"A product is something made in a factory; a brand is something that is bought by the customer. A product can be copied by a competitor; a brand is unique. A product can be quickly outdated; a successful brand is timeless," Stephen King, WPP Group, London.
Reports from the World Diamond Council meeting recently held in St. Petersburg heralded the end of the International Diamond Board (IDB) initiative to develop generic marketing for the industry, almost a year to the day that it was established, Avi Krawitz writes in the editorial posted by www.diamonds.net.
Back in July 2009, the five major diamond mining companies — De Beers, ALROSA, Rio Tinto, BHP Billiton and Harry Winston — set up the body, proclaiming that the “overarching mission of the IDB is to create and sustain strong consumer demand for diamonds worldwide through effective category marketing.”
While no one has formally pronounced the end of the IDB, it is clear that ALROSA, the original proponent of the scheme, is no longer interested and the others will not push forward without the Russian company.
The death of the IDB should not be mourned by the industry. Although, it does comes as a surprise that its demise emanated from the mining sector, as this sector stood to gain the most from the initiative.
The idea driving generic marketing is that such a campaign should increase demand throughout the pipeline. While that may be the case, it does not necessarily mean that full and equal benefits will filter through to all channels.
Make no mistake; higher diamond demand is in everyone’s best interests. However, it inherently brings lower profit margins. As demand increases, polished prices rise and rough prices ultimately follow. In fact, as the industry has observed in the past year, rough prices are bullish by nature and tend to run ahead of the polished reality.
The result is that while manufacturing, wholesale and retail revenues may increase, so do their respective costs. The equation becomes simple: higher demand leads to higher rough prices and lower profit margins for the industry. In the decade of growth that preceded the Lehman Brothers’ collapse of 2008, there was an inverse relationship between diamond jewelry sales and profit margins: The more the diamond market boomed, the slimmer the margins became.
The exception to this rule is the mining sector, because it is the only one within the diamond pipeline whose costs run independent of diamond-pricing variables. The mining companies therefore stand to gain the most by stimulating demand and that is their privilege.
However, manufacturers in particular find themselves in almost a no-win situation.
While they would understandably encourage a rise in consumer demand, as demonstrated by the vocal support given to the IDB by the International Diamond Manufacturers Association (IDMA) and the World Federation of Diamond Bourses (WFDB), as a sector, their margins appear destined to remain perpetually slim. It is therefore left to individual firms to compete for market share in order to grow.
To this end, companies would be better served by focusing on their own brand awareness than by lending blind support to a generic diamond campaign.
As it is, the verdict is still out regarding the long-term effectiveness of generic marketing. Conventional wisdom dictates, however, that increased competition between product brands has an overall positive effect for general demand.
Joint research by the University of Texas and the University of Central Florida in 2004 (“Generic and Brand Advertising Strategies in a Dynamic Duopoly”) concluded that while generic advertising is proportionally more important in the short term, with some free-riding effects for weaker firms, “the effectiveness of generic advertising and the allocation of its benefits, however, have little effectiveness on the long-run market shares, which are determined by brand advertising effectiveness.”
The diamond industry could well serve as a potential case study for these researchers, as the long-term “free-rider” benefits of the De Beers campaigns appear to have not lasted. What has been consistently beneficial to De Beers has become a mere product to other industry players.
Unfortunately, a solution was sought by replacing one successful generic campaign with another that didn’t get off the ground. Hopefully, the industry can now put the IDB behind it. Instead, the diamond sector might do well to consider Stephen King’s words above and recognize that the best way to ensure that diamonds are forever, is to create more timeless brands.
