By Ashley Bailey
, Friday, August 04, 2006
The Fear Factor
De Beers, the diamond monopoly that controls at least 60% of world supply, is running scared.
In 1999, it discovered that consumer spending on diamond jewelry lagged significantly behind spending on other luxuries like vacations. There were several reasons:
1) diamond cutters and distributors lacked the marketing sophistication to create memorable branded cuts and lines of jewelry;
2) the diamond industry was reluctant to invest the large amounts of money needed to develop and promote brands;
3) the public feared both treated and man-made diamonds and wanted better assurances that stones were natural and unenhanced.
In January 2000, De Beers announced a radical new sales and marketing program which it called "Supplier of Choice (SoC)" operated through its rough sales and marketing arm, the Diamond Trading Company (DTC). Here's how it works.
Survival of the Fittest
Although De Beers' Supplier of Choice (SoC) program tries to make sightholders more brand-savvy, it is, at heart, a market consolidation plan.
Believing that a chain is no stronger than its weakest link, De Beers is trying to eliminate as many weak links as possible. The company sees the weakest links as undercapitalized, usually small and medium sized companies, that do not have the power to hold on to inventory or hold the line on prices in turbulent times and contribute to market instability through panic selling. It also sees these firms as adding little value to the goods they sell since most do not cut or market stones.
De Beers has a point. The diamond trade is a bit archaic in structure, composed mostly of family-owned firms that operate with great secrecy. In recent years, many of these firms have either gone under or shifted their emphasis from loose stones to finished jewelry. Those that have survived have found brand and/or specialty niches.
Nevertheless, De Beers has never hid its feelings that the future of diamonds belongs to the fittest. And the fittest, as De Beers defines the term, are mostly large Indian, Israeli, Belgian and American conglomerates that offer a wide range of products and services, each differentiated and creatively marketed.
Goliath Meets Many Davids
To allays fears that its Supplier of Choice (SoC) program is a thinly disguised squeeze play, De Beers has pledged itself to direct open-market sales of rough. But the amount of these sales—both in carats and dollars—is a small fraction of the amount sold to sightholders.
In fact, De Beers has been increasingly stingy when selling to its own customers. The company claims there are natural scarcities of larger, finer stones. The market charges that the scarcity is artificial, designed to starve out weak players. No one outside De Beers knows for sure.
If De Beers' SoC program is meant to modernize and streamline the diamond distribution chain, the pain it is causing is being felt as much by customers as non-customers.
De Beers has long viewed some of its own clients, called sightholders, as weak links. In January 2003, it announced that it would cut the number of its clients from around 120 to 80 by year's end. To remain a member of the club, each sightholder had to submit a detailed marketing plan to De Beers, along with a complete financial disclosure of a sort these companies show only to accountants.
Six months later, it announced who made the final cut and who didn't, giving each of the purged firms six months to find alternate sources of rough.
The dramatic announcement, which included names long associated with the company, has triggered law suits in Europe and America.
Three Industry Cleanup Areas
De Beers' Supplier of Choice (SoC) program addresses four areas where the DTC says, "the industry needs to improve its competitive performance."
1) Distribution. De Beers wants a leaner, meaner distribution pipeline where value is added at every step. That leaves room for miners, rough distributors and cutters. Traditional intermediaries will be a thing of the past.
2) Advertising and Branding. According to De Beers, diamond jewelry makers only spend an amount equal to 2% of global sales on advertising and marketing. Compare that to 6% for watches and 10% for luxury goods overall. While the company itself spends close to $200 million globally on advertising, few of those in the trade who benefit from these expenditures pitch in with ad programs of their own. Or, if they do, they budget too little money for effective consumer awareness of their brands. To be a De Beers Sightholder from now on, you better be ready to intelligently spend big bucks on brand-building and marketing.
3) Consumer Confidence. Diamonds have had their fair share of bad publicity in recent years—thanks to media attention given to "conflict diamonds" (sales of illicit gems by African rebel groups to finance arms purchases), synthetic (or man-made) diamonds and treated diamonds. To boost consumer confidence, De Beers will inscribe cut diamonds with a microscopic "Forevermark" that guarantees the diamond is all-natural and free from color and/or clarity treatments such as irradiation and fracture-filling.
The New De Beers' Sightholder
The diamond industry is the most transparent it has ever been. And while to some that may still be the equivalent of looking through a glass darkly, the fact is De Beers has been as upfront about its plans and activities. In many ways, the Supplier of Choice program is born of a need for greater transparency—in order to inspire more public trust.
Stung by bad publicity over "conflict diamonds," and the fact that some firms trafficked in these stones, De Beers is asking that each of its customers commit to a code of best business practices and principles. Violation of these is grounds for the company to suspend sales to the offender. This should go far to improve the image and conduct of the industry.
De Beers will also expect its customers to have solid finances and great creditworthiness. To determine this, the company will insist on seeing its customer's full records. This is a touchy point for many who feel it is an invasion of privacy.
Next, De Beers will evaluate its customers' technical, manufacturing and distribution abilities. Weakness in any of these areas could be costly.
Last, but far from least, De Beers will demand to see detailed marketing and advertising programs that show creativity and are back by firm spending commitments.
By insisting on greater financial and marketing prowess on the part of diamond cutters, De Beers argues that consumers will benefit from greater price stability and product diversity. SoC has already resulted in the greatest proliferation of fancy cuts in history. And with the industry in stronger hands, consumers have been freed from worries about price drops—even in the current period of economic uncertainty.
All in all, SoC has been good for consumer confidence and jewelry industry credibility.
Appreciation to GIA Diploma Program candidate & Whiteflash customer Josh Rioux (AK) for his contributions to this article.