De Beers in the Dumps

“Change is painful,” De Beers executives sometimes note when quizzed about the agony of sightholders who are trying to comply with its new dictates. But De Beers is finding change thornier than it bargained for. Since last year, the company’s attempts to reinvent both itself and the diamond industry have met a string of roadblocks. Last year’s bid to gobble up Ashton Mining, co-owner of Argyle, fizzled when antitrust authorities unexpectedly stalled the move. Its privatization plan nearly met a similar fate but was rescued when the company’s new owners offered more cash per share to skeptical stockholders. And now both its “Supplier of Choice” strategy and its retail alliance with LVMH may be radically altered or even canceled, the result of antitrust investigations by the European Commission. (De Beers stresses that it notified the EC about “Supplier of Choice” to get its verdict; still, the extent of the investigation appears to have caught the company by surprise and forced it to postpone the initiative’s launch, originally scheduled for July.)

Add to that the worldwide drop in demand, a reported tax investigation by British authorities, the ongoing noise over conflict diamonds, and two lawsuits—one over use of the letters “DTC,” the other from a consumer charging De Beers with antitrust violations—and there are a remarkable number of fires to fight, even for a company that’s dealt with many over the years. Notes one sightholder: “De Beers has a little bit more of a challenge than they previously thought.”

Out of the monopoly game. It wasn’t supposed to be this way, particularly on the question of antitrust. That issue has long been De Beers’ Achilles heel, limiting executives’ actions and even their movements. “Supplier of Choice” is partly an attempt to make the company more transparent and alter its image as an all-controlling, quasi-legal monopoly.

Yet, when unveiling the new strategy, executives dodged talk of ending the cartel, despite prodding from reporters. Executives felt that it wasn’t up to them to say whether De Beers is a monopoly or a cartel.

They may soon get their answer. The European view of monopolies differs from the American view. The EC eyes the effect monopolies have on their competitors, while U.S. authorities focus on consumers. That’s why De Beers is illegal in the United States, but Europe has always tolerated it—as long as it was, in the words of the late Harry Oppenheimer, “a monopoly that benefited all.”

But today, the EC seems to be investigating whether the post-“Supplier of Choice” De Beers will be a monopoly that no longer “benefits all.” If De Beers is using its market leverage to boost its own goods, that could be seen as “an abuse of position,” notes Hilton Ashton, a diamond analyst with Investec Securities in Johannesburg. Accordingly, several questions on the form the EC recently sent to sightholders ask whether “Supplier of Choice” or the LVMH deal will increase demand for De Beers’ stones.

Other doubts. The EC aside, some of the biggest doubts about the new direction come from De Beers’ own clients (privately, of course). Many weren’t pleased about the LVMH deal, which they feel is a forerunner to further vertical integration that will freeze them out of the pipeline. (Their retail customers are even more upset.) Sightholders also doubt whether increased marketing is suitable for the current depressed market.

Many also complain that, in recent months, the new company has been even more difficult than the old one, providing unprofitable assortments and raising prices. “It’s a cold-hearted exploitation of clients,” says one sightholder. “They are ramming goods down people’s throats just when the American market’s collapsing. And people are too scared to say no.”

This fear stems from persistent rumors that De Beers will shave its roster of sightholders—possibly dramatically. To avoid getting dumped by the new “demand-driven” De Beers, sightholders have invested heavily in new marketing programs, often laying out millions of dollars. But if a sightholder invests in marketing and is shorn from the list anyway, it will have spent a lot of money it might not otherwise have spent.

To many, this betrays the original promise of “Supplier of Choice,” whose name implied that, in the new competitive environment, De Beers would vie for customers’ dollars with services that add value. But somewhere along the line it became apparent that De Beers was choosing its sightholders far more than they were choosing De Beers. Since the new strategy was announced last July, clients have felt as if they’ve been on an unending audition to win De Beers’ favor, and the selection process often has been burdensome. First, De Beers asked each sightholder to complete an exhaustive profile—the business equivalent of a strip-search—then it asked for an elaborate presentation on the company’s marketing plans. Next came a meeting to discuss progress in this area. That’s a lot of confidential information to give a company that might drop you from its client list.

Now comes the European Commission’s questionnaire, which includes the same sensitive questions De Beers asked—such as how many diamonds are sold each year, and what a company’s main markets are. “They are asking you to bare your soul, which you’ve already done for De Beers [with] great reluctance,” says one client.

Many grumble that the issues with the EC might have been avoidable. De Beers executives met with EC authorities last year but apparently never received an official blessing on either “Supplier of Choice” or the LVMH alliance. “It makes you wonder why all this wasn’t put to bed earlier,” says one sightholder. “All this is a big headache that requires a lot of time, money, and lawyers.”

Many sightholders are particularly worried about what will happen to the confidential information on the questionnaires. While the EC’s form gives sightholders the option of “a confidential version, which will be seen only by the Commission,” many fear their replies could fall into the hands of De Beers, other bureaucrats, or even their competitors. One sightholder wryly notes that, if the European Union subpoenas the records of Belgian sightholders, it could prove problematic for those who were a little “over-enthusiastic” in their replies to the first edition for fear of losing their sight. “You won’t believe how many people suddenly sold to Zale and Tiffany,” he says.

The new guard. Some hope that when—or if—”Supplier of Choice” begins and the “new guard” moves in, things will improve. But others fear that the newly private De Beers, with its large amount of debt, will saddle sightholders with over-supply to plug the holes in its balance sheet.

Even more than complaints, there are questions. Despite all the attempts to explain “Supplier of Choice,” the privatization, the LVMH deal, and the rest of it, some say they still don’t understand where the company is going. For many, pieces of the puzzle remain missing. “I don’t think any of us really knows what ‘Supplier of Choice’ is,” one sightholder says. There’s even a suspicion that these dramatic changes may have been haphazard and may not add up to anything in the end. Although longtime De Beers watchers doubt that, it’s hard to believe that a well-conceived plan could have resulted in the current mess.