Branding and the diamond industry

I’m sure it has happened to practically everyone: you’re at an airport, yet another flight, and no book to read . . . panic. The terminal did not have a particularly good bookshop and, as time ran out, my eye caught a softcover volume titled No Logo by a Naomi Klein.

It’s certainly not the sort of book I would normally read; it seemed to be about brands, but with all the talk about brands in our industry [diamonds], I thought I would be self-righteous and read it. Truth is I am not that sure I really know what a brand is.

On to the plane, and the person sitting next to me had a copy of Vogue and Tatler. She kindly let me flick through them once I had read all the newspapers I could lay my hands on. I have to confess I was not desperately looking forward to No Logo.

I realize we are in the Christmas season, but even so, the number of ads in both magazines caught my eye as I flicked through nonchalantly. It is quite remarkable just how many “brands” use diamonds in their advertising. Virtually every page seemed to be merrily twinkling away.

De Beers’ Supplier of Choice program is most definitely having an impact, as it pushes its “reluctant” participants into spending fortunes on advertising at a time when margins are being eaten up by the constantly spiralling cost of “rough” with no commensurate increase in polished prices. (Editor’s note: The Supplier of Choice program is designed to increase the demand for diamond jewelry and make the diamond distribution system more efficient. It proposes that clients, or “sightholders,” develop a direct “pipeline” to distribute the diamonds.)

Gareth Penny, the driving force behind Supplier of Choice, is confident this season will make a sufficient dent in the stock of polished, and bring the whole rough/polish demand-supply scenario into equilibrium.

A strong season and a weak dollar augur well indeed, especially against a backdrop of no stocks in rough or polished (we hope). Even the market acknowledges that there are no outstanding rough stocks, though it has taken a remarkably long time for the industry to acknowledge as much. It was painfully obvious that this was the situation two years ago. But no, the industry just could not accept that De Beers did not have huge hidden reserves of rough. The peak of the stockpile in 1998, at US$5 billion, was talked up to US$13 billion or US$15 billion — absurd numbers. Regarding polished stock, it is going to be interesting to see if it really has taken a hit in the current problem areas.

What seems to be passing by unnoticed is how shortages in specific articles are spreading. Even the market accepts that there is a shortage of better-colour larger sizes, but this is creeping down the colour range.

As the boom is orchestrated and promotion continues, I find myself wondering how the resultant increase in demand is going to be met. In the short term (a few years or so), it can only prove positive. But conceivably, this could become just as serious for the industry as when it laboured under a huge rough overhang.

Prices are inevitably going to go up. Good news, yes . . . but is it such good news if prices are driven up too fast and are too removed from a reasonable correlation with gross domestic product growth? Are we witnessing the engineering of a boom-and-bust scenario?

De Beers has had at least four price increases this year, and everyone is talking about another increase in January 2004. If the season matches expectations, it would seem to be inevitable, like the increase in polished prices over an ever-increasing range of goods.

At the same time, we have the increasing threat of “cultured” diamonds.

Personally, I do not see why such diamonds should be a threat. If handled judiciously, there is no reason why these cannot result in the creation of another market, or in the “cannibalization” of such products as cubic zirconium.

Not that any fiancs would want to be offered a cheaper version of the real thing for their ring; they might take offense.

Vogue demonstrates the degree to which diamonds are being used to support fashion brands. De Beers’ own venture with the French luxury goods group LVMH showed that it wanted to generate excitement by being different, more fashionable, more trendy, more relaxed.

To all anecdotal accounts, this approach has not been outrageously successful. The essence of fashion is that it changes. A diamond may be forever, but no fashion is. Moving diamonds away from a sense of permanence could certainly increase consumer volatility.

Price may also come into the equation. As the price of natural is forced up and up, cheaper alternatives, such as cultured diamonds, could become more attractive.

It is difficult to see this happening in engagement rings, but what about diamonds in a leather strap? What is going to happen to diamond content in jewelry — a, if not the, key factor for long-term health?

The creation of jewelry brands will put huge pressure on the diamond content. Currently, the polished wholesale value of the diamonds accounts for about 25% of the total retail market. De Beers’ advertising has been paid for out of the rough cost. The new incremental advertising that Supplier of Choice demands will almost certainly have to come from the diamond content.

Also, the diamond content will further be reduced by the fact that jewelry has a much higher design element. A simple band with a diamond attached to it will not do. If these effects cause average diamond content to drop to 20%, the advertising will need to add 25% to retail sales just for the trade to stand still.

Also, it is questionable whether the new advertising will be sending out the right message. De Beers’ advertising was designed to send out the message: “buy more diamonds.” The message that the advertising agencies are now being asked to promote is more along the lines of: “come to my store, not his.”

Advertising agencies have always claimed that cigarette advertising does not increase the overall market; it just makes people swap brands. Has anyone seen an advertisement that would make someone buy a diamond who otherwise wouldn’t, or spend more than he otherwise would have?

It was while some of these ideas were percolating that I started to peruse No Logo.

It is an angry book, but exceptionally well-argued. As with all good arguments, it is not necessary to accept all the points that are raised. But as a diatribe against globalization and the impact of branding, it is powerful, and although I do not agree with much of what Klein says, I found myself agreeing with an uncomfortably significant number of points. One of these is that “brand essence” revolves around confirming a feeling. A brand creates emotional ties as it forces a move away from the corporeal world of commodities.

The added value is effectively generated by advertising. For such brands as Nike and Gap, the value has come in a phenomenal increase in advertising and, at the same time, a slashing in other costs — in particular, manufacturing costs.

The middle, producing segment of the final equation of bottom-line profit has been squeezed beyond the pipes going dry. As the author states, the more advertising that is out there, the more the brands must spend in order to stand out. In other words, brands need continuous and constantly increasing investment in marketing to stay afloat. This would seem to suggest that careful thought is required by the diamond industry as it moves ahead.

Diamonds differ from the fashion trade in that the cost of the raw material represents a significant part of the cost of the finished product. It is unlikely you will be able to produce diamond rings for a couple of dollars to be sold for US$125, which apparently is the case with some of Nike’s trainers. If this does become possible, it would imply that the Supplier of Choice strategy has become self-defeating.

Even more worrisome is the issue of supply. Creating diamond brands is hugely expensive and time-consuming. It is inordinately risky to go into this process without the comfort of knowing that supply is reasonably certain. But this is not the case. De Beers has no stock; it only gives a commitment for six months. As the rand increases in value against the U.S. dollar, De Beers is having real problems even with its own production. The development of the Premier mine, near Pretoria, South Africa, has been postponed as a result of rising costs and the possible introduction of an 8% royalty.

In its pricing policy in 2003, De Beers has clearly shown that the immediate interests of its shareholders take precedence over its customers’ drive to create brands, despite the fact that the company is forcing them to do that, so that they, in turn, can increase prices.

Somehow it does not seem to make sense. Having read Klein’s book, I think I understand brands better. But the orientation toward brands by De Beers only confuses me.

I agree with what Gabby Tolkowsky said: “Diamonds are a brand.” Diamonds are a commodity, a special commodity — in fact, a range of commodities — and jewelry has emotional ties, which is the essence of a brand.

The Diamond Trading Company (De Beers’ rough-diamond sales arm) is concerned that commodities are more vulnerable to changes in the market, and, with nothing different on offer to attract the consumer, they become defenceless within the heavily branded and highly competitive luxury-goods sector. I believe this shows a remarkable lack of confidence in the core emotional appeal of diamonds, which has protected them so well at a time when all other luxury goods have nosedived.

To sum up, creating brands does not stop diamonds from being a commodity, as clearly stated brands have little to do with the actual product and more to do with emotional ties.

— The author is a former director of De Beers’ Central Selling Organisation. In 1995, he co-founded WWW International Diamond Consultants, and currently serves as a director of Diamonds International Canada (DICAN), a joint venture between the Aboriginal Diamond Group and WWW International. More information is available at WWW International’s web site, www.polishedprices.com, which includes news, commentary, and up-to-date prices based on transactions.