International Diamond Manufacturers Association had collected data on the price of De Beers’ rough diamond assortments (boxes), their cost of manufacturing and the realized price of the resulting polished diamonds. They have discovered that retailers’ margin amounts to 2–5% only. Let’s try to understand the reasons behind such modest profit.

Typically, the closer we get to retail, the less prices fluctuate. However, according to American retailers, there is an issue with polished diamond prices — they cost too high, which make consumers choose other jewelry items. The recent ad campaign about lab-made diamonds, where they are positioned as more “ethical”, is another factor, harming long-established price forming by monopolists.

A decline in consumer demand resulted in a decline in polished wholesale prices (PWP). Miners have reduced prices of rough diamonds in response to continued pressure from the retailers. However, these price reductions were too little and came too late. Producers did so mainly because they were forced to do so by the market. As a result, the prices didn’t became fair, they just lost their stability.

The lack of stability in rough prices were bad news for manufacturers. This group of diamond businesses have little to no control over the price of raw materials and lack the flexibility found in some other industries in which manufacturers can shop for other suppliers to reduce the cost of raw materials through competition between suppliers. Unfortunately, 70% of the diamond industry is run by a group of monopolists — De Beers, Alrosa and Rio Tinto and there are not so many competitors.

It is worth comparing gross margins in the diamond industry of 2%-5% to other industries to see how different margins are. According to a 2013 Ernst & Young report on consumer product companies (Margin Unlocked), the average gross margin was 19.1% for the top 50 companies in 2012, and it averaged 18.7% in the preceding decade. Based on an analysis by Butler Consultants from 2009, wood manufacturers had a gross margin of 29.1%, equipment manufacturers 32%, clothing manufacturers 38.4%, food manufacturers 37.4% and beverage manufacturers as much as 57.1%.

Diamond industry margins are by all accounts low by comparison, especially considering the high financing and inventory costs they incur and the limited differentiation, as well as the highly fragmented and competitive environment they are working in.

The diamond industry definitely needs alternative market, which Diamond Open Market platform is going to bring.