24 February 2016

Editorial: Why Diamonds Are Dying

After my editorial of this week regarding the Rapaport press release of their Investment Diamond Grading Report, I received a myriad of responses from around the world, all in support of our concern for what Rapaport is trying to perpetrate on consumers. Among these responses were many asking: what has happened to the diamond markets?



The truth is: the diamond markets happened to the diamond markets. Greed and short term vision have killed the diamond market, as a whole.

The History of the Diamond Market

There was once a time when Debeers was indeed a monopoly in control of the diamond markets. In fact, had DeBeers not created this monopoly, diamonds would have most likely never become the staple of the jewelry industry for so many years. During these decades of successful diamond markets there was a structure…a controlled distribution chain that diamonds followed from mine, to sight holder, to cutter and manufacturer, to wholesaler and dealer, and eventually to retailer and consumer. It was a well-structured, well-controlled, and highly profitable industry. No one got out of line in the distribution chain, profits of each link of the chain were protected, and the industry operated on the concept where each link in the chain worked to protect the integrity of the chain as a whole. For many decades, business and profits were good for every link of the chain from the DeBeers mining to the local, home-town independent retail jeweler.

Then came Rapaport and the Internet

When Martin Rapaport announced his “Rapaport Report” of what (at the time) was claimed to be a New York wholesale price list of diamonds, virtually overnight the profits of the industry plunged. Why? Because until now you had to be in the diamond business to know the diamond business. Now, with the “Rap Sheet” one could have secret insider price information on diamonds that in other industries would have been considered sacrilege to publish. With the publishing of the Rapaport Report not only was secret wholesale pricing information being distributed, it also put Rapaport in the position of being able to have collateral control of diamond prices since the published “Rap Sheet” wholesale diamond price could be unilaterally adjusted at the whim of Rapaport to influence the market. What made the situation totally FUBAR was that Rapaport was making their New York wholesale diamond price list available to consumers! Suddenly retail jewelers had retail customers walking into their stores with Rapaport wholesale price lists in their hands.

It was a monopoly on top of a monopoly.

This situation was made direly worse with the advent of the internet, and the greed of the wholesale diamond industry to circumvent the local, home-town independent retail jewelers. The wholesalers and diamond producers put together diamond inventory databases and made this available to anyone with an internet website. By utilizing the Rapaport Report wholesale price list, and embedding a diamond wholesaler’s database into a website, anyone with a computer and internet connection could become a diamond dealer. With virtually no overhead cost they could offer huge “virtual” loose diamond inventories at selling prices that no bricks-and-mortar jeweler could compete with. Names such as BlueNile, DirtCheapDiamonds, and many other online diamond dealers sprang up due to this action by the wholesale diamond industry, many operating from second bedrooms of someone’s apartment.

The Last Nail in the Diamond Coffin

The advent of the GIA Diamond Grading Report, and all of the other labs producing diamond grading reports, was the last nail in the coffin. Previous to this time, to operate as a home town, independent retail jeweler required one to have the training, experience, and tools to grade diamonds for themselves, and their customers. Customers trusted their diamond buying decisions to their local, home town jeweler because the local home town jeweler was a professional jeweler, not just a merchant.

With the advent of the GIA Diamond Grading Report (and other labs) diamond sellers no longer had to know diamonds, or even have any experience in the diamond industry. All one needed to become a major diamond dealer was: An internet website with an embedded diamond database from a wholesaler. (You did not have to own a single diamond yourself.) A Rapaport Report. (no need to actually know anything about the diamond markets) A GIA Diamond Grading Report (to do your technical thinking for you.)

The Chain Was Broken

At this point, the well-designed distribution chain was broken, and with it the whole structure of the diamond market was broken. Suddenly the home town, independent retail jewelers had to compete with bedroom based diamond dealers, sitting around in their underwear, selling paper grading report rather than diamonds. This had three main effects on the diamond market: Profits from diamond sales fell 99% almost immediately. A guy sitting in his bath robe at his computer in his apartment bedroom could sell a $10,000.00 diamond online, have it drop shipped to the customer with the GIA report, and make a couple hundred dollars, without ever having had to meet the client or touch the diamond. Just take the money. The traditional home town, independent retail jeweler could not compete unless they dropped their prices also, which caused the profitability of diamonds to crash. Wholesalers started providing larger inventory listings and lower prices to the big internet diamond sellers, which further eroded the home town, independent jeweler’s ability to compete. Diamonds were (and are) sold based on paper certificates (diamond grading reports) and no longer sold by professionally trained and equipped jewelers in traditional jewelry stores.

Why Diamonds Are Dying

Simply stated, diamonds are dying because the diamond wholesalers got greedy and went outside the structured chain of distribution. This includes not just actual wholesale diamond inventories being provided to bedroom-based internet sellers, but also includes wholesale diamond information being provided to consumers and people who have no business being in the diamond business. The destruction of the established market distribution chain by the wholesale links of that chain have caused the chain to be irreparably broken, and the diamond wholesalers and producers have no one else to blame but themselves.

The Impact on the Retail Jewelry Industry

When you read the Jewelers Board of Trade report that home town, independent retail jewelry store closings are up 24% I assure you it is not due to a bad economy, it is due to lack of profits due to the breakdown in the diamond distribution chain by the wholesale diamond industry. There is no way for an independent, home town retail jeweler to compete with places like Costco, BlueNile and other big names when the wholesale diamond industry gives preferential pricing and inventory to the big internet sellers and discounters. I have had people tell me that this is just the way it is…deal with it. I have no problem with that as we are specifically structured and purposefully oriented to the colored gemstone markets. Colored gemstones work on a market of “supply and demand”, and profits and business are doing exceptionally well. Which further confirms to me that the diamond market is dying, not due to the economy, but rather due to their own actions. Make no mistake, diamonds are dying…but it’s because the diamond wholesale market committed suicide years ago! It’s just taking this once vibrant industry a long time to die. The future of this industry is in colored gemstones….and lab created diamonds. But that is another story, for another time. Tweet Robert James FGA, GG

President, International School of Gemology

That is my opinion, I would love to hear your comments, thoughts or rebuttals. Contact me at this link: Contact the ISG.

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