The comments De Beers CEO Philippe Mellier made about sightholder profitability in last week’s interview attracted a lot of notice, and I’d like to offer some thoughts.
If you didn’t see them, here are some edited highlights:
Mellier: It is down to the sightholders to get organized and do what it takes to make money [on their sights]. You cannot go back to your supplier and say you are responsible for my margin. We think that we price the stone at the right price and based on that a customer should make money. But it’s down to them to make money. You don’t make money automatically. As we say internally, you need to own your margin.
JCK: If [sightholders] are making 2 to 3 percent or less on each allocation, as many say, is that okay with you?
Mellier: If it is acceptable for them, it is okay for me…. Chow Tai Fook, Tiffany, and big customers are buying a large number of rough diamonds from us and seem to be pretty happy and making a good margin out of it.… Everybody should be able to get organized according to their business model and make enough margin for them to prosper. But that’s not down to me.
JCK: The recent report by Bain suggests that, to lure banks back into the industry, producers need to do more to support their customers’ profitability. Do you think that is a fair request?
Mellier: I have a business. I am not a banker. I am not a supporter of customers. This is not sound, to support a customer base.
Privately, executives are even blunter. They note, with some justification, that there has been a lot of crying wolf from sightholders over the years. They also point to other industries. Mellier talks about car dealers making 1.5 percent. Some have even compared clients to Coca-Cola bottlers, service providers who typically make a 2 to 3 percent margin.
They also argue that, for all the griping, most clients choose to remain sightholders and don’t decline allocations, despite having far more places to buy rough now than they did in the past. Of course, sightholders don’t turn their backs on goods and sightholder status for a variety of reasons, from wanting the prestige that comes with being a De Beers customer to a desire to keep factories humming and customers supplied.
Sightholder agreements say clients can decline up to 10 percent of boxes without repercussions and can defer—push off to the next sight—one box per category (“band”) every six months. [See clarification.] In December, clients felt they had no choice but to refuse as much as 20 to 25 percent of the sight, according to broker H. Goldie & Co. For the sight currently taking place, De Beers is allowing clients to defer as much as 25 percent of what was offered and to push the allocations off two sights instead of the standard one. Some have taken that option, says spokesperson Lynette Gould.
As hardheaded business logic, one can’t argue with Mellier. Companies exist to maximize profits. If clients pay those prices, De Beers would be foolish to charge less. De Beers’ recent high profits have changed it from an Anglo stepchild to its newly minted corporate star. It has no reason to change things.
That said, we have all seen instances where diamond businesses give their customers a break to keep them in business, particularly with retail bankruptcies. They figure they don’t have any good customers to lose. The diamond business is a small one; De Beers’ long-term health is tied up with the trade’s.
Mellier points to Tiffany and Chow Tai Fook as vertically integrated companies that are “pretty happy” with their sights. Signet will, one assumes, soon be added to that list. Now I’ve heard an executive from one of those companies complain about the price of De Beers rough. But it’s also worth considering: How many sightholders are truly vertically integrated the way they are? Probably somewhere from five to 10. Is that enough to take all of De Beers’ production? And where does that leave all the smaller retailers that sell diamonds, who don’t have sights but remain a backbone of this business?
Mellier is right that every company must take care of itself. But De Beers remains, as even he admits, something of a guardian of the industry. The small profits on rough are one reason bankers are fleeing the trade. For them, it is not worth all the risk to finance a business making a two to three percent return.
So the current strategy may make sense in the short term, but in the long run it could prove quite harmful.
In the 1990s, a client told me buying from De Beers was a roller coaster: Sometimes it’s like winning the lottery. Other times it’s a headache. In those days, De Beers would sometimes sneak clients a few well-priced big stones (“specials”) to compensate for the headaches.
Mellier’s comments should put clients on notice that aggressive pricing from De Beers is the new normal. It will not make up for lost profits. The only thing that may force a change is if it can’t sell. We saw that this week. Following the refusals in December, and talk of even more turndowns in January, De Beers adjusted prices at the sight. “We will start to see a change in buying patterns from the leading manufacturers,” Mike Aggett, CEO of H. Goldie, told Rapaport. “They will look for the best deal and not just buy to show their loyalty.” Like all businesses, De Beers listens best when people speak with their wallets.
Clarification/correction: This story originally said that Sightholders are only allowed to refuse up to 10 percent of their allocations. That number is the amount of stones from parcels they are allowed to refuse without jeopardizing their ability to keep getting goods at requested levels. Clients are free to refuse as many goods as they wish, though that could put their continued ability to get that rough in jeopardy. Deferrals are governed by a different process, mentioned above.Follow JCK on Instagram: @jckmagazine
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