Brand Ahoy?

It’s the year 2002, and a new De Beers commercial has premiered. The two shadows approach each other as the now-famous classical music plays. With trembling hands, the male shadow gives the female a diamond ring—the ultimate symbol of his love.

Suddenly, we see the female’s face. Her eyes well up with tears.

“I’m so glad you’re happy, honey,” the male shadow says.

The female responds: “I’m crying because I wanted a De Beers diamond, you jerk!”

That’s one ad you’ll never see—De Beers would never take such a marketing approach—but many believe it’s only a matter of time before commercials for De Beers diamonds hit the airwaves.

Last January, in the press release that reverberated around the world, De Beers announced it would offer its first-ever “branded” stones in a test sale at three stores of English retail chain Boodle & Dunthorne. It later announced that a select group of 10 sightholders will sell a special limited-edition, “collectors’-item” De Beers-branded millennium diamond. De Beers executives stress the two projects are different—the English one is a pilot, the other a one-time effort to take advantage of the calendar change. But taken together, the announcements indicate De Beers is serious about branding.

For years, De Beers has been the diamond industry’s self-styled “benevolent dictator,” stockpiling stones to ensure price stability, boosting demand through its advertising, and creating markets from scratch in Japan and the Far East. For some, “branding” is a profound strategic and psy-chological shift, suggesting

De Beers is renouncing its role as Great Protector. Industry consultant Ben Janowski, who’s done research for the company, notes, “It all comes down to the question: How does De Beers see itself in the market?”

De Beers executives say they’re just testing the concept, nothing more. “We are far from certain where [branding] will lead, or how to use it for the benefit of the industry,” says De Beers chairman Nicky Oppenheimer. “The only thing we can say is that we will look at this fairly carefully, and De Beers will not do anything precipitous.”

Most De Beers watchers believe the company will forge ahead. “I don’t believe they would embark on such a venture just to do a little test in [England],” says sightholder Hertz Hasenfeld. In fact, the English test is a smash, and

De Beers may extend it to other English jewelers.

There are subtler indications as well. You no longer need a magnifying glass to see the name “De Beers” in a diamond ad, and its slogan (“the world’s diamond experts since 1888”) also is noticeable and prominent. In addition, De Beers is raising its public profile—ABC’s Joan Lunden recently filmed an episode on the company for her “Behind the Scenes” series, which airs sometime this month.

If branding does occur, what will the impact be? And what exactly does De Beers have up its sleeve? Based on extensive interviews with De Beers executives, independent diamond dealers, and sources close to the South African company, the following picture emerges.

Brand based on inscription. De Beers often calls itself a monopoly “of a most unusual kind.” That also describes its brand. For example, De Beers isn’t producing the branded stones, simply supplying the service. (The company compares it to the Good Housekeeping Seal of Approval.) In theory, branding will work like this: De Beers sells select rough to, say, a New York sightholder, who changes it to polished stones. The sightholder ships these back to De Beers for branding, after which they return to New York. The process could be time-consuming, requiring a processing center the size of the Gemological Institute of America.

De Beers’ marketing director, Derek Palmer, acknowledges the company has to work out the logistics.

Some note that sightholders buy rough from a variety of sources, so how would De Beers know that the polished stones it receives for branding come from its mines? Possible answer: Sources say De Beers will likely institute a “quota” system, under which sightholders can brand an amount of rough proportional to what they buy from De Beers.

The invisible brand. The brand itself is unusual. It’s called an inscription—some call it a decal—and it’s invisible to both naked eye and loupe. It’s burned into the stone’s table and includes the name “De Beers” as well as an “individual security number” that will be logged in a database. The inscription is permanent but can be removed with repolishing.

Most inscriptions are on girdles, but De Beers decided against girdle inscriptions because they can’t be seen on prong-set stones. Table etchings bring their own problems. Unlike girdle inscriptions, they hurt clarity grades, so De Beers shrank its inscription to microscopic size—an estimated 100 to 300 microns—and you need a special $5,000 viewer, or 200-power magnification, to see one. The company says the brand does not hurt a stone’s grade, except for the rare diamonds that are both internally and externally flawless.

The viewer also adds a touch of show biz. “We didn’t want to just use a loupe, but do something more visual and impressive, that would have a ‘wow’ factor with the consumer,” Palmer says. James Riley, diamond sorter for Boodle & Dunthorne, says the readers are well worth it. “Usually, when a couple comes in, the lady’s very interested, but the gentleman is bored. This makes the man much more interested. It’s something the couples can use themselves and makes it more of a hands-on process.”

De Beers added special features to both the English test and the millennium program, including special packaging and pamphlets. The millennium stones will even include a letter signed by Oppenheimer. So far, De Beers’ marketing plans seem to be working. Boodle & Dunthorne is so happy it now sells mostly branded stones, and some sightholders have already sold out of millennium stones (see page 201).

Why buy? Just as Bayer costs more than generic aspirin, De Beers stones are pricier than “generics.” In the English test, the branding process costs $50, but the stones command an estimated 10% premium. For millennium stones, branding costs $100, but with packaging, marketing, and so forth, they’re expected to sell “at Rap” or higher—meaning they could fetch as much as 30% to 50% more than nonmillenniums.

Why would consumers pay that much? The same reason they pay extra for other brands: They trust them. “People feel that if it has the De Beers name, the stone’s of high quality, and they’re happy to pay the difference,” Riley says. Literature for the pilot program calls the “Marque” an “assurance of quality” that “is reserved for quality diamonds of exceptional brilliance.” (There’s a short blurb on the store’s Web site: www.boodles.co.uk/marque.htm). The company also notes the brand could reassure nervous consumers that their stones are not drilled, treated, or synthetic.

But that raises a question: If a stone isn’t branded, is its quality not guaranteed? And if De Beers touts “branded” stones in its advertising, what will happen to the market for all the others? (This is more than an academic question; as many as 30% to 40% of the world’s diamonds aren’t sold through De Beers—and only the “nicest, most beautiful” would qualify for branding.) Finally, will the countless nonbranded diamonds that have already been sold lose value?

These issues have caused particular anxiety in the wholesale diamond market. Many nonsightholders worry that De Beers’ big advertising budget will be diverted to a product they won’t have access to. “If consumers start believing that the only kosher diamond is one with a De Beers brand, it could disenfranchise leading segments of the industry,” argues Eli Haas, president of the New York Diamond Dealers Club, which has expressed opposition to “branding.”

Palmer thinks the issue is overblown, noting that Boodle’s sale of branded stones hasn’t hurt its competitors’ diamond sales. “Look at Rolex,” he says. “People don’t think, ‘I can only buy Rolex or nothing.’ There are other brands and even generic watches that do just as well.” And Oppenheimer contends that, even if the company goes ahead with branding, it won’t stop advertising “nonbranded,” or generic, stones. “The only way we would not do that is if [De Beers’ share of the market] goes down to 20, 30%,” he says. “For now, that’s nowhere near where we are.”

Integration tomorrow? The other big fear is that “branding” will lead to vertical integration. Why couldn’t De Beers just polish the stones itself? The company already has a polished division that the industry has watched nervously for years. And once De Beers establishes itself as a consumer name, couldn’t it sell retail—the way Swarovski, Movado, and other brands have done? De Beers executives respond that this is wild speculation. “For the 25 years I’ve been in the business, people have been saying that [De Beers will one day sell retail],” Palmer says. “But think about it—we mine diamonds. You can’t retail according to what you mine. We would have to be a low-end mass merchandiser and a top-end retailer. How much money would that cost?”

Yet fears were not calmed by the news that the stones will include registry cards to be sent to De Beers and entered in a database. Although registrations are common for other consumer products, some fear De Beers will build a list of diamond consumers for direct marketing. “I’d be concerned about any kind of registration,” says Kansas City retailer Tom Tivol, who nevertheless is carrying the millennium stones. “I’m even wary of things like watch warranties. Very few retailers want to have their customers’ privacy invaded.” But Riley of Boodle & Dunthorne says that registration aids sales. “The local press played up the security aspect,” he says. If an inscribed stone is ever recovered, it can be returned to the original owner, Riley notes. De Beers’ Palmer stresses that the registry is optional and designed to increase consumer confidence, but he isn’t ruling anything out: “It’s not our objective to direct mail [consumers] necessarily, but if it will help the industry, we might.”

Still, the registrations are part of an uneasiness about branding—there’s something Big Brother-ish about it. De Beers’ information network is already formidable. With branded stones and a registry, the company will know who manufactured a diamond, what store they sold it to, and which consumer bought it. Grumbles one dealer: “The last thing this industry wants to do is give De Beers more power.”

Trust busted. Because of strict antitrust laws in the United States, De Beers has no official U.S. presence. Some feel a full-scale branding campaign could cause trouble. It’s even whispered in the diamond market that a company plans to challenge

De Beers if it goes ahead with its plan. But the millennium stones haven’t caused problems so far, and De Beers executives say they’re not worried. “This was explored when branding first came up,” says Joan Parker, spokeswoman for De Beers’ U.S. advertising team. “Obviously, there are ways it could be done. We

wouldn’t do anything in a way that would raise an issue. Believe me, there’s too much at stake.”

De Beers may also confront jewelers’ long-held ambivalence to brands in general. “Any time you brand something, it becomes a commodity, and your margins get worse,” says David Norman, vice president of Reeds Jewelers, Wilmington, N.C., expressing a feeling shared by many of his comrades. Lately, however, “branding” has become an industry buzz word, and some new brands have sparked interest. Still, with the exception of watch brands, many retailers say their store is their brand—and they like it that way. “If there’s a De Beers brand on the diamond, there is no need to go to my store,” says Tivol. “Consumers can go anywhere, as long as there’s a De Beers brand—even the Internet.”

Palmer argues just the opposite. Branding, he says, is an attempt to escape the “commoditization” of diamonds and persuade customers to look past “the numbers.” “We have this strange psychology of gemology in the industry,” he says. “If all a customer knows is he’s getting an H VS1, does he know if he’s getting a beautiful diamond? It’s like showing someone a Rolls-Royce, and then lifting up the seat and saying there’s this flaw in it.… We’re saying: Let’s bring the industry back to the beauty and love that the diamond represents.”

Taken aback. Privately, De Beers executives say they’ve been taken aback by the wholesale industry’s hostility to branding. (Even some sightholders have reservations; Leon Tempelsman of Lazare Kaplan, which has its own brand, told financial analysts he didn’t think it was “appropriate.”) Oppenheimer stresses that the company won’t move without talking with the trade first. “[When the time comes,] we will explain to the world at large exactly what we are doing, and why we are doing it,” he says. “There will be no double-talking or misunderstanding.”

Palmer says De Beers has heard the objections but urges the industry to keep an open mind. “Obviously, people who have a stake in something or feel they will be damaged in some way will make these comments,” he says. “People are speculating like mad and we haven’t even finished the first test yet.… Our industry needs to be willing to test new ideas. It’s a bit like the [De Beers-promoted] solitaire necklace. The manufacturers said it was terrible, that they wouldn’t be able to make any money from it. And at the end of the day, manufacturers are making a lot more money at it than they thought.”

He adds that, even if De Beers does green-light “branding,” no one should expect a dramatic move right away. “We can’t go from three stores to a worldwide brand overnight,” he says. “It will be an evolution, step by step.” For now, the industry is watching with both anxiety and curiosity, wondering what those next steps will be.

Brand Psychology

De Beers’ reasons for exploring branding have been dealt with at length in this publication and others. The following is a quick refresher:

  • De Beers says branding grew out of its effort to protect the integrity of natural diamonds against the threat of filled and synthetic diamonds and simulants such as moissanite. A brand, some argue, assures consumers that their stones are the real deal.

  • For many men, diamond buying is a traumatic experience. De Beers’ recent ads have tried to soothe their fears, and executives say branding is another step in that process. “We want to increase the market, and brands will help us achieve that,” Palmer says.

  • Some of De Beers’ own customers gripe that buying De Beers rough is no longer profitable. Many watched in envy and anger as Israel’s LID made millions defying De Beers’ Central Selling Organisation and buying rough from Russia. Branding gives sightholders an edge, something no one else has.

  • Many believe this is the real reason behind the campaign. Although De Beers still controls an overwhelming percentage of the diamond business—60% to 70%, by most estimates—in recent years its supremacy has been challenged. De Beers advertising benefits every diamond mine, so in De Beers’ view, mines that don’t join the cartel—or that leave it, like Argyle—aren’t paying their fair share. This angers mines that do sell through De Beers and makes it harder to sign up others.

Independents Like the Millennium Stones

The “millennium” stones are for sale, and sightholders report strong demand, especially from independents. Millennium stones aren’t a hard sell, but the requisite $5,000 viewer is. A buyer at one major department store chain says he passed on the stones because he couldn’t supply all his stores with viewers.

Independents are somewhat more receptive, but they also have doubts. “The viewer is a huge sticking point if you think the [millennium brand] is a one-time shot,” says Jacksonville, Fla., retailer Clayton Bromberg. “But I honestly think this is the introduction of a branded product. And we will be getting on the ground floor with the viewer.”

JCK has learned the following about the millennium campaign:

  • Retailers must purchase a range of colors. They’re mostly in the lower end of the spectrum (from H down), which De Beers has had difficulty selling since the collapse of the Far East market. “You want to get all price points included,” says Leon Cohen of Codiam, which is selling the stones. “But this isn’t about selling a D or L color. It’s about selling a limited-edition millennium stone.”

  • Although colors and clarities (VS and up) are mixed, all millennium stones are in the 1-ct. to 2-ct. range and “exceptionally well-cut.” De Beers has given the sightholders specific parameters for cutting the stones.

  • De Beers has allocated, but not sold, approximately 14,000 stones. The company initially planned a 20,000-stone run, but for now there’s no final number.

  • The Gemological Institute of America’s Gem Trade Lab is positioning itself as the “official” lab for the millennium diamond effort. It has designed special cover sheets for millennium grading reports.

  • There will be 10 “series” of millennium stones, each representing one of the brightest stars, e.g., Antares, Rigel, and Arcturus. Each series will comprise approximately 2,000 stones but will not be correlated to the 10 sightholders selling the stones.

  • The most sought-after numbers—including “1,” “2,000,” and “20,000”—are being held off the market and may be sold at auction for additional publicity.

  • Eight of 10 sightholders are looking into a joint marketing effort. They’re interviewing public relations firms to develop a consumer publicity effort in the United States. (The other two sightholders are in the Far East.)