eBusiness Weekly
Hopewell Mauwa
Back in 1947, an advertising firm working for De Beers coined the phrase “A Diamond is Forever” which won awards as the best advertising slogan of the 20th century. That slogan gave birth to the highly effective strategy of marketing diamonds as a symbol of love and commitment. So effective was the marketing strategy that diamonds today derive their value almost entirely from that marketing genius.
Diamond demand by value is almost exclusively diamond jewellery (roughly 99 percent of demand), while industrial application represents merely 1 percent by value. Contrast that with other precious stones like gold and platinum, whose jewellery use accounts for 47 percent and 34 percent, respectively, while the rest is for industrial/investment usage.
This makes diamonds unique to other precious stones; diamonds are simply a discretionary product or a luxury. They have very limited industrial application apart from use in abrasives (due to their hardness). Effectively, therefore, diamonds are very much susceptible to changing consumer tastes and preferences, with the US the trend setter. Indeed, the US is by far the most significant diamonds consumer, accounting for well over 50 percent of the US$80 billion global diamond jewellery market.
Fast forward to 2018, two significant changes with lasting impact on the diamond industry happened. Firstly, the US Federal Trade Commission changed its Jewellery Guide clarifying “a diamond is a diamond” regardless of its origin i.e. whether lab-grown or natural. Secondly, in September of that year, the industry leader, De Beers, made a surprise U-turn, and launched a lab-grown diamond jewellery retailer.
The lab-grown diamond market currently accounts for 2 percent of the diamond jewellery market but expectations are that their share will rise to 20-30 percent by 2030. Take note — the difference between synthetic/lab-grown diamonds and natural diamonds is not visible to the naked eye; aesthetically they are undistinguishable, only specialised machines can detect the difference.
Lab-grown diamonds have in fact existed for over 60 years. The major source of “disruption”, however, has been the effect of technology improvements on costs of production. As an example, in 2008 it cost US$4 000/carat to produce a lab-grown gem. In just a decade (by 2018), same cost had tumbled 10-fold to US$300-400/carat. Consequently, a consumer can now purchase lab-grown diamond jewellery at US$800/carat, whereas equivalent jewellery piece from natural diamonds is priced at US$8 000/carat.
This is really where consumer preferences matter. The younger generation (the next generation of consumers) is more ethical than pragmatic. While diamonds are a cultural obsession in the US, their younger generation are more concerned about the environmental and human impact of diamond mining — and that will significantly influence their purchasing preference. As these millennials approach the age of engagement and marriage, they are demanding answers to environmental, human and ethical questions. Socially conscious, they insist on knowing the provenance of what they eat and wear, and how it’s made, including the sparkling engagement rings.
The future of natural diamonds therefore very much depends on what will shape consumer perception (the marketing narrative). In turn, that will shape the extent of future differentiation between lab-grown and natural diamonds.
In a scenario where there is very little differentiation (i.e. consumers see lab-grown and natural diamonds as the same product), the price (value) of natural diamonds could drop by as much as 30 percent by 2030. In fact, the only reason why they would not drop even further is, for now, the limited production capacity for lab-grown diamonds, which of-course needs significant investment.
Even in the best case of very high differentiation between the two, where consumers consider natural and lab-grown diamonds as two different products, prices for smaller natural stones will still come under pressure from increased price competition (substitution).
So how should diamond mining companies respond to the rapidly changing industry dynamics?
Diamond producers of the future will be those that excel in two core capabilities; technological innovation and marketing excellence, not necessarily those simply relying on abundance of diamond ore reserves.
In fact, Debswana, the joint venture between De Beers and the Botswana Government bears interesting insights; De Beers brings technology and marketing on the table while Botswana brings the “finite” resource. But clearly, if the resource can be grown in a lab, the one who controls the technology and marketing, in fact holds the keys to the future of the industry.
Zimbabwe’s diamond miners may want to strategically reposition. Digging out stones without concurrently developing essential core competencies in technology and marketing is clearly not sustainable and short term focused; it will be a matter of “when” not “if” such diamond houses will sink into oblivion. Granted, the short term is important, but future generations must also benefit from today’s policies.
Above all, diversification from extractive industries must be a national priority to enable smooth inter-generational transfer of wealth. A lesson in our generation is the oil industry; once seen as invincible but now the industry’s days are numbered due to changing technologies and consumer preferences. Most countries which failed to capitalise on the oil boom will remain with swathes of the black liquid buried underneath with no value. Similarly, it appears natural diamonds will not be forever after all!
About the Author: Hopewell Mauwa is a strategic analyst based in London. He graduated from the University of Cambridge and holds an MBA from Warwick Business School. He writes in his personal capacity and can be contacted on [email protected]
