The fine jewelry industry seems to be perpetually full of glaring margins and yet what seems like steady sales. Diamonds fall straight into this mysterious game of price shopping and bargain hunting. How is it that a jewelry salesman always seems to be able to pull out a calculator and reduce the price of a diamond engagement ring, already 60% off, a few notches higher? Who is getting a good deal? Are diamonds really as expensive as they seem?
At the retail end of the diamond spectrum, diamonds really are as expensive as they seem, but why? If the market value of a diamond is less than its retail value, where does the money go? To get an idea of what’s included in the price tag of a diamond at your local jeweler, it’s important to understand how a diamond gets into the window to begin with.
By the time a diamond reaches your local jeweler, it has already traveled around the world. Most diamonds are mined in just six of the world’s countries: Botswana, Russia, South Africa, Angola, Namibia, and Australia. Rough diamonds are immediately graded for value when initially mined from the mine by a “diamond appraiser” (Diamond Consultants, 2012). The appraiser analyzes each rough diamond to determine its size, color, quality, shape, and cutability. Each rough diamond has the potential to be cut into a multitude of different polished diamonds and thus separated into as many as “12,000 different categories in preparation for sale” (Diamond Consultants, 2012).
After appraisal and grading, rough diamonds are cut and polished into high-quality, light-reflecting stones. Most of the large mining companies have manufacturing and distribution branches. Thus, “the production and distribution of diamonds is largely consolidated in the hands of a few key players” (Diamond Consultants, 2012). These gem-quality rough diamonds are distributed to one of the two main cutting and processing centers in the world.
There is a good chance that the rough diamond will travel to India, where 60% of rough diamonds are cut and polished, or to Israel, which cuts and polishes 14% of the world’s diamond supply (Diamond Consultants, 2012). The cutters, also known as “diamonds”, will cut each rough diamond into a new polished version. Polished diamonds now have unique and specific characteristics that are all their own, including their shape, color, clarity and new carat weight.
From the manufacturer, the new polished diamond will arrive at the hands of a wholesaler. The wholesaler will then supply small jewelers and large corporations with its inventory of diamonds to mount and sell to the consumer. This step in the diamond pipeline is more complex than its predecessors because it is targeted specifically at the consumer. As long as the demand for diamonds is high and consumers are willing to pay more for these stones, they will be delivered in a luxurious box with an exclusive price. It is worth noting that globally, the United States is the predominant market for the polished diamond industry, accounting for 45% of all diamond retail sales (Diamond Consultants, 2012).
The diamond pipeline is extensive, and by the time a polished diamond reaches a jeweler’s window, everyone who has been involved in crafting that stone must be making a profit. With the purchase of a diamond, the consumer pays the entire bill, as well as the profit margins of all the people who have invested time and money in that diamond. As an example, consider this: mine diamonds cost $800-1200 per carat; however, by the time it reaches the consumer, it has become a $7,000-8,500 piece of jewelry.
Every time a diamond changes hands, the new owner is responsible for the profits of his predecessor, ultimately falling on the consumer.
This very high profit margin has been reduced in recent years, with the increase in direct sales to the public. Wholesalers and Internet diamond sellers can sell a diamond at a reduced price due to a lack of large inventory and relatively low overhead costs. Looking at the big picture on a small scale, for every dollar a wholesaler pays a cutter or fabricator for stones, he will sell the product for $1.30. By comparison, for every dollar a traditional jewelry store gives a supplier, the supplier sells their items for $2.00-$2.50 (O’Neill, 2012). This is where the calculator comes in, and the seller starts discounting a percentage here and a percentage there, to make it look like the consumer is getting a bargain.
While the consumer may not be able to avoid going around the world taking a diamond, they can avoid jewelers’ high markup by purchasing a diamond directly from a wholesaler. It is important to remember that if one is ever able to sell a diamond, its value falls back down the pyramid between polished and wholesale. Not because it has depreciated in value, but because the consumer has now become the supplier instead of the jeweler with the calculator.
Written by Anne Johnson, CEO of MJ Gabel
References
Diamond Consultants Canada. The Diamond Industry: Assessment of Opportunities and Impact. Rep. Economic Development Reports for the City of Prince Albert. website. February 27, 2012..
O’Neill, Sean. “Clicks and Stones”. Kiplinger’s Personal Finance 60.2 (2006): 102-105. Academic Search Alumni Edition. website. February 28, 2012.
MJ Gabel / http://www.mjgabel.com / 800-804-1980