Recently, Maurice Tempelsman of Lazare Kaplan was asked about the future of De Beers. His answer was to the point: “I don’t know, and I don’t think De Beers does either.”
Substitute the “diamond industry” for “De Beers,” and Tempelsman could be speaking for many people these days.
The diamond industry is now, more than ever, grappling with outside forces, from the political (nongovernmental organizations and governments in Africa) to the scientific (synthetics and treatments). Throughout the industry there’s a feeling of uncertainty about the future. The diamond industry is morphing into something, but no one is sure what.
So JCK took a step back to question a group of industry leaders, wise people, and commentators about what kind of industry we will see in five to 10 years. Tellingly, no clear picture emerged, and our experts didn’t always agree. Many thought that predicting even five years ahead was impossible. But most interestingly, these meditations on the future offered some intriguing insights into the present.
Here is JCK‘s roundup of the best guesses on what lies ahead:
(Lots) more ‘commoditization,’ forcing independents to differentiate their diamonds.
Retailers may have been slow to embrace the branding trend, but in the years ahead, they may have no choice.
Much has been said about “commoditization,” and how it’s impossible to make a substantial margin on bread-and-butter stones. All indicators predict the trend will get worse. The Gemological Institute of America is adding a cut grade for round brilliants, which will make it even easier to comparison shop.
“It will close the gap on the fourth C,” admits GIA president William E. Boyajian. “Many people will argue that diamonds are a commodity even with color and clarity. We know that cut was a huge variable and we are tightening it. It will be foolish to say that it won’t impact margins.”
Plus, retailers will have to cope not only with increased competition from the Internet but also growing pressure from nontraditional jewelry retailers like Wal-Mart.
Jeffrey Fischer, president of the International Diamond Manufacturers Association, thinks retailers can stay in the game, even for widely sold stones, if they stress their “knowledge, integrity, and professionalism,” and make their stores inviting places for customers. “Right now, I see a lot of jewelers losing faith and confidence, and that’s not a good thing,” he says.
Many see retailers experimenting with products that differentiate themselves. Elizabeth Chatelain, MV Marketing, predicts that diamond departments will become much more varied. “You will have traditional diamond inventory; then you have country-of-origin inventory; some color; and maybe some alternative diamonds, such as things that have been treated and moissanite,” she says.
Whether this will include national brands, as some have predicted, is an open question. Despite the hype about branding, some say the effectiveness of nationally known jewelry names remains unproven.
“In a mature market like the U.S., with huge retail operations that already have quite sophisticated marketing, one probably shouldn’t expect to see a lot of jewelry brands,” says Mark Boston of H. Goldie & Co. Ltd., a De Beers rough broker. He notes the trend has been more successful in places like India and China, where the market is still relatively new.
The national-brand model may not be proven yet, but some are bullish on the idea of brands tied in with retailers, such as the Leo with Sterling. Chatelain says we could see the kinds of alliances that are common in other industries, such as hardware manufacturers selling only certain products to Home Depot.
Stephen Lussier, executive director of marketing for the Diamond Trading Company, which has promoted the increased focus on marketing, notes that a handful of brands are already doing $100 million a year. “That’s impressive in any industry,” he says. And he is convinced that the increased focus on consumer needs is here to stay. “When we look back in 10 years, we will be amazed at how we existed all this time without it,” he says.
Speaking of the end of “generic,” also get ready for…
The end to the Diamond Trading Company’s generic advertising.
De Beers’ generic A Diamond Is Forever campaign dates back nearly 60 years, but it may not last forever.
“There may always be some generic aspect to [De Beers advertising], but the days of all-embracing generic campaigns are a bit passé,” says Boston. “De Beers will likely be working more closely with individual sightholders, helping them to develop their brands.”
Consider what the company is doing in Japan. There, De Beers advertises not the idea of a generic three-stone ring, as it does in the United States, but the Trilogy brand. Trilogy is manufactured by sightholders. Like it or not, that approach will likely come here.
The only reason the DTC’s marketers aren’t doing this in America, they admit, is the law. Because De Beers still has no legal presence in the United States—and is reluctant to enter here— its ads still aid the entire industry, rather than specific companies.
“We operate under different legal structure in the U.S.,” Lussier says. “If you go to other markets, we more directly involve our sightholders in our advertising. That’s where our long-term future lies. It’s only right and fair. We are not a charity.”
One thing will likely stay the same: Despite some recent speculation to the contrary, Lussier says De Beers will always advertise diamonds. “We will always have a role to play,” he insists. “We still spend $180 million a year in marketing, far greater than any sightholder could imagine. If we are going to do programs like right-hand ring, that requires a player of our scale.”
One indication of where things are going could be De Beers’ recent decision to charge sightholders for “value-added services.” Some sightholders think the initial fee is just the beginning, and it could eventually evolve into De Beers’ charging sightholders for its marketing efforts on their behalf.
Supply will be a huge issue, and prices will increase.
For over a decade, the United States has been the market in the industry—and American jewelers have had no real problem either getting goods or the industry’s attention.
U.S. predominance isn’t likely to be toppled anytime soon, but India and China are both rising markets. Most projections say worldwide demand will outstrip supply in the next few years—thanks, De Beers executives would note, in part to Supplier of Choice.
All this means that stones won’t be as easy to get in the next few years as they were in the past. The shortage may be particularly acute on the low end—with Australia’s Argyle Mine planning to either halve production or shut down completely. “Retailers—especially big-volume retailers—are going to be faced with the elimination of an entire product category if Argyle goes,” says Martin Hurwitz of MV Marketing.
Carl Pearson, a London-based industry analyst, says small-goods production will be partly made up by mines in Africa, Canada, and Russia. “So all is not lost, but all is not found either,” he says.
Of course, most jewelers will probably be able to get what they want—but not at attractive prices. “I see a situation where one can expect significant rough-prices rises every year,” says Boston. “In the old days, there was a boom-to-bust scenario, where you had demand going up, and then an oversupply, and then a softening. But this is going to be something you can count on every year—very stable upward rough prices.”
But many feel that price movement will be less orderly than in the past, because the industry no longer has one entity acting as a buffer. “You will have a long-term upward trend, but within that trend there is going to be huge volatility and a bit of mayhem,” says Charles Wyndham, owner of PolishedPrices.com, who notes that there are already concerns that prices are too high.
With supply crunched, whoever has the goods will rule the roost. That’s why sightholders are jumping through hoops to retain their sights. And why African producers are having De Beers jump through their hoops to get access to African stones.
African diamond producers are pressuring De Beers to relocate factories and some DTC functions to Africa. This process has already begun; new factories are opening up throughout the continent, and the DTC has recently committed to a “DTC Botswana.” But many worry about the consequences of splitting the DTC into different components located throughout producer states in Africa, as some predict might happen.
“They have to be terribly careful not to lose their expertise,” notes Boston. “You would lose the benefits of what was a centralized selling organization and have lots of local operations that all have little parochial interests and don’t see the big picture.”
Some were similarly skeptical about the long-term future of factories in Africa, noting the mixed track record of factories in producing countries like Canada, Brazil, and Russia. “The likelihood is that it will fail,” says industry consultant Ben Janowski of Janos Consulting. “It’s like when the U.S. tried to force steel manufacturing and textiles to stay in this country. The laws of economic nature can’t be forced.”
While we’re messing with nature …
Synthetics could threaten sales of ‘natural’ diamonds.
Synthetics are the big question mark right now—and many see them as a real threat, even if their immediate future is murky.
Three companies manufacture synthetics. But availability is insufficient, and despite frequent promises, mass production could be a long time coming. As contradictory as it seems, it remains far harder to find a diamond produced by a machine than one dug out of the ground.
Still, new synthetic methods continue to multiply (see “University Claims ‘Better Faster’ Synthetic Diamonds,” p. 51), and most experts feel that eventually, someone will figure out how to mass-produce synthetic gems cost-effectively. Lussier predicts the price will fall as well. And once the scientific battle is won, the marketing battle will begin in earnest.
“Sooner or later synthetic manufacturers will get their act together and that’s pretty scary,” says Hurwitz, who has done some consulting for synthetic manufacturers. “It’s a potential threat to eat up a lot of market share from natural diamonds.”
De Beers has fired some opening volleys; its executives regularly stress the word “natural” in every communication, from marketing materials to the annual report, and industry officials are following suit. “It will be incumbent upon the natural-diamond industry to prove the benefits of the real thing,” says Fischer.
Lussier offered a clue to how that might be done—talking up the question of “value” will prove critical. “In the end synthetics will live or die on whether a consumer believes them to be valuable or something that holds their value,” Lussier says. “A diamond’s value emanates inherently from the fact that it’s very old and in limited supply.”
“There is a great market for sparkly things that have no value,” he notes. “The world sells an enormous amount of cubic zirconia and moissanite. All luck to them. It’s not our market.”
Pearson notes that natural-color stones still fetch record prices at auctions, even with as many fancy-color synthetics around. He says that while synthetics will have a market, people will still prefer natural gems. “Buying a diamond is an emotional as well as a financial purchase,” he says. “When you are giving a gift of love, something that is perceived as artificial or synthetic doesn’t hit the right note.” Which is why the battles over nomenclature (“synthetic” versus “cultured”) may prove crucial.
Janowski thinks the supply squeeze could give synthetics an opening. “You are going to have huge markets like China and India demanding huge amounts of goods,” he says. “If they turn to synthetics as a legitimate replacement, it will validate the product and make it acceptable for a segment of the market.”
While De Beers does tout the superiority of natural gems, its executives have been known to muse that if synthetics are successful, the company itself will enter the market, where it could likely produce them more economically than anyone else. The company is already a major producer of synthetic industrial stones.
The other question is about consumer confidence. Boyajian thinks synthetics will always be able to be differentiated from naturals. But he says high pressure, high temperature–treated stones remain a problem.
A consolidated market.
This seems almost certain, and companies already are merging and dropping out. But it isn’t the massive bloodletting that some had predicted; it’s an orderly, gradual process of linkups and phase-outs.
“You walk around Antwerp and you see a lot of the small dealers are getting squeezed out,” says Wyndham. “But as long as the prognosis is generally sound for the industry, then structural changes should be possible without too many problems.”
In the future, our experts agree, it will not likely be so “easy” to get into the diamond business. And we will likely see more pipeline-bending alliances like manufacturers owning retail chains or continent-spanning unions like Indian sightholders’ buying American jewelry manufacturers.
Most believe middlemen will still exist, but not as many. Lussier says survivors will be specialized and differentiated. “It has become increasingly hard to compete by meeting everybody’s needs,” he says. “The middle market has to focus on differentiating themselves, and if they don’t do that they are very vulnerable. They have to offer and develop something that is not available. It will take them up in price and up in value.” Adds Fischer: “Everyone who wants a piece of the pie in the future will have to work hard for it. And it won’t come easy.”