DIAMONDS: LVMH’S NEW BEST FRIEND

Byline: James Fallon / With contributions from Miles Socha, Paris / Wendy Hessen, New York

LONDON — Cartier, Tiffany, Bulgari and De Beers?
After months of speculation, LVMH Moet Hennessy Louis Vuitton and the De Beers Group on Tuesday announced the formation of a joint venture to turn the De Beers name into one of the world’s leading prestige jewelry brands. This confirms a story reported Tuesday in WWD that the two parties were expected to form a union.
The total diamond jewelry market, from the most moderate chip to the most luxurious stone, is worth an estimated $60 billion worldwide and Bernard Arnault, chairman of LVMH, made no secret he wants a big piece of it.
“It is our strategy to build one of the largest [jewelry] companies in the world in 10 years,” Arnault said at a press briefing for about 25 journalists in the paneled boardroom of De Beers offices here. “But even a fraction of a percent of $60 billion is quite a lot of money.”
LVMH has been eager to expand in the prestige jewelry and watch markets for the last several years. Its current watch and jewelry division comprises Tag Heuer, Ebel, Chaumet, Zenith and Fred.
For De Beers, the joint venture represents a plank in its strategy to jump-start demand for diamonds, which has been lagging behind the growth of other luxury goods over the last few years. Nicky Oppenheimer, chairman of the De Beers Group, said the joint venture “will be good for consumers and good for the diamond industry as a whole.”
Many of the details of the joint venture are to be worked out over the next six months, as its executive team is appointed. These include who will be its chief executive, where it will be based, the level of investment and even its name.
The joint venture will be equally owned by the two partners. Myron Ullman, group managing director of LVMH, will be the new entity’s nonexecutive chairman and Gary Ralfe, managing director of the De Beers Group, also will be on its board. The initial investment in the new De Beers jewelry brand is expected to be on the order of $400 million over the next five years, equally split between the two partners, Ralfe said.
Ullman said the company plans to open freestanding stores under the De Beers brand within the next 12 to 18 months, when the first collections are introduced. The collections will be designed by in-house and freelance designers. The new company also might wholesale its collections, but Ullman said the initial strategy will be to open its own units in order to capture consumer attention. He declined to say where the first store would open.
“We look forward to the day when there are De Beers stores in New Bond Street in London, Place Vendome in Paris, the Ginza in Tokyo and Fifth Avenue in New York,” Ralfe said.
There are hurdles, however. A major one is the reaction from De Beers’s customers to rough diamonds: the 125 or so major wholesalers of diamonds around the world, called sightholders. Oppenheimer insisted they shouldn’t be upset because the joint venture will have no direct access to the group’s famous diamond stockpile. Instead it will have to buy polished gems from the sightholders.
“We have no intention to compete with them,” Oppenheimer said. “It actually will be beneficial to them because there now will be another big buyer in the marketplace.”
Some U.S. sightholders had received a letter from Ralfe alerting them to the LVMH partnership.
Saul Goldberg, president at William Goldberg, a De Beers sightholder for more than 30 years, said there has been a lot of confusion in recent months as De Beers sought to organize how it would continue to work with the wholesalers and institute its Supplier of Choice program, but “De Beers is still a key supplier of diamonds.
“I’ve actually become less concerned about [the LVMH partnership],” said Goldberg. “They want a part of the retail pie and I imagine there will be De Beers boutiques all around the world.
“There is still a world that wants an Hermes handbag or a Prada bag or a Gucci bag, so why can’t there be the same thing for diamonds?” he added, referring to the various price ranges for designer handbags.
De Beers last year announced the Supplier of Choice program to stimulate demand for diamonds. As reported, the sightholders will have to comply with a set code of practices that would insure diamonds aren’t sourced from so-called “conflict areas.” They also would have to agree to boost their marketing spending on diamonds. De Beers itself has been stepping up its advertising and this year expects to spend $180 million on its generic marketing program under the Diamond Trading Co. name. This is equivalent to about 4 percent of its sales, still well below the average of 10 percent of sales spent by most other luxury goods firms.
Another complication is the status of De Beers in the U.S. Dating as far back as 1944, the group has been constrained from operating in the U.S. under that name because of a long-running antitrust investigation. There remains an outstanding criminal indictment of De Beers and its senior executives cannot enter the U.S. because of the action. But since the U.S. accounts for half of the diamond jewelry sold worldwide, it is a market that can’t be ignored.
Despite its monopoly status, De Beers has used and continues to use the De Beers name in generic diamond consumer marketing campaigns in America. Ralfe insisted the action will have no affect on the new joint venture because it is not controlled by De Beers. The new company will be registered in the U.K. and, if anything, will increase competition in the diamond jewelry market, he said.
However, a De Beers executive admitted the joint venture will need the approval of all regulatory authorities in the world’s major markets.
“We assume it will not be a problem in the U.S., but nothing is certain,” he acknowledged.
A basic question, though, is whether the De Beers moniker can make the leap from being a supplier brand to being a consumer name. Unlike apparel or accessories, the fine jewelry world is not overly saturated with big brands, indeed, a large share of fine jewelry is sold generically.
And while consumers might be aware of the De Beers name when it comes to diamonds because of its institutional advertising, the majority of its stones are used in jewelry that retails for less than $5,000. Cartier, Bulgari and Tiffany, meanwhile, consider their starting price point for prestige jewelry to be at least $10,000 — and generally from $30,000.
“The success of turning a commodity ‘diamond’ into a brand is not promising,” John Wakely, a luxury goods analyst at Lehman Brothers in London, wrote Tuesday in a scathing note on the joint venture.
Claire Kent, a luxury goods analyst at Morgan Stanley Dean Witter, was more positive but admitted “the success of the joint venture shouldn’t really be taken as a given because while De Beers is a well-known brand, it is not a luxury brand.
“At the moment, De Beers does not have an identity,” she added. “It’s not known for any particular style and that will be the main challenge.”
The most bullish was Antoine Colonna, a luxury goods analyst at Merrill Lynch, who said the deal has the potential to add high-quality earnings to both parties. Colonna said the new De Beers consumer company eventually could have a major impact on Cartier, currently the world’s leading prestige jewelry brand with an estimated 18 percent share of the luxury market. But Colonna pointed out that it will dilute earnings for both companies in the short- to medium-term, as LVMH and De Beers invest to turn the De Beers brand into one well known by consumers.
LVMH’s expertise in that area was why De Beers linked up with it in the first place, Oppenheimer said. De Beers announced plans last July to realize the latent value of its brand by launching it in the consumer market. Since then, it has been evaluating a number of options, including launching its own consumer collection; selling its brand outright; forming a royalty agreement; or forming a joint venture with a luxury goods group. De Beers is said to have talked to most of the world’s luxury conglomerates over the last few months, including Gucci Group NV, owner of Yves Saint Laurent and Boucheron, and Compagnie Financiere Richemont SA, owner of Cartier, Van Cleef & Arpels and many of the world’s leading watch brands.
Industry executives said Gucci wasn’t interested in pursuing a joint venture with De Beers, questioning whether it could be a success. Richemont, meanwhile, wasn’t keen because it wanted to maintain its focus on Cartier and Van Cleef & Arpels. Richemont owns 60 percent of Van Cleef & Arpels and Johann Rupert, Richemont’s chief executive, has said he believes Van Cleef eventually could be as big as Cartier.
Oppenheimer said LVMH was the logical choice for De Beers because it is the world’s largest luxury goods company with extensive experience in developing, designing and retailing luxury brands. De Beers is licensing its brand to the joint venture and transferring some of its staff with experience in choosing and grading diamonds, Ralfe said. It also is transferring some of the technology in the physical branding of diamonds that it has tested over the last few months.
While the initial De Beers consumer collection won’t be finished for at least a year, Arnault hinted that he already has plenty of ideas about what it should look like. While Ullman and Ralfe spoke about figures and branding, Arnault spoke about the need to develop a “soul” for the brand.
“It is by far the best-known brand in diamonds,” he said. “We will build the image of the new company on that. We will add to the image a reality and product designs by modern designers that will bring meaning to the brand, which at the moment doesn’t have an image.
“There will be several different faces to De Beers. All the young actresses and models are fascinated by De Beers diamonds and they will become even more so in future. Maybe we can even use De Beers diamond jewelry in a Christian Dior show. There are many opportunities.”
Arnault insisted it simply isn’t a matter of opening stores under the De Beers name and compared the process of developing the brand to what the group has done with Louis Vuitton. While there is the potential to do other products under the De Beers brand, for the foreseeable future the focus will be on exploiting its strength as the premier diamond brand.
“This is a unique proposition,” Arnault said. “If it is very successful, then I believe we can open shops of substantial size with only jewelry and jewelry-related products. It’s a very simple image to convey — the stores will be the ultimate place to find the best diamond jewelry. We believe we can gain substantial market share.”

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