Martin Rapaport discusses global diamond demand with Stephen Lussier, executive director of De Beers and CEO of Forevermark.
: Why do people buy diamonds?
People buy diamonds for many reasons, but the most important is for their emotional symbolism. I’ve just come from watching focus groups of buyers of Forevermark diamonds in China and they talk very similarly to American brides. They see the diamond in their wedding or engagement ring as representing their aspirations and dreams for their life together. It’s emotionally symbolic. The symbolism gets underpinned by other important factors. The inherent beauty of the diamond — there is something magical about the way in which diamonds handle light — and the sense that the diamond has lasting value which underpins the product’s ability to symbolize important emotion between couples. If diamonds didn’t have those things it wouldn’t work as a symbol, but the underlying motivation is that it’s symbolic of the couple’s dreams and aspirations.
MR: So diamonds are an emotional store of value?
SL: I often talk about diamonds as an emotional store of value, but they are, in some ways, separate motivations. Diamonds symbolize love, hope, aspirations, the dreams that people have both to themselves and publicly. Consumers would struggle with that if diamonds weren’t also a product that is inherently valuable and a store of value. Those ideas help reinforce each other.
MR: Where are people buying diamonds?
SL: The past couple of years have been, and remain, a challenging time. While the industry is certainly in an improved position, it is far from fully recovered. Like many other industries, and particularly in America, it will take some years to see if consumers come back to the way it was before. Nonetheless, America remains the most important market retaining between 35 percent and 40 percent of world demand, compared to 50 percent a couple of years ago. The slack has been taken up by China and India, with Chinese consumers also buying overseas in Japan, Hong Kong, and increasingly in Europe. China and India now equally share close to 20 percent of world demand.
They’re not yet big enough to rival America, but they will be the main force driving increases in diamond demand in the decade ahead and probably by the end of this decade they will be collectively the same size as America with about a third of global demand. By the middle of this decade, almost all of the incremental new business growth will come from China and India.
MR: The diamond industry used to have only one selling season — Christmas. Now with Diwali in India and the Chinese New Year are we in a better situation?
SL: We’re seeing an extended season, with the importance of Chinese New Year which is generally the first quarter of the year, and with India and the Middle East holidays which tend to be in the fourth quarter, a bit earlier than Christmas. We have an extended season that goes through the whole fourth quarter and into much of the first quarter. Rather than a single focus that could make or break the global industry for the year, we now have three months that are of critical importance — November, December, January and sometimes into the beginning of February.
MR: Is there a significant difference in how India, China and the United States buy diamonds?
SL: The core motivations are the same. However, the importance of different motivational factors does vary by market and so the marketing will, at times, emphasize different points. If you look at China and India, they are quite different even though people talk about those two countries as being the most important emerging markets. The impact each one has on the diamond market and the way in which those markets work are quite different.
The best way to think about it is that China is really a mass-bridal market. It’s not restricted to the elite, or dominated by them. It’s a market with a broad spread. Today in Beijing and Shanghai, half the people that get married will get a diamond. Those figures are growing in a two-tier market. The people who buy into the diamond dream are diverse. They buy what we in the west would call engagement rings, solitaires on average 20 to 40 points, one stone per piece. Motivation is associated with marriage. There is a sense that the diamond is both a prestigious brand, something that speaks universally and has lasting value. They want to participate in that.
India is a market with a huge jewelry tradition that is very different from modern China. The vast majority of diamonds bought in India are design-oriented pieces using smaller diamonds. Such pieces have existed for hundreds and hundreds of years since the Maharajas. There’s a very powerful elite market in India that has bought for years and continues to buy significant volumes of diamonds, but it’s a very narrow market. Then you have the emerging Indian market — people buying relatively small decorative adornment oriented pieces of jewelry. There is less emotion in the purchase process in India than in the U.S. and China. You’ve got a stronger sense of modernity, fashionability, elegance — factors that are more of a woman ‘self-purchase-type’ market, than in the west. While the basic motivations and beliefs about diamonds are often similar from market to market, those beliefs that motivate purchases will vary in intensity. That’s why you have to think about each country individually in tailoring any marketing program.
MR: How are people buying diamonds? Is that changing too? Retail stores versus internet versus auctions?
SL: On the whole, most people are buying very similarly to the way they always have. Retail jewelers in most parts of the world remain the dominant distributors and with the exception of China and the U.S., they still tend to be independent operators with relatively few stores selling higher value products. In America, over a long period of time, there’s been a growing consolidation of chain stores and in China you see some very big chain operators driving market development. The internet is the fastest growing segment of the diamond business, but it started from a very low base. There are clearly customer segments that value buying through the internet, but the vast majority of diamond buyers seem to want a different experience and we see that commonly in each country.
The more interesting question is: In what ways can the industry improve the overall buying experience and their economics? How can we use inventory management and grasp opportunities that technology will present and feature? Technology is likely to create a change in the buying experience, if not the distribution channel. It certainly will affect the winners and losers in the retail sector going forward.
Our industry has not been the fastest to grasp the benefits of technology. Whether it is in China, Japan or the U.S., when we look at the emerging generations, the digital world is the world in which they live. As an industry we can either take them with us, or lose them, based on our ability to use those digital tools to market and to create an experience, in which these customers feel not just comfortable, but excited. There’s a huge opportunity, but it takes a lot of creative thought and we’re just on the verge of finding those things that we can adapt for our industry.
MR: How are diamond prices doing today? Are diamond prices an important factor in the purchasing decision?
SL: In the short-term, prices can often be driven by people’s confidence in what’s going to happen in the few months. When one takes a long-term view — which is really the most important one — diamonds benefit from being a store of value and generally an appreciating asset. That’s part of what makes consumers comfortable, not only in buying diamonds, but also in making them comfortable seeing diamonds as important emotional symbols. It’s an important part of diamonds’ past success.
When I consider the medium and long-term supply-demand fundamentals, I see a future where diamonds continue to appreciate in value. Demand opportunities in places like India and China are substantial, and assuming that we’re able to maintain the diamond dream in our existing markets — those additional markets will add significant incremental demand to global demand. When we look at supply in the long term, it’s hard to see how that could grow in the same way it did during the past 30 years. It’s likely that demand will be greater than supply and it’s likely to lead to an appreciating value for diamonds. That’s good for the product and that’s part of its appeal and attraction for consumers.
MR: How about the short-term impact of prices? Are diamonds a conspicuous consumption article where higher prices increase demand, or are they price sensitive where higher prices decrease demand? What is the relationship between prices and demand?
SL: I think one needs to be careful when talking about diamonds as a single product. Depending on the size and value of the individual diamond, as well as the market and type of jewelry product, you can have different answers to that question. If you take a key product category, like engagement rings, I don’t think that you would see volumes go up if prices came down. I think that the size of the engagement ring market is dependent on those who believe in the tradition. There are plenty of price points for buyers to comfortably afford a ring and that along with the appreciating value aspect of diamonds is an important motivation that helps consumers decide to make the purchase. So in the engagement ring market, I would say that as long as the rings are desirable and affordable, a price which increases gradually over time would not reduce demand.
If you look at the very high-end of the market the story is similar. People are more interested in buying into a rising market than a falling market. If you were looking at jewelry, which is used for adornment, self purchase, something pretty for my hand, then obviously the price point and perceived value becomes much more important. A look that provides a lot of sparkle for your dollars generates more volume.
If we look at the historical development of the Indian cutting center and the creation of a significant volume of new demand for low priced diamonds, we can certainly make the case that that the availability of lower price category diamond jewelry has significantly expanded the overall size of the diamond market.
MR: So Laurence Graff is not Walmart. There are many different types of diamond markets with different price sensitivities.
SL: That’s absolutely right. Even within categories some products will be more price sensitive and others will be extremely insensitive to price. It’s a very fragmented market in that way and different retailers targeting different consumers with different product types have to decide their own product positioning.
MR: Are there sectors where higher prices boost demand because of investment potential?
SL: Yes. We certainly see that in the art market. Obviously there comes a point when people are concerned about a bubble and then they don’t buy. That’s when prices drop again. But you’ll certainly see in the art and real estate markets that people buy when they think there’s an opportunity for price appreciation; people like buying on the way up, not the way down.
MR: So are diamonds an investment?
SL: I don’t think that diamonds are purchased, on the whole, as an investment. The reason I say this is because generally people don’t buy diamonds with the idea that they’re going to sell them. People buy diamonds with the idea that they will own them for a lifetime, and that’s why the concept of store of value, or appreciating value, is a better descriptor of most consumers’ perception.
For a relatively narrow range at the very high end, investment may be a very important part of the process. If you’re buying a very expensive diamond you want to think you’ve made a good purchase and if you think the price is going to be lower in a month, you may put off the purchase. It is what we saw in the downturn in 2009. There were certainly quite a number of high-end consumers who still had plenty of money available to buy diamonds, but they felt that they might get a better deal in six months. Once the market turns around they think maybe now’s a good time to buy because they think diamonds will cost more in six months.
MR: So are diamonds a commodity?
SL: I think as an industry, we certainly risk creating the perception that they are a commodity when in fact they are not. One has to be careful about what sort of diamonds you’re talking about. I’ve just come from listening to Chinese customers talk about why they’re buying Forevermark diamonds and our consumer research tells us these consumers certainly do not think that a diamond is a commodity. Our consumers don’t think like that, because they don’t want to think about diamonds in that way.
Consumers want uniqueness. The concept of a diamond as unique — that there is one diamond that is right for them — is extraordinarily emotionally powerful. I heard that over and over from different consumers. Why do they want the Forevermark diamond and why do they choose it? It was a sense of this is a diamond that is unique; consumers are unique and they want to find that match, the one diamond that is special for them.
Sometimes our industry works hard to make consumers think that diamonds are an investment, but that’s not what they want. The challenge for our industry is to find the selling tools and the creative ideas that actually sell consumers what they want, rather than what we want. If you’re an expert in the industry, you know that just because the Gemological Institute of America (GIA) grading report says a diamond is a certain color and clarity, you need to know a lot more about the diamond before you decide what you’re going to pay for it. So why should we treat consumers any differently? Each diamond is unique, it has its own value, and we should market them that way.
MR: De Beers recently talked about a diamond Exchange Traded Fund (ETF). Is there a shift in De Beers’ attitude towards investment diamonds?
SL: There probably has been some shift but we wouldn’t want to exaggerate it. We have had a number of people bring ideas to us and we can see opportunities and benefits for the overall diamond business if done on a scale that is very, very small relative to the jewelry business. I think there are significant risks with any investment business being of a scale that would drive investment demand separate from the underlying fundamental consumer demand.
On some scale we know investors are interested in holding hard assets to a greater degree than they were before. It gives them a sense of longer-term security and if it helps to emphasize the lasting and inherent value of diamonds in the consumers’ mind, then that could be a good thing for demand, particularly demand in the Indian and Asian markets.
So while there are some potential benefits it is still a complex area. There are significant challenges over both valuation and liquidity that would need to be resolved and it needs to be kept in perspective. It would not be useful if it were to drive prices separate from the demand for diamonds from consumers, which is what our industry depends upon.
MR: How is Forevermark doing?
SL: It is doing well. We started in the East with a focus on China because we think that getting into that market of the future early on is a good idea. We are making very good progress with over 150 retailers now distributing Forevermark diamonds in China alone, and a total of 294 doors across Asia. By the end of 2010 Forevermark will also be available in Singapore, selected islands in the Caribbean, Mexico and India. We are particularly pleased with both the trade and the consumer reaction in the Far East.
One of the principle benefits of Forevermark, when we think about the western world, is its ability to play effectively in what we think is going to be a growing market where supply chain issues and the provenance of products will be of greater importance. Asian consumers, however, for the moment are still very focused on the quality control process and the quality of the diamonds they buy. Over the longer term though, I think consumers’ interest in ethical issues will continue to grow and I think commercial solutions offered by companies like De Beers, that give consumers further assurances, may well provide a better long-term solution.
Forevermark offers consumers a promise that the diamond they have purchased has been handled by experts at every stage of its journey and adheres to the highest standards of quality and integrity.
MR: How great are Forevermark sales?
SL: Our retail partners are selling about 70,000 stones with revenue between $100 million and $150 million a year. It’s early days and it has the potential to be five to ten times that in the future.
MR: How about generic diamonds? Is the diamond industry losing market share?
SL: It depends on each market, but if I had to step back and look at it the whole picture I certainly don’t think we’re gaining and we may have lost some market share over the past couple of years. That’s not surprising given the luxury nature of our product and the current economic environment. I am concerned that when we look at Generation Y in America, or the increasingly competitive landscape in China, powerful new global competitors to diamonds are expanding at rapid rates. We need to find new ways to make sure that we’re competitive.
I am concerned about our industry’s focus on doing the things necessary to keep new generations of consumers buying diamonds. We can’t take demand for granted. Just because the parents bought diamonds does not mean their children will. From a marketing perspective the diamond world is in transition; we can no longer rely entirely on De Beers to bring in each new generation of consumers.
In some ways we have an advantage using the digital space as a marketing tool. Diamonds are not generally a frequent purchase, they are a considered purchase. Consumers do research before they buy and that gives us a lot of opportunities to use the digital-marketing space to effectively recruit new generations of buyers. I think that’s where the Forevermark brand is going to be focused, and it’s where I’d urge others in the industry to do the same. If we can play a role to help inspire retailers in that area and help them with their marketing programs then that would be a good and efficient use of our marketing resources in the future.
MR: Who are our competitors?
SL: There’s no doubt that holiday and travel is one of our biggest competitors. They compete in the same emotive space as diamonds. Short-haul emotional breaks directly compete at similar price points to diamonds. So travel is one competitor, but we haven’t lost market share against it.
A second, and perhaps more important area of competition in the Asian markets, are the luxury goods competitors — the Louis Vuittons and Guccis of the world. We see greater women’s self purchase in Asia. In a place like Hong Kong where products are more likely to be for adornment, the option of whether to buy a Louis Vuitton bag or diamond-designed earrings are in the same consideration step. And that’s my concern about Asia because the luxury goods marketers are powering into those segments.
The third area of competition, which is less direct — but yet of significant concern at the retail level — is technology. If you walk around the shopping malls and look at where the young people are, you will find them at the Apple store. Generation Y is fascinated by technology, and that industry is very good at creating new things that they want to buy each year.
Someone wouldn’t directly question whether they should buy an iPad or a diamond, because the motivations are different. The reality is that if you bought the iPad for Christmas, you’re probably not also going to buy a diamond that Christmas. In the young anniversary and Christmas gift segment where we sell diamond jewelry for between $500 and $1,500, we are competing head on with new technology products. In some ways technology products seem more exciting than ours, and that is a challenge.
The opportunity to consider is how we can use technology to make our diamond products more interesting. There are quite a lot of interesting developments in that space that I think will help us to make diamonds part of that world.
MR: Can you give us an example?
SL: I saw a very interesting thing that De Beers did in one of its stores in Japan. A Japanese department store was using 3D technology to showcase diamonds in its windows. Technology can make jewelry feel more exciting and create a better user experience.
I’ve recently seen iPad applications that allow you to try on diamonds and see yourself wearing diamond jewelry without having to stand at a showcase. Technology can also create more accessibility and more interactive engagement with consumers.
MR: How about generic advertising? Can the industry survive without De Beers’ generic advertising and their beacon product promotions?
SL: The industry can survive without generic advertising, but for us to have the sort of growth we want, we need our industry to be effective marketers. There are two major priorities that were historically achieved through generic advertising.
First, the challenge for the industry, is to make sure that we maintain the diamond dream — those broad emotional concepts and the symbols that apply to diamonds. We must make sure that each generation comes on board and buys into the diamond dream. That can’t just be taken for granted. As an industry we must find ways to develop marketing programs that communicate emotional platforms and that don’t just focus on “here’s my design and here’s the price.” We need to work to keep the diamond dream alive. We have to find the commercial tools that will allow us to do that.
The second priority is beacon or big-idea products. De Beers’ Forevermark program in the Far East is very much focused on how we take what we used to do generically and build it into a program that we can sustain financially — a program that benefits our participants, contributors and developers, but doesn’t allow those who don’t contribute to benefit. We’re looking for different business marketing models that will achieve the same end of driving large scale-product initiatives, but in a different business model. And we are having good success with our program in the Far East. So that is an encouraging sign.
Another important thing that our industry needs to do is deal with the ethical side of our business. While retailers may take some comfort that not many consumers are yet asking them penetrating questions about the ethical side of the business, there’s growing evidence that slowly over time that’s going to change. We will need to find ways to appeal to customers who will be very interested in ethical jewelry.
MR: Is De Beers basically abandoning generic advertising and saying we can’t do all this advertising for companies riding for free, we’re going to concentrate our dollars on our Forevermark products. Is De Beers generic advertising a thing of the past?
SL: I wouldn’t say it quite like that, because it’s not a thing of the past. We’re still funding similar activity such as the Everlon program in the U.S. It’s really about the definition of generic. One has to be realistic. We have a market share of somewhere around 35 percent. The old generic model does not make economic sense to De Beers in the long run. It does not mean we abandon category marketing activities overnight because that wouldn’t be sensible for us either, but we are looking at different marketing models that will allow us to achieve the same results collectively with those who come on board with us. Our challenge is to be commercially appealing to jewelry manufacturers, retailers, and all those in the pipeline who benefit from coming on board and helping to build business, for those who are in the club, rather than those who choose to be outside the club.
There are a number of different models. The Everlon model in the U.S. had greater contribution by those who participated. Those who contributed benefited and those who didn’t, didn’t. With models like Forevermark we can continue to support our clients and like-minded retailers to grow their diamond business with greater benefit to the distribution channels that participate. That’s the challenge for us. We haven’t got the final answers yet, but we’re working on it.
MR: So is it unrealistic for the industry to expect De Beers to continue generic advertising where there’s no direct benefit to the people paying for the advertising?
SL: Yes. I think the economics are different when one has a two-thirds market share or a 35 percent market share. There are areas where we’ll do things that we think are good for the diamond dream, because with about 35 percent market share we need a healthy diamond business. So we have an open mind about what makes sense for us. What we did historically is not going to be the solution for the future.
MR: Everlon is now in its second year. Will there be any new beacon products?
SL: Yes. We are working on a roughly two-year cycle for new products because from our prior experience year two is usually bigger than year one. It takes a while for consumers to translate their desire into action and as long as there is sufficient promotion and inventory, sales of those products tend to build over time. So we’re looking at a two-year cycle for new product development of big ideas.
The Everlon idea is interesting. It wasn’t as big as the three-stone ring because it didn’t have the same broad distribution. Everlon distribution was limited to those who contributed. But if you look at the contribution it made to sales last Christmas for the overall mix of retailers who had it on board, you’re getting into similar territory. While the overall industry impact was less, the impact to those who were part of the program was pretty good; that’s probably the model that you will see in the future. You will have to participate actively to get the benefit.
MR: So what’s the next beacon product, what can you tell us?
SL: I can tell you that we’ve got a number of good ideas and that they’re in research now. We’re always striving for a product idea that is more than a design, that has a symbolic reason for existence and that meets the timely needs of consumers. We’ve got ideas, we’ve got prototypes, and we’ll have to see how they do in research. It would be something that we would plan to launch to the world in the second or third quarter of next year.
MR: Are you still into this idea that women want one big present or has that idea faded away with the recession?
SL: I still think it’s important for diamonds to be the one big present. The thing about the recession is that people were cutting back everywhere. When they are cutting back on everything you’ve got to do what you can to try to be the one thing that remains important for consumers. In this tough environment I think that was a message that minimized the downside impact to us as a luxury product.
The underlying message in the world of luxury is the inherent integrity of quality. It’s fascinating to see the change in luxury goods advertising over this past 12 to 18 months. There is significantly less fashion advertising and a significant increase in the amount of advertising weight reminding consumers of the underlying quality and integrity of products, the efforts put into their creation, their history and where they come from.
What is all this about? It’s about saying that consumers want to buy luxury products where the message they’re trying to communicate to others is not: “I’m spending this because it’s a product that’s going to be around for a week, or it’s this month’s hot fashion, I have to have it, and I want people to know it costs a lot.” Now they’re communicating that they want to buy products that have an inherently enduring quality. When people know it’s expensive their conclusion will be that due to the quality of the product, it is inherently worth it. That element of the message which, we used to call “fewer, better things,” now focuses on the desire for inherent enduring quality and value. It is this which differentiates diamonds and will help us to increase market share.
MR: What other trends are you seeing in terms of fashion and diamonds?
SL: In terms of diamonds I see greater effort to create more iconic designs — designs that people can identify as a specific signature as opposed to just something pretty. You see this particularly with the brand houses. They are putting a lot of effort into creating things which people will identify as theirs. I’m sure that’s driven by the need to maintain margin in a more competitive environment. If there was one particular trend, I think that would be products that you can identify by sight.
MR: How are trends created? Are trends manufactured?
SL: Manufactured is a hard word. I don’t think trends are manufactured in the sense that there’s collusion around it. I think a powerful trend works when different creative people looking at the same sort of stimulus arrive at similar conclusions. And I think that when enough creative people do it, it becomes a trend.
MR: Is there a consumer trend towards increasing social responsibility? Is consumer demand threatened by the situation in Zimbabwe? Should we be concerned about reputational risk?
SL: Reputational risk is not a static game. What was acceptable and appropriate 10 years ago is different from today, and will be different 10 years from now. If you hold the same level of social responsibility always, you will create a significant problem. So the first point is that social responsibility is constantly evolving.
In terms of the demand impact today, I think that the diamond industry has taken sufficient steps to put us in a position where I don’t feel that for this Christmas, for example, we are at significant demand risk. If we are still doing only the same things five years from now we would be at a significantly increased risk.
Opinion leaders and opinion-leading consumers are moving more rapidly than current purchasers when it comes to their considerations around ethical assurance. Over time they will emerge first as a niche group and then the niche will get bigger and they will influence others and we will need to provide greater assurance. That’s how I look at this issue. So when someone says to me are you concerned, I think we need to keep doing more and more and be better and better. We should be offering consumers who are interested in more ethical assurance the ability to get that assurance so that we don’t lose them.
That task will become more demanding and our industry has to rise to it. Does that give me some concern? On the one hand, yes, because it’s hard to move an industry. On the other hand, I think commercial solutions provide an opportunity that will better drive change than sweeping industry-wide solutions. So I think translating ethical demand into opportunities is the best way to address the issue.
MR: Is Supplier of Choice ‘kaput?’
SL: No. You would expect me to say that, but it really isn’t. The world is a different place than it was a decade ago and the nature of our distribution system has evolved hugely from 10 years ago, and will continue to evolve as we go to the future. The challenges and opportunities we face are quite different to what they were ten years ago so Supplier of Choice has constantly been evolving and in some ways is very different from the year 2000 version.
MR: Are Sightholders a quaint relic of the past, sort of like bowler hats? Are rough tenders going to replace the Sightholder system?
SL: We don’t think so. As a large-scale supplier of rough diamonds our Sight system provides substantial benefits to our producer government partners and ourselves as well as long-term benefits to our industry. We are committed to it. We have a lot of diamonds to sell and we need to sell them consistently from Sight to Sight. The cost of mining needs to be matched with consistent cash flow that the Sight system provides.
At the same time, we need diamantaires with the manufacturing capability and confidence to invest in that steady supply. Sightholders make forward supply commitments with the reasonable expectation that they’re going to retain that supply. Without such commitments there is quite a lot of risk for the downstream.
This isn’t a problem for a small niche player, or a small mine that has a few goods to tender and will no
Article from the Rapaport Magazine - November 2010. To subscribe click here.