From A Nonessential to A Necessity: A Diamond’s Transformation

Before 1947, Diamonds weren’t forever; they weren’t even a while.

Diamonds were seen as a gift that only the extremely wealthy would get for their significant other in the early 20th century. Most women would have preferred a new car, washing machine, or mattress. Women wanted something practical, rather than some gaudy ring on their finger that just appeared as a waste of hundreds or thousands of dollars. This was the case, until a Ms. Gerety came up with the slogan that Advertising Age named the slogan of the century in 1999.

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Francis Gerety was hired by a Philadelphia advertising agency by the name of N.W. Ayers in 1943, and her only client during her time there was De Beers Diamond Jewelry. When Ms. Gerety submitted the famous slogan “A Diamond is Forever” in front of her colleagues, they were as displeased as she was. Ms. Gerety felt that the line wasn’t that good, and her colleagues thought that the word “forever” didn’t even make grammatical sense. Thankfully, she gave it to De Beers and it has been in every one of their ads since 1947.

This ad slogan essentially transformed giving a diamond ring to your significant other from something that was seen as unneeded into a social norm. Diamond sales had been slumping for decades, especially going into the Great Depression. Gerety and N.W. Ayers were trying to sell the public a product that they didn’t want or need. The powerfulness of the slogan is based on its simplicity and emotional appeal. It was a way to symbolize to your significant other that your love was timeless, and what better way to capture all of that emotional sentiment  than with a diamond ring? The repeated advertisement and gaining popularity of the slogan created a psychological phenomena in Americans’ heads that diamonds were valuable. This played right into De Beers’ wallets.

De Beers created a diamond monopoly in the late 19th century and early 20th century, carefully controlling the supply of diamonds into the market. They were able to figure out a way to sell a stone that had no intrinsic value unlike precious metals such as gold and silver. In addition to appealing to the ethics and emotions of an eternal love and marriage through their famous slogan, they also discouraged consumers from ever re-selling their rings. This ability to discourage reselling prevented a disrupt in the market because if many consumers resold their rings, the market would realize that diamonds really had very little intrinsic value.

While De Beers couldn’t remain a monopoly in the American as well as global market, they ensured that they would remain in the $72 billion dollar a year market just as long as the product would; forever.

Sources:

http://www.nytimes.com/2013/05/05/fashion/weddings/how-americans-learned-to-love-diamonds.html?_r=0  

https://www.washingtonpost.com/opinions/why-a-diamond-is-forever-has-lasted-so-long/2014/02/07/f6adf3f4-8eae-11e3-84e1-27626c5ef5fb_story.html

http://blog.hubspot.com/marketing/diamond-de-beers-marketing-campaign

10 thoughts on “From A Nonessential to A Necessity: A Diamond’s Transformation

  1. You raise two separate issues. One is whether it is possible to “create” a market where none existed before. The answer you give is “YES”. (Note that gold also has little intrinsic value beyond its decorative function, whereas silver has an array of commercial uses. Non-gem-quality diamonds have many industrial uses. Diamond dust isn’t particularly expensive.)

    The second issue is that of a diamond monopoly. Keeping prices high means that you need to keep diamonds in inventory, either in your vaults or in the ground by not mining at a fast pace. Now in the 1800s de Beers owned the major mines in southern Africa that were the only incremental source of gem-quality stones. Think though of the incentive that provided to geologists, particularly once diamonds were forever and small stones could be sold. (My sense – I may be totally wrong – is that smaller diamonds weren’t particularly valuable, in contrast to trophy stones, the Hope Diamond and so on.) So how what happened next? Were geologists unsuccessful? Or did de Beers face – and solve? – the challenge of new entrants.

    These two issues are in fact closely intertwined. Let me save why that is the case for later, or challenge others in the comments to puzzle it out.

    • Looks as if De Beers did face some market struggles, particularly in the 1990s. In 1994, the US DoJ charged both De Beers and GE with a conspiracy to fix diamond prices. This issue was ultimately resolved in 2004 when De Beers paid a $10,000,000 fine and plead guilty to the accusations (Berkeley Presentation).

      Besides the price fixing allegations, De Beers faced other issues in the 1990s. According to the presentation cited below, the collapse of the Soviet Union, new Canadian diamond mines, and the popularity of synthetic diamonds all contributed to De Beers’ 20% loss of market share (from 85% to 65%) during the 1990s (Berkeley Presentation).

      As far as a solution to these problems goes, De Beers decided to refocus on reinvigorating their past successful marketing. They also partnered with Louis Vuitton to move into retail (Berkeley Presentation). This must have done some good, as income rose from $676,000,000 in 2003 to $923,000,000 in 2014 (Berkeley Presentation; Diamonds.net).
      Sources:
      http://are.berkeley.edu/~sberto/DeBeersDiamondIndustry.pdf

      http://www.diamonds.net/News/NewsItem.aspx?ArticleID=50393&ArticleTitle=De+Beers+Profit+and+Revenue+Soar+in+2014

  2. How has De Beers reacted to the shift in consumer demographics in recent years in the diamond industry? Popular culture in the 21st century has put diamonds into national attention, whether it be athletes wearing diamonds during interviews or Hip/Hop artists writing songs about them. Thus, diamonds have become popular in populations that they usually were not. Did this change De Beers strategy at all, or did it open the market to new firms, decreasing their market share even more?

  3. You mentioned that de Beers was able to successfully discourage consumers from reselling their stones, and that this helped them in the long run. Yet, how was this possible? On a practical level I reason that de Beers can spread word all they wish, but without credible commitments or control over resellers I don’t see how de Beers could successfully mitigate turnover of their diamonds.

    In this situation I think of a dilemma between rent-seekers and producers. At a certain equilibrium both rent-seekers and producers can maintain profits without an incentive for either parties to switch roles. However in this game, when there are a lot of producers (or in this case, not many rent-seekers), players have a high incentive to become rent-seekers to reap the benefits of this untapped revenue stream. In this example the rent-seekers would be resellers of de Beers diamonds.
    I would like to know how the company was able to avoid this situation of the producer/rent-seeker dilemma.

    • Interesting ideas. I would argue that used diamond market is really not that liquid or profitable. An article from The Atlantic tells an interesting story about a wealthy woman tried to sell her diamond ring in 1978 after reading about the “diamond boom” in magazines and wanted to make some profits. It turned out that none of the stores were willing to buy it back from her at a fair price, some even offered to swap it for another jewel. Since the markup on a diamond is extremely high (more than 200%), retailers would only pay for the wholesale prices for the diamond; however, this would not only be “deemed insulting” to the customers, but also be undercutting the notion of high intrinsic values of diamond in the market.
      http://www.theatlantic.com/magazine/archive/1982/02/have-you-ever-tried-to-sell-a-diamond/304575/

  4. Retail purchasers may not get back the full price on a ring, given the markup, but how about wholesale markets? If diamonds are not forever, then they start to look like Bitcoin, no particular foundation to their value if prices can zoom and plummet on the basis of fads (but perhaps of use if you’re a criminal needing to launder money).

    A similar example: should a new car purchaser look at the used prices for their car?

    Finally, if you want to sell Grandma’s diamond ring, is going to a jewelry store the best route? I suspect not.

    • Is this a fundamental issue of the diamond market? Diamonds do not depreciate the same way cars, factories, or other traditional assets do. The reason diamonds are resold for so much less than their original purchase prices appears not to be practicality, but born from the market itself.

    • I’m not an expert on Bitcoin, but the two fields (diamonds and Bitcoins) seem to me to be wholly different. Demand for diamonds are influenced mostly by the effectiveness of advertising strategies, whereas the demand for Bitcoins stems primarily from their usefulness as a tool to purchase items online – especially, as you point out, items of a nature such that the purchaser (or seller) wishes to remain as anonymous as possible throughout the transaction. Of course, Bitcoin is used in more legitimate transactions as well, as a substitute for Paypal. And, being a product fabricated online, the supply of Bitcoin can expand or shrink far more easily than diamonds can.

  5. You mentioned that De Beers created a diamond monopoly in the late 19th century and early 20th century by controlling the supply of diamonds that enter into the market. However, I am curious how or if they have been able to maintain this control of supply in recent years. Since the boom in demand for diamonds at the launch of their advertising campaign, it appears that other major competitors such as Alrosa and BHP Billiton have entered into the market. I am curious as to how this recent lack of control of the supply of diamonds has affected the market price.

    • So do we have an index of gem-quality diamond prices? I think one of the “recent reads” on the blog sidebar has such a graph, showing prices down a lot.

      Now if population is growing and incomes are growing, then as long as consumers believe “diamonds are forever” there is incremental demand that can’t be met by reselling old stones, which may be in the form of inheriting grandma’s jewelry [and perhaps resetting diamonds to match today’s fashions].

      So if de Beers can keep the supply of new gemstones limited, then life is good. Let expectations change, perhaps as a result of new entry by producers who don’t join with de Beers, then the market can potentially collapse.

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