Protecting the Pipeline

De Beers calls it “spaghetti junction.” It’s the complex web of dealers, jewelry manufacturers, and middle-folk that constitute the diamond pipeline. When De Beers first unveiled its “Supplier of Choice” strategy to the industry last year, executives said they wanted sightholder-clients to follow “efficient routes to market.” To many, the point was clear: The most efficient route is one that leapfrogs “spaghetti junction”—and short-circuits a major part of the industry.

At the recent diamond association presidents’ meeting in Idar-Oberstein, Germany, the “spaghetti” fought for its place at the table. Officials of the World Federation of Diamond Bourses—a group composed mostly of middlemen—were particularly insistent that the industry’s structure be maintained. “The future of the small people is extremely important to the industry,” said Shmuel Schnitzer, president of the Israeli Diamond Exchange, vice president of the World Federation, and hardly a small guy himself. “In the 1980s, the big companies collapsed, and the small ones held up the trade. Bankers will not finance an industry depending on few people, because that is a sick foundation.” He said that if the trade cuts out the small guys, “it will be one of the worst things we have ever done.”

No one denies that, even if De Beers had never voiced its opinion on the matter, the residents of spaghetti junction face a bleak future. Sightholders and other manufacturers have been increasing their direct sales to retailers for a long time. “The idea of selling diamonds in a bourse sounds foreign in an era when everyone is dealing directly with retailers,” price sheet publisher Martin Rapaport noted at the meeting. “The question is: Will we soon see an industry of manufacturers, retailers—and no one else?” Added Sergi Oulin of the Russian bourse: “This is not a crisis like we have faced before. It’s a structural challenge.”

Still, it’s one thing for intermediaries to drop out through a natural economic winnowing. It’s another for De Beers to usher the process along. “De Beers is dismantling a distribution channel that’s worked for 40 years,” complained Derek Parsons, president of the Diamond Dealers Club of Florida. “We are seeing a deliberate strategy to squeeze out the little guys.”

In fact, there are signs that De Beers was backpedaling from its earliest pronouncements. At a recent meeting in London, “Supplier of Choice” architect Garreth Penny said that De Beers had been “misunderstood,” and that it never said that sightholders should sell directly to retailers.

To some sightholders, the company was doing an about-face in light of the European Commission’s inquiry into “Supplier of Choice.” But De Beers corporate communications director Rory More O’Ferrall says the message has been consistent all along.

“The prime purpose of ‘Supplier of Choice’ is to raise demand for diamonds, and a rising tide raises all ships,” he says. “We are looking for strategic alliances within the pipeline, not alliances from one end of the pipeline to another. … Our intention is to be sure there is value added at every stage in the pipeline. There are stages of the pipeline where little or no value is added, and we won’t go around defending them.” Of course, “added value” is a vague—though frequently used—term in the diamond world these days; O’Ferrall defines it as “doing something with the diamonds rather than just passing them on at an increased price.” Yet “passing diamonds on at an increased price” is what most middlemen do. And even if the little guys want to add value, many don’t have the same resources the big boys do. “The small dealers cannot undertake big marketing programs,” Rapaport notes.

No solutions. For all the attention paid to the problem in Idar-Oberstein, few had any solutions beyond scheduling a meeting with De Beers to discuss the topic. This caused a brief rift between the WFDB and the International Diamond Manufacturers Association, its sister group, which also wanted to meet with De Beers, but only to discuss issues of declining profitability. In the end, the groups agreed to hold meetings on both topics.

Rapaport surely raised the blood pressure of a few people at De Beers with his proposal: that the industry also should meet with the European Commission (which is currently examining “Supplier of Choice”) about forcing De Beers to sell a certain amount of its production to smaller dealers. “The WFDB has a moral imperative to be concerned with the livelihood of the small people,” he said. WFDB president Bram Fischler of Antwerp noted that six of his city’s young manufacturers had recently formed a group called YAM (Young Antwerp Diamond Manufacturers), hoping they can boost their market power by working together.

Attendees also discussed holding seminars to teach dealers about marketing and other related topics. But by the meeting’s end, people still had more questions than answers. Said David Woolf of the South African bourse: “I don’t know if we can wave a magic wand and give these people a niche in the market.”