The past Christmas sales season proved a certain recovery of the jewelry market in comparison with the fizzling year of 2008. The major market, which is the Untied States, posted increased sales at every second retailer with every fifth of them boosting their gains by 20%. It looks inspiring, especially on the backdrop of general results of the year reflecting frozen or dropped incomes at 60% of jewelry sellers and frankly languid growth at others. The Christmas season also showed a rare level of disarrayed metrics produced by large retailers: Tiffany & Co.’s sales, for example, went up 17%, while Zale Corp. on the contrary fell 12% in theirs. Such a disorder, unusual for pre-crisis times, most likely reflects the ability of corporate marketing experts to timely react to demand fluctuations within the limits of the basic trend: the greater bulk of buyers prefer products whose price is close to the bottom level of an average price segment; so those promoting this range of goods have the right to count on profit.
Last year diamond manufacturers’ sales were averagely reduced by 40% and so far there are no even slightly relevant signals pointing to fast restoration of this market. However, the rough market is in sharp contrast to the previous: cumulative sales posted by DTC and ALROSA in January come near $900 million, and in view of deliveries by other diamond miners this market will obviously conquer a billion-dollar aiquille, which is quite comparable with the pre-crisis period.
Do the modest successes of jewelry retailers and impressing achievements of diamond miners reflect a steady recovery trend for these markets or are they only a sign of respite before a new and long nosedive? In our opinion, an answer to this burning question may be prompted by the dynamics of such a yardstick as the “U.S. household savings rate” being a direct indicator of the U.S. population’s readiness to increase consumption. In the 1970s and the beginning of 1980s the savings rate fluctuated around 10% rising to 12-14% during the periods of economic slowdowns. But starting from the middle of the 1980s, when the Federal Reserve System interest rate began its smooth and steady slide while the U.S. population’s demand for goods and services was simultaneously spurred by ever cheaper credits, the household savings rate was persistently decreasing.
From August, 2005 to April, 2008 the household savings rate was changing within the limits of 0-1%. Exactly this period reflected a historic maximum of diamond goods consumption in the United States. From the middle of 2008 to present time there was an explosion-like upswing in the household savings rate – it went up from 0% to 8%; simultaneously the diamond jewelry consumption in the United States was almost halved. An unprecedentedly abrupt exponent in this parameter is a convincing proof that there occurred serious changes in the American consumer’s psychology - people do not wish to buy at the former level of available credits. It was the first time when the dynamics of household savings rate ceased to correspond to that of the FRS interest rate.
This process is even deeper in the Eurozone and Japan – the other traditionally large markets for diamond jewelry. As a matter of fact, it is already possible to exclude Japan from that number – it has yielded its place to China. But this new distribution of positions should not cause euphoria – China has taken the second place not so much owing to growth of its own consumption, but mainly because of a fatal drop in Japanese consumption.
The divergence in savings rate charts in the countries which appear to be basic consumers of diamond jewelry to a certain extent reflects consumers’ mistrust to anti-recessionary measures undertaken by the authorities. Really, pumped-up liquidity has reactivated stock markets and stabilized them and in some cases led to higher prices for hydrocarbons and commodities but yet stopped short of generating new jobs. Some part of this superfluous liquidity flowed to the diamond market as well and this was the main reason which gave a jog to the current rough rally. If the household savings rate will grow at the current pace (and so far there are no reasons to doubt it) the misbalance between the rough and polished markets will increase.
Unfortunately, modern realities of the diamond market add a number of negative features to what is already a disturbing picture. For instance, at a first glance the thesis about depletion of existing deposits and absence of new ones is absolutely fair to excuse sightholders’ motivation, forcing them today to increase rough purchases for their stocks at current prices presuming that prices will grow proportionally to depletion of the world mineral base. This seemingly faultless logic does not take into consideration that for the last two decades there was recovered almost the same amount of diamonds as for all the previous history and that end users have accumulated “on their hands” a huge number of polished diamonds – with no trace of a civilized secondary market around. It is possible to say that there has been discovered a new deposit of diamonds, already cut and polished, comparable by its proved reserves with the best of operating diamond fields. And already there are signs that its owner by the name of “Crisis” is ready to put this production on the market. However, so far there is a powerful deterrent which is psychology of a human being who will be ready to take a symbol of fidelity and love marking one’s wedding or anniversary to a pawnshop if only worst comes to worst. Nevertheless the same kind of psychology can prevent a buyer to spend his or her money once again for diamonds if he or she will see the same goods in a store as several years ago but only cheaper. Will anyone need such a symbol? Taking into account that all exotic ideas related to “diamond derivatives,” “standardized baskets” and other embodiments of “investment diamonds” have once again sunk into oblivion, the secondary diamond market affected by an adverse succession of events may simply represent uncontrollable waves of diamonds turning cheaper with almost nothing to counter them - if only by way of increased prices for jewelry brands or prompt growth of jewelry consumption on new markets.
It should be recognized that unbiased transition of the diamond market into a mode of real competition has negatively affected generic marketing. Now it is quite the moment when it is necessary to make active efforts to convince the end user to purchase diamond jewelry. Meanwhile the span of diamond advertising is narrowed and its creative swing is beneath any criticism. It is very likely that the IDB has died virtually unborn. The reasons are obvious – the single-channel system is finally destroyed and market heavyweights – major diamond mining companies - turned full-fledged competitors. Since they are in different degrees of vertical integration the concept of their joint efforts in diamond advertising becomes impossible. Indeed, is there any reason why ALROSA, BHP Billiton and Rio Tinto which do not own any jewelry brands should invest in polished promotion resulting in wider success, say, for the Everlon Collection representing a jewelry brand belonging De Beers, their direct competitor? The behest left by the Founding Fathers of the diamond market which forbid diamond mining companies to engage in polished business is forgotten, but most likely no one of the participants is going to pay for infringing the canon individually.
How to convince consumers to pay for diamonds despite their increasing unwillingness to do so is the main question for the market in 2010.
Sergey Goryainov, Rough&Polished
