One World

By Shuan Sim

As the world becomes more interconnected, globalization takes unexpected turns.

Business has become increasingly global over the years, and the diamond sector is no exception. Everyone, from those in the supply chain to those consuming diamonds, have gone from a parochial view concerned with developments in their own countries to one where they look outward for trends, opportunities and inspiration. This new perspective has been brought on by technological advancements and the increased interconnectedness of economies around the world, to name a few of the factors encouraging this global view. But experts generally agree that China has been the primary driver of the recent broadening of the luxury industry, including diamonds.

What is Globalization?
“At its basics, globalization is about local markets democratizing and opening to a larger consumer base,” explains Claudia D’Arpizio, a partner at Bain & Company. “It could be the same product, but consumed by millions around the world. The horizons of brands become expanded.” However, she adds, globalization is more complicated than consumers around the world buying the same thing — it is also about tailoring to local needs. Fifteen to 20 years ago, being “global” to the luxury industry meant having 20 stores in big, metropolitan cities such as in New York, Paris or London, D’Arpizio says. Consumers were used to going to the same cities for these goods.
Now, it’s about having a much bigger network of stores. D’Arpizio points out that brands have to be nearer to where customers live, resulting in more competition in the same arena. Many luxury brands previously considered “global” have relaunched or revilatized themselves in order to meet current consumers’ buying behavior. Major luxury brands used to be frequented by what was called “jet set nomads” — people traveling mainly to major cities for holidays or for business — D’Arpizio notes. Today, these brands have expanded into emerging markets, such as in China. Stores in established markets are frequented by visitors from these emerging markets, and unlike the “jet set nomads,” these visitors are motivated mostly by price differentials between goods in their home country and those found abroad.

Globalization of Demands
The same rules apply to international jewelry brands, such as Bulgari and Cartier, which have expanded the same way historically. That is not to say, however, that the diamond industry globalizes exactly the same way as other sectors of the luxury industry do, highlights D’Arpizio. After all, the products are inherently different.
Diamond jewelry can carry a lot of added meaning, given its strong links to the bridal industry. Some consumers even see it as a sort of investment. Unlike other kinds of luxury goods, however, diamonds have less utility, says Chris Ellis, head of Consensus Advisors, a boutique investment banking and financial advisory firm in London. “If you buy a yacht, you know you’re getting to use a yacht. Diamonds and diamond jewelry are intrinsically decadent,” explains Ellis. “They’re more of a want than a need, and they’re more marketing dependent.” He likens diamond consumption to possessing works of art — it is perennial.
Diamond jewelry also requires a great amount of tailoring to a customer’s needs, according to Patrice Nordey, founder and chief executive officer (CEO) of Velvet Group, a luxury consultancy group based in Shanghai. “There is also a limited supply of jewels, and fine jewelry requires even more customization.” As a result, diamond jewelry is a luxury sector that needs the most amount of localization. “Leather goods can have logos or take on specific shapes that are easily identifiable, and that plays a lot into emerging markets when they consume luxury goods,” says D’Arpizio.
Nordey explains the stages of luxury consumption in countries as they develop. The first stage is a logo-centric consumption. Consumers go for conspicuous logos on their luxury items. The second is less logo-centric and requires people to recognize patterns and telltale marks without the logo being displayed. The third and last is experiential luxury, with consumers opting for more lifestyle experiences such as travel and more intangible products. Diamond jewelry, being unable to conspicuously feature a logo, does not have that ease of recognition. “That is why you have so many collections, a very large assortment of goods to address different needs,” D’Arpizio points out. “It also allows consumers to show off something that’s easily recognizable by association with the collections.” Given those limitations, the diamond jewelry sector can be seen as being slightly less globalized than others, says D’Arpizio. Some companies, according to Nordey, get around that challenge by associating a design with the brand, such as the iconic blue box from Tiffany & Co., making it easier to break into emerging markets.

POLISHED DIAMOND SALES INCREASE 2009-2014

CHANGES IN TOTAL HOUSEHOLD WEALTH 2014-2015

INCREASE OF MIDDLE & UPPER CLASS ADULTS 2008-2015

International Players
Globalization affects players of the diamond industry differently, based on their sizes. Global companies, such as Tiffany & Co. and Cartier, are certainly affected directly by worldwide market forces, says Ellis. Things like the economic and currency strength of one country can certainly affect how a jewelry brand does business in another. Then you have regional brands, such as in the U.S., where you have East coast and West coast brands. These are more affected by local forces, such as local competition,” Ellis continues. “Regional brands, however, can be affected indirectly by factors such as consumer confidence and purchasing power.”
Then there are specialists, adds Ellis, who are small retailers that may operate no more than one store. While it seems that global forces might be irrelevant to them, globalization could affect their business, too. Increasingly, specialists are creating fashion items that are becoming branded and identifiable so that they can sell globally without having a global distribution. Something that is helped a lot by ecommerce. “With jewelry, you don’t have to go into a shop to know what you’re getting,” Ellis notes. Ben Smithee, CEO at The Smithee Group, a media consultancy group, explains how specialists could benefit with the advent of ecommerce. “There is a democratization of eyeballs,” he says. “I can be in the U.S. but attract viewership in the Indian market. I can be a designer in India and try to affect the U.S.”

Globalization and the Supply Chain
China’s propitious growth has led to opportunities for brands around the world to rush into the country, growing their business. “China is probably the largest single contributor to the globalization that has taken place in the diamond industry in recent years,” says Ellis. From 2009 to 2014, growth of polished diamond sales in China went up the most in the world, according to “The Diamond Insight Report” released by De Beers in 2015 (see Polished Diamond Sales Increase 2009-2014 in Slideshow). This led to an influx of retailers into the Mainland, increasing penetration and saturation.
The rise of China also meant that jewelry brands increasingly were taking care to design to cater to Chinese tastes. Rio Tinto, in partnership with Chow Tai Fook, collaborated with five Chinese jewelry designers in 2013, with Chinese consumers specifically in mind. The rush for Chinese customers also presented a chance for manufacturers and suppliers to stock these storefronts. “However, the recent slowdown in the Chinese economy has left a lot of inventory stranded, and a lot of stores have shuttered,” notes Ellis. “It’s stifling one’s ability to supply into China these days.”
The manufacturing decisions from one country increasingly affect supply and prices in another country, too, Ellis continues. “Producers recently continued pumping rough into the supply chain that cannot be digested,” he says. “Diamonds were being cut and polished at a rate when there wasn’t enough demand for finished jewelry, leading to a glut.”
Capital is another aspect that ties diamond markets around the world more tightly. A recent flight of banks financing the industry has led to less third-party financiers, according to Ellis. This also might lead to less available loans for manufacturing, which could in turn affect supply. Ellis notes that everyone in the supply chain, from miners to retailers, could be affected by the squeezing of capital.
With more jewelry companies going global, currency and price changes matter more these days. “Currency fluctuations are an issue for the luxury market right now,” D’Arpizio points out. “The pricing strategy for luxury goods is usually decided one year before the launch and it is very difficult to forecast fluctuations.” Brands usually cannot increase or decrease prices during the season if the cost of distribution changes, or if there is a devaluation of currency. The same applies to diamond jewelry brands. “Only companies that can control their own distribution and sell within their own network can change prices more easily,” D’Arpizio states. She reiterates that with price differentials being the main motivator of Chinese tourists traveling overseas for luxury goods these days, the lack of flexibility presents a challenge to companies deciding their international pricing strategies.
Companies have also started rethinking their business strategies. “It has made the difference between ‘aspiring’ and ‘acquiring,’” Smithee states. “It’s not a matter of whether one can be global, but rather how they can be global.” He explains that brands are considering the lines of vertical acquisition to better position themselves for a global business. For example, Signet Jewelers acquired a polishing factory in Botswana in 2013 to further its supply chain efficiencies. Tiffany & Co. currently internally manufacturers more than half of the merchandise the company sells, according to an annual report filed in March 2015, and may increase the percentage of internally manufactured jewelry in the future.
Technological advancements have forced retailers around the world to reinvent the way they approach customers and reinvent the retail experience. “Luxury brands are increasingly expected to ‘follow the customer,’” says Nordey. As luxury consumers travel more, brands have to enhance the retail experience by providing instore Wi-Fi access to allow customers to remain connected to social media and their online resources. “This is a small element but has such a big impact in the market,” he notes.
Developments in technology also have redefined what it means to be at the forefront of the diamond industry. “Recent technologies such as 3D printing mean that every player in the jewelry industry has a level playing field,” Nordey notes, describing how a designer from China could come up with 3D printed designs that could be just as innovative as those of long-established companies in the U.S.

Globalization and Diamond Demand
Just as the rise of China benefited those on the supply side of the diamond industry, Chinese consumers’ diamond consumption patterns also changed. China’s newfound affluence saw the explosion of the middle-class and, coupled with the country’s easing of travel restrictions, saw the growth of luxury tourism to countries such as Paris and the U.S. The high import tariffs on luxury goods into China can result in a 50 percent price increase. With the rise of internet use, Chinese travelers can easily figure out where they can get the best deals. According to D’Arpizio, these savvy customers often research a product extensively before making a purchase decision. The desire for obtaining luxury goods while circumventing China’s tariffs has even led to the creation of a black market known as “daigou,” where shoppers based outside of Mainland China buy luxury goods on the behalf of clients and ship them back. In addition to seeking out better prices, Chinese tourists also travel to overseas luxury boutiques because they feel they will receive better service than at their local shops, D’Arpizio adds. According to the United Nations World Tourism Organization (UNWTO) “Tourism Highlights 2015” report, Chinese tourists’ expenditure abroad in 2014 reached $164.9 billion, a 27 percent increase from a year ago, keeping them in the number one spot as the world’s top tourism source. Chinese traveler numbers are also expected to increase over the long term, according to the report.
There has been an increase in global wealth since 2008, valued at $250.1 trillion in 2015, according to the “Global Wealth Report 2015” from Credit Suisse. The U.S. topped the list of countries for wealth increase from 2014 to 2015 with $4.6 trillion; China came in second at $1.5 trillion (see Changes in Total Household Wealth 2014-2015 chart in Slideshow). The worldwide increase in personal wealth and the middle class (see Increase of Middle Class & Upper Class Adults 2008-2015 chart in Slideshow) have led to a democratization of brands and an increase in accessibility, according to D’Arpizio. Consumers now have greater access to luxury brands previously out of their reach. The increased interlinking of global economies also affects factors such as consumer confidence, which in turn affects things such as travel and spending, which many luxury brands are dependent on.
A more world-savvy younger generation has led to different perceptions and a greater embracing of online shopping, affecting the traditional experience of buying diamond jewelry. “You have a generation of young people who can buy diamonds online, and they’re not afraid of doing so, whereas the older generation might be more wary and still insist on seeing the product in person,” says Nordey. “These new consumers are not as concerned about fakes online, and grew up with a different concept of what the retail experience means.” According to Smithee, these consumers, commonly referred to as Millennials, have a natural comfort with the web, having grown up with ecommerce conveniences such as Amazon and Tmall, China’s largest B2C online retail platform. The vastness of the internet means that a Millennial consumer can easily take his or her business elsewhere globally should a brand fail to meet expectations.
The internet has also led to the lowering of borders between trends. “There is a saying that when the U.S. catches a cold, Europe catches pneumonia,” Ellis quips. Social media and the internet have led to fashion trends easily passing from one country to another, and brands tend to underestimate the importance of cross-pollination of popular culture. “A bag was featured on the Korean show, “My Love from the Stars,” and immediately was sold out in China, where the show is popular,” Nordey cites as an example. He adds that the rise of media downloads and subtitles have made media products more accessible to a foreign crowd. The world has also seen the entry of “Key Opinion Leaders” (KOL) contributing to the influence and transfer of trends across borders. “They could be bloggers, writers, or YouTube stars,” describes Nordey, explaining how they can be used not just as amplifiers of a luxury brand’s strategy but also co-opted as original content creators.
“Our tastes are starting to evolve, because we’re becoming such a global culture,” Smithee says. “We’re naturally more open to new things that are not just black and white — things outside our comfort zone, be it food, media or jewelry.” He describes globalization has having led a generation clamoring to find something different. “It’s harder for us to find something that’s new and different, because we’re exposed to so much in the market saturated with what we can achieve,” Smithee notes.

The Future of Globalization
What’s next for the diamond industry as the world becomes more interconnected? An increasingly globalized world could lead to two outcomes, according to Nordey: an intensification of existing forces on the luxury industry, be it on the supply or demand side, or the creation of new items and attitudes toward the industry. “The jewelry industry must figure out how to recognize a person as a single customer across borders,” he says. Nordey explains that luxury companies need to tweak their marketing strategies in one country knowing it might affect their business in another as these customers become increasingly mobile.

The changing world also means a new generation with different expectations and perceptions of luxury. “How will diamond brands keep up the cachet and protect the core product that is diamonds?” Ellis wonders, reiterating that Millennials do not have the same urge to store and display their wealth in diamonds as their parents did.
One of the biggest changes will definitely occur in the diamond retail space moving forward, according to Smithee. “The change will be similar in any mass market and developed country, because technology is becoming ubiquitous.” He believes the fine jewelry industry has the chance to be far greater than it ever was via the internet, as long as brands make their approach global from the beginning. “As soon as you’re on the web, you’re serving a global audience. Its about not making fashion faux pas or breaking taboos,” Smithee explains. “You have to be not only conscious but also courteous of other cultures when you’re creating content.” As communication between people around the world increases, it could serve as an opportunity for luxury brands. “People appreciate communication if it is relevant,” Smithee opines. However, he cautions, personalized communication has its own caveats. “There is nothing worse than a botched personalization, but the opportunity to personalize is awesome, and Millennials will embrace it if it is done right.”
As travel becomes more common and price differentials drop, D’Arpizio thinks that the industry will have its work cut out for it. “People will be traveling less for bargains, and start seeking better experiences,” she says, describing a situation where diamond jewelry companies can no longer rely on Chinese tourists traveling to their boutiques in Florence or Milan simply because prices are cheaper than back home. “There will be a greater need for storytelling,” D’Arpizio concludes.

Source: Rapaport Magazine