Diamonds: are they of “enduring value” or just plain luxury?

Isaac Mostovicz writes...

De Beers new emphasis on “enduring value” is achieving widespread coverage.  Many in the trade, like JCK magazine, really WANT to believe the message!

Reading through the hopeful message of De Beers, it is easy to find many rational arguments that diamond prices are sound, but the truth is, the arguments are flawed.

The first of the arguments is that diamonds are of “enduring value”. I simply do not know what enduring value means here, given that we all know that diamonds are not a viable form of investment and never have been.

The second argument is that it is better to buy now because the supply of diamonds is limited – as existing mines are depleting or even depleted and no big mines are on the horizon.  The industry has been spinning this yarn for years when it wasn’t true.  So how can we expect consumers to believe us now?

It will be particularly interesting to see how this particular argument helps in convincing a retail customer who stands in front of display-case after display-case overflowing with diamond jewellery; not to mention the immensity of the diamond jewellery overhang, lying dormant in domestic jewellery boxes.

The final argument DTC makes is that among really affluent buyers, price is not an issue. I do not know who these affluent people are and what their weight might be among diamond buyers. Data shows that since the mid 1980’s the “sweet point” of diamond purchases simply did not change. In the US, with its social multi-layered demography, most of the diamonds sold are in the range between $2000-4000 while in Japan this “sweet point” still hovers around $2000.  For diamonds, sold as commodities, price does matter!

Of course this could all change if we reverse the tide of the 1980s and return to first principles.  Diamonds are luxury, pure and simple. They must be sold as such.

The one thing we know about luxury is that it is ultimately irrational (the subject of my PhD – thankfully now completed!).  Luxury is a fine example of the fact that that the value for money is NOT what we seek. When we ask people for a definition of luxury we usually get two answers.

First, we hear that luxury is expensiveness and second, we hear that luxury is unnecessary (or superfluous). In this sense, diamonds are, in principle, the pinnacle of luxury – as they are, quite literally of no use whatsoever.  When it comes to valuation, saying that luxury is unnecessary opens the door to premium and unbounded, personalised pricing – the antithesis of commodities.

Instead of recognising and embracing the irrational consumer, since the 1980s,  De Beers has adopted a rational line, looking to “educate the customer”.

This is still the producers’ strategy – at the expense of the industry , which simply has to follow the leader’s line.

However, as these ‘rational’ arguments will never convince any serious customer, we have seen and will continue to see a lower proportion of people interested in diamonds.  Other luxury offers, by contrast remains resolutely irrational – and many categories are indeed relatively resilient to economic considerations. Purchasing of luxury is ultimately an irrational activity.

Of course it is just possible that during the coming six weeks American customers will storm the jewellery stores and clear up everything still in their vaults delivering a knock-out blow to the recession.

My feeling, though, is that we are looking less at a boxing match and more at a game of Russian roulette that may well send the final blow to the de-facto bankrupt industry.  Doubling up the Christmas ad spend and pleading with consumers to value ‘their commodities’ at heavily inflated prices is a very big gamble indeed.

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