Fate of Diamond Industry Looks like Chicken & Egg Situation
2003: Fate of Diamond Industry Seems Scary to Imagine
Changes in the “sightholder” list were expected when De Beers launched “Supplier of Choice.” Executives had said there would be a new list for a long time. What had surprised everybody was, instead of the promised “evolutionary” change, there was a “revolutionary” change, an earthquake that shook the trade to its core.
It seems that the new De Beers has not only changed the way it does business but who it does business with and the items that it sells. It is keeping the truth about who is on and who is off secret for the time being, although they will announce a full client list at the end of the year. But market rumors include mentions of some of the biggest companies in the industry. The rumor mill says that New York and Israel got many names cut off and India got some added — a sign that diamonds are increasingly being cut in low-cost labor markets and then imported here. Some also say India fared well because they are willing to take a wide range of goods, while other centers only want just the “cream.”
Still, many thought that New York deserved better, since from De Beers own statistics, the United States constitutes over 50% of the world’s diamond jewelry market. One rough dealer says he doesn’t how De Beers can make a convincing case that it should be let into the United States and then take away so much from New York.
There is a lot of speculation about why these companies were dropped. Some of the reasons people are guessing is that these companies were going around them and competing with them for rough in Russia and Africa. Other theorized that companies that said bad things about De Beers in the media were let go. Hopefully by the end of the year, De Beers will clear up some of the rumors. The new De Beers has pledged to be more transparent, and this is a good place to start.
De Beers’ dramatic action is likely to increase concern about “Supplier of Choice” from groups like the World Federation of Diamond Bourses. The WFDB has repeatedly asked De Beers to protect some of the industry’s middlemen. They have asked that Supplier of Choice not be “elitist,” detrimental to non-sightholders, and should have room for customers of Diamdel.
In response, De Beers has given its standard rationale for launching Supplier of Choice. It is meant to counteract competition from other luxury items. At present, the average marketing spend by luxury goods companies is about 10 percent of turnover. The watch sector spends about six percent of turnover, but the diamond jewelry sector only spends between 1 to 2% on advertising. Currently, surveys show that vacations are more important than diamond jewelry in the consumers’ minds.
One former customer of De Beers feels that many of the analogies that they are now using are flawed. Take a look at the travel industry. The airlines cut out the middlemen — the travel agents — and what happened? The airlines are having terrible problems, in part because there are no more travel agents to stir up business. All their advertising has not helped them.
Furthermore, the diamond industry has very weak margins — about 2 to 3%. That’s not enough to subsidize the big marketing programs that De Beers wanted. Of course, De Beers says this is a “chicken and the egg” situation, and brands increase margins. This is true, as anyone who looks at Tiffany’s books can attest. Still, it’s a little scary to think that the fate of this industry may depend on it suddenly developing two or three more Tiffanys.