It has been repeatedly said that the cost of raw diamonds is too high, and this leads to a lack of profit in the diamond industry. As a person who has dedicated his entire life to this industry, I believe that it is prices in the retail trade of diamonds that are too low.
Diamonds are not an "elastic product", the demand for which increases with an increase in supply or a decrease in the price. Diamonds are not a one-time or consumable product, which must be purchased continuously. Purchase of a diamond for many people is an event that takes place once in a lifetime. The price reduction will not stimulate the increase in sales of diamonds. At best, reducing the price will simply save money for the consumer or increase the weight of his purchase in carats.
As a former student studying business in a prestigious university, I was taught that the purpose of a business enterprise is to create profit. Profit is an essential element of the success of any business structure, since without the profit and the positive cash flow that it creates, the business model is unstable. Profit is the excess of income over expenses, which include the cost of goods sold and many other costs incurred in the course of the business enterprise.
Gross profit is income over and above the cost of the goods sold. It is from this excess of income after deduction of the cost of goods sold and the resulting profit is formed. As many far-sighted businessmen have said, gross profit is the key to determining how healthy the financial condition and future of any business is. With a few exceptions (for example, Amazon.com), revenue growth will not talk about anything unless the business model creates positive cash flows. Such a business will become unstable over time.
Recently I had a business meeting, which led me to these arguments. Here is how it was.
A wholesale buyer tried to sell a 3 carat diamond to a long-time valued retail buyer, with whom he had established professional and trusting relationships. He offered a fair retail price to a client who was excited about the prospect of getting a perfect new diamond for his wife, with whom he had been together for many years. The wholesale buyer / retailer was surprised when his customer called him and said that he can buy the same diamond cheaper on the Internet.
I can not say how much cheaper, because I do not know the retail price that my customer spoke about. I only know that one online seller has set a price of $ 24,996.00 for the same diamond that I have, and I sell it at a wholesale price of $ 24,575.00! This means a gross profit of $ 421.00 on a diamond worth $ 25,000.00 - a gross profit of less than 1.7 percent!
On this we with the customer both said: "This is insane!" .. What's the point? " This makes no sense, and you should not sell anything at a profit rate of 1.7% compared to the cost price. No matter how effective a person can do business. Regardless of how much a person can receive income.
In this story there are many consequences. Perhaps the customer will now hesitate to buy a diamond for his wife, because the perceived value of the diamond is undermined, as is the confidence he felt for the seller. He probably will just get out of the deal, because he has a bad sludge from all this, and for him it's best to just give up buying.
Or maybe he'll just buy it for $ 24,996.00. In this case, the buyer will purchase a valuable diamond for a price of 1.7% above the wholesale value! In this case, the industry will lose. No one will get a profit, as 1.7% can not be considered a profit. More importantly, there were no additional sales. Ultimately, thousands of dollars were lost - in the form of profits and value for the industry and value for consumers - because the value of diamonds estimated at billions of dollars, perceived by society and industry, was greatly belittled.
As for the question of the profitability of the industry and the impact of "high" diamond prices, the above story shows that there are players in our industry who are striving to nullify the profitability of the industry at any price level. When the price of diamonds falls and, consequently, the price of diamonds should fall, these industry participants nevertheless consider it necessary to make diamonds accessible to people at the same absurd and unstable levels of gross profit. Reduction of wholesale prices for diamonds will simply lead to a decrease in retail prices - in essence, this situation is hopeless.
Tiffany and Co. And Signet Corporation are two examples of success in our industry. Both companies sell diamonds and jewelry to consumers for billions of dollars. They understand that profit is essential for working enterprises. Both of these companies are extremely successful. Their earnings and gross profit continue to grow, despite the fact that others seem to believe that the only way to do business is to sell diamonds at a cost - well, maybe 1-2 percent higher!
Tiffany and Co. In 2014, the company registered an annual sales volume of $ 4,249,913,000, which is 5% higher than in the previous year. Tiffany achieved such a sales volume with a gross profit of 64.3 percent! The trading margin of Tiffany was 280 percent! If we put it in a broader context, Tiffany had a selling price of $ 28,000.00 at a cost of $ 10,000.00, and the above-mentioned Internet retailer would have a selling price of $ 10,170.00 for the same hypothetical product!
Signet Corporation, the parent company of Kay, Jared and Zales, reported in 2015 that it had an annual sales volume of $ 5,736.3 million for the last financial year. Signet's sales volume increased by 36% .1 Signet received such a figure of earnings with gross profit of 36.2% - the trade margin over the cost price was over 156 percent!
It is interesting to note that the Signet annual report, published in 2015, contains the following reference: "Our research constantly shows us that the main reason why people buy jewelry exactly where they buy is NOT the PRICE. . . But TRUST (written in capital letters to emphasize).
This is confirmed by what my friend once told me about why her family buys jewelry from Tiffany. As she explained, she knows that she receives a quality product and, although the price can be high, she receives the same price as others receive. Again, the issue of trust!
http://www.diamonds.net/News/NewsItem.aspx?ArticleID=53119&ArticleTitle=Op-Ed%253a%2bInsanity%2bof%2bthe%2bDiamond%2bIndustry
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