Sunday, June 26, 2011

De Beers Forever, or maybe not the way we know it

A couple of years ago I proposed that everything De Beers was doing pointed to the end of the sight process.  First off, they offered "additional" goods to sightholders, then proposed to sell off excess goods to non-sightholders. They quickly backed off from that when, undoubtedly,  sightholders saw their price and marketing edge dented and squawked loudly.  Also, everyone knew by then that production was going to decline and fall behind demand.  BHP was already demonstrating that auctions were producing solidly better prices - though the quantities were not that great.  Moreover, De Beers was being put into a tighter and tighter box by the producing countries, notably Botswana, South Africa and Namibia.  Russia was already fated not to be a supplier to De Beers. 

People in the trade pooh-poohed the idea, saying that De Beers would always want to distribute through a small number of clients; would not give up the power of dictating the content in the boxes; and needed assured tracking of all goods, necessary for the non-conflict pitch coming in the Forevermark campaign.  Not very convincing.  And the history since then does not support such thinking. 

For one thing, when push came to shove at the worst of the recession, sightholders simply refused to take boxes, and De Beers could do little about it.  So much for power.  The Supplier of Choice program has flopped, and badly.  De Beers is essentially selling to the companies it wants to sell to.  Period.  There is no semblance left of the original marketing/branding/controlled distribution concepts.  Best practices became a shell when alleged misdeeds by sightholders in the stone grading scandal were swept under the rug when no prosecutions were forthcoming.  Had that happened, the whole industry could have been severely damaged.

So where are we now?  All we hear about is shortages, especially in prime goods.  It could be real - these stones are just not coming out of the ground.  Or there is some serious hoarding going on, which is possible given the open wallet attitude of the Indian government and Indian banks.  Either way, De Beers is further behind the eight ball.  If there are real shortages, then De Beers must know that every sight is under-priced.  Boxes are immediately being re-sold at good profits.  If there is hoarding going on, then the real power in the industry is moving from De Beers (and other producers) into the hands of cash-rich rough dealers and cutters.  Even if that is only partially true, that alone could end the sight process.

De Beers still hold some strong cards.  The key holdings, especially the Botswana mines, are strong producers.  And in total, De Beers still markets the largest slice of global rough production.  The real question is whether there is any future in sustaining that path.  At the moment, the producing nations are continuing to assume increasing control of production and taking bigger profit shares.  That is not going to change.  On the other side, rough dealers, the De Beers clients, are becoming more independent in their thinking, and more aggressive in taking control of distribution. 

De Beers strengths are in mining, sorting and managing distribution.  We can assume that demand will stay ahead of production (even assuming significant recycling of publicly held diamonds).  If the emerging nations continue to grow as they are, notably India and China, of course, then marketing will become a questionable expense.  (I will hold Forevermark aside for another blog, as that program will be barely a blip in the diamond world.) 

So what should De Beers be doing?  Mining, sorting and running auctions.  That will maximize profits, and it should be easy for them to negotiate a share of those profits.  DTC?  Well, that could be a goner.  Diamdel?  Now, that could be the future!

1 comment:

  1. I've been predicting the fall of De Beers for a few years now. They have been too slow to adapt to the changing market. I think that the EU and their anti monopoly attitude has put the hurt on De Beers as well.
    The average jewelry purchaser trend has changed from male to female and the average consumer is much more savy about paying retail and going online for purchases. It's a whole new business model now.