Industry coping with changes, Bates says

The diamond industry is coping with big changes, said JCK senior editor Rob Bates in a speech titled “The Buzz on Diamonds.”

Most of the changes are compliments of De Beers, whose “Supplier of Choice” strategy debuts this summer. Bates noted that this strategy became formulated as De Beers’ share of the market shrank. “With De Beers realizing it can no longer control supply, it had to set its sights on demand,” he said. “De Beers wants this whole industry to become more demand-oriented.”

He noted that De Beers’ research showed while sales of other luxury goods doubled in the ’90s, diamond sales were flat, lagging behind world GDP. De Beers’ consultants, Bain and Co., told the company that while other industries spent 10% of gross sales on marketing, the diamond industry spent only 1%. That’s why De Beers is urging sightholders to start marketing initiatives and brands.

“They want to see more kinds of diamonds, different ways to present diamonds, diamonds in places they never were before,” Bates said. “It’s an attempt to bring more ideas and creativity into the category.”

He noted that there were some problems with this approach. Most of the brands and initiatives were likely to fail, he said, and “that could cause some big problems for some very big companies.” He said there have been so many new initiatives—200, at last count—that people are starting to feel overwhelmed. But he also noted that this year, De Beers fulfilled its goal: Diamond sales outstripped sales of other luxury goods, and world GDP. “So all the noise is having an effect,” he said.

Many in diamond associations were unhappy about De Beers’ urging sightholders to take an “efficient route to market,” as they fear this will cut people out of the pipeline. “De Beers has said it will support any part of the pipeline that ‘adds value,’ ” Bates said. “But what does that mean? Does De Beers think most of the pipeline does that? We’ll have to see.”

On the subject of conflict diamonds, Bates noted that a bill that makes the Kimberley Process part of U.S. law had just passed Congress and was signed by President Bush. Despite this—and despite the planned launching of the Kimberley Process this summer, there still are dangers for the industry. At the recent World Diamond Congress, he said, there were demonstrations with a fake Marilyn Monroe crooning, “conflict diamonds are not a girl’s best friend.” There were even rumors that there will be demonstrations at this show, he added.

He noted that it’s hard to quantify how much damage all this has done to the industry. “You look at how much it costs to run a spot on 60 Minutes, and then you consider the fact that 60 Minutes ran not one but two negative stories on this issue, it’s very likely there’s been some damage. There definitely are some people who won’t buy diamonds because of this issue, but if the publicity fades away in a few years or so, it shouldn’t be such a big factor,” he said.

He noted that the proposed solution to the problem had two components. The first is the Kimberley Process certification scheme, which tracks how diamonds cross borders and is run by governments. The second is the industry self-regulation scheme, which is regulated by the industry and attempts to develop a “chain of custody” for diamonds. Neither system could exist without the other. Together, the two plans are meant to prevent illicit stones from entering the system and assure consumers that all diamonds are clean.

“Everyone in this industry has responsibilities under Kimberley,” Bates said. “As a retailer who belongs to groups like Jewelers of America or Jewelers Vigilance Committee, you are obligated to ask for a warrant that the diamonds are ‘conflict-free’ on a stone’s invoice.” He explained that retailers don’t have to show the warrants to customers, “but if they ask, you can show them the documentation.”

He said there were two main questions about this process. The first is, “How will it be monitored?” The certification scheme is run by governments, he said, and has the force of law. “People certainly lie to governments all the time, but it’s not recommended.” Under the “self-regulation scheme,” which is run by the industry and involves warrants on invoices, all the warrants are entered into a company’s books, and a company’s independent auditor examines them at the end of the year.

Regarding diamonds that come from the pre-Kimberley era, Bates said that “they are the big hole in the system” but for the time being, they are being “grandfathered in.”

“It’s certainly possible that, in the future, if you make the representation that a diamond was pre-Kimberley, a government will say, ‘Prove it,’ ” he said.

He noted that human rights group Global Witness just released a 100-page report on the industry’s links to terrorism. “It’s mostly nothing new,” he said. “It certainly demonstrates that al Qaeda members bought diamonds and were interested in the diamond industry, but people no longer think it was a major part of their financing.”

He noted that some people take this connection very seriously. He told the audience that he recently went to a conflict diamond conference in Washington, D.C., that was attended by someone from the Department of Homeland Security.

In the final analysis, he said, the issue will end up being a positive for the industry. “For a long time the industry had its own rules,” he said. “The good side was the personal aspect of the business, the trust, the idea of conducting major transactions on a handshake. The bad side has been things like conflict diamonds.”

He continued: “This industry is realizing it has to join the rest of the world. This is not likely to be the last issue this industry has to wrestle with. There is a talk again of a link between tanzanite and terrorism, and some groups are starting to look at things like mining conditions. Retailers can no longer say that these things don’t concern them, or there’s nothing they can do about it. They are responsible for everyone they do business with and cannot just ignore other parts of the chain.”

JA’s decision to undertake a “social audit” of the industry could be “very positive,” he said. “Hopefully, when this is all done, we will have an industry that we can really be proud of, that’s one of the cleanest in the world. I don’t know if we can say that now.”

He did note that the diamond industry has already done many positive things, including making Botswana the No. 1 economy in Africa and employing 1 million people in India. Regarding diamond treatments, the news is not good, he said, although it hasn’t really captured the industry’s attention since everyone is more focus on conflict diamonds and De Beers. More high-pressure/high-temperature-treated stones are on the market, he said, and they are not always disclosed. “We know this because some labs have caught these diamonds, and they didn’t have any notice on them signifying they are treated,” he said.

He added: “These diamonds are very hard to detect, even for gem labs. Scientists today say they can detect the ‘vast majority’ of the stones, although there are rumors of labs missing them.”

He said most of the treated stones are yellows, greens, or high-color and clarity whites. “The good news is that most of these stones are sent to gem labs,” he said.