(Bloomberg Businessweek) -- You know you have a marketing problem when you find yourself arguing that the competitor's product is "simply too perfect looking." Or when you fall back on warning people that if they buy the competitor's product they may not be able to resell it—when reselling it was never their intention anyway.
That's the diamond business for you. It gets harder every year for diamond merchants to fetch a good price for their product because the competition is insane. First there's mounting production of natural diamonds. And now synthetic diamonds have gotten so good that for average customers they're indistinguishable from the kind that come out of the ground. On top of all that, some customers are turned off by the violence endemic in parts of diamond mining, featured in Leonardo DiCaprio's film Blood Diamond.
What's a strategist to do? For De Beers, the diamond-mining unit of Anglo American Plc, conflict diamonds may be the smallest of its problem. Last year it announced a pilot program in Sierra Leone to track ethically sourced diamonds from their source, reassuring customers that they're not inadvertently financing violent conflict.
Oversupply is a harder nut to crack. In July my Bloomberg colleague Thomas Biesheuvel wrote, "High-end jewelry sales are stagnating as other luxury offerings, like shoes, handbags and resort vacations, crowd the field." In October he reported that "demand for rough diamonds is continuing to plunge as polishers and traders refuse to buy stones when they can’t make a profit."
And this month he quoted industry sources saying that De Beers cut prices about 5% at its November sale in the Botswanan capital of Gaborone, the first such price cut in years. In diamonds, as in any industry, the price in the most recent transaction determines valuation. So that price cut at the latest sale in Botswana didn't just affect the $390 million in rough diamonds sold there. It effectively erased billions of dollars in paper wealth by devaluing diamonds not involved in the sale.
A successful painter once told me that the key to being collectible is to make sure your works fetch steadily rising prices. Any price cut—a "down round," in venture capital terminology—is a huge blow. If his agent senses that a work of his won't sell, he pulls it off the market and waits for demand to recover. Since losing its monopoly, De Beers can no longer do that.
The challenge from synthetic diamonds is particularly interesting. Synthetic diamonds are to natural diamonds what robots are to factory workers—an improving and cheaper alternative. If they are "too perfect," that's solvable: Diamond factories can mimic the inclusions and chemical impurities that natural diamonds have.
The last resort of diamond merchants is to say that synthetic diamonds have lower resale than natural ones. That is a weak threat to mass-market customers, who don't buy jewelry with a focus on resale . They buy them for the pleasure they get from them. The same way they buy, say, avocados. And nobody thinks about selling back an avocado.
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