CSO, R.I.P.

Everyone expected big news from De Beers’ July press conference. At least three newspapers predicted the company would declare the end of its 100-year-old cartel.

But when the moment came, executives spelled out a series of changes but adamantly refused to declare the end of the diamond world as we know it. “De Beers is not giving up its leadership position,” De Beers chairman Nicky Oppenheimer toldJCK in an exclusive interview. “We want to remain the leading diamond company in the world.” The company did make one, largely symbolic, gesture that signals the dawn of the old order: It will no longer use the cartel-signifying Central Selling Organisation. But otherwise, reporters were left puzzled. One noted in a TV interview with managing director Gary Ralfe, “You’re still the dominant player. Won’t you end up operating a bit like a cartel?”

And it’s true, the structure and rudiments of the cartel system remain largely intact, and barring any major changes in the supply situation, they will remain so for some time. De Beers still has contracts with the world’s leading diamond producers, including Russia, Botswana, Namibia, and the Ekati mine in Canada, and it controls an overwhelming majority of the diamond market. Even after all the corporate navel-gazing of its year-and-a-half “strategic review,” De Beers retains much of what makes it unique, including its idiosyncratic sight, broker, and pricing system (i.e., by the box, not by the stone).

But the changes do represent a profound shift, one that will affect everything from marketing to prices. Ever since the company’s market share plunged from its traditional 80%-it now markets about two-thirds of world production-the company has realized it can no longer be the market’s “guardian.” So while the company still operates under the old system, it’s less committed to it than in the past. And where once it “took care” of the entire market, now it will look after only that segment it sells to. “It’s an entirely new mind-set,” says De Beers spokesman Robin Walker.

Supplier of choice. This new mind-set stems largely from suggestions by Bain and Co., the Boston consulting company that conducted De Beers’ strategic review. De Beers calls its new strategy “supplier of choice.” (One wag, alluding to the company’s still-overwhelming domination of the market, dubbed it “Supplier of No Choice.”) It’s a strategy for the future, a way of dealing with new mines or defections from the cartel (which Russia is again threatening). The company wants to ensure that, when push comes to shove, buyers favor De Beers over its competitors. “We want people to say that, while I can get diamonds from people other than De Beers, the package that De Beers gives me is so valuable, I get a better return from them,” Oppenheimer says.

One result of the strategy is that sights will be less “take it or leave it” than in the past, and clients will have more say in what they get. The company will continue to price sightboxes so clients make profits. And De Beers will offer more “value-added” services, especially marketing support. (More on this later.) The strategy is similar to that of its old antagonist, Argyle, whose Indo-Argyle Diamond Council taught customers the basics of marketing.

While De Beers is offering more to sightholders than it has in the past, it also expects more from them. For the first time, De Beers has defined what it takes to be a sightholder. The criteria include financial strength and manufacturing ability (which some read as a bad sign for dealers.) In addition, sightholders will have two-year agreements with the company. The agreements will “professionalize” a system that ran into trouble when sightholders dropped by De Beers brought complaints to the European Union. Many in the media were less surprised by the company’s bold moves than by its tradition of doing business with clients strictly on oral agreements.

Most of the criteria are not new. Financial strength, for example, long has been a prerequisite for sightholder-hood. The “best practice principles”-ethical rules governing sightholders’ conduct with both De Beers and non-De Beers stones-are new. (See sidebar for a list.) Gareth Penny, the 37-year-old Rhodes Scholar in charge of the strategic review, toldJCK the “best practice” rules extend even to companies that buy from De Beers’ Antwerp subsidiary, Diamdel.

Also new is marketing expertise. One lesson De Beers learned from the strategic review-and one it has taken to repeating-is that the diamond jewelry sector spends less on promotion and advertising than other luxury sectors do. That may explain why the diamond jewelry market has not grown as fast as other luxury markets. So De Beers is all but demanding that its sightholders spend more on marketing. “We want to put the goods in the hands of people who will market them,” says Stephen Lussier, De Beers’ marketing director.

Leaving marketing to sightholders could be a gamble. The last time De Beers did that-with the limited-edition millennium stones-the results were less than stellar. But De Beers thinks clients can step up to the plate, with its help. It’s offering a marketing seminar for sightholders this fall and will make its considerable marketing resources available to sightholders who want them.

Branding. But what does “marketing” mean? De Beers has embraced “branding,” and not just its own brand, but the concept in general. The company believes that brands build excitement, and it cites vodka as an example. Absolut’s advertising led to advertising by other brands and spurred growth across the market. De Beers may one day introduce its own brand, but it’s not worried about rivals getting into the act-in fact, it encourages it. “The best thing for De Beers is a group of brands competing aggressively, because it will lift the marketing spend for diamonds overall,” Lussier says. “We would like to see at least 10 to 20 brands, competing on how they are different rather than just on price. Saying something’s 20% off doesn’t create excitement for the product.”

Lussier stresses that the company is interested not only in loose diamond brands but also in diamond jewelry brands. One example is the new Fredrick Goldman brand that’s sold on QVC, whose diamonds are supplied by sightholder Schachter and Namdar. Sightholders could even support retail brands. “Many sightholders might be better off forming alliances,” Lussier says. “We are just looking for good ideas.”

De Beers also wants to cut what it considers extra chinks in the diamond pipeline. In presentations, executives ridicule the traditional distribution system (dealers, sightholders, and manufacturers) as “spaghetti junction.” A lot of people are part of that spaghetti, but De Beers clearly wouldn’t mind if they drop out. “De Beers is looking for efficient routes to market,” says Penny. “If people are adding to efficiency or adding value, they are part of the future. If they are not adding value, I don’t know.” De Beers is also in favor of pipeline-bending experiments like diamond.com, which sells directly to the public and is owned by Israeli sightholder R. Steinmetz. “It’s a very efficient model,” Penny says. De Beers will closely watch whether sightholders are fulfilling these criteria. There will be twice-annual “business reviews” to check on their progress. And De Beers is stepping up its market monitoring-sightholders say the company now wants more information from them than ever. In a way, despite all that’s happened, De Beers remains true to its character-it may not control the entire market, but it will have greater control over those segments it’s associated with.

Sightholder reaction to the changes ran from enthusiastic to panic-stricken-although most said the direction had been forecast for some time. “A lot of the older generation heard this and said, ‘What do they want from us?'” says Philip Klein of Isaac Klein Diamonds, a New York sightholder. “But those with open minds can see this is the right direction for them to go.” Some worried about rumors that De Beers will drop clients, but Penny claims that’s not necessarily in the cards. “As the result of this, we could end up with a lot more sightholders,” he says.

Outstanding issues. A number of issues remain. The big one is prices. One of the cartel’s purposes was to prop them up, but now that De Beers is tinkering with that structure, can it still promise the price of rough will never go down?

Yes and no. De Beers will continue to be “flexible” with the price of small goods. The other segments are another question, although Penny says people shouldn’t worry about devalued inventory. “With 20 points and up in polished, I can’t imagine volatility,” he says. “The availability isn’t there.” Oppenheimer hints that the company isn’t backing away from its prior position but moderating it a bit. “I don’t think prices will always go up, but the trend will be that they go consistently upwards,” he says.

The company hopes to manage prices by increasing demand rather than by controlling supply, its traditional method. “If we grow diamond jewelry demand by at least 10%, we do not envision [diamond production increasing] at that rate, so the prices should go up,” Ralfe says. But 10% is an optimistic target. What happens if the company is faced with a situation like it

confronted in 1997, when demand shrank dramatically because of the Asian economic crisis?

When pressed on this point by theEconomist recently, Ralfe admitted, “There’s no textbook for this stuff. We’re making it up as we go along.” One thing is for sure: In the past, De Beers’ automatic response would have been to throw the excess diamonds on a stockpile. Today it would consider other options, including stockpiling but not allowing levels to get as high as they did in the past. Other options might include pouring resources into increasing demand or doing what was once anathema-lowering prices.

Ironically, for now, De Beers still sells like it’s the glory days of “single-channel marketing.” “De Beers still cares about the market,” notes Antwerp sightholder Chaim Pluczenik. “They recently gave a small sight, and they could have allocated a lot more. They are managing things quite well.”

De Beers has made one firm change to its pricing policy. It used to publicly announce its price increases-which now are called “price adjustments”-but now will discuss them only in its annual reports. This doesn’t sit well with sightholders, who used the announcements to inform their customers of price changes. But De Beers says it’s a matter of competition. “Our suppliers don’t tell the newspapers when prices are going up, so why should we?” Ralfe asks.

The good old U.S. of A. Another unresolved question is the U.S. situation. De Beers has no legal presence here for fear of the country’s antitrust laws. While Oppenheimer says the changes won’t affect the company’s legal standing in the United States, clearly it’s hoping that the Justice Department will take a fresh look at the company. Although Oppenheimer was rebuffed in his initial attempt to talk to U.S. authorities, executives seem optimistic something will be worked out.

If De Beers ever makes it to American soil, even greater changes could be required. The prospect doesn’t frighten the company as it once might have. Once institutionally opposed to change, the company has made change part of its daily substance. When asked how his father, cartel architect Harry, reacts to the changes that are dismantling much of what he built, Oppenheimer says, “He’s not a man who’s afraid of change.” And neither, apparently, is the new

De Beers.