Historical background

The recent KPMG report projected global jewellery sales will under perform unless the industry as a whole focuses on "growing demand for jewelry as a category".

KPMG’s Advisory Services director said, "Transformation is necessary for growth. The industry has the potential to successfully compete against the luxury goods industry and preserve its traditional domination of the consumer’s discretionary spending." It is not surprising that the most luxurious jewellery segment – diamond jewellery - is suffering a lower growth rate in both sales and profitability.

Why does diamond – the ultimate luxury product – loose out so badly to “other luxury goods”? It is because other luxury industries (expensive cars, high fashion, yachts, etc,) practice technical novelty, fashionable brands and customization, while diamonds has evolved into a very traditional business with little innovation. How did it happen?

Since the early 1900’s professionals worked with cuts to stimulate consumer demand by offering different diamond shapes and by working to improve the proportions of the most popular shape, the round brilliant. Commonly, diamond is graded by 4C’s: Carat weight, Clarity, Color and Cut shape. Among them it is the Cut, which defines brilliancy, fire and scintillation - is the one factor controlled by man. The cut transforms the stone’s appearance and performance from a pebble into a sparkling gem to be admired by human beings.

The very successful “Diamonds are Forever” campaign was the first major step towards stopping diamond Cut evolution. It was launched by De Beers in the 1940’s and created a mass diamond market, especially for diamond engagement rings. However, this mass marketing ideology did little to differentiate between diamonds, so the main market differences became those of nature: clarity, colour and size. This time pricing of a stone became dependant on the traditions and beliefs of each manufacturer or retailer and, as a result, a stone could get noticeably different prices when estimated by different retailers.

To establish common standards for grading and to give manufacturers and customers an independent source of verification of traded diamonds, Gemological Grading Laboratories came into play from the 1960’s. This marked the second major development. These lab’s produce grading reports or ‘certs’ for individual diamonds using its natural characteristics: Carat weight measured numerically, Colour and Clarity compared with Master Stone Sets, while the Cut was barely judged: only the shape name, polish and symmetry quality were mentioned in the grading reports. Rounds were the only exception – they could receive one of a few cut grades depending on how close their basic proportions were to a standard model.

The third major market milestone was established in 1996 when the American Gem Society (AGS) lab, introduced their standard for an ‘ideal’ round cut defined by numerical tolerances in geometrical proportions. Initially only a few leading manufacturers were able to produce such ‘ideal’ cut round diamonds and could command a premium, however numerous competitors soon diluted the higher margins. At the same time stone certificates became widespread and a major source of value adding or subtracting for the trade. A report issued by a world-renown laboratory strongly influences customers’ choices. While buying a diamond customers’ tend to rely on the grade shown in the stone ‘cert’ rather than on the appearance of the stone itself.

It is worth noting, that since that moment the evolution of the round cut came to an end.

Innovative manufacturers lost their reasoning to improve cuts, because it was apparent that a deviation from ‘ideal’ proportions would make the cut ‘less ideal than AGS Ideal’ and therefore less valued. The industry concentrated on minimizing production costs instead. Now a severe bottleneck for the market development of new cuts had been created since the AGS lab takes several years to develop a grading system for industry optimized cuts (so far only the princess, emerald cut and ovals have been added). Meanwhile other leading labs only attempt to grade the cut quality of the round brilliant; this has the effect of virtually outlawing any shape other than round plus small numbers of AGS Princess.

Thus the profitability of the round diamond, which makes up around half of total diamond sales, has sunk to the level of a commodity. The table on the following page shows drawbacks of this situation for principal market groups and how OctoNus leverages innovations and makes a business platform to introduce new diamond cuts.

Historical background (slides)

OctoNus Diamond Cut Initiative