On Thursday, De Beers released financial results for the first half of the year, which show just how much it’s been battered by COVID-19—with total revenue coming in at $1.2 billion, a 54% drop from the year before, which itself was not a great period.
In an interview with JCK, chief executive officer Bruce Cleaver talks about how the company plans to transform its business, the post-COVID-19 consumer, and when the diamond business will get out of its current doldrums.
JCK: We keep seeing stories about De Beers changing its business model. What will that entail?
Bruce Cleaver: It’s the same model. It’s just doing it more efficiently and more profitably. We’ve been looking at a process of transformation, and now we are looking at how to accelerate the transformation of De Beers. That’s across the whole of De Beers, from exploration to retail. It’s really about how we’re going to explore more efficiently, mine more efficiently, more profitably, and also make our downstream brands [De Beers Diamond Jewelers and Forevermark] be more profitable. So, it’s not really a new strategy. It’s just a question of doing it quicker than we might have done before, doing it more efficiently, and using data and technology more than we have in the past. We see the need to integrate the upstream, midstream, and downstream more efficiently than in the past, to connect them better with data and technology in every part of the business, so that when we come out of COVID, we will be well positioned for the future.
There’s been speculation that you will change the sight system.
We certainly will continue to sell goods on long-term contracts with our customers. We always evolve the contract we have with our customers, and we’re in the process of doing that anyway and we will be talking to our customers through the year about that. We certainly would want to work with them to try and connect them better to any kind of retail demand data as far as what we sell to them and what we mine. It’s certainly not true to say that we’re going away from the sight system. It has served us well and will continue to serve as well.
What will all this mean in practice?
One of the pain points in the midstream is how long it takes a diamond to get out of the ground and into a retail store. Can we accelerate that value chain for everyone’s benefit? Can we work with customers more, and work with data more, in order to shorten that and then have better demand signals as to what people are selling quicker and translate that better into what we sell people in boxes and how we put the boxes together and who we sell them to?
So, it’s really about: Can we collectively use demand data in the retail space better and quicker to sell rough more efficiently to people and also hopefully to hurry up the value chain and maybe even mine in a way that’s more around demand and responds to signals of demand. It takes a long time to get a piece of rough out of the ground and into a store, and demand patterns can change tremendously during that. If we can hurry that up, we can benefit everyone in the value chain and improve profitability.
And how will that involve your downstream business?
We need to make our downstream businesses more profitable, and we need to make them better, which you’ll see in the next couple of months. There will be a focus on making our retail business more profitable too.
When people talk about efficiency, that generally means cutting jobs. Do you see that happening?
We’re done a lot of work in 2020 just to save costs. As you’ve seen our production guidance is lowered, we’ll be cutting costs, slowing down capital projects, slowing down outlay in business capital, and cutting head office costs. So it’s a piece we’ve done already, but insofar as your question is concerned, we are now going to start a process of formal consultation with our staff around the world about this process, and it is likely there will be job losses. I can’t tell you at this point what that will look like because we have an obligation to go through this consultation and we will do it honestly and transparently. Different countries have very different rules on how to do this, and some of the countries have quite a lengthy process. We will do it fairly and properly, but it is likely that we will have job losses.
Do you expect to still hold physical sights?
We’ve certainly been able to do some sales virtually, and we’ve been quite flexible at the moment about how we sell goods, because you just can’t get people into Botswana. We are able to sell some boxes blind, and our sightholders trust us enough to do that. But I do think the core business of people gathering 10 times a year in order to physically inspect the goods will continue. Whether that’s blended with more virtual transactions, we will see. But I don’t see that we’re going to have a radical change from people coming to sights and physically inspecting the goods. I don’t think you can do virtual sales for the volume of goods that we sell. I think there’s a whole lot of other benefits that come from getting together with your customers on a regular basis.
You still don’t have a new contract with Botswana, which was expected last year. Is there anything holding that up?
That’s because of COVID and the inability to get in the same room with our counterparts. There is no travel going into Botswana at the moment, in or out, which is why we’ve looked at doing sights virtually. But it’s really a function of not being able to gather with our counterparts in a room together. As soon as we can do that, we will press on with that, and I’m sure we’ll get this resolved in time. We always do.
De Beers has talked about consumers wanting more emotional gifts. How does the diamond industry take advantage of that?
The good news is that, if you look at the bounce back in China, you see a V-shaped response. Some people there said they sold more in May and June than they did in 2019. That’s encouraging because that would lead you to conclude that people certainly have not gone off the product at all during COVID. So that’s one good piece of data.
All the data we have and all the consumer research we have is that people think that meaningful gifts are going to be more important in the future than less meaningful gifts, and I think diamonds fall well within that. We also known from research that 90% of American consumers say that they are considering giving a gift that holds its value, so I think there are some really good opportunities now coming out of COVID. I also think that one of our biggest competitors in this space, which is luxury travel, is clearly unlikely to be at any kind of meaningful level for the rest of the year. So, maybe we can capture some dollars from consumers’ wallets that might have gone elsewhere. At the end of 2020, obviously, people will have less to spend, so our role is we need to get them to spend it in the diamond industry.
Our advertising in Q2 has been less about product-specific issues and more about sustainability and the good diamonds can do. To me, one of the big opportunities will be millennials and Generation Z, who are more interested in brands that have a sustainable social purpose. We’ve done some tremendous work over the years in that regard.
I think that the Natural Diamond Council has a lot coming out in the second half of the year. We certainly have a lot coming in the second half of the year, and we are open to working in partnership with others in the downstream space to try and maximize the value of our dollar spend.
How do you see the second half of the year?
It’s a very difficult question to answer because it’s really going to depend on the speed and the sustainability of the U.S. economic recovery. Any subsequent lockdowns, second waves of COVID, will be really unhelpful. Given how little we have mined and sold, I think there’s some evidence that there is a bit of stock starting to move in the midstream and there certainly are some diamond jewelry sales going on. Some of the recovery we’ve seen in America has been quite strong. It seems to me some of the independents have done quite well, and bridal has done quite well. I don’t think that the worst is past, but as to when this translates into real demand coming back, it’s pretty difficult to say. It’s going to really depend on what happens in Q4 in the U.S.
We have seen some diamond mines have some financial distress and some close. Do you see supply falling over the next few years?
To me, that is a big positive here. While it is not great for many companies, I think it’s unlikely that the supply that is around now will come back at the same levels that it was before. We would have seen supply dropping off anyway, post-2018 and -19, even if everyone was running at full production. And I don’t see mines coming back at full production anytime soon, if at all. I do think that that’s quite positive for those who remain. It is tough for those folks involved, obviously. But our model would suggest that there’s going to be less supply over the next five to 10 years than we thought even a year ago. Argyle is obviously closing, we knew about that, but I think with some of the Canadian mines and some in Tanzania, it’s unlikely they will be at the same level of supply anything like the level that we previously thought.
Would De Beers be interested in buying any of those mines that are now on the market?
We don’t comment on specific opportunities, but we are always available for someplace where there is value. We have a strong balance sheet.
Any thoughts on lab-grown?
The data that I’ve seen is that they’ve also had quite a tough time in the COVID era. We continue to track it through Lightbox, and actually our facility in Portland has been disrupted. Portland is not a place you would have thought would have a disruption, but, so far, things are still going. We are commissioning reactors now. By the end of this year or Q1 next year, that facility will be up and running. That’s positive for us because we will have more volume to sell.
Any final thoughts?
It’s been unbelievably difficult time for all of us in the industry, but I think everybody’s done a tremendous job in helping communities where we have mines and helping the people who work for us. I do think that there is a rosy future for the diamond industry. It’s not out of the woods by any means, and it’s very much dependent on America. But now is the time to start thinking positively and to start preparing for a decent season. I think we can look forward to a much better 2021.
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