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Gold Mining and Marketing - the New Paradigm.
This has been a turbulent year for the gold mining industry with the drop in the price of gold - now the turbulence has spread with the crash in share prices - or the "correction" of share prices, the collapse of the Asian currency, and nervousness about currencies everywhere. Of particular relevance here is the insight of Andrew Grove, President and CEO of Intel, in his recently published book "Only the Paranoid Survive". He says "There are moments in any business when massive change occurs, when all the rules of business shift fast, furiously and forever". He calls such moments "strategic inflection points". A strategic inflection point can be set off by almost anything:
In the Australian gold mining industry we have all of these and more:
We believe today this industry - the gold industry - is at a strategic inflection point. The world of gold mining has entered a new era. This new era is one which will be defined by globalisation, technology and communication, reduction in traditional boundaries, and a strategic focus on the market for gold. Globalisation means that efficient supply is increasingly taking precedence over geographic proximity. Global alignments are increasingly impacting on all industries including mining companies. The virtual organisation has become a reality in technology and information based industries. Technology has increased the precision and speed with which we do almost everything - from the precision with which an ore body must be modelled and mined and the speed with which a highway or a car must be built, to the speed with which new technology itself can be created. Technology has also increased both the speed and complexity with which information can be transferred and processed with dramatic impacts on the speed of communication. If globalisation has removed or weakened traditional geographic boundaries, the combined impact of globalisation and communications/technology has weakened the boundaries which separated industries, eg a credit card is now in many ways doing what a bank does; a utility company which installs a direct line to its customers is potentially in the business of telephony; a manufacturer plus internet can be a retailer. There are opportunities and threats in abundance. At face value the weakening of traditional boundaries may appear to have little relevance for a gold mining company. We would argue that the major players in any industry ignore the potentially profound, but as yet unidentified implications of globalisation and the information highway at their peril. We believe today this industry - the gold industry - is at a strategic inflection point. Today more so than ever before the gold industry must develop its own market. Grove points out that, managed wrongly, a strategic inflection point can mean the end of the game. Managed right, it can turn into a powerful force. Clearly, we all want to manage it right - so we have tried to address the topic of the gold industry within this new paradigm " Gold - Mining and Marketing.." So how do we go forward? The value of a gold mining company has always been dependent on many unknown factors, such as:
Ever improving technology and communication is increasing mining and exploration efficiency - new methods of surveying including satellite aerial photography, ever increasing sophistication in computer modelling of ore bodies, larger more cost effective plants, new methods of extracting gold, eg. bugs etc, etc, etc. This kind of change, continuous improvement, has itself become almost a constant. It is in the area of the market (supply and demand and the gold price) that everything is changing - that there opportunities and threats in abundance. For the most part until recently demand for gold has consistently outstripped supply, and consequently the gold price has been relatively stable. Mining companies have sensibly focussed their attention on mining costs and exploration. However recently such things as the Reserve Bank of Australia selling its gold - resulting in a significant fall in the $US gold price, and a general unsettling influence on perceptions of stability of the gold price; and the Asian currency devaluation - resulting in forecasts of declining growth rates and falling demand and prices for other commodities. Today more so than ever before, the gold industry must develop its own market. We can no longer rely on channels of distribution to create and drive demand for gold (they have their own priorities). If we agree that the gold mining industry must develop its own market, then the question is where to begin. The current uses of gold can be categorised broadly into four: as an investment, in fashion jewellery and watches, industrial uses, and decorative uses. Gold as an investment As an investment gold or gold jewellery/ornamental works must compete with other investments including shares, bonds, trusts, real estate, business and other investments. Gold jewellery and ornamental works in particular compete with intrinsically precious goods eg. art, silverware, oriental rugs, porcelain, furniture, etc. The issues then relate to such things as liquidity, interest rates, capital growth, risk, etc. all the issues people consider when making investment choices (eg. an older retired person may be looking for income-generating investments, while a younger highly paid executive may be looking for capital growth, and perhaps investments which also provide intrinsic value and beauty). The figure in Appendix 1 shows the profile of people who currently invest in gold, silver, diamonds and precious stones. External issues which impact on demand for gold as an investment include the perception of gold, at least partly driven by "good or bad press". Fashion jewellery and watches In order to sell more gold in this segment, it will be important to:
The figure in Appendix 2 shows a ring sold at $25; and another ring with similar level of design but in gold selling at $1,555. There is clearly a large increase in price due to the ring being "gold", but the actual value of the gold (in $’s paid to the gold industry) is a minor part of the increase in price. Increasing the price of gold sales to the gold industry will depend on such things as taxation and cutting out the "middle men" (eg. internet sales). From a consumer perspective gold fashion jewellery and watches must compete with other fashion items as clothing and apparel, other accessories and a host of other ways people spend their disposable income. The figure in Appendix 1 shows the profile of purchasers of jewellery and watches. Industrial uses of gold There are many current and potential industrial uses of gold in industry - from medicine and medical equipment, and dentistry to computers and other electrical componentry. For many uses gold, because of its non-corrosive properties and excellence as a conductor, is clearly superior to the alternatives. In theory as the price of gold decreases, more uses should become viable. In practice it is not so simple. A major issue for industry has always been the fear of gold price increases - ie if an industry gears up to use gold in its manufacturing and the price goes up, there may be substantial cost increases (if they pay the increased price of gold) or disruption to production (if they have to change to an alternative). The decorative market Historically gold, gold-plating, gold leaf, have been used for decorative purposes in buildings and houses. With clever marketing there are opportunities for gold-plate, in such things as taps, signs, mirrors, etc. The issue here is really a typical marketing issue - specifically, marketing a luxury good, creating "pre-packaged envy". In each of these areas there is change ranging from the economic turmoil associated with the notion of gold as a currency to the rapid and revolutionary change in every element of retailing. Each has its own strategic considerations and issues. The one thing which remains constant is the reality that at the other end of all the change is a person - a person making choices - to buy gold jewellery or not; to invest in gold or not; to choose gold over a paper currency or not; to use gold in their business (dentist, computer component manufacturer); or to use gold in decorating their home, office or building. In some instances, the person is an ordinary individual - in others the person is a member of the Central Bank Board, or a computer designer etc - but all choices are made by people (consumers or people regulating on behalf of consumers). More than ever before we need to understand that consumer - and the choices he or she will make. We must go beyond asking the customer what he or she wants in jewellery, investments, etc. It is essential to understand what he or she wants from life, and to recognise that gold, jewellery, investments etc, are only a means to an end - instrumental in the person pursuing what he or she wants from life. In Australia, it is not hard to get a really good understanding of people. Australia is blessed with good information. We have the second best census information in the world (Canada has the best). We have arguably the world’s best single source database - for understanding customers, marketing, advertising, media buying and monitoring in the financial industry - Roy Morgan Single Source, incorporating investment behaviours, jewellery purchasing, media (print readership, TV rating, radio listening), other product usage and lifestyle activities, and Roy Morgan Values Segmentation1 - a powerful psychological instrument to understand the choices people make. However, while information can make all the difference, there are no simple answers - no substitute for thinking and planning. Our view is that regardless of how consumer market information has been used historically, well-focused organisations are increasingly now taking a very strategic and practical approach. The focus is clearly on the uses to which the information will be put - decisions which will be made based on the data. What kind of decisions?
These are the kinds of issues that the gold mining industry will need to turn its attention to. How are our well-tuned financial organisations using consumer information? We know companies such as GE Capital, Merrill Lynch, Visa, Amex and Microsoft are looking at research data with the big picture in mind. We know they are looking at the bigger picture - looking aggressively at their supply chain, and the supply chain of other industries .
We know the more enlightened of the telephone and utility companies are also looking at the big picture - but from a different angle - looking to find their most profitable slice.
If the gold industry is to flourish within this changing world it will need to take charge of its distribution channels. Core to the industry’s planning will be a thorough understanding of the distribution channels in the four segments and a thorough understanding of the customer (or customers). The well-tuned organisation will have a structured approach to defining roles of product development, product & service bundling, advertising, P.R. and media within the total mix. The means is a single focus - from strategic planning through product development, marketing - on the market and the customer. Australia as a test market There is an opportunity today to test market the new approach in Australia:
Figure 1 - Industries doing a good job for Australia If any doubt remains that the gold industry must market gold seriously and aggressively, it is worth noting what is going on in the allied diamond industry. "The De Beers marketing people have never let up. Today the United States still accounts for more than a third of diamond jewellery sales. But now the company spends no less than $200m a year marketing diamonds in 34 countries around the globe." The Economist December 20 1997 |
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