THE DIAMOND INSIGHT REPORT 2014
STEPHEN LUSSIER PRESENTATION
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Thank you, Philippe. Good afternoon everyone.
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The Diamond Insight Report contains a wealth of information and analysis and Bruce and I will try
to give you just a small flavour of it today.
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But I’d also encourage you all to visit the Insight Report microsite to get an in-depth appreciation
of everything it can tell us.
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Right now, we’d like to spend the next few minutes sharing with you a glimpse in to the future of
the industry.
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And as the only true source of value in the diamond industry is consumer demand for diamond
jewellery, I will start us off by looking at the consumer end of the value chain.
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Of course, this is a part of the industry that has seen major changes in recent times. We have
seen markets open up that until recently didn’t exist and the creation of entirely new sales
channels. There have been countless developments in the consumer landscape over the last 20
years and in another 20 years we can expect things to look very different once again. I’ll try to give
you a sense of where we think some of these changes are likely to occur.
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The US diamond jewellery market performed particularly well in 2013, with stronger growth than
that seen in 2011-12.
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But we’re continuing to see a pattern of emerging markets, particularly China, occupying an ever
greater share of global consumer demand for diamond jewellery.
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China continues to be the main growth engine for the industry and the country has seen its
diamond jewellery market grow by a compound annual growth rate of 18 per cent from 2008 –
2013 in US Dollar terms.
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In fact, when looking at a variety of different scenarios that the diamond industry may encounter
in the years ahead, recent research by McKinsey suggests real positive growth in even the most
pessimistic scenario.
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The scenario deemed the most likely sees the ‘double cylinder effect’ of continued economic
recovery in the US, and the ongoing escalation of demand in China, deliver strong and sustained
growth in global consumer demand for diamonds.
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And we can see why when we look at certain aspects of the current consumer landscape in these
markets.
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Turning first to the US, diamonds remain the most popular type of jewellery for all age segments
and they are in fact almost three times more popular than any other type of jewellery
Looking at particular trends within the US diamond jewellery market, the premium and bridal
segments continue to expand. The rise of brands and premium products brings further potential
for retailers to realise the higher margins that are necessary for investing in activities that create
further consumer desire for their products.
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The fact that average incomes for the top one per cent of Americans has risen much faster than
average wages in the country as a whole means that there is substantial opportunity for retailers
in the higher-end jewellery segment.
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For example, although female consumers with household income of over $150,000 accounted for
just eight per cent of US diamond jewellery consumers in 2013, they accounted for one third of
total sales by value.
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Meanwhile, the single women's diamond jewellery market in the US - which generally represents
the ‘mass market’ segment – has also changed. The good news is that these consumers have
bought more pieces, but the segment's share of US diamond jewellery retail value has reduced by
nearly 9% between 2007 and 2013. The trends show clearly that bridal and premium diamond
jewellery have the greatest potential in the coming years.
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And when we consider the Chinese market, it is a story of strong growth to date with even greater
growth potential in future.
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China has seen the world’s fastest growth rate for diamond jewellery sales over the last decade
and a substantial jump in average prices paid and sizes consumed – in real terms prices paid
have risen 32 per cent over the last decade and average carats per piece over the same period
rose from 0.18 to 0.25.
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And most interestingly, there remains substantial opportunity for further growth in China.
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Fine jewellery is the most desired object or experience for urban women in China; and yet the
Chinese market remains underpenetrated. Diamond ownership has risen to 20 per cent in the top
urban cities (up from 10 per cent in 2003) but this remains well below the US ownership rate of
around 70 per cent.
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And the Chinese consumer-base is also set for expansion. Expectations are that by 2020,
‘mainstream’ Chinese consumers (with annual disposable income of between $16,000 and
$34,000) will increase to 51 per cent of the market (from just six per cent in 2003); ‘affluent’
consumers with incomes of over $34,000 will represent six per cent of the market (up from two
per cent in 2003); and in 2013 alone, the number of Chinese millionaires rose nine per cent to
1.1 million.
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Meanwhile, growth is expected in each of the three main routes to diamond ownership in China –
that is, bridal; ‘milestone’ moments (such as birthdays and anniversaries); and the ‘spoiling’ route
(where there is no specific occasion related to the purchase).
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In short, despite its hugely impressive growth in recent years, the Chinese market continues to
represent a major growth opportunity for the diamond industry.
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But it is not just the US and China that are expected to drive growth – demand from other
developed and emerging markets is also expected to contribute strongly to the industry’s future
success.
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In terms of the cyclicality of global macroeconomics, it appears as though the world is entering
another phase of consumption. In this environment, the rapid growth of middle classes in
emerging economies is key. Looking at forecasts for the growth in numbers of middle class homes
in India and China, these are expected to reach around 130 million and 330 million respectively
by 2025. The purchasing power of around half a billion middle class consumer households in
these markets will need to be a major factor in the industry’s decision making in the years ahead.
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Set against this, however, is the fact that the pace of this growth in demand is expected to outstrip
production growth in the medium to longer term.
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Bruce will give you more background on the changing face of global diamond production and the
reasons for it later on today, but suffice it to say that the growth in demand we have just talked
about will very likely not be matched by a corresponding growth in production in terms of carats.
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The diamond industry is both cyclical and seasonal, so in practice we would not expect straight
lines when forecasting future supply and demand, but the trend for rising demand and diminishing
supply over the medium to longer-term is clear.
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Leading analysts such as Goldman Sachs and RBC are united in this view and it represents a
crucial theme for the diamond trade in the years ahead.
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Growing demand from developed and emerging markets certainly represents a major area of
opportunity for the industry, but capitalising fully on this opportunity can only be achieved if the
industry as a whole can maximise the value of every carat that nature created over a billion years
ago. For example, the industry will need to intensify consumer desire while marketing each
diamond as the increasingly rare and precious wonders they truly are; designers will need to
create new designs that maximise the available carats; and producers will need to continue to
improve recovery rates from existing mines while investing in new production.
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It’s crucial that businesses in the industry factor this supply demand dynamic into their planning
activities as it can be expected to have a direct impact on all parts of the value chain. While not a
short term issue, and while investments in exploration and production can help to address the
growing imbalance between supply and demand, the extended period of time taken to bring a
discovery into full production means that the industry will undoubtedly feel the impact towards the
end of the decade.
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Of course, it’s all too easy to think favourable supply and demand fundamentals guarantee a
successful future. But they don’t.
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We need to bear in mind that the world is changing very quickly and other industries are investing
and progressing – in this increasingly competitive environment, if the diamond industry only
maintains its current level of investment it will in effect go backwards.
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To illustrate this point, diamonds’ share of advertising voice in the US has almost halved since
2007. Over this period, fashion and electronics have both grown their share of advertising voice in
the US – in fact electronics now has over three times the share of jewellery.
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This has a clear and direct impact on consumer purchasing behaviour. Looking at growth rates of
luxury categories in the US, luxury electronic gadgets have seen a compound annual growth rate of
nearly 14 per cent between 2004 and 2013, while luxury jewellery has seen growth of just under
two per cent over the same period.
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In 2013 fine jewellery was not among the top five on the list of gifts that American women would
most like to receive, ranking behind holidays (foreign and domestic), electronics, home furnishings
and spa days.
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Among young people in the US aged 18-34 the desirability of diamond jewellery ranked in ninth
place in 2013, below branded luxury products such as designer handbags and clothes.
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It is undeniable that if consumer desire is not maintained, the diamond industry will see its share
of consumer spend reduce and it will risk missing out on what could be one of the strongest
periods of opportunity in living memory.
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And while on the subject of considering how to nurture and safeguard the diamond dream, the
Insight Report also touches on another trend that the industry will need to watch closely – that of
diamond jewellery recycling or reselling.
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While for most people a diamond is forever, there are certain situations which cause people to
look to sell their diamond back into the trade – these can include divorce or financial distress.
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This activity has been happening for a long time, but has attracted greater attention recently as a
result of the economic downturn and the accompanying increase in gold prices – and therefore
sale of gold jewellery – during this period.
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Some consumers who have attempted to sell their diamonds back have reportedly been left
dissatisfied with the current experience, especially due to a perceived lack of transparency and
objectivity in the pricing of the diamond they are looking to re-sell.
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The industry clearly needs to examine other structures through which the re-selling experience
could be improved so that this activity does not undermine consumer trust in the industry and the
innate value of their diamond.
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Although there are a number of challenges to address when it comes to engaging consumers with
the diamond dream, there are some prime areas of untapped opportunity that the diamond
industry can focus on in order to improve its prospects.
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I have already briefly touched on some of these, but the introduction of branded products is
perhaps the greatest of them all.
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Currently, diamonds are generally a non-branded category, despite an obvious increase in interest
in branded products from consumers all over the world.
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For example, the claimed acquisition of branded engagement rings in the US has risen sharply –
from just 7% of consumers in 2002 to three and five times that level in 2011 and 2013,
respectively.
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Fashion brands such as Dior and Chanel are growing quickly.
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And there has also been an uplift in awareness of specialist diamond brands such as Hearts on
Fire, Leo and Tacori.
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Meanwhile in China, traditional branded jewellers such as Tiffany and Cartier have seen a jump in
claimed brand-acquisitions of eight to nine times by young middle-class consumers since 2008.
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We have also seen this escalating demand for brands clearly in our own business: Forevermark
has experienced rapidly growing retailer and consumer interest since its launch a little over five
years ago.
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It’s worth bearing in mind that the offer of brands with a specific positioning and story helps
retailers address consumer needs for emotional engagement with the product, and protects the
offer against commoditisation. In addition, brands are a crucially important vehicle for building
confidence and trust in consumers when it comes to the quality of the product.
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When we consider the net effect of these last three points – the growing imbalance between
supply and demand, the escalating competition from other aspirational categories and the
increased importance of brands – it is obvious that organisations able to innovate and
differentiate themselves will be best positioned to capture the emerging opportunities.
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One other conspicuous trend in the consumer space is the rapid increase in the use of the
internet by those interested in buying diamond jewellery.
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As is the case with many industries, online is becoming an increasingly important channel across
the globe.
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Consumers are going online in increasing numbers in all markets, for both research and
purchasing
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In the US, over one in six diamond jewellery purchases were made online in 2013 – in value terms
this represented about 13 per cent of all acquisitions being made through this channel.
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Meanwhile in China, around 50% of single women use the internet to research their purchases in
advance of buying instore; for affluent Chinese consumers the figure is around six in ten.
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In short, online, including mobile usage, can be expected to grow in importance for diamond
jewellery retailers everywhere, whether for research purposes before a purchase or as a sales
channel in its own right.
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For the diamond industry – where purchases tend to be relatively infrequent and in where it can
be challenging to identify high-impact consumer touch points through which we can communicate
– this represents a huge area of opportunity. With so many consumers visiting websites when
undertaking research and making purchases, online provides us with a rapidly growing medium
through which we can engage consumers with the diamond dream and brand stories.
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While having a few minutes of consumer engagement through TV commercials will continue to be
important, the opportunity to tell consumers about our products and companies through a longer
period of time on the internet should certainly not be underestimated.
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In summary, it is undeniable that the ways in which people buy diamonds are changing. And it is
equally clear that the competitive set has upped its game when it comes to marketing and retail,
while the diamond industry has not always kept pace.
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We are fortunate in the diamond industry that the product we sell holds a unique place in the
hearts of men and women all over the globe and that we are seeing ever greater numbers of
people fall in love with diamonds. In fact, 2013 was the record year for diamond jewellery
purchases by consumers around the world.
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But make no mistake – if we do not act now to increase our share of advertising voice, to develop
compelling brands and to improve diamond retail standards, then we will see the industry fail to
maximise its sparkling potential.
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I will now hand over to Bruce to take us through midstream and upstream. Bruce…