Meet Your New Competitor: De Beers

The word is not in any press release. It was never uttered by executives. Spokespeople delicately dance around it. But it’s been on everyone’s mind ever since De Beers announced its new retail venture: Antitrust. For years, the market has feared that De Beers would open up retail stores. But there was always the assumption that the law would stand in its way. After all, antitrust rules hampered the company’s first forays into “branding” and even today prevent it from doing business in the United States. And yet, in London this January, there stood Nicky Oppenheimer announcing that within the next 18 months, “De Beers” stores will open in major cities—including New York.

The stores are a joint venture with Moet-Hennessy Louis Vuitton (LVMH), the ritzy French conglomerate whose stable of luxury brands includes Christian Dior and Dom Perignon. They will feature not only “De Beers” diamond jewelry but also other luxury items emblazoned with the company’s name. Analysts expect there will be up to 50 stores in four years, and online sales are also a possibility. (At press time, the project was awaiting regulatory approval.) And while the plan is still in the embryonic stages, no one doubts that the new chain will eventually be a major player in the business.

“We are not here to do something small,” Alain Lorenzo, the LVMH veteran who’s the CEO-designate of the new venture, told JCK in an exclusive interview. “This project is ambitious. We are here to build a world-class company.”

If this were any other diamond miner, this sudden leap into retail wouldn’t be much of a shock. Recently we’ve seen a retailer (Tiffany) purchase part of a mining company, a miner (Russia’s Almazy-Rossi-Sakha) open a retail store, and another miner (BHP) sell diamonds over the Internet. But De Beers isn’t just any company, and many aren’t sure how it can get involved with a retail venture. The answer: very carefully.

New structure. As with De Beers’ “supplier of choice” initiative announced last July, this new venture is at once revolutionary yet leaves a remarkable amount of the status quo intact. It tries to shed De Beers’ baggage by minimizing the company’s involvement.

The new chain will be run by a freestanding company—as yet unnamed—managed entirely by LVMH. “This new company is not De Beers and on that basis should be free to operate worldwide,” says De Beers marketing director Stephen Lussier. “The way we see it, De Beers is licensing its name and taking an equity investment in the new venture.” While De Beers put up half the money for the venture—and will get roughly half the profits—it will be a “passive investor” with no say in day-to-day operations. “Our input is done,” Lussier says. “We have agreed on a vision. Now it’s the task of the new team to take it and run.”

De Beers officials will hold seats on the company’s board, but they will be “nonexecutive” positions. This is also likely a bow to antitrust rules—although spokesmen say it’s to prevent executives from competing with their sightholders, and because LVMH knows more about brand-building than De Beers does.

The set-up also ensures that De Beers—or anyone associated with the company—will not derive commercial advantage from the plan, other than De Beers’ share of the profits. Again, antitrust probably plays a role here: The old “branding” plan, which used only De Beers stones and favored sightholders, faced trouble from authorities within the European Union. The new company, however, will not buy rough or polished stones from De Beers and will be able to buy diamonds from any company it chooses—not just sightholders. “This brand will be competing on a level playing field,” says Lussier. “It will derive no benefit from the fact that we are a passive holder in the investment.” Still, all stones must be sold in accordance with De Beers “best practice” principles, meaning they have to be “non-conflict.” And for the time being, it’s mostly De Beers sightholders who can guarantee that.

There are also concerns that De Beers will steer its nicest stones toward sightholders that sell to the new venture. De Beers executives pledged not to do this, saying their goal is as many brands as possible. The company also stresses it will not further vertically integrate and go full-scale into diamond manufacturing. (It currently has a small polishing division.) But even sightholders are skeptical. “One would have to be blind not to see that, if you follow this to its natural progression, eventually they’ll be bypassing most of us,” says one.

Reasons. The two companies are joining this venture for different reasons. For LVMH, it’s a chance to join the jewelry market, where it is currently weak, without purchasing a big name like Tiffany.

De Beers, for its part, has long felt there’s potential in its name, which has appeared at the end of its ads for years and is one of the best known in the jewelry industry. And the 2001-model De Beers is determined to let no asset go unexploited.

Executives insist there’s also a larger purpose: to increase the number of brands in the jewelry industry, something De Beers has been talking about for some time now and urging its clients to explore. “Hopefully, this will be one of many brands competing on the market,” Lussier says. “This is De Beers committing to branding by putting its money and reputation where its mouth is. We are not asking our clients to take this gamble without taking it ourselves.”

The company says the key is to have the brand “add value.” Lussier says this will likely include innovative design. The new brand may also use the table inscriptions with serial numbers that were used in the first De Beers-branded stones.

Lorenzo feels the De Beers name stands for “authenticity,” which will be a focus of its advertising. He adds that he’s encouraged by data on consumer awareness of the “De Beers” name.

Chain reaction. Industry reaction to the announcement was predictably mixed, with many retailers—particularly those at the very high end—feeling that the company they’ve long seen as their partner has now stabbed them in the back. But De Beers insists competing brands will enlarge the market and be good for everyone. “We need to stop losing market share to other luxury goods,” Lussier says.

Lorenzo believes the market is large enough and fragmented enough that no one retailer will dominate it. “There’s certainly room for another world-class name,” he says.

For now, De Beers clearly wants to stay on the good side of jewelers. The Diamond Promotion Service recently released a letter noting it would have nothing to do with the new venture. And executives stress that the company’s $180 million advertising budget will advertise generic diamonds, as it always has. “We need everyone to be successful,” Lussier says, “if we are going to move $5 billion in rough diamonds each year.”