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The task set before industry is to provide consumer with maximum information about diamonds we sell

08 august 2016

andrey_polyakov_2_xx.jpg( - After “conflict diamonds” have been virtually excluded from the market by the Kimberley Process (KP), the latter, as well as the World Diamond Council (WDC) found they were facing new emerging problems, this time related to polished diamonds, which - not being living essentials - must comply with moral and ethical standards in the first place and have no connection with violence or blood. There are as well other recipes to win consumer confidence in diamonds, including the upcoming generic marketing campaign to be launched by the Diamond Producers Association (DPA). This and other issues are highlighted by Andrey Polyakov, President of the World Diamond Council and Vice-President of ALROSA in his interview to Interfax.

- In May this year, you became the head of the World Diamond Council (WDC), turning to be the first representative of the Russian diamond industry in this position. What are the main tasks currently set before this organization?

- The World Diamond Council represents the interests of the entire diamond business – from mining companies to jewelry retailers - in the Kimberley Process.

As you know, at one time one of the major challenges facing our industry was related to the so-called "conflict" diamonds - stones that were used to finance purchases of weapons for all sorts of insurgent groups. This was true in the first place for the African continent, at that time struck by civil wars. Probably, you remember, there was such a movie called "Blood Diamond" with Leonardo DiCaprio in the lead. The film’s action took place in Sierra Leone in 1999. So, the Kimberley Process was created precisely in order to protect the market against the penetration of such diamonds in the legal circulation. KP decides whether to allow or not diamond export from one country or another, it develops requirements for access and has its own certification system.

KP has been formed on the basis of cooperation between member-states, industry stakeholders represented by the World Diamond Council and civil society. The latter two have the status of observers, but are fully involved in the work of the organization. Decisions are made by consensus. Russia is represented in KP by the Ministry of Finance. When KP was being established, it became obvious that it was important to invite the diamond business to take part in the KP work, as only the diamond business has deep understanding of the diamond market and is able to provide sufficient expertise. To this end, the World Diamond Council was founded - an organization bringing together various representatives of the industry and developing a common position of the diamond industry with regard to this or that issue of current concern to KP.

In practice, WDC, for example, makes possible the functioning of the KP Administrative Support Mechanism. It is involved in the daily work of its working groups, among other things carrying out review missions to mining areas, compiling a database on mining geography of diamonds and their distinctive features and, if needed, providing assessment of rough diamonds value.

KP has reached great progress during the 15 years of its operation. Today, more than 99% of all diamonds in the market have confirmed conflict-free origin - that is, the so-called "blood diamonds" are practically excluded from the market. Each parcel of diamonds is accompanied by a certificate confirming their origin.

- That is, the KP mission can be considered fulfilled?

- In the sense in which it was formulated at the beginning of the 2000th the answer is virtually yes. Today, KP has a task, so to speak, to maintain a stable order in the diamond world, which, in turn, is facing new global challenges.

- What kind of challenges?

- Well, firstly, there still remain areas where diamond mining may all of a sudden become involved in an armed conflict. The latest example is the Central African Republic. KP has imposed an embargo on the export of diamonds from the Central African Republic after the armed coup there. Recently, WDC in team with non-governmental organizations and government representatives completed a monitoring mission to CAR. As a result of this review mission, some part of the diamond mining areas has been recognized compliant with the minimum requirements set by KP and export of diamonds from these sites was permitted under strict expert supervision provided by KP. This is only the first step of CAR on the way back to the civilized market. However, the budget of this country will now receive at least some money from diamonds, which can help its economic recovery.

Secondly, the mandate of KP covers only rough export certification. But on the way from a diamond field to a retailer’s store the rough stone turns into a polished diamond bringing about a new and even more global problem - how to provide guarantees to the consumer regarding legal and non-conflict origin of polished diamonds?

Jewelry houses note that customers are ever more often asking about the origin of diamonds they buy. This is largely due to the new information environment in which we live. The example of CAR, which I cited, is revealing. The volume of diamond mining in the Central African Republic is a drop in the ocean, but once again this conflict brought the story about "blood diamonds" to the cover of the Time Magazine and then it was carried by all global media. If you google for "diamond miner", the first thing you will see will not be information about ALROSA or De Beers, the companies engaged in high-tech mining operations, but photos of African children with shovels, mining diamonds in inhumane conditions.

There is no doubt that this results in psychological pressure on buyers. Jewelry is not an essential necessity and buying an engagement ring with a diamond is one of the most deliberated and emotional purchases in life. And how is the new generation shaping their worldview and lifestyle? They do it under the influence of insane informational strain, a huge flow of data including negative input, unlimited freedom to receive this information, which in fact is not even information, but the white noise, a background, which defines the image of the world beyond the daily routine.

This means that today, when a young person comes to buy jewelry, the problem of the origin of precious stones is not a hollow name to him or to her. By and large, this customer does not care about what is going there in Central Africa, but he or she has already reserved a kind of psychological lock and is reluctant to draw, if you like, "bad energy," unwilling to make this purchase somehow connected with blood or violence and letting all this be "trailed" to his or her home. However, this turns to be a challenge for our entire industry, on which whole cities and even countries rely. This is not just a problem of universal nature, it is also a commercial problem.

Major US retailers - for example, Signet or Tiffany - can guarantee the origin of diamonds to the consumer largely because they buy stones either directly from producers or because they deal with the most proven diamond manufacturers. But if you look at the statistics, small retailers, one door stores, account for more than 60% of jewelry sales in the world. And such small sellers find it much more difficult to give any assurances to customers - not because they are not responsible sellers, but because they themselves do not have this kind of information.

The problem has already reached the level of legislators. The possibility of introducing legal regulations in this area similar to the Dodd-Frank law has been discussed in the United States in good earnest - in that part of the law, which obliges every public company using gold in its operations to find out its origin and make sure it is not from conflict areas in DRC. For jewelers and retailers such additional regulation will mean a dramatic increase in all sorts of procedures and costs. Therefore, the main task of the diamond market now is to show that it is able to self-regulate and ensure the entire sales chain.

WDC has a very clear mandate - to represent the interests of the industry in KP, and at the same time we are now the only platform, where the industry is represented in full: diamond mining companies, diamond manufacturers, diamond centers, retailers, banks and even carriers, as well as other more or less important institutions having weight in the rough and polished diamond business. If the industry now faces the task of self-regulation, in my understanding WDC is the only industry organization, where this issue could be discussed in the representative format. And we are doing it. We talked about it last year here in Moscow, and in September we will meet in New York.

- What will WDC do in this regard?

- I see two main areas for our work. Firstly, it is a more intensive information activity, I would even call it educational. Inside WDC, we are talking about the need for us not just to carry out the functions of an observer within KP, but also to interact with public authorities of diamond producing and diamond consuming countries to explain how the industry operates. Many problems occur because of the banal lack of understanding. The same can be said about informing the society itself and non-governmental organizations - we need to move away from the stereotype viewing diamond mining as some closed industry. Once, this had been a problem, but the situation changed a long time ago. However, “a residual feeling remained," as they say. To do this, we now have an approved strategic plan and appropriate means.

Second, the industry needs to think seriously about providing guarantees of origin for diamonds. Not so long ago, WDC introduced a voluntary system of guarantees, the System of Warranties (SoW). This is a declaration that the market stakeholders agree to respect the rules of responsible business practices in order to guarantee "clean" and conflict-free origin of their product to the consumer. So far, SoW is a voluntary system, but we see how market stakeholders are joining it at their own discretion to assume these disclosure obligations.

From the practical point of view, if we are not talking about voluntary guarantees, but answer the question asking us to "prove," the industry has established a certification platform, which is the Responsible Jewellery Council (RJC). Primarily, RJC certifies the business practices followed by its members through an independent auditing system. ALROSA also intends to apply for RJC membership and this has already been approved by the company's shareholders meeting.

- What is the difference between the SoW and RJC standards?

- As I said, SoW in its present form is a declaration, a company's statement that it maintains a responsible business and adheres to the KP principles. However, RJC does not imply a mere statement, it implies an independent audit. Unlike KP, which, being an inter-country union, monitors only the system of state control over diamond turnover, RJC explores the activities of companies more widely, focusing on compliance with environmental regulations, human rights, labor laws, the system of social guarantees for workers, non-use of child labor and many more things. Again, as an industry we are working with the object, which is not an article of first necessity, but probably that of not even a hundredth necessity. Consumers are the least likely to favor negative emotions from jewelry, while the information environment is very aggressive. So we must show professional excellence in protecting our own product.

- When can we expect ALROSA to join RJC?

- Under the standard procedure, having applied, we have to get the approval of the RJC management and then select an auditor from those accredited by RJC to pass audits in the course of two years. After the audit, ALROSA will receive an RJC certificate. The RJC certificate confirming the company’s compliance with business conduct standards is valid for 3 years, after which it will be necessary to undergo auditing once again, taking into account the previously given recommendations by the auditor.

We discussed the issue of joining RJC with the biggest US retailers. It was a mutual process. Retailers want to show consumers that the source of rough in their jewelry is ALROSA, a verified and independently audited company. It is important for retailers and for public companies in terms of marketing jewelry. We are interested in this, because we have quite a high technological level of production and the highest standards of labor law. Getting an RJC certificate for us will mean a certain promotion of the company as a responsible producer of rough diamonds in the market. Almost all of our clients have already joined the RJC system of safeguards. All major diamond mining companies are already there.

- Will the RJC certification result in expansion of direct trade relations with retail?

- It is not connected directly, but in the future - yes. Retail is definitely not easy to work directly with mining companies, and vice versa, because our task is to sell everything that we produce, and their task is to buy certain standardized inventories. But the request coming from the consumer, who wants to know the origin of his or her stone, is pushing retailers to us. And gradually this increase in inter-relations will all the same happen and the certificate will be then though important, but a contributing factor, not the main reason. In addition, there is a potential threat of undisclosed synthetic diamonds used under the guise of natural. And this is yet another factor that makes retail go directly to mining companies to be confident in the natural origin of diamonds.

- It was reported that ALROSA is discussing with Chinese partners the possibility to take part in a tracking program, which permits to identify every diamond put up for sale from mining to selling it to the final consumer. Is it the request of the Chinese retail market?

- There is a request from retail for guarantees of origin regarding rough from which polished goods are made. There is an idea to provide the customer with information about the place, where the stone was mined or manufactured, and also about what good was done by this stone to the development of human communities. After some joint research with Chinese retailers, we took as a hypothesis that the Russian origin diamonds can give added value to the diamond jewelry sold in China.

China is the second-largest market in the world for jewelry consumption. We assume that it will be possible to launch a project in this market, which will promote the Russian origin of diamonds per se commercially. The perception of Russia in Hong Kong or Mainland China is different, but in general it is positive. In China, there is, so to speak, a set of positive cultural stereotypes in the good sense of the word regarding Russia. Just as we here have similar attitude regarding China. These stereotypes associated with another, dissimilar cultural code, large-scale events, grandeur and luxury - if turned into a beautiful story - will eventually attract consumer interest. After all, people come to a jewelry store for emotions.

We held preliminary talks on the tracking program with the entire Chinese retail, including our long-term customers. It's an interesting idea from commercial and reputational perspectives. Such a program would make it possible to stimulate the interest of Chinese buyers towards our products through obtaining additional information about where and how rough diamonds were mined and then used to manufacture polished diamonds sold in Chinese jewelry stores.

- How will this program be implemented and what is its budget?

- These were preliminary talks, so it is premature to discuss practice. In my view, there can be several scenarios of its realization. This may be a joint venture, or this may be our participation in the existing marketing programs in China to promote knowledge about the origin of diamonds. The negotiation process has somewhat slowed after the sharp fall the Chinese market experienced in the jewelry segment. But it's a matter of time.

- How much China is reducing jewelry purchases? What other factors affect the demand in China?

- In spite of the deceleration in the country’s economy and anti-corruption campaign of the previous year (which primarily affected watches), Mainland China continues to buy diamond jewelry showing not a bad growth rate. However, Chinese mass tourists are buying worldwide. The consumption culture in China is influenced by traditional factors, such as people’s interest towards traditional gold jewelry. Polished diamonds came to China on the backdrop of growing middle class there and due to marketing efforts. The Chinese middle class is currently feeling good - hence, diamond jewelry is in demand. At the same time, the Chinese population is "aging," and this, among other things, is also a consumer factor.

- Can other regions become a driving force for the jewelry market?

- Yes, India can become such a driver. Previously, domestic demand in India was not perceived as a significant factor, and the local diamond cutting industry was focused primarily on the United States and China. Now the situation is changing. It is believed that in the next 5 years, a certain decrease in China’s diamond consumption will be offset by its growth in India. The Indian middle class is growing at a very strong pace. So far, of course, this is the “country of gold” consuming mostly gold jewelry. However, as the middle class is growing, diamonds are increasingly coming into use, becoming part of ceremonial procedures. In India, there are a lot of sacred things and ceremonies, which may kindle interest for marketing initiatives.

A promising market is Brazil, also having a large number of middle class. The latter consumes a number of colored stones, and there is an idea knocking on the door to stimulate diamond demand through marketing efforts. But so far, it is premature to say that Brazil will take up a significant share in diamond jewelry demand - because of problems with crime in general, Brazilians are avoiding to wear expensive jewelry in everyday life.

- Will the launching of marketing programs in China result in greater number of contracts for rough diamonds with Chinese consumers?

- It's a little different. Business buys diamonds delivered to the jurisdiction through which it is more convenient to work with both from commercial and technological points of view. Our task is not so much as to tell our customers where they should take rough from Russia, but to ensure our own commercial interests. However, geographical diversification of sales is part of our strategy. This process is developing evolutionary, in line with the logic of transformation taking place in the global diamond business. It should be remembered that up to 90% of polished goods in the world is produced in India, and therefore, the bulk of China's diamond jewelry companies are buying from Indian manufacturers. China’s own diamond cutting facilitates emerged relatively recently and are being gradually developed, but so far they cannot be compared with Surat. As demand from China will be growing, ALROSA, following its clients, will ship more rough directly to China. And, of course, if China's diamond manufacturing capacity will grow, the existence of a marketing program to promote Russian diamonds will be a plus, it will spur interest exactly towards this kind of rough. These are complementary factors.

- Will the promotion of Russian diamonds affect the Chinese market alone? And what can be said about the world’s largest market, the United States?

- In general, similar requests for tracking come from the United States and other major markets. If we talk about the US market per se, it should be said that for this market it is increasingly important to have no negative information associated with diamonds – meaning here human rights, conflict-free background, environmentally benign business, social responsibility. Incidentally, Tiffany, Signet and Chinese retail players come to visit our facilities as well to perform a kind of socio-cultural due diligence. They understand more than anyone else the peculiarities of the US market, and perhaps later on there will emerge shared ideas on how our history can be used to promote Russian diamonds in the United States.

Currently, the United States accounts for about 47% of the world’s diamond jewelry consumption. It is there that major consumer trends are taking shape. The tradition of engagement rings was born there and only then it came to Japan, China and India. In addition, the US is a sufficiently "young" country with a demographic trend going contrary to that observed in China. And the new generation, the millennials (those born in 1980-2000), however problematic, is estimated to be the largest generation of luxury consumers in the US history.

In addition, the US market continues to grow. This growth is based not only on economic opportunities and people's willingness to spend, but also on the fact that there are certain behavioral patterns related to the fact that the diamond ring there is associated with marriage. And that has been the main driver, which kept “pulling in the wake" everything else. If this factor will start fading, the diamond market will start falling apart. Therefore, diamond producers have recently joined in an association (Diamond Producers Association, DPA) to stimulate diamond jewelry consumption and give our products a new emotional component.

- Why did you need a new slogan, why DPA did not reincarnate the classic "A diamond is forever"?

- The key idea of the campaign "A diamond is forever," which began in 1947, was the word ‘forever.’ It was of great importance in the post-war period – at that time people needed stability and confidence in the future, not only in marriage.

Now there has grown up a generation not affected by generic marketing, behind which was De Beers. This generation has not seen those commercials on American television – these young people are completely digitized and receive information, make purchases and communicating over the Web. They are formed differently, unlike their parents.

DPA had a task to find some new fundamental idea that will resonate with the generation of millennials. We had to tell the eternal story using a new language. Why they? As I said, this is the first "digital" generation, the first generation that was not affected by the generic marketing of diamonds promoting them as emotional values. At the same time, this generation is very pragmatic, as it is caught up in an economic environment, which cannot be called easy enough, particularly in the field of education, having to bear with strong social differentiation. And the main thing – there is a no-kidding grapple going on for millennials’ wallets right now. The forces at play involve electronic gadgets, designer clothes, tourism and many more other things. So, our efforts can be called, without any exaggeration, a struggle for the future consumer, for our own future.

Our research has shown that unlike previous generations, our target audience perceives the word ‘forever’ as having a frightening connotation more often than not. This generation requests something real, but at the same time true and exclusive. Real feelings, real emotions. For example, some people in the survey said, "I have thousands of friends on Facebook, but in life, perhaps, only one." This is how the idea of "Real is Rare. Real is a Diamond" came into existence. Something truly real is indeed rare and valuable.

- When the DPA marketing campaign will be kicked off? What is its budget?

- We plan to launch a pilot campaign in the US in the fourth quarter of this year. The budget for this campaign is so far very modest, I do not even want to name the amount, and therefore I called it a pilot venture. It will be focused primarily on social media, networking and regional media.

Right now, our main goal is to understand to what extent the idea of "Real is Rare. Real is a Diamond" will “hook,” so to speak, the new generation. In focus groups, people reacted positively to this campaign, but we also need a commercial test. Early next year, we will evaluate the commercial efficiency as such. If the results are positive, then ALROSA, De Beers and other members of DPA, as well as the market as a whole will have to address the issue regarding a substantial, multiple increase in financing the generic marketing of diamonds promoting them as an emotional value. De Beers used to spend about $ 200 million a year on the campaign "A diamond is forever." Currently, we are not talking about such amounts, but if we want our campaign to be global under DPA, then we will need to increase funding in a significant way.

We also assume that the essence of the new-old story about the polished diamond may and will be used to promote it by jewelry brands and retailers. DPA's position is that we should achieve synergy from the generic campaign and marketing programs carried out by various jewelry brands. Much in the same way, retailers previously used the slogan "A Diamond is Forever" to promote their own brands. In the end, this benefited all parties concerned - this is the inheritance we are so far living on.

- What is the gauge you will use to evaluate the effectiveness of the marketing pilot phase? Do you expect any growth in jewelry sales?

- Of course, there is no linear dependence in all this. The main task is to form a beautiful story, a positive reaction to the diamond as an emotional symbol that has its value in human life. The results of our marketing program – hopefully positive - will first of all be felt by retail, from which we expect to have some feedback, and then by us, mining companies. The idea is not apt to materialize in money immediately, but it creates the future outlook of our customer. We are optimistic. Focus groups show that people react to the idea positively. Let us see, how they will respond to our videos and product information on the Web.

- The marketing campaign is a key area of DPA’s work, but what other issues does it address?

- Before the establishment of DPA, there was no other organization in the world to represent the interests of the diamond mining business. The objectives of this organization also include the protection of the reputation of our products, information on the contribution that the diamond industry makes to the development of national economies. By conservative estimates, the global diamond industry, stretching from mine to jewelry store, involves more than 10 million people. The diamond business is making a significant contribution to the development of regional economies, and sometimes entire countries. In Russia, it is the Republic of Sakha (Yakutia), the largest constituent entity in our country, in Africa it is such countries as Botswana, South Africa, Namibia, and here we should also mention regions of Canada, Australia, India (as the world diamond cutting center) and the US - the world center of diamond consumption.

Being the diamond mining part of the industry, we are making vast investments in exploration and mining, comparable with any mining operation. But unlike our peers in mining, we depend on the emotions felt by consumers, for whom diamonds are not the daily bread. Therefore, the mainstay of our business is in protecting our product's reputation and in championing for the customer’s vision of the world. DPA is designed to interact with national regulators, mass media, non-governmental organizations and the investment community in order to properly inform the widest possible range of people about the fundamentals of the diamond industry.

- Do you view synthetic diamonds as your competitor?

- No, if it is legal implementation of this synthetic product being fully and honestly disclosed to the buyer as to what he or she is going to purchase. This product can have its own niche and develop in parallel with our market. Problems may arise if synthetics are sold as natural stones, thus making direct forgery, or if its manufacturers will deliberately cause confusion among customers.

The diamond mining industry has already accomplished a more than a century long way in its development. This is a good legacy, which should be used in a prudent manner. Let the others go their own way.