Graff requires some glitter to shine in Asia

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It is somewhat surprising that Laurence Graff, the king of bling, has never been namechecked in a hip hop track.

In the collected works of Jay-Z, Kanye West and 50 Cent, the London-born diamond dealer to the super-rich, whose Graff Diamonds launched its $1bn Hong Kong share sale this week, appears never to have merited a mention.

Could this be down to the company’s lofty market position? It claims to sit at the absolute pinnacle of “the luxury pyramid”. But rap has brought plenty of other elite names into common consciousness.

How many had never heard of Cristal champagne until the name was dropped regularly in rap songs? Even the lyrically challenging Audemars Piguet has gained such currency that Vibe Magazine in April listed its top rap references to the watches.

These brands have become part of the glittering backdrop to hip hop, the great theatre piece of the modern American dream, which puts the highest riches in reach of anyone determined enough to get them. So, why no “props” for Graff?

Half of the answer is about brand, the other is about reach. Both are addressed by Graff’s initial public offering.

A big problem for jewellery companies is that the goods themselves are never branded. An LVMH suitcase is immediately, even gauchely, recognisable. Tiffany solved the problem with its baby-blue packaging. Similarly, Graff in recent years has plastered the pages of luxury magazines with a distinctive – and very British – emerald green.

But as its prospectus admits, Graff does not have the same brand awareness in Asia as the luxury fashion houses that it says are moving aggressively into high-end jewellery. The IPO will support Graff’s plan to boost its brand in part through store openings across Asia.

In western markets, the company boasts recognition as the top jewellery brand in surveys such as the Robb Report. Away from the rarefied niches of luxury trend monitors, its name is little known. The company to some degree wants to keep things that way. But this is a fine line and Graff needs stronger branding.

Graff is actually two businesses. One, which roughly equates with jewellery worth $1m and up, has been described by analysts as lower growth and lower margin. In fact, the bigger and pricier the item, the lower the profit margin involved.

From a trader’s point of view, this business looks much riskier: it involves big proprietary bets on very large diamonds that can sit on the books for years – an average of four.

Prices for five carat stones have almost tripled since 2003, according to Credit Suisse, after being flat for decades. Graff would say there is no risk with supply so restricted. But the run-up in prices come from both the rich getting richer and companies such as Graff buying diamonds in the market. It added $200m in stock last year alone.

Graff has a rare inventory with almost $500m worth of stones of 10 carats and more. This is a big selling point in terms of what it can offer top clients and in what the ordinarily wealthy can aspire to. But elite clients are very few in number and do not go on buying diamonds forever. Its top five customers regularly make up 30 per cent of total yearly sales.

The other business features items of $1m and below. It is still very high-end by most people’s standards, but is much more like a retail business that most would understand. Analysts say it is higher growth and importantly much higher margin. The stones are sold in their thousands and stock turns over on average every year so it looks less risky too.

This side of the business is the branding opportunity that ultimately will help Graff attract the Asian super-rich who can afford the chunkier treasures it holds.

Branding is hugely important in Asia. As in the world of hip hop, conspicuous consumption is all. Branded goods consumed in public, or involved in gift-giving and celebration, command massive premiums, according to Tom Doctoroff, an advertising executive, in his book What Chinese Want. Goods consumed in private or in ordinary chores do not.

Graff’s big branding move was to launch watches in 2009. Their average selling price last year of $90,000 may be eye-watering but, unlike engagement rings, the watches always carry the Graff name.

There is a fine balance to be struck between brand awareness and brand dilution. Graff has no plans to sell luggage and it is a million miles from the cheapening phenomenon of Burberry caps being worn by the youth of Essex. But its long-term performance and that of its shares demands a name that is instantly known at the best Chinese weddings and New Year gatherings – whether or not it rhymes.

Paul J Davies is the Financial Times’s Asia Financial Correspondent

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