De Beers CEO Philippe Mellier spoke to me today after making an appearance at the Forevermark cocktail party on Jan. 7. (His remarks can be seen here.) Our talk concerned mostly recent events in the diamond industry, including new talk of undisclosed lab-grown diamonds in the natural pipeline in India, issues with grading labs, holiday sales, and what he says to all those complaining clients who claim they can’t make money:
JCK: There are new reports of undisclosed synthetics in India, and rumors of sightholders possibly being involved. How seriously do you take those reports?
Mellier: I take it very seriously. We have always said, and I repeat, it’s a threat to the integrity of the diamond pipeline. Synthetics are not a problem. Undisclosed synthetics are a problem. That is why we are the only company, with the help of GIA, working on machines to detect synthetics. We can detect any synthetics.
Synthetics have always been around. Undisclosed synthetics in the natural rough or polished pipeline are clearly the issue. And we need to have a tolerance of zero. At De Beers we have the Best Practice Principles. If a sightholder is caught trying to sell undisclosed synthetics in the natural rough or polished pipeline, that is a breach of BPP, which will call for immediate cancellation of the contract. And I will do it, without hesitation.
JCK: Do you think that is the case [sightholders being involved] this time?
Mellier: I have not [seen] that so far. I am not anticipating it to happen, but if it was found to be happening we would do it. We cannot tolerate any deviation from the BPP. If there was a clear case, without hesitation, we would cancel.
JCK: Are you concerned that the issues with different standards at grading labs will affect consumer confidence?
Mellier: Clearly we are worried. I am worried. The Forevermark grading system is very strict and rigid. A lot of the things we do are automated, and we try to minimize human interference. We are clearly reliable and predictable.
My personal thinking is that either you stick to the GIA requirements, and you are extremely strict and follow their procedures—and GIA education is very clear on that—or you can have your own grading [system]. But you don’t pretend to be GIA or you don’t pretend to be compared with GIA. This is all calling for a little bit of cleansing in industry, and making sure that we all know who is [grading] with what standard, with what system, and what process.
Clearly, this is an opportunity for us to grow the business for Forevermark grading and become one of the leaders in grading. We have a big laboratory in Antwerp, we are also working in the U.S., and we have a big laboratory in Surat, and are already looking at an expansion. We are clearly moving in this direction. With customers looking for the right grading with the right standard, I think Forevermark has to be on top of the list with GIA as the preferred grading laboratory.
JCK: Will you ever open your lab to the trade at large?
Mellier: It is too early to tell. Today the problem is we have a tough time coping with the volume. We are, like GIA, operating with overcapacity. I’m not saying no, but for the time being we are focusing on Forevermark.
JCK: Can you give us an update for your plan to buy back “recycled” diamonds?
Mellier: It is very early in the process. We are doing this pilot to understand the market. We think if recycling is not done in a proper way it can hurt the desire for diamonds and the reputation of diamonds. We have a very small team in the U.S., working with a few retailers. The pilot is there to understand this market, what the customers are thinking about it, and what retailers think about it. We need at least another six months until we reach some meaningful conclusions about what the market is all about. Give us another six months.
JCK: Do you see buying back diamonds as a potential business?
Mellier: Really, really, too early to tell. We just need to understand what it’s all about, instead of relying on secondhand information and rumors. At the end of the day, what is very important for De Beers is to keep the diamond dream alive and the customer experience at the highest level possible. We believe that recycling is part of the ownership experience and we need to look at what we can do to improve it.
JCK: What is your sense of how diamonds did at Christmas?
Mellier: It is too early to tell. It seems that the season was not bad. It seems that some customers came late to buy. My personal feeling it was okay. It was not extraordinary but it was not bad at all. We usually have a [better] idea around mid-February.
We have said the world market will increase by 4 percent in 2014, after increasing 3 percent in 2013. I have met dozens of retailers, and the feedback I got was positive. The year will be good in the U.S. In China it was very good. As of now, I don’t see any reason to deviate from my forecast of 4 percent growth in demand worldwide. Which is better than what we saw in 2013.
JCK: Sightholders have been complaining that De Beers’ boxes are too expensive. What is your sense of how much sightholders are making on their boxes?
Mellier: Customers’ profitability is important to me. I want sound and healthy customers. But I am not responsible for the margin of my customer. They are responsible for their margin. It is down to them to maximize their profitability.
We believe there is money to be made with the rough stones sold by De Beers. That’s for sure. But it is down to the sightholders to get organized and do what it takes to make money [on them]. 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 they 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. If you look at a business I know very well—car dealers—they make 1.5 percent, and they are all smiling and happy about it. It depends on what you need to invest, it depends on the activity you have. I don’t think there is a uniform level of margin for sightholders to be happy with. The sightholders are extremely diverse. What I know is that Chow Tai Fook or Tiffany or the 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. It is difficult for me to comment on my customers’ margin. They should be able to make a margin at this price. We know many of our customers do. 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. What is very important to understand is there is a big demand for diamond jewelry. We should be able to have an upstream industry, midstream industry, and downstream industry able to make money. I’m not saying that everyone should be able to make the same margin, at the same time, at the same level. We have different business models.
We know that supply will clearly be lower than demand in the future years. So the prospects are pretty good. It is true the business today is different from the business 10, 20, 30 years ago. And we need to adapt. Producers need to adapt—we need to improve existing mines, we need to get more production and minimize costs. The upstream—the retailers—need to adapt to more competition. The midstream part of the business also has to adapt to more competition, diversity of location, more markets opening. I look forward to our customers adapting their business to reflect the change coming from the upstream part of the business and downstream part of the business. Do you know of any other business where a retailer or a trader or transformer of any product can go back to his supplier and say, you are in charge of my profitability? I don’t know any other business claiming that, if you think about it.
JCK: Turning to Forevermark, De Beers spends $100 million a year marketing Forevermark. How much of that goes to the United States?
Mellier: We spend about $100 million—even a bit more—on marketing related to Forevermark. We don’t disclose the numbers by market but being the biggest market in the world you can understand the U.S. gets its fair share. It is the biggest market, so it is going to get the biggest share.
JCK: You have been talking about the importance of brands in our industry. Would you like other big companies to get involved supporting brands?
Mellier: This is a message we have been relaying for a year now. We have spoken about it in Vegas and in Hong Kong. The message is not just for us and our customers but the world of diamonds.
We strongly believe the future of diamonds is in branded diamonds. We want to make Forevermark the leading brand worldwide. The results so far are very exciting. We are working on many initiatives on new cuts, on new diamonds. The Forevermark will grow with the full support of De Beers behind it.
The big difference between the time when De Beers was the market—and was spending a lot of money—is that we are now a key player but not the only player by any means. The advertising world is being occupied by other diamond brands. Tiffany and Cartier and Chow Tai Fook are spending massive amounts to advertise diamond jewelry. You have Chanel and all the other makers of watches talking about watches with diamonds.
What we need to look at is the total amount being spent on advertising diamond jewelry. It’s much more than the $200 million we were spending 10 or 15 years ago when we were spending [by ourselves].
Remarks have been edited for space and clarity.