Diamonds are forever – if you spend a lot of money reminding people
Diamond giant De Beers was almost certainly getting bang for its buck with its growing expenditure on advertising, chief financial officer Nimesh Patel said this week.
In the first half of this year, De Beers bought out its partner in De Beers Diamond Jewellers, a retail operation with 29 stores in 16 countries. Luxury goods group LVMH held 50% of the business.
Alongside the Forevermark branded diamonds, De Beers sells through 2 080 outlets in 25 markets, which means more exposure to the downstream end of the diamond business.
“Our involvement in the downstream is for driving demand. The core principle has been to drive that demand,” said Patel.
In effect, this is part of the group’s increasingly large marketing budget.
De Beers spent $140 million (R1.8 billion) on marketing in the half year, 20% more than a year before.
“Every time we talk about upping the budget for marketing, I ask what the return will be,” said Patel.
“It is hard to measure, but the history of this industry shows a direct correlation between dollars spent and demand. The best example is Japan – a few years ago, we decided to reallocate spending from there into China. You can see the affect, not only in higher Chinese sales, but in lower Japanese sales. There is undeniably a link.”
De Beers results for the first half of this year show that the company sold more carats at a lower average price, which is to some extent due to the disruption of the Indian market by that country’s unexpected “demonetisation” experiment of removing large-denomination notes from circulation.
India is a sizeable diamond market and one that is cash-based.
“There was a degree of disruption with less lower value goods being sold, but we knew that would happen,” said Patel.
Total carats sold in the first half of this year rose 7% to 18.4 million, but the price per carat fell 12% to $156.
This, said Patel, reflected the return of the demand for those lower value diamonds in India.
Overall, the company’s revenue fell slightly to $3.1 billion, but earnings rose thanks in large part to a return of margins in De Beers’ marketing division.
Marketing contributed $281 million to earnings before interest, tax, depreciation and amortisation, which was slightly more than mining did.