China Wanderlust Poses Hurdle for De Beers Diamond Strategy (1)

Sep 15, 2017 1:08 am ET

(Bloomberg) -- China’s newfound penchant for luxury travel poses the latest threat to a turnaround for the $80 billion diamond industry.

Chinese deluxe spending on travel is the “fastest-growing competitor” standing in the way of diamond sales in the world’s biggest consumer market, said De Beers SA Chief Executive Officer Bruce Cleaver. To win those travel dollars, he said De Beers could even see itself tying up with the luxury travel market somehow.

“Luxury travel is certainly a competitor to diamonds,” Cleaver said in an interview in Hong Kong Thursday. “If there’s a way to link luxury travel to an African destination where the diamond came from, we’d certainly look into that too.”

The world’s biggest diamond producer is seeking to kickstart an industry that’s seen prices for polished diamonds slump for the past six years. Its major Asian markets including China and India reported flat or declining sales in 2016. The company is also facing hurdles as a younger generation of Chinese shoppers increasingly spend more on high-end electronics, travel and fine dining than on baubles.

“Chinese consumers, especially the millennials, are willing to spend more to enrich their lifestyles through services and travel,” Bloomberg Intelligence retail analyst Catherine Lim said on Friday. “Jewelers can tap into the rise in Chinese tourism, both domestically and overseas, by selling more through travel retail channels such as tax-free as well as duty-paid points-of-sale.”

Worldwide diamond demand in 2016 was essentially flat, as a 4.4 percent gain in the U.S. offset sluggishness in Asia, according to a De Beers industry report published Thursday. Sales in China and India showed improvements in the first half of 2017, with single-digit growth from a year earlier, said Cleaver. The industry expects gains for those countries in the next five years as the global economic outlook improves, though Japan won’t grow as fast as its Asian peers due to its aging population, he said.

De Beers is seeking to influence buying trends by spending $140 million this year to advertise diamonds, the most since 2008. It is focusing on women in its main markets -- particularly those between the ages of 18 and 33 -- who De Beers says are buying diamonds for themselves as their earning power increases.

Winning over those shoppers won’t be easy, especially in China, where diamond sales declined 4.8 percent last year in dollar terms. Competition from travel is a big challenge. China is the world’s largest source of outbound travelers, according to the World Tourism Organization. More than 135 million Chinese traveled in 2016, and their spending rose 12 percent to $261 billion.

Fashion Statements

Even at home, rich shoppers who want to make a fashion statement are frequently opting for items such as Louis Vuitton bags and Gucci loafers. De Beers also is competing against companies including Chow Tai Fook Jewellery Group Ltd. that are offering fashion jewelry at lower prices to lure Chinese shoppers.

“The concept that a diamond is forever doesn’t sound as fancy to customers as before, especially for young customers,” Hong Kong-based ICBC International Research Ltd. analyst Yixin Luo said this week. “Brands may need to reshape their images.”

De Beers says it isn’t daunted by the challenges.

“We are still pretty positive,” said Cleaver. “It’s a question of adapting your brands to the future, which I think we have all the tools to do.”

(Updates with analyst comments in the fifth paragraph.)

--With assistance from Thomas Biesheuvel

©2017 Bloomberg L.P.