NEW DAY FOR DE BEERS AND DIAMONDS
Byline: Wendy Hessen / With contributions from James Fallon, London
NEW YORK — If De Beers’ recently announced plan to ease control of the world’s diamond supply and institute sweeping changes in the way it does business actually works, it could become a premier brand — the Gucci of the diamond industry.
Though the 112-year-old company has controlled a majority of the supply of diamonds around the world for 60-odd years, a recent review of its business practices by Boston-based Bain & Co. has led it to undertake some significant changes in its approach to selling diamonds.
Historically, whenever an abundance of diamonds was about to enter the market, De Beers gobbled them up, stockpiling huge inventories in order to maintain a tight control on worldwide pricing. The end result was a supremely dominant position, which at one time amounted to as much as 80 percent of the world’s supply.
Today, amidst a monopoly that is now at 60 percent of market share and continues to slide, increasing international consumer concerns about the origins of some diamonds, the rise of branded diamonds from retailers such as Tiffany and a slower growth arc than other luxury products, the industry leader has been forced to develop new strategies to increase its competitive edge.
Over the next year, the diamond company plans to implement a Supplier of Choice program aimed at boosting demand for diamonds while streamlining the supply chain to jewelers, in the process raising both the profile and the demand for diamonds.
“There’s a huge untapped opportunity for all of us in the industry to grow the diamond business and match the growth rates enjoyed by leading luxury-goods companies,” Gary Ralfe, the managing director of De Beers, said in a statement.
“We need to get demand up to the levels of the Chanel handbag,” a De Beers spokeswoman said. “We want to encourage sightholders to invest in marketing and for other brands to come into the diamond market.”
De Beers spends about $170 million annually on generic diamond advertising, a figure equivalent to about four percent of its sales. Overall, the diamond industry spends just one percent of sales on advertising, versus six to 10 percent by most other luxury-goods firms.
The company also has moved to counteract negative publicity surrounding diamond supplies. Sightholders — the roughly 125 major wholesale purchasers of diamonds around the world — will have to agree to comply with a set of business practices that would ensure that diamonds aren’t sourced from areas “where this would support conflict, not being responsible for the exploitation of children and not being responsible for harming or endangering the health or welfare of individuals,” De Beers said.
The policy is intended to stem the rising tide of protests from consumers and governments around the world that the sale of diamonds has funded rebellions in such countries as Angola, Sierra Leone and Congo. De Beers has until recently been accused of buying diamonds from such conflict areas in its determination to control the world market. Two months ago, the company issued a guarantee that none of its diamonds would come from conflict areas.
In return for sightholder compliance, De Beers has agreed to ensure efficient distribution and supplies to its sightholders. The company is setting up a sales-planning system to help direct the right diamonds to the right distributors, which should further boost marketing and branding.
“While our core business will remain the mining and marketing of rough diamonds, in five years time, we envisage an industry in which there are multiple and competitive brands,” Ralfe said. “As we have learned from other industries, competing brands stimulate global demand.”
But it will take some time. Sightholders have a year to show a business plan that shows how they will share in marketing expenditures.
“What they are trying to do is twofold,” said a major U.S. sightholder who spoke on condition of anonymity. “De Beers wants to clean up its act regarding conflict diamonds, putting the supply on a sure footing, and partner with their sightholders to better support their customer with advertising and marketing. Essentially, they would like us to be a salesperson for them, by taking in more goods. They say they will make us more profitable, which they probably won’t be able to do.”
The sightholder added, “This whole thing could be just to get into the United States,” referring to De Beers’ inability to maintain a headquarters here because of its monopolistic status.
“A lot of diamonds will be let loose in the next 1 1/2 years,” the sightholder continued. “De Beers’ stockpiles could go from nearly $5 billion to just what they need to run the business, about $1 billion. For the most part, sightholders have done very well over the long haul with De Beers, though there are some that are also successful without ever buying a diamond from De Beers.
“The success of the plan will depend on how if affects our relationship with our customers. We need the strength to go to our retailers and beat our competition with enough product at the right price.”
“De Beers has absolutely no desire to vertically integrate,” claimed Joan Parker, director of the Diamond Information Center, the company’s U.S. marketing and promotional arm. “They do know that there is potential and added value in the De Beers name and they are looking for ways to bring that name to market. If the De Beers name does go to market, at some point, it will just be one of many brands. The more brands there are, the better it is for the market.”
Stanley Zale, vice president of Louis Glick, a high-end U.S. sightholder and jewelry manufacturer, said, “Competition is always good. I’m guessing they want to sell De Beers branded diamonds and they want to sell them in the U.S. It’s no surprise to anybody that their business hasn’t grown over the decades.
“Twenty years ago, diamonds did sell with similar margins to other luxury goods, though it has always been more expensive to bring a diamond to market. I wouldn’t be surprised if there is a De Beers store on Madison Avenue in 10 years.”
Glick is one of a few diamond firms that have successfully expanded into finished jewelry and undertaken direct-to-the-consumer marketing and advertising. It has been advertising its own Louis Glick name and the Starburst brand of diamond since last year.
“We’re very happy with our relationships with De Beers, but you always keep your eyes open. It’s a great name, so you can’t blame them for wanting to market it themselves,” he said. “It’s very important to have a reliable source of supply, and De Beers has been that. If you are merchandising your diamonds correctly, you’ll be able to sell more.”
As for concerns about how releasing more diamonds into the market will affect pricing, Zale said De Beers “understands how the market works, and they will do things in a systematic way.”
“It’s a big world, with plenty of untapped markets,” Zale said. “There are over 30,000 jewelry stores in the U.S. alone, and there are plenty of places with emerging wealth such as China, India and much of Latin America.”
A U.S. upscale fine-jewelry retailer, also speaking on condition of anonymity, said De Beers’ strategy did not come as any major surprise.
“While we’re happy to see that there is a lot more advertising planned, we are concerned about the price of existing and future goods and how that will reflect on inventories we already hold,” the jeweler said. “We are also a bit concerned that in the short term there will be a lot of diamonds out there being sold by people who shouldn’t be selling them, such as Internet and auction sites.”
Jeff Pfeffer, senior vice president at Bank Leumi, which manages more than half a billion dollars in commitments for the diamond and fine-jewelry business, described the De Beers strategy as ultimately being geared toward “dealing directly with the end consumer.”
“They are looking for people to add value to their product and are trying to set a bunch of guidelines,” Pfeffer said. “Branding is coming to the forefront, and De Beers would likely support that. They would probably love to have a store on Fifth Avenue right next to Tiffany.”
Though he credited the current distribution system with working well for decades, Pfeffer said the game is changing.
“The sightholders are here to stay, but their numbers will decline,” he added.