Alex Twersky, President of Finesse Diamonds On Namibian Diamond Benefication: A Fairjewelry.org Interview

Introduction:

Alex Twersky is President of Finesse Diamond Company, a DTC DeBeers Sightholder, has been in the forefront of ethically sourced diamonds with their Namibian Kalahari Diamond sourcing. Ninety percent of Finesse’s diamonds are cut in Namibia—including rough from other parts of the world which they export to Namibia.

Finesse’s visionary operations represent a real skill transfer program. They pay living wages in an African country where good jobs are hard to find. Yet in context to the global diamond business, which is cut throat competitive, Namibian beneficiation was risky and very expensive—even more so in today’s economy which is more price driven than ever.

In this interview, which I conducted in September and October of this year, Alex talks candidly about a wide range of issues, including the challenge of conducting exemplary business practices while still having to compete.

~ Marc Choyt, Publisher

Marc: What are you thinking about these days in terms of your business?

Alex: There’s the traditional model of selling to retailers versus boutique players. When considering the bigger players, or regional players, their business models are going to have to change because they can’t be sustained.

Marc: Talking about the change of business models, you mean the jewelry sector as a whole, both boutique and bigger players?

Alex: Yes, the retail model has developed with the same unchecked growth of other nonessential retail industries connected to rapid expansion of economy, like real estate. People are always going to buy diamonds. But the demand for larger and larger pieces was related to the real estate bubble.

(Determining the best cut for a raw diamond)

The current retail model and to a large extent, those customers, were a product of a bubble that has burst. So all that overbuilding, money spent on developing retail infrastructure to service this nouveau riche—they are gone.

We are not heading back to a few years ago. The big chains are going to go bankrupt or they are going to scale back. Retail space will contract. It has already happened to some degree. We have been waiting for the consumer to bail us out and spend our way out of the dumps and that’s not happening.

Marc: Is your Namibia diamond gaining traction in this environment?

Alex: There’s a defined subset of consumer. They seek your company and others like you, but they a very small minority in the overall sector. People who are within the ethical consumerism space overestimate the selling point of social responsibility in terms of diamonds.

We are in a complex environment and I want to do things differently, working with people who are more boutique players and finding new, out of the box, ways of selling diamonds, that are more novel, including using the internet more and other media and exploring interesting new retail concepts. I’m trying to innovate. Unless we do that, we won’t survive.

(Polishing a stone after the initial cuts)

Marc: What examples of new models are you seeing?

Alex: People are much more value conscious and more relationship oriented. They are expecting relationship, transparency and value.

Marc: Examples?

Alex: Blue Nile is very successful in creating a client relationship because they offer value and they offer transparency.

Marc: But not the transparency that I would demand in terms of ethical sourcing.

Alex: True, but their whole notion of transparency on the product level is a relatively new thing in the diamond business. It allows the customer to say, “I get what these guys are doing, I feel comfortable, not being taken advantage of in this transaction.” If people feel that then they are more inclined to buy from you.

There’s nothing unclear about their diamonds and where they are coming from. They are giving the customers what they want. But it is not a personalized sale. Unlike the independent jeweler, they don’t have that.

Marc: They’re very competitive with their prices.

Alex: Price is a major factor—but how people relate to the product you’re selling is also critical. In the case of diamonds, people want a better sense of what that sale represents. The sales person must have a deeper command of the product.

Marc: One issue few talk about is the variation of the labs in context to online sales, particular between, for example, EGL vs. GIA.

Alex: There are different standards in different labs. GIA is fairly strict and that reputation is well earned. In terms of balance, I think that consumers are still aware that GIA is a premium cert. I’m not seeing a major backlash among consumers comparing certs, but they are aware there’s a difference. Some just don’t care.

Marc: Blue Nile has almost has become a default Rapaport for retail—they’re setting a baseline for online retail diamond prices.

Alex: That’s a good analogy. But the real issue for us is, how do we move forward in this different climate, coming up with ways to make that relationship. The people who will succeed are those who are aware of the changing dynamics of the market. They will adapt to it, connecting to the customers on a much more essential level.

(Charting the diamonds attributes after cutting)

Marc: So you don’t think that transparency as a trend in ethical sourcing is a factor right now?

Alex: It is early. Very early. Whether the concept we’re talking about in terms of ethical sourcing takes off depends upon a lot of factors that are out of our control.

Marc: I’ve realized with my own designer jewelry company that it is enough for a piece to simply be cleanly sourced. For example, to sell a “conflict free” Namibian diamond in an engagement ring made from recycled gold, the ring must be very well executed, beautifully designed and well priced. It has to compete with every other product that doesn’t have extra value of humanitarian and environmental responsibility.

Alex: At the end of the day, the sourcing issue, such as our Namibian beneficiation project, is a deal sealer and not a deal maker. These days, with so few people taking on new product, it is a much harder sell.

Marc: The problem, it seems to me, is that the customer has been educated for decades now not to connect sourcing in jewelry, with the finished product. We have this kind of ingrained disconnection.

Alex: Right

Marc: It is going to change. In my thinking, it is a matter of education, which is the function of fairjewelry.org. I can’t imagine that in 5 to 10 years – it won’t be strong.

Alex: But in the meantime, we need to sell diamonds and we have to be competitive with everyone else even though our production costs are higher.

Marc: Competing with all the other companies who are not tied to creating beneficiation projects?

Alex: Right now, it is difficult to be competitive because of multiple dynamics. In India, for example, diamond dealers are getting government support from banks that want to feed their factories. This is driving up the cost of rough, keeping the prices high. Though DeBeers has kept pricing stable in some categories, the current market trends might have the makings of another bubble.

At the moment, price action in polished diamonds shows downward pressure. You’re entering into a situation where there is a disparity between raw and finished goods pricing. It cuts into our already thin margins and makes it harder to make a living.

Marc: This makes it more difficult with your Namibia project.

Alex: With the Kalahari diamond, we have the ability to offer our clients extra value. At this point, the consumer and retailer are on their own. They either get it or they don’t. We don’t have the manpower to educate them on the market. It is going to be a slow drift. It takes that level of commitment to understand how to position diamond brands as differentiators in this new economy.

(Polishing another diamond’s facets)

Marc: But it also takes someone awake.

Alex: Many retailers equate selling diamonds like tying a shoe or flipping burgers. It is not reasonable for us to expect the entire market to change.

Marc: But it is changing. Look at how successful Hoover and Strong has been with their introduction of recycled metals. Last I heard, they’re backed up almost two months in production right now producing recycled rings for department stores. Few could see how fast things would change I first spoke to Torry Hoover about it a few years ago at the Madison Dialog in DC.

Alex: I want to be right. I would be the first person to say that the beneficiation we and others are doing in Namibia and Botswana is working.

Marc: The big question that we’ve been circling around gets to this—the cost of doing business right, and by right I mean, with concern for human rights, the environment,  future generations, is more expensive, not just in our industry, but in almost all businesses—because true costs, human costs, environmental costs, are hidden from the consumer.  Yet, we have to still compete with those who are producing as cheap as possible.

Alex: I have been preaching this ethical sourcing thing and I want to say that the market is agreeing with me! Look at all the people lined up to buy! But it is not the case. The consumer is focused on surviving, in getting the best price. Ethical sourcing is a bonus.

Marc: The commoditization chain is set up this way. It is like a catch 22—doing things right costs more money. Still, at this point, there is little market support for doing things right, or the recognition of the effort involved.

Alex: This is the reality. Doing good is more expensive. To support that, consumers need to pay more, but they don’t want to pay more. The ethical trend will catch on, but growth will be limited. It might remain longer in the embryonic stage than it would if the economy was better and people were freer with their cash.

Most people just don’t care. They want a reasonably priced stone. But then again, we’re not selling to most people. Our goal is to make a relationship with that subset who cares more. That is the hard part in this environment, to balance new initiatives and sales.

Marc: This gets back to what I have been wanting to discuss with you for months now—that is, the process of bringing beneficiation to Namibia. You had to train all these people, bring in equipment—a huge task.

Alex: It was a complex process, very costly to do it.

Marc: Isn’t there savings from going into a developing country for your polishing?

Alex: The cost of manufacturing in these countries is high. It is also expensive because the source diamonds are not as competitively priced as they would be if you were buying them elsewhere. We pay top dollar for diamonds and top dollar for manufacturing.

Marc: There’s no savings on the ground?

Alex: No, it is higher than if we did the polishing in established centers. You have to train people from the ground up. Mistakes are made that are cut into thin margins. You need strict oversight and good, expensive people monitoring the operation. You are flying those expensive expats to Africa, offering housing, paying them, feeding them and you could buy the same goods that will come out of the factory on the open market already certified and cheaper with much less risk.

Just going from A-Z, waiting for 2 to 3 months before a stone hits the market you can lose margin. Sometimes it is more expensive to manufacture there than to buy goods on the open market.

Marc: Yet you still have to be competitive with other goods.

Alex: Yes, because most people don’t care. A jeweler will say to a customer, of course it is Kimberley Certified, and the customer will take it. They don’t stand around and grill the jeweler. They are not going to ask about how the diamonds were polished in some factory.

If people were willing to pay more—you could recoup the cost associated with doing things right, but instead, you are searching for a rare bird in a big jungle. It is not cost effective to find that bird one at a time—you want to find that bird in clusters. You need to find many of that customer which is not easy. If the Kalahari diamond costs 10% more to be ethical—would you be able to be able sustain selling it against other diamonds?

Marc: Maybe 10% to 15%.

Alex: We have to sell our Kalahari diamonds at a very competitive price. You’ll find it is very competitive. Otherwise there’s no way we can sell them.

Marc: What essentially have your learned from all this? I’m interested in the cutting edge of your thinking.

Alex: The biggest thing to be aware of is it is going to take a lot longer than you think it will, even if you have the best people working on it, to make beneficiation work. There are so many obstacles—to manage it and oversee production in a place with no history of it—it keeps the operation not as competitive globally and that takes a lot time.

Still, that’s where the future is, and in some ways, it will create more balance and equity of wealth distribution in Africa, which has contributed much to our diamond industry.

Marc: Would you do it again?

Alex: I would call the experience of beneficiation in Namibia fraught with challenge, but not a mistake.

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