Friday, September 13, 2013

The De Beers Forevermark Promise - real or illusory?

De Beers has a superb history of managing the diamond business and the public perception of diamonds.  No one will ever do it better.  The two parts of its business - mining and marketing - have over long years evolved into the distinct positions they now hold, neither of which give the company very much breathing room.

While that might sound drastic - and we are not looking at any imminent change - the outlook for the status quo is not promising.

On the mining side, we have all been aware for a while that no mining company is excited about the future.  BHP sold out; Rio Tinto tried, but could not find a buyer who would take on their huge investment in going underground at the Argyle mine.  Never mind that mining companies want no part of the bad publicity involved in operating in some countries.

And where is De Beers?  They continue to be a dominant supplier, and that will not change soon.  But, just before the Oppenheimers sold out, they signed a new 10-year agreement with the government of Botswana.   Now, even government ministers are open about the future, stating that the country needs to diversify its sources of revenue.  As it is, Botswana reaps the lion's share of the profits from its giant mines, and De Beers has fully moved its sorting and selling operations to the capitol.  This major source of national revenue has 20 years of life left, and one questions if Gabarone, Botswana's capitol, will have the infrastructure and heft to become a top diamond center even if it no longer extracts diamonds locally.

So it looks like De Beers (or rather Anglo at this point) gave themselves a 10-year window to transform their business.  Either a real change in the outlook for mining diamonds (not very likely); or doing something else.  They have expanded Element 6 operations - man-made diamonds - which could open the door for either a variety of diamond applications, including man-made gem stones.  Or the current big push, Forevermark, sucks up a significant piece of the diamond trade.  Maybe both.

Man-made diamonds (MMD's) could have a very big future.  As diamond production continues to decline, the door opens wider and wider for MMD's to expand.  De Beers could be well-positioned for that.  A technological breakthrough that would radically increase productivity would be the turning point.  Who knows when that will happen, or if it will happen.  Even so, there is even now a steadily increasing supply in the market, sufficient for EGL to offer special grading reports in Hong Kong, due to the volume being generated there.

And what about Forevermark?  Many diamond cutters are involved and leaning on the program, as they have historically every time De Beers spends big money on advertising and marketing programs.

Of course, this time it is different.  In the past, De Beers programs allowed other miners to ride coattails.  This time, De Beers is trying to make it an all-inclusive program, and to have everyone down the distribution pipeline share the cost.  They provide the marketing, the stone marking, and the diamond grading.  You are either in it or not.  No coattails.

Throwing enough money at it makes it attractive.  And unlike the past, it seems that the commitment is there to keep at it.  De Beers certainly has the wherewithal to keep going.  On the plus side, the sightholders, dealers and retailers involved are pushing it as they have skin in the game.  Some uninvolved dealers have been hurt because some key customers are boxed in for now as they feel obligated to buy from Forevermark suppliers.

On the downside, will enough of the public buy into paying a premium for the singular benefit being offered - a diamond with known provenance?  This year, 2013, is when the big push is being made to sell the pitch.  It is doing so at a time when several factors mitigate against success, at least in the US.  The economy is still on shaky ground.  More and more diamonds are being recycled, and that will continue to grow as a far cheaper way for retailers to acquire stocks and generate solid profits.  De Beers no longer does image advertising, and it shows.  Even a casual look at September fashion magazines reveals nearly a total lack of diamond jewelry advertising.  If anything, the magazines are showing edgy costume jewelry that is feeding the strong trend towards inexpensive, well-made adornment.  Diamond sales are tough at retail, and we are seeing anomalies in the buying pattern.  Most ominously is the mounting evidence that the Millennials, the baby-boomers, do not have the attachment to diamonds that was so strong with the Boomers. 

And then there are the bigger questions.   How many retailers will consider the program a success and renew next year?  How many more will judge that the advertising campaigns and the "message" warrant the fees and the premium prices?  If Forevermark makes money on grading and marking diamonds, will the business make money - enough money for all the overhead carried by Forevermark?  And will Anglo be patient, or turn off the spigot at some point? 

There are significant weaknesses in the program.  Consumers, even as they nod their heads in agreement over the non-conflict message, are predominantly moved by design and life style relevance.  On this aspect, Forevermark is unfocused and the products are mostly very dull and all over the map because every distributor makes their own collections.  Does a high-end store want to promote a brand that is also in middle and low end stores? And retailers are in a position of making excuses for non-Forevermark diamonds. 

Can the whole plan be to create a new empire for De Beers once the productions dry up a decade or two ahead?  An empire based on taking over the world of diamond grading and marking?  As compared to building a huge business selling MMD's? 

Something does not ring true.