De Beers’ Lightbox aims to protect mined diamond sector revenues – ABN AMRO

Albert Robinson

De Beers’ decision to launch a laboratory-grown diamond jewelry brand called Lightbox was likely prompted by a desire to create clear segmentation of the lab-grown and mined diamond industries and to protect its revenues from the mined diamond business, ABN Amro Bank says in a report.

Gem-quality laboratory-grown diamonds threaten the business case of miners,” the bank wrote in the report. “For most diamond miners and producers, gem-quality laboratory-grown diamonds have been a threat for several reasons. For a start, undisclosed mixing of laboratory-grown diamonds with natural diamonds had a serious impact on confidence in the industry. However, since the introduction of the detection machines the fear of mixing laboratory-grown diamonds with natural diamonds has eased. Moreover, the miners have not only been confronted with a substitution product but also the entrance of a large number of new market participants who threaten to end the oligopolic industry structure. Furthermore, the marketing campaign of the miners to defend their turf has not been particularly successful up to now. In fact, there are signs that the laboratory-grown diamond producers have the upper hand.

De Beers is known for being proactive, the industry’s leader in many ways. First, it used the knowledge of its laboratory-grown diamond production unit (Element 6) to build machines that can early detect laboratory-grown diamonds in parcels of natural diamonds. Moreover its diamond grading service – International Institute of Diamond Grading & Research or IIDGR – has the knowledge to detect laboratory-grown diamonds. Second, it announced in January 2018 that it aims to launch the first industry-wide blockchain this year to track gems each time they change hands starting from the moment they are dug from the ground. And now De Beers directly takes on the laboratory-grown diamonds’ challenge by its latest announcement to launch a laboratory-grown diamond jewelry brand Lightbox.

What is the strategy behind this move? We were not present in De Beers’ boardroom, but we think that the most likely strategies behind the announcement by De Beers are as follows. First, De Beers would like to create clear segmentation of the two different industries: a natural diamond industry and a laboratory-grown diamond industry. If successful it could protect the revenues from the mined diamond business. It is possible to create two different industries. However, it remains to be seen if this will happen. Markets will only remain separated if the products in the two different markets are sufficiently different.

Second, both industries have different industry structures: oligopoly for the natural diamond industry where the strategy of supply limitation is important. Meanwhile full competition will characterize the laboratory-grown diamond industry.

Polished Diamonds

Third, there is a new set of generic strategies. For the natural diamond industry the strategy seems to be differentiation and focus, while for the laboratory-grown diamond industry the strategy is economies of scale and focus. De Beers has priced the laboratory-grown diamonds based on the production costs rather than as a discount on the natural diamonds, like the other laboratory-grown diamond producers have done. This pricing strategy should help create the perception that the two products are different enough to have separate markets. The other laboratory-grown diamond producers are being challenged to follow with De Beers’ low pricing strategy (not pricing off the natural diamonds) and the perception that laboratory-grown diamonds are not special and rare.

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Source Idexonline