Janus Thinking

Now that Bill Ford has put Aston up for sale, Jack poses a really interesting question in his comment over at stealthisbrand.

Who is best placed to exploit brand Aston Martin?

According to auto trade press like Evo, prospective valuations vary wildly between £200m and £1billion.

This has very little to do with car sales - which have increased ten-fold in the last 10 years, and everything to do with brand equity…

Is it time that Richemont, or LMVH took over, asks Jack?

I see three challenges:

L’Oreal now owns Aveda and Body Shop, and actually appears, on balance, to be acting as a pretty good parent….

On the other hand, l’Oreal is not just managing the brand, it’s optimising the supply-chains which get these brands to market. Similarly, the profitability of modern carmaking (such as it exists!) is all about platform-sharing, shared development facilities and optimising the communal parts-bin…

What could a luxury goods firm possibly contribute to this? The answer may be ‘quite a bit’.

At present, within Ford’s Premier Automotive Group, the design, performance and positioning of Jaguar is constrained by its need to sit ‘under’ the Aston brand. And vice versa. New, divided ownership would free both brands to live their brand essence more fully.

Aston could move to a much more sporting race-bred focus, and would also be free to move ‘down’ through a Cayman-equivalent, in due course. It would also leave Aston free to re-interpret its Britishness in a much fresher way…

Aston is a much more powerful and transferrable lifestyle brand than Ferrari or Lamborghini…

As this Brand Channel white paper points out, celebrity endorsement of luxury products is nothing new. Nevertheless, it sets out succinctly 7 reasons why celebrity endorsement is important:

1. Celebrity endorsement is a great brand awareness creation tool for new luxury brands.
2. Endorsement by celebrities helps to position and re-position existing brands.
3. Celebrities contribute to sustaining a brand’s aura.
4. Celebrities are used to revive and revitalize staid brands.
5. Celebrities generate extensive PR leverage and opportunities for brands.
6. Celebrities are used to create global brand awareness.
7. Celebrities promote a brand’s products and appeal.

It also points out the dangers of relying on celebrity endorsement—the fallout from Tom Cruise’s dealings with scientology is a good example of the potential for damage which can occur when the media personality in question adopts unconventional behaviour.

However, when used wisely, and when affordable and achievable, paying for celebrity endorsement can bring credence and value to luxury brands. What happens, though, when it’s uninvited, and potentially damaging?

The adoption of upmarket champagne brands by well known rap artists has lead to a certain amount of mud-slinging. Jay-Z has led a boycott against Roederer’s Cristal in response to Frederic Rouzaud’s suggestion that the association between rap and his firm’s products might not be entirely welcome.

But, of course, the explosion of Burberry caps and scarves among the ‘chav’ population of the UK didn’t do their brand any good either. It’s clear that it doesn’t necessarily take an unwelcome celebrity endorsement to damage a brand, but the same fundamental principle applies - the brand had been ‘hijacked’ by a group who arguably weren’t the original target audience.

As a buyer of luxury goods, then, the behaviour and characteristics of other buyers is critical to my purchasing decisions - as a brand manager, though, keeping my products out of undesirable hands could be an insurmountable challenge.

From a BBC News article on the subject:

Graham Hales, of branding experts Interbrand, says the short answer is that brands can do nothing. “You can have an exclusivity around your brand but these are people who can afford it and are voting for it. You have to go try and find a way to make it a good thing.”

Del Forte Denim is designed for the eco-chic woman who is transforming the face of fashion. Made in the USA with 100 percent organic cotton, Del Forte’s premium denim apparel is part of a growing trend which interprets luxury as a combination of distinctive design and ethical production.

Del Forte Denim is just one of many clothing manufacturers who play on their ethical credentials in order to woo customers. In the UK, longer established eco-brands such as Howies have now been joined by high street stalwarts Marks & Spencer, whose Look Behind the Label campaign marked an effort to distinguish themselves from their less ethical competitors.

In the fashion sector, it has historically tended cto be the designers and brands outsid of the mainstream which push sustainability as a selling point. And it’s not just the sourcing of fabrics and labour which these brands are concerned about - it’s what you do with your clothes once you’re bored with them. Del Forte, for example, has a recycling programme, and London’s Junky Styling will transform your old clothes in their boutique workshop.

Whether it’s traceable production, organic fabrics or unionised labour, consumers are becoming increasingly interested in the manufacturing process. Del Forte may be jumping the gun somewhat when they define luxury in terms of ethical production, but there is no doubt that ‘green’ sells - and the days of luxury goods which aren’t may be numbered.

Continuing the automotive theme from ealier this week…

Reuters report that Alfa is to launch a limited run car, the 8C, in an attempt to salvage its poor reputation for quality. Unveiled at the Paris Motor Show, the new model will be priced at 135,000€, and so with a limited run of 500, may not actually represent a significant revenue opportunity for Alfa Romeo.

Nevertheless, it seems that this wasn’t necessarily the intention of Alfa’s boss. From the Reuters article:

The head of Alfa Romeo says the car “is not just an exercise in style”, but part of a wider strategy to help the carmaker reclaim its reputation among the world’s best premium brands. “What we needed was a flagship for the brand,” said Antonio Baravalle in an interview. He sees the 8C as the shape of things to come at Alfa Romeo.

However, while for some the exculsivity is likely to be a draw, surely these are the people who have bought Alfas all along, despite the tarnished reputation of the marque in recent years?

It will be interesting to see whether this strategy has the desired effect - however, as this blog has suggested before:

Unless the expensive product is backed up with outstanding customer service, great packaging and comprehensive after-sales support, the appeal may quickly fade. Simply slapping a bigger price tag onto a poor product experience won’t drive new custom.

It wouldn’t be surprising if this were true in the case of the 8C; luxury must be more than skin-deep.

Back in 2001, De Beers’ Nicky Oppenheimer said:

“I don’t want diamonds to be discounted. I abhor it. What is tantalizing is that at the luxury end—the famous blue box of Tiffany’s—there are brands getting the margins and markups enjoyed in the luxury goods business as a whole. We want to see stores pushing the preciousness of diamonds rather than treating them as a commodity you can discount.”

The lesson for De Beers here is that people buy luxury brands, not commodities. They buy Tiffany and its simple, natural design ethos… not diamonds.

They buy the dreams of living like Audrey Hepburn, a purchase experience of classless quality, and an entree into a ‘club’ of fellow sophisticates, not jewellery…

Martin Löb, master of philosophy and mathematics has died.

Löb is known for his famous ‘green cheese’ paradox.

In mathematical logic terms, the sentence “if this sentence is true then the moon is made of green cheese” is true, implying the moon is indeed made of green cheese…

So now you know.

Coach, the luxury leather producer is suing Target, the discount store for selling rip-off copies of its handbags.

Whether or not the case is proven, it demonstates the difficulty of maintaining integrity of supply for retailers.

Retailers cannot be expected to see down to the bottom of every supply-chain - expecially those of branded goods. The onus is on manufacturers to develop systems which enable them to maintain their own brand integrity. Labelling and branding are not enough. Rich, interrogatable information transfer is required…

Traceability is a core part of the solution. For the diamond industry, Kimberley is a great start of a critical process of consumer accountability.

The article gives several reasons for the declining in prices, referring to global economic slowdown and higher interest rates. What this article almost forgot to say is that sales of diamonds, at least from the consumer’s point of view, are almost uninfluenced by the world’s economy. After all, the global diamond jewelley market is very small - $60 -70Bn and it is a drop in the bucket when compared with the size of the world economy. Say it differently, there will be always wealthy people who will buy these diamonds.

Speaking about the price of a diamond, the question is what is really its price? Let us ask even a more fundamental question: why do people buy diamond in the first place or what need does a possession of a diamond satisfy? Unfortunately, it seems as if nobody in the industry bothered to find an answer for these questions.

It took me several years of research to find out that the reason for buying diamonds is the enhancement of self-esteem. This is a complicated issue that needs to be studied in detail as to understand the role of price in marketing of diamonds and other luxury. It is enough to say that selling luxury in a discounted price is an oxymoron or shooting in the seller’s leg. Luxury has to be expensive or it will lose its attractiveness.

I have to add here two notes: first, one needs a bit of Chutzpah when asking a high price and not giving up. Second, while people will ask for a discount, they do not want it. What they say is not what they mean. They need the bargaining as they feel respected, an activity that enhanced their self-esteem but, paradoxically, they want to pay the full price for the very reason that when paying more their self-esteem increases. Unfortunately, once the jeweler imagines that the buyer might ask for a discount he is offering it immediately.

As this discounting backfires when the luxuriousness of the diamond disappears, its value declines. The decline in price is a clear indication that the industry fails to understand what it markets. While an entire generation lacks a proper education in marketing of diamonds, causing the industry to shrink in the last 25 years, the last few years were disastrous.

Organizational

You can take from the “diamond bubble” article. The main points, if you can do it in few words, is that there is no leadership and the market does not know how to cope with paradoxes. You have more than enough there.

Financial

Idem. The key is that people try to close the sable when the horses are away. There is no money available and people try to raise funds even when they have to assume losses with the hope that tomorrow will be a better day. It is looking at the past, trying to fix things instead of looking at the facts, as bad as they are and ask: “what can we do now with these lousy facts?”

I would finish with two comments:

First, what surprises me is the resilience of the market. While the diamond industry is unique and cannot be comparable, I would anticipate a total collapse and low morality to happen long time ago. I am proud to be part of such an industry that show that robustness and morality are rooted deeper than the level of the balance sheet.

Second, we should be able to assess the facts without fear. The facts are there and hiding from them is useless. Trying to change them, or “fixing” them is impossible as the problems are more fundamental. Thus, it is important to face clearly the facts and ask: what can we do? There is always an alternative for those who have the courage to face reality.

One of the world’s largest diamonds sold for over $12m US at auction in Antwerp on Monday. The Lesotho Promise was sold to the South African Diamond Corporation, which is part of the Graff portfolio.

However, even at 603 carats, it is by no means the biggest discovery in history; the Cullinan diamond weighed in at 3106 carats, and the 530 carat Great Star of Africa, which takes pride of place in the Sceptre with the Cross of the British Crown Jewels, approaches in cut weight the uncut weight of the Lesotho Promise.

Even if, as Isaac would argue, new generations of diamond dealers have lost the passion for gemstones held by their forebears, it would be hard to deny that diamonds of this magnitude continue have the power to awe and inspire consumers and industry players alike.

Watch the Lesotho Promise video at Reuters

This article on Diamonds.net (registration required) reports that Element Six are targeting a turnover of $1bn (US) by 2010.

“We realised that R&D was going to make the difference to this business. Diamond can be engineered in many ways to suit different applications. You can control characteristics like shape, crystal strength and thermal resistance that’s why it’s called an engineer’s best friend,” said Hultner. The company centralised its R&D at its new R14m (SA) Diamond Research Laboratory (DRL), next to the world’s biggest diamond synthesis plant, in Springs, on Gauteng’s East Rand, South Africa.

I find their approach interesting as marketing and sales drive the science. The article highlights the move away from ‘ivory towers’ research towards a customer-focused approach:

Thus began the shift in R&D strategy. R&D had always operated in a kind of ivory tower. Now, for the first time, it was directly informed by the business strategy, adds DRL general manager Serdar Ozbayraktar. “We got closer to our own marketing and sales departments, and, more importantly, we developed research partnerships with our customers.”

Also, interestingly:

Element Six has also put resources into a new way of making artificial diamond, using chemical vapour deposition (CVD). This is a chemical process for depositing a thin film of material (in this case diamond) on the surface of a substrate. The resulting product could be a semiconductor chip that will benefit from diamond’s unique electrical properties or it could be an artificial hip joint that will benefit from diamond’s hardness and biocompatibility.

This has the potential to be a huge breakthrough, so long as they can meet the technical challenges…

This is the first of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking. Randy raises a question about an assumption made in Isaac’s PhD thesis:

Marking up by retailers varies and it depends on the location of the shop, its prestige, the type of diamonds sold and its geographic location. A high end jewellery shop in main luxury shopping European cities might mark up its diamond by about 300% whereas a cheap outlet in the US will mark up only by 40% or less (Even-Zohar, 2002). On average, it is estimated that the markup is about 200%, and the cost of the diamond to the consumer is about 370%, based on the index of rough cost at the beginning of the diamond pipeline.

And so the email exchange begins:

From: Randy Pearson
Sent: Friday, October 06, 2006 5:13 PM
To: Isaac Mostovicz

Dear Isaac,

I did want to ask a question about the diamond bubble piece. You made an assumption in your writing that I’m a little concerned about which was the mark up from wholesale to retail that is captured by the retailer of 200% average. I’m not sure how this skews the analysis, but my instinct is that this number is too high. On the small, melee type items I’m sure this is realistic as it is sold as promotional and in huge quantity, but for the type of shops I have contact with, this is on average much too high.

What I see happening is a squeeze from both ends. That’s the real problem as it’s a sort of implosion. The polisher can not survive losing money on each diamond he cuts and at the other end we through experience know how financially weak the retailer is in this market. A once healthy margin on a 1ct G,VS of 65 to 80% is now 20-40% in most cases and less in some. The current squeeze can only go so far and people will simply quit the fight and move over to another venture.

Anyway, the logic of the article is solid. If I had a criticism it would be that this piece covers too much ground but for a professional publication the total view is important.

Randy Pearson
S. Muller & Sons

Check back at the same time tomorrow for the next installment…

This is the second of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.

From: Isaac Mostovicz
Sent: 10/8/2006 5:08:29 PM
To: Randy Pearson

Randy,

It is very difficult to give such an estimate, as you know and comment. Some take 1ct or 0.5ct as a benchmark but this is not better either. Therefore, I preferred to rely on Even-Zohar as a source. He is honest enough to know the complexity of the market and provide these numbers as an illustration only. There are so many factors in building such a graph: the type of diamond (size and quality), the geographical market, the type of outlet, the time that the data was collected (now the situation is worse) and more. However, this complexity is more pronounced at the retail level.

You are correct about the squeeze at both ends, or throughout the pipeline. In the past, people were ready to suffer blows as they knew that in the long run they will win. This was the case with sightholders who were ready to overpay for their boxes, knowing that the DTC will pay back its loyal customers for the losses by offering special goods. Unfortunately, I believe that the DTC is not making money either, even when their mining operations are considered to be the most efficient in the market. De Beers is now a private company but did they stay a public company we’d see a hostile takeover. This article in IDEX confirms this squeezing trend.

Isaac

Once again, check back at the same time tomorrow for the next installment.

This is the third of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.

From: Randy Pearson
Sent: Monday, October 09, 2006 5:22 PM
To: Isaac Mostovicz

Is this trend leading to a “new diamond market” where diamonds become once again unobtainable to the masses? At the end of the day, there is little room for efficiency gains, so prices must go up. If indeed the market forces operating on De Beers are such that once they pay for African empowerment, government taxes, extraction costs, exploration costs, stockholder demands, etc. that they simply can not afford to produce on such a large scale, then maybe their future is a smaller scale profitable business that charges what is necessary to make profit. The same is true all through the food chain from the rough dealer to the retailer. Maybe the world should consider that diamonds may be forever, but maybe not for everyone.

Is it healthier in the end to have a much smaller, but healthier industry that supports presenting diamonds to those who can afford to buy them? I know it sounds simplistic, but for the past 40 years the industry has been extending the definition of what diamonds should be accepted by the jewelry buying public and the status of diamond as a luxury statement has eroded by the same magnitude. When Wal-Mart is the world’s largest purveyor of diamonds then we all can smell that something is wrong.

Anyway, this is one of many outcomes possible; emerging markets will play a big role as China is an untapped market and many more exist. De Beers may be able to hold things together, but in my opinion they will need to make some big moves. When SoC began, they needed to find sightholders who could move the type of rough that they were producing. So far, this type of diamond has not performed at the consumer level which is the unspoken problem. This under performance has lead to high debts and many of the current problems. It may be that consumers simply do not want these goods.

As for higher level goods, I see the problem as more short term. At some point the balance will tip and people will decide that it is better to produce less and sit and wait for a price where they can make profit. For those supporting programs, they will be forced to evaluate each individual client and make sure they are profitable on each one and eliminate those who fail. Only then can they justify the investment required to support the initiative.

Anyway, just thoughts from the street level.

Randy Pearson
S. Muller & Sons

Once again, check back at the same time tomorrow for the next installment.

This is the fourth of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.

From: Isaac Mostovicz
Sent: 10/9/2006 6:24:12 PM
To: Randy Pearson

I think that Randy raises a point that needs a further exploration. Until the 60s the range of what were considered diamonds suitable for jewellery was much more restricted. The Indians learned how to produce rough that was previously considered unsuitable for jewellery. I raise the following question: is it possible that the market became too large in the sense that many of the goods that are offered are unsuitable for consumption? In other words, the production of real diamonds is very limited and if we manage to market only these goods, the offer will be limited but we will be able to raise prices to very high levels as the availability will not be there.

One of the reasons for the SoC was the unsold stockpile of $5bn (US). The claim of the shareholders was that the worth of this stockpile is nil, something that the DTC tried to prove wrong by selling the stockpile for the price they wanted. However, selling the stockpile was not an indication that the need for these goods exists. To take an analogy from what we have on hand, we, at Allied, have plenty of goods but if we want to be faithful to our program, only a limited part of this stockpile is suitable as need satisfiers. Nevertheless, it is our responsibility to find ways for using these goods for satisfying clear and existing needs.

Another example is Patek Phillipe that produces only 18000 watches per year regardless to more markets that open. It is very tempting to try and to cater to the entire world but there are other ways for making money and mass marketing may not be suitable for diamonds.

The last point that Randy raises is interesting. Good manufacturers burned their fingers in the last years by manufacturing. It is possible that people will try to slow down manufacturing as keep prices of rough at bay and gain from selling his existing stock, effectively lowering the level of stock. I am not sure that all will follow but as a different policy is the way of those manufacturers who might suffer and even close down, we are facing an interesting period.

Isaac

Once again, check back at the same time tomorrow for the next installment.

This is the fifth of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.

From: Randy Pearson
Sent: Monday, October 09, 2006 8:55 PM
To: Isaac Mostovicz

To extend this a bit more, I see this point as one example of how SoC has worked as intended. DTC had a problem of stock that was unsuitable. Their existing sightholder base was not equipped to produce and distribute these type of goods that they had stockpiled. By bringing in “new sightholders” they were able to move out these goods and leave it to the banks and these clients to find a way to cash these goods. The banks took the sightholder status as collateral for the loans based on the experiences of the past and now they have a problem. These goods were consumed into the marketplace via the sightholder transfer of ownership from DTC to the SOC, but then we have a bottleneck as there was low demand at the consumer level for this article (that’s why they stockpiled them in the first place - remember there was no reason for them to stockpile other than low demand back in 1999 as markets were healthy). In one viewpoint, their tactic was brilliant as they did this on the backs of these “new SOC sightholders”, but on the other the banks that support the industry will suffer.

Of course, I do not have privy to how gets which box and assortment of goods, but you can get a clue based on who the new players are and who was eliminated. New Indian companies and new firms that polish in Africa. If they divert this unsuitable rough to these firms then they satisfy the political problems while liquidating dead assets.

Yes the standard of what is jewelry quality has slipped greatly. There is no doubt of this point. It has opened markets to the masses, but I would argue has greatly damaged the diamond dream and the symbolic value of diamond. On one hand you can argue that everyone should share in this dream and I tend to agree, but at what cost and where do you draw the line. Recall the decision of DTC in 1999 regarding the Millennium Diamond. They set a standard of rarity that was far higher than their average production. Do you imagine they did this without research to indicate that if you place the range too low it would not appeal to certain demographics or targets? Why did they not select smaller goods in promotional quality range? Were they concerned about the image of diamond as a symbol?

These are just thoughts, but it may very well come to pass that we have further segmentation in the industry when the dust settles. I would much prefer to be selling our range of goods than bags full of promotional goods selling on a volume basis during the next few years.

One question to explore is, “what is the definition of a diamond that represents the symbolic diamond dream?” Where is that line and how do we know if it is crossed?

Randy Pearson
S. Muller & Sons

Don’t forget to check back at the same time tomorrow for the final installment.

This is the final post in our mini-series documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.

From: Isaac Mostovicz
Sent: 09 October 2006 20:39
To: Randy Pearson

Dear Randy,

Here are my comments:

You raise a classical point as companies under a pressure to produce short-term successful results, act against their long-term goals. There is no doubt that the act of the DTC was brilliant in the short-term and the SoC is only four years old. They managed to get rid of their stockpile and turn it into money. However, what happened in the last years shows that they did not take into consideration long-term consequences and as a result, they are unable to sell their entire intake and, effectively they build a second stockpile, they have a problem with their profitability and in spite of an increase of volume and price, their profits raised only marginally (I think that the figures for 2005 were 3%).

In regarding the Millennium experience, I have several observations to make. While we advocated high prices (we sold at +30% or more), other participants did not even thought that these prices are possible. Together with this, we advocated top make and had to fight with the other participants (mainly Americans) who wanted a much more lenient standard. To add insult to injury, the level of rejection by us was 3-4% and I knew beforehand most of which will be rejected. On the other hand, the rate of rejection by others was 30-40%! Last, but not least, to become a Millennium distributor we had to submit a marketing plan. When all participants met in April 2000, the DTC introduced them to the 4Ps which was considered by many as a brilliant novelty. My question is how exactly looked the marketing plan of the other participants? Taking into consideration that the DTC was not involved in the marketing of the product, it is not a surprise that the program crashed. Give a F1 to someone who does not know how to drive and he’ll crash it in no time.

Your last question is excellent. I must say that my imagination is limited and not every diamond is appealing to me or can be considered a luxury. Thus, I do not exclude Indian junk as long as it is presented properly. Rolex is a junk of a watch, unless you use it as a calendar but it is the finest example of what luxury is. The legendary Jaguar E Type is of the same league. However, when you treat cheap diamonds as junk, that’s what happens.

Isaac

We hope you have enjoyed this mini-series; do let us know what you think - the comments field is open!

The new trend of renting designer items instead of buying them seems bound to extend into the jewellery arena sooner or later….

I would like to discuss this trend from the point of view that the role of luxury is to enhance person’s self esteem.

Today, people seem attached to their “things” as a defensive tactic. However, on its face, it seems as if by renting a “thing” for a day would not do the trick as the temporality of the action will not allow for the needed emotional attachment.

In the ‘old days’ brands that lasted forever, as the London shoe designer that promised that his shoes will exist even after their owner will die, were built around this idea of building a lasting relationship with their owner.

However, with fashion statements that keep on changing every six weeks, luxury brands have had to change their strategy. Good brands have ‘a look’ and then create new incarnations of that look to maintain freshness and exlusivity. For example, my mother in law liked to buy Celine whereas my wife finds this line unsuitable for her. In other words, people start to be identified with certain brands and even when fashion changed, “their” brand supplied them with their needed look and feeling part of a stable fashion.

Nevertheless, we can see people who are able to establish their own brand or statement. In this case, the brand that they use does not have a real meaning in that we talk about a “Chanel” woman as in such a case, it is the woman who decides on what fits her.

Thus, we can see two trends that derive from the development of luxury brands. The older trend is a message of security and power where the woman can make her own statement, regardless to the message that the brand is interested in.

The newer trend is one of instability and temporality when a woman is looking for her own identity. With mounting costs of luxury and designer’s items this identity-seeking exercise became exorbitantly expensive.

Thus, these women will look for more economic solutions and will prefer to test their look before committing to purchase or even not buy at all as they lack security.

If they are from the latter group, they do not need to purchase as they can create their own contemporary look.

A luxury marketers what we need to check is whether this trend announces a change in the market in that the luxury market will not grow per se, but change its patterns…
or does this trend open more opportunities that will bring into the market people that otherwise would not be part of it.

We should not think, for one minute that this trend will not change internal patterns, though.