There was a lot of talk about the future of the diamond industry at the Gemological Institute of America Third International Symposium this summer in San Diego. Yet the people who may really help determine the industry’s future were two unassuming women who sat through the sessions without saying a word.
The two observers were consultants from Bain and Co., a Boston company “facilitating” De Beers’ strategic review. The review, a top-to-bottom look at De Beers’ assets and role in the market, began last year and was due to be finished just as this article went to press. De Beers has never turned outward for such extensive guidance before, which leads many to speculate that big changes are coming. South Africa’s Business Day predicted the review will lead to a “fundamental shake-up in the diamond market.”
De Beers senior management has given sometimes-contradictory signals on what to expect. Early on, managing director Gary Ralfe said the review would have “no sacred cows.” He said at the recent diamond association meeting in Moscow that some change is inevitable. “I’m surprised that anyone would wish that things would keep going as in the past,” he said. When company chairman Nicky Oppenheimer mentioned the review in his videotaped message to the GIA Symposium in June, he pledged that De Beers would remain a “leader in the diamond industry” and was committed to “stability in the market”—goals many found vague, especially since he made no mention of single-channel marketing.
People who have been interviewed by the “strategic reviewers” are even more convinced that something serious is afoot. The interviewers spell out several roads De Beers could take—including becoming a mining company or spinning off the Central Selling Organisation, its London-based marketing and distribution arm.
Evolution, not revolution. With speculation abounding, De Beers executives now play down expectations. “People shouldn’t expect a big bang” once the review is finished, Ralfe told JCK in an exclusive interview. “The basic structure of our business is sound. We think we should be doing it better.” Ralfe said at the Moscow meeting that any change would be “evolutionary, not revolutionary.” Oppenheimer similarly warned security analysts not to get “too excited” about the review, adding that it’s unlikely that De Beers will become “a completely different company.”
But while executives are cagey about where the review will lead, they are crystal-clear about its objective: boosting the company’s stock price, which last year hit an all-time low of $11.56. And while the share price recently rebounded to nearly $27, Ralfe admits that “De Beers shareholders haven’t had a good ride in the 1990s.”
What’s holding De Beers down? Unlike other mining companies, De Beers has a marketing arm that puts brakes on production. As a result, the mining division and CSO are often at odds.
De Beers also has a $4.5 billion stockpile of stones, meant to keep prices stable. Ralfe notes that the market places “almost no value” on the stockpile, which has grown for nine of the last 10 years. De Beers clearly wants it to shrink, but Ralfe says the company isn’t planning a massive dump. “The way we’d like to do it is to increase demand,” he says.
But demand is another problem area. One of the ways De Beers may try to boost it is through “branding”—which executives say increases consumer confidence. “Branding” might also steer consumers to diamonds from De Beers’ mines as opposed to its competitors’.
Now what? For all the stock talk, the review may have bigger objectives. De Beers is clearly not the market force it was 10 years ago. Ralfe notes that the company sold 66% of the world’s diamonds this year and roughly 60% last year, down from its traditional level of 80%. “Right now, De Beers is halfway between being a monopoly and being a regular company,” notes consultant Ben Janowski. “They can’t keep sitting on that fence.”
The review may answer the question, Now what? For the last few years, De Beers has often seemed uncertain about its new role. Consider its experiment with “branding.” Company executives say they don’t know where it will lead. The review may provide some direction.
For now, some bet that De Beers will opt for a modified version of its current role. Company executives say that De Beers no longer wants to be the “custodian” of the industry but its “leader.” What’s the difference?
De Beers the “custodian” restricts sales so prices won’t fall. But a “leader” might sell what clients request and not worry about the market. De Beers the custodian promotes all diamonds. A leader might advertise only its own stones. De Beers the custodian has diamond-buying offices throughout the globe, an unsurpassed market intelligence network, and the stockpile. Would a leader have those things? Time will tell.
Ironically, this speculation comes at a time when De Beers’ custodianship of the market arguably is working better than it has in years. Following the Asian financial crisis, De Beers slashed allocations 28%. A year later, market confidence and profits are up—and so are De Beers’ sales and stock price. Still, the company may have made more money if it hadn’t cut back so drastically, letting Argyle and others fill the breach. Ralfe says the company has to look at “the price shareholders have paid to maintain market stability.”
These and other issues make it likely that De Beers will be a very interesting company in the months ahead. As Lazare Kaplan’s president, Leon Tempelsman, recently put it, “This is not the same diamond business we grew up with.” What will it morph into? Not even De Beers seems to know. But it wants to find out.