Will De Beers gain control of polished market or invite a new "brand of rivalry?
It may be the biggest news to hit the diamond market in the last decade, or it may be not much at all. That's the market reaction to De Beers' announcement that it will test-market diamonds whose tables are inscribed with the name "De Beers" and an individual security number. The test will take place at a retail chain in England later this year.
The inscribing uses a special process that is invisible to the naked eye and a loupe. But while the current effort is only a test, De Beers already seems to be looking ahead, noting that it may offer the service "to sightholders and involving leading jewelry manufacturers and retailers."
The benefits for De Beers are many. For one, if the test proves that consumers are interested in the "De Beers" name, it could boost overall sales by increasing consumer confidence. (De Beers said it is would be similar to the "Woolmark and appellation controllee in wine.") And if a successful synthetic gem diamond ever comes on the
market, it would give consumers an easy way to distinguish "natural" stones - no laser-drilled or filled stones would be granted the De Beers mark.
Furthermore, the service would only be offered to De Beers sightholders, and so it would be a way to give added value to its sometimes-ornery customers, similar to the way sightholders have become the point people for J. Walter Thompson's co-op programs.
And finally, if the program is expanded, and De Beers -inscribed stones are indeed valued more than others, then that would give miners more incentive to join the cartel - and mean De Beers wouldn't be spending its $200 million advertising budget on "other people's" stones.
Still, there are a lot of unanswered questions. For one thing, the strategy could backfire - with other producers entering into the fray with their own brands. The Russians could emphasize their finely cut stones. Argyle could promote themselves as the fancy-color brand. Perhaps Canada could even sell its own branded diamonds in a "Buy Canadian" campaign.
Another question raised: How would it be efficient for De Beers to sell rough to sightholders, then have the sightholders send the stones back to De Beers for inscriptions? (Some think De Beers might have to set up inscribing offices in the cutting centers, which may not be possible in New York, for anti-trust reasons.)
Some also wonder if the distribution of these diamonds will be tightly monitored, and if so, what would happen to the standard distribution channels? And how could De Beers ensure it was inscribing its rough, and not other people's? (After all, most sightholders buy rough and polished from many sources outside De Beers.) Similarly, how could De Beers ensure its inscribed stones remained "pure" - without any filling or drilling? And if De Beers starts advertising its own products in the U.S.,will that catch the eye of anti-trust regulators?
And finally: If De Beers starts advertising its own stones, does that mean it will stop advertising diamonds as a generic product? This could be the most important issue of all. De Beers has always maintained that its single-channel system works for the good of all by increasing demand for diamonds as a generic product. But in the last few years, the "single-channel" system has taken some lumps.
Although the overwhelming majority of the world's diamonds are still sold through the De Beers cartel, it is no longer a given that new producers will continue to do so. And recently there have been a number of prominent defections, including Argyle and the Congo.
Until now, most of the defections have been in the small stone area, which many think that De Beers no longer has much interest in marketing. But if the large stone-rich Canadian mine does not sign up - and due to anti-trust reasons, some think the chances are "iffy" - it could hurt De Beers' control of the big-stone market.
Indeed, at a recent conference, De Beers Managing Director Gary Ralfe speculated that, if the company loses more market share, it may one day have to promote its own diamonds "rather than giving a free ride in promotion to those diamonds which remain outside the CSO system."
And so this so-called "branding" test could be De Beers' way of acknowledging the old order has changed. Which is why a small test at an English retail chain could turn out to be big news indeed.
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PS ---That last paragraph IS interesting....
And, here's another ......
Trade not too happy about De Beers branding plan
No one knows what will happen with De Beers' "branding" plan, currently being tested at a retail chain in England-or even whether the company will go ahead with it. But so far, its introduction has to be rated something of a flop.
The plan has raised near-unanimous fear and disapproval from dealers, with even some sightholders and retailers expressing reservations about it. The thumbs-down from non-sightholders could be expected; after all, De Beers is giving their competitors an item they will have only limited access to.
But the vehemence of the reaction must be taking the company by surprise, with some threatening to do everything from call the U.S. Justice Department to treat the De Beers stones (which are supposed to be non-treated).
Some sightholders say they are interested in the idea, feeling it will give them an edge in the market. Yet, a surprising number were skeptical - they worried about De Beers getting more power, and viewed shipping the stones back to De Beers to be "branded" as a cumbersome bother.
When we asked Leon Tempelsman of Lazare Kaplan, one of the first companies to go into "branding," what he thought about the plan during a teleconference announcing the company's financial results, he didn't see how it would work, noting there wouldn't be any difference between De Beers-branded diamonds and anyone else's.
He added that the stones would sell in both mass-merchant and high-end outlets, which could send a mixed message to consumers. "I don't feel they are particularly well-positioned, nor is it appropriate for them to be doing this," he said.
Tempelsman, like other sightholders, considers the plan was a political ploy to warn other diamond miners that they should join the CSO, rather than anything the market will ever have to seriously reckon with.
Retailers, meanwhile, note that margins on branded products, such as Rolexes, are typically lower than other products. One official from a major chain couldn't see spending the money on hundreds of De Beers brand-detectors for all of her stores.
Some New Yorkers were also worried that the plan could hurt the industry here. Since De Beers cannot officially do business in this country to avoid conflicts with anti-trust laws, New York could be the only center without an official "branding" station.
Yet even those who are calling the plan foolhardy don't want to underestimate the power of advertising. If De Beers can come up with a compelling reason for women to buy its branded stones-the same way it has created markets for products like the diamond anniversary band, or engagement rings in Japan-then it's likely to the trade will scramble to have their stones "branded"-the way they now scramble to give them reports.
One consumer has already contacted us by e-mail to inquire about the location of a De Beers store in which he might purchase a De Beers diamond.
Still, for the time being, De Beers should probably do a better job of explaining how the plan will work - if indeed they know themselves - and calming trade fears.
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