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Sharing Information Enhances De Beers Leadership Position
Q&A with Bruce Cleaver, De Beers Director of Strategy and New Business
Oct 5, 2014 3:14 AM
By Avi Krawitz
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RAPAPORT... De Beers published its Diamond Insight Report at the September Hong Kong Jewellery and Gem Fair. The 90-page volume, also available online, provides a snapshot of the state of the diamond industry and outlines trends that De Beers expects will drive the market in the coming decade. Rapaport News sat with Bruce Cleaver, De Beers executive head of strategic and corporate affairs, in Hong Kong to discuss the report’s key findings:
 Rapaport News: Why has De Beers embarked on this project?
BC: We’ve been conducting consumer research for years. As we try to increase our profile we felt it would be a good idea to bring it all together. We want to tell the story that this is still an attractive industry.
On a basic level, we see that growth in demand is likely to exceed growth in production. We also outline some emerging trends in the two big markets, the U.S. and China.
We are trying to make a strong point that you can't take this for granted. The world and its consumers have changed. Everyone along the value chain from exploration to retail has to adapt in order to keep the diamond dream alive.
Rapaport News: What does that entail and what are your recommendations for each sector?
BC: We don’t go so far as to give recommendations, but we do say that we have already seen considerable change taking place. For example, the way that technology is used from exploration to retail has changed dramatically. Industry innovation is going to continue and the way we use technology in all spheres will have to improve.
Differences have emerged among Chinese and U.S. retailers, with more consolidation in one and fragmentation in the other. There has also been a very strong drive toward brands.
So in the report we concentrate on some common themes that we feel people need to think about.
Rapaport News: Where is the fragmentation and consolidation occurring in the U.S. and China retail markets?
BC: The U.S. is quite a fragmented market as we estimate that there are 35,000 jewelry retailers there. However, we have seen some consolidation through liquidation, whereby a number of large retail chains no longer exist, and recently there has been significant consolidation with Signet Jewelers acquiring Zale Corporation.
The U.S. market is broken down into one-third being the big chains, one-third independents and the rest are discounters and general department stores. China is more consolidated in the sense that Chow Tai Fook, Chow Sang Sang and Luk Fook have a considerable share of the retail market.
Rapaport News: Do consumer trends differ between the U.S and China?
BC: Jewelry purchasers tend to be younger in China and the average price point in China is lower than in the U.S.
The U.S. is a more mature market. The U.S. has always been a very strong market for bridal and married women. So the single women's market in the U.S. is getting slightly smaller, but the married women's market is growing. Married women spend more than single women because they are more affluent.
We also found that slightly more is being spent on diamond engagement rings and diamond wedding gifts in the U.S. That is partly because the average length of engagements in the U.S. is longer than it used to be. People spend more because they have more time to save before the wedding.
Rapaport News: How big is the bridal market in China?
BC: Bridal is a big factor in China but diamonds are more of a gift for weddings than engagements there. As a rule, a diamond gift is given only at the wedding ceremony. There are also events around which diamond gifts are given which celebrate the relationship. That's a culture that is developing in China, not just bridal but also milestone events for couples.
Rapaport News: Is there a difference in the types of diamonds the different markets buy?
BC: Chinese consumers are very brand-focused and tend to like and trust Western brands. The average price for Chinese purchases is actually not as high as in the U.S., even though they have traditionally bought higher-quality goods. There is a slight drift away from VVS-VS clarity goods there. I think that is expected when markets are emerging into wealth. What they like is a big stone even if it’s not of the same quality.
Ultimately, all of what is produced gets sold in all markets. You just need to know how the trends are evolving.
Rapaport News: Given the consolidation in China, is it not difficult for the Western brands to penetrate that market?
BC: High-end luxury in China in general is dominated by the large Western brands. We also found that a considerable number of Chinese consumers buy diamond jewelry outside of China. Tourism is increasing exponentially, particularly to European destinations, where they spend large amounts on diamond jewelry with Western brands that they understand.
Rapaport News: The report estimates that online accounts for about 10 percent of jewelry purchases in the U.S. Did that surprise you?
BC: Purchasing online is bigger than we would have thought and 30 percent of consumers do research online before they buy.
The diamond industry went online relatively late as people traditionally want to see and feel diamonds before purchasing. In the U.S., online is used for both research and purchase purposes, while in China, it is mainly for research at this point.
Given the speed with which the Internet is growing in China you would expect that to change. That is going to require retailers to think differently about how they market their products.
Rapaport News: What was your key find regarding the mining sector?
BC: Both capital expenditure and operating expenses in the mining sector are rising faster than local inflation. The three biggest operating costs the mines have are diesel, labor and power, which are increasing constantly.
We included research done by McKinsey where they project demand to increase and compare it to known production output – including from existing mines, expansions of existing mines and new mines coming on-stream. We see that over time the growth in demand should exceed the growth in supply.
Rapaport News: Do you take the polished recycling market into account when predicting the shortage in supply?
BC: We know that recycling has always been around, particularly in the U.S. It has increased since the financial crisis as recycling happens for a number of reasons, including stress. We don’t know how big the market is, but we can say that it has grown since 2008.
We are doing a pilot research project in the U.S. to better understand what is going on with recycling, not only the volume that is being recycled, but also consumer attitudes because the initial experience is not good. We want to understand what that means.
Rapaport News: What insights can you offer regarding profit margins in the mining, mid-stream and retail sectors?
BC: We didn’t publish that research in this report, but we may choose to do so at a later date.
The mining sector is profitable and it is highly consolidated, although mining isn't easy and it’s not getting any easier. The retail end is also profitable although that is an oversimplified answer. In general, we think all sectors are making profits, but more is made on the bookends of the value chain.
Rapaport News: Is there concern that consolidation is squeezing out manufacturers as we see retailers moving into manufacturing?
BC: There is no doubt that the mid-stream has had a difficult time over the past few years. They’re being affected by a combination of things and being squeezed by the retailers is one aspect. We do see a trend of big retailers trying to vertically integrate more than before.
Factors such as borrowing costs have been difficult for the mid-stream and will require it to adjust. I think that is due to a lack of transparency. Historically mid-stream businesses have not been properly capitalized and the banks have figured out that they are actually taking equity risk here for non-equity returns.
Rapaport News: Rough prices have increased, while polished prices are not rising at the same pace. How do manufacturers navigate that environment long term?
BC: I think that investment in technology, better inventory management and trying to lower borrowing costs by capitalizing themselves better will all help manufacturers. Another aspect is the recognition that local beneficiation is here to stay.
The host governments, particularly in southern Africa, are insisting on local beneficiation and you can't really argue with that. Our view is that the amount of goods cut and polished in Asia has peaked.
I think that more discussion needs to be had with the host governments because the mid-stream is not yet incentivized enough to make local beneficiation a widespread success.
Rapaport News: What was your methodology in compiling this report?
BC: Historically, we’ve collected a lot of data and do a lot of research on consumers. We have not shared this information before, but we decided about a year ago that we should.
It has been a big job because we had to cover the entire value chain.
In jewelry, we have done some consumer research ourselves and we also have access to what’s in the public domain. But it has taken a large team the better part of a year to put this together. We presented it to the trade in Hong Kong and we will also talk about the findings with our government partners and with analysts.
Our objective is to update the report every 18 months or so by concentrating on topics that are of particular importance to the industry, do the research and share our findings with stakeholders. We are going to use this as an ongoing tool, to fill a gap that is not really being filled by anybody else – to speak authoritatively about the entire industry.
Rapaport News: What does De Beers gain from this?
BC: We are and we remain the industry leader, so it is important that we are able to talk authoritatively. This helps us to reinforce that message. I think there are some important messages here for the whole industry and somebody has to deliver them. It seems that we are the right people to do it and it fulfills a leadership role that we are very keen on fulfilling.
If you’re the largest producer by value, then sharing information can bring confidence back into the market. We believe we’re the world’s leading diamond company. A diamond company and a diamond mining company are two different things and understanding the pipeline is part of that.
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Avi Krawitz
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