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Reflections

Dec 3, 1999 10:55 AM   By Martin Rapaport
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By Martin Rapaport

As we approach the new millennium, one gets the sense that society is preparing to mark an important milestone in human history. While the new millennium presents unlimited commercial and celebratory opportunities, it is also focusing the attention of society on an important point of transition. In many ways we are leaving the old world and the old way of doing business and entering a new advanced electronic communications and information era that is changing the basis of how we live and work.

The transition to the new millennium provides an opportune time for us to consider the big picture. This is a good time for us to reflect on the accomplishments of the past and our hopes and aspirations for the future. As an industry, this is a good time to take stock of where we have been and where we are going.

In this issue of the Rapaport Diamond Report we take a look at the past 100 years and highlight many of the milestones experienced in our industry. Next month and throughout the year 2000 we will present articles about the future of our industry. It is appropriate that before we look ahead to the future we take time to reflect on the past. There is much to be learned from the history of our industry and we should recognize that one of the best ways to prepare for the ununcertainty of the future is by gaining a better understanding of the past.

Historical Overview

Diamonds have a rich and colorful history. In ancient times diamonds were believed to have mystical and spiritual properties. The first written record of diamonds appears in the bible. The Hebrew word for diamond "yahalom" is used to describe one of the stones used in the breastplate of the high priest. India produced and traded diamonds as far back as the fourth century B.C.E. when demand was fueled by the belief that diamonds were living beings whose spiritual properties provided power and security to their owners. At the start of the first millennium the magical properties of diamonds were supported by the Roman, Pliny the Elder, as well as the Greek philosophers Plato and Aristotle. The most common use of diamonds was as talismans and charms.

While the fact that diamond is the hardest and purest natural substance known to man played an important role in the development of beliefs and legends about its mystical and spiritual powers, the key element driving diamond demand this millennium has been its symbolic value and limited availability. The first known piece of diamond jewelry the "Holy Crown of Hungary" was created in about 1074. For the first half of this millennium diamonds were pretty much the exclusive property of royalty. By the late 1500’s scribbler rings (rings set with rough octahedral diamonds that could be used to scribble on window panes) became popular among the wealthy class. It was not until the Brazilian diamond fields were discovered in 1725 that there was a sufficient supply of diamonds to popularize diamond jewelry to a broader spectrum of the population.

The advent of what can be considered the modern diamond industry coincides with the discovery of diamonds in South Africa in 1866. The diamond rush resulted in a wildly competitive and erratic market. New discoveries flooded the market and fierce competition in the “wild west of diamonds” resulted in extremely volatile pricing. The establishment of De Beers by Cecil Rhodes in 1888 signaled the beginning of attempts to consolidate control over diamond sources. Rhodes was a firm believer in limiting the supply of diamonds so as to raise prices and his efforts set about the basis for the establishment of the diamond cartel. By 1929, Ernest Oppenheimer, had taken control of De Beers. The great depression in the early 1930’s brought about a complete collapse of diamond demand resulting in the closure of almost all the diamond mines. Oppenheimer convinced the other major diamond producers that the only way to salvage the diamond industry was by working together to control the supply of diamonds and regulate sales through a single channel marketing system. The Central Selling Organization (CSO) was established in 1934 to control the sale of diamonds from De Beers and the other mining companies in the cartel. It also established the De Beers diamond advertising campaign with the famous “a diamond is forever’’ slogan.

Perspectives

At first glance it would appear that the history of the diamond industry provides little help in analyzing the current and future condition of our industry. After all, we are conditioned to analyze developments in the context of relatively recent events. The natural perspective of twenty-first century man is based on a fast-moving action-reaction environment and is decidedly short term. In order to take our analysis beyond the short term we must broaden our thinking to include a historical perspective.

Demand Side Considerations

Quite a few people in the diamond industry believe that diamond demand is completely artificial and solely dependent on De Beers’ advertising. De Beers has supported this notion arguing that since diamonds are a luxury product with no utility the diamond market could not exist without De Beers advertising. This argument has served De Beers well since it encourages diamond producers to support the cartel and also encourages the trade to support the De Beers monopoly. Unfortunately, the argument is no longer true.

First of all, history shows us that diamond demand existed well before De Beers. While we agree that advertising enhances demand, the fundamental basis of diamond demand has been around forever. The simple fact is people have emotional needs. They need to enforce their sense of self-esteem to make themselves feel special, important and powerful. They need symbolic tokens of wealth, status and rank to signify their position in society. They need to feel loved. Once a person’s basic physical needs are taken care of their emotional needs become primary. Sure everyone could wear Mao jackets and drive Ford Escorts but they don’t. Man does not live by bread alone. The argument that diamonds have no utility is simply false.

Okay, but why should diamonds fulfill these needs? While history has been especially kind to diamonds, having given them spiritual powers in ancient times and kings for customers in the middle ages, we do have to recognize the fact that advertising is what made diamonds go in the twentieth century. And giving credit, where credit is due, it was De Beers and their diamond cartel that created the modern multibillion dollar diamond market. All that money in Botswana, jobs in India, and retail outlets in the U.S. would not be there if De Beers didn’t seize the initiative and focus all of this emotion-filled consumer need on diamonds.

The problem with De Beers claim to diamond advertising fame is not that they didn’t do a good job. They did a great job, in fact too good a job. The monopolist driven generic diamond advertising campaign put the diamond industry to sleep. After all, why should diamond firms spend their own money selling diamonds if De Beers is doing such a good job for them?

De Beers Strategic Review

De Beers ASR (After Strategic Review) has woken up to the fact that optimal advertising is the result of competitive marketing behavior. In other words, if De Beers focuses its advertising budget on its own brand, or more likely co-op ads, with sightholders or sightholder’s customers then non-De Beers firms will have to compete with their own ads. Firms will compete for market share through advertising and the net result will be a huge increase in the level of diamond advertising and therefore an increase in diamond sales. The great benefit of the competitive market model is that while firms think they are advertising against each other to gain market share, in fact they are competing against other luxury products and thereby gaining market share for the whole industry.

The paradigm for De Beers ASR in the historic model is the shift in diamond demand that came about when people realized that diamonds were not alive and did not have souls or magical powers. One would think that diamond demand would have ceased forever. Obviously, this did not happen. Instead of fulfilling spiritual needs in the form of talisman and magical charms, diamonds fulfilled emotional and symbolic needs in the form of jewelry and crowns.

The diamond industry 2000 is going to experience unprecedented change. De Beers ASR is going to move away from a monopoly position they can no longer afford to hold and the trade is going to have to grow up and deal with real competitive market forces without the umbrella of De Beers. The internet is going to change the face of diamond trading and retailing. New technology is going to challenge the integrity of the industry and probably develop new electronic/scientific uses for diamonds that will compete with jewelry.

The bottom line for the diamond trade is that in spite of all the change and challenges the diamond industry will prosper. Sure the players will have to change their strategy and adapt to new realities, but the game will go on just as it has over the past few thousand years.
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Tags: De Beers, India, Jewelry, Luxury Products, Mining Companies, Sightholders, South Africa
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