On the rocks
A diamond is not so much a girl’s best friend, more a very old lump of coal. But De Beers, which controls an estimated 80 per cent of the world’s gem diamonds, has created such mystique around the sparkling stones that in 1997 consumers around the world spent $52bn (31.5bn) on them.
It has used inspired marketing techniques for the past century to turn diamonds into a product with mass appeal – from product placement in Hollywood films to the creation of one of the world’s best- known advertising slogans, “a diamond is forever”, in 1947. But the company is entering new territory with the launch of De Beers-branded diamonds later this year.
The branding – which places the De Beers name onto some of its gems – is a classic marketing technique aimed at “segmenting” the diamond market between high value gems, bearing the De Beers name, and lower value stones. It is an important departure and comes as the company faces a drastic decline in demand for its diamonds, as well as a threat to its near-monopoly of gem diamond supply.
De Beers’ sales of uncut gem diamonds have fallen 41 per cent this year. The company says this is mainly due to the Asian economic downturn – Japan is De Beers’ second biggest market after the US. This and a number of other factors, including the rapid decline in the value of gold over the past three years, has led parent company Anglo American’s share price to fall from a 52-week high of 36 to 20.
De Beers has reduced supply to meet the fall in demand. One source says: “Demand has fallen, so De Beers has been forced to withdraw supply because otherwise the price of diamonds would plummet. This is classic monopoly behaviour.”
In fact, De Beers operates like a cartel – it mines about half of the world’s gem diamonds, but through its Central Selling Organisation (CSO) manages the distribution of closer to 80 per cent of all diamonds. That is, non-De Beers mines use the CSO to market and control the price of their diamonds.
The origins of De Beers’ dominance can be traced to the end of the last century when English imperialist Cecil Rhodes moved to protect the price of diamonds in the face of increasing supply. He bought rival mines in southern Africa until his De Beers Consolidated Mines controlled 90 per cent of the world’s gem stones.
The CSO was set up by Sir Ernest Oppenheimer, grandfather of De Beers’ current chairman Nicky Oppenheimer, in 1934.
The existence of a diamond cartel is no secret, though De Beers prefers to call it “single channel marketing”. A spokesman says: “It has been described as an unusual monopoly, because everyone benefits.” He says the company calls it a “benevolent monopoly”.
The company’s Internet site proclaims: “The generally difficult market conditions have continued into 1998 and the CSO has consequently maintained its policy of severely restricting sales of rough diamonds.”
That such price protection goes unchecked seems astounding. As a source close to the company says: “It’s the last great monopoly in the world. No one has been able to challenge it, no-one knows why it is tolerated.”
The fall in demand for diamonds is not the only problem confronting De Beers: its vice-like grip on diamond distribution is beginning to weaken.
In 1996, Australia’s Argyle diamond mine pulled out of the CSO. It produces vast quantities of inferior quality diamonds. One source says: “You can buy an uncut Australian diamond of up to one carat for $20 (12). They are bad quality, but there are enough to stud the whole of Piccadilly Circus.”
Not only this, but according to one source, De Beers has spent about $1bn (606m) to maintain control of the distribution of diamonds from the former Soviet Union. It has managed to some extent, but has had to agree to allow the region to sell some diamonds on the open market.
Added to this, Canada will begin to mine diamonds later this year, and has not yet committed itself to the CSO. It is estimated that by 2002, it will produce over ten per cent of the world’s diamonds.
The decline in demand for diamonds can mostly be blamed on the Asian crisis. According to one analyst, the Asian diamond market has plummeted by between 60 and 80 per cent in the past six months.
The figure has been slightly offset by an estimated ten per cent increase in demand in the US and an average one per cent rise in Europe. Diamond sales are closely linked with the economic performance of markets.
In Europe, Britain is one of the strongest markets for diamonds. According to De Beers, $1.1bn (666m) worth of diamonds were sold in the UK in 1997. And it is in this country that it is piloting a scheme where 200 of its gem diamonds will have a De Beers marque attached to them.
The method by which the marque is attached to the gem is secret, but it is understood that the logo is placed on a film, which is then attached to the diamond. This © avoids damaging the value of the gem with permanent engraving.
De Beers has entered a joint initiative with upmarket jewellery retailer Boodle & Dunthorpe for the scheme. In three of its five stores, a De Beers logo will be projected against the wall. Customers can see a diamond magnified by over 200 times to reveal the De Beers marque and the diamond’s serial number.
A source close to the company says De Beers has resisted any hint of a retail presence in the past because of the risk of alienating jewellers. The new tactics underline the dire straits De Beers is in, says the source.
Another source says De Beers’ stranglehold on the market gives it carte blanche to do as it pleases. However, he concedes: “Jewellers might find it irritating because they like to capture the extra margin and appear that they are offering the added value rather than De Beers.”
De Beers’ marketing is a complicated and unique phenomenon. Not only does it have a near-monopoly of the world’s gem diamonds, it also largely controls the distribution of most of the world’s secondary quality diamonds. In this way, it has successfully prevented a glut of cheaper diamonds undermining the prices of its gems.
However, it still needs to sell a large volume of poorer quality diamonds, without diminishing the value of the top gems. The new branding scheme will only see gem diamonds given a marque – it is a straightforward way of creating distance between top-quality gems and their lesser cousins.
This is only a pilot scheme, but a spokesman says branding all De Beers diamonds, from gems to low quality stones, has not been ruled out.
De Beers spends $200m (121m) a year on marketing, with global advertising through J Walter Thompson. But its most innovative marketing has not been through ad campaigns.
The company is credited with one of the earliest examples of product placement – it supplied glamorous film stars like Marilyn Monroe with elaborate diamond jewellery in the Fifties.
When the all-American tennis star Chris Evert lost a diamond from her bracelet on the court at Wimbledon in the Seventies, De Beers was quick to capitalise on the interest around the event and launched the “tennis bracelet”. The result was that any self-respecting female American tennis player just had to have one.
It introduced the eternity ring to Japan in the Seventies. Husbands who truly love their wives end up buying five diamonds instead of one as proof of their devotion.
A De Beers spokesman says growth in Japan has been impressive: “In 1969, ten per cent of brides in Japan were given diamond engagement rings and now it’s 75 per cent.”
The last two examples are ways of selling diamonds in high volume, but neither of them threatened the value of gem diamonds in any way. Since the Forties, the company has established diamonds as the ultimate emblem of middle class prosperity – Americans spent $19bn (11.5bn) on diamonds in 1997.
There are several reasons why a move into branded diamonds makes sense. Derek Palmer, De Beers director of Western markets, says: “We have a name in the industry and we’ve never used it to drive sales.”
A key motive for the branding move is to reassure consumers. One analyst says: “It will reduce the fear factor for people buying diamonds. You know the diamond is good quality and genuine. By giving its stamp of approval, people will know they are not being ripped off.”
Palmer says: “By introducing a serial number, over time it will give security to the customer if the diamond is lost or stolen.” It won’t be good news for burglars.
By branding its diamonds, the company is preventing other producers from benefiting from its advertising budget. The De Beers spokesman says: “Producers who don’t sell through De Beers piggy-back on our advertising.” The idea is not so much that “a diamond is forever”, but that “a De Beers diamond is forever”. This could be a key defence if the company’s domination of global diamond distribution continues to diminish.
But Palmer stresses that generic campaigns promoting diamonds are still central to De Beers’ strategy: “Our objective is to promote diamonds generically in the UK. We are not moving away from that position.”
If Anglo American’s move into the retail arena is a success, the company may consider switching some of its gold stocks into stores which carry the De Beers branding. There is logic in such a move because although the price of gold has fallen from a high of $800 (485) an ounce to $300 (182) over the past 15 years, the price to the consumer has not fallen – the jewellers are scooping the margins.
As domination of the world diamond market begins to trickle away from De Beers, the company may find itself turning increasingly to the marketer’s handbook. The introduction of branded diamonds may be just the beginning.
