On the Disputed Pink Diamond Purchase at Wal-Mart

The Wall Street Journal reported on what appears to be a partial rebuttal by Wal-Mart of charges made by Julie Roehm, its deposed marketing executive.

A quick recap: Roehm was ousted last December. She sued for breach of contract and unfair dismissal. Wal-Mart counterclaimed, asserting that she had had an affair with a subordinate, taken gifts from suppliers in violation of company policy, and was seeking a job with an ad agency she hired. Roehm retorted, charging that other Wal-Mart execs had had affairs but were still employed, said that she had told vendors to bill the company for gifts, and that top management did not adhere strictly to its ethics policy. She focused on CEO Lee Scott, whose son has been employed by his close friend and Wal-Mart supplier Irwin Jacoba. Jacobs was also accused of selling Scott a large pink diamond and yachts at favorable prices.

The pink diamond may have been sighted. While it apparently wasn’t sold by a Jacobs entity, the transaction doesn’t pass the smell test. From the Wall Street Journal, “Wal-Mart Chief Bought Ring From Firm’s Vendor“:

Mr. Scott purchased the ring for his wife in April 2003 from The Aaron Group, a wholesale supplier of jewelry to Wal-Mart, said Robert Kempler, president of the New York-based company. Mr. Kempler declined to discuss the terms of the diamond sale other than to say Mr. Scott hadn’t received preferential pricing….

Mr. Kempler said he’d never heard of Mr. Jacobs, and he said everything about the transaction was “above board.” Mr. Jacobs called the allegations without any substance and has denied knowing anything about any diamond purchase by the Wal-Mart CEO….

Supplying a diamond ring for a chief executive’s wife would appear an unusual order for The Aaron Group, which on its Web site describes itself as a “maker of popular priced” jewelry. The company says its “target focus is the middle market consumer” with retail jewelry from $29.99 to $999. Among its retailing partners it says, are Wal-Mart and its Sam’s Club unit; JCPenney Co.; and Kohl’s Corp.

“Preferential” is in the eye of the beholder. How is one to judge a transaction that a company does that is well outside its ordinary line of business? I guarantee that if you or I called The Aaron Group a week before this story broke and asked them to find a large colored diamond, they’d laugh.

I happen to know people in “the trade,” as jewelry dealers in New York’s diamond district call themselves. If an ordinary retail person buys an ordinary diamond from a dealer, meaning a wholesaler, he is likely in this competitive day to charge only a “thin profit” of a 5% to 15% markup, provided he had an introduction and wasn’t high maintenance.. But if you were to buy that same diamond in a setting from a retailer, the markup on the stone would be at least two times, often three. And if it is a fancy stone (and colored diamonds are prized these days), it is much more likely to be found only at the tony retailers like Cartier, Van Cleef & Arpels, Harry Winston, or Tiffany, who most assuredly mark up three times.

Given that the stone was unusual, a dealer might have charged a higher markup even to a retail buyer who came in by referral. And if a custom setting was involved, he’d be even more likely to mark it up to a higher degree (fuss, going out to the right craftsman, etc.). And the dealers I know don’t cut breaks to wealthy people unless they have to (ie, they are clearly shopping and bargaining hard). So the facts argue that even a dealer would charge a reasonably full profit (close to two times) for this ring.

So I am just about certain that what Mr. Kempler is saying is completely misleading. First, the very fact that his company entered into this transaction is preferential treatment. As the Journal made clear, they aren’t in the business of selling fancy big diamonds. This was a special project, clearly an accommodation.

Second, since The Aaron Group doesn’t routinely sell this sort of ring, they could take the view that any price above their cost isn’t preferential. It’s even possible that they have done this before for friends of the company and actually have precedents.

But that still proves the point. This isn’t normal treatment, and there was value in this arrangement to Mr. Scott. Even if he paid a two times markup (unlikely), I guarantee you he didn’t pay three times. And consider the service he got: stones sent to him for his review, either shopping for an existing estate setting or designs for a new setting. This would have been a fair bit of work for the vendor to produce what was likely a Tiffany level product at a much lower than Tiffany price.

Scott is beginning to twist in the wind….