Implications of De Beers’ two-prong lab-grown and natural diamond strategy

The jury is still out on De Beers’ decision to enter the lab-grown gem market

The question is whether its two-prong strategy will succeed in disrupting the synthetic gem market and boost natural diamond sales.

De Beers’ battle plan is to produce lab-grown gems. Using one of its subsidiaries called Lightbox, it will sell them at cut-throat prices to show consumers that they are very different products from natural diamonds.

At the same time, De Beers is raising its global annual natural diamond marketing budget from $140 million to $170 million. Russia’s Alrosa and other miners will supplement the campaign with a further estimated sum of $40 million.

The tactics have been met with a mixed response. Several diamond dealers and analysts contend that the move is brilliant.

They say that De Beers’ own lab-grown production and marketing will show consumers that there is a wide quality and price gap between “real” natural diamonds and synthetics.

“By strengthening the appeal of natural stones to the consumer, while simultaneously flooding the synthetics market, De Beers will effectively address two of its most crucial challenges,” says Derryn Maade, a metals and mining analyst at HSBC.

Other dealers and analysts are more cautious as they fear the battle could evolve into a drawn-out war.

Some synthetic gem producers have already indicated that they will retaliate with their own marketing campaigns. Those that are financially strong could also cut their prices.

A free-for-all could lead to a surge in lab-grown output that could undermine prices of lower and medium quality natural gems.

“By launching Lightbox, De Beers has blurred the idea of real diamonds,” said Ya’akov Almor, a diamond consultant.

“When a consumer walks up to a Lightbox salesman and asks whether the diamonds are ‘real’, what will the answer be? The salesman will honestly say they are real diamonds but they are manufactured in a factory. They are, however, exactly the same as the product from a mine.”

He fears that “if synthetics can take over the emotional significance messaging that the natural diamond industry has so painstakingly built up over decades, the bottom could well fall out of the market”.

Indian diamond dealers and cutters, who produce low-priced natural diamonds, are also concerned and will be holding a special meeting with De Beers officials next week.

The growth of the synthetic diamond market has indeed become a problem for natural diamond dealers and polishers.

Bonas & Company Diamond Brokers and Consultants estimated last year that global annual production had soared to 4.2 million carats from only a few hundred thousand a few years ago.

Bonas’ figure could be an underestimate because there is no clarity on China’s production, an Antwerp gem consultant said.

Lab-grown output is still small compared with 126 million carats of natural diamonds produced in 2016. But now that De Beers has reversed its previous policy and joined the lab-grown market, competitors could claim that the historic firm has at last accepted lab-grown gems as a “real” alternative.

De Beers aims to prove industry sceptics wrong. In September, Lightbox, will begin selling online lab-grown diamonds as “fun and pretty” fashion accessories.

To emphasise that lab-grown gems are unlike natural ones, the initial sale price will only be US$200 for a quarter-carat to US$800 a carat. (A carat is one-fifth of a gram).

The pink, white and blue lab-grown studs and pendants are about a quarter of current synthetic producer prices.

As a result, profit margins of competing lab-grown diamond producers are expected to tumble. Diamond analysts expect some of these companies to either merge or fail.

De Beers response 

By applying the second prong of its strategy, De Beers aims to bolster the natural diamond market with a traditional and innovative advertising campaign.

It will continue to stress the mystique of natural diamonds in mines that create jobs for poor people in Africa and elsewhere.

De Beers and fellow producers will target millennials in a global diamond jewellery market estimated to be US$82 billion.

“Lightbox appears well thought out, but it’s also a huge gamble. De Beers has opened a door, it has crossed a Rubicon,” wrote Rob Bates, news director of JCK, a US jewellery publication.

“There is no going back from what it has done, and no one really knows where this new path will lead.”

© copyright Neil Behrmann

 Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has just been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner

 

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