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De Beers Brand Goes Retail
Jan 30, 2001 10:13 AM
By Martin Rapaport
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By Martin Rapaport
Well, it has finally happened. De Beers has announced that they will be using the De Beers brand name to sell diamonds to the public. The deal with the world’s leading luxury brand group, LVMH, is sure to shake up the retail sector of the jewelry industry as it introduces significantly higher levels of luxury brand competition into a very fragmented retail distribution system. Needless to say, everyone in the industry is concerned about exactly what De Beers is up to and how the De Beers brand will affect their business.
Lets start out with the facts. De Beers has established a new independent, equally owned joint venture with LVMH that will have exclusive worldwide rights to the De Beers name for luxury goods in consumer markets. The partners have agreed to jointly contribute up to $400 million over the next five years to build the brand. Its immediate focus will be on premium quality diamond jewelry. Subject to regulatory approval, the brand will debut within the next 12 to 18 months with a small number of flagship stores that will sell directly to consumers.
In their press release and in talks with this writer, De Beers has emphasized that the new firm will be completely independent of the De Beers Group of mining companies including the Diamond Trade Corporation (DTC) — the firm that sells diamonds on behalf of De Beers and other diamond producers. De Beers will have no operational involvement in the day-to-day running of the new company which will develop specific business plans, including product assortment and channel strategy under the direction of LVMH. The new company will not buy any diamonds, rough or polished, directly from De Beers. Furthermore, it will not be involved in diamond manufacturing and will therefore not buy rough diamonds from anyone. The new firm will be free to buy polished diamonds or diamond jewelry from anyone, including non-sightholders that source their rough exclusively from mining companies that compete with De Beers.
De Beers Perspective
Okay. So what’s going on? De Beers wants to use their name and money to go downstream, wake up the retail market for diamond jewelry by pushing brand competition to the maximum, and grab some retail diamond jewelry profit margin that may boost their share price. However, they don’t want to compete directly with their sightholders because they still have to move about $5.5 billion of rough a year through them and they must be extremely careful not to have their brand thrown out of the U.S. and European Community markets because of anti-trust and unfair competition charges. Hence the establishment of what they believe will be a completely independent retailing business run by LVMH.
Essentially the De Beers name is going retail but the mining company is not. De Beers mining sells to the DTC, the DTC to sightholders, and sightholders to De Beers Retail. Theoretically, De Beers Retail has no advantage over any other retailer buying from sightholders or non-sightholders. It will not get priority access to scarce goods or better prices than any other retailer. The only thing De Beers Retail gets is the De Beers name, the expertise of LVMH and all the money it needs to ensure success.
From De Beers’ perspective, the new brand is a public good for the diamond industry (see The Big Brand Theory this issue of RDR). It brings into the market a new well-capitalized customer for polished (i.e. LVMH). It also promotes high-end name brand competition which will increase overall retail advertising and thereby ensure that diamonds obtain an optimal market share of the luxury product category. Furthermore, De Beers believes that brand competition will promote added value competition in the retail sector in place of price competition. In other words, retailers will be busy figuring out how to produce and sell more expensive products that better serve the needs of their customers instead of trying to figure out how to sell diamonds cheaper then the next guy.
The Promise
While the De Beers brand looks good on paper, it does raise a number of serious concerns. What is the De Beers brand name all about? What is the promise of the brand? What are the consumers going to be thinking when they go into a De Beers retail store? We must recognize that the key to any brand is the direct or implied message that the brand communicates to the consumer. While LVMH has not yet decided, let alone communicated, the promise of the De Beers brand there is legitimate concern that the message may be unfairly associated with De Beers monopoly control of the diamond industry.
When a consumer sees the De Beers name on a store they are going to be thinking: "De Beers the diamond mining monopoly — the source of all diamonds." They are not going to understand or believe that De Beers mining is not selling to De Beers Retail. Will the brand image be fair to other retailers who can’t project the mining monopoly image because they are not and could not legally be diamond monopolists?
In a broader context, the issue is not just limited to De Beers. How about BHP selling directly to consumers? Is this fair to other retailers that don’t have a mine? If BHP sells direct, why shouldn’t De Beers? While the BHP issue is interesting, it is a commercial matter. Buyers can chose to buy or not buy from BHP. That is not true for De Beers. Firms have to buy from De Beers because they dominate the market and this makes it a legal anti-trust and unfair competition matter.
LVMH is going to have to tread a very fine line about how it positions the De Beers brand, assuming it can position the brand in a legal way. Perhaps they would be better off just picking a new name out of a hat. In any case, retailers are gong to have to wake up to the fact that diamond miners such as BHP are going downstream and will not only sell polished direct to consumers but also use their brand advertising to communicate the fact that they are "the source" for diamonds.
The message for retailers is simple — stop crying about your suppliers selling your customers — start competing and create your own brands and/or marketing initiatives that emphasize the positive aspects of your market position. Get used to the fact that we are entering a period of hyper-competition, which believe it or not, is good for you and the industry. De Beers is right, the best way to build our business is through free and fair unbridled competition.
Undoubtedly, De Beers and LVMH have the right to sell the De Beers brand, but they are going to have to do it in a way that does not open them up to charges of unfair competition. Aside from the legal issue, there is the moral issue. After all, your customer’s customer is still your customer.
Credibility
De Beers is to be commended for its efforts to assure that its branding initiative does not unfairly compete with its sightholder clients. Hopefully, it will also ensure that its branding message is fair to other retailers. While it appears that De Beers is doing its honest best to move its branding initiative forward in a fair manner, there is still serious concern and unease in the trade about its new initiatives.
Simply put, many in the trade do not trust De Beers and they do not want to be put in position where they are forced to trust them. It’s sort of like having a 500 pound gorilla in your china shop. You know the gorilla is tame, he tells you he is tame, he even acts tame. But still, you don’t want the gorilla in your china shop.
De Beers is big and all powerful in the diamond industry. It’s nice that it now talks about the benefits of competition, but hey, for the last 100 years De Beers has not been exactly a pro-competitive force in our industry. The trade is afraid. We are crossing a red line here. Once De Beers gets its teeth into retail will it ever let go? Will it eventually use the same monopolistic practices that it has in the rough diamond markets on the retail jewelry sector? Will it at some time in the future cut out legitimate retailers through unfair competition? These are tough questions that De Beers and LVMH will need to address if they are to avoid unnecessary legal hassles from the retail and wholesale sectors of the diamond trade.
Long Term
As it moves forward, De Beers is going to have to be very careful about potential future conflicts of interest. De Beers owes its allegiance to its shareholders, but what happens when there is a conflict between the interests of the shareholders and the sightholders and/or trade?
Consider the following scenario: The De Beers brand specializes in larger, better quality diamonds that are in tight supply. The good people in the DTC are instructed not to prefer sightholders that sell LVMH over any other sightholders. So the DTC simply sells the scarce rough to the highest bidder. The highest bidder pays 10 percent more then the sightholder supplying LVMH.
Now lets say LVMH works on a 50 percent net retail profit, half of which goes back to De Beers due to the partnership in the joint venture. Now De Beers shareholders are unhappy. De Beers should be selling more rough through to LVMH because the profits that LVMH gives back to De Beers are significantly greater than the extra 10 percent that the DTC is making from some sightholder.
What does De Beers say to the shareholders? Is this a legal anti-trust issue? Is it a moral issue supporting a policy of De Beers not competing against its sightholders? Will the shareholders sue the board to force them to maximize profits?
Now based on my personal experience, I believe that the people at De Beers are honest. They really want to do the right thing here. But can they control the unforeseen consequences of their actions? At some stage De Bees will have to gear up for these issues. We’re still early in the game but we have crossed a line of complexity here. One way or the other De Beers is involved downstream and this involvement is going to change the future of the company in ways that no one can yet predict.
Looking out to the future, unless De Beers starts implementing some very clear policies, it appears that one way or the other supplies of larger, better quality diamonds are going to be removed from the open market. Perhaps De Beers will perfect an optimal added value marketing/branding initiative that optimizes the price and distribution of these goods. Maybe it will be the LVMH De Beers brand that ends up with all the goods. Perhaps it will be another brand that creates a strategic partnership with De Beers. But something tells me that the days of the free ranging big beautiful rough diamonds from De Beers may be numbered. Now I’m not saying that De Beers or anyone else is doing anything wrong. I’m just telling you which way the wind is blowing.
Rebirth
The rebirth of De Beers as evidenced by its strategic review and resultant significant changes in policy and direction, including the Supplier of Choice and branding initiative, are forcing the company out of its shell. You could say that the company has reached a certain critical mass of change that will force it to normalize even if it doesn’t want to. While great gains have already been made in areas of transparency and corporate structure and there is serious talk about separating from Anglo American, there is still very much that needs to be done.
While the De Beers branding initiative is of great interest to the trade, its impact on De Beers itself may be even more interesting. For the first time the company is actively trying to comply with U.S. anti-trust regulations and constraining economic activity to meet these requirements. De Beers finds itself on the slippery slope of legal legitimization.
One expects that over the medium-term there will be ever increasing internal and external pressure on the company to rid itself of monopolistic practices and cast away the antitrust charges that have so limited its economic activity in the United States as well as its share price. Sure there is a long way to go. But this branding initiative and it’s resultant economic benefit sets De Beers on a new course that over time will encourage the company to abandon anticompetitive business practices and fully legitimize its legal position in all countries.
After all, if De Beers can unleash competitive forces strong enough to reinvigorate the entire diamond and jewelry industry, they should be able to use those same forces to reinvent themselves. Physician, heal thyself.
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Tags:
Anglo American, China, Consumers, De Beers, DTC, Jewelry, LVMH, Manufacturing, Mining Companies, Sightholders, United States
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