DeBeers Bends the Pipeline

When it launched Supplier of Choice, De Beers listed eight criteria for becoming a sightholder. Among them was manufacturing skills. To many this was a no-brainer: If you’re going to pick candidates for the premier position in diamond manufacturing, of course they’d have to be skilled manufacturers.

But after the Diamond Trading Company’s latest sightholder selection, some worry that manufacturing skills have skidded down the priority list. The most recent roster includes downstream companies like Stuller, Tiffany, and Caribbean chain Diamonds International. The first two are among the best- regarded companies in the industry. But they didn’t make their names as diamond manufacturers.

It’s all part of what some see as the second stage in the evolution of Supplier of Choice. In the first, De Beers urged its sightholder clients to go downstream and become marketers. Now, De Beers is having downstream companies go upstream to become sightholders.

This isn’t being driven solely by De Beers. Tiffany, in particular, has been enthusiastically swimming upstream for years. In addition to its two sights in partnership with South African manufacturer Rand, it recently signed a deal with the Jericho Mine in Canada to buy the mine’s entire production. The deal, in effect, makes the renowned retailer a dealer selling on the Antwerp, Belgium, market. And recently, Sterling, the nation’s second-largest jeweler, announced it had hired DTC broker I. Henning for rough sourcing — which some see as a sign it also wants a sight.

The trend is clearly gathering steam, and it’s caused some to flash warning signs. They argue that the two ends of the diamond pipeline—diamond cutting and retailing/jewelry manufacturing—are very different disciplines, involving very different skills. The results from diamond manufacturers’ venturing downstream into branding and other marketing initiatives have, perhaps inevitably, been mixed. There may also be problems, some feel, when downstream companies reach up the pipeline.

Mark A. Boston, director of H. Goldie, another DTC broker, says that while he applauds Supplier of Choice’s emphasis on marketing, he feels De Beers may be downplaying the complex art of diamond manufacturing.

“Ever since I have been in this industry it has been recognized that rough diamonds should only be sold to companies who have demonstrated a proven understanding and track record of diamond activity and skills,” he says. “An industry that is in denial about its own core skills and strengths is an industry that has lost its way.”

One clearly needs skills to be a sightholder, which involves purchasing a lot of diamonds, and then manufacturing and selling them as fast as possible to recoup your upfront investment. Chuck Lein of Stuller compared having a sight to the famed I Love Lucy episode where Lucy is on a conveyer belt wrapping chocolates; once you get done with one box of stones, there is a whole bunch more coming, ready or not.

All this has led to a bitter irony. One of the things Supplier of Choice was meant to do is prevent “box trading”—when sightholders sell their boxes for a profit on the open market, without adding value to them. And yet, market talk says that some box trading comes from downstream companies suddenly hit with so many diamonds they don’t know what to do with them.

It was these kinds of problems that led Zale to give up the sight it had years ago. But today some see upstream activity as a way to save money, secure a consistent supply stream, and keep an eye on the supply chain (to ward off problems like conflict diamonds and dirty gold). Supply is particularly important to a company like Tiffany, with its appetite for high-quality diamonds.

But diamond mining is an unpredictable business, and erratic production has already torpedoed Tiffany’s agreement to buy diamonds from Aber in Canada, which was canceled, in part, because Tiffany wasn’t getting the high-quality stones it needed.

This might be an unavoidable pitfall of going upstream. One DTC broker notes that, while retailers generally purchase only what they need, sightholders are limited to what De Beers allocates them based on what comes out the ground.

“When you get rough, you get undesirable stones,” the broker notes. “You get stones that are imperfect, that you don’t want. So what do you do with those stones? It’s not like you can return them. You end up building up stock. All of a sudden, you’re not a retailer. You’re a wholesaler.”

Despite all these problems, many think this trend is here to stay and could even reshape the industry. “De Beers has been trying for the past few years to shift the burden of marketing and advertising onto the sightholders,” says industry consultant Ben Janowski. “That, for the most part, has not worked.

“So now they might want to go after people who are the marketers,” he says. “You could see a future where the Stullers of the world become the sightholders who obtain and control the merchandise, and the people who convert it are merely subcontractors.”

That might not be an exciting future for diamond manufacturers—and the approach holds perils for De Beers as well. With Tiffany and Diamonds International and now maybe Sterling getting sights, it’s safe to say other major retailers are looking into them, too.

Who knows where it will all end, one employee of a sightholder mused recently. Could even Wal-Mart, which has become one of the biggest diamond retailers in the world, apply for a sight? De Beers, which has stressed the objectivity of its process, will be hard-pressed to deny it one. And while De Beers is a big powerful company, it’s not as big and powerful as Wal-Mart. “That would really be the tail wagging the dog,” the employee notes. “You wouldn’t know who is controlling who.”