Last week, the main highlight discussed by the mass media was the jewelry brand bought out by De Beers. Only idle minds missed the opportunity to write about it, but most of all I was surprised by the statements of some industry experts about the “difference in the chosen business strategies.” All this cropped up as if inviting to assess how differently the market is viewed by stakeholders: while some diamond miners are deliberately choosing a “resource-centric” approach and confine themselves to extracting and selling raw minerals, De Beers is choosing its own strategy for building a strong brand, including its projection to retail.
However, a “chosen development strategy” means that a company had a chance to choose the most cost-effective alternative out of several possible options. If there is nothing to choose from, this is no longer a strategy, it is just adaptation to existing conditions. Let's face it: "Strategy" has nothing to do with this. For now, none of the market players, except De Beers, is able to create a full-cycle holding spanning from mine to well-developed international retail, even if they really wanted to.
ALROSA is often expected to develop its own retail - as it is the largest diamond mining company, which has its own diamond-cutting arm, and it tried to open its own stores in the past. But, firstly, ALROSA is a Russian company, which means that the attitude to its retail in the West will be certainly ambiguous for political reasons (even if Yakut diamond miners are related to politics in the same way as ballerinas to astronautics). Secondly, ALROSA is a state-owned company, and the state as a shareholder is unlikely to ever approve the opening of retail jewelry stores, the more so abroad. A state-owned mining company fits perfectly into modern Russian realities, but state-owned stores selling luxury goods look obviously like venturing too far.
Other “second-tier” miners cannot boast to have such an opportunity either. At least because the creation and promotion of a branded jewelry network require substantial funds. Last year, De Beers invested $ 85 million into promoting Forevermark only. Judging by the past interviews of the company's management, the launch of DBDJ cost it $ 400 million. Such amounts of money can be put up neither by Petra with a profit of $ 66.8 million for 2016, nor by Rio Tinto Diamonds with a profit of $ 47 million, nor by Gem Diamonds with a profit of $ 32.3 million, nor by Dominion with a net loss of $ 34 million.
Diamond-mining companies adhere to the "raw commodity" business model not because they consider it to be the only winning one, but because they do not have an alternative. Similarly, De Beers for historical reasons has no other alternative but to develop a brand. This is not good and not bad – it is exactly the same kind of something given as the weather outside. Both options have their pros and cons, and both are necessary for the current market, if it is to exist in the future.
The brand for some
The whole history of De Beers is the history of a brand. Since the time Cecil Rhodes arrived in Africa and started buying up diamond deposits, the words "diamonds" and “De Beers” have become almost synonymous. The slogan "A Diamond is Forever," which was later recognized as one of the most successful in history, did not formally mention De Beers or any other brand and did not invite people to any particular jewelry store, but there was no need in this at all: Except De Beers, there were simply no other suppliers of diamonds to the market. The cartel sold stones both from its own deposits and from deposits owned by others, buying out rough diamonds under trade agreements, regulating their supply and setting prices.
For a hundred years of its existence, the brand of De Beers has gained not only worldwide fame, but also sometimes a dubious reputation. The company was able to create a massive demand for this product, which before that was the object of select consumption, and built a unique trading system. However, as information in the world became more accessible, the cartel model of this business was becoming evident to more and more people. Due to its monopolistic manipulation of prices De Beers for a long time did not even have the right to work in the U.S., and later, by decision of the European Commission lost the right to buy Russian diamonds for re-selling.
Actually, De Beers began to develop its jewelry brand setting up stores for De Beers Diamond Jewellers and Forevermark only in the 2000s – at the time, when the cartel system was breathing its last and the market saw the emergence of new and strong independent producers, which made it more logical for De Beers to promote its own name, rather than invest in generic marketing for the benefit of competitors.
What is De Beers without a brand? The company, which is closing a loss-making asset in Canada and mining diamonds in Africa. Of course, South Africa, Botswana and Namibia are quite calm and stable countries by African standards. But this is evident only for professional market players. What part of the American hoi polloi, do you think, know where Botswana is, if quite a number of them have small knowledge even of the geographical location of U.S. states? Does the average person there see a big difference between Namibia and, for example, Sierra Leone? Does he or she realize that an employee of an underground mine run by De Beers in Botswana is tens of times more socially protected than an illegal artisanal miner somewhere in the CAR? Especially when Google, now the main source of information for most people, by no means returns pictures of unformed miners, if searched for “African diamonds.”
Brands are often "at war" with each other, trying to grab a bigger piece of the market pie. I think everyone saw examples of the "poster wars" being waged between McDonalds and Burger King. Probably, jewelry retail brands are also doing something similar. However, this does not apply to diamond mining companies. De Beers does not need to build a brand to increase the number of consumers. In the B2B sector, all diamond mining companies are well known, and every one of them has a queue of midstream buyers. However, the sector of consumer trade is crowded with so many players that even De Beers will not be able to lay hands on a large enough share generating revenues comparable to those from the sale of rough diamonds.
But building a brand is necessary for De Beers to restore reputation and grapple with consumer myths and negative stereotypes, building consumer confidence. In essence, all the actions undertaken by De Beers in the field of retail are aimed precisely at giving a signal to consumers: See, it's not a cartel any longer! Look, in this incomprehensible and questionable market there is still a place where you can buy a guaranteed good diamond, not tainted with bad stories. This message is more than relevant at a time when, on the one hand, the market is being invaded by synthetics, and on the other hand, the Time Magazine comes out with an image of African children digging for blood diamonds on the cover.
Obtaining control over DBDJ is a logical step in this story permitting not only to strengthen consumer confidence, but also to segment the market. A simple solitaire ring with an 0.5-carat diamond is sold by DBDJ at prices starting from $ 4,150, while a one-carat diamond ring is traded at $ 12,500 and above. In one of the previous reviews, we quoted average prices for rings graced with diamonds of different sizes. The rings bearing VS1/G diamonds of 0.5 carats in size were sold by the majority of online stores at $ 1,700 to a maximum of $ 2,000. A solitaire ring with a one-carat average-grade diamond was priced at around $ 4,000-5,000. The assortment offered by De Beers will cost at least twice as much as similar pieces from mass retail and it is clearly focused on "premium" buyers. Given that 40% of Americans earn less than $ 25,000 per year, the classic "one-carater" for engagement from DBDJ will be a pleasure worth not two, but six months’ wages.
For more ordinary people, there will always be Forevermark - though not branded by the name of the great corporation, but still a diamond with guarantees and even special engravings. Other moves by De Beers are pursuing exactly the same thing - creating guarantees. Recently, the company announced that its subsidiary, the International Institute of Diamond Grading & Research (IIDGR), partnered with Chinese retailer Lukfook to produce diamond grading reports under a joint brand and probably confirm the color, quality and clarity of diamonds in a supplement.
According to the company's website, IIDGR’s diamond grading services will be priced at $ 50 to $ 1,500 per stone, depending on its weight. A customer will have to pay $ 60 to grade an 0.5-carat stone and $ 100 for a one-carat stone. This partnership is extremely beneficial for everyone. According to our estimate, the availability of such a certificate will increase the cost of diamonds by an average of 3%, which will most likely bear down on buyers, as they have to pay for additional guarantees. But this money does not just create consumers’ confidence in that they really bought a valuable thing. This money also creates consumer confidence in De Beers as a company that guarantees quality. And the guaranteed quality, in turn, creates an added value to the diamonds thus sold (3%).
In the recent past, a well-known industry analyst dreamed of a sui generis division of diamonds into good and bad. In line with this logic, good diamonds, having proven origins and not violating human rights, should have been sold with a premium, while "doubtful" diamonds, not having the "right" confirmations, should have been sold at a discount. As you can see, the analyst’s dreams are not so far from coming true.
Diamonds for many
In a recent review, we already said that market fragmentation is a quite possible phenomenon, despite all its destructiveness. And in theory, the first to "break away" will be the premium segment, in which diamonds - real, proper and high-quality stones with a guarantee - remain to be the lot of the elite. The remaining part of the market - three quarters of the world's diamond output, millions of workers and their families – will play on the same field with synthetics, probably losing to the latter in terms of price and affordability.
However, there is good news as well. More than 60% of jewelry sales are still accounted for not by branded networks, but by small single stores. Half of the buyers are still not ready to spend more than $ 1,000 on a diamond jewelry piece, and only 15-20% (according to a report released by Bain) are willing to plunk down more than $ 5,000. And these buyers will not go to the premium segment, even if it will offer thrice as strong guarantees compared to other market segments - they will simply not have money for that. In fact, it is for these buyers - ordinary people who dream to share their emotions with their close friends and relatives - that all the other diamond mining companies do their work.
As we have already mentioned, none of them is able to create their own jewelry brand. They choose another way - cheaper, but thus, perhaps, more accessible and understandable to the consumer: marketing based on the origin of diamonds. Dominion Diamond is promoting the CanadaMark brand - stones mined in Canada and hence not related to conflict stories. Rio Tinto working in team with jewelry designers and retailers offers "Diamonds with a story" - a project in which every diamond is supplemented with a brochure about where and how it was produced. Rio even developed special recommendations how to design and dress stands for those sellers who want to take this product for sale, thereby creating the most comfortable working conditions for the project participants.
This approach does not promote the trademarks of Dominion and Rio Tinto. It does not require to open a diamond-miner-owned jewelry store maintaining there sellers and experts. But it gives guarantees of the origin and quality of diamonds sold to consumers much in the same way. In a situation where the Kimberley Process is increasingly being criticized and the World Diamond Council is not in a hurry to expand the system of guarantees, rough diamond producers have to take care of their consumers’ comfort themselves. Who, if not the producers of rough diamonds, are responsible for where and how their product was extracted?
It is strange, why Russia’s ALROSA has not taken this path so far. The term "Russian cut" in the professional environment is more likely to be associated with an example of commercially questionable operations, albeit splendid in their appearance. In the mass consciousness, however, this is for sure a more controversial story than the "CanadaMark," prompting to avoid spending money to dispel these stereotypes. But the story of Yakutia could theoretically be successful in the same way as today the Canadian origin is enjoying success. Yakutia is not Africa: It did not have civil wars, its local population was not oppressed (there was practically no population in Western Yakutia before the start of diamond mining there), and there were built entire cities and a complete system of social guarantees. Add to this the local flavor, a couple of stories from the Yakut folk epic, which among other things is considered to be an intangible treasure of humanity according to UNESCO, along with the Belgian brewing culture - and voila, you have a conflict-free product with an interesting ethnic component on your hands.
Restricting their business to mining only and selling “regular diamonds” without creating some added value, miners are running high risks. Right now, their business is not in danger, but anything can happen in today's unstable geopolitical environment. For example, there may rise another wave of concern about human rights. And under such conditions, “regular diamonds” from Russia or South Africa will formally not differ at all from “regular diamonds” mined, for example, in Zimbabwe, whereas finding a way out of this situation will take some precious time.
Needed symbiosis
Be that as it may, to compare both these models of business in terms of efficiency is at least incorrect. It is all the more incorrect to make predictions about which of them will survive in the end. Both of them exist in parallel, and moreover - they need each other to create an integrated market.
The majority of diamond mining companies work "out of the way" of end users, selling to them not their own brands, but diamonds with guaranteed origin and quality. In essence, this activity shapes and forms the very foundation of the global market trading in rough and polished diamonds. Polished diamonds have always been positioned as an exclusive expression of feelings, which is - over and above - expensive. But diamonds cannot exist only in the premium segment - this is contrary to the original ideas of Cecil Rhodes. A diamond should be desired, but still available to a person who wants to propose to a beloved woman. Without observing this condition, the market will simply disappear.
As the founder of the market, De Beers is engaged in the restoration of its brand. This facilitates market segmentation and, perhaps, will make some changes in the picture of the existing retail. But this is necessary. In a situation where most consumers, by virtue of the stereotype, continue to associate all diamonds with the Cartel, it is important for De Beers to break this opinion and build a new image – the image of a responsible company that is transparent and guarantees the quality and ethics of its goods. Ultimately, if buyers will stop associating diamonds with hungry African children, this will benefit the entire industry.
Elena Levina for Rough&Polished
