February 7, 2013
Original Source: Forbes in LEADERSHIP
By: Bain Insights, Contributor

Excerpts from:

Diamonds Sparkle For The Next Billion Consumers  

Demand for diamonds continues to grow despite the economic troubles in many countries. Retail diamond sales for 2011 (the latest data available) soared 18% over 2010 and exceeded the pre-financial-crisis peak, new research by Bain & Company shows. The industry is on track to post further sales gains in 2012.

China and India will account for most of that growth, we found, as their middle classes expand and more families adopt the Western practice of giving diamond jewelry to celebrate engagements, weddings and anniversaries.

But the surge in demand will not translate to automatic growth and profits for every major diamond producer or luxury retailer. The companies benefiting the most from strong demand will be those that carefully manage their inventory, refining the mix of stones for a wider range of price points. Although global demand is growing, our research shows that at the retail level this is a very local business, in which the store network, branding and promotions must be tailored to local preferences.

Consider the Chinese market, which at compound annual growth of 32% since 2005 is the fastest-growing in the world and now the second-largest market for diamonds, with annual sales approaching $9 billion. Long-standing preferences for gold and jade, both associated with good fortune, are being supplanted by a fascination with Western culture, with an extra boost from lower taxes and tariffs on diamonds. This trend will only accelerate as the middle class expands in mid-sized and smaller cities, because only one-fifth of lower-income Chinese currently own diamond jewelry. Indeed, there's nothing the Chinese would rather buy with their spare cash, making diamond jewelry the fastest-growing discretionary purchase.

Indians are demonstrating an even greater appetite for diamonds. The country's middle-class households spend an average of twice the amount on diamond jewelry as their Chinese counterparts, despite having less disposable income. That's led to compound annual growth of 22% per year since 2005 to annual diamond jewelry sales of $8.5 billion – surpassing Japan, the European Union and the Persian Gulf region.

Meanwhile, tough economic times and fiscal austerity have crimped sales in US and Europe. While the US market still accounts for 40% of global demand with $27 billion in annual revenues – roughly double that of the US mobile phone handset market – it stands at a level comparable to a decade ago. And more Americans are gravitating toward cheaper jewelry and smaller stones.

Naturally, diamond producers, wholesalers and retailers have been flocking to China and India. What are they finding there? Our recent online survey of 13,000 women in China, France, Germany, India, Italy, the UK and the US, plus 1,000 US men, found different preferences in the various markets:

• In China and India, diamond jewelry stands as the clear favorite among women asked to rank their preferred luxury gift, ahead of vacation trips, fashion accessories, cash and electronics.

• In China, diamonds conjure up a sense of eternity, whereas for Indians they are associated with conspicuous wealth. Consumers in both countries note an additional association with economic security, suggesting that a market for investment diamonds could develop in those countries.

• Diamonds have lost some of their magical appeal among younger women in US, where the custom of sealing engagements has slipped since its peak in early 2000s.

We expect global demand for rough diamonds – the stones before cutting and polishing—to grow at an average annual rate of 5.9% to nearly $26 billion (in 2011 prices) by 2020. China and India will account for half of this incremental demand and together will overtake the US as the largest market. Supply of rough diamonds, meanwhile, will grow by an average annual rate of 2.5%, suggesting that pricing will remain solid.

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