There are a variety of competing forces that drive long-term change in our industry, but when multiple catalysts for change exist that all point in the same direction, extremely rapid evolutionary events can occur that quickly alter the marketing landscape. In my view, we are about to witness just such an evolutionary scenario, and the extent to which you react properly may have a profound impact on your future sales, market share, and profitability.
Diamonds have historically been cut using a variety of faceting architectures, but at the end of the First World War, Marcel Tolkowsky codified, in a theoretical sense, the ideal proportions of the 58-facet diamond. Since then, the “Brilliant Cut” diamond design has been generally accepted as the most effective way to apply facets so as to obtain maximum brilliance. In recent years, though, we’ve seen the subsequent introduction of a variety of new cuts designed to produce even greater brilliance. From a marketing standpoint, the most successful thus far has arguably been the Leo Diamond, Sterling’s 66 facet stone. But now, the number of branded diamond designs is about to increase exponentially, for some very interesting reasons.
1) The Complete and Final Commoditization of Diamonds. Retail margins on round brilliants have been declining for several generations, but the introduction of the Rapaport Report, the general acceptance of GIA grading terms as a method for allowing price comparisons, and the subsequent development of the internet as a commercially viable retail distribution mechanism have finally resulted in the complete collapse of margins throughout the entire supply chain.
Of course, for the past decade, the use of alternate certs has at least provided some relief. I’ll leave the question of whether EGL International certs are purposely deceptive to the litigators in the coming class action consumer protection lawsuit. Instead, let’s recognize that the difference between the wholesale price of an SI1 G-color GIA certed diamond and that of an SI1 G-color EGL Israel certed diamond potentially provided at least some margin of relief for those who chose to sell them, but recent events suggest that this window for enhanced margins is closing fast.
The alternate route of selling ideal cut 58 facet diamonds as a means of protecting margins (note the extraordinary retail margin levels of Hearts on Fire, for example), which certainly propped up many independent retailers’ profits, has now been adopted by the majors with success, as witness the significant inroads made by Sterling’s Tolkowsky and Helzberg’s Super Ideal Cut.
But the really sweet spot in the margin curve lies in the realm of proprietary specialty cuts. There is simply no better way to obtain margins in the retail diamond business than selling specialty cuts, because in today’s market, this represents far and away the very best way to de-commoditize diamonds.
2) The Redistribution of Supplier Sales Caused by Signet’s Acquisition of Zales. Imagine that as a supplier, you’re doing 10 million dollars annually with Sterling, at virtually no margin, while simultaneously doing 60 million dollars per year with Zales, at healthy Margins. Then suddenly, Signet pulls the rug out from under you by purchasing Zales, effectively aligning America’s two largest jewelry retailers under one collective buying roof. Where do you go to replace the revenues and profits? You move to the independent sector at light speed, of course. (For a greater understanding of this scenario, please see my article “ Understanding the Implications of the Signet acquisition of Zales”, SJN May, 2014).
But without a road rep sales force or existing relationships, how do you achieve penetration? Recognize that to establish a new supplier relationship with an independent jeweler you have to either knock out an incumbent vendor, or arrive with an amazingly good idea. There are quite a few global diamond jewelry suppliers who now face the Zales acquisition scenario. Expect some of them to arrive at a store near you riding a specialty cut diamond at NASCAR speed in the extremely near future.
3) Consumer Acceptance of the Gemex Light Performance Report. If I were to inform someone that a particular woman’s measurements were 36-24-36, would he then be able to predict on that basis whether she’s pretty, or sexy, or someone he’d like to take out for dinner? This scenario represents an anthropomorphic re-statement of the arguments in support of the Gemex lab report, and one can reasonably argue that the alphabet diamond soup created by GIA grading terms doesn’t really serve the consumer well in predicting the beauty of a specific diamond. In my view, we’ve hit a tipping point where so many retailers will now be relying on the Gemex report as a reliable third party laboratory that its use will become ubiquitous. And the Gemex measurement methodologies love nothing more than a specialty cut diamond!
4) Recent Discoveries in Diamond Faceting Architecture. A diamond cut precisely to Marcel Tolkowsky’s specifications is likely to produce a pretty good Gemex report, but just as airplane technology has evolved quite a bit since the 1920s, so has diamond cutting. Indeed, recent innovations are now allowing for the production of diamonds with insanely high “Triple Flush” Gemex pedigrees, without necessitating cutting them so they look like miniature golf balls. Remember – it’s not the number of facets that produces extraordinary light performance, it’s the faceting architecture!
5) The internet is finally selling significant quantities of diamond jewelry. At the turn of the century, many industry “experts” were lamenting the end of the brick and mortar jewelry-selling model, suggesting that the internet would wipe out traditional jewelry stores. But that didn’t happen, of course, because even though the technology was becoming available to facilitate diamond sales on the net, consumers were slow to shift their buying habits. Unfortunately, as Millennials have come to represent a larger and larger share of diamond jewelry consumption, their natural willingness to buy things on the internet is increasingly siphoning market share away from classic brick and mortar retailers, and towards internet-only as well as brick and click pathways like zales.com. This reality has not only accelerated the commoditization of diamonds; it’s also shrunk the pool of potential buyers in traditional retailing environments. The natural defense for independent jewelers lies in developing specialty cut brands that are far more difficult to shop, and far easier to sell.
There is a final benefit to selling specialty cuts that puts them squarely in the independent jeweler’s swing plane. Many of you have not only survived, but thrived, during the recent economic downturn because you’re an important part of your local community. You’re not “just” a retailer. You’re intimately connected to the people you serve. You go to church with them, you socialize with them. You’re their neighbor, and their friend. And you’ve maintained your relationships by providing honest value in everything that your business does. So I suspect that as specialty cuts become available to you that represent honest, authentic value, you’re very likely to adopt and embrace selling them. An elite group of your higher volume peers has already proven that this strategy works, and the industry is ready for a new, much more margin-friendly way to sell amazingly beautiful diamonds in a profitable manner.
So don’t be surprised if you suddenly see lots of specialty cuts being promoted by both suppliers you recognize, as well as suppliers you don’t. And as more and more retailers embrace selling them, for all of the reasons mentioned above, consumers are going to start hearing the specialty cut story more and more frequently, which in turn will accelerate acceptance by the general public. Just make sure that you align yourself with the right brand, because as we’ve seen in other categories over the past twenty years (like beads!), there will be winners, but there will also be losers. So in the final analysis, make sure you select a specialty cut diamond that’s supported by a company that understands the loose business, has the marketing acumen to provide the support you’ll need to dominate the category locally, and has the staying power necessary to create a legacy brand.
Class Dismissed!
By the way, I’ll be running a seminar on ”How to Increase the Effectiveness of Your Bridal Marketing to Millennials” Saturday afternoon, Feb 25, at the SJTA Show in Atlanta. If you’re visiting the Show, I look forward to seeing you.
George Prout is Vice President of Sales and Marketing for Gems One Corporation, and can be reached via e-mail at info@gemsone.com, or at Gems One’s New York office at 800-436-7787.
