Out of Sight

A major shake-up and shakeout is taking place in the diamond industry this week. The De Beers Diamond Trading Company (DTC) has decided who will qualify as sightholders under their new Supplier of Choice (SOC) regime. The SOC qualification process that took place over the past four months established new competitive standards for all sight-holders. It applied equally to everyone seeking to buy rough diamonds from the DTC — existing sightholders as well as new applicants. As we went to press, the DTC was notifying all applicants as to whether or not they would become or remain sightholders.

We expect significant changes in the sightholder list. New entrants will have an opportunity to become primary sources of polished diamonds, while firms removed from the list may have serious difficulty sourcing rough and maintaining market position. The changes not only affect the individual firms but their customers and their customers’ distribution systems. Given the fact that the DTC controls some 65 percent of rough diamond distribution, who the DTC distributes diamonds to has a major impact on the polished diamond distribution network. Even if you are not a sightholder, it is very likely that some of your suppliers are. What happens to your suppliers will surely impact the prices and availability of the polished diamonds and diamond jewelry that you buy.

The DTC sightholder qualification process was not really about picking sightholders. It was not about who the DTC thinks has a better company, or even a more efficient diamond-manufacturing capability. Sure these factors are important, but all the existing sightholders and serious applicants score high in these areas. We believe that the key DTC criteria for selecting and deselecting sightholders have been the applicant’s market position, distribution ability and marketing strengths. The real DTC selection process was about optimizing Supplier of Choice, not just picking the “best” diamond people.

Supplier of Choice is the DTC’s sales and marketing strategy that aims to drive consumer demand for diamond jewelry. In a press release this April at the Basel show, the DTC said: “Through our Supplier of Choice initiative, we aim to help grow a $55 billion industry by 50 percent over the next ten years…. The industry has been constrained by complex inefficiencies in the distribution of diamonds and a severe underinvestment in advertising and marketing. The DTC has introduced Supplier of Choice to help address these challenges.”

Selecting Distribution Channels

In our view, the DTC sightholder selection process has not been about selecting people, it has been about selecting distribution channels — distribution channels that the DTC thinks will optimize the added value to diamonds through advertising and marketing. Through the selection of new sightholders, the DTC is directly controlling how polished diamonds and diamond jewelry are distributed, from their source as rough diamonds all the way through to finished diamond jewelry sold to consumers.

Ever since Supplier of Choice was announced in 2000, sightholders have been struggling with the best way to add value to diamonds and thereby ensure DTC rough allocations. While some retailers have developed programs with sightholders, many others have been merely amused as sightholders came to them, hat in hand, offering all types of marketing programs. Now that the DTC has voted on the distribution systems that it will support, it is time for retailers to wake up and realize that if they do not get their “advertising, marketing and branding” act together, they may not have access to the types of diamonds they want at reasonable prices. As long as the DTC was only laying the groundwork with sightholders, retailers did not feel the full brunt of the new DTC initiatives. Now that the DTC has selected new sightholders and their distribution systems for the next two years, retailers who are not “up to marketing” are going to feel the pinch as their suppliers get cut out of the distribution system or cut them out of the distribution system.

Wake up, folks. We are not talking about the theory of SOC anymore. We are talking about the firm implementation of SOC this July. We are talking about existing sightholders losing their rough allocations by the end of this year. We are talking about well-known, long-term supply channels of rough and polished diamonds disappearing in a number of months.

Marketing Competition

For many years, the polished diamond trade has been based on market competition. There were many suppliers competing with each other in the polished diamond marketplace and they bought and sold diamonds based on prices and availability. If retailers wanted to buy a diamond they simply paid a better market price. Diamond prices were used to allocate diamondsand decide who got what type of diamonds.

Now that Supplier of Choice is moving downstream, it is time for the diamond trade to recognize that major changes are on the way. We are rapidly moving from a trade based on “market competition” to a new strategically integrated industry based on “marketing competition.” Retailers are going to find that just paying more is not going to get them the “hard-to-get” goods anymore. Being in the diamond trade is no longer just about price, or even connections. To get the diamonds you want, you are going to have to know what to do with them. The good old days when you could simply buy very well to cover up an inefficient sales/marketing organization are over. Firms that market diamonds in the “best” way will get the diamonds from suppliers who get the diamonds from the DTC. Firms that don’t, won’t.

Marketing competition is relative. Some people market better than others. To help understand how marketing competition works, consider the following story. Two sightholders are having a picnic in the woods. Suddenly, they see a bear charging at them from a distance. As they get ready to run for their lives, one sightholder starts changing into his sneakers. His friend says to him, “Come on, do you really think that you can outrun the bear with those sneakers?” “No,” he replies, “but I don’t have to outrun the bear, I just have to outrun you.”

Marketing competition is all about using marketing skills in a way that enhances your strategic market position. A good marketing strategy should not only get you more customers and better prices, it should also position you to obtain preferred relations with your suppliers. As SOC moves downstream, there will be increasing opportunities for firms to convert their marketing power into market power. This market power can then be used to increase sales, profits and market share.

At first glance, the headline of this story “Out of Sight” refers to the sightholders who will lose their sights. Some retailers might not care very much about sightholders and figure that what happens to sightholders is not their concern. An important lesson is that our diamond industry is highly interrelated and interdependent. “Out of Sight” does not just refer to sightholders, it also refers to their diamonds. Diamonds that will be “Out of Sight” are no longer available for sale in the marketplace because they have been allocated to specific marketing programs from the time they were rough. “Out of Sight” also refers to some retailers. Retailers who do not get their diamond jewelry marketing act together may very well find themselves “Out of Sight.”