De Beers is talking about change, urging the trade to be proactive in dealing with a persistently uncertain and volatile market environment. While the company has directed its message to the diamond industry at large, and specifically to sightholders, it continues to evolve its own agenda and business strategy to ensure growth in such a changing marketplace.
Assessing De Beers strategy requires some perspective as the company seemingly moves beyond being just a supplier of rough diamonds.
One might be forgiven for thinking the mining company is positioning itself to capitalize on every area of growth in the diamond business. After all, Forevermark gives De Beers a retail jewelry presence along with its diamond-grading capacity and brand placement. The company has also been working to combat the threat of undisclosed synthetic diamonds entering the market by selling products like its DiamondSure, DiamondView and Automated Melee Screening machines.
During August, De Beers signaled its intention to enter the secondary polished market by exploring ways to improve the diamond reselling process that is available to consumers. Furthermore, at the upcoming Hong Kong Jewellery and Gem Fair the company will unveil a new research initiative providing market information via its inaugural Diamond Insight Report and prospective accompanying website.
So while De Beers garners the vast majority of its revenue from rough sales at its sight and auction platforms, and supplements that with its industrial diamond supply at Element Six, the company is also dabbling in the polished and retail markets, grading, equipment, research and branding.
From De Beers point of view, these are necessary steps to maintain its leadership position. While these initiatives make business sense in that they should eventually bring in additional revenue, if they don’t already, management argues that they enable the company to protect the integrity of its product and ensure the value proposition of diamonds – for its own sake and for the sake of the industry.
A De Beers spokesperson explained to Rapaport News that the company bases its philosophy on four pillars that include: product integrity to deal with threats such as undisclosed synthetics; ethical integrity to protect the product from being stained by conflict, human rights abuses, or unfair labor practices and the like; ensuring the emotional value of diamonds encompassed by its Forevermark branding and marketing efforts; and safeguarding the financial value of diamonds, which is what the company hopes to achieve by participating in the polished secondary market.
De Beers is aiming to raise the value of its core rough diamond supply by following these guidelines and is pushing its customers to follow suit by embracing change.
Sightholders have already navigated substantial changes in the past year. As Philippe Mellier, De Beers CEO, acknowledged at the recent Business Excellence Seminar at the August sight in Botswana, the most significant of those was the change of environment as the sights moved from London to Gaborone.
The next requirement of sightholders – and possibly the more important change – is their adaptation of international financial reporting standards (IFRS) in order to gain a sight during the next contract period beginning on April 1, 2015. As they apply for a contract in the coming months, sightholders will need to prove that they comply with De Beers best practice principles, and that they have an IFRS-compliant corporate structure — or a program in place to achieve that by 2017.
While De Beers seeks to engage with well-structured, financially-stable customers that can ride out periods of market volatility, the company also argues that financial compliance is a necessity for the industry to navigate the changing and cautious banking environment.
“We know that many of the banks are looking to reassess their exposure to the diamond industry and that liquidity is an issue,” said Nigel Simson, De Beers senior vice president of global sightholder sales, in a recent interview with Rapaport News. Therefore, he stressed that the industry needs to attract additional financing from new sources, and that will only happen if it can demonstrate the expected level of transparency and adherence to financial regulations that would make a bank comfortable with lending to a prospective new customer.
Few can argue the point, and the industry will inevitably be in a healthier position, and build a better reputation, once manufacturers can demonstrate stronger financial transparency and compliance. In doing so, De Beers is also asking sightholders to change their mindset for doing business. In a sense, it expects sightholders to shift from a family-run business mentality to a more corporate-driven agenda – arguably in much the same way that De Beers did when Anglo American bought out the Oppenheimers’ stake in the company back in 2012.
By adopting a more corporate-like structure, De Beers presumes that manufacturers will broaden their view of the market and be better prepared to deal with the challenges the diamond industry faces today.
According to De Beers, among the most pressing of those challenges is operating in an increasingly competitive luxury market space. Mellier appealed to sightholders to work with De Beers to gain a better understanding of the market – luxury, not just diamonds – as a means to maintain the diamond industry’s position therein. With greater knowledge, diamantaires can also position themselves in such a way as to become comfortable with uncertainty, he said. The goal, according to Mellier, is to ultimately be able to predict market developments, and even influence future changes that other luxury products will be forced to follow.
De Beers appears to be doing just that in its own business strategy. By positioning itself across the pipeline, the company is not only able to improve the value proposition for its diamonds, but it is also better able to deal with an uncertain market environment, and possibly influence changes of its own.
Mellier modeled this ambition off of how Apple affected change in the music industry through its iTunes innovation that enabled its dominance in the market. He then recognized that De Beers achieved a similar impact on the jewelry market during the twentieth century. “In response to changing economic realities in the U.S., with a growing middle class that had disposable income, we created a new category of consumers by developing the diamond dream and by marketing diamond products on the basis of their emotional significance,” Mellier said.
It’s a mission that is still relevant today. De Beers says that the diamond dream is under threat by reputational issues such as undisclosed synthetics, conflict diamonds and human rights issues, and is losing financial value as consumers may or may not get fair value when they resell their diamonds.
Furthermore, while the growth of the middle class has spread with enormous potential in China and India, consumers have far greater choices in luxury products than ever before. Diamond jewelry is competing for consumer attention with iPads, smartphones, TVs, handbags, high-end fashion and the like.
Therefore, the industry certainly needs a strategy to deal with these challenges and De Beers should be commended for its awareness and proactive approach. Then again, it may simply make business sense to diversify one’s position to effectively deal with uncertainty. As Mellier stressed, “A diamond is forever, but the diamond industry will continue to change.” Whether the rest of the industry is gearing up for these challenges is a noteworthy question being asked by the miner.
