The Luxury of Dreams
June 29, 06At the World Diamond Congress, a suggestion was made to the major producers in attendance to reduce rough prices. Thank goodness the producers made it clear that they are not about to make such a move. Even a public “hint” that producers might lower prices would result in an instantaneous loss of billions of dollars in a diamond pipeline that may contain anywhere between $30-$40 billion worth of diamonds. Consumers would delay purchases since they would anticipate great discounts or lower prices in the months ahead. Jewelry manufacturers would already lower the prices they are willing to pay. Banks would see their collateral dissipate. The domino effect could be devastating.
Thank God neither Gareth Penny of De Beers nor Alexander Nichiporuk of Alrosa fell into the trap of answering the question. Yes, in a volatile price environment, producers occasionally make adjustments by fine tuning specific assortments or, in the past, by admitting that pricing may have been incorrect and, in extreme situations, may provide some compensation.
The issue isn’t the rough selling price – the issue is our inability to get the price that we should be getting from a public that is truly captivated by the “diamond dream.” Our main problem is on the demand side – and we shouldn’t fool ourselves.
Maintaining Conspicuous Consumption
The issue is a growing dichotomy of the types of diamond products we sell and the marketing message. At the Congress,
Sometimes I wonder whether the industry (and that includes the producers) are facing up to reality: when you sell a $29.99 set of diamond earrings that contain two one-pointers with a diamond material value of $1 and a processing cost of $1.50, are those earrings part of the “diamond dream?"
Some would say “Of course not.” Others would frown or say “maybe.” The consumer has a better answer. A few years ago, those who were doing consumption surveys discovered that their questioning was missing out on a large segment: people buying these cheap earrings don’t think of them as “diamond jewelry.” The purchase wasn’t motivated by the diamonds – but rather an accessory to throw away when a new dress is bought or the present one is going to cleaners. Let’s put this in perspective. We are now seeing massive carat productions (in the area of 165 million carats per year). Of the resultant polished, 93 percent of stones that are entering the gem-quality market are smaller than 0.07 carats (seven points). It isn’t relevant to dismiss this by saying that this isn’t the range where “the money” is – but my gut feeling says that we must start to understand the impact of this massive volume of small goods on the market and their impact on the perceptions of the consumer and of the retailer. (It is probably unfair to imply that all the smaller goods fall outside conspicuous consumption. A lovely necklace of a few hundred smalls can still be a highly desired valuable gift. So maybe the argument is not with 93 percent of all stones, but with 70 percent – 80 percent or so.)
We all know that the worldwide diamond industry is still in the midst of a transition process that started at the end of the last century and that transforms the diamond industry from a supply-controlled structure to a purely competitive demand-driven industry. We can argue about whether this transformation is successful or not – that’s not the issue at the moment. We all know that there were many reasons for the transformation.
I wonder, however, whether the fact that the "diamond dream” was losing much of its sparkle is part of it – and, more importantly, whether with the best marketing in the world that dream can be rekindled, reinforced, reinvigorated? Is there a possibility that the consumer is not buying the dream anymore – and are we ignoring the signals?
The “diamond dream” is totally based on “conspicuous consumption.” Some manufacturers have been saying in recent years that diamonds have largely ceased to represent a conspicuous consumption item, as diamond jewelry had become consumer goods – a consumer necessity not just for weddings and engagements, but also as fashion accessories. (Conspicuous consumption is a term used by Thornstein Veblen (1857-1929) in his book The Theory of the Leisure Class (1899) to identify that ostentatious personal expenditure that satisfies no physical need but rather a psychological need for the esteem of others. Goods may be purchased not for their practical use but as a “status symbol” and to keep up with the Joneses.)
You cannot have a “diamond dream” without conspicuous consumption; or, to say it differently, consumer goods, by definition, have utility and are not conspicuous consumption.
There are definitely no “diamond dreams” in Wal-Mart. But the Wal-Mart message may be affecting consumers and retailers. The hundreds of millions of diamond stones that are sold through mass retail outlets such as Wal-Mart, catalog houses and television sales channels may well have led to the realization (by retailers, by consumers, by jewelers) that competitive consumer pricing has now become a central focus of marketing. That sounds good; but it is potential lethal.
Throughout the 1990’s the diamond industry stagnated, at least partly because of consumer resistance to prices. How can there be “resistance” to the “diamond dream?” After all – the only product “utility” in conspicuous consumption is the “tremendously good feeling of happiness, etc.” the jewelry recipient gets from receiving an expensive and exquisite piece of jewelry.
The higher the price tag; the happier she should be. That, at least, is the theory of conspicuous consumption, which is basically the underlying theory of the “diamond dream.” Many diamantaires keep telling me that the market for the expensive goods, for the largest items, is rather strong – even today; or, maybe, especially today. That seems to indicate that “the diamond dream” is still strong; but, apparently, not strong enough.
What Impacts the Diamond Dream?
But can the “diamond dream” persist alongside the massive supplies of “non-dream” items? This hits indirectly at synthetics, as Penny stresses that, “the emotional and financial value of diamonds is inextricably linked to the way they were created naturally billions of years ago.” So the $10 two-pointer is natural (and thus old), but does it convey an emotional and financial value?
A few months ago, a business graduate student in a
Price Resistance Runs Counter to the Dream Theory
The market tells us that retailers are facing “price resistance” above a certain level. They are talking about the invisible ceiling that diamond prices seem unable to break through.
Any economic analysis of the diamond business would focus on demand, supply and market structure. At the end of the day, the interaction of these factors is supposed to determine prices and quantities sold. There is absolutely no doubt that the massive off-loading of stockpile by producers in the past five years has had an accumulative impact on the market. In theory, however, that should amount to a one-off historical correction, relating the abandoning of the cartel’s time-honored system of diamond stockpiling for market manipulative purposes and the abandoning of the practice of imposition of production quotas.
From then on, all diamond producers started to optimize their production and sold the output to the market as soon as they were sorted and ready for sale – which is the situation today. Today it has become accepted that the growth of the diamond business is solely dependent on increased consumer demand.
Many of the players who are now facing difficulties had grown accustomed to an artificial environment in which supplies would generally run below demand. They had been able to make a good living, while totally depending on the producers’ artificial management of the market. Prices would always rise and the appreciation of inventory values provided a comfortable cushion. The artificial market management would also make it easier to sell “the diamond dream.”
Today, it is clear that we have a problem on the demand side. The market is stagnating. I have written before that we have largely missed the benefits of the economic boom of the past five years. At the end of the day, what counts is the interaction between supply, demand and market structure.
Why do we have a problem? Some reasons have already been touched upon. Market structure is a major one. The cartel system of the past led to a rapid growth of pipeline participants and the creation of an overly heavy and widely fragmented, inefficient structure. For the diamond industry to become purely demand driven, the “diamond pipeline” needed to become more competitive and marketing oriented. This led to the introduction of Supplier of Choice, a marketing strategy that was developed in dialogue with the European Commission, which aims to make the supply chain responsive (and ready) for an industry driven by consumer demand. So far the results of Supplier of Choice have been mixed and the model is now generally recognized as problematic.
But that cannot be the main reason – or even partial reason – for retailers (and therefore manufacturers) being unable to secure better selling prices. And here we get back to “the diamond dream.”
Dreaming doesn’t cost money; its implementation does. The "diamond dream" depends on economic cycles, on disposable income, on interest rates and even exchange rates. There is a consensus in our business that, to quote one of the speakers at the congress, we don’t sell a commodity – we sell an intangible emotion. Diamonds are seen as intrinsically precious, desirable and valuable because they are a visible embodiment of an illusion, love, romance, and sex – all things that, presumably, will last forever (they don’t; but that’s a different story).
From an economic perspective, any product has a “utility” – whether it is a computer, bicycle or T-shirt. Luxury items have also a “utility” – you need the vacation to rest; you need the watch to tell the time.
The “diamond dream” depends on a price for conspicuous consumption. We have problems with that price – this price seems to be stuck. Economists distinguish between the product’s functional utility and the utility attached to its price. The price component is the conspicuous consumption element.
The “diamond dream” theory says that the higher the conspicuous price, the more people are impressed – and so the greater the satisfaction of the purchaser. Theory has it that if conspicuous consumption is an important determinant in setting the demand for the good, the higher the conspicuous price -- the higher the demand.
Without the “dream” element, the “conspicuous component” in the price would be reduced and only the utility price remains. This means a price collapse, which means disaster. And that gets me back to the start: reducing the price is self-defeating; reducing the price on something that is supposed to last forever is cheapening the product, and cheapening the dream.
The real questions that need to be addressed are: what is wrong in our message? What is wrong in our marketing? What is deficient in our market structure that apparently makes it extremely difficult to increase the conspicuous consumption element in the diamond retail price? We don’t have the answer.
Finding the answer is our foremost challenge. Our business will depend on it – in the most literal and simple meaning of the word.