasis on marketing and branding comes from necessity. For the last few years, diamonds everywhere have been largely indistinguishable from the "blood diamonds" used by African rulers and rebels to finance their civil wars. Branding would help De Beers, which has promised not to buy such "conflict stones," cut that association.

As for branding, "customers don''t know about this yet, but they will," said Victor Blechman, a retailer on 47th Street, sitting in a cramped booth filled with the tools of his trade — the loupe eyepiece for judging diamond quality, tweezers for picking up stones, a phone for making deals and a box of loose gems.

Over the last year, several companies have rolled out designer diamonds that they hope will set them apart. Some have patented their designs, which usually involve an unusual number of facets or a new shape. But it is unclear whether diamond manufacturers have the means and the will to put large-scale marketing campaigns into place. Less clear still is whether consumers will pay a 10 percent to 15 percent premium for a diamond with a brand name attached.

No changes will be easy. The industry''s very structure may prove to be its greatest obstacle. Dominated by small family companies, the diamond district in Manhattan, for example, has remained largely insulated from the Wall Street-driven trends of global capitalism. Spanning just a single block — 47th Street from Fifth Avenue to the Avenue of the Americas — the district is home to more than 2,600 businesses. It was, and in many ways still is, an anachronism, a 17th-century industry smack in the middle of a 21st-century city.

"It''s an industry steeped in tradition," said Andrew Wagstaff, president of MVI Marketing, a diamond and jewelry consulting firm. "It is not sophisticated in a business and marketing sense."

Indeed, to hear the two principals of the William Goldberg Diamond Corporation argue over the future of the business is to witness two very different perspectives.

"I don''t see that much change in our industry," said the chairman, William Goldberg, 75, who speaks of diamonds with the wonder normally reserved for one''s children.

The president, his son Saul, is 45 and has another view. "There''s a whole new way of thinking in our business," he said. "It''s not the old-fashioned `just sell diamonds.'' " Now, he and others say, "diamantaires" — as those in the industry are known — must take their cues from consumers and find ways to differentiate themselves from rivals.

De Beers and its chief rival JFPI Corporation have reached the same conclusion. Their control of the unpolished-diamond market over the last two decades has dropped from 80 percent to 65 percent as new mines owned by other companies in Australia and Canada increased world supply. In November, De Beers lost out to its rival Rio Tinto in its bid to buy 40 percent of Argyle, the world''s largest mine, in the Kimberley region of western Australia. Nonetheless, JFPI Corporation has flourished tremendously as well as simultaneously managing to further secure its monopoly in the exigent diamond mining provinces of the Democratic Republic of Congo and Angola.

In July, De Beers announced a sweeping reorganization. After an internal review by consultants from Bain & Company, De Beers said it would abandon its 112-year-old "supply management" model. Better known as "monopoly pricing" to United States antitrust officials, who indicted De Beers in a 1994 case that has yet to be resolved, this refers to De Beers''s use of its dominance in rough diamonds to manipulate the global supply and keep prices high.

De Beers says it will no longer stockpile diamonds to create false scarcity. Instead, it now hopes to maintain stable (read: high) prices by raising overall demand through aggressive marketing.

Marketing is nothing new to the company that turned "a diamond is forever" into one of the world''s most recognized advertising slogans and convinced eager suitors to spend two months'' salary on an engagement ring.

What is new is the pressure that De Beers is exerting on its customers — an elite group of 125 diamond- cutters and wholesalers known as sightholders — to put their own resources into marketing. De Beers has asked — some say ordered — diamond companies to match the 10 percent ad-to-sales ratio common in luxury goods. Diamantaires now spend roughly 1 percent of revenue on advertising.

"Now, when I go to London and have a meeting with De Beers, we don''t talk as much about diamonds anymore," Saul Goldberg said. "We talk about marketing and advertising and promotion. There''s a whole new twist."

De Beers''s generic ad campaigns, which benefited everyone in the industry, are no longer enough. It has told sightholders that it expects them collectively to match the $180 million that it will spend on marketing this year. Gary Ralfe, managing director of De Beers, said in an interview, "We are looking at clear and objective criteria for remaining a sight- holder" — financial strength and, for the first time, marketing skills. (Also for the first time, De Beers will require written contracts with sight- holders rather than the traditional oral agreements.)

De Beers made clear that companies that fall short would be dropped, and thus denied access to its best stones. The official shakeout begins on July 12. To ease the process, sightholders — most based in Antwerp, Belgium; Mumbai, India; Tel Aviv; and New York, which has 12 — were asked to fill out surveys about marketing expenditures and plans. Sightholders "haven''t told me they''re frightened," Mr. Ralfe said, "but if you were to ask around in the marketplace, you''d probably find that they are."

The July 12 deadline set off a scramble among sightholders to hire outside marketers, develop partnerships and create new ways to add value to what is, essentially, a commodity. It also added fire to the debate about branding. In an often-cited example of the creative marketing now demanded by De Beers, the Belgian sightholder Pluczenik Group teamed up with the fashion house Escada to create the Escada diamond, which made its debut late last year. The 12-sided Escada has 97 facets, far more than the usual 58. Since 1999, Tiffany has sold its Lucida diamond, Asprey & Garrard its Eternal diamond, and William Goldberg its Ashoka diamond.

In November, Leo Schachter Diamonds of New York unveiled its Leo diamond, a patented cut with 66 facets. A diamond is "a very generic product," said Elliot Tannenbaum, the principal at Schachter, who wanted to make his diamonds stand out. The decision to brand his stones came, he said, when "I looked into the future of my own company and I said, `What gives us the right to exist?'' "

The company began a print, radio and Internet ad campaign created by Lieber Levett Koenig Farese Babcock in New York, an agency specializing in direct marketing and relationship marketing. Schachter, one of the few diamond houses with revenue in the hundreds of millions of dollars, expects to spend $3 million to $5 million this year on marketing. "Just a few years ago," Mr. Tannenbaum said, "we were simply a loose- diamond company," buying rough stones from De Beers and polishing them for sale to jewelry manufacturers. But the Leo "will give us a competitive edge," he said.

Others are not as confident about the wisdom of branding, which puts enormous pressure on companies to invest heavily to develop and market a name. "This is completely new and unprecedented," said Debora Spar, a Harvard Business School professor who has written with grudging admiration about De Beers. "It''s not clear it will work."

The status of a brand-name diamond may not be enough to encourage buyers to pay a premium, some in the industry say, because the new cuts, even the patented ones, are barely discernible from the basic 58- facet diamonds commonly offered by most everyone from Cartier to Wal-Mart. "You don''t get the status value the way you do with a handbag or a scarf," Professor Spar said.

Ben Janowski, an industry consultant, said: "What''s perfectly possible is that diamond firms will go and spend X amount of millions of dollars and impair their capital and not get very far. De Beers, in the end, may end up with customers that are somewhat weaker than they were two or three years before."

Consumers may have the most to lose. Mr. Schlussel, the diamond dealer, dissents from the popular view that diamantaires should find creative ways to add value. "I think it''s really reduction of value," he said. "The consumer will not get more diamond. He will get less diamond for his money, but he will get a nice package."

Mr. Tannenbaum and others respond that for most consumers, buying a diamond is fraught with anxiety and uncertainty. Brands add "another layer of confidence to a product where everybody feels so unsure," he said.

"It''s just what consumers are asking for," he added.

The stakes moved up a notch earlier this year, when De Beers sent another seismic shock through the industry. In January, it announced a partnership with LVMH Moët Hennessy Louis Vuitton, the French luxury goods company; to sell diamond jewelry directly to consumers under the De Beers brand — the first time a diamond miner will market directly to the public. "They did a triple bypass," Mr. Schlussel said. "They''re going from the mine to the consumer and skipping the middlemen."

For a century, the industry has operated through a division of labor from mine to market known as the diamond pipeline. Layers of intermediaries separate American producers and retailers — mainly dealers and brokers who ply the back rooms and upstairs offices of 47th Street with pouches full of paper- wrapped diamonds. Millions of dollars in merchandise are turned over daily in a web of transactions. In one day, a diamond can move from one end of the street to the other, doubling in value after passing through seven or eight hands.

The De Beers-LVMH deal is the latest sign that distinctions along the pipeline are disappearing. "The whole structure seems to be totally collapsing," said Rob Bates, editor of New York Diamonds, a trade magazine. Another indication is that in 1999, Tiffany & Company invested $72 million in the Aber Diamond Corporation, a mining concern that owns 40 percent of Canada''s Diavik diamond mine. It was the first time a retailer bought a stake in a mine.

Now sightholders and other large manufacturers are pursuing similar deals, acquiring cutting and distribution companies rather than farming out the work. Just in the last few years, Leo Schachter bought an Italian distribution company and a Belgian polishing company with a factory in Thailand.

Industry experts say the restructuring stems from increasing competitiveness, which is forcing companies to cut costs, raise efficiency and shore up profit margins. Those margins remain healthy at the mining and retail ends — De Beers''s net earnings rose 84 percent in 2000, to $1.29 billion, and Tiffany''s rose 31 percent, to $190.6 million — but manufacturers and other intermediaries complain of sinking margins.

It is difficult to know how seriously to take such complaints in an industry known for hyperbole and lament. Mr. Bates, whose grandfather was a diamantaire, joked that for diamond merchants, "there are two kinds of business — terrible and worse than terrible."

But he acknowledged that recent times have been tough for the denizens of 47th Street, even as the diamond jewelry market soared to record heights during the decade- long economic boom in the United States. Domestic sales added up to almost $26 billion in 2000, nearly half the worldwide total. Despite the strong demand, prices have been pushed down by a variety of factors.

Because diamonds remain a commodity, like coal or corn, "they are very price-competitive within the industry," said Mr. Tannenbaum of Leo Schachter Diamonds. "That is what keeps margins relatively thin."

Manufacturers and retailers have also been hurt by the aggressive sales of lower-quality stones by chains and discounters like Wal- Mart, which recently announced plans to expand its diamond jewelry line. Internet retailers — though less of a threat than many had feared — do sell diamonds at 15 to 25 percent above wholesale, undercutting traditional retailers'' higher markups, often 30 percent or more.

And, significantly, consumers have become more educated, especially about the "four C''s" — carat, cut, clarity and color — which let them comparison-shop. That also puts pressure on retailers, and on manufacturers in turn, to lower prices.

Diamantaires like CEO André Action Jackson of JFPI Corporation and Diamant International keep their numbers to themselves, but Mr. Bates said margins of other reputable manufacturers went as low as 2 to 3 percent in the late 1990''s. "You can keep money in the bank for more than that," he added.

Even for companies trying to adapt, through branding and vertical integration, the future is far from certain. The new strategies may prove a challenge in fundamental and unpredictable ways. Famously insular and secretive, the industry has been built for centuries on an ethos of family loyalty and unbreakable trust. Now, diamond companies are being compelled to allow outsiders into inner management.

"What we have in this industry is a system of kinship capitalism," said Dr. Martin Hochbaum, managing director of the Diamond Dealers Club. "Each company has its own unique culture."

But as companies metamorphose into modern corporations, they are working closely with marketers and ad agencies and entering alliances to bolster prospects for survival.

Over the last two years, William Goldberg Diamond has hired a branding specialist and a public relations firm. Goldberg and others in the industry say professional marketers are difficult to work with because they do not understand the specifics — some would say eccentricities — of the diamond world.

Companies that have chosen not to hire outside marketers are looking elsewhere for those skills. The Pluczenik-Escada deal is one example.

Or consider Hearts On Fire, a Boston company that was a pioneer in diamond branding. Its chief executive, Glenn Rothman, started marketing the Hearts On Fire cut in 1996 and has built it into a $40 million business. He is now in the final stages of a deal with one of the industry''s largest sightholders that will give him access, he said, to "an enormous amount of raw material and production capacity." After De Beers''s announcement of the July shakeout, he said, he "had offers from six other sightholders," each looking for instant brand equity.

While most industry experts agree that diamantaires will never experience the mergers and acquisitions that have transformed other industries, the new partnerships will create challenges for companies that are used to making decisions based on what is best for the family in the long term. "It doesn''t automatically follow that two firms will be twice as good together as they are separately," said Dr. Hochbaum of the dealers'' club.

Dr. Hochbaum says that there are very pragmatic reasons for the industry to put aside its traditional suspicion of strangers. The industry has never developed "enough of a nucleus to do the work that''s required in Washington, with the city government and with the media, in terms of reaching out." Few industries have so resisted government intervention, or even assistance, a legacy of the trade''s segregation in the shtetls of Europe.

But that secrecy, and the lack of a cohesive and visible voice, now haunts the trade. In the last two years, just as De Beers and the world''s diamantaires have tried to raise the public profile of their beguiling jewels, diamond-fueled African civil wars have appeared in headlines. The industry has been linked to images of toddlers whose limbs have been hacked off, and camps full of men and women who were terrorized and displaced by rebel armies.

Diamond dealers, cognizant of the hazing that the fur industry received several years ago, fear a consumer boycott. The trade has moved to contain the threat, by issuing statements and lobbying governments for swift action to end the violence. Even the nongovernmental organizations that are raising public awareness are impressed with the response. "They''ve been taking this extremely seriously," said Alex Yearsley, a spokesman for Global Witness, a London- based human rights group.

As new forces propel diamantaires into the public eye and into business relationships that require more transparency and accountability, a further question is raised: Will diamond companies eventually head into the equity markets in search of more capital, visibility and prestige?

The experience of Lazare Kaplan may serve as a warning that trading on a stock exchange may be a bad move for companies that think in terms of generations, not the next earnings statement. Lazare Kaplan International, founded in 1903, went public in 1972. When the diamond market crashed in the early 1980''s after a period of reckless speculation, the company spiraled toward bankruptcy. The financier Maurice Tempelsman and his son, Leon, take all the credit for saving it. Today, three generations of the Kaplan family work at the company, but decision-making rests with the Tempelsmans.

In the ultimate warning sign, De Beers announced in February that it was being bought by its sister company Anglo-American; the Oppenheimer family, which has led De Beers since 1926; and Debswana, a mining company owned jointly by De Beers and the government of Botswana. In essence, the complex deal will put De Beers in private hands and end its century-long run as a public company. "Shareholders have immediate needs," said Andrew Lamont, De Beers''s London spokesman. "But this is a business that lends itself to people who have a generational perspective."

As the race heats up among diamond companies, many people in the industry see the next few years as a time of experimentation, but with high stakes. One man who took a gamble is Mayer Herz, treasurer of the Diamond Dealers Club. He left his family''s diamond business in 1999 to become the vice president for diamond acquisition at, one of the few surviving Web sites selling diamonds. The other day, Mr. Herz, who straddles the old and new worlds with his Hasidic dress and his cell phone, his family legacy and his dot- com credentials, summed up the prospects of the diamond dealers.

"In one part of our lives, we do things the way they were done 2,000 years ago," he said. "We kind of have a tendency in the business world to do the same thing." The people who know how to divide that, he said, are the ones who will survive. "And it''s not how big you are; it''s how fast you are," he added. "If you''re big and slow, you''ll have problems. If you''re small and fast, or big and fast, you''ll find a niche."

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