Friday, November 4, 2011

De Beers - end of a remarkable era

The news today that the Oppenheimer family has sold out its remaining share of De Beers to Anglo-American, subject to regulatory approvals, brings to a close a remarkable era, and the extraordinary tale of the Oppenheimer family.  In many ways, the diamond industry owes its success and perhaps its very existence to this family. 

Observers have been commenting for over a decade on De Beers' struggles to transform itself from a near monopoly into a modern commercial operation.  At every turn, it fought to maintain control of its distribution and historical methods, and step by step it has been forced to retreat.  At the core, the issue was whether it could create an effective marketing plan that would create added profits--and justify the existence of a complex marketing and sales organization, the DTC.  European regulators forced it to sever its long-time control of Russian diamond production, and to create a cumbersome and onerous system for continuing its sightholder processes.  Its critical partner in mining, the country of Botswana, steadily acquired a greater hold on De Beers ownership, and share of mining production.  Canadian exploration proved expensive and of limited production.  And South African mines were sold or closed, with remaining operations seeing declining yields.

The sale to Anglo-American, at a relatively cheap price, raises a host of questions as to the future direction of De Beers.  Foremost might be the motivation for Nicky Oppenheimer to take this step.  Some claim that continued control by the Oppenheimer family was in question (Nicky himself stepped down recently from the Anglo board, possibly indicating friction over policy and continued Oppenheimer control of De Beers).  That might be too simplistic.  Perhaps there was a recognition that the major marketing initiatives and distribution systems will not survive.  The Supplier of Choice process for selection of of sightholders has essentially failed in its core objectives. 

And Forevermark, the latest iteration of the beacon programs run over the years, has apparently not generated the kind of acceptance anticipated from retailers, and will probably not have the level of financial support from the industry needed to make it work.  Even then, the initiative might not possess compelling appeal.  Always part of the marketing problem is De Beers' position several steps removed from the consumer.  In an age where lines of distribution have been shortened by disintermediating wholesalers and agencies, De Beers still tried to increase market share and profits by enhancing the value of, and branding, a component in jewelry - its diamonds.  De Beers does not possess the ability or the latitude to do otherwise, and has paid the price.

Now we ask, does Anglo have any intention to continue De Beers policies and marketing?  Has Nicky Oppenheimer sold out knowing the writing is on the wall, and is leaving Anglo to be the bad guy?  The Anglo board has no particular attachment to legend and precedent.  Will we see De Beers be turned essentially into a mining and sales operation? 

Will we see the end of the long history of De Beers advertising?  What will happen with the De Beers partnership wth LVMH on De Beers stores? 

None of these questions, and many more, can be readily answered.  We can only speculate.  But one thing is certain.  This is the end of a remarkable era.

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