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DAVID LAZARUS CONSUMER CONFIDENTIAL

Diamond rebates deflect attention off of trade issues

January 27, 2008|DAVID LAZARUS

Zak Smith's bling may soon make him sing. And you too might be humming a happy tune if you've bought any diamond jewelry since 1994.

I encountered Smith, 22, at one of the numerous shops that are in downtown L.A.'s jewelry district, several blocks of brightly lighted emporiums with cases full of glittering gold, silver and fancy stones of all types.

I wanted to see what people had to say about a recent announcement that De Beers, the international diamond behemoth, has settled a class-action lawsuit alleging that the company monopolized diamond supplies and fixed prices.

As part of the settlement, De Beers agreed to spend $295 million on rebates of up to 30% to all consumers who purchased diamonds from 1994 to 2006 -- whether or not they were bought directly from De Beers.

That's not a devastating financial hit for the company, which earned $324 million on sales of $3.4 billion in the first half of 2007 alone. But it's potentially a very sweet deal for Smith, who, by his own admission, buys a lot of diamonds.

I met him as he was picking up the latest additions to his collection: a diamond-encrusted, white-gold Jesus hanging from a white-gold chain ($15,000), and a matching diamond-encrusted, white-gold bracelet ($25,000).

The ensemble was nicely set off by his purple basketball jersey.

Smith said the jewelry represented a small portion of his income, which he said came primarily from real estate transactions.

I told him about the De Beers settlement and asked if that was something he'd be interested in pursuing. He seemed very interested.

I also asked Smith if he knew where his diamonds originated. The issue, of course, is that many such stones -- dubbed "blood diamonds" -- come from conflict zones and end up funding civil wars and similar nastiness.

Smith shrugged. "The only thing that matters to me is the quality," he said.

I heard similar expressions of indifference from other people I met at various stores.

"I don't think consumers have that much interest in it," said Jim Tomchak, 46, who was dropping off some of his wife's diamonds for cleaning.

That's where De Beers is the real winner.

"They've succeeded in taking a commodity that's the perfect currency for warlords and making it reflect values like love and purity and timelessness," said Barak Richman, an associate law professor at Duke University who focuses on the diamond industry.

Marketers have hailed De Beers' ad campaigns as a triumph of establishing in consumers' minds the notion that diamonds have an emotional value that transcends all other commodities.

The slogan "A diamond is forever," created by De Beers' ad agency in 1947, was named by Advertising Age magazine the best ad slogan of the 20th century. Among other things, it discouraged creation of a secondary market for diamonds by planting the idea among women that it's wrong to wear another woman's rocks.

The company also established what's known as the "two months salary" rule, by which Romeos can calculate the appropriate sum (at least in De Beers' eyes) to spend on engagement rings for their Juliets.

De Beers controls about 40% of the world's diamond trade. The company reportedly stockpiles billions of dollars' worth of stones to keep prices at artificially sky-high levels.

"They manipulate diamond supplies so they charge monopoly prices," Richman said.

In 2004, De Beers pleaded guilty to conspiring to fix diamond prices in the United States and agreed to pay a $10-million fine. Conclusion of the decade-long federal case allowed the company to resume direct operations in this country after an absence of nearly 50 years.

This month's settlement followed a separate class-action lawsuit that sought compensation for people who may have been overcharged buying De Beers diamonds.

"Nothing is more important to De Beers than consumers' confidence in diamonds," said company spokeswoman Lynette Gould. "Consequently, while we don't accept the allegations, we took the step to settle and put all outstanding legal matters behind us.

"Putting this matter behind us enables us also to focus on building De Beers' future and build and maintain our reputation as a leader in the luxury goods sector," she added.

The $295-million settlement is available to anyone who purchased rough diamonds or finished diamond jewelry from January 1994 to March 2006. To qualify, you'll need a receipt or other proof of purchase.

The catch is that the more people who apply for a piece of the settlement pie, the smaller the amount individual claimants will receive. You have until May 19 to file a claim.

More information on the settlement is available at diamondsclassaction.com.

As for blood diamonds, efforts have been underway among governments and the diamond industry since 2000 to curtail the trade of gems from war zones. It is known as the Kimberley Process and is credited with making a big dent in the number of blood diamonds that reach display cases.

But many such diamonds still get through, often masquerading as stones from conflict-free areas.

After Smith departed the jewelry store with his $40,000 in bling, I chatted for a bit with Smith's jeweler, Mike Kay, who said he had also designed pieces for rapper Snoop Dogg and reggae artist Sean Paul.

The jeweler told me that he avoided blood diamonds by buying his stones from Canada. I asked how he could be sure that the diamonds were indeed Canadian.

"For all we know," Kay replied, "we could be eating horse meat at McDonald's. You have to trust what you're getting."

Or cut back on the Big Macs.

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Consumer Confidential runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.

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