New York's diamond district was just as dazzling as ever on a recent Tuesday afternoon. Shop windows sparkled with stones capable of stealing a tourist's attention away from midtown Manhattan's skyscrapers. Sellers, attempting to catch buyers' eyes, made sweeping gestures over their wares, hands adorned with thumbnail-sized jewels.
Despite the impressive displays, though, the diamond business has lost much of its brilliance in recent months.
"It was horrible from January to March," says Wendy Gandola, a saleswoman at Millman Diamond in the heart of a 47th Street stretch renowned for the precious stones.
Jewelry sales are down about 14% in the first three months of the year compared with the same period in 2008, according to the International Diamond Exchange, an online stone exchange for jewelers that also provides industry research.
Now, thanks to "wedding season," business has picked up slightly, Gandola says, though it's still down from previous years. "People are not buying 'just because' anymore."
Diamond sellers, in particular, are caught between a rock and a hard place. The recession has put a severe damper on demand, but retailers can't offer significant discounts without drastically cutting into their margins, because of recent actions to keep diamond prices artificially high.
"If you get a deal, it is not coming from De Beers -- it's coming from the vendor," says Norman, a seller at Blauweiss/Berkowitz jewelers, declining to give his last name.
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De Beers has been rapidly shuttering mines, cutting production by more than 90%. Alrosa, meanwhile, has begun stockpiling diamonds, declining to sell a single stone since December, according to a New York Times article this month.
"The recent recovery in rough diamond prices may be presenting an illusion that there has been a significant recovery in demand for diamond jewelry," says Des Kilalea, an industry analyst at RBC Capital Markets. "In fact, most retailers report quite the opposite."
Many diamond retailers have already sliced their profit margins. Traditionally, jewelers sell diamonds for 49% more than the wholesale cost, according to Harry Winston Diamond and the International Diamond Exchange. But competition from online retailers such as Blue Nile (NILE, news, msgs) and Amazon.com (AMZN, news, msgs), which sell diamonds at a markup below 25%, has made it more difficult to continue charging such high prices.
"Buyers now do a lot of investigation," says Norman, of Blauweiss/Berkowitz. "They know the price from Blue Nile."
Unable to reduce prices further, many jewelers are watching shoppers pass them by and struggling to stay in business.
Blauweiss/Berkowitz has been around for nearly 100 years and isn't going anywhere, Norman says. But more than 30 jewelers nationwide declared bankruptcy in the first half of this year, according to the Jewelers Board of Trade, an industry research and marketing group.
Despite making business more difficult now, some jewelers are positive about recent actions by De Beers and Alrosa. After all, diamonds are appealing, in part, because their worth is supposed to be relatively stable. A fire sale in the short run -- though it could help jewelers increase sales -- could seriously dampen the jewels' future appeal.
"It's a good thing if buyers see a stable market," says Josef Millman of Millman Diamond. "They will want to buy more."
Excluding recent events, the price of diamonds has remained relatively stable for the past five years, according to IDEX, a diamond exchange for jewelers that tracks prices.
To further this view, De Beers has started promoting diamonds as investments. The Financial Times reported this month that the company had launched a global advertising campaign to attract investors who are concerned that inflation could erode the value of their money and are seeking a stable alternative to holding cash.
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The experience of many diamond owners who look to sell their jewels also is unlikely to win over investors. Typically, sellers get much less than the amount on the jewels' appraisal certificates, say jewelers.
Recently, however, it has become slightly easier to sell diamonds. A year-old Web site, I Do Now I Don't, is dedicated to giving diamond owners a way to sell their unwanted jewelry from failed relationships. Jewelers also buy diamonds, though they may want just the stone and not the setting. Sellers and buyers are also finding eBay to be a good secondary market.
"It's good that buyers know diamonds don't spoil," Millman says. "They retain their value."
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