In July this year, there will be a new guy in charge of the DTC. He is by no means, however, a stranger to the company. In fact his entire career has been spent working for the diamond giant in a variety of capacities.

 

His career began in Anglo American Corporation of South Africa as a management trainee, with responsibility for the establishment of the Anglo American and De Beers Small Business Initiative. He then transferred to Debswana Diamond Company where he project managed the construction and start-up phase of Teemane Manufacturing Company, a diamond cutting factory situated in Botswana.

From there, he moved to the DTC's Sales Department in London before returning to Johannesburg to take up the position of personal assistant to the Chairman of De Beers and the Anglo American Corporation. He was promoted to the position of diamond consultant for Southern Africa in April 1996, where he was responsible for the sales of rough diamonds to the South African cutting industry, as well as other related matters. In January 1999, this Rhodes Scholar was appointed to manage the De Beers Strategic Review. In July 2001, following the completion of the review, he was appointed director of DTC’s sales and marketing activities, based in London. He is also on the Board of Directors of De Beers Centenary AG and on the board of De Beers Societe Anonyme (the De Beers Group of Companies).

 

He is, of course, Gareth Penny, considered by many as the architect behind Supplier of Choice and the one man who can lead the DTC into a new market-driven competitive environment. But can he achieve this enormous goal?

 

Penny recently talked to IDEX Magazine Editor-in-Chief Virginia Halevi and explained how the DTC is moving ahead in its quest to drive diamond demand. From jewelry retailers to fashion designers, manufacturers to marketers, Gareth Penny lays all his cards on the table.

 

Now that Supplier of Choice is well underway, what are the major benefits and obstacles, specifically downstream, that you have been coming across?

 

Last year we saw that diamond content in PWP (polished wholesale prices) grow by an astonishing 6.7% in dollar terms. This is ahead of GDP. We are now very much in a growth industry.

 

It is always our point of departure to remind ourselves of what happened in the 1990s. This business, measured in terms of consumer demand, was declining when you look at it globally. There were some markets, like America, that showed consistent growth throughout the period, although not necessarily above GDP. But three out of five regions across the globe - Japan, Europe and South East Asia all declined significantly in the 90s. Supplier of Choice was designed to address this. We asked ourselves ‘what are the reasons for the under performance and what do we have to do in order to make sure that we are in a growth business?’ The strategy that we have embarked upon has had significant, positive consequences in terms of retail sales of diamond jewelry. This is the third year, in the past five years, that diamond jewelry demand has grown faster than GDP, whereas there was only one year in the nineties in which this happened.

 

Looking downstream, how is the Supplier of Choice program affecting retailers’ sourcing of polished diamonds?

 

I think retailers are, and should be, positive about the impact of Supplier of Choice on the industry. The results speak for themselves. The challenge that faces us, together with all members of the trade, whether they are sightholders, non-Sightholders, wholesalers, jewelry manufacturers or retailers, is to try and provide products and an environment that excite the consumer. How any one retailer (or other trade member) organizes itself in order to meet this challenge is clearly up to them. What we are saying, by way of encouragement, to retailers is, ‘build your relationships, look for consistent supply, know your suppliers so you can be confident about issues to do with conflict diamonds and other best practice principle issues and work with your trade partners on marketing ideas and new ways of exciting consumers and adding value’.

 

There has been for some time a huge discrepancy between the price of rough and polished. Why is this so? Why has the price of polished not increased in tandem with the prices of rough?

 

Polished prices are rising and in some cases significantly. The indications are that in many areas polished prices have risen in high single digits since the beginning of the year. We are seeing growth in retailer demand coming back through the pipeline to the demand for rough. Polished prices did appear to remain static for a while, but now they’re on the move. Rough is in short supply. This is likely to continue to be so.

 

There has been a lot of news and controversy over the past 12 months regarding the implementation of SoC. How would you answer critics regarding the way SoC was implemented?

 

It was always going to be difficult, no matter how we did it. There were people who, no matter what we said about SoC beforehand, felt they would nonetheless have a Sight for life. The formal introduction of Supplier of Choice was always going to be extremely difficult for those businesses who did not then meet our objective criteria as well as others with whom they were competing, and therefore did not qualify to receive supply under Supplier of Choice.

 

Currently the number of Sightholders stands at 84 companies, what is going to happen in the future, will you end up working with just a few companies?

 

We have no desire to have a very short list of sightholders. We also have no pre-determined number of sightholders. Most relevant for us is - what do we have available to sell, and how are we going to sell it in a way that is going to drive efficiency and demand for diamonds? The number of sightholders is a consequence of what we have to sell and how those sightholders apply for these goods.

 

Over the past couple of years, we have seen some confusion over just what branding a diamond is. Is it branding the stone, the jewelry line or as retailers more and more point out, they are marketing/ branding the point of sale - the retail shop? Just how and what do you foresee as ‘branded diamonds’?

 

IDEX says: ‘The spirit and character which an individual or organization shares, is its brand’. I am happy to subscribe to that definition. A brand is something that talks to the spirit and character of your product or company. It can be any of the above that you mentioned. It can be a cut. It can be the way you position your company, be it B2B, B2C, it can even be Internet-based. It is something that differentiates your service and your product - that makes it stand out from being a commodity. Each business can find its own particular way of expressing that spirit and character. We strongly believe there are opportunities for everyone and every type of activity we’ve discussed. Our research also supports this belief.

 

There are two characteristics that a brand needs to have to succeed, in our view. It needs to have differentiation and relevance. Just differentiating something doesn’t necessarily give it relevance. Making something relevant without differentiating is also difficult to do. To build a successful brand, you probably need to have both.

 

How much of the diamond jewelry market is branded and what percentage is generic?

 

It is impossible to try to define the market in this way. For example, if you walk into Zale’s, would you define the diamonds in Zale’s as branded or non-branded? Zale’s store is a brand although not every diamond that is sold in the store is marketed as a Zale’s diamond.

 

We spend a lot of our time considering branded ideas, the Three-Stone ring, Right-Hand Ring, Trilogy, etc. The Three Stone Ring is an idea that is being sold - an idea that has deep relevance with the consumer. The relevance symbolizes a relationship - where you’ve come from, where you are today and where you’re going in the future. Today, the Three-Stone Ring is a $2 billion plus segment of the diamond jewelry market. If one takes all of these ideas together then the branded market is growing quickly.

 

Has the share of diamond jewelry sales in the luxury goods category also increased?

 

Certainly in the past few years we have outperformed many segments of the luxury goods category. The diamond business is also now more evident in the luxury goods industry itself. Many companies in luxury goods that were not previously in diamonds have now entered the diamond category. They would not be doing that if they didn’t think there were significant opportunities.

 

How can retailers increase their sales of diamond jewelry?

 

This is an industry that at its core needs to understand the consumer and be marketing driven. If retailers do this and reflect consumer needs in their products and services, they will increase their sales.

 

How do you see the impact of synthetic diamonds on the natural diamond business? Is it a threat? Or do you foresee it becoming a separate market such as cubic zirconia or moissanite?

 

I believe that synthetics are likely to be one of the important competitive challenges the natural diamond business has faced. Having said that, I believe the diamond business will rise to this challenge as there are fundamental differences between the two products and, in my view, they cater to very different audiences.

 

We know within a certain number of years there are likely to be significant volumes of synthetic stones available for purchase. If the natural diamond industry was going to compete on a basis of price with synthetics, i.e. you’ve got a natural described by a certain set of characteristics, competing with a synthetic also described by the same set of characteristics at a significantly lower price, it’s fairly self evident as to what the result would be. However, I don’t believe that that situation will exist. Synthetics raise a number of issues of concern to the industry.

 

Essentially, these boil down to three main issues, detection, disclosure and communication. First of all, as an industry, we need to be able to detect a synthetic stone and I am happy to say that this is currently possible. De Beers will continue to strive to ensure that this remains the case. Secondly, we need, as an industry, to address the question of how to prevent synthetic stones from being unscrupulously inserted into the pipeline so that their true nature is not disclosed. Finally, we need to ensure that members of the trade and consumers know the difference when making their purchases and can therefore make an informed choice.

 

Turning to the issue of competition between natural diamonds and synthetics, the question is how to encourage consumers to still desire the real thing. That’s where marketing comes in. But marketing can’t succeed in the absence of the above three fundamental issues being addressed, and each of those three issues is at the heart of DTC’s objectives as we operate Supplier of Choice. I believe these issues will present a challenge. They are important to maintain consumer confidence in our industry and in natural diamonds. I firmly believe that the responsible approach and commitment to integrity demonstrated by many within our industry will enable us to rise to these challenges.

 

What about the online sales of diamonds to consumers, do you think it will have any impact on traditional ‘bricks and mortar’ sales? E-bay for example sold $1.3 billion worth of jewelry and gemstones in 2003. Every two seconds they sell a piece of jewelry and every minute a loose diamond.

 

In our experience, most people still want to buy a diamond in a physical environment, providing they have a compelling shopping experience. People don’t mind paying 5% or 10% more for something they’ve bought, if they have a very high level of confidence in the jeweler and they feel they are getting value for money. Diamond jewelry is a product a consumer wants to touch and feel. What e-business is doing, is affording greater competition to the bricks and mortar business. I believe the bricks and mortar businesses can compete, but not on the basis of a commoditized product.

 

With a population of over 1.2 billion the growth potential in China is enormous. How are you marketing and targeting this market?

 

I think China is an extraordinarily exciting market. China and India are probably the two largest growth markets in the world. They are both growing at double digit rates. The India market for diamond jewelry for example grew last year by 22%. China, post SARS, grew by almost 20%. China is urbanizing and developing at an incredible rate and the retail sector is changing very quickly. There are some possible developments that will positively affect the diamond industry in the short-term such as the reduction in VAT. Last year we were marketing in 11 markets in China and this year we are expanding our marketing activities into 20 markets.

 

 What is the DTC’s area of responsibility over the various Diamond Promotion Services (DPS) worldwide? What is the role of the DPS and the DTC’s area of responsibility over them?

 

The role of the DPS generally is to grow consumer demand for diamond jewelry and to assist the retail trade in the sale and promotion of diamonds and diamond jewelry. In key markets outside the US, where DTC does not carry out marketing activity, they also help manage catalytic DTC-led marketing programs and seek to encourage local marketing activity amongst the trade more generally. In many respects, the DPS in these markets are the executors of DTC marketing ideas, but they also help to grow these ideas. We consider they have a valuable role to play in encouraging quality and effective marketing.

 

In conclusion, our message to the market is a positive one. We see a great opportunity in this business. We are excited about the way it performed last year. In the second half of the nineties, the business was declining at 0.2% per annum on average.

 

In the past three years on average we have grown by 2.8% and last year we grew by 6.7%, despite SARS, the war in Iraq and recession in many parts of Europe.

 

This year, if we are going to keep up with GDP, we are probably going to have to grow by 7%. The diamond industry is closing the opportunity gap.