U.S. Market Report – Market Competition Heats Up

RAPAPORT…

A marketplace defined by record high prices, uncertain
economic outlook and cautious consumers has created a new, highly competitive
environment for diamond and jewelry wholesalers — leaving some with record
sales, and others with dwindling business. 

Divergent Septembers

“We are up about 65 percent since 2010 in August and
September, with about 15 percent of that being dealer-to-dealer sales,”
remarked Sam Frank, owner and president of Leo Frank & Sons, a diamond
wholesaler based in Troy, Michigan. “I think that we have gained market share,”
he added. “More people know about us and the relationships we have built are
coming to fruition.”

Things, however, are much different for Doron Rozen, owner
of Doron Diamond Merchant, a loose diamond wholesaler and fine jewelry
manufacturer in Memphis, Tennessee. “It’s been quiet — we were really busy in
June, but August and September just died. And I think the market fall had
something to do with that. I think our customers were waiting to see what would
happen with the stock market and did not shop for diamonds.”

Wholesalers who fared well in September attribute their good
sales to their proactive and innovative efforts. “In today’s business climate,
we all have to be optimistic — we cannot stand still and freeze. We need to be
creative and provide the tools and products for our customers,” explained Linda
Garrido, director of marketing for Los Angeles–based MK Diamonds and Jewelry.

Garrido, whose company experienced a marked increase in
September sales, pointed out that internet marketing efforts can make a huge
difference in attracting and keeping new customers. “We did whatever we could
to optimize not only our business-to-business sales, but also to allow our
customers to reach consumers through our website and newly created iPhone apps.
We also increased advertising on bridal websites.”

Inventory Inequality

The new competitive market is creating some interesting and
contradictory inventory dynamics throughout the industry, leaving some
wholesalers awash in goods and others straining to find supply. “We are strong
in demand, so we have much more inventory than we did two years ago — right
now, we have the highest inventory we have had in awhile,” divulged Asaf
Herskovitz, president of Philadelphia-based GN Diamond.

Jai Bhansali, owner of diamond and precious stone wholesaler
Diagem Inc. in Chicago, sees things differently. “Inventory is very tight, and
I think the syndicates aren’t releasing the stones I really think we really
need. We are seeing a shortage in fancy shapes and are having trouble replacing
those.”

Like Bhansali, some in the industry are concluding that the
discrepancies in inventory are the result not only of competition, but of a
squeezed and limited supply. “I think there is a big shortage of rough — at
least that’s what I hear from cutters in Russia and Israel,” said Rozen.

“Bread and Butter”

While many are competing for supply, few wholesalers are
selling many large stones, due to the record prices and wary consumers. “People
are buying mostly their ‘bread and butter,’” noted Herskovitz. “Three-quarters
to one-and-a-half mainly, but we also have a lot of sales of 2 carats. But
bigger than that is very slow.”

And though prices have caught on throughout the industry,
many retailers are still searching around for deals. “The real trouble is
stores are still looking for price points that don’t exist anymore. They still
want 1-caraters that are very well cut for under $3,000. Those stones are
now $3,300 to $3,600 per carat,” observed Frank.

Due to their desire to hit price points, many retailers are
shunning more expensive Gemological Institute of America (GIA)-certified
diamonds. “A GIA 1-carat, VS2 stone is at least $4,500,” Frank continued, “so
there is definitely price resistance there.”

Differing Expectations

Given the differing results wholesalers reported for
September, it is not surprising that many had different expectations for the
coming months, especially for the end-of-the-year holiday shopping season. “I
expect a very strong holiday season,” said Frank, explaining that “we have been
hitting our goals every month and have seen double-digit increases every month
this year except for June and July — and I think that says something about
where it’s going.”

Wholesalers who have experienced an erratic few months of
sales, however, are taking a wait-and-see attitude. “It all depends on what the
market does,” noted Rozen. “If the markets go up and down like a yo-yo, I think
we will have a holiday season below 2010. Jewelry stores in particular are
going to be slower if the stock market continues to be as volatile. But hopefully,
that is not going to happen.”

The Marketplace

• .75 carats to 2 carats in F, G and H colors are in high
  demand.

• Demand for round shapes has slowed, while demand for
  fancy, oval and
  
  cushion shapes is stronger than usual.

• There is resistance to Gemological Institute of America
  (GIA)-certified stones because of their higher prices.

• Rough demand is limited throughout the market due to
  slowed production and higher competition among wholesalers.