In 2000, De Beers relinquished its hold on the market. JCK examines how the company’s dramatic moves still reverberate a decade later.
Ten years ago, a century of diamond history came to an end.
In June 2000, following a decade of plunging market share, De Beers officially said goodbye to the monopoly game. Over the next few years, it ceased stockpiling stones, unloaded billions in excess inventory, and shuttered its network of offices that purchased rough that fell outside the cartel. And while it once regularly maintained a 70 to 80 percent market share, its share of diamond production is now pegged at 40 percent.
It was a sharp turnabout for a company that, for most of its 112-year history, had regularly preached that without single-channel marketing, prices would plummet and the industry would fall apart.
Instead, De Beers said it would sell under a new policy dubbed Supplier of Choice. Almost instantly, a new diamond world was born. (Days later, the two major diamond associations agreed at an Antwerp meeting to the similarly epochal Kimberley Process, the international certification scheme designed to end “conflict diamonds.”)
To commemorate this milestone, JCK spoke with Varda Shine, CEO of the Diamond Trading Company (the sales and marketing arm of De Beers) and prominent industry analysts to reflect on how the diamond business has—and hasn’t—changed.
The industry is now more focused on the consumer.
Supplier of Choice was launched in part because consumer demand for diamonds stagnated throughout the 1990s. “The industry was declining—very slowly, but we were declining,” says Shine. “In the 1990s, we only outperformed [worldwide] gross domestic product twice. Other luxury goods were growing stronger and stronger.”
And so, De Beers, which for years had been supply-oriented, prodded its clients to focus on demand. Most famously—and notoriously—the DTC goaded sightholders to become marketers. That led to a slew of brands, many of which had disappointing results—particularly those based on big names like Escada and Vera Wang.
Today, Shine pronounces herself “happy that people are no longer wasting money,” and argues Supplier of Choice always directed stones toward clients that “add value” to their diamonds. But she feels that the Great Branding Experiment was not a complete bust. A handful of Indian brands, as well as Hearts On Fire and Sterling’s Leo, are considered successful and ongoing. (Although it should be noted that Hearts On Fire predates SoC.) And many sightholders became vertically integrated; for example, Indian manufacturer Gitanjali runs Samuels and Rogers stores in the U.S. and a chain of stores in India.
“That trend was already there, but Supplier of Choice definitely helped it,” says Mark Boston, managing director of London-based De Beers broker H. Goldie. “It encouraged people to accept that we are all in the same business.”
The industry is not as brand-crazy as it was after SoC launched, especially once the recession forced many companies to slash ad budgets. But it definitely thinks more about marketing and consumers today than it did 10 years ago. “Compared to where we were, the industry has evolved,” says Shine. “But we still have a way to go.”
The industry has embraced “ethical consumerism.”
Courtesy of De Beers Group
De Beers diamonds being sorted
Boosting demand goes hand in hand with maintaining consumer confidence—also a cornerstone of SoC. Despite considerable remaining issues, industry ethics have improved significantly since 2000, when diamonds fueled three African wars and companies rarely considered human rights or the environmental impact of mining. JCK columnist and consultant Ben Janowski sees that as a response to a larger consumer movement: “The entire commercial environment has gone that way. We saw it with Nike sneakers—never mind diamonds.” But SoC accelerated the trend by requiring sightholders to comply with ethical dictates it called “Best Practice Principles.” Other producers followed suit, and the concept is now so ingrained in the industry that the Responsible Jewellery Council was founded in 2005 to develop best practices for the entire jewelry supply chain.
“De Beers has done quite a good job on that,” says Boston. “By spelling out standards for their clients, they raised standards overall. And the sleazy side of the industry, while it’s still there, has been pushed to the margins.” Rob May, executive director of the Natural Color Diamond Association, says once the trade emerged from De Beers’ shadow, it was forced to examine its own practices more closely. “If this were 20 years ago, what is going on in Zimbabwe would all be in De Beers’ lap,” he says. “Now it’s the entire industry’s responsibility.”
Diamond Trading Company CEO Varda Shine
Of course, 10 years ago, De Beers had its own issues to clear up. In 2000, it was still under indictment by the U.S. government for industrial diamond price-fixing, and executives rarely ventured here for fear of running afoul of U.S. antitrust laws. In 2004, it pleaded guilty to the criminal charges and paid a $10 million fine. Four years later, it settled a massive trade and consumer class-action suit. (That settlement has been held up; see De Beers Class-Action Suit in Limbo.)
And then there are the political issues: As the traditional structure of the industry fractured, African governments began wondering why diamond cutting—and the accompanying economic benefit—wasn’t taking place in their countries. They pressured De Beers and other producers to set up factories in producer nations. Shine feels the resulting cutting operations have been helped by the trend toward branding, as many locally cut diamonds are now touted as Botswanan or Namibian stones.
The supply chain contracted.
Bain and Co., the consultants who conducted the strategic review for De Beers that spurred SoC, persuaded executives that industry growth was hampered by the trade’s great web of middlemen—what they called “spaghetti junction.” This remains the most controversial part of the policy, with many wholesalers none too happy about De Beers’ plans to squeeze them out. Even so, SoC rewarded sightholders that dealt directly with “end users”—meaning retailers and, on occasion, consumers. De Beers also slashed the number of clients it sold to, from about 125 when SoC began to 75 today.
Years later, the diamond sector has shrunk a bit, although it retains more middlemen than comparable industries. Boston gives De Beers partial credit—or blame, if you are one of the impacted companies. But he believes the recession and the Internet also played roles.
Diamond prices fluctuate more.
The old saw that diamond prices never go down was never completely true; prices fell precipitously in the early 1980s (when the diamond investment bubble burst after the Federal Reserve raised interest rates), and De Beers reduced rough prices several times, generally without announcing it. But since it ceased squirreling away stones and other producers began using market-based sales tools (like tenders), prices have grown significantly more erratic; at the onset of the 2008 financial crisis, prices at the BHP tender dropped 30 percent. “As soon as De Beers backed off from being the industry buffer, it was inevitable that we would go into a volatile market,” says Janowski.
Yet this volatility often pushes prices up. With increasing demand in India and China, and no new mines coming on stream, the long-term forecast calls for prices to rise. This has led to fevered spurts of speculation on the rough market, which hasn’t always corresponded to gains in polished. Shine admits that the lack of a stockpile “does create some speculative behavior.” And while De Beers officially frowns on speculation, it’s also made quite a bit of money off it.
Diamond advertising dropped.
It’s an irony that, even with SoC’s emphasis on the consumer, there is less diamond advertising now than when the decade started, as De Beers never really addressed the issue of generic marketing.
Its seven decades of advertising and PR—some hits (the three-stone ring) and some misses (the “I Forever Do” anniversary campaign)—made the industry what it is today. But as its market share slipped, execs resolved to no longer spend money promoting other people’s diamonds. By mid-decade, De Beers began focusing most of its efforts on proprietary brands, like the Forevermark and its retail chain.
This, in turn, led major retailers to fill in the gaps—which May feels is a good thing. “Generic marketing caused the mass commoditization of diamond jewelry,” he maintains. “If you go through Sterling’s catalog 15 years ago, it was like a De Beers catalog. But now, without generic marketing, you have Love’s Embrace, you have Jane Seymour, you have the Leo. And this has made the chains stronger and healthier, because they are depending on themselves and not another entity.”
Yet retailers and sightholders couldn’t match De Beers’ $200 million annual advertising spend. In 2008, Russian diamond producer Alrosa proposed an International Diamond Board to underwrite general industry promotions. De Beers and other producers signed on. But once the head of Alrosa departed, the idea never materialized.
In recent years, like an old cowboy lured out of retirement, De Beers has reluctantly sponsored new campaigns. In 2009, it introduced its first new “product” in years, the Everlon Diamond Knot, which differed from past “beacons” in that its advertising was subsidized by retailers and manufacturers. “It wasn’t something we wanted to do,” admits Shine, “but something people expected of us as a leader.”
Generic advertising is but one challenge De Beers faces in the coming years. Soon, it may have to compete with lab-grown (a.k.a. synthetic) diamonds and continued interest from African governments in selling diamonds independently. And the company is searching for new leadership after Gareth Penny, the architect of many of the changes discussed in this article, resigned as CEO on July 23.
But if the 2000s have proven anything, it’s that De Beers and the trade are more resilient than many thought: The industry did not implode without De Beers’ protective shield. (In his 1982 book The Rise and Fall of Diamonds, Edward Jay Epstein wrote that if the cartel fell, “The diamond craze of the twentieth century could end as abruptly as the tulip mania of the eighteenth century.”)
While De Beers renouncing its “market guardianship” raised eyebrows at the time, today it seems inevitable. The industry couldn’t continue to be ruled by a cartel in a new transparent era. And not only did the business endure—it arguably became stronger. All the changes “dragged the industry from the 19th century into the 21st century in a very short time,” says May. “It made companies look at their customer instead of just cutting diamonds and walking away. It made them more accountable.”
Even De Beers believes it is now a better company.
“The competitors to the DTC actually made the DTC more professional,” says Shine. “It turns out competition is good for us as well.”
For more on De Beers, see Rob Bates’ interview with global marketing director Dominic Brand on JCKTV.