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Jul 3, 2002 11:14 AM   By Martin Rapaport
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The diamond business is changing. It is hard to put your finger on it and many people find it hard to understand exactly what is going on. The changes are subtle and unannounced as they are the result of independent and confidential activity by many different firms. Yet everyone seems to be going in the same direction — downstream.

While De Beers and its Diamond Trading Company (DTC) have played a critical role defining and communicating a new direction for the diamond industry, the impact of the message is only now beginning to take shape. Instead of an easy to understand revolution with clearly defined and understandable changes, we are undergoing a drawn out process of evolution. Since the rate of change is slow we may underestimate its impact. But make no mistake; the diamond industry is undergoing a period of fundamental transformation that will require all of us to adopt a new way of thinking about how we do business.

So what is all this change about? It’s really quite simple. The diamond business is reinventing itself. For as long as most of us can remember, the diamond industry was controlled by the supply side. Market power was defined by your ability to have and/or produce the diamonds. If you had secure sources of supply and a manufacturing base your position was relatively secure. But now all that is changing.

Market power is now being redefined as marketing power. The ability to sell diamonds is becoming more important than the ability to produce them. Customers are becoming more important than suppliers. Slowly and steadily, one firm at a time, the diamond industry is changing direction — we are creating a new demand driven diamond market.

Demand Driven

The big idea behind the demand driven message is that the diamond industry must find ways to increase and create new diamond demand. The days when De Beers could create enough customers for us through generic advertising are over. The luxury market sector is too big, complex and competitive for De Beers to do the job for us. We can no longer produce diamonds, sit back and expect customers to buy them. If we do not figure out how to sell diamonds — they simply won’t sell.

At a simple level demand driven means that we only produce diamonds for which there is demand and that we greatly increase our customer service capabilities. But at a far more important level demand driven means that our entire industry refocuses its resources, intelligence and direction on our customers and their customers. The question of how to sell more diamonds and get our customers to sell more diamonds to their customers is not merely about how to make more profits. It is a question of survival.

Some people take comfort in the fact that the global economy has grown to such an extent that there are now more wealthy people than ever in the history of the world. Others point out that there is now more disposable income available for nonessential luxury products then ever before. While this is good news it is also bad news. The large amounts of money available for luxury purchases (i.e. luxury wallet) has attracted fierce competition from a broad range of competitors. What should a wealthy person, or even a not wealthy person, do with their extra money? Should they buy diamond jewelry, a better car, a dream vacation or an expensive watch? Perhaps they should invest the money. The fact is that all that extra money has attracted more competitive products than there is money. So where will the extra money go? Will it go to whoever creates “better” products? Not necessarily. The money will go to whoever figures out a better way to sell, market and promote their products. Just as the squeaky wheel gets the oil, so too the best marketer gets the money.

The bottom line is that having a great product is not enough — you must also have great marketing. For many years the diamond industry has emphasized product over marketing. There was this notion that diamonds were special and did not need extra marketing efforts beyond what De Beers was doing. We created an illusion that diamonds sell themselves. Perhaps this was true in the old days and maybe it is true for engagements rings. But the diamond industry is much too big for it to be carried by the bridal market. We need to sell over $50 billion of diamond jewelry a year just to stay even. And every other seller of luxury products is after our market share. It’s a dog eat dog world out there and our industry is just now learning how to bark.

Internal Competition

Interestingly, the primary forces at work forcing us to reinvent ourselves will not necessarily come from other luxury products. Few if any of us compare our sales against the sale of luxury cars or clothes. When is the last time you thought about taking market share from Mercedes Benz? Probably, this is because we are a highly fragmented industry with few brands and we are not yet strong enough to compete against other luxury producers. But consider this: Just because we are not big or strong enough to think about how to steal market share from others does not mean that they aren’t thinking about how to steal our market share. Marketing is simply a form of highly civilized economic warfare.

Given the size and level of sophistication of firms in our industry, many of our initial attempts at marketing competition will be directed at each other instead of outside luxury products. In other words, your wake up call will not come from someone selling cars but rather from some other diamond supplier or retailer using a sophisticated marketing program to sell your customers. Initially our attempts to develop strong competitive marketing programs will be focused on rapidly increasing the diamond jewelry share of individual firms. What better way to do this than to take market share from our direct competitors? Namely other diamond and jewelry firms that do not have good marketing. If you are a retailer get ready for a multitude of well branded, highly advertised diamond jewelry products that will compete against your generic merchandise. If you are a manufacturer or dealer, get ready for very strong competition — not on price, but on branded product or product that is sold with sophisticated marketing programs that provide extra, tangible benefits to retailers and their customers.

It looks like the diamond jewelry industry is going to practice brand and marketing warfare on itself before getting up the steam to take on other luxury categories. The weakest links will get clobbered as channels of distribution become stronger and more direct. Firms that know how to efficiently create great product will be forced to create strategic partnerships with firms that know how to perform great marketing. Retailers will need suppliers that can help them participate in nationally advertised and marketed products. Suppliers will need retailers that will help them define and deliver products that are integrated with marketing programs. They will need to become intimately involved with not just producing diamond jewelry but selling it as well. Suppliers will need strong assistance with converting their diamonds into saleable merchandise. Merchandising will become the new art of the diamond industry as important as diamond cutting was in the past century.

Going Too Far

Undoubtedly, at some stage the demand driven market approach will overextend itself. The pendulum will swing much too far in the direction of marketing and away from product and availability. The notion that demand is more important than supply will be a by-product of the new demand driven market, but this idea is wrong. In the real world demand is not more important than supply. They are both equally important and markets optimize when they give both equal weight.

Undoubtedly, some firms will come up with brilliant marketing programs for products that do not exist in sufficient quantity and many will be frustrated and disappointed. In the rush to create new demand inventories will become unbalanced. The industry will come to realize that it cannot survive without the smaller firms that give the market its liquidity and find innovative ways to create small-scale demand and move product that does not fit into the big plans of the big firms.

At this stage it does not seem appropriate to preach moderation. For after all the great diamond rush is just beginning. New alliances are being formed. Exciting battle plans over market share are being drawn up. All eyes are focused downstream on the new battlefield where awareness and the luxury wallet are the ultimate spoils. Who can think of moderation at a time like this? At a time when great action is required.

Let us then preach balance. By all means go off to battle and strive to serve your customer and their customers. Grab market share and create all the demand you can, for that is the order of the day. At the same time keep an eye out for what is going on upstream. Balance your marketing dreams with the realities of the supply side. How is your supplier and his supplier doing? Are they your competitors? Can you get what you can sell? Expect the unexpected from the supply side because it will be changing rapidly and preparing for the return of the pendulum. For after all, once we have conquered and increased demand, will not the supply side demand its share of the bounty?
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Tags: De Beers, DTC, Economy, Jewelry, Luxury Products, Manufacturing
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