MINING 2000 CONFERENCE
MELBOURNE, 20 SEPTEMBER 2000
END PRODUCT MARKETING IN GOLD
Thank you for the invitation to speak to you today here in Melbourne.
I guess that I should either be rather less than grateful for the choice of topic which was allotted to me to speak to, or at very least have rather mixed feelings on the subject. This is not because AngloGold has mixed feelings about the marketing of gold, but rather because as a gold mining company we operate in a mining environment and a culture in which the majority view has long looked askance at any market support for the metal which they produce. As a rough rule of thumb it would be safe to say that 70% of gold producers today apply no resources – money or manpower – to marketing gold in any form or to growing the market for gold or to improving sentiment towards gold or to any one of those many related activities which go towards supporting ones product. I guess some of you will have heard the observation made by Egizio Bianchini of Nesbitt Burns, Toronto, at the Financial Times Conference in Paris this year, where he commented that his own experience as a gold miner in North America was that marketing by gold miners amounted to presenting one’s self at the front gate of the mine to wave the Wells Fargo gold truck goodbye as it removed the dorè to wherever it might have been going.
Put into this context, you might understand my mixed feelings about speaking on this topic. What makes it worthwhile, however, is that it is such a real and concrete subject. For AngloGold, the subject of marketing gold isn’t simply an intellectual debate or another speech at another gold conference, it is an integrated business activity in managing our gold business today and for the longer term.
The many aspects to this subject exceed by far any chance of dealing exhaustively with them in this short presentation. Instead, I would like to tackle three broad and very basic questions on this subject, and to attempt to convey in answering each of these questions the rationale which AnlgoGold has applied in approaching the subject of the marketing of the metal we produce. Those questions, quite simply are:
- Why should anyone market gold?
- What do we mean by marketing gold?
- Why should gold mining companies market gold?
Why Should Anyone Market Gold?
There are industry commentators who argue that gold needs no marketing. Their arguments usually run along the lines that gold jewellery has some sort of universal product franchise which sells itself. They argue that gold jewellery has been bought by men and women without any particular marketing for centuries, and that other forms of gold usage do not require conventional marketing methods.
In some respects, the direct experience of gold mining companies in their own sector would incline them to agree with this argument that gold requires no marketing, as we are all of us able without the slightest effort at marketing to dispose of our refined bullion or our dore pretty well at the mine or refinery gate in large bars of the metal to the bullion banks who play the role of pipeline and product financiers in physical gold business.
However, our ability to encash our product in this way has nothing to do with the reality of the physical demand for our product, and arises rather from the residual monetary role that attaches still to gold. Gold producers were historically privileged by the monetary role of their metal and by a “natural” market of official institutions happy to take large bars of the metal to use as reserves or for international settlement obligations. Platinum and diamond producers have never had such a “natural” market and have always had to work hard to sustain and grow a market for their product.
Unfortunately for gold producers, their “natural” market of official and monetary institutions has disappeared and has become a nett seller of the metal. Gold producers have for the most part not had to change their own product marketing behaviour to reflect this change. We are able to sell our gold with such ease not because there is some grateful customer waiting to take 400 ounce bars of 995 fineness gold from the gates of the Rand Refinery when and as we offer them for sale, but because official institutions are happy to lend part of their gold holdings to the market in a manner and at a cost which allows bullion banks to fund the pipeline of physical gold sold to them by gold producers, often all the way down to the real final end-user. In the gold business today, no gold producer has any business with real, end-user consumers of gold and we are all of us several times removed from the end market for gold by the benefit of the bullion bank-financed product pipeline.
What are these end markets for gold? Broadly speaking, there are three categories:
- Gold as money or monetary asset;
- Gold as investment or store of value; and
- Gold as adornment or fashion item, i.e. jewellery.
With regard to the first two product forms, it is possible to argue that no conventional marketing is needed for gold, and I will deal with these cases in a moment. However, in respect of the third and the biggest product category of gold–gold as adornment or fashion, in other words, gold jewellery – which makes up 80% of all gold demand annually, there is no doubt in my mind of the importance of marketing to the health of the market, both in the developed and the developing economies, and in particular in developed markets.
In the modern world in which we live there are millions of products competing with each other for the consumers’ spending. Not all products compete with all other products, but there are few products that have no competition at all.
In the product area of gold jewellery, gold must compete with many other products – gold competes with jewellery made from other precious metals like silver or platinum, and with jewellery including gemstones, and with designer label clothing, and with designer handbags or shoes, and with any number of fashion or luxury goods by which human beings mark their personal preferences. You have only to look at the growth of platinum jewellery demand vs. gold jewellery offtake in Shanghai and the coastal provinces of China, or the sharp decline in gold jewellery offtake in Japan as World Gold Council marketing efforts were curtailed during the 1990’s, or the slippage in gold jewellery’s desirability to consumers in Italy to see real and painfully concrete examples of the neglect which our product gold is suffering thorough lack of marketing. Do not expect miracles of gold offtake in China following deregulation of gold in that country unless major efforts are made to improve gold jewellery product and retailing in China at the same time. If we wish consumers to buy jewellery made of our metal in preference to those of competing products, we need to market the metal and to remind the consumers repeatedly of the desirability of our product. That is why we market.
We should also understand what marketing can’t do for our product. I believe that we all understand very well that it is the investment or speculator sector in the gold market that is largely responsible for driving the price of our metal from day to day, rather than the demand for gold jewellery in the hundreds of thousands of retail transactions worldwide where the impact is too diffuse to move the price of gold at any one time. However, what the cumulative sum of all that physical demand does for the gold price is to provide it with a fairly reliable platform of price support under the market, and it is that demand platform which we believe has done much to steady the gold price in the past two years.
In addition to providing current price support floor for our metal in the times when neither investors nor speculators have any interest in gold, the successful marketing of physical gold product is important for the longer-term desirability of the metal to the end consumer. This is not simply about increasing demand; it is as much about securing and renewing the franchise that gold jewellery has as a product in consumer’s imaginations in the many different markets of the world. Without a strong franchise and healthy physical demand for gold from millions of end consumers, there is likely to be no long-term strength or value to our product.
WHAT DO WE MEAN BY MARKETING IN GOLD?
Now this question of what we mean by marketing is an important one for gold. I remind you that the physical gold market includes a number of different product areas:
- Gold as money or as monetary asset;
- Gold as investment or store of value; and
- Gold as adornment or fashion item.
In the first two cases, marketing has a very particular meaning; it is the third category of gold as jewellery where conventional marketing has its greatest relevance.
In the first of these products, gold as a monetary asset competes in effect with the paper currencies or government bonds of other countries. The buyers or holders of gold as a monetary asset are for the most part national official institutions such as central banks, or bilateral official institutions such as the BIS or the IMF, and the decision to buy or sell gold by this sector is usually taken at a high policy making level. Whilst one might influence policy decisions towards gold in this monetary area, this would not be done through conventional marketing, but rather by high level and intellectual engagement between monetary authorities and gold industry leaders on the role that gold can play in monetary economic systems.
The second category of gold as an investment or as a store of value brings us closer to the everyday world of consumers, but still with a difference. In this area, gold competes with other financial assets – with equities, with life insurance and assurance policies, with savings accounts. Where these alternative financial assets do not exist – for example, in emerging economies such as Vietnam, or in parts of mixed economies such as India - gold is a serious and viable alternative for consumers to buy in order to preserve the value of their earnings and savings. Even in economies where these alternative financial assets do exist, a case can still be made for gold as a store of value of a special kind particularly in times of economic dislocation, or high inflation, or severe currency depreciation. Many of these circumstances have been seen quite recently in a number of South East Asian economies, and gold played a useful store of value role for consumers in that region in 1997 and 1998, as it did in Western developed economies during the destructive inflationary cycles of the 1970’s and early 1980’s.
One important action which can be taken on behalf of gold as a store of value is to ensure that the metal is allowed to compete fairly and freely with other monetary or financial assets for the private consumer. This is rarely the case in our world, and consumers face numerous obstacles to buying gold in most countries worldwide. In the developed markets of the West, gold faces duties and value-added taxes which destroy its value-preserving role. In other countries such as China and South Africa, there are other regulatory obstacles to private ownership of gold which make it impossible for gold to play this role. There is accordingly a real challenge in this product area to achieve a deregulated market for the metal, to allow evolving economic and financial circumstances from country to country or from market to market to determine the desirability of gold to the end consumer.
However, in the third category of offtake – gold for personal adornment, or gold as fashion gold jewellery – effective marketing can make a very real difference to demand, and it is this area of gold marketing to which we should pay attention.
When we talk about effective marketing for the gold jewellery market, we include a large number of different activities. Some of these activities aim to support the product generically, others might aim at promoting particular retail outlets, or particular gold jewellery product lines – special new designs for a festive season, or special fashionable pieces for particular consumer groups. Other activities seek to make retailers more effective in delivering gold jewellery product to consumers.
The following are a number of examples of useful marketing initiatives which can positively impact on consumers’ desire to buy gold jewellery or on the ability of gold jewellery manufacturers to produce, and jewellery retailers to sell gold product to consumers:
1) Generic gold and gold jewellery promotion to remind consumers of the desirability of the metal. In the developed markets, gold jewellery is in need not only of generic promotion and marketing, but in some cases of a more fundamental re-positioning for modern consumers. The World Gold Council began work early this year on just such a challenge in its branding initiative with consultants in London. Developing markets such as India and China present different but equally important challenges for the positioning of gold going forward.
2) Seasonal or special event promotions to push gold jewellery at important times, or from particular retailers or manufacturers.
3) Sponsorship of new gold jewellery designs and high-end aspirational pieces to inspire consumers to a new interest in the product.
4) Consumer and market research.
5) Organisation of the retail trade to co-ordinate promotional activities, to lobby for favourable regulations, to improve product offer, etc.
6) Trade education and training for retail shop staff to assist in making them more effective in selling gold jewellery products, rather than, say, gemstones or other precious metal products; the jewellery retailer is not an automatic or even a natural ally in selling gold, and requires both reason and help to prefer our product above others.
7) Quality and caratage protection programmes to ensure that consumers are guaranteed good quality products.
These are just some examples of the kinds of intervention in our markets which are capable of making a positive difference to the desirability of gold to the end consumer and ultimately increasing the offtake of the metal.
It is important to note that effective marketing and promotion of gold jewellery does not consist only of some grand advertising campaign. Marketing through advertising is an important part of the need, particularly in developed markets, but there are many other elements which go to make up effective product support in a modern market. The World Gold Council is particularly experienced in these areas of marketing and promotion in support of gold product, and we have historically supported this sort of activity through our membership of the Council. More recently, with the limitations on the resources available to the World Gold Council brought about directly by the failure of gold producers to support the organisation. AngloGold has undertaken some of this work itself both directly and in co-operation with the Council and with other parties.
WHO SHOULD TAKE RESPONSIBILITY FOR GOLD MARKETING?
Now, why should gold mining companies take any responsibility for promoting gold, and gold jewellery in particular? Gold mining companies are clearly not the only players in the gold business, and most of them don’t even produce gold in any final product form that you and I might recognise as consumers.
Other sectors or businesses which could take an interest in gold marketing include gold refiners who produce gold bars, gold coins and other bullion investment products, or gold jewellery manufacturers, or jewellery wholesalers or, finally, and not least, gold jewellery retailers themselves, since they are most directly involved in the sale of the final product, gold jewellery, to the final consumer.
I’ve heard some commentators in our industry even suggest that either central banks with their large gold holdings or commercial bullion banks should play a role and contribute to the marketing of gold. On these two sectors, I am least convinced that there can be a role, and the reasons against their involvement are strong enough for us not to consider any role for them.
Of the jewellery product businesses, I would argue that none of the other businesses in the jewellery product chain is as well placed to look after the effective marketing of gold as gold producers are. This does not mean that gold jewellery manufacturers or retailers have no role to play at all. I believe that they have an important and co-operative role to play in effective gold marketing.
However, I believe that the leading role in gold promotion should come from primary gold producers themselves.
There are a number of reasons to argue this; and these include
(1) The gold mining sector is the one sector whose sole interest lies in gold and only gold.
By comparison with gold mining companies, those gold businesses downstream of gold producers – particularly jewellery manufacturers and jewellery retailers – profit from a range of alternative metals/precious products, including silver, platinum, coloured gemstones, and diamonds that provide them with a range of product loyalties and options when it comes to selling strategies and marketing effort.
Gold mining companies have no alternative products and no alternative loyalties – we need a strong gold market to guarantee the health of our business for years to come. The will to put gold first, above competing products can only come from gold mining companies.
(2) On the whole, cash resources in gold mining are probably rather higher and more reliable than at of the other stages of the gold product chain.
The intermediate businesses of gold refining, jewellery manufacturing and jewellery wholesaling or distribution are known for their slim margins. The bigger margins on gold jewellery earned at the retail end make them important as partners in co-operative marketing but other structural reasons make it difficult to see that gold promotion could be left to the retail trade alone to carry out and fund on their own.
(3) The structure of companies and the nature of ownership and management in each of the gold business sectors argue that gold producers should play the leadership role in gold product marketing.
Gold producers are for the most part listed companies operating in the strict formal sector, with both balance sheet and human resources. By comparison, the typical jewellery manufacturer or jewellery retailer is a private company, often family owned, with few formal or human resources beyond those applied directly to the running of the business at hand. This is particularly true of the retail end of business, where there is huge fragmentation and the majority of gold jewellery retailers are single shop ventures. This makes these retail entities, however interested they might be in gold or gold jewellery, inappropriate to bear sole responsibility for the generic marketing and promotion of gold as they are both under-resourced and divided as a group.
I cannot emphasise sufficiently the importance of formal and focussed managerial resources in dealing with a challenge such as marketing of gold jewellery product at the retailer end. I’m afraid to say that for all the generous margins imposed on gold jewellery by retailers in the developed market, for the greatest part, that sector is probably the least fit to design or drive a marketing campaign of the size and vision required by gold. As a retailing industry, most jewellers remain locked in a pattern of doing business which has been left far behind by modern consumer retailing and an effective gold marketing campaign needs to factor into its agenda the need to modernise and improve this jewellery retail environment as well.
(4) Compared with the level of new gold being placed on the market annually in 1980, gold producers today annually deliver over 2 500 tons of gold to be taken by the market. Over the past twenty years, gold producers have placed over 17 000 tons of gold into consumer markets more than they would have had production remained at 1980 levels. By comparison, total net official sales of gold into the market during the same period amounted to some 2 300 tons. (1990 – 1999 : 3 090 tons)
This leaves us with the gold mining companies as the sector most interested in the health of the market for gold jewellery, and most certainly best equipped to plan, lead and manage any generic campaign in support of gold in jewellery worldwide. The role for manufacturers and retailers should most effectively be to support, to partner and to co-fund gold producers in gold marketing in generic and special event programmes which are planned to suit each important market.
That in outline is the way we see the issue of marketing of gold product, and the reasoning by which we have concluded so firmly that this is a challenge which must be taken up by gold producers. Some gold mining companies have faced that responsibility for years now, and these are the companies which continue to work with and through the World Gold Council. These include large and small companies, American, Canadian, Australian, South African companies. There is no single differentiating characteristic to this membership, other than the shared belief that for all the unique characteristics of gold, and the unique characteristics of our gold market, there is a very large part of the end consumer gold market which operates on entirely conventional market principles, and that to produce gold annually and expect someone else to promote and secure the desirability of the metal to the end consumer may prove to be a long term folly of the most serious kind.
Notwithstanding the reasoning that we have followed to arrive at this conclusion, we are aware of the difficulties and the dangers for individual gold producers who accept the challenge of leading and funding gold promotion. Without unanimity or solidarity amongst gold producers, those who do tackle the task do so with inadequate resources. The long-term nature of the challenge for gold makes this all the more difficult for a single producer or a minority of producers to bear the burden of generic support for gold forever. Gold mining is a fragmented industry by comparison with other mining sectors and this has not helped the cause of proper marketing support gold. Equally daunting is the fact that in recent years of economic growth and huge consumer prosperity, gold marketing support has actually fallen sharply and absolutely, and in the consumer markets of the developed economies, our product today is certainly in a weaker position than it was a decade ago. Any serious marketing effort to tackle the challenges facing gold must accept the fact that we will need time to make a difference to this market. Invidious though comparisons can be, gold producers would do well to consider the consistency and track record of both diamond and platinum producers, and the latter in particular whose focussed efforts and growing spend through the 1990’s has seen it improve its position consistently and most directly at the expense of gold.
Other industries have shown us what results can be achieved with proper resources, and a medium to long term commitment to a professional programme; we hope that other gold producers will accept responsibility for the challenges for the metal which they produce, and that we will see a new beginning in gold marketing in the not too distant future.
QUOTE
“The Italian jewellery retail trade is generally unsuited to consumers’ new needs. Besides being arrogant and often incompetent, retailers are somewhat blind to innovation (in every sense, from the product to the handling of the shop’s image) and to transparency.”
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